utahcondolawblog

I had the privilege and honor to be an invited guest at Community Solutions & Sales’ monthly managers’ meeting today; I spoke to an attentive group about construction defect litigation. The stories that I told — and those that I heard — all shared a common theme; construction defect litigation is too time consuming, too expensive and too destructive to communities.

Unfortunately, the other common theme is that there’s still a lot of defective construction out there, and developers and contractors would often rather deny than address the problems. We can only hope that proposed changes in civil procedure (the rules by which lawsuits are governed), and a realization of the need for better alternatives, can result in prompter, more efficient resolutions to these issues when they arise.  (As they will.)

I also enjoyed an informative presentation by John Boekweg, C.P.A. and David Lewis, C.P.A.,  both with the accounting firm of HEB Business Solutions, who both spoke knowledgeably about community association audits and taxes, and the need to retain professional accountants with knowledge of the industry.

Several months ago, the New York Times posted a story on the proven hazards associated with so-called “Chinese Drywall.”  Here’s the story.

Let’s hope that there’s no Chinese drywall that made it into Utah.  If there is, the manufacturers will be insulated from liability, thanks to our Utah Legislature and HB 220, which they passed two years ago.

Section 1: The Economic Loss Rule

The Davencourt opinion begins with the analysis of the most eagerly anticipated portion of the opinion; how the Court would deal with the economic loss rule.

Background on the Economic Loss Rule

The economic loss rule, as it applies to construction disputes in Utah and more particularly with community associations, began with the 1996 ruling in the case of American Towers Owners Ass’n v. CCI Mechanical. In that case, the Court held that in the absence of physical property damage to “other property,” or personal injury, economic losses could not be recovered through a negligence claim. (Simply stated, a negligence claim involves an assertion that one party failed to comply with duties involved to another – in building, for example, to meet the “standard of care” expected of a contractor.) Because of the American Towers ruling, it has been difficult for community associations to pursue claims against developers.

In 2002, the Court limited the Economic Loss Doctrine somewhat in the case of Hermansen v. Tasulis; in that case, the court held that the doctrine did not bar claims where one party owed an “independent duty” to the other party. The Hermansen case, which we filed and argued, involved claims against real estate agents.

Davencourt’s Holdings Respecting the Economic Loss Rule

The plaintiff homeowners association, and I acting as amicus counsel for the Community Associations Institute, had hoped that the Court would further limit, or even overrule the American Towers case, because of its adverse consequences to community associations. The ultimate goal would have been the elimination of the doctrine, at least as it related to construction defect claims asserted by community associations which, by their nature, do not have contractual relations with the builders. A lesser, but still desirable result, would have been the establishment of an independent duty to be owed from builders to the purchasers in community associations.

In Section I.A. of the opinion, the Court rejected an outright reversal of American Towers, stating that the doctrine was “particularly applicable to claims of negligent construction.” Furthermore, the opinion expressed an inability to overrule the doctrine based upon the “codification” of the doctrine in Utah Code Ann. 78B-4-513. (That section of the code arose from the Legislature’s passage of Senate Bill 220, in 2008.

In Section I.B., the Court next refused the Association’s request that the Court recognized that the unique status of community associations warranted that the doctrine not be applicable to associations. The Court declined, asserting that contractual expectations created in the contracts among the Unit Owners, the Developer and the Builder” could not be ignored. Under the ruling, then, neither an individual owner nor an association can pursue a claim, in negligence, against the Builder.

The third argument rejected by the Court was a contention that various components of the structures had been damaged by defects in other components, triggering the “other physical damage” exception to the doctrine. Again, the Court rejected this argument, finding that Unit Owners had not bargained for individual components, but rather for “a finished product, which included the integral components of the roof, the foundation and the siding.”

Turning to the review of “independent duties,” the Court rejected a request to extend the independent duty between a contractor-seller and a home purchaser to a similar duty between a contractor-seller and the Association. Interestingly, however, the Court appears to have clearly established that a contractor-seller’s duty “to disclose known material information” to a buyer. If the Developer of a condominium project was also the contractor-seller, that developer/contractor-seller would owe each unit owner a duty to disclose known defects in the units and the common areas, an interest in which was also being sold.

