The Hidden Dangers of Construction Defect Litigation
March 28, 2012 — David M. McLain, Colorado Construction Litigation
David M. McLain, writing at Colorado Construction Litigation, has an interesting blog post republishing his article in Common Interests magazine, the monthly periodical of the Rocky Mountain Chapter of the Community Associations Institute. In his article, he touches on a number of pitfalls in construction defect litigation, including the potential conflicts of interests facing HOAs. He also considers the problems homeowners can face, including both “strong-arm tactics” taken by attorneys to compel homeowners to join the lawsuit, or situations in which the interests of the HOA do not match those of the homeowners. He writes:
There is also a conflict of interest with individual owners who attempt to opt out of the case. This can lead to shocking strong-arm tactics on the part of plaintiffs’ attorneys. In one instance, a plaintiffs’ attorney sent a letter to an individual homeowner that stated that as a 1/58th owner of the common elements, if he refused to go along with the suit, and there was ultimately a finding in favor of the HOA which was in any way limited by his refusal to participate, he would be personally liable for 1/58th of the HOA’s total damages. In another instance, a different plaintiffs’ attorney sent a letter to a homeowner who wanted the builder to perform warranty repairs, informing the owner that if he let the builder perform any repairs, the attorney would bill the HOA according to the fee agreement entered by the HOA board (without knowledge or consent of non-board members) and that the HOA would assess the homeowner for that expense. These are just two examples of conflicts which may arise between the HOA board and individual homeowners when the HOA pursues CD cases.
Another example of a conflict which will arise as a result of CD litigation occurs post-settlement. When an HOA settles for less than 100% of the amount necessary to fund all repairs outlined by its experts, plus attorneys’ fees and litigation costs, there will obviously be a shortfall in the amount necessary to fix the development. The HOA board must then choose to impose a special assessment to cover the shortfall or to make some, but not all, of the repairs outlined by its experts. In choosing the latter, the conflict arises with respect to which homes get fixed and which do not. In this situation, the HOA board has acted as the attorney-in-fact for the individual owners by bringing claims on their behalf, and has compromised those claims without their knowledge or consent.
Read the full story…
Reprinted courtesy of David M. McLain of Higgins, Hopkins, McClain & Roswell, LLC. Mr. McClain can be contacted at mclain@hhmrlaw.com.
Contractor Manslaughter? Safety Shortcuts Are Not Worth It
August 11, 2011 — Douglas Reiser, Builders Counsel
It’s been a while since I discussed the importance of safety. But, a recent article on ENR.com compelled this brief article. Don’t shortcut safety — you could be facing serious criminal repercussions.
A New York crane company owner and one of his employees are each facing a second-degree manslaughter charge for the death of two construction workers.  The charges stem from the collapse of a crane in New York City. The district attorney determined that the crane owner cut a few corners to reduce its operation costs, significantly sacrificing safety.
Another example was the 2010 trial of another New York crane operator who was charged with manslaughter. In that case, the criminal charges failed to stick, but an administrative judge found that the contractor used a damaged sling to support the steel collar binding the tower-crane mast to the 18th floor of a high-rise building being constructed. The company also used four slings instead of the eight, as specified by the crane manufacturer; improperly attached the slings and failed to pad or soften them.
Read the full story…
Reprinted courtesy of Douglas Reiser of Reiser Legal LLC. Mr. Reiser can be contacted at info@reiserlegal.com
South Carolina Legislature Redefining Occurrences to Include Construction Defects in CGL Policies
April 1, 2011 — April 1, 2011 Beverley BevenFlorez - Construction Defect Journal
The question of what circumstances must be in place for construction defects to be covered in a general commercial liability (CGL) policies is being raised by the courts and the legislature in South Carolina. The Insurance Journal reports that the American Insurance Association as well as the Property and Casualty Insurers Association of America are speaking out on the issue.
