Follow Up on Continental Western v. Shay Construction

In a post on February 2, 2012, this blog discussed the case of Continental Western Insurance Company v. Shay Construction, Inc., 805 F.Supp.2d 1125 (D. Colo. 2011). Recently the Court ruled on two Motions to Reconsider filed by Defendants Milender White and Shay Construction. 

Procedurally, the Motions to Reconsider were ruled on by the Honorable William J. Martinez, because the day after the motions were filed the action was reassigned to Judge Martinez. In the short analysis of the Motion to Reconsider, the court leaned on Judge Walker D. Miller’s ruling on the summary judgment and his analysis of the (j)(5) and (j)(6) exclusions.

As a quick refresher regarding the grant of summary judgment, Judge Miller agreed with Continental Western’s argument that the asserted claims were excluded under the “damage to property” exclusion. The policy’s exclusions state: “(j) Damage to Property . . . (5) that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations; or (6) that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Judge Miller found that both exclusions (j)(5) and (6) applied to both Shay’s allegedly defective work. Accordingly, Judge Miller found that the policy did not cover claims asserting breach of contract that do not involve property damage and the policy excluded the claims alleging property damage under exclusions (j)(5) and (6).

Based on the prior findings of Judge Miller, the court upheld the prior ruling granting summary judgment and denied the motions for reconsideration. The court found that while the defendants arguments for reconsideration of the (j)(5) and (j)(6) exclusions were viable, Judge Miller’s previous findings were reasonable and were not clearly erroneous. Without rising to the threshold of clearly erroneous, Judge Miller’s order granting summary judgment cannot be overturned. Thus, the court denied the Motions for Reconsideration, upholding Judge Miller’s prior order, but failing to discuss HB 10-1394 or the applicability thereof.

The ongoing determination of the applicability of HB 10-1394 continues and in the coming weeks this Blog will post articles regarding more cases which have dealt with HB 10-1394 and its codified statute C.R.S. §13-20-808.

For additional information regarding Colorado construction litigation, please contact David M. McLain at (303) 987-9813 or by e-mail at mclain@hhmrlaw.com.

The Hidden Dangers of Construction Defect Litigation

I was recently asked to write an article for the Common Interests magazine, the monthly periodical of the Rocky Mountain Chapter of the Community Associations Institute. In thinking about what I would say to community association managers, I came up with the idea of discussing those parts of construction defect litigation that get little coverage in Colorado today. I wrote the article, and they published it, which was somewhat of a shock to me. Here is the article from the March 2012 volume of Common Interests magazine:

By way of introduction, my legal practice has been almost entirely devoted to representing Colorado’s construction professionals, mostly in defense of construction defect (“CD”) cases brought by homeowners associations (“HOAs”). In this article, I will discuss some of the problems faced by HOAs and their boards, which are inherent in construction defect litigation.[1] These are important issues and there is seemingly no one out there discussing them.

The point of this article is not to suggest that dealing with construction defects is a simple issue, or that HOA boards should not seek legal and engineering advice when problems in construction come to light. The point is to suggest that HOA boards should be leery of taking the ready, fire, aim approach to resolution of construction defects issues. Filing a lawsuit should be the last resort of any HOA.

The main problem facing HOAs and their boards is the lack of communication to, and lack of consent to the filing of a CD claim by, individual owners within a common interest community. At this point, it is important to understand that most plaintiffs’ CD attorneys work on a contingency fee, usually 1/3 of the gross recovery if a case settles and 40% of the gross recovery if the case is tried. In typical CD cases, plaintiffs’ firms represent the HOA, not the individual members of an HOA, and have only to deal with the board. This is much easier for the plaintiffs’ counsel because it has to report only to a handful of people and not every owner in a community. It is this dynamic that causes potential problems for the HOA and its board.

One of the first steps in a CD case is to amend the HOA’s CC&Rs to remove any impediment to filing a lawsuit, such as arbitration clauses. This is likely the only chance individual members of the HOA have to weigh in on the lawsuit and the only reason they are involved at this point is that amending the CC&Rs requires a vote of the owners. After amendment, the HOA board rarely seeks input from the individual members regarding whether to file suit. HOA boards rarely inform individual owners that if they have problems in their homes, they have the right to bring an action against the builder themselves and that if they do so, they will have additional claims not available to the HOA, including claims for personal injury damages such as aggravation, annoyance, discomfort, etc. In some cases, individual owners would be better off asserting their own claims.

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 1/58^th 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 1/58^th 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. If, after the fact, the HOA board decides not to make certain repairs, that will have a negative effect on the property values of the individual owners who may then bring a claim against the HOA for acting in a manner not in their best interest, and in doing so without their knowledge or consent. A bigger problem exists if the members of the HOA board get their homes fixed and others get no repairs. In a situation like this, each of the owners must then disclose to potential purchasers that the suit was brought and that the experts identified defects which were left unrepaired. This again will have a negative impact on the value of the property, which will have occurred without the knowledge or consent of the individual owners. Further problems arise when the HOA board has repairs performed under no-bid contracts or when sufficient controls are not put in place to protect the HOA’s resources during the repair process.

Under Colorado’s existing statutory and case law, it is almost impossible for an HOA to recover all the money necessary to fund the repairs outlined by their experts. HOA boards must be aware of this and must engage in honest and open dialogues with its membership about the hidden dangers of CD litigation. Finally, HOA boards should get the approval from the individual owners prior to filing suit and prior to making any decisions regarding what to do with any amounts received in settlement or judgment. Not to do so may expose the HOA to liability.

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[1] I previously wrote an article discussing similar problems with CD litigation, from the HOA’s perspective, which you can read here: http://www.hhmrlaw.com/publications/lawsuits-avoidable.pdf.

If you can think of other hidden dangers of construction defect litigation, or can think of other examples of conflicts of interest arising as a result of it, please leave a comment below.

-- David M. McLain

HHMR Makes its Mark on the 2012 Lists of Super Lawyers and Rising Stars.

Higgins, Hopkins, McLain & Roswell (“HHMR”) is proud to announce that two of its attorneys have been named among Colorado’s Super Lawyers by Super Lawyers magazine and that two of its lawyers have been recognized as Rising Stars.

David B. Higgins (construction litigation and civil litigation defense) and Stephen Hopkins (construction litigation and personal injury defense: general) have been named to the Colorado Super Lawyers[1] list as two of the top attorneys in Colorado for 2012.  No more than five percent of the lawyers in the state are selected by Super Lawyers. This recognition is indeed exceptional given the fact that Dave and Steve are mostly retired and we do not exactly see them around the office very often.

David M. McLain (construction litigation and construction/surety) and Derek J. Lindenschmidt (construction litigation) have been named to the Colorado Rising Stars list as two of the top up-and-coming attorneys in Colorado for 2012. To be eligible for inclusion in the Colorado Rising Stars list, candidates must be either 40 years old or younger or in practice for ten years or less. While up to five percent of the lawyers in the state are named to the Colorado Super Lawyers list, no more than two and a half percent are named to the Rising Stars list.

HHMR exists to embody and exemplify the principles of service and stewardship. In everything we do, we focus on serving our clients selflessly and to the best of our ability. In doing so, we always have in the forefront of our minds our obligation to act as the stewards of our clients’ trust, confidences, and resources. We are highly regarded for our expertise in construction law and the litigation of construction claims. We represent a wide variety of clients, from individuals, to small businesses, to Fortune 500 companies. For more information visit our web site at www.hhmrlaw.com or call (303) 987-9870.

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[1] Super Lawyers, a Thomson Reuters business, is a rating service of outstanding lawyers for more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a rigorous multi-phased process that includes a statewide survey of lawyers, an independent research and evaluation of candidates, and peer reviews by practice area.

A Downside of Associational Standing - HOA's Claims Against Subcontractors Barred by Statute of Limitations.

In multi-family construction defect litigation in Colorado, homeowners associations rely on associational standing to pursue claims affecting more than two units and to bring claims covering an entire development. This practice broadens an association’s case beyond what individual, aggrieved owners would otherwise bring on their own against a developer or builder-vendor. However, reliance on associational standing to combine homeowners’ defect claims into a single lawsuit has its drawbacks to homeowners.

A recent order in the case Villa Mirage Condominium Owners’ Association, Inc., v. Stetson 162, LLC, et al., in El Paso County District Court, presents an example. There, the HOA unsuccessfully sought a determination from the court that its claims against subcontractors were not barred by the statute of limitations. To do so, the HOA's attempted to apply the Colorado Common Interest Ownership Act (“CCIOA”), which governs the creation and operation of HOAs, and a statute intended to apply to persons under a legal disability.

Under CCIOA, during the period of “declarant control” the developer may appoint members to the association’s executive board until sufficient homeowners have moved into the development and taken seats on the board. In Villa Mirage, the Association argued that a provision of CCIOA related to the period of declarant control and sharing tort liabilities between a developer and an association should toll the statute of limitations for claims against third-parties. That provision, C.R.S. § 38-33.3-311(1), states:

Neither the association nor any unit owner except the declarant is liable for any cause of action based upon that declarant’s acts or omissions in connection with any part of the common interest community which that declarant has the responsibility to maintain. Otherwise, any action alleging an act or omission by the association must be brought against the association and not against any unit owner. If the act or omission occurred during any period of declarant control and the association gives the declarant reasonable notice of and an opportunity to defend against the action, the declarant who then controlled the association is liable to the association or to any unit owner for all tort losses not covered by insurance suffered by the association or that unit owner and all costs that the association would not have incurred but for such act or omission. Whenever the declarant is liable to the association under this section, the declarant is also liable for all expenses of litigation, including reasonable attorney fees, incurred by the association. Any statute of limitation affecting the association’s right of action under this section is tolled until the period of declarant control terminates. A unit owner is not precluded from maintaining an action contemplated by this section by being a unit owner or a member or officer of the association. [emphasis added]

The court held that this statute section only governs claims between an association and a declarant, and that it cannot be stretched to toll a statute of limitations for claims against third-parties.

The HOA also equated the period of declarant control to a legal disability, during which the association was prevented from asserting claims against subcontractors, relying on C.R.S. § 13-81-103. That statute section tolls a statute of limitations to protect the rights of a person under a disability, until the person has legal representation, dies, or overcomes the disability. The Villa Mirage court referred to C.R.S. § 13-81-101(3), which defines a “person under disability” as “any person who is a minor under eighteen years of age, a mental incompetent, or a person under other legal disability and who does not have a legal guardian.”  The court stated that the statute protects the interest of individuals, and no case law applies this statute to business entities. The concise order suggests that this issue was an easy one for the court to decide.

While the court did not discuss in further detail, it can be presumed that if individual homeowners had viable claims against subcontractors, they should not have waited for their HOA to bring those claims. A homeowner association's drive to combine all claims affecting a development into a single lawsuit may sometimes be an economical means to litigate a case, but the interests of the individuals may be forgotten in the strategy to rely on associational standing.

To learn more about construction defect litigation in Colorado, you can reach Bret Cogdill by e-mail at cogdill@hhmrlaw.com or by telephone at (303) 987-9870.