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What You Always Thought You Knew: The Many Facets Of Construction Defect Litigation

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September 25, 2007

On September 10, 2007, the Court of Appeals handed down its decision in El Escorial Owners' Association v. DLC Plastering, Inc., 07 C.D.O.S. 10864. The decision was not novel; however, it does provide several good overviews of different aspects of construction defect litigation. Of the many issues addressed by the Court of Appeals, this article focuses on the following six: (1) Nuisance as a Cause of Action for in construction defect litigation; (2) the ability of a suspended corporation to recover its litigation costs and attorneys fees; (3) a court's power to allocate settlement; (4) Calderon Act and Statute of Limitations in construction defect actions; (5) the Collateral Source Doctrine; and (6) Expert Fees as Damages.

Background

Escorial is a condominium association consisting of 261 condominiums. Between 1990 and 1996, the apartments were converted to condominiums in a four-phase construction project.

On June 28, 1996, Escorial gave notice that it was proceeding under the Calderon Act and demanded its general contractor Investec, correct the construction defects. [1] On March 31, 2000, Escorial filed a construction defect lawsuit against 35 contractors and subcontractors, alleging causes of action for negligence, nuisance, and breach of implied warranties. Defendant Investec cross-complained against its subcontractors for indemnity. The court approved good faith settlements totaling $10,629,759. Escorial proceeded to trial against the subcontractors who did not settle. Investec had assigned its indemnity claims against these subcontractors to Escorial. The subcontractors were Pyramid, an installer of bathtubs and windows; Mid-Cal and Coastline, painters; Alderman, a framing contract; and DLC, a plastering contractor.

The trial court determined that DLC caused $7,000,000 in damages and Alderman caused $1,600,000 in damages. The trial court held that DLC and Alderman were entitled to a setoff based upon the amounts obtained in the good faith settlements. The trial court held that Coastline, Mid-Cal and Pyramid were not liable. They filed motions for attorneys fees based on fee provisions in the indemnity contracts. Escorial objected to Mid-Cal's request for fees because its corporate status had been suspended for not paying taxes.

A. Nuisance

Escorial contended that the trial court erred by rejecting its cause of action for nuisance. The Court in upholding the trial court's decision cited, City of San Diego v. U.S. Gypsum Co., 30 Cal.App.4th 575, 584 (1995), which concluded that a city could not maintain a nuisance cause of action for asbestos contamination of its buildings. In order to state a cause of action for nuisance, "sufficient facts must be alleged so that the court may conclude that a nuisance exists within the provisions of the statute." People v. Lim, 18 Cal.2d 872, 881 (1941). Additionally, nuisance is usually accompanied with a request for an injunction and not monetary damages. Here, Escorial did not properly allege the necessary facts and requested improper relief. Escorial alleged the same factual allegations as it did for its negligence and defective workmanship causes of action. Where negligence and nuisance causes of action rely on the same facts about lack of due care, the nuisance claim is a negligence claim. City of San Diego v. U.S. Gypsum Co., supra, 20 Cal.App.4th at 587.

 

Most importantly the Court noted that: "A nuisance in many, if not in most, instances, especially with respect to buildings or premises presupposes negligence." Lussier v. San Lorenzo Valley Water Dist., 206 Cal.App.3d 92, 104 (1988). Or stated another way, a negligence claim presented in the garb of nuisance need not be considered apart from the negligence claim. Atherton Condominium Apartment-Owners Assn. Bd. Of Directors v. Blume Development Co., 799 P.2d 250, 263 (Wash. 1990).

Accordingly, it appears that unless the plaintiff can establish facts unique to a nuisance cause of action and seeks the appropriate relief, a court will reject a nuisance cause of action in construction defect actions.

B. A Suspended Corporation's Ability To Recover Attorneys' Fees

Escorial contended the trial court erred by allowing Mid-Cal to appear in the action and to receive its litigation costs because its corporate status was suspended for nonpayment of taxes. The general rule is that "a suspended corporation may not prosecute or defend an action." Rev & Tax Code, 19719. However, Revenue and Taxation Code section 19719(b) contains an exception which allows insurers to intervene in an action on behalf of the suspended corporation. Escorial argued that Kaufman & Broad Communities, Inc. v Performance Plastering, Inc., 136 Cal.App.4th 212, 217 (2006) interpreted section 19719 and held that "an insurance company must intervene in the lawsuit to protect the rights of its insured suspended corporation." Escorial argued that since the insurance carrier did not intervene, but rather defended in Mid-Cal's name it was not allowed to prevail.