Next, the Court held, to a limited degree, that the developer’s limited fiduciary duty to the Association does fall outside of the doctrine. The Court expressly recognized and acknowledged “the inherent conflict that a developer faces in promoting and marketing property for a profit, while simultaneously ensuring the interests of a homeowners association and its members…” In light of the conflict, the Court expressly adopted Section 6.20 of the Restatement (Third) of Property, which establishes several clear and important duties owed by a developer to an association. These duties, set out in full here, include 1) “reasonable care and prudence in managing and maintaining the common property;” 2) establishment of a sound fiscal basis for the association; 3) disclosure of developer subsidies, if any; 4) records and an accounting; 5) compliance with governing documents; 6) disclosure of “material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and 7) disclosure of “all material facts and circumstances affecting the financial condition of the association…”

The Court’s opinion stated: “In adopting this limited fiduciary duty, we recognize that it constitutes a newly-recognized independent duty of care in Utah.” These types of claims, the Court stated, “lie outside of the economic loss rule.” Recovery under this independent duty, however, is restricted to the common areas. The Court indicated that the association could “bring its claims for negligence and negligent misrepresentation against the [developer] insofar as the claims stem from the limited fiduciary duty owed.”

In the next successive sections of its opinion, the Court declined to find an independent duty to comply with the building code, and declined an independent duty to build without negligence in the construction of a home. The Court’s opinion seems to intentionally leave open the possibility, however , that the Court could find such a duty in a sale between a contractor/seller of a new home, and a buyer.

As promised, I’m trying to figure out, and to help others to figure out, what the new Davencourt v. Davencourt opionion means; I plan on spending a few hours reviewing the case while I’m on a plane tomorrow, continuing that quest. In anticipation of that, and to help make this more manageable, I’ve typed out the case outline, as set forth in the opinion. In the next several posts, I’ll comment on each of these sections, and I’ll update each of them with a link, when I do. Hopefully, that will be helpful.

The Davencourt Opinion — An Outline

I. THE DISTRICT COURT ERRED, IN PART, IN APPLYING THE ECONOMIC LOSS RULE

A. The Economic Loss Rule Remains in Force

B. The Economic Loss Rule Applies Despite Whatever Unique Relationship Exists Among the Association, Developer, Builder and Unit Owners

C. Construction Components Integrated into a Finished Product Do Not Constitute “Other Property”

D. The Existence and Scope of Independent Duties

1. Neither the Builder, the Developer, Nor Woolstenhume, in Their Respective Expertise and Relationships, Owe the Nonpurchasing Association an Independent Duty

2. The Limited Fiduciary Duty Owed by a Developer in Control of a Homeowner’s Association Falls Outside the Scope of the Economic Loss Rule

3. Utah Does Not Recognize an Independent Duty to Conform to the Building Code

4. Utah Does Not Recognize an Independent Duty to Act Without Negligence in the Construction of a Home

II. UTAH RECOGNIZES A CAUSE OF ACTION FOR BREACH OF THE IMPLIED WARRANTY OF WORKMANLIKE MANNER AND HABITABILITY

III. THE DISTRICT COURT MISAPPLIED THE COLLATERAL RIGHTS EXCEPTION OF THE MERGER DOCTRINE TO DISMISS THE CONTRACT AND EXPRESS WARRANTY CLAIMS

A. Contract and Warranty Claims Regarding the Quality of Construction Are Collateral to the Conveyance of Title

B. The Absence of an Act After the Delivery of the Deed Is Not Conclusive Evidence of the Parties’ Intent

IV. THE DISTRICT COURT ABUSED ITS DISCRETION IN DENYING THE ASSOCIATION’S MOTION TO AMEND THE COMPLAINT AND REINSTATE DISMISSED CLAIMS

and it looks like a mixed bag. The Court refused to overrule the American Towers case (I think a bad thing, but ameliorated by the rest of the opinion), expressly adopted Section 6.20 of the Restatement, Third of Property (I think a very good thing), and adopted an implied warranty of habitability on the sale of new property (also a very good thing).

They also made some really interesting rulings and made some interesting comments on the independent duties that will result in allowable negligence claims, even despite the economic loss doctrine. It will take some time, and probably more rulings, to clarify this area of the law.