The problem seems to be centered on what defines an “occurrence.” CGL policies were not meant to cover faulty workmanship, according to the filing by the South Carolina Supreme Court. In January of this year, the South Carolina Supreme Court reversed the ruling in Crossmann Communities v Harleysville Mutual declaring that “Respondents cannot show the damage here was the result of an occurrence. Rather, the damage was a direct result and the natural and expected consequence of faulty workmanship; faulty workmanship did not cause an occurrence resulting in damage.” They focused their attention on the word “accident,” stating that there is a fortuity element that is not diminished.
The South Carolina legislature reacted by producing a bill that would add new language directly negating the ruling by the Supreme Court. The South Carolina bill S-431 would change the definition of an occurrence in regards to construction defects as follows: “For a liability insurance policy issued to a construction professional, an ‘occurrence’ means, at a minimum: (1) an accident; or (2) continuous or repeated exposure to substantially the same general harmful condition or substance. No additional requirement of a fortuitous event is needed to constitute an ‘occurrence.’”
S-431 is currently residing in the House Committee on Labor, Commerce and Industry.
Read the full story...
Fourteen More Guilty Pleas in Las Vegas Construction Defect Scam
June 19, 2012 — CDJ Staff
The ongoing case over claims that a group fixed homeowner board elections in order to supply the conspirators with a stream of construction defect cases and repairs has lead to fourteen guilty pleas. The judge recently issued charges against fifteen of the accused; one defendant did not join in the group as he was recovering from pneumonia. The prosecutors have asked the judge to delay sentencing, as the investigation is continuing. Prosecutors note that another dozen people may be indicted.
Along with an earlier group who plead guilty, this brings the total number of guilty pleas in the case to twenty-five. All have promised to cooperate with authorities.
The case has also involved four deaths, although authorities have not suspected foul play in the deaths. Nancy Quon, one of the four, was the construction defect attorney suspected to be at the center of the conspiracy.
Read the full story…
State Farm Too Quick To Deny Coverage, Court Rules
July 22, 2011 — CDJ Staff
On July 13, 2011, Judge Sarah S. Vance of the US District Court issued a rule in the case of Travelers Cas. & Surety Co. of Am. v. Univ. Facilities, Inc. (E.D. La., 2011). In this case, Stanley Smith Drywall was contracted by Capstone Building Corporation to “perform undisclosed work at the facility believed to involve the installation of drywall.” The project involved the design and construction of student residences for the Southeastern Louisiana University in Hammond, Louisiana. In May, 2009, University Facilities, Inc. (UFI) sued Capstone Development Corporation and Capstone On-Campus Management.
State Farm insured Stanley Smith Drywall and they sought a declaration that they have no duty: “(1) to insure Stanley Smith or CBC, or (2) to defend or indemnify any party against UFI's claims in the pending arbitration.” State Farm contends “(1) there is no "occurrence" to trigger coverage under the policy; (2) only breach of contract claims are asserted; (3) there is no property damage alleged; and (4) various coverage limitations and exclusions apply to prevent coverage.’
The court concluded that “whether State Farm has a duty to defend in the arbitration must be determined by considering the claims asserted in the arbitration.” However, the arbitration claims were not made part of the record. There, “, the Court cannot determine as a matter of law State Farm's duty to defend on the present record.” The same was true of State Farm’s duty to indemnify. “Stanley Smith and CBC assert that State Farm's motion for summary judgment was filed before any discovery was conducted in the arbitration proceeding or in this case. The Court finds that State Farm has failed to develop the record sufficiently to establish that there is no genuine issue of material fact as to its duty to indemnify Stanley Smith or CBC in the arbitration.’
The court denied State Farm’s motion for a summary judgment on its duty to defend and indemnify.
Read the court’s decision…
Yellow Brass Fittings Play a Crucial Role in Baker v Castle & Cooke Homes
May 10, 2012 — CDJ Staff
Baker v Castle & Cooke Homes Hawaii, et al. is a “class action filed by homeowners who allege that their homes have a construction defect. They allege that their plumbing systems include brass fittings susceptible to corrosion and likely to cause leaks. They bring this action against the developer of their homes and the manufacturers of the brass fittings.”