The Court in acknowledging the Kaufman decision sided with Mid-Cal's insurance carrier by holding:

Escorial may "not prevail solely by retroactively applying a new procedural rule after it had lost on the merits at trial. The insurer did not predict the Kaufman decision. To penalize it for not anticipating a change in the law, would unfairly punish it 'for a lack of extrasensory perception.'" Clemens v. Regents of University of Calif., 8 Cal.App.3d 1, 20 (1970).

We disagree with the Court's analysis. The insurance company should have intervened in the action. Kaufman did not change the Revenue and Taxation Code and Corporations Code, but rather Kaufman rightfully interpreted the codes as requiring intervention. While the Court allows the insurance carrier to retain counsel in the action, its analysis should be limited to the situation where the insurer's actions were well before the Kaufman decision. Clearly, the best course of action is to intervene in insurance carrier's name and not retain defense counsel.

C. Settlement Allocation

The trial court approved several good faith settlements. DLC, Alderman and Escorial, each for their own reasons, argue that the trial court's allocations were incorrect. However, the Court of Appeals upheld the trial court's allocations. In a complex multiparty construction defect case, a trial court may have to use rough categories to initially determine good faith settlement allocations for various types of construction defects. Regan Roofing Co. v. Superior Court, 21 Cal.App.4th 1685, 1705 (1994). Then after any future trial of plaintiffs' claims against the nonsettling defendants the trial court may have to take evidence to calculate the offsets due those defendants, in distinguishing among the various defect categories. Id. (Emphasis Added.)This flexibility is necessary because in settlements involving multiple building trades and multiple construction defects, the allocations may involve some degree of overlap between the trades. Id.

The Court of Appeals in upholding the trial court's analysis, noted: "a statement of decision may be wrong, but the judgment must be affirmedif it is correct on any theory." Mike Davidov Co. v. Issod, 78 Cal.App.4th 597, 610 (2000).

The Court's analysis and strong support of the trial court emphasizes the broad discretion a trial court has in approving good faith settlements and allocating the costs amongst the parties. The purpose in upholding the trial court's good faith settlement is to encourage settlement by the parties. Accordingly, based upon the analysis provided, the trial court must abuse its discretion before the court of appeals will overturn a good faith settlement.

D. Statute Of Limitations And Calderon Act

The Calderon Act requires common interest development associations to give notice to builders about construction defects before suing. The statute provisions that notwithstanding any other provision of law, the notice by the association shall, upon mailing, toll all statutory and contractual limitations on actions against all parties who may be responsible for the damages claimed, whether named in the notice or not, including claims for indemnity applicable to the claim, for a period of 150 days or a longer period agreed to in writing by the association and the builder.

Alderman presented a strong, but unsuccessful argument that the Calderon Act is not applicable. Alderman contended that because it was a subcontractor, not the builder and not a party to the tolling agreement, it is not bound by the Act.

The Court rejected the argument because statutes should be given a construction consistent with the legislative purpose. The Calderon Act promotes the goal of encouraging settlements, repairs and discouraging unnecessary litigation. Shaffer v. Debbas, 17 Cal. App. 4th 33, 43 (1993). The broad tolling provisions apply to the builder and "all parties who may be responsible for the damages" whether or not they are named in the notice.

Although the Calderon Act provides for an automatic 150 day tolling period, the parties may agree in writing to toll the statute of limitations for a longer period. Here, the Court rejected Alderman's argument that it could not be bound as it was not a builder because to do so "would add restrictions not found in the statute and impose requirements the parties could not have anticipated."[2]

The Calderon Act is a defense that should always be reviewed prior to answering any construction defect complaint. If the party does not comply with the requirements, it may have foregone its protections.

E. The Collateral Source Rule

DLC and Alderman contend that the trial court erred by applying the collateral source rule which allowed Investec and Escorial to be unjustly enriched by the insurance proceeds. It is implied that Investec and Escorial received first party insurance benefits.

The collateral source rule prevents tort defendants from reducing their liability by disclosing that the plaintiff received compensation from an insurance company. Patent Scaffolding Co. v. William Simpson Const. Co., 256 Cal. App. 2d 506, 510 (1967). Where a person suffers property damage, the amount of damages shall not be reduced by the receipt by him of payment for his loss from a source wholly independent of the person who caused the injury. Shaffer v. Debbas, 17 Cal. App. 4th 33, 40 (1993).

The collateral source rule has generally not applied in the indemnity setting because it is a contract cause of action. The collateral source rule has not been generally applied in cases founded upon breach of contract. Patent Scaffolding Co. v. William Simpson Constr. Co., supra, 256 Cal. App. 2d at 511.