I’ll post some more details, which will presumably be more meaningful to non-followers of the law, in the next few days.

I’m wrapping up a jury trial (hence the hour of this post), but have been informed by a reliable source that the Utah Supreme Court’s opinion in the Davencourt opinion (dealing with the “economic loss doctrine”) will be issued to the public at 10 a.m. tomorrow.

That’s all for now; check back tomorrow for updates. (It won’t be at 10 a.m., that’s the scheduled time for arguments to the jury.) I will, however, post an update and a link to the opinion at my earliest opportunity; that will be followed by a summary, sometime tomorrow or this weekend.

The Utah Court of Appeals, in an opinion last week, came out with a rather absurd result in a dispute between a condominium developer and unit purchaser.

The case, Flores v. Earnshaw, involved Mr. Seadhna Flores’ purchase of a yet-to-be-built condominium unit. Mr. Earnshaw and Mr. Flores both signed a Real Estate Purchase Contract (REPC) which called for a purchase price of “$144,950, less the $10,000 previously paid when Flores had exercised the earlier Option Agreement.” About a month later, Earnshaw called “to express concern about the selling price…” Earnshaw sought to revise the contract to increase the price of the unit to $179,950; Flores rejected this offer, and ultimately sued, seeking specific performance of the contract.

Following a trial, the trial court decided that the contract was ambiguous as to whether the parties intended to convey a fully built-out unit, or just a shell of a unit. The court found that the form language in section 1.l was ambiguous, and considered evidence outside of the contract to ascertain the parties’ intent. The court thus ordered the sale of a fully built out for $144,850. Earnshaw appealed.

The issue addressed by the Utah Court of Appeals involved whether or not the trial court was correct in allowing and considering the evidence outside of the contract. Ultimately, the court concluded that the court could only look to the contract to determine if it was ambiguous; it the contract itself did not appear ambiguous, the extrinsic evidence should be excluded. Looking only at section 1.1, the court found no ambiguity. Unfortunately for Mr. Flores, that section called for inclusion of “plumbing, heating and air conditioning fixtures, and equipment; ceiling fans; water heater; built-in appliances; light fixtures and bulbs; bathroom fixtures; curtains, draperies, and rods; window and door screens; storm doors and windows; window blinds; awnings; installed television antenna; satellite dishes and system; permanently affixed carpets; automatic garage door opener and accompanying transmitter(s); fencing; and trees and shrubs,” only to the extent that they were presently owned and attached to the property. Because none of the items were “owned and attached” as of the date of the contract, the court found the language unambiguous, and held that the admission of the extrinsic evidence was improper. Thus the court remanded the case (sent it back to the trial court) “for further proceedings consistent with this opinion.”

This is, obviously, an absurd result even if the case was decided correctly pursuant to evidentiary rules. There is no doubt, when the extrinsic evidence is considered, that Flores was expecting to buy, and Earnshaw originally intended to sell, a completed unit, with toilets and appliances. The court noted that the parties (and presumably the real estate agents, erred by using an REPC for completed construction. That fact, while true, is of little consolation to Mr. Flores.

The appellate court gave a few hints, and possible solutions, to Flores, in noting that the existence of an ambiguity can be found by reviewing the “contract taken as a whole.” Furthermore, the court noted that the parties had not argued “mutual mistake, reformation, impossibility or any other theory to support their positions.”

At this point, Mr. Flores and his counsel have the option to ask the Utah Supreme Court to review the Court of Appeals’ decision, or they can try to get the trial court’s reconsideration as to whether the contract, as a whole is ambiguous; Mr. Flores and his counsel could also seek to pursue some of the other theories suggested by the trial court. That may or may not be successful, depending upon the posture of the case.

This case should serve as a reminder of several things; the need for the assistance of competent advice in the purchase of property, the need to deal with an honest and reputable builder, and the need to carefully evaluate and pursue all legal options and theories when everything else fails. Although I had no familiarity with the case prior to last Thursday, (when the opinion was issued), I strongly suspect that the attorneys fees incurred by both both parties likely approached or exceeded the $35,000 difference in the original and proposed purchase price. And now, they get to go back to the trial court to fight some more.