Zurn, the manufacturer of the allegedly defective brass fittings, sought a dismissal, or if that could not be achieved, then “a more definite statement, of five of the six claims.” Zurn moved for summary judgment on the sixth claim, or alternately sought “summary judgment on one of the five claims it” sought to dismiss.” The court granted in part the motion, and denied the motion for summary judgment.
The developer, Castle & Cooke, sought dismissal of the First Amended Complaint stating “that Plaintiffs have not complied with Hawaii’s Contractor Repair Act, chapter 672E of Hawaii Revised Statutes, which requires, among other things, a plaintiff to give a contractor the results of any testing done before filing an action against that contractor.” The court couldn’t determine “certain facts essential to ruling” on Castle & Cooke’s motion, and therefore denied the motion, but ordered Plaintiffs to submit requested material by the stated deadline.
The Baker v Castle & Cooke case began with the Plaintiffs claim that the use of yellow brass fittings can lead to construction defects. They allege that “yellow brass is particularly susceptible to dezincification, a corrosion process in which zinc leaches into potable water that comes into contact with the brass. According to Plaintiffs, as the brass corrodes, it becomes porous and mechanically weak. Plaintiffs further allege that the PEX systems in the putative class members’ homes have begun to, or are about to, leak water into the walls, ceilings, and floors of their homes. Plaintiffs allege that the leakage will cause water damage and mold growth, exposing the occupants to toxins.”
In response to the plaintiffs’ claims, Zurn argued “because their yellow brass fittings have not failed to date, Plaintiffs fail to allege, and have no evidence showing, that they have suffered any actual injury.” Plaintiffs replied, “even if the fittings have not failed as of today, failure in the future is inevitable.”
However, the court stated, “whether Plaintiffs have suffered any injury, or whether Plaintiffs are attempting to proceed based solely on future injury, implicates Plaintiffs’ standing to bring this action, as well as whether this case is ripe for adjudication.” The court has requested the parties to submit “supplemental briefing on whether this case should be dismissed pursuant to Rule 12(b)(1). In supplemental briefs, Zurn argues that dismissal is appropriate because Plaintiffs lack standing, and Castle & Cooke argues that dismissal is appropriate because Plaintiffs’ claims are not ripe.”
The court continues to discuss the problem of standing: “To establish standing, a plaintiff must demonstrate three things. First, the plaintiff must suffer an "injury-in-fact," which means that there must be a concrete and particularized "invasion of a legally protected interest" and the invasion is actual or imminent. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). Second, the injury must be fairly traceable to the challenged action. Third, a favorable decision must be likely to redress the injury. Id. It is the first element (injury-in-fact) that is in issue here.”
The court found that the plaintiffs do have standing: “Even if the court could not rely on the allegations that the pipes will soon leak, the court would conclude that, for standing purposes, Plaintiffs have a sufficient injury-in-fact in the form of their alleged economic loss.” In a hearing, Plaintiffs argued that their homes had decreased in value.
The court also denied Castle & Cooke’s motion to dismiss based on a lack of ripeness, stating “the same reasons Plaintiffs satisfy the injury-in-fact requirement for standing purposes, they satisfy the constitutional ripeness requirement.”
Plaintiffs asserted six counts against Zurn. Zurn, in response, made a motion to dismiss counts VIII, IX, X, XII, and XIII. The court granted Zurn’s motion for Counts VIII, IX, and X only: “Counts VIII (product liability), IX (negligence), and X (strict liability) sound in tort. Zurn argues that, because Plaintiffs allege no injury other than to the PEX systems and the yellow brass fittings themselves, the economic loss rule bars their tort claims. The court agrees.”
The court disagreed with Zurn’s motion regarding Count XII: “Count XII asserts that Zurn has breached the implied warranty of merchantability. Zurn argues that Count XII is barred by the applicable statute of limitations and that Plaintiffs do not sufficiently allege an injury. The court disagrees.”
Zurn’s motion regarding Count XIII was also denied: “Count XIII asserts that Zurn violated section 480-2 of Hawaii Revised Statutes.” Furthermore, “Plaintiffs allege that Zurn ‘engaged in unfair and deceptive acts or practices when [it] designed, manufactured and sold Yellow Brass Fittings.’ Zurn argues that Plaintiffs fail to state a claim under section 480-2(a) because their claims are barred by the statute of limitations and they do not adequately allege reliance or a cognizable injury. The court disagrees.”
