Recent Developments

COURT OF APPEALS REINSTATES STATUTORY WARRANTY CLAIMS FOR HOMEOWNERS

TO REPAIR OR NOT TO REPAIR

NON-STUCCO HOMES SHOWING MOISTURE INTRUSION DAMAGE

MECHANICS' LIEN PRIORITY A MYSTERY

HOMEOWNER RECOVERS CONSEQUENTIAL DAMAGES FOR BREACH OF STATUTORY NEW HOME WARRANTIES CONCERNING SEPTIC SYSTEM

SELLER LIABLE FOR NONDISCLOSURE OF SEPTIC SYSTEM DEFECTS

KOOTENIA HOMES DECISION AFFIRMED

STUCCO PROBLEMS PLAGUE WOODBURY

COURT OF APPEALS REINSTATES STATUTORY WARRANTY CLAIMS FOR HOMEOWNERS

The Court of Appeals' decision was based on its review of amendments made to Minnesota Statute §541.051, that became effective on August 1, 2004. Prior to those amendments, no statute of repose applied to statutory warranty claims made under Minnesota Statutes Chapter 327A. This meant that homeowners could pursue statutory warranty claims against homebuilders more than ten years after the home was constructed as long as the homeowners: (a) complied with the other requirements of the warranty statute; (b) commenced their lawsuit within two years of the date they learned that the builder would not or could not fulfill its warranty obligations; and (c) could prove that the defective conditions or damage existed during the warranty period. See e.g. Vlahos v. R&I Const. of Bloomington, Inc. The 2004 changes, however, provided that home warranty claims could not accrue "more than ten years after substantial completion of the construction." Further, the amendments limited claims to those actually commenced within twelve years from the completion of the Home.

The Court of Appeals concluded that the 2004 amendments could not be applied retroactively to statutory warranty claims which had already accrued before the statutory amendments were effective (i.e. August 1, 2004) because the legislature had not specifically stated that the amendments should be applied retroactively.

The homeowners in this matter first noticed water damage and mold contamination when their Home was approximately thirteen years old. They notified their builder, who failed to honor its warranty obligations. The homeowners then vacated the home, and retained a contractor to perform the necessary repairs in 2003. The homeowners commenced their lawsuit against the builder in November 2004 - after the effective date of the amendments, but within two years of the date that the builder refused to fulfill its warranty obligations. The district court incorrectly applied the amended statute and dismissed the homeowners' warranty claims as untimely.

Relying upon the Supreme Court's decision in Vlahos, the Court of Appeals noted that a statutory warranty claim "accrues when the homeowner discovers, or should have discovered, the builder's refusal or inability to ensure the home is free from major construction defects." The Court of Appeals further held that because the homeowners' statutory warranty claim had accrued before the effective date of the amendment, the homeowners "had a vested right to sue on their claim" and could proceed to trial on their statutory warranty claims.

TO REPAIR OR NOT TO REPAIR

One of the most difficult decisions facing any homeowner, townhome or condominium association involved in moisture intrusion or construction defect litigation is whether repairs should be started prior to or during the course of the litigation or whether it would be best to wait to repair until after the case is resolved. As with most difficult decisions, there are pros and cons either way and you should consult with your legal representative as to your particular situation. The following factors may help in that discussion.

Repair Prior to Case Resolution

Benefits of repair prior to case resolution:

• Peace of mind. Much of the damage may be hidden and be undiscovered. By repairing first, all the damage will likely be discovered. In some cases, once the exterior cladding is removed, areas of previously undiscovered damage were found. Some homeowners and associations appreciate the peace of mind that comes with knowing the full extent of the damage beneath their siding prior to concluding their litigation against responsible parties.

• Damages quantified. By repairing first, the cost of repair will be a known quantity. Absent actual completion of the work, many contractors may include in their estimates various allowances leaving the homeowner or association unsure of what the ultimate cost will be.

• Window problems known: If repairs are completed, window replacement costs will be fixed and known. Oftentimes, the condition of the windows can not be ascertained until the windows are actually removed from the home during the repair process. Homeowners or associations who repair first know exactly the number of windows that needed to be replaced. Windows can be further examined upon removal for evidence of design or manufacturing defect as well and may assist in pursuing claims against the window manufacturer.

