General Release of Contractor Upheld Despite Knowledge of Construction Defects

Garret Murai | California Construction Law Blog | January 14, 2019

Ah, the elusive Lepus Cornutus, commonly known as the Jackalope. Rarely seen, we may have one in SI 59 LLC v. Variel Warner Ventures, LLC, Court of Appeals for the Second District, Case No. B285086 (November 15, 2018), an interesting case involving a developer, a contractor, a general release, and Civil Code section 1688.

SI 59 LLC v. Variel Warner Ventures, LLC 

In 2005, Variel Warner Ventures, LLC (Variel Warner) entered into a construction contract with Verdugo Management & Investment, Inc. (Verdugo) to construct improvements at an 85 unit apartment complex. Under the terms of the contract, Verdugo agreed to construction the improvements in a good and workmanlike manner in strict compliance with all drawings and specifications and to comply with all laws. It didn’t. The work was defectively flashed, counterflashed, and waterproofed.

In the meantime, in December 2007, Sobrato Interests II (Sobrato) entered into a purchase agreement to purchase the property. Pursuant to the purchase agreement, Sobrato was not obligated to close escrow until “Final Completion,” which was defined as “all Improvements hav[ing] been constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract.”

The purchase agreement also contained a general release stating that Sobrato “shall rely solely upon [its] own knowledge of the Property based on its investigation of the Property and its own inspection of the property in determining the Property’s physical condition, except with respect to . . . [the] representations, warranties and covenants [made by Variel Warner].” Under the purchase agreement, Sobrato released Variel Warner and Verdugo, among others, from all claims including construction errors, omissions, or defects.

In 2008, Sobrato assigned all of its interests in the property to SI XX, LLC. In 2015, SI XX, LLC assigned all of its interests in the property to SI 59 LLC.  SI 59 LLC later observed water leaking from the podium and pool deck into the parking garage and sued.

In its complaint, SI 59 LLC alleged that Verdugo negligently constructed or inspected the structural concrete slab and slab waterproofing and that Variel Warner negligently managed, inspected and developed the property. SI 59 LLC further alleged that Variel Warner breached the purchase agreement by failing to deliver the property with all improvements having been “constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract.”

The Trial Court Decision

In the trial court, Variel Warner and Verdugo demurred to SI 59 LLC’s complaint on the ground that SI 59 LLC’s claims for negligence and breach of contract were barred by the general release contained in the purchase agreement.

In response, SI 59 LLC cited Civil Code section 1668 which provides that “[a]ll contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of law.” And, here, because Variel Warner and Verdugo were aware of the construction defects, the general release was void as a matter of law.

The trial court disagreed and SI 59 LLC appealed.

The Appellate Court Holding

On appeal, the Second District Court of Appeal held that while Civil Code section 1668 clearly “prohibits exculpation for future torts” (emphasis added), “[w]hether section 1668 might apply to past torts is a slippery question” (emphasis added), but that “the weight of authority recogniz[es] that section 1668 applies only to concurrent or future torts.”

However, while recognizing that Civil Code section 1668 only applies to “concurrent or future torts,” the Court of Appeal also recognized that depending on how a claim is asserted, Section 1668 could potentially apply although SI 59 LLC had not and could not adequately plead sufficient facts to have it apply.

As to SI 59 LLC’s negligence claim, the Court of Appeals held that Verdugo’s defective construction was a past event and that Variel Warner’s failure to properly manage, inspect and develop the property was a breach of a common law duty of care rather than a statutory violation (and, in any event, a past event) precluding application of Civil Code section 1668.

As to SI 59 LLCs breach of contract claim, the Court of Appeals held that the purchase agreement merely provided that Sobrato was not obligated to close escrow until “Final Completion,” and that while “Final Completion” was defined as “all Improvements hav[ing] been constructed in substantial accordance with all plans and specifications and other applicable provisions of the General Construction Contract,” the alleged breach that ‘Final Completion” had not occurred as defined “was not itself a negligent misrepresentation” triggering Civil Code section 1668.

The Court of Appeals suggested that if the facts were different, and SI 59 LLC had the ability  to claim that Variel Warner had affirmatively represented that the property was in fact constructed in substantial accordance with all plans and specifications and other applicable provisions fo the General Construction Contract and further that Sobrato reasonably relied on that representation, that a claim for negligent misrepresentation and application of Civil Code section 1668 might be tenable since reliance and damages would have been concurrent.

Conclusion

This is an interesting case. While the Court of Appeal’s decision is straightforward it seems that its decision was grounded primarily on how the purchase agreement was drafted. As described by the Court of Appeals, it sounds like Variel Warner made no representations as to the condition of the property in the purchase agreement (and, without a representation, there can logically be no “mis”-representation). I wonder though, how many purchase agreements are written in a similar manner.

