Colorado Court of Appeals Decides the Triple Crown Case

In an earlier blog post, we discussed the case of Triple Crown Observatory Village Assn., Inc. v. Village Homes of Colorado, Inc., et al (2013 WL 5761028) because it presented the rare case where the Colorado Court of Appeals accepted an interlocutory appeal. Notably, the interlocutory appeal resulted from dismissal of the HOA case in which the trial judge directed the parties to arbitrate in lieu of a jury trial, under the declaration of covenants, conditions, and restrictions that governed the community. The Court of Appeals decided the case on its merits on November 7, 2013, and its decision can be found at 2013 WL 6502659. (Note: this presently unpublished opinion may be subject to further appeal to the Colorado Supreme Court.)

The case resulted from an attempt by the HOA’s counsel to amend the mandatory arbitration provisions of the declarations before it filed suit.  This amendment process took the form of soliciting signature votes of homeowners on a revocation resolution to repeal the specific provisions of the declarations that provided mandatory, binding arbitration as the sole remedy for disputes between the HOA and the developer and/or general contractor. The declarations required that 67% of homeowners vote in favor of amendment in order to modify the declarations. 

After 60 days of soliciting such written signatures, the HOA was only able to get 48% of homeowners to vote for the modifications, which was not enough to pass the amendment.  However, within another 60 days (120 days after beginning to obtain signatures), the HOA had the required 67% of signatures on the amendment resolution.

 

The questions on appeal were whether, as argued by the declarant developer and general contractor, the HOA was governed by the time limits for such a process under the procedures of the Colorado Revised Non-Profit Corporation Act (CRNCA). Declarant argued that those procedures only allowed the HOA 60 days to gather all of the required homeowner signatures, after which time the amendment would fail if there were insufficient signatures.

In contrast, the HOA argued that the Colorado Common Interest Ownership Act (CCIOA) was the relevant governing authority, and that the lack of any stated time limits for gathering such homeowner signatures for modification of the declarations meant that the HOA had successfully amended the declarations using a period of more than 60 days.  Accordingly, the HOA argued that through its actions over 120 days, the arbitration provisions of the declarations had been repealed.  The HOA then argued that it had a right to a jury trial on its claims against the declarant developer and general contractor, as well as other related parties.

In a lengthy and analytical opinion, the Colorado Court of Appeals held that both statutory authorities were potentially applicable.  However, it determined that there is a provision in CCIOA which makes that statute the greater and final authority where the two statutes may be in conflict.  However, the appellate court found that the time limit issues raised by the parties were not addressed to any degree by CCIOA, and instead that such time limits were addressed by the provisions of CRNCA. 

Because there were no timing-related conflicts found between the statutes, the court determined that it had a duty to harmonize the statutes if possible. Since the time limits for such actions were found in CRNCA, and these requirements were not expressly or impliedly contradicted by the terms of CCIOA, the Court determined that the governing authority was the CRNCA.  Since that statute provided time limits that were not met by the HOA, the Court determined that the HOA failed to amend the declarations.  Accordingly, the HOA was required to submit to binding arbitration in lieu of a jury trial, as ordered by the trial court. Significantly, the Court also held that the HOA’s Colorado Consumer Protection Act (CCPA) claims were subject to the same arbitration process, and could not be separately asserted in a jury trial.

The lesson to be taken from this case is obvious, regardless of whether it is further appealed to the Colorado Supreme Court.  The application of technical procedures under the CRNCA and CCOIA must be part of overall case evaluation, and early in the case.  If there are arbitration provisions which arguably govern the dispute, they must be followed. If those provisions have been amended, the amendment requirements must also be strictly followed, or the amendments may not be successful.  In the end, that analysis will decide whether the case proceeds to jury trial or mandatory binding arbitration.

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 Economic Loss Rule and the Disclosure of Latent Defects: In re the Estate of Carol S. Gattis

In a recent case of first impression, the Colorado Court of Appeals determined that the economic loss rule does not bar a nondisclosure tort claim against a seller of a home, built on expansive soils which caused damage to the house after the sale.  The case of In re the Estate of Carol S. Gattis represents a new decision regarding the economic loss rule.  Because it is a case of first impression, we must wait to see whether the Colorado Supreme Court grants a petition for certiorari.

Until then, we will analyze the decision handed down on November 7, 2013.  The sellers of the home sold it to an entity they controlled for the purpose of repairing and reselling the home.  Before that purchase, Sellers obtained engineering reports including discussion of structural problems resulting from expansive soils.  A structural repair entity, also controlled by Sellers, oversaw the needed repair work.  After the repair work was completed, Sellers obtained title to the residence and listed it for sale.

Sellers had no direct contact with Gattis, who purchased the residence from Sellers.  The purchase was executed through a standard-form real estate contract, approved by the Colorado Real Estate Commission: Contract to Buy and Sell Real Estate, to which no changes were made.  Several years after taking title to the residence, Gattis commenced action, pleading several tort claims alleging only economic losses based on damage to the residence resulting from expansive soils.