• Homeowner flexibility for relocation. If the homeowner needs to move (voluntarily or as a result of a job change or transfer), a repair may be the quickest way to allow the homeowner to sell the house to meet moving deadlines and take advantage of favorable markets.

• Future Assessments known. For the multi-family association, the threat and extent of unknown future assessments on the individual units can be quantified which may assist in the marketing and sale of the units because prospective purchasers can be apprised as to the eventual assessment risks.

The downside to repairing prior to case resolution includes:

• Cost of the repair: Out of pocket repair expenses can be very high and you may end up carrying the cost to repair for a long time until a settlement can be reached or verdict result rendered by a jury. If the case goes to a jury and there is an appeal or problems collecting the money, funds could be tied up for an indefinite amount of time. In many situations, whether a townhome, condominium or individual residence, the cost may simply be too much for the owner or association to bear.

• Engineering oversight: Engineering fees can be higher. If a home or association is in litigation or a claim is pending, it is necessary to have the engineer inspect the property on multiple occasions both before and during repair to document the condition and preserve critical evidence.

• Challenge to repair cost: Juries are unpredictable and risky. A typical defense strategy is to argue that the homeowner or association could have chosen an equally competent contractor at a lower cost. Should the case not resolve and a trial occur, if the jury believes the defense arguments, the homeowner would be at risk of a greater out of pocket loss.

• Bargaining position: Your bargaining position may be weakened. If a homeowner or association, in order to save costs, chooses a less expensive siding product as part of the repair, they risk recovering only the cost of the less expensive product instead of the more expensive siding that is being replaced. This could result in a less favorable settlement.

Waiting to Repair until After Case Resolution

Benefits of waiting to repair until after case resolution include:

• Bargaining position: By negotiating based on repair costs for the actual products already installed at the home or unit, the homeowner or association is left with the flexibility to choose less expensive siding products for the repair should the resolution be less than desired. Large damage allowances and contingencies in repair bids may help the homeowner or association in their negotiations and protect them from unknown damage and costs.

• Out of Pocket expense. Waiting to repair until after case resolution minimizes the out of pocket carrying costs associated with repairing first.

• Damages quantified. The builders’ insurance companies argue that they only pay for actual, physical damage. In the case where there is limited, localized damage on the home or to individual units, early repair that reveals this limited damage may actually embolden the insurance companies who argue that only a certain percentage of repair costs relate to actual damage and therefore that is all they are willing to pay.

• Post resolution bargaining: Depending on market conditions and contractor availability, some homeowners or associations may have the opportunity to negotiate more favorable repair pricing once a contractor knows a project is imminent and that it is in competition with other contractors for actual work.

Arguments against waiting to repair until after case resolution include:

• Unknown damages: In some instances, despite all the testing, there is no way to find all the damage until the cladding is removed. Negotiating based on repair estimates leaves some risk that undiscovered damage will be found during repair causing the costs to adjust upward unexpectedly. The only way to know for sure the full extent of the damage and need for any window replacement is to repair the home or units.

• Relocation impact. It is difficult if not virtually impossible to sell a home or unit until it is repaired. If a move is in the foreseeable future, waiting on resolution before repair may not be an option. In an association, sales tend to stagnate for the entire community until repairs are performed.

• Future assessments. Until the case is resolved, it is hard to predict the amount of any future assessments for the association’s membership.

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NON-STUCCO HOMES SHOWING MOISTURE INTRUSION DAMAGE

Contrary to popular belief, many homes built in the 1990’s or early 2000’s that are not stucco are experiencing moisture intrusion damage. Hammargren & Meyer P.A. is currently representing homeowners with significant rot and decay underneath vinyl, cedar, brick and hard board siding. The problem with many of these homes seems to stem from improper window installation, failing windows, missing flashings or other defective construction techniques.

If you have a home that is less than 10 years old, even if it is not stucco, we strongly encourage you to have a moisture test performed. If you have a problem, do not delay. Contact your builder in writing and contact us if you are in need of legal assistance.