California Court of Appeal Holds That the Right to Repair Act Prohibits Class Actions Against Manufacturers of Products Completely Manufactured Offsite

Gus Sara | The Subrogation Strategist | January 10, 2019

In Kohler Co. v. Superior Court, 29 Cal. App. 5th 55 (2018), the Second District of the Court of Appeal of California considered whether the lower court properly allowed homeowners to bring class action claims under the Right to Repair Act (the Act) against a manufacturer of a plumbing fixture for alleged defects in the product. After an extensive analysis of the language of the Act, the court found that class action claims under the Act are not allowed if the product was completely manufactured offsite. Since the subject fixture was completely manufactured offsite, the Court of Appeal reversed the lower court’s decision. The court’s holding establishes that rights and remedies set forth in the Right to Repair Act are not available for class action claims alleging defects in products completely manufactured offsite.

In Kohler Co., homeowners instituted a class action against Kohler, the manufacturer of water pressure and temperature regulating valves that were installed into their homes during original construction. The class action was filed on behalf of all owners of residential dwellings in California in which these Kohler valves were installed as part of original construction. The complaint asserted, among other claims, a cause of action under the Act. Kohler filed a motion for anti-class certification on the ground that causes of actions under the Act cannot be certified as a class action. The trial court denied the motion with respect to the Act but certified its ruling for appellate review. Kohler filed a petition with the Court of Appeals, arguing that certain sections of the Act explicitly exclude class action claims under the Act.

The Act revised and codified the laws applicable to construction defect claims related to newly constructed homes. The Act sets forth the standards for home construction, as well as rights and remedies for homeowners. When the Act was passed, it essentially became the exclusive remedy to individual homeowners for losses resulting from construction defects within their homes. The Act also established a builder’s right to attempt to repair a defect before a homeowner can file an action in court.

One of the essential purposes of the Act is to have construction defect disputes resolved expeditiously, and, if possible, to avoid litigation. The Act is specific as to the types of claims that fall under its purview and explicitly excludes certain types of claims. Section 896 of the Act states that the “title does not apply in any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.” The Act defines a “manufactured product” as “a product that is completely manufactured offsite.” In addition, section 931 identifies certain claims that are not covered by the Act, which include class actions. However, the last sentence of that section states that for “any class action claims that address solely the incorporation of a defective component into a residence, the named and unnamed class members need not comply with this chapter.”

The court acknowledged that while section 931 excludes class actions generally, the last sentence of that section sets forth an exception for class actions pertaining “solely [to] the incorporation of a defective component into a residence.” However, the court found that this provision needed to be reconciled with section 896, which excluded claims solely for defects within manufactured products. The court noted that a manufactured product qualifies as a defective component. Thus, in an effort to harmonize the two sections, the court held that the class action exception applies only to those claims related solely to the incorporation into the home of a defective component other than a product that is completely manufactured offsite. Based on this interpretation of the statute, the court reversed the lower court’s decision and granted Kohler’s motion for anti-class certification.

The Kohler Co. case narrowed plaintiffs’ ability to use the Act to pursue class action claims. The court’s interpretation of the Act establishes that plaintiffs cannot use the Act to assert class action claims for defects in manufactured products. Thus, the Kohler Co. decision reminds us that a cause of action under the Act is not permitted for any claims, whether individual or class actions, against manufacturers for alleged defects of products completely manufactured offsite. On the flipside, this decision also reminds us that product manufacturers are not afforded the defenses of the Act.

Another Federal Judge Dismisses Lawsuit For Crumbling Foundation, But Some Relief May Be Forthcoming

Jason Cleri | Property Insurance Coverage Law Blog | January 9, 2019

I’ve previously written about the issues insureds are facing in Connecticut regarding crumbling foundations.

In a blow to insureds in Connecticut affected by crumbling foundations due to the infusion of pyrrhotite, a mineral which gradually deteriorates concrete when exposed to water and oxygen, the Federal District Court for Connecticut ruled that the insureds, Richard and Denise Hyde, did not prove their case to sufficiently to overcome Allstate’s motion to dismiss.1 The Hydes, who had been living at their property in Tolland for 18 years, decided it was time to sell. When they had an engineer inspect their property in anticipation of the sale, the pyrrhotite defect was discovered. The Hydes sued Allstate after the denial, claiming the policy language was ambiguous as to coverage.