Sellers argued, in a pretrial motion for summary judgment, that Gattis’ claims should be precluded by the economic loss rule.  Sellers also raised the economic loss rules through an oral motion to dismiss at the end of Gattis’ case-in-chief at trial.  The trial court denied all of Sellers’ attempts to invoke the economic loss rule.  Sellers appealed on the basis that the economic loss rule should have barred Gattis’ tort claims.

Pursuant to the economic loss rule, “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”  Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000).  The source of the underlying duty determines whether the economic loss rule applies.  Id. at 1262.  For a claim to escape the economic loss rule, the duty must arise independently of any contractual obligation.  Id. at 1262.

The trial court held Sellers liable for nondisclosure of material facts.  The trial court explained that Sellers falsely represented in the contract that they had no personal knowledge of the property, including the presence of expansive soils which already had caused serious structural damage to the residence.  On appeal, Sellers did not dispute the trial court’s finding that before the sale closed: no reference was made to “expansive soil;” no person or entity ever informed Gattis, or Gattis’ representatives, that the Sellers were principals of the structural repair entity; and, neither Gattis, nor Gattis’ representatives, were ever made aware of the various engineering reports that Sellers had reviewed when debating their purchase of the residence. 

The Court of Appeals relied on past cases to conclude that an independent duty exists between home sellers and home buyers, as well as residential builders and subcontractors.  The Gattis court relied on Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 WL 3943215, a negligent construction case involving a residence.  In that case, several policy considerations were identified favoring an independent duty to protect homeowners: preventing overreaching by builders, who are comparatively more knowledgeable to determine structural conditions of a house than most buyers; ordinary purchasers of a home are not qualified to determine when or where a defect exists; purchasers of homes rarely have access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features; magnitude of the investment made when purchasing a home; foreseeability that a house will be sold to someone who is not the original owner; foreseeability that a construction professional’s work on a home is for the benefit of the homeowners, and that harm to the homeowners from negligent construction is foreseeable; and, an independent duty discourages misconduct and provides an incentive for avoiding preventable harm.

The Gattis court drew analogies between a home builder’s common law duty to act with ordinary care, as discussed in the Mid Valley case, and a home seller’s common law duty to disclose known but latent defects in the property.  Both of those duties are long standing, with the Gattis court pointing out that for over 50 years Colorado has required sellers to disclose latent soil defects of which they are aware.  Another analogy was drawn between a builder’s position of superior knowledge related to the structural condition of a home and a seller who has actual knowledge of a latent defect.  The Gattis court then stated that where a disparate knowledge exists, a person has a duty to disclose to another with whom he deals facts that in equity or good conscience should be disclosed.  In contrast, where an original homeowner or a later buyer, both parties have a similar difficulty in learning of a latent defect.

Furthermore, according to the Gattis court, a buyer cannot not afford to suddenly find a latent defect in his or her home, whether it is caused by a negligent home builder or a seller who remains silent despite knowledge of a latent defect.  Typically, this is because a home purchase is the biggest purchase and most important investment, and done on a limited budget.  Such harm to the home and homeowner are also equally foreseeable, whether caused by a latent defect arising from negligent construction or nondisclosure of any latent defect known by the seller.

The final analogy the Gattis court drew between the home builder’s common law duty to act with ordinary care and a home seller’s common law duty to disclose known but latent defects in the property, relates to enforcing the duty of the sellers to disclose the known latent defects.  Just as enforcing the duty to build with ordinary care avoids preventable harm to innocent parties, the Gattis court concludes so will enforcing the duty of the sellers to disclose the known latent defects.  Limiting its holding somewhat, the Gattis court did state that the burden to disclose latent but known defects is minor because the seller’s duty to disclose latent but known defects would only apply to material defects.

We have to wait and see if Gattis will be upheld by the Colorado Supreme Court.  But until then, Colorado home sellers have a new independent tort duty for disclosure of latent but known defects.

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

A Bill for an Act Concerning Workers’ Compensation – 2014 Edition

Workers’ compensation (“WC”) costs are a significant portion of the labor costs experienced by construction companies.  These costs have typically risen over time due to the “experience modification factor.” This term means the amortized cost of past claims recovered through future premiums charged by an insurer to an employer. As a company’s claims go up in both number of claims and total expense of claims over time, the experience modifier increases as a multiplier of the base WC premium.  As with other general medical costs, the question is not whether the cost of claims with a medical component will go up, but rather the rate at which they will increase from year to year.

It is with these facts of life in mind that it is reported that the Colorado legislature will take up a bill concerning WC benefits in the 2014 session. This bill, if passed, will have the likely effect of dramatically increasing the cost of WC claims to the construction industry - along with all other Colorado employers.

The draft bill has three distinct changes for the current law, each of which serves to change the delicate balance of rights and obligations of employers and employees under existing law. 