The court denied the motion for summary judgment with respect to Counts XI and XII.
Castle & Cooke sought to dismiss “Plaintiffs’ claims against it under section 672E-2 of Hawaii Revised Statutes, which provides for dismissal when claimants fail to comply with chapter 672E.” There was some discussion regarding the test results. Apparently, the plaintiffs had failed to provide a written notice of claim at least 90 days before filing the action. However, it is unclear if the Plaintiffs have since complied with the requirements of the chapter. “The court has received no supplemental information from either party about whether any test results from another case have been turned over or whether those materials are subject to a confidentiality agreement. The record at this point does not establish noncompliance with the requirement in chapter 672E to provide such information. The court therefore denies the motion to dismiss.”
In summary, “Zurn’s motion to dismiss is granted as to Count VIII, Count IX, and Count X. Zurn’s motion to dismiss is denied with respect to Plaintiffs’ other claims. Zurn’s request for a more definite statement and its summary judgment motion are denied. Plaintiffs are given leave to file an amended Complaint no later than May 21, 2012.” Furthermore, “the court denies Castle & Cooke’s motion, but directs Plaintiffs to file, within two weeks, either a certificate of compliance with section 672E-3(c), or an explanation as to why they have not complied. Castle & Cooke may submit a response within two weeks of Plaintiffs’ submission. Each party’s submission is limited to 1000 words.”
Read the court’s decision…
Eleventh Circuit Asks Georgia Supreme Court if Construction Defects Are Caused by an "Occurrence"
December 20, 2012 — Tred Eyerly, Insurance Law Hawaii
The Eleventh Circuit certified a question to the Georgia Supreme Court, asking whether property damage can constitute an "occurrence" under a CGL policy where its effects are not felt on "other property." HDI-Gerling Am. Ins. Co. v. Morrison Homes, Inc., 2012 U.S. App. Ct. LEXIS 23813 (11th Cir. Nov. 19, 2012).
The general contractor, Taylor Morrison Services, Inc., was covered by a CGL policy issued by Gerling. The policy excluded "expected or intended injury," contractual liability," and business risk exclusions. Morrison was sued by homeowners in a class action suit. Morrison had allegedly omitted four inches of gravel required beneath the base of the concrete foundations by the Uniform Building Code. Thereafter, the houses sustained water intrusion, cracks in the floors and driveways, and warped and buckling flooring.
Gerling defended, but sued Morrison for a declaratory judgment.
Read the full story…
Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Judge Rejects Extrapolation, Harmon Tower to Remain Standing
November 7, 2012 — CDJ Staff
CityCenter has filed an emergency motion asking the Nevada Supreme Court to intervene in Judge Elizabeth Gonzalez’ order that the building’s defects cannot be extrapolated from those tested. CityCenter’s structural engineering expert “evaluated 397 of the Harmon’s critical structural elements and found all but one defective,” according to the article on Vegas.Inc. Judge Gonzalez would not permit this to be extrapolated to the untested 1,072, as the locations tested were not random.
Judge Gonzalez also ruled that if CityCenter does additional testing, they may not appeal her order that ruled the extrapolation inadmissible. CityCenter argued to the Nevada Supreme Court that “the notion that CityCenter should be forced to incur additional millions of dollars in testing costs and sanctions ?Äì on the condition that it waive its right to appeal this ruling ?Äì just to be permitted to present its own damages evidence, shocks the conscience.”
Gonzalez gave the okay to CityCenter to demolish the building, but its demolition would make any further testing impossible. Under Gonzalez’ ruling, the untested structural elements cannot b assumed to be defective.
Read the full story…
Construction Worker Dies after Building Collapse
November 18, 2011 — CDJ Staff
A Bronx construction worker died when the pillars gave way in the basement where he was working. The two-story commercial building collapsed, burying Mr. Kebbeh under about six feet of rubble. The New York Times reports that firefighters dug him out with their bare hands. Mr. Kebbeh was taken to Jacobi Medical Center where he died. Two other construction workers escaped unharmed.
