Monday, August 26, 2013

A few pictures from HHMR's day at the Home Builders Foundation 2013 Blitz Build

Issue and Claim Preclusion When Forced to Litigate Similar Issues in Different Forums: White River Village, LLP v. Fidelity and Deposit Company of Maryland

Often in construction litigation the parties wish to move the case to arbitration.  However, there are certain circumstances in which such change of litigation forums should be carefully analyzed.  The case of White River Village, LLP v. Fidelity and Deposit Company of Maryland, serves as an example of one of those circumstances.

In March 2013, U.S. District Court Judge Blackburn ruled on a motion for summary judgment filed by Fidelity and Deposit Company of Maryland (“F&D”).  The order grants the motion in part and denies it in part.  White River Village, LLP (“White River”) was the owner of the project which hired S&S Joint Venture (“S&S”), the contractor, to build two similar developments, directly adjacent to each other.  The contracts between Whiter River and S&S for the two projects were so substantially similar that the court referred to them as the S&S Contracts.  F&D issued payment and performance bonds guarantying the obligations of S&S under the S&S Contracts.

After S&S defaulted on the construction contracts, F&D, as the surety, undertook to complete performance on the contracts.  White River alleged that F&D was liable for construction defects and delays in completing the project, and failed to fulfill its obligations under the performance bonds after it overtook the construction of the projects.  Specifically, White River asserted claims for (1) breach of performance bonds; (2) bad faith breach of insurance/surety contract; (3) civil conspiracy; (4) negligence (against a different company); (5) breach of express warranty; (6) breach of payment bonds; (7) slander of title; and (8) deceit.

Initially, the case was brought in the U.S. District Court for the District of Colorado, but Judge Blackburn ordered the parties to arbitrate certain aspects of the case according to an arbitration provision in the S&S Contracts.  However, the bonds did not contain an agreement to arbitrate and, thus, White River’s claims based on those remained in district court and were stayed until conclusion of the arbitration.  Thus, F&D’s counterclaims went to arbitration and were fully litigated before White River was able to litigate its claims in the district court. 

F&D was successful in proving its counterclaims and third-party claims against White River in the arbitration.  White River was also allowed to assert various affirmative defenses in the arbitration, though it was not successful on any of them.  Accordingly, F&D filed the motion for summary judgment arguing that White River’s claims already were resolved in the arbitration.  F&D relied on the doctrines of issue preclusion and claim preclusion.  On the other hand, White River argued that its claims related to the bonds were stayed, not resolved, and reserved for litigation in federal court.

Judge Blackburn’s order immediately dismissed White River’s fourth and seventh claims, negligence and slander of title.  The negligence claim was asserted against a separate entity and the slander of title claim was conceded by White River.  Also, White River’s claim of deceit, the eighth claim, was entitled to summary judgment because the claim was barred by the economic loss rule.  Judge Blackburn then took the remaining claims in order and determined if they were precluded.

The first issue, breach of performance bonds, included a determination of what the arbitration panel decided and what was excluded from the panel’s consideration.  The exclusions are important as they continue through Judge Blackburn’s order.  The first exclusion was that the arbitration did not resolve White River’s claims based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings.  The second exclusion the panel did not resolve was White River’s claim based on the alleged failure of F&D to install Tyvek in some portions of the project. 

The other two issues excluded from the arbitration panel’s consideration dealt with damages -- the first being White River’s claim for replacement costs to the extent the panel did not determine the amount of replacement costs to which White River might be entitled, and the second being White River’s claims for liquidated damages.  In resolving the breach of performance bonds claim, Judge Blackburn stated that the arbitration resolved F&D’s obligations under the S&S contracts and that White River’s claims (save for the exceptions noted) were a part of that determination.  Thus, Judge Blackburn concluded, in accordance with the elements for issue preclusion, that the issues decided in the arbitration were: identical to the issues raised in the breach of performance bonds claim; the parties to the two proceedings are identical; the issues were adjudicated in the arbitration proceeding finally and on the merits; and White River had a full and fair opportunity to litigate these issues in arbitration.

As for the bad faith claim, Judge Blackburn found that White River was precluded from asserting factual contentions contrary to the myriad factual issues that were addressed and resolved by the arbitration panel.  Judge Blackburn did allow White River to bring its claim to the extent it would be based on the alleged conduct at issue in the exceptions noted.

Judge Blackburn found that White River’s civil conspiracy claim was not adjudicated by the arbitration panel and would not be precluded.

Similar to the bad faith claim, Judge Blackburn found the claim for breach of express warranty was not to be precluded for the specific carved out exceptions.  Otherwise, Judge Blackburn concluded that the issue had been resolved by the arbitration panel and White River was barred from asserting any factual contentions contrary to the panel’s conclusions.

Finally, White River’s breach of payment bond was completely precluded by Judge Blackburn.  The judge concluded that White River was obligated to raise the issue as a defense when addressing the breach of contract issues the arbitration.  Since White River never raised the issue in the arbitration, Judge Blackburn determined claim preclusion barred it from raising the claim in the district court case.

