Taylor Morrison v. Terracon and the Homeowner Protection Act of 2007

On January 30, 2014, the Colorado Court of Appeals decided the case of Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc. and Terracon Consultants, Inc. 2014WL323490. The case addressed a substantial issue of Colorado constitutional law, as well as a variety of procedural issues of potential importance to construction litigation attorneys.  Of particular interest is the question of whether the provisions of the 2007 Homeowner Protection Act (“HPA”) are limited in application to contracts between residential homeowners and construction professionals, or whether they have broader application between commercial construction professional parties as well.  As discussed below, the Court of Appeals stated that it would not answer the question, and then, separately, implied that the statute might only apply to homeowner transactions – with the resulting exclusion of commercial transactions. However, after its analysis, it left the actual decision of that issue to a future court in a later case.

The factual background for the case involved claims of breach of a contract for soils engineering by Terracon Consultants, Inc. (“Terracon”) and negligent excavation work by Bemas Construction, Inc. (“Bemas”).  Plaintiff was Taylor Morrison of Colorado (“Taylor Morrison”), the developer and general contractor for a residential subdivision called Homestead Hills. After it constructed many homes, Taylor Morrison began to receive complaints of cracking drywall resulting from foundation movement and it made repairs at significant expense.  Taylor Morrison then filed suit against Terracon and Bemas in connection with their respective roles in the original construction.

Terracon defended in part by asserting that the HPA provisions that nullified limitations of liability were only applicable in contracts as between homeowners and construction professionals.  The heart of that argument was that Taylor Morrison was not a homeowner and for that reason could not defeat Terracon’s contractual limitation of liability for a specific dollar amount.  Terracon also defended in part by arguing that the HPA was being applied to its contract retrospectively, in violation of Article 11 of the Colorado Constitution.

Taylor Morrison responded to these defenses by attempting to amend its pleadings to assert separate claims against Terracon for gross negligence, negligent misrepresentation, and fraud.  However, the trial court judge denied this attempt to amend because it was so late in the case. Taylor Morrison then challenged Terracon’s defenses that the HPA was inapplicable to the Terracon contract.  The trial court agreed that the HPA only applied to transactions between homeowners and construction professionals. It held that Terracon’s contract with Taylor Morrison did not violate the HPA for that reason, and Terracon’s limitation of liability was valid.  Terracon thereafter deposited the maximum amount that Taylor Morrison could recover under the limitation of liability in the contract in the trial court’s registry, and the trial court then dismissed Taylor Morrison’s claims against Terracon.

Bemas proceeded to trial and received a defense verdict on the merits.  Taylor Morrison’s appeal sought a new trial of the Terracon issues, but also sought a new trial against Bemas.  Its argument for a full re-trial was that Bemas had an unfair advantage in trying its case with an “empty chair” that should have been occupied by Terracon. The appellate court disagreed, saying that the issues involving Terracon were distinct from those involving Bemas, and that a partial re-trial of the issues involving only Terracon involved no inherent unfairness to Taylor Morrison. In the absence of clear prejudice to Taylor Morrison, the Court refused to allow the re-trial of Bemas.

The appellate court addressed the matter of the trial court’s refusal to consider evidence that Terracon’s conduct was willful and wanton and/or grossly negligent, as alleged.  While the appellate court did not clearly reverse the trial court’s ruling that denied Taylor Morrison’s amended complaint, it did hold that Taylor Morrison had the right to contest Terracon’s defenses  by offering proof of such misconduct, because it would potentially invalidate Terracon’s limitation of liability. The appellate ruling viewed the potential evidence of misconduct as potentially admissible to respond to Terracon’s defenses, even if it was not part of an amended complaint.

In the course of remanding the Terracon case to trial, the appellate court disagreed with the trial court’s determination that the HPA only applied to homeowner/construction professional transactions, but did so without actually deciding the issue. Instead, it expressly declined to decide that issue, vacated the lower court’s HPA determination, and proceeded to decide Terracon’s constitutional argument.

In deciding that constitutional argument, the Court of Appeals held that Terracon’s contract was retrospectively impaired by the application of the HPA to its terms, which pre-existed the 2007 statute.  In an extended discussion of constitutionality, the Court explained that where: (1) perfected contract rights had fully vested; (2) those rights were the subject of past actions on the part of the parties; and (3) those rights would be reasonably expected by the parties to be enforceable, any statute that changed those rights after the fact was unconstitutionally retrospective.  

The Court of Appeals was presented with and rejected arguments that asserted that the HPA was a remedial statute, and was akin to new regulation of an existing industry.  In making this determination, the Court held that the statute was not part of a body of prior regulation that was simply being expanded and was reasonably anticipated by the parties. That was the argument offered by an amicus brief which argued analogous cases. Those cases were rejected as distinguishable by the Court of Appeals.

The appellate court also considered the question of whether the stated public policy of the HPA – “to protect Colorado residential property owners' rights and remedies” – was to be balanced against Terracon’s contract rights.  The Court held that since “the contracts at issue were the products of arms-length negotiations between sophisticated commercial entities” there was no impact of the HPA in the present case on residential property owners. The Court also based its analysis on detailed references to the 2007 Colorado legislative history.  Accordingly, the Court found no basis for any such “balancing” analysis between public policy and Terracon’s impaired contract rights.

Notably, in this last determination, one can see the possibility that the 2007 HPA may yet be held by a future appellate court to be inapplicable between general contractor and design professional or subcontractor (or similarly postured non-homeowner) parties.  In this later portion of the opinion, the Court suggests that an argument that the 2007 HPA is not applicable to commercial transactions between construction professionals may yet be upheld in a future case.

The Court of Appeals remanded the case back to the trial court for further proceedings on whether Taylor Morrison’s claims of Terracon’s willful and wanton conduct were sufficient to overcome Terracon’s limitation of liability argument. This was determined separate from the constitutional analysis described above. Notably, the case has not been selected for official publication as of this date, and may be further appealed because of the significance of the constitutional issue that was decided.

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