Read the full story…
Battle of “Other Insurance” Clauses
March 23, 2011 —
Tred R. Eyerly -
Insurance Law Hawaii - March 23, 2011
The New York Court of Appeals considered the impact of competing “other insurance” provisions located in both a CGL policy and a D&O policy. See Fieldston Property Owners Assoc., Inc. v. Hermitage Ins. Co., Inv., 2011 N.Y. LEXIS 254 (N.Y. Feb. 24, 2011).
In the underlying case, Fieldston’s officers were charged with making false statements and fraudulent claims with respect to a customer's right to access its property from adjacent streets. Suit was eventually filed against Fieldston and its officers, alleging several causes of action including injurious falsehood. Damages were sought.
Fieldston’s CGL policy was issued by Hermitage. The “other insurance” provision stated, “If other valid and collectible insurance is available to the insured for a loss we cover . . . our obligations are limited,” but also stated it would share with all other insurance as a primary policy.
Read the full story... Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Faulty Workmanship Exclusion Does Not Bar Coverage
November 18, 2011 — Tred Eyerley, Insurance Law Hawaii
The court determined that the Faulty Workmanship Exclusion only barred coverage for damages arising from problems with the property under construction itself and not to losses incurred to correct damage from accidents during construction. See 1756 First Associates, LLC v. Continental Casualty Co., 2011 U.S. Dist. LEXIS 117100 (S.D.N.Y. Oct. 3, 2011).
A tower crane collapsed at the construction site, causing damage. First Associates tendered the claim to its insurer, Continental. Continental reimbursed First Associates for certain costs arising from damage to and cleanup of the construction site and building stemming from the crane collapse. Continental refused, however, to reimburse First Associates for costs associated with construction delays resulting from the collapse.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Builder Cannot Receive Setoff in Construction Defect Case
July 10, 2012 — CDJ Staff
The California Court of Appeals has dismissed an appeal in a San Diego construction defect case. In Smith v. Walters Group, Christopher and Maud Smith sued The Walters Group, a real estate developer, and Galen C. Pavelko, Inc, the builder of their home. Walters had bought five lots and hired Pavelko to build houses on them, selling one of these homes to the Smiths. “After moving in, the Smiths noticed a strong and obnoxious odor permeating the house.” The Smiths sued but were ordered to arbitrate instead, pursuant to a clause in the purchase contract. The Smiths were awarded $1.5 million at arbitration.
Walters requested that the arbitration remain open to determine if Walters was entitled to a setoff for settlements from defendants not involved in the arbitration. During this time, Pavelko made a settlement with the Smiths, which the court found was in good faith. At the same time, the arbitrator “reached the opposite conclusion.” The arbitrator concluded that “only settlements made ‘in good faith before verdict or judgment’ qualified for setoff.”
Walters moved that the trial court “‘correct’ the award,” but the trial court declined to do so and confirmed the award. In the appeal, Walters raised the issue of “whether Pavelko’s settlement occurred ‘before verdict or judgment.’” The appeals court dismissed the appeal, noting that “Walters would not be entitled to a $500,000 setoff if we reversed the trial court’s order determining the Smith-Pavelko settlement was made in good faith because Pavelko’s $500,000 payment was expressly conditioned on such an order.” They add that “were we to reverse the trial court’s order, Pavelko would have no obligation to pay the Smiths the $500,000.” This would then “deprive Walters of the corresponding statutory right to a setoff.”
Read the court’s decision…
Landmark San Diego Hotel Settles Defects Suit for $6.4 Million
March 4, 2011 — April 4, 2011 Beverley BevenFlorez - Construction Defect Journal
After five years of legal battles, the condo owners of the El Cortez Hotel building in downtown San Diego settled for $6.4 million, as reported by The San Diego Union-Tribune on March 28, 2011. The Homeowners Association will net just over $3 million from the settlement.