In summary, to the extent White River’s claims were based on the alleged failure of F&D to remove all pre-existing mold and other damaged materials prior to replacement of decks on the buildings or the alleged failure of F&D to install Tyvek in some portions of the project, and the associated damages claims, neither issue preclusion or claim preclusion bar the claims.  White River was barred from asserting: (1) any other claim that F&D breached the terms of the performance bond and the underlying S&S contracts in any way; (2) any claim that it did not breach its obligations under the performance bonds and the S&S contracts by failing to make payment under the S&S contracts; and (3) any factual contention that was contrary to the conclusions of the arbitration panel.

As the White River case demonstrates, arbitration is not always the best course of action for a contractor.  There are other factors that need to be considered before a final decision is made regarding in what forum all or part of the case will be litigated.

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

Thursday, August 15, 2013

A Closer Look at an HOA Board Member’s Duty to Homeowners

Whenever a homeowner association (HOA) starts thinking in terms of a construction defect lawsuit against its developer and/or builder, its board members will inevitably be confronted with the purported risk and liability to their homeowners if they do not pursue the alleged defects and deficiencies brought to their attention.

Not surprisingly, the board members are on occasion led to believe that pursuing such claims is synonymous with acting in the homeowners’ “best interests.” Further—and unfortunately—board members often feel as though they will breach their obligation to the homeowners if they don’t agree to proceed with such claims.

Nevertheless, how well do we really know what the board members’ duty actually consists of, when it applies, and what potential liability exists for a board member’s breach of same?  The answers might surprise you.

Colorado’s Common Interest Ownership Act, which was enacted ideally to “establish a clear, comprehensive, and uniform framework for the creation and operation of common interest communities” – but which in reality provides the statutory basis for most multi-family construction defect lawsuits – describes a board member’s duty of care in express and unequivocal terms:

Except as otherwise provided in subsection (2.5) of this section [pertaining to the investment of the association’s reserve funds]:

(a)              If appointed by the declarant, in the performance of their duties, the officers and members of the executive board are required to exercise the care required of fiduciaries of the unit owners.

(b)       If not appointed by the declarant, no member of the executive board and no officer shall be liable for actions taken or omissions made in the performance of such member's duties except for wanton and willful acts or omissions.

C.R.S § 38-33.3-303(2) (emphasis added).  To be sure, as set forth in subsection (2)(a) above, an officer or board member appointed by the declarant, .i.e., the developer/builder, does indeed have a fiduciary duty to the homeowners. Accordingly, it is common for such declarant-appointed officers to be named personally in construction defect lawsuits.

Subsection (2)(b), in contrast, makes it very clear that HOA-appointed or elected officers and board members shall not be liable for their actions or omissions made within the performance of their duties, except for wanton or willful acts or omissions. In such instances, Colorado courts have determined that the board member’s conduct will be measured against the “business judgment rule,” which generally holds that board members will not be held liable for errors or mistakes in judgment, pertaining to law or fact, when they have exercised their judgment or discretion in good faith.

Furthermore, Colorado law makes it clear that courts will generally not interfere with a board member’s decision regarding whether to pursue a claim, provided they engage in a “reasonable and honest exercise of [that] judgment.” See Rywalt v. Writer Corp., 526 P.2d 316 (Colo. 1974).  

In the context of a board member’s decision to [or not to] pursue claims against a developer or builder for alleged construction defects, it reasonably follows that such a board member will not be subject to liability unless they willfully or wantonly fail to exercise judgment and discretion in good faith.

Given Colorado’s construction litigation climate, where homeowners and communities are subjected to long and frustrating legal battles with uncertain results (while the attorneys and forensic experts profit), it begs the question whether the board members’ decision to pursue such claims was really in the homeowners’ best interests in the first place.

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

Thursday, August 8, 2013

Lenders and Post-Foreclosure Purchasers Have Standing to Make Construction Defect Claims for After-Discovered Conditions

The Colorado Court of Appeals has decided a case which answers a question long in need of an answer: do banks/lenders have standing to assert construction defect claims when they receive title to a newly-constructed home following a foreclosure sale or deed-in-lieu of foreclosure?  The decision was released on August 1, 2013, in the case of Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlack Geotechnical, Inc., Steve Pawlak, Daniel Hadin, and S K Peightal Engineers, Ltd. (Colorado Court of Appeals No. 13CA0519).

The background facts of the case are typical of a Colorado residential construction defect case generally.  A developer contracted for an analytical soil engineering report from a geotechnical engineering firm (H-P) which made a foundation recommendation.  The developer’s general contractor then retained an engineering firm (SPKE) to provide engineering services, including a foundation design. The general contractor built the foundation in accordance with the H-P and SPKE criteria and plans.

The house was not sold by the developer and went into default on the construction loan.  These events resulted in a deed-in-lieu of foreclosure to a bank-controlled entity which purchased the house for re-sale.  Shortly after receiving the developer’s deed, the bank-related entity discovered defects in the foundation that resulted in a construction defect suit against the two design firms and related individuals.  The defendant parties moved for summary judgment on the negligence claims, based on the economic loss rule.  The latter rule precludes the bringing of a tort/negligence claim based on a claimed breach of duty which also exists as a term of a contract between the parties.