Here, the trial court held that the monies sought by Investec and Escorial were not pursuant to the indemnity provisions, but rather were sought pursuant to allegations of negligence. Since the Court determined that the claim against DLC and Alderman is based upon negligence and causation, the Court held that the collateral source rule is applicable.

F. Expert Fees As Damages

An issue which almost always rears its head in construction defect litigation is whether a party is entitled to recover its expert fees. DLC and Alderman claim that the trial court erred in relying upon Stearman v. Centex Homes, 78 Cal.App.4th 611 (2000), in awarding Escorial expert fees as damages. The Court upheld that trial court's decision.

In Stearman, the court held that prevailing tort plaintiffs in a construction defect case who incurred fees for hiring experts are "entitled to be made whole." Stearman v. Centex Homes, 78 Cal.App.4th 611, 625 (2000). It ruled that expert fees incurred for repair or expert investigative services, that were not litigation costs, may be awarded as part of the damages.

DLC and Alderman argued that the experts were retained to aid in the litigation and thus the experts should be considered litigation fees and not subject to Stearman. The Court of Appeals side stepped the issue and noted that "[w]e presume the trial court resolved all conflicts and inconsistencies in the testimony of Escorial's experts against the appellants."

The Court of Appeals is trying to broaden the scope of Stearman. The Court noted "[o]ther decisions have applied the doctrine more broadly to include expenses for retaining experts to evaluate a party's claim or to discovery construction defects. Apple Valley Unified School Dist. V. Vavrinek, Trine, Day & Co., 98 Cal.App.4th 934, 949 (2002).

Although the El Escorial decision does not provide new law, it does provide an overview of the various nuisances which ordinarily develop in construction defect litigation. This decision also serves as a reminder that trial courts have broad discretion in construction defect litigation.


[1] Viola, the initial construction contractor, required its subcontractors to sign indemnity agreements and hold Viola harmless for construction defect. Viola was terminated. Investec, the new contractor, agreed to complete the construction and required Viola's subcontractors to sign an assumption agreement.

[2] The court also reiterated the statute of limitations applicable for construction defect actions. The statute of limitations for latent construction defects is 10 years from the "completion of the development or improvement." CCP 337, 338, A & B Painting and Drywall v. Superior Court, 25 Cal. App. 4th 349, 355 (1994).

September 25, 2007

On September 10, 2007, the Court of Appeals handed down its decision in El Escorial Owners' Association v. DLC Plastering, Inc., 07 C.D.O.S. 10864. The decision was not novel; however, it does provide several good overviews of different aspects of construction defect litigation. Of the many issues addressed by the Court of Appeals, this article focuses on the following six: (1) Nuisance as a Cause of Action for in construction defect litigation; (2) the ability of a suspended corporation to recover its litigation costs and attorneys fees; (3) a court's power to allocate settlement; (4) Calderon Act and Statute of Limitations in construction defect actions; (5) the Collateral Source Doctrine; and (6) Expert Fees as Damages.

Background

Escorial is a condominium association consisting of 261 condominiums. Between 1990 and 1996, the apartments were converted to condominiums in a four-phase construction project.

On June 28, 1996, Escorial gave notice that it was proceeding under the Calderon Act and demanded its general contractor Investec, correct the construction defects. [1] On March 31, 2000, Escorial filed a construction defect lawsuit against 35 contractors and subcontractors, alleging causes of action for negligence, nuisance, and breach of implied warranties. Defendant Investec cross-complained against its subcontractors for indemnity. The court approved good faith settlements totaling $10,629,759. Escorial proceeded to trial against the subcontractors who did not settle. Investec had assigned its indemnity claims against these subcontractors to Escorial. The subcontractors were Pyramid, an installer of bathtubs and windows; Mid-Cal and Coastline, painters; Alderman, a framing contract; and DLC, a plastering contractor.

The trial court determined that DLC caused $7,000,000 in damages and Alderman caused $1,600,000 in damages. The trial court held that DLC and Alderman were entitled to a setoff based upon the amounts obtained in the good faith settlements. The trial court held that Coastline, Mid-Cal and Pyramid were not liable. They filed motions for attorneys fees based on fee provisions in the indemnity contracts. Escorial objected to Mid-Cal's request for fees because its corporate status had been suspended for not paying taxes.