The litigation may have had an adverse effect on the value of the condos within the El Cortez Hotel building. According to an article by Kelly Bennett of Voice of San Diego, “Many condos in the building originally sold for more than $600,000. Currently, the three units on the market are asking for just more than $200,000, the U-T said.”
Andrew Berman, the owners’ attorney, told The San Diego Union-Tribune that the five years of litigation included six lawsuits, 200 depositions, and multiple construction tests.
Read the full story... (San Diego Union Tribune)
Read the full story... (Voice of San Diego)
The Complete and Accepted Work Doctrine and Construction Defects
August 16, 2012 — CDJ Staff
Matthew C. Bouchard of Lewis & Roberts PLLC, writes how North Carolina is “bucking the trend” on the “complete and accepted work doctrine.” As he notes, in most states “a contractor can be found liable for personal injuries suffered by third parties from accidents occurring after the contractor’s work is completed and accepted.” But one exception is North Carolina.
He gives the example of a case, Lamb v. D.S. Duggins Welding, Inc., in which a site superintendent was “injured by the alleged negligence of the project’s steel deck installer, a sub-subcontractor in the contractual chain” “after the sub-sub’s work had been completed and accepted.” The trial court held that the “completed and accepted work doctrine” ended the subcontractor’s liability. The case noted that “employees of the general contractor had modified the installation of the perimeter safety cable in question after the sub-sub had demobilized from the site.”
Mr. Bouchard notes that “once a project is accepted and turned over, the contractor typically loses control over maintenance of the new facility.” However, he notes that “where the contractor’s work constitutes negligence ?Ķ the doctrine may not apply.” Nor does it end breach of contract claims. It only covers third parties.
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Washington Court of Appeals Upholds Standard of Repose in Fruit Warehouse Case
August 4, 2011 — CDJ Staff
On July 28, the Washington Court of Appeals ruled in Clasen Fruit & Cold Storage v. Frederick & Michael Construction Co., Inc. that more than six years had passed since a contractor had concluded work and so granted a summary dismissal of the suit.
Frederick & Michael Construction Co., Inc. (F&M) was contracted to construct several buildings for Clasen Fruit and Cold Storage. These were completed in March, 1999. The buildings suffered wind damage to the roofs in 2001, 2003, 2005, and 2006. In the first two incidents, F&M repaired the roofs with Clasen paying for repairs.
In 2005, Clasen hired Continuous Gutter to make repairs. The final incident was the collapse of the roof of one building. This was attributed to “excessive moisture in the roof’s vapor barriers.” At this point, Clasen demanded that F&M pay for repair and replacement costs. In 2008, Clasen sued F&M for damages for breach of contract and negligent design and construction of the roof.
The decision then covered the meanings, in Washington law, of “termination of services” and “substantial completion.” The panel concluded that construction was “substantially completed in 1997” and “relevant services” by 2001. “But Clasen did not sue until 2008, some seven years after termination of any roof related services.”
Read the court’s decision…
Allowing the Use of a General Verdict Form in a Construction Defect Case Could Subject Your Client to Prejudgment Interest
August 2, 2012 — Heather Anderson, Higgins, Hopkins, McLain & Roswell, LLC
A recent opinion from the Colorado Court of Appeals is a cautionary tale concerning the calculation of pre-judgment interest. See Hendricks v. Allied Waste Transportation, Inc., 2012 WL 1881004 (Colo. App. 2012). The Hendricks sued Allied after one of its drivers backed into the corner of their home with an Allied garbage truck. At trial, a jury awarded the Hendricks $160,100 in damages. Although the jury was instructed on the cost of repairs, diminution in value, and non-economic damages, the parties agreed to a general verdict form that did not ask the jury to specify the types of damages awarded. The Hendricks sought to amend the judgment to include prejudgment interest and costs, which the trial court granted.
Allied appealed, arguing that the trial court erred by awarding the Hendricks prejudgment interest from the date their property was damaged. Id. at *7. The Colorado Court of Appeals found no error, and affirmed.