For the past several weeks, I’ve been trying to protect Utah Community Associations and their owners (past, present and future), from SB 220, a bill pushed by the Utah Home Builders Association, and designed to protect builders from construction defect lawsuits. Here, for your review, is a copy of the letter that I sent to Utah representatives, who will be voting on this legislation on Monday.

If you have not done so yet, I encourage you to email or call your legislator.

Here’s a handy page that will help you to find your representative, by address:

Contact Your Representative

Dear Representative:

I am an attorney, practicing primarily community association law. I was the founder of the Utah Chapter of the Community Associations Institute and am a member of CAI’s College of Community Association Lawyers. (The opinions in this letter are my own.)

I have become aware of SB 220, and am very concerned regarding the adverse consequences that it would have, if it passes, upon community associations and those who buy and live in them. I have no doubt that the legislation, if it passes, would deprive most Utah homeowners from having any recourse in the event of defective construction.

I have received a copy of correspondence sent from a local realtor to a representative in support of the bill; I would respectfully request that you consider my responses to the arguments in the letter that you may have received:

“It codifies more than a decade of Utah case law currently in place”;

This is not true. The Utah Supreme Court stated several years ago, regarding to the American Towers decision, which this purports to “codify” : “we do not find American Towers Owners Ass’n and SME Industries persuasive authority regarding the current state of the economic loss rule in Wyoming or Utah.” (Grynberg v. Questar, 2003 UT 8,¶56, 70 P.3d 1). Several other cases have questioned and limited American Towers. I am certain that it is that clear trend, from Utah’s Supreme Court and Court of Appeals, that is spurring this legislation.

“It reinforces homeowners’ rights to bring claims under contract law, allowing current and subsequent homeowners to sue builders for defective construction under the terms of their contract or warranty”;

There is no need to “reinforce” a right to sue under contract. This right is clearly established under Utah law, and has been since statehood. This bill does absolutely nothing to create or reinforce any homeowners’ rights.

“It clarifies that homeowners and third parties may bring tort claims when a construction defect causes personal injury or damage to other property”;

Again, this right is clear under existing case law. This bill, however, would allow these claims to be pursued only when there is an injury. If a tub falls through the floor and kills or injures someone, there could be a lawsuit. If a tub falls through and lands on the concrete garage in a condo, there will probably be no suit, because there will be no “damage to other property” and no contract between the contractor and the homeowner.

“It strikes a balance between allowing a homeowner to sue for faulty work, while guarding against frivolous lawsuits.”

Many, if not most homeowners will not be able to sue because of the absence of a contract. Even where contracts exist, they are almost always drafted by the developer’s or contractor’s lawyer, and unit owners very seldom seek or obtain legal advice when purchasing their homes.
Furthermore, I have seen no evidence of “frivolous lawsuits”. On the rare occasions that frivolous lawsuits may be filed, the courts can and will respond by awarding attorneys’ fees to the defendants under Utah Code Ann. 78-27-56.

Why is the Utah Association of Realtors supporting SB 220???

“It protects the free market system and the home buyer’s right to choice”;

This does not, in any way, add any “right to choice”. What does it allow one to choose that they cannot currently choose?

“It helps insure that buyers have choices regarding the design, construction and warranty of their home”;

How does this bill even effect, much less help that “choice”? How does an owner’s inability to sue in negligence increase their choices in design?“

It prevents third parties from suing on behalf of homeowners who may not want to be part of a lawsuit”;

No one can sue on behalf of another without the other’s consent. A community association can, under current law, (which has been in place for thirty years) bring a suit on behalf of the association, but when that happens, the decision to sue is made by an elected board. No one is being forced, by anyone else, into lawsuits.

“It protects housing affordability by limiting frivolous lawsuits that artificially inflate home construction costs”;

I keep hearing this, and I keep asking for any evidence of “frivolous lawsuits”, but I am not seeing any evidence of any frivolous construction defect lawsuits. Furthermore, “housing affordability” necessarily includes the cost of repairs and maintenance. If builders are shielded from liability (by this or any similar bill), the cost of resultant repairs and maintenance will be borne by innocent homeowners.