A. Nuisance

Escorial contended that the trial court erred by rejecting its cause of action for nuisance. The Court in upholding the trial court's decision cited, City of San Diego v. U.S. Gypsum Co., 30 Cal.App.4th 575, 584 (1995), which concluded that a city could not maintain a nuisance cause of action for asbestos contamination of its buildings. In order to state a cause of action for nuisance, "sufficient facts must be alleged so that the court may conclude that a nuisance exists within the provisions of the statute." People v. Lim, 18 Cal.2d 872, 881 (1941). Additionally, nuisance is usually accompanied with a request for an injunction and not monetary damages. Here, Escorial did not properly allege the necessary facts and requested improper relief. Escorial alleged the same factual allegations as it did for its negligence and defective workmanship causes of action. Where negligence and nuisance causes of action rely on the same facts about lack of due care, the nuisance claim is a negligence claim. City of San Diego v. U.S. Gypsum Co., supra, 20 Cal.App.4th at 587.

 

Most importantly the Court noted that: "A nuisance in many, if not in most, instances, especially with respect to buildings or premises presupposes negligence." Lussier v. San Lorenzo Valley Water Dist., 206 Cal.App.3d 92, 104 (1988). Or stated another way, a negligence claim presented in the garb of nuisance need not be considered apart from the negligence claim. Atherton Condominium Apartment-Owners Assn. Bd. Of Directors v. Blume Development Co., 799 P.2d 250, 263 (Wash. 1990).

Accordingly, it appears that unless the plaintiff can establish facts unique to a nuisance cause of action and seeks the appropriate relief, a court will reject a nuisance cause of action in construction defect actions.

B. A Suspended Corporation's Ability To Recover Attorneys' Fees

Escorial contended the trial court erred by allowing Mid-Cal to appear in the action and to receive its litigation costs because its corporate status was suspended for nonpayment of taxes. The general rule is that "a suspended corporation may not prosecute or defend an action." Rev & Tax Code, 19719. However, Revenue and Taxation Code section 19719(b) contains an exception which allows insurers to intervene in an action on behalf of the suspended corporation. Escorial argued that Kaufman & Broad Communities, Inc. v Performance Plastering, Inc., 136 Cal.App.4th 212, 217 (2006) interpreted section 19719 and held that "an insurance company must intervene in the lawsuit to protect the rights of its insured suspended corporation." Escorial argued that since the insurance carrier did not intervene, but rather defended in Mid-Cal's name it was not allowed to prevail.

The Court in acknowledging the Kaufman decision sided with Mid-Cal's insurance carrier by holding:

Escorial may "not prevail solely by retroactively applying a new procedural rule after it had lost on the merits at trial. The insurer did not predict the Kaufman decision. To penalize it for not anticipating a change in the law, would unfairly punish it 'for a lack of extrasensory perception.'" Clemens v. Regents of University of Calif., 8 Cal.App.3d 1, 20 (1970).

We disagree with the Court's analysis. The insurance company should have intervened in the action. Kaufman did not change the Revenue and Taxation Code and Corporations Code, but rather Kaufman rightfully interpreted the codes as requiring intervention. While the Court allows the insurance carrier to retain counsel in the action, its analysis should be limited to the situation where the insurer's actions were well before the Kaufman decision. Clearly, the best course of action is to intervene in insurance carrier's name and not retain defense counsel.

C. Settlement Allocation

The trial court approved several good faith settlements. DLC, Alderman and Escorial, each for their own reasons, argue that the trial court's allocations were incorrect. However, the Court of Appeals upheld the trial court's allocations. In a complex multiparty construction defect case, a trial court may have to use rough categories to initially determine good faith settlement allocations for various types of construction defects. Regan Roofing Co. v. Superior Court, 21 Cal.App.4th 1685, 1705 (1994). Then after any future trial of plaintiffs' claims against the nonsettling defendants the trial court may have to take evidence to calculate the offsets due those defendants, in distinguishing among the various defect categories. Id. (Emphasis Added.)This flexibility is necessary because in settlements involving multiple building trades and multiple construction defects, the allocations may involve some degree of overlap between the trades. Id.

The Court of Appeals in upholding the trial court's analysis, noted: "a statement of decision may be wrong, but the judgment must be affirmedif it is correct on any theory." Mike Davidov Co. v. Issod, 78 Cal.App.4th 597, 610 (2000).

The Court's analysis and strong support of the trial court emphasizes the broad discretion a trial court has in approving good faith settlements and allocating the costs amongst the parties. The purpose in upholding the trial court's good faith settlement is to encourage settlement by the parties. Accordingly, based upon the analysis provided, the trial court must abuse its discretion before the court of appeals will overturn a good faith settlement.

D. Statute Of Limitations And Calderon Act

The Calderon Act requires common interest development associations to give notice to builders about construction defects before suing. The statute provisions that notwithstanding any other provision of law, the notice by the association shall, upon mailing, toll all statutory and contractual limitations on actions against all parties who may be responsible for the damages claimed, whether named in the notice or not, including claims for indemnity applicable to the claim, for a period of 150 days or a longer period agreed to in writing by the association and the builder.

Alderman presented a strong, but unsuccessful argument that the Calderon Act is not applicable. Alderman contended that because it was a subcontractor, not the builder and not a party to the tolling agreement, it is not bound by the Act.

The Court rejected the argument because statutes should be given a construction consistent with the legislative purpose. The Calderon Act promotes the goal of encouraging settlements, repairs and discouraging unnecessary litigation. Shaffer v. Debbas, 17 Cal. App. 4th 33, 43 (1993). The broad tolling provisions apply to the builder and "all parties who may be responsible for the damages" whether or not they are named in the notice.

Although the Calderon Act provides for an automatic 150 day tolling period, the parties may agree in writing to toll the statute of limitations for a longer period. Here, the Court rejected Alderman's argument that it could not be bound as it was not a builder because to do so "would add restrictions not found in the statute and impose requirements the parties could not have anticipated."[2]

The Calderon Act is a defense that should always be reviewed prior to answering any construction defect complaint. If the party does not comply with the requirements, it may have foregone its protections.

E. The Collateral Source Rule

DLC and Alderman contend that the trial court erred by applying the collateral source rule which allowed Investec and Escorial to be unjustly enriched by the insurance proceeds. It is implied that Investec and Escorial received first party insurance benefits.

The collateral source rule prevents tort defendants from reducing their liability by disclosing that the plaintiff received compensation from an insurance company. Patent Scaffolding Co. v. William Simpson Const. Co., 256 Cal. App. 2d 506, 510 (1967). Where a person suffers property damage, the amount of damages shall not be reduced by the receipt by him of payment for his loss from a source wholly independent of the person who caused the injury. Shaffer v. Debbas, 17 Cal. App. 4th 33, 40 (1993).

The collateral source rule has generally not applied in the indemnity setting because it is a contract cause of action. The collateral source rule has not been generally applied in cases founded upon breach of contract. Patent Scaffolding Co. v. William Simpson Constr. Co., supra, 256 Cal. App. 2d at 511.

Here, the trial court held that the monies sought by Investec and Escorial were not pursuant to the indemnity provisions, but rather were sought pursuant to allegations of negligence. Since the Court determined that the claim against DLC and Alderman is based upon negligence and causation, the Court held that the collateral source rule is applicable.

F. Expert Fees As Damages

An issue which almost always rears its head in construction defect litigation is whether a party is entitled to recover its expert fees. DLC and Alderman claim that the trial court erred in relying upon Stearman v. Centex Homes, 78 Cal.App.4th 611 (2000), in awarding Escorial expert fees as damages. The Court upheld that trial court's decision.

In Stearman, the court held that prevailing tort plaintiffs in a construction defect case who incurred fees for hiring experts are "entitled to be made whole." Stearman v. Centex Homes, 78 Cal.App.4th 611, 625 (2000). It ruled that expert fees incurred for repair or expert investigative services, that were not litigation costs, may be awarded as part of the damages.

DLC and Alderman argued that the experts were retained to aid in the litigation and thus the experts should be considered litigation fees and not subject to Stearman. The Court of Appeals side stepped the issue and noted that "[w]e presume the trial court resolved all conflicts and inconsistencies in the testimony of Escorial's experts against the appellants."

The Court of Appeals is trying to broaden the scope of Stearman. The Court noted "[o]ther decisions have applied the doctrine more broadly to include expenses for retaining experts to evaluate a party's claim or to discovery construction defects. Apple Valley Unified School Dist. V. Vavrinek, Trine, Day & Co., 98 Cal.App.4th 934, 949 (2002).

Although the El Escorial decision does not provide new law, it does provide an overview of the various nuisances which ordinarily develop in construction defect litigation. This decision also serves as a reminder that trial courts have broad discretion in construction defect litigation.


[1] Viola, the initial construction contractor, required its subcontractors to sign indemnity agreements and hold Viola harmless for construction defect. Viola was terminated. Investec, the new contractor, agreed to complete the construction and required Viola's subcontractors to sign an assumption agreement.

[2] The court also reiterated the statute of limitations applicable for construction defect actions. The statute of limitations for latent construction defects is 10 years from the "completion of the development or improvement." CCP 337, 338, A & B Painting and Drywall v. Superior Court, 25 Cal. App. 4th 349, 355 (1994).