Read the full story…
Reprinted courtesy of Heather Anderson, Higgins, Hopkins, McLain & Roswell, LLC. Ms. Anderson can be contacted at anderson@hhmrlaw.com
Texas Court of Appeals Conditionally Grant Petition for Writ of Mandamus to Anderson
April 25, 2011 — April 25, 2011 Beverley BevenFlorez - Construction Defect Journal
The Texas Court of Appeals conditionally grant mandamus relief to Anderson Construction Company and Ronnie Anderson (collectively “Anderson”)… from the trial court in a construction defect lawsuit filed by Brent L. Mainwaring and Tatayana Mainwaring. See Tex. Prop. Code Ann. 27.001-.007 (West 2000 & Supp. 2010). Relators contend the trial court abused its discretion by compelling discovery while the case was abated by operation of law.
The Court of Appeals opinion describes what led up to the proceedings: “The Mainwarings’ original petition identified certain defects in their Anderson-constructed home. Those defects concerned the roof trusses and framing, air conditioning, mortar and masonry, exterior doors and windows, and weep holes. With respect to the five areas of defects identified in their original petition, the Mainwarings gave Anderson the statutorily required notice on January 13, 2010. After implementing agreed extensions, Anderson made an offer of settlement for the defects the Mainwarings identified in their notice. Almost eight months later, the Mainwarings filed an amended petition adding defects they had not included in their original petition and notice. The additional defects the Mainwarings included in their amended petition had not been addressed by Anderson’s offer of settlement.”
Following these events, Anderson claimed the Mainwarings did not respond in writing to their settlement offer. “Anderson filed a verified plea in abatement on December 2, 2010. In the trial court, Anderson claimed that the Mainwarings failed to respond in writing to Anderson’s settlement offer, as required by Section 27.004(b) of the RCLA. See Tex. Prop. Code Ann. 27.004(b)(1). The Mainwarings moved to compel discovery responses from Anderson. The Mainwarings alleged that they rejected Anderson’s settlement offer, and that if their response was insufficient, they contend that Anderson’s offer was rejected by operation of law on the twenty-fifth day after the Mainwarings received it. See Tex. Prop. Code Ann. 27.004(i). The Mainwarings’ motion to compel was not supported by affidavit. See Tex. Prop. Code Ann. 27.004(d)(2). On January 13, 2011, Anderson filed a verified supplemental plea in abatement. Anderson alleged that the Mainwarings failed to provide written notice concerning the newly alleged defects and complained the Mainwarings were attempting to circumvent the inspection and resolution procedure of the RCLA. Over Anderson’s objection that the lawsuit had been abated, the trial court granted the Mainwarings’ motion to compel discovery.”
After listening to both sides, the Court of Appeals offered this reasoning for their opinion: “The parties do not dispute that Anderson inspected the property before the Mainwarings alleged the existence of additional defects in their amended pleading, nor do the Mainwarings claim that Anderson has been given an opportunity to inspect the additional defects the Mainwarings identified in their amended pleadings. We conclude the trial court did not have the discretion to deny or lift the abatement until the Mainwarings established their compliance with the statute. In other words, the Mainwarings are required to provide Anderson a reasonable opportunity to inspect the additional defects identified by their amended pleading, which will allow Anderson the opportunity to cure or settle with respect to the newly identified defects.”
The Court of Appeals spoke directly on the issue of mandamus relief: “The Mainwarings contend that mandamus relief is not available because the trial court’s ruling does not prevent Anderson from making settlement offers during the discovery process. ‘An appellate remedy is “adequate” when any benefits to mandamus review are outweighed by the detriments.’ In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 136 (Tex. 2004). The failure to abate a case is typically not subject to mandamus. See In re Allstate Cnty. Mut. Ins. Co., 85 S.W.3d 193, 196 (Tex. 2002) (citing Abor v. Black, 695 S.W.2d 564, 567 (Tex. 1985)). In this case, however, the case was abated by operation of law. By ignoring the statutory abatement, the trial court interfered with the statutory procedure for developing and resolving construction defect claims. See In re Kimball Hill Homes Tex., Inc., 969 S.W.2d 522, 525 (Tex. App. Houston [14th Dist.] 1998, orig. proceeding) (An appeal provides an inadequate remedy for the trial court’s failure to observe automatic abatement pursuant to the RCLA.). The benefits of mandamus review are not outweighed by the detriments of mandamus review in this case.“
In conclusion, “The trial court had no discretion to compel discovery while the case was abated, and Anderson, who has been compelled to respond to discovery during a period the case was under an automatic abatement, has no adequate remedy on appeal. Accordingly, we conditionally grant the petition for writ of mandamus. The writ will issue only if the trial court fails to vacate its order of February 3, 2011, and fails to refrain from proceeding with the case until a motion to reinstate is filed that establishes compliance with the notice and inspection requirements of the Residential Construction Liability Act.”