For a list of moisture testing companies, please click on our links page.

MECHANICS' LIEN PRIORITY A MYSTERY

The Minnesota Court of Appeals recently dealt a surprising and confusing blow to the rights of mechanics' lien claimants in Minnesota. In Mavco, Inc. vs. Eggink, etal. (Filed August 29, 2006), the Court concluded that the lien of a mortgage that was issued before, but not recorded until after, the commencement of a mechanics' lien foreclosure action was prior to the mechanics' lien. This decision poses risks to mechanics' lien claimants and their attorneys because it appears to conflict with or at least confuse the clear language of the Minnesota Mechanics' Lien Statute.

The priority of a mortgage lien is typically determined by the date the mortgage is recorded. The priority of a mechanics' lien is typically determined as of the date of the first actual and visible improvement to the property. The relative priority of multiple mechanics' liens arising out of the same improvement is usually concurrent and relates back to the date of the first actual and visible improvement.

In order for a mechanics' lien claimant to assert and obtain priority over a mortgage lien, however, the mechanics' lien claimant must include the mortgagee as a defendant in the mechanics' lien foreclosure lawsuit. The Minnesota Mechanics' Lien Statute requires that the mechanics' lien foreclosure action be commenced within one year of the date set forth in the claimant's recorded mechanics' lien statement as the date of the lien claimant's last contribution to the improvement. The mechanics' lien statute also specifies that no person is bound by a judgment in the mechanics' lien foreclosure action unless that person is made a party to the action within that one year period. In Mavco, Inc. the Court of Appeals expanded the protections of the statute by holding that the lien of the mortgagee, Wells Fargo, was protected from the mechanics' lien because Wells Fargo was not made a party to the mechanics' lien foreclosure action within the one year period - even though Wells Fargo failed to record its mortgage before the mechanics' lien foreclosure action was commenced! This result is contrary to the language of the mechanics' lien statute and inconsistent with routine mechanics' lien practice, but absent action by the Minnesota Supreme Court, the issue will have to be corrected by the legislature. In the meantime, mechanics' lien claimants and practitioners will need to take extra precautions to maintain priority over mortgage liens and other claims that are not of record at the time the mechanics' lien foreclosure lawsuit is commenced.

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HOMEOWNER RECOVERS CONSEQUENTIAL DAMAGES FOR BREACH OF STATUTORY NEW HOME WARRANTIES CONCERNING SEPTIC SYSTEM

In an unpublished decision filed July 11, 2006, the Minnesota Court of Appeals affirmed a District Court's decision that a homeowner was entitled to recover from his builder the costs incurred to remedy a septic system that did not comply with the applicable building code. In Iverson vs. Chicilo Homes, Inc. the homeowner sought to recover from the homebuilder the costs he incurred to install a new, code-compliant drain field and re-landscape the affected area. The builder claimed that the homeowner failed to start his lawsuit in time and, also, that there was insufficient proof that the septic system failed to meet the requirements of the building code. The Court of Appeals rejected the builder's arguments. In affirming the homeowner's claims, the Court of Appeals emphasized several items important to all homeowners that have claims against their builders:

· A builder of a new home warrants that the home will be free from defects caused by faulty installation of plumbing systems due to "noncompliance with building standards". A septic system that does not comply with the applicable building code does not comply with building standards and is a breach of the new home warranty.

· A letter from a city building official stating that the septic system is not properly sized is sufficient evidence that the septic system did not comply with the building code.

· Consequential damages are fully recoverable for breach of the statutory new home warranties. To recover damages a claimant must prove his loss only to a reasonable, not necessarily an absolute, certainty.

· The new home warranty statute of limitations is two years from the homeowner's discovery of the breach of warranty. In this case, the statute of limitations began to run in 2003 when the homeowner was told by the building inspector that the septic system did not comply with the building code, not in 2001 when the homeowner first noticed seepage of effluent in his backyard.

· In 2001 the homeowner notified the builder that effluent was seeping into his backyard and the builder sent out an inspector that concluded that the problems were due to weather, not faulty design or installation. The District Court and the Court of Appeals agreed that the homeowner reasonably relied on what he was told by the builder's inspector.