“And, it gives buyers the option, in line with building code standards, to choose more affordable products for their homes, e.g., a 20-year shingle for a roof, rather than a 50-year on”.

Again, home buyers have that option right now. This adds nothing. In fact, under this law, they may get that 20 year roof without being told about it, because there will be no obligation on the builder to meet any standard of care.

“It protects homeowner and home builder insurance availability and affordability”.

There is no evidence that this will help availability or affordability of home builder or homeowner insurance. If it has any effect on homeowner insurance, it would almost certainly be negative, as homeowner insurers would lose their right to subrogate against builders.

“It reinforces homeowners’ rights to bring claims under contract law, allowing current and subsequent homeowners to sue builders for defective construction under the terms of their contract or warranty”;

A repeat of the same arguments above. Those rights exist, and this does not add to them.

“It clarifies that homeowners and third parties may bring tort claims when a construction defect causes personal injury or damage to other property”;

See above.

“It strikes a balance between allowing a homeowner to sue for faulty work while guarding against frivolous lawsuits”.

There is no balance for the majority of Utahns who don’t have contracts with their contractors, and thus would have no right to sue.

I sincerely thank you for your time and consideration of this important legislation. I respectfully suggest that there is no need for any legislation on the subject, but if there is to be legislation on an issue of this importance, it should be carefully considered and debated. That has not happened with this bill.

Lincoln W. Hobbs
801.519.2555

31 P.3d 576 (Ut. Ct. App. 2001)

The Snowflower case was another construction defect case with an unfortunate outcome for the association and its members. In Snowflower, the Association discovered construction defects in connection with a remodelling project; their claims against the developer were all thrown out by the Utah Court of Appels, based largely upon the “economic loss rule” and the absence, in Utah, of implied warranties of habitablity and fitness.

The Snowflower case did not create any shocking new law in Utah, and its conclusion was rather predictable, given the then-existing status of the “economic loss rule” in Utah and the length of time that had elapsed since construction. Time will tell, however, whether or not the Snowflower case remains viable following the recent developments in case law presented by Hermansen and Yazd.

930 P.2d 1182 (Utah 1996)

The American Towers opinion, dealing with an association’s right to pursue developers and contractors for construction defects, put a disastrous impediment – “the economic loss rule” – in the way of associations’ efforts to seek redress for poor construction. Fortunately, the underpinnings of American Towers have been limited by several subsequent cases, and the viability of the opinion is questionable. Because of its historical significance, however, a review of the case is warranted.

The first claim for relief which was rejected in American Towers was the association’s claims for breach of contract and warranty. The court held that the association was not a party to any contracts with the contractors, and held that the association was not a clearly intended third-party beneficiary of the contracts between the developer and the contractors.

Next, the Court discarded the association’s negligence claims based upon the determination that negligence claims cannot stand for purely economic losses resulting from negligence, in the absence of physical harm to persons or other property. The Court held that the association’s (and the owners) damages were all economic in nature, and thus should be protected by contracts agreed to between the parties.

The Court’s determination that the association was not entitled to sue under the contracts to which they were not parties, followed by the preclusion of a negligence claim, effectively left associations with few, if any methods of recourse against builders. American Towers left the option of pursuing developers, but developers often insulate themselves from liability through the use of limited liability companies that are disolved at the end of construction. Naively, the court suggested that “A buyer can avoid economic loss resulting from defective construction by obtaining a thorough inspection of the property prior to purchase and then by either obtaining insurance or by negotiating a warranty or reduction in price to reflect the risk of any hidden defects.”

Lastly, the Court rejected the imposition of an implied warranty of habitability in condominiums, again based upon the naive determination that “a condominium homeowners’ association typically oversees the management, maintenance, and operation of the units. The potential buyer can contact this association, which is equipped to know of respond to, and guard against defects in the complex.” In making this assertion, the Court closed its eyes to the reality that the association is inevitably controlled by the developer/seller during the initial sales period, and it is often conflicted from “responding to” defects.

Fortunately, the subsequent opinions of Hermansen and Yazd have significantly cut back upon the pronouncements of American Towers, and associations do, in fact, now have options and remedies available when construction defects are discovered.