Read the trial court’s decision…
Arizona Court of Appeals Decision in $8.475 Million Construction Defect Class Action Suit
May 9, 2011 — May 9, 2011 Beverley BevenFlorez - Construction Defect Journal
In the case of Leflet v. Fire (Ariz. App., 2011), which involved an $8.475 million settlement in a construction defect class action suit, the question put forth to the Appeals court was “whether an insured and an insurer can join in a Morris agreement that avoids the primary insurer’s obligation to pay policy limits and passes liability in excess of those limits on to other insurers.” The Appeals court provided several reasons for their decision to affirm the validity of the settlement agreement as to the Non-Participatory Insurers (NPIs) and to vacate and remand the attorney fee awards.
First, the Appeals court stated, “The settlement agreement is not a compliant Morris agreement and provides no basis for claims against the NPIs.” They conclude, “Appellants attempt to avoid the doctrinal underpinnings of Morris by arguing that ‘the cooperation clause did not prohibit Hancock from assigning its rights to anyone, including Appellants.’ This narrow reading of the cooperation clause ignores the fact that Hancock did not merely assign its rights — it assigned its rights after stipulating to an $8.475 million judgment that neither it nor its Direct Insurers could ever be liable to pay. Neither Morris nor any other case defines such conduct as actual ‘cooperation’—rather, Morris simply defines limited circumstances in which an insured is relieved of its duty to cooperate. Because Morris agreements are fraught with risk of abuse, a settlement that mimics Morris in form but does not find support in the legal and economic realities that gave rise to that decision is both unenforceable and offensive to the policy’s cooperation clause.”
The Appeals court further concluded that “even if the agreement had qualified under Morris, plaintiffs did not provide the required notice to the NPIs.” The court continued, “Because an insurer who defends under a reservation of rights is always aware of the possibility of a Morris agreement, the mere threat of Morris in the course of settlement negotiations does not constitute sufficient notice. Instead, the insurer must be made aware that it may waive its reservation of rights and provide an unqualified defense, or defend solely on coverage and reasonableness grounds against the judgment resulting from the Morris agreement. The NPIs were not given the protections of this choice before the agreement was entered, and therefore can face no liability for the resulting stipulated judgment.”
Next, the Appeals court declared that “the trial court abused its discretion in awarding attorney’s fees under A.R.S § 12-341.” The Appeals court reasoned, “In this case, the NPIs prevailed in their attack on the settlement. But the litigation did not test the merits of their coverage defenses or the reasonableness of the settlement amount. And Plaintiffs never sued the NPIs, either in their own right or as the assignees of Hancock. Rather, the NPIs intervened to test the conceptual validity of the settlement agreement (to which they were not parties) before such an action could commence. In these circumstances, though it might be appropriate to offset a fee award against some future recovery by the Plaintiff Leflet v. Fire (Ariz. App., 2011) class, the purposes of A.R.S. § 12-341.01 would not be served by an award of fees against them jointly and severally. We therefore conclude that the trial court abused its discretion in awarding fees against Plaintiffs ‘jointly and severally.’”
The Appeals court made the following conclusion: “we affirm the judgment of the trial court concerning the validity of the settlement agreement as to the NPIs. We vacate and remand the award of attorney’s fees. In our discretion, we decline to award the NPIs the attorney’s fees they have requested on appeal pursuant to A.R.S. § 12-341.01(A).”
Read the court’s decision…