The homeowner's recovery was limited in this case to $7500 because it began as a conciliation court claim and the homeowner did not amend his complaint after the case was removed to District Court.

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SELLER LIABLE FOR NONDISCLOSURE OF SEPTIC SYSTEM DEFECTS

On September 12, 2006 the Minnesota Court of Appeals affirmed a District Court decision that a home seller that represented to a buyer that a septic system is compliant with applicable sewage-treatment-system laws and rules when the seller had reason to believe that the system is noncompliant, is liable to the buyer for the cost to replace the noncompliant system plus attorneys' fees as allowed by statute. The Court noted that the relevant statute, Minn. Stat. Section 115.55, subd. 6(a)(2) and subd. 6(b), requires that a seller disclose the condition of the system not only to the extent of the seller's actual knowledge, but also to the extent of what the seller should reasonably know. The Court concluded that the seller should have known of problems with the system because of its "variant operation", and, therefore, his disclosure to the buyer that there were no problems with the system was inaccurate.

Interestingly, the seller asserted a claim against the person he hired to inspect the system for the negligent performance of that inspection. The District Court concluded that the inspector had, indeed, negligently performed the inspection. The Court of Appeals held that the seller could recover from the inspector all damages caused by the inspector's breach of contract, including the cost of the buyer's second inspection of the system and the attorneys' fees the buyer incurred and recovered from the seller pursuant to the statute.

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KOOTENIA HOMES DECISION AFFIRMED

In an unpublished decision filed January 31, 2006, the Minnesota Court of Appeals affirmed the Washington County District Court's decision in the case of Kootenia Homes, Inc. v. Federated Mutual Insurance Company and Cincinnati Insurance Company. This long-awaited decision has important implications for homeowners currently involved in litigation with homebuilders and subcontractors over claims of defective construction, water intrusion and damage to their homes.

The Kootenia Homes case involved a dispute between a homebuilder, Kootenia Homes, and its general liability insurers, Federated and Cincinnati, over which insurer's policies covered Kootenia Homes for claims asserted by homeowners against Kootenia Homes for defective construction (including primarily defective application of a stucco exterior) that resulted in water infiltration that damaged their homes. Kootenia Homes was insured with Federated from April 1, 1996 through April 1, 2002 and was insured with Cincinnati after April 1, 2002.

Since its inception in 1996, Kootenia Homes built more than 200 homes, over 100 of which had stucco exteriors. Many owners of homes built by Kootenia Homes from 1996 to 2000 discovered that Kootenia Homes and its subcontractor had installed their home's stucco exterior in a defective manner, resulting in water intrusion and damage to their homes. Kootenia Homes tendered these claims to Federated for defense and indemnification. Federated paid the first few claims, but in March, 2003, it told Kootenia it would only cover a portion of future claims based on its proportionate "time on the risk," i.e. the date of completion of construction to April, 2002 when Federated's coverage terminated. Federated argued that Cincinnati should be responsible for its "time on the risk," i.e. from April, 2002, to the time of repair. Cincinnati refused to defend and indemnify Kootenia Homes and argued that Federated was entirely responsible for claims arising out of homes built prior to Cincinnati's coverage period. Kootenia Homes then commenced this lawsuit against Federated and Cincinnati to determine which insurer (or insurers) were responsible and for how much.

The Washington County District Court granted summary judgment against Federated and in favor of Kootenia Homes and Cincinnati. The Court concluded that there was no material fact issue regarding the timing of the damage - the damage began to occur shortly after the homes were completed - during the Federated policy period. Applying Minnesota's "actual-injury trigger rule," the Court concluded that the actual injury occurred during the Federated policy period and, therefore, coverage under Federated's policy was activated. The Court of Appeals agreed with the District Court and explained the "actual-injury trigger rule" as follows:

Where, as here, the policy at issue provides occurrence-based liability coverage, Minnesota applies the "actual-injury" or "injury-in-fact" coverage-trigger rule to determine whether an occurrence activates insurance coverage. In re Silicone Implant Ins. Coverage Litigation, 667 N.W.2d 405, 415 (Minn. 2003). Under that rule, "the time of the occurrence is not the time the wrongful act was committed but the time the complaining party was actually damaged." Singsaas v. Diederich, 307 Minn. 153, 156, 238 N.W.2d 878, 880 (1976). "Thus, under the actual-injury trigger rule, only those policies in effect when the bodily injury or property damage occurred are triggered." In re Silicone, 667 N.W.2d at 415. To trigger a policy, "the insured must show that some damage occurred during the policy period." N.States Power Co. v. Fidelity and Casualty Co. of N.Y., 523 N.W.2d 657, 663 (Minn. 1994) (NSP). "For purposes of the actual-injury trigger theory, an injury can occur even though the injury is not 'diagnosable,' 'compensable,' or manifest during the policy period as long as it can be determined, even retroactively, that some injury did occur during the policy period." In re Silicone, 667 N.W.2d at 415.

Once the Court of Appeals concluded that the District Court properly determined that coverage under Federated's policies was triggered, it then addressed Federated's request that liability for the damages be allocated between Federated and Cincinnati and apportioned based on their respective "time on the risk." The Court of Appeals noted that this type of "allocation" is the exception rather than the rule and is appropriate "only if the triggering injury does not arise from discrete and identifiable events." In re Silicon at 420. The Court of Appeals upheld the District Court's denial of Federated's request for allocation because "the installation of the stucco was a discrete and identifiable event" and allocation would not be proper. Consequently, "Federated was liable for all damages resulting from the improper installation of the stucco."

What does this mean for homeowners? Claims for defective home construction have been increasingly difficult to settle because the builder's or subcontractor's various insurers cannot agree on how coverage and liability should be calculated. Some insurers argue that their liability should be limited to a small percentage of the claim because they had only a short "time on the risk." Other insurers argue that only the insurer at (or shortly after) the time of completion of the home should be liable. The Kootenia Homes decision should remove some of this uncertainty and make it much difficult for the insurance company that insured the builder at or shortly after completion of the home to disclaim liability for all of the claimed damages.

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STUCCO PROBLEMS PLAGUE WOODBURY

Since the 1990's the City of Woodbury, Minnesota, has been investigating the unusually high percentage of stucco-clad homes with moisture intrusion, rot and mold. City officials describe the stucco/moisture problem as "the largest construction defect problem in local history."

According to the City of Woodbury, the failure rate of homes with stucco exteriors is simply "unacceptable." Statistically, Woodbury has found that 41% of stucco homes built before 1999 needed repairs because of moisture infiltration. Of the homes that have already been repaired, 13% required more than one repair.

Unfortunately, the problem is not limited to homes built in the 1990's. Woodbury reports that of the 74 stucco homes built since 2001 - presumably utilizing the latest construction means and methods - 11% have already failed. These results have caused Woodbury officials "to question the viability of stucco on current wall systems." In 2004 the average repair in Woodbury cost in excess of $140,000, with many homeowners facing repair estimates exceeding $300,000.

Woodbury also compared the failure rate of stucco versus non-stucco clad homes. The results of this comparison were published on the City's website in 2005. See www.ci.woodbury.mn.us/
planning/hmstucco.html . The City reported that of the 18,000 dwelling units in Woodbury with siding other than stucco, less than one-tenth of one percent had significant structural damage - a "statistically insignificant" figure.

The problem is not limited to Woodbury - the same construction defects and damage are prevalent in neighborhoods including Stillwater, Lake Elmo Hugo, Plymouth, Maple Grove, Eden Prairie, Eagan, Minnetrista, Independence, Victoria and Lakeville. Hammargren & Meyer, P.A. attorneys have litigated, arbitrated and settled hundreds of residential construction defect claims in the nine-county metropolitan area and greater Minnesota with an aggregate settlement value to the homeowners of several million dollars. Many of these cases involved homes with exterior cladding other than stucco.

Deadlines and statutes of limitation and repose are a homeowner's worst enemy in cases involving water intrusion and damage to their home. Inattention to critical duties and failure to act promptly may cause a homeowner to lose valuable legal rights.

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