1.      The Changed Choice of WC Primary Physician

The first change allows the injured employee to select his own attending primary doctor for the first three days after the injury occurs.  Existing law gives this right of appointing the primary physician to the employer, and it is a key to (1) getting appropriate, cost-conscious care to the employee; (2) getting the employee released to light duty and/or the earliest reasonable physician-approved return to regular work; and (3) getting the doctor’s reasonable determination of when the employee has reached “maximum medical improvement,” after which medical care either ceases, or tapers to a lesser degree of “maintenance care.” In other words, it is as important to an employer to have a middle-of-the road physician to serve as the medical “umpire” of what is reasonable for the nature, extent, and duration of WC medical care.

This proposed change would alter the present procedures, and allow the employee to select a Level II accredited WC physician of the employee’s choosing within three days of the accident/injury. Note: Level II accreditation is not significantly less difficult to obtain than a driver’s license.  It involves limited and brief attendance of classes held on weekends, and successful completion of a multiple-choice examination on WC procedures and benefits.  

Interestingly, or coincidentally, the present law also gives the employee up to three days to report the accident/injury to the employer.  Practically speaking, this means that the employee has two and a half days not to report the accident/injury, but within which to find a lawyer who will typically direct the employee to a doctor who is generously claimant-oriented. Then, both the accident and the chosen doctor will be made known to the employer by the end of the third day.  If the accident/injury was not witnessed and understood for what it was (which is surprisingly often the case), the employer may not know that there is a WC situation brewing.

Odds are that the claimant-chosen physician may be significantly less of an honest broker when it comes to (1) making decisions about referrals to other medical providers for additional care; (2) deciding work restrictions during recovery from the injury; (3) allowing the employee to return to regular duty; (4) deciding when “maximum medical improvement” has been reached; and (5) determining the nature of future care and disability benefits.  These are the key decisions that drive claim costs, claim duration, and overall WC benefits to the employee – which will return as later premium costs to the employer.  Clearly, the proposed change which would allow the employee to make the key cost-driving decisions at the front of the WC claim.

2.      The 50% Increase in Benefits if the Injury Was Due to an “Unsafe Workplace”

3.       

The second proposed legislative change involves the right of the employee to claim a 50% increase in the statutory WC benefits if the employer “willfully placed the employee in an unsafe work environment.”  Little needs to be said about the vagueness of this new provision which appears to lack any objective standards.

More importantly, this potential change would create an opportunity for claimants to increase their benefits by 50%, if the Administrative Law Judge (ALJ) who decides the case as a sole fact-finder decides that the facts of any particular case meet this nebulous and potentially subjective standard.  Bluntly stated, it is designed to create new, ancillary claims for a 50% increase in WC benefits in exchange for merely asking for a hearing on the matter before an ALJ.

The proposed change in override benefit liability is akin to an injured worker being given a lottery ticket at the time of the injury. Most importantly, it is philosophically contrary to the 100-year historical legislative policy that the Colorado WC system was created as a no-fault area of the law, with benefits being awarded solely on the basis of the injury, not the causal fault of the employee or the employer.

Notably, ALJ fact-finding is generally not subject to any meaningful appeal. Once an ALJ decides the facts of the case, they are presumptively written in stone. 

Once again, these new 50% override benefit exposures will be translated (even prospectively and pre-emptively) into steeply climbing premium costs. This is particularly likely in construction environments, where safety can be inherently difficult to control during multi-trade activity.

3.      The Change in “At Will” Employment for WC Claimant Employees

The third change proposed by next year’s draft bill is that a WC claimant’s resignation of current employment may only be “voluntary,” rather than decided by the employer in the present Colorado “at will” employment environment.  While this leaves open the possibility that the employment resignation of the WC claimant will be “negotiated” by the parties for an exchange of dollars, it gives the WC claimant employee an effective right of veto over the employer’s decision to terminate that employment.  In a worst case scenario, this means that a WC-injured employee who cannot do the job that they were doing before the injury is potentially an employee for life of the WC employer by statute.  In the hypothetical alternative, the employer can make the employee an offer of settlement that is so lucrative that it is an “offer that cannot be refused.”

The practical and legal problem for employers is that insurers will potentially say that this termination prohibition is a non-insured employment law issue, rather than a covered WC insurance issue. The potential result may be that such settlements will not be paid – or will be only partially paid – by the WC insurer, if at all. The uninsured “resignation” balance will potentially need to be paid by the employer without the benefit of WC insurance.  The alternative is that no resignation is ever negotiated, and the disabled employee must be continued on the payroll. This scenario assumes that the employee may be paid a pre-injury salary or wage that is not driven by the (diminished) ongoing value of the employee’s work for the employer.

4.      Action and Communication are Needed – NOW

These proposed legislative alterations in the present fabric of WC law and employment law are problematic to say the least. That they will dramatically raise employer costs – with significant impact on construction costs, in particular, is not debatable.  In fact, this assessment is probably superficial in identifying the mischief that will be done with such changes. 

If action is to be taken to avoid these developments, it should be taken now.  Contacting your state senator and representative is an important means to this end.  Testifying before the committee with responsibility for the bill is equally important.  Talking to your colleagues and even your competitors in the world of construction – now – has seldom been this important.

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