The Court of Appeals decided this case on an interlocutory appeal by the defendants from the denial of summary judgment.  In reviewing the case, the Court relied primarily on the “independent duties” of construction professionals as applied in the prior cases of Cosmopolitan Homes v. Weller, 663 P.2d 1041, 1042-43 (Colo. 1983) and Yacht Club II Homeowners Ass’n. v. AC Excavating, Inc.,  114 P. 3d. 862 (Colo. 2005).  

The Cosmopolitan case held that a successor homeowner could assert newly discovered claims against a builder-vendor which were latent and therefore not discoverable at the time of purchase of the home.  The separate Yacht Club II case held that there was an independent duty of due care owed by subcontractor construction professionals to homeowners to “act without negligence in the construction of homes.”  To get to its result in Mid Valley, the Court conflated the holdings of both prior cases, and even engaged in retrospective application of Cosmopolitan to the Colorado cases involving the economic loss rule, in order to circumvent its effects in Mid Valley.  In other words, this was more of a case about public policy and avoidance of technical defenses raised by builders than it was a legal analysis of the economic loss rule.

The arguments advanced by the defendants claimed that the economic loss rule should bar the negligence claims of the bank-related homeowner because it was not a “homeowner” in the conventional sense of that word.  The Court said, in substance, that the duties of Comospolitan and Yacht Club II owed by construction professionals were the same regardless of the nature or identity of the “homeowner.”   The Court also said that it could not decide whether the lender was the alter ego of the bank-related entity based on the record before it. Therefore such allegations were not deemed proven, nor were they assumed. However, the tenor of the opinion suggests that the identity of the homeowner was irrelevant to the policy analysis that followed.

In substance, the Court held that the technical arguments of the defendants about the bank-related entity’s standing and the application of the economic loss rule were trumped by the legal “duty” holdings of Cosmopolitan and Yacht Club II as they pertained to construction professionals.  Further, the Court made it clear in its discussion that it did not want to see a “windfall” dismissal of the claims accrue to a construction professional simply because the property owner was not a consumer or a more conventional owner. 

While the case may be limited in its application because it was an interlocutory appeal, and because the factual record was not fully developed, it is the first indication that lenders, foreclosure investors, and even distressed property speculators may have the ability to assert construction defect claims as successors in title.  The case may yet be appealed to the Colorado Supreme Court for further proceedings, but its inclination for taking interlocutory appeals is very small. 

For now, the appellate question of legal standing for successor owners (regardless of their identity) pressing tort claims has been answered, at least where latent and later discovered problems manifest for the first time after the ownership has been transferred. By logical extension of Cosmopolitan, such claims would be barred for a successor owner if the problems were manifest at the time of transfer. 

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

Thursday, August 1, 2013

Limitations on the Ability to Withdraw and De-Annex Property from a Common Interest Community

On February 28, 2013, the Colorado Court of Appeals issued its opinion with regard to the ability of an owner (and in this case, a real estate investment owner) to withdraw and de-annex lots from a common interest community.  Specifically, in Vista Ridge Homeowners Ass’n., Inc. v. Arcadia Holdings at Vista Ridge, LLC, 300 P.3d 1004 (Colo. App. 2013), the Court denied Arcadia’s appeal of a lower Colorado District Court ruling which invalidated Arcadia’s attempt to withdraw and de-annex 70 single-family lots which it owned from the 94-lot Vista Ridge Filing No. 9.

The applicable Declaration reserved the right to withdraw or de-annex any portion of the community in accordance with the Colorado Common Interest Ownership Act (CCIOA), and further limited such right to the extent that “no portion of the Property may be withdrawn or de-annexed after a Lot or Unit in that portion of the Property has been conveyed to an Owner other than a Declarant or a Builder.”
The decision ultimately turned on the meaning of a “portion” of the property, as intended by CCIOA, and as applied to the specific language in the Vista Ridge Declaration.  Subsection 210(4) of CCIOA governs when a declaration subjects “all or a portion of the real estate” to a right of withdrawal, and imposes parallel restrictions depending on whether the real estate is divided into portions:

(a)    If all the real estate is subject to withdrawal, and the declaration does not describe separate portions of real estate subject to that right, none of the real estate may be withdrawn after a unit has been conveyed to a purchaser; and

(b)   If any portion of the real estate is subject to withdrawal, it may not be withdrawn after a unit in that portion has been conveyed to a purchaser.
C.R.S. §28-33.3-210(4) (emphasis added).  Whereas the applicable Declaration described the lots as “Lot 1 through 94, Vista Ridge Filing No. 9,” the Court found this sufficient description of a separate portion of the Vista Ridge development, and therefore subject to Subsection 210(4)(b). In so finding, the Court concluded that CCIOA prohibited Arcadia from de-annexing the 70 lots that it still owned from the Filing No. 9 plat.

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


The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter.