ANAHEIM CALIFORNIA CONSTRUCTION EXPERT WITNESS
DIRECTORY AND CAPABILITIES

California Bill Would Notify Homeowners on Construction Defect Options

The California Building Industry Association supported Assembly Bill 1892, but its goals of informing homeowners of their rights under SB800 have been accomplished through the administrative process. The Department of Consumer Affairs has now posted text on its web site noting that “prior to pursuing legal action or responding to a construction defect solicitation, you must first contact your home builder.” The text goes on to note that “if the homebuilder fails to follow any of the procedures, the homeowner is entitled to proceed with the filing of an action.”

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Home Sales Still Low, But Enough to Spur Homebuilders

Although new home sales are still fifty percent below the average over the last forty years, the housing rebound has sent stock of homebuilders up 53 percent this year, during the same period, the S&P 500 rose only 12 percent. The San Francisco Chronicle reports that from 2005 through 2011, homebuilder stocks trailed the S&P 500.

The growth isn’t limited to homebuilders alone. Building suppliers are also seeing a growth in sales, with profits for companies that make gypsum wallboard, cabinetry, plumbing products, and other items used in home building.

Homebuilders have also been able to raise prices. Standard Pacific Corp of Irvine, California has raised prices and cut incentives. Nevertheless, the buyers still come. PulteGroup and D.R. Horton are also raising prices.

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Partial Settlement in DeKalb Construction Management Case

The DeKalb County School District has made a partial settlement in a lawsuit over their claims of mismanagement of construction projects. The Atlanta Journal-Constitution reports that the school board settled with E. R. Mitchell & Co., the smaller of two firms that they have sued. As part of the settlement, Mitchell will be testifying against their former partner. Claims from the other side of the lawsuit are that the school board improperly fired the Heery/Mitchell partnership. The superintendant who fired the company, Crawford Lewis, and his chief operations office, Pat Reid, have since been charged with criminal conspiracy to defraud the construction program. A lawyer for Heery said that “we believe that when presented to a jury, Heery will be vindicated.”

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Exact Dates Not Needed for Construction Defect Insurance Claim

The Texas Court of Appeals reversed the decision of the trial court in Vines-Herrin Custom Homes v Great American Lloyds Insurance Company on December 21, 2011. Vines-Herrin Custom Homes built a single-family home in Plano, Texas in 1999. They obtained a commercial general liability policy from Great American, later purchasing coverage from Mid-Continent, which the decision describes as “a sister company of Great American.”

While the home was under construction, Emil G. Cerullo sought to purchase it. At the time, it was under contract to another buyer. Two months later, Vines-Herrin told Cerullo that the deal had “fell through.” Cerullo bought the house with modifications from the original plan. Upon moving in, Cerullo began having water intrusion and other problems. “Cerullo noticed water gathering on window sills and damage to the sheetrock and baseboard.” Additional problems followed, including cracks, leaks, “and in early 2002, the ceiling and roof began to sag.”

Cerullo sued Vines-Herrin, claiming negligent construction. Vines-Herrin filed a claim seeking defense and indemnification under the insurance policies. Coverage was denied and Vines-Herrin filed suit to require coverage and also bringing claims for “breach of the duty of good faith and fair dealing, breach of contract, and DTPA and insurance code violations.”

In May, 2006 Vines-Herrin stated that it had no more defense funds and went into arbitration with Cerullo. The underlying construction defect action was settled for about $2.5 million. As part of the settlement, “Cerullo became the rightful owner of all remaining claims, rights, and causes of action against” Vines-Herrin’s insurers. He then joined the coverage lawsuit.

The non-jury trial was held under the controlling law of the time which “imposed a duty to defend only if the property damage manifested or became apparent during the policy period.” The court concluded in Cerullo’s favor. During the post-judgment motions, the Texas Supreme Court rejected the manifestation rule. Under this ruling, the trial court set aside its judgment and found in favor of the insurance companies. The trial court noted that although “the Residence was covered by an uninterrupted period of insurance (which began before the Residence was constructed) and that the damages to the Residence manifested during the uninterrupted period of insurance coverage,” “Mr. Cerullo failed to allege the date when actual physical damage to the property occurred.”

The first claim by Cerullo and Vines-Herrin was that the “Final Judgment” occurred in October 2004, and that all proceedings thereafter were void. The court rejected this as the “final judgment” is not “final for the purposes of an appeal unless it actually disposes of every pending claim and party or unless it clearly and unequivocally states that it finally disposes of all claims and all parties.” Despite the use of the word “final,” the trial court’s decision did not do this.

The second issue was the application of the Texas Supreme Court case Don’s Building Supply Inc. v. OneBeacon Insurance. In this case, framing rot due to defective stucco was not discovered until after the end of the policy period. The Supreme Court noted that “the key date is when injury happens, not when someone happens on it.”

The appeals court found that the trial court misapplied the Don’s Building Supply decision. Rather than an exact date, “so long as that damage occurred within the policy period, coverage was provided.” The appeals court noted that “Cerullo alleged the house was constructed in 1999 and he purchased it in May 2000.” “By April of 2001, Cerullo noticed that the windowsills in the study were showing signs of leakage and water damage.” As the court put it, “the petitions then alleged a litany of defects.”

The court noted that coverage by Great American was in effect from November 9, 1999 to November 9, 2000. In May of 2000, the house suffered “substantial flooding from a rainstorm that caused damage.” This was during the policy period. “As a matter of law, actual damages must occur no later than when they manifest.”

The court concluded that as damage manifested during the period of coverage, so must have the damage. The court ruled that “contrary to the trial court’s determination otherwise, the evidence showed Great American’s duty to indemnify was triggered, and expert testimony establishing the exact date of injury was not required to trigger the duty.”

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Houses Can Still Make Cents: Illinois’ Implied Warranty of Habitability

In a report published earlier this week Marisa L. Saber writes about the implied warranty of habitability in the context of construction defect litigation. The piece speaks of the difficulties in alleging tort theories against builders and vendors in light of Illinois’ expansion of the economic loss doctrine, and how the implied warranty of habitability may provide another avenue for recovery.

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State Farm Too Quick To Deny Coverage, Court Rules

On July 13, 2011, Judge Sarah S. Vance of the US District Court issued a rule in the case of Travelers Cas. & Surety Co. of Am. v. Univ. Facilities, Inc. (E.D. La., 2011). In this case, Stanley Smith Drywall was contracted by Capstone Building Corporation to “perform undisclosed work at the facility believed to involve the installation of drywall.” The project involved the design and construction of student residences for the Southeastern Louisiana University in Hammond, Louisiana. In May, 2009, University Facilities, Inc. (UFI) sued Capstone Development Corporation and Capstone On-Campus Management.

State Farm insured Stanley Smith Drywall and they sought a declaration that they have no duty: “(1) to insure Stanley Smith or CBC, or (2) to defend or indemnify any party against UFI's claims in the pending arbitration.” State Farm contends “(1) there is no "occurrence" to trigger coverage under the policy; (2) only breach of contract claims are asserted; (3) there is no property damage alleged; and (4) various coverage limitations and exclusions apply to prevent coverage.’

The court concluded that “whether State Farm has a duty to defend in the arbitration must be determined by considering the claims asserted in the arbitration.” However, the arbitration claims were not made part of the record. There, “, the Court cannot determine as a matter of law State Farm's duty to defend on the present record.” The same was true of State Farm’s duty to indemnify. “Stanley Smith and CBC assert that State Farm's motion for summary judgment was filed before any discovery was conducted in the arbitration proceeding or in this case. The Court finds that State Farm has failed to develop the record sufficiently to establish that there is no genuine issue of material fact as to its duty to indemnify Stanley Smith or CBC in the arbitration.’

The court denied State Farm’s motion for a summary judgment on its duty to defend and indemnify.

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Bar to Raise on Green Standard

Next June, members of the U.S. Green Building Council will be voting on changes to the LEED green building standard. “The bar is getting raised,” said Navad Malin of BuildingGreen, a consulting and publishing firm, in an article in USA Today. Under the proposed guidelines, builders would have to project energy and water use for five years as part of the certification process. However, if the occupants aren’t as green as the builders anticipated, the buildings will not lose their certification.

The new rules will include higher energy standards, award points for avoiding potentially hazardous materials, and even determine what kind of plumbing items can be used.

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CC&Rs Not the Place for Arbitration Agreement, Court Rules

In January, the California Court of Appeals ruled that an arbitration clause inserted in a development’s CC&Rs by the developer could not be enforced. The case, Villa Vicenza Homeowners Association v. Noble Court Development, involved a case in which, according to the opinion, “following the first sale Nobel controlled the board of directors of the Association and because the initial condominium buyers noticed defects in common areas and common facilities and did not believe Nobel had provided a reserve fund sufficient to repair the defects, the condominium owners brought a derivative action on behalf of the Association against Nobel.”

The court concluded, “The use of CC&R's as a means of providing contractual rights to parties with no interest in or responsibility for a common interest development is also problematic from the standpoint of determining what if any consideration would support such third-party agreements. By their terms the CC&R's bind all successors, even those with whom a third party such as Nobel has never had any contractual relationship and to whom Nobel has not provided any consideration.” The court determined that “the trial court did not err in denying Nobel's motion to compel arbitration.”

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Ohio Adopts Energy-Efficient Building Code

In a compromise between environmental groups, who were looking for stricter standards, and homebuilders, who were trying to contain building costs, the state of Ohio has adopted buildings codes that will increase the energy efficiency of new homes. The estimated costs are about $1,100 with estimated annual savings of $230. According to Corey Roblee of the International Code Council, “It’s something needed in the state of Ohio.”

The Ohio Home Builders Association opposed a proposal to adopt the guidelines of the International Code Council. Builders will be able to either follow the ICC guidelines or they can use the Ohio guidelines to meet the same energy efficiency. Vincent Squillace, the executive vice president of the OHBA, said, “We came up with an equivalent code that’s more strict but is about $2,000 cheaper per home to implement than the original code.”

The new code will require that at least 75% of lighting must be high efficiency, increases the degree of insulation, and specifies more efficient windows, among other changes.

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DA’s Office Checking Workers Comp Compliance

The San Bernardino office of the California District Attorney is partnering with the California Contractor’s State License Board to check if subcontractors are holding the required workers compensation insurance. The High Desert Daily Press reports that the process of checking at sites has been going on for several months.

Investigators visit sites and ask supervisors to provide a list of subcontractors which the state then checks for compliance. One worker was quoted that insurance inspections were so rare that he had never seen one before, despite 20 years in construction.

On one day, investigators in two teams visited fourteen construction sites and reviewed the insurance status of twenty-two firms. Three were found out of compliance and stop work orders were issued.

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Construction Defect Journal Seeks Article Submissions Regarding SB800 and Other Builders Right to Repair Laws

As we approach the tenth anniversary of the passage and signing of SB800, California’s right-to-repair law, we’d like to hear your reactions to the law, your experiences with it, and your thoughts on it and right-to-repair laws in other states.

We invite you to submit articles either reacting to SB800 or on other matters relevant to construction defect and claims issues. You can promote your firm’s capabilities and get valuable exposure through the publication of your articles. Construction Defect Journal is widely read by our highly targeted audience of decision makers, construction attorneys, builders, owners, and claims professionals.

Articles may contain relevant images, your firm’s name, and links to your corporate website or third parties and can be submitted through e-mail to submitstory@constructiondefectjournal.com. Please remember to include your contact information if you would like it to be published with your content. If you are submitting photos or PDF documents with your article, please send them as e-mail attachments. Items submitted are assumed to be cleared for publishing upon receipt by CDJ.

Normally articles are published in full, although we reserve the right to edit content for space purposes. All articles submitted are considered for publication. For additional questions please contact editor@constructiondefectjournal.com.

Contractor Convicted of Additional Fraud

A Pennsylvania contractor in prison for fraud has been convicted with insurance fraud. The York Daily Record reports that Steven D. Gebhart was already in jail for fraud for about $350,000 for work he either failed to finish or even start or by using substandard materials and practices when he was convicted of insurance fraud. Gebbert’s offices were destroyed in a fire that was later determined to be arson. He was not charged with this, but instead for overestimating his losses to the insurance company. Sentencing for the fraud charge will be on December 21.

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In Re Golba: The Knaubs v. Golba and Rollison, Debtors

Now comes another cautionary tale for builders and developers, especially those using single purpose business entities to handle individual construction projects. The United States Bankruptcy Court in Denver, Colorado, through the Honorable Michael Romero, provided an order regarding plaintiffs’ problems with a home they purchased from an entity controlled or represented by defendants. Plaintiffs, Kelvin and Holly Knaub (the “Knaubs”) filed adversary proceedings against debtor Robert Golba in his bankruptcy proceeding and against debtor Greg Rollison in his separate bankruptcy proceeding. The adversary proceedings were partially consolidated to proceed in parallel but not substantively.

The Knaubs purchased a home from Gemm Homes (“Gemm”) in May 2003. Problems stemming from the foundation caused the Knaubs to seek an explanation and ultimately a solution from Gemm and then from Avalon Homes (“Avalon”), which the Knaubs claim is just a continuation of Gemm. Through their complaint, the Knaubs seek relief for 1) damages caused by fraudulent representations and false pretenses under 11 U.S.C. § 523(a)(2)(A), based on Golba’s misrepresentation that Gemm and Rollison were not involved in Avalon; 2) damages caused by actual fraud under § 523(a)(2)(A), based on Golba’s and Rollison’s alleged conspiracy fraudulently to convey the assets of Gemm to the Avalon entities; and 3) damages caused by breach of fiduciary duty under § 523(a)(4), alleging Gemm was an insolvent company which owed a fiduciary duty to its creditors, and alleging Golba participated in transferring Gemm’s assets to Avalon for no consideration. In the Golba action, the third claim for relief was dismissed.

The facts of the case are important and somewhat convoluted. In an effort to make the cases clear, the evidence, allegations, and facts will be laid out in detail below. The Knaubs’ house was purchased from Gemm and soon after both Gemm and Rollison had an engineering company perform an analysis which discovered the foundation was not laid on stable ground.

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Reprinted courtesy of Brady Iandiorio, Higgins, Hopkins, McLain & Roswell, LLC. Mr. Iandiorio can be contacted at iandiorio@hhmrlaw.com

Nevada Assembly Sends Construction Defect Bill to Senate

In a 26 to 16 vote, the Nevada Assembly has passed Assembly Bill 401, which extends the time limit for legal action over home construction defects. According to the Las Vegas Sun, Assembly member Marcus Conklin, Democrat of Las Vegas, said the bill was about “keeping the consumer whole.” However, Ira Hansen, Republican of Sparks, told the sun that suits are happening before contractors can make repairs. The bill would allow attorney fees even if repairs are made.

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There Is No Non-Delegable Duty on the Part of Residential Builders in Colorado

Recently, in the Arapahoe District Court, the Honorable Michael Spear, issued an order holding that builders do not owe a non-delegable duty to homeowners. In Marx and Corken v. Alpert Custom Homes, Inc., et al., Judge Spear’s order came in response to plaintiffs’ motion for determination of question of law seeking a finding that the defendants owed a non-delegable duty to the plaintiffs and thus, to strike defendants’ designation of nonparties at fault. After being fully briefed, Judge Spear, found that such a non-delegable duty does not exist.

The case arises from the construction of a single-family residence in Aurora, Colorado. Through the construction and interaction with Alpert Custom Homes, Inc. and Scott and Sally Alpert, the defendants, Paul Marx and Kay Corken, the plaintiffs claimed they suffered various damages and losses, and brought claims for breach of contract-warranty, breach of contract, violation of the Colorado Consumer Protection Act, breaches of the implied covenant of good faith, promissory estoppel, willful breach of contract, and quantum meruit. During litigation, the defendants filed a designation of nonparties at fault, which named several parties which were at fault for the alleged construction defects at issue in the case.

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Reprinted courtesy of Brady Iandiorio, Higgins, Hopkins, McLain & Roswell, LLC. Mr. Iandiorio can be contacted at iandiorio@hhmrlaw.com

Delays in Filing Lead to Dismissal in Moisture Intrusion Lawsuit

The Alabama Court of Civil Appeals has upheld a summary judgment in the case of Franklin v. Mitchell. Walter Mitchell, doing business as Southern Classic Construction built a new home for the Franklins. The Franklins moved into the home in October 2001. In April 2006 they discovered sagging floors in both the bathroom and kitchen. They contacted Mitchell who suggested the flooring might be defective. The Franklins spent eight months attempting to contact the flooring manufacturer.

In March 2007, the Franklins had the home inspected. The sagging was determined to be due to a loss of strength in the decking because of condensation from the air conditioning system. Air returns were not properly sealed and drawing moisture into the structure. There was mold on the decking and floor joints.

When Mitchell was contacted by the Franklins, he told them his one-year warranty had expired but had the HVAC subcontractor, Southern Mechanical Heating & Air (owned by Mitchell’s father, Jim Mitchell), look at the situation. SMHA replaced and braced subfloors. Later, they entered the crawl space to tape ducts, seal the air return, and insulate the air vent housing. The Franklins were not satisfied with the repairs, as not all the ducts were taped, nor were the air vent housings insulated.

Franklin complained to Walter Mitchell who again cited his one-year warranty. Jim Mitchell said he would not report complaints to his insurer, stating that the repairs were unnecessary, that the work had been done correctly in the first place, and it was only done at the request of Walter Mitchell.

In February 2009, the Franklins sued Walker Mitchell. Mitchell denied the claims, citing in part the statute of limitations. Mitchell also filed complaints against three subcontractors, including his father’s firm. Mitchell received a summary judgment as the case started after Alabama’s six-year statute of limitations.

The appeals court rejected the Franklin’s argument that the claim of damage did not start until they were aware it was due to a construction defect. The court noted that as Walter Mitchell was licensed as a “residential home builder, the statute the Franklins cite did not apply, as it concerns architects, engineers, and licensed general contactors.”

Nor did they feel that Mitchells’ claim that his warranty had expired were sufficient to override the statute of limitations, quoting an earlier case, “Vague assurances do not amount to an affirmative inducement to delay filing suit.” Their claim of subsequent negligent repairs was rejected because Mitchell did not direct the specific actions taken by his father’s firm.

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Preparing For the Worst with Smart Books & Records

Contractors are often too caught up in keeping the wheel of business churning to recognize deficiencies in how their records are managed. Working hard and working often tend to leave little time for consideration of your documents. But all too often I see the unthinkable, a contractor gets into trouble and has to call on its surety for help. At that point, you might finally get your first dose of reality about your records ?Äì and it can cost you.

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Reprinted courtesy of Douglas Reiser of Reiser Legal LLC. Mr. Reiser can be contacted at info@reiserlegal.com

Homebuilders Go Green in Response to Homebuyer Demand

McGrawHill Construction reports that 17 percent of new homes and remodels in 2011 were done with green building practices. Their report estimates that by 2016, this will rise to 29 to 38 percent of the market for home construction and remodeling.

Consumers see the green buildings as more desirable, particularly where they are more energy efficient. Two thirds of builders noted their customers were interested in features that would lower the energy use of their homes. Consumers also feel that green building materials are more durable and see green homes as higher quality.

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