The trial court dismissed the action on two grounds:

  1. The court noted that it did not believe an ambiguity existed in the policy language regarding what was considered “sudden and accidental.”
  2. Allstate argued, and the court agreed, that the gradual concrete decay was not sudden and accidental, nor did it qualify for coverage as an entire collapse. In addition, there were other policy exclusions, such as an exclusion for cracking walls, rust, and defective construction materials that precluded coverage.

As a silver lining to insureds, Gov. Dannel Malloy and State Attorney General George Jepsenannounced in a joint release that state had entered into a memorandum of understanding with Travelers Companies to assist current and former Travelers policyholders seeking financial assistance to remediate crumbling foundations.

Under the agreement, Travelers will establish and administer the voluntary Travelers Benefit Program and commit $5 million to the program in conjunction with an assistance program launching through the Connecticut Foundations Solutions Indemnity Company.

I leave you with a quote from author and life coach, Craig D. Lounsbrough, “[t]he thing that I’m most likely to collapse under is not the weight of the stresses that stand around me, but the ego that sits within me.”
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1 Hyde v. Allstate Ins. Co., No. 3:18-cv-00031 (D.Conn. Dec. 4, 2018).

Florida Federal Court Finds Insurer Must Defend Contractor in Defective Condo Construction Suit

Michael S. Levine | Hunton Andrews Kurth LLP | December 27, 2018

The United States District Court for the Middle District of Florida recently granted summary judgment in favor of developer, KB Homes, ruling that Southern Owners Insurance Co. must defend KB Homes under various Commercial General Liability policies.

The action arises from the construction of the Willowbrook Condominium project, a 51-building, 270-unit condominium project located in Manatee County Florida. Gallo Building Services, Inc., a subcontractor, entered into a master subcontract with KB Home, the developer and contractor for the project. Following the completion of the project, the association retained an engineering firm who discovered several defects at the project. The association sued KB, which then sued multiple subcontractors, including Gallo, forming the underlying litigation.

Southern, Gallo’s insurer, then filed the coverage action seeking a declaration that it had no duty to defend or indemnify Gallo under its policies of insurance. After Gallo became insolvent, KB Home stepped in and moved for summary judgment on the duty to defend.

Southern opposed the motion, arguing that the “your work” exclusion and the Exterior Finishing and Stucco Exclusion barred coverage, and that the association’s underlying complaint failed to allege property damage. The Court rejected Southern’s arguments and held that the Southern’s duty to defend was triggered by the broad allegations of “damage to other building components,” “damage to other property,” “water intrusion,” and relocation of resident,” which encompassed damage besides the work completed by Gallo. Moreover, the Court rejected the application of the Exterior Finishing and Stucco Exclusion stating that “Southern does not describe how each defect relates to stucco or an exterior finishing system,” therefore, determining the exclusions did not do away with Sothern’s duty to defend.

Not only is the decision a substantive win for policyholders, the decision provides a firm example of the value that can be obtained from other people’s insurance. By obtaining insurance from Gallo’s insurers instead of its own, not only did KB Home secure a complete defense in the litigation, it did so without implicating coverage under its own insurance and potentially impairing its own policy limits and without impacting its own loss ratios. Policyholders should therefore consider all potentially applicable insurance and indemnity agreements when faced with a claim or potential liability.

Class Actions Under California’s Right to Repair Act. Nope. Well . . . Nope.

Garret Murai | California Construction Law Blog | December 17, 2018

It’s the holidays. A time when family and friends, and even neighbors, gather together.

And nothing brings neighbors closer together than class action residential construction defect litigation.

In Kohler Co. v. Superior Court, Case No. B288935 (November 14, 2018), the Second District Court of Appeal addressed whether neighbors can bring class action lawsuits under the Right to Repair Act. For those who are regular readers of the California Construction Law Blog you’re familiar with the Right to Repair Act codified at Civil Code sections 895 et seq.

For those of you who aren’t here’s a short history. In 1998, in Aas v. Superior Court (1998) 64 Cal.4th 916, the California Supreme Court held that economic damages arising from construction defects, say a defective roof (as opposed to damage to your holiday gifts as a result of water damage resulting from the defective roof), are not recoverable if the basis for liability is negligence (e.g., faulty workmanship) or strict liability (e.g., defective materials).

To limit the application of the Aas case to newly constructed residential housing, including single family homes and condominiums (but not condominium conversions), the California legislature enacted SB 800 also known as the Right to Repair Act. The Right to Repair Act permits homeowners of newly constructed residential housing to sue for economic damages alone if new residential construction does not meet certain enumerated construction standards set forth under the Right to Repair Act and the homeowner satisfies the pre-litigation procedures of the Act.

One aspect the Right to Repair Act does not clearly address, however, is if homeowners can join together and bring a class action lawsuit under the statute.

Kohler Co. v. Superior Court

In Kohler, two homeowners, Joanna Park-Kim and Maria Cecilia Ramos, filed a lawsuit against Kohler Co. on behalf of themselves and others similarly situated  throughout California. The plaintiffs alleged that “Rite-Temp Pressure Balancing Valves” and “Mixer Caps” manufactured by Kohler, which are used to regulate water flow and temperature in household plumbing, were “corroding, failing, and/or will inevitably fail” and violated the construction standards of the Right to Repair Act.  Kohler sold approximately 630,000 of these valves and mixer caps in California during the relevant period.

While the case was pending, Kohler filed a motion claiming that the Plaintiffs could not bring a class action lawsuit under the Right to Repair Act. The trial court denied Kohler’s motion but certified its ruling for appellate review finding that the issue presented a controlling question of law upon which there were substantial grounds for differences of opinion.

The Appellate Court Decision

On appeal, the Second District Court of Appeal focused on Section 931 of the Right to Repair Act, which provides that, when construction defect claims combine causes of action or damages that are not covered under the Right to Repair Act (i.e., construction defects that are not among enumerated construction standards of the Act) with other claims involving construction defects that are covered by the Act, that those defects that are covered by the Act are to be administered according to the Act (i.e., the pre-litigation procedures of the Act). Specifically, Section 931 provides:

If a claim combines causes of action or damages not covered by this part, including, without limitation, personal injuries, class actions, other statutory remedies, or fraud-based claims, the claimed unmet standards shall be administered according to this part, although evidence of the property in its unrepaired condition may be introduced to support the respective elements of any such cause of action. As to any fraud-based claim, if the fact that the property has been repaired under this chapter is deemed admissible, the trier of fact shall be informed that the repair was not voluntarily accepted by the homeowner. As to any class action claims that address solely the incorporation of a defective component into a residence, the named and unnamed class members need not comply with this chapter.

Describing Section 931 as “somewhat obtuse,” the court noted that while the inclusion of the term “class actions” in the first sentence implies that class actions cannot be brought under the Right to Repair Act, the last sentence of the section that “any class action claims that address solely the incorporation of a defective competent into a residence” suggests that certain class actions might be able to be brought under the Act.

Looking to the legislative history of the Right to Repair Act, the Court of Appeals held that class actions may not be brought under the Right to the Repair Act, “with one very narrow exception.”

The Court of Appeal referred to a Senate bill analysis of SB 800 discussing the pre-litigation procedures of the Right to Repair Act, which stated: “The bill establishes a mandatory process prior to the filing of a construction defect action. The major component of this process is the builder’s absolute right to attempt a repair prior to a homeowner filing an action in court. Builders, insurers and other business groups are hopeful that this right to repair will reduce litigation.” The Court concluded that “it makes sense” that “the Legislature intended to exclude class actions for virtually any claim under the Act, because class actions make prelitigation resolution impossible.” Moreover, held the Court:

Even if the named plaintiffs bringing a class action comply with the prelitigation process, thus giving the builder of their homes an opportunity to attempt to repair whatever defect is claimed as to their homes, the builders of other homes are given no such opportunity with respect to the unnamed class members, thus thwarting one of the most significant aspects of the Act.

However, held the Court of Appeal, Section 931 does carve out one narrow, or, as the Court stated, one “very narrow” exception to the Right Repair Act.  And that is claims that solely involve the incorporation of a defective component into a home.

And, here, because the plaintiffs’ claims against Kohler alleged that the defective valves and mixers violated several of the enumerated construction standards set forth under the Right to Repair Act causing damage to other components in their homes, the Court of Appeal held that their claims did not solely involve incorporation of a defective component in their homes, and further, involved an allegedly defective manufactured product that is excluded under Section 896 of the Right to Repair Act, which excludes “any action seeking recovery solely for a defect in a manufactured product located within or adjacent to a structure.”

“In short,” held the Court of Appeal, the Right to Repair Act “does not permit class action claims except when those claims address solely the incorporation into the home of a defective component other than a product that is completely manufactured offsite.”

So there you go. Something for everyone this holiday season. Kind of.

Conclusion

Kohler Co. clarifies that, with one very narrow exception, class action lawsuits cannot be brought under the Right to Repair Act. Furthermore, while the Court did not directly address what constitutes a “defective component other than a product that is completely manufactured offsite,” it would seem that this is indeed, as the Court of Appeal stated, a very narrow exception that would exclude class action claims involving most  manufactured products except products built in whole or in part at a project. Maybe I’ve had too much eggnog, but I can’t even imagine what those types of products might be.