New Jersey’s Highest Court Scrutinizes Statutes of Limitation and the Discovery Rule in Construction Defect Cases

Robert C. Neff, Jr. | Wilson Elser | July 11, 2018

The typical construction defect case presents an up-front analytical challenge: the defense attorney is presented with boxes of project materials, perhaps an extensive case history and prior discovery, and likely an unhappy (but these days, resigned) client. So you start with the basics: a review of the complaint to assess the allegations; a review of the contract documents, particularly the scope of work, for an understanding of the client’s role in the project; and a conference with the client to review the project and the expected course of the litigation.

At the same time, you speak with the carrier involved for an understanding of the terms of the applicable policy, and whether that may affect your strategy. Is there an ability to spread the risk, perhaps through a contractual indemnification provision? Or might your client be on the hook to defend and indemnify another party?

There is so much to do that sometimes a statute of limitations or statute of repose evaluation might take a back seat, unless it’s obvious. After all, particularly if your client was brought into the suit late, aren’t these cases typically subject to the discovery rule? And aren’t there often multiple owners, such that this new owner bringing suit wouldn’t have had prior knowledge of any defects?

Well, yes and yes. But a new case in New Jersey illustrates the importance of reviewing this potential affirmative defense and the related statute of repose defense, and making the review part of every initial analysis. Most importantly, the case gives defendants the ability to defend against the assertion that the statute of limitations was tolled until the most recent owner (and plaintiff) discovered the cause of action.

Background
In Palisades at Fort Lee Condo. Ass’n v. 100 Old Palisade, LLC, 2017 N.J. Lexis 845, 169 A.3d 473 (Supreme Court of New Jersey, September 14, 2017), Palisades at Fort Lee Condominium Association, Inc. (plaintiff) sued the general contractor and three subcontractors, alleging various defects in a commercial/residential high-rise under plaintiff’s control at the time suit was filed. However, the complex had gone through two ownership changes prior to suit being filed, and the building had been completed more than six years earlier.

The relevant timeline was as follows: in December 1999, Palisades A/V Acquisitions Co., LLC (A/V) retained defendant general contractor AJD Construction Co., Inc. (AJD) to build the complex. The project architect certified that the project was “substantially complete” as of May 1, 2002. A/V then rented units in the project for two years, after which, in June 2004, it sold the complex to 100 Old Palisade, LLC (Old Palisade), which converted the units into condominiums. On October 1, 2004, an engineer retained by Old Palisade found the complex to be in good condition.

In July 2006, the unit owners took control of the Condominium Association and retained another engineer to inspect the complex. That engineer issued a June 13, 2007, report detailing construction-related defects, and the Association eventually sued various defendants in 2009 and 2010. The allegations were the typical breach of warranty and negligent workmanship allegations found in most construction defect complaints.

Rulings
In New Jersey, the statute of limitations to file such a suit is six years, as set forth in N.J.S.A. 2A:14-1. Ruling on a motion to dismiss for violation of the statute of limitations, the trial court found that the statute began to run on May 1, 2002, when the complex was “substantially complete.” Because suit had been filed after May 2008, the court granted the motion and dismissed the case.

The Appellate Division disagreed, concluding that the Association’s claims accrued when it assumed control of the complex and became “reasonably aware” of the claims of construction defect based on its June 2007 engineer’s report. The Supreme Court granted certification, but did not completely agree with either the trial or appellate courts, illustrating the difficulties inherent in the application of the statute of limitations and the discovery rule in construction defect litigation.

First, the Supreme Court disagreed that it is simply a matter of determining when a project is “substantially complete” when setting the accrual date. The discovery rule applies, it noted. So if an owner does not reasonably first discover a cause of action until after the project is substantially complete, then the full six-year statute does not begin to run until the date that the cause of action is discovered.

The Supreme Court therefore rejected the trial court’s opinion that, because damages and an at-fault party were discovered within the initial six-year period commencing with the substantial completion of the project, the plaintiff had to file the action within the initial six-year period. “We therefore reject defendants’ argument that, so long as plaintiff discovered the basis for an actionable claim within six years from the date of substantial completion, plaintiff had to file within the time remaining in the limitations period.”

Instead, the Supreme Court determined the statute of limitations does not begin to run until “the date that the plaintiff knows or reasonably should know of an actionable claim against an identifiable defendant” if that date is after the date of substantial completion. While defendants lost that argument, they won another, perhaps less obvious, argument.

The plaintiff in Palisades was the third owner of the project in question, a 41-story high-rise consisting of a 30-story residential tower atop an 11-story parking garage, including mid-rise apartments, townhomes and recreation facilities. A/V owned it in 1999, Old Palisade took ownership in 2004, and the plaintiff, the Condominium Association, owned it in July 2006 when 75 percent of the unit owners took control of the Condominium Association.

Plaintiff attempted to argue that the statute of limitations did not begin to run until the Condominium Association received its expert report in June 2007, notifying it of the defects. In fact, that is how the Appellate Division ruled. It made no difference to the Appellate Division that the prior owners had known of defects in the project. Instead, the Supreme Court held that a current owner stands in the shoes of a prior owner for statute of limitations purposes, and has no right to revive what may have been a lapsed claim simply because of a change in ownership:

“The statute of limitations clock is not reset every time property changes hands… A cause of action, for purposes of N.J.S.A. 2A:14-1, accrues when someone in the chain of ownership first knows or reasonably should know of an actionable claim against an identifiable party.”

Rejecting plaintiff’s argument and that of its amicus curiae supporters, the Supreme Court explicitly held that a condominium association is not exempt from that rule: “Old Palisade took title subject to the rights of A/V Acquisitions, and the plaintiff Condominium Association took title subject to any limitation on the rights of the two predecessor owners.”

As a final point, the Supreme Court noted that its holding does not abrogate the effect of the statute of repose, which in New Jersey is 10 years. Repose statutes are specifically enacted to save architects, planners, designers, builders and contractors from indefinite liability through operation of the discovery rule. Thus, the 10-year period begins to run on the date of substantial completion and cannot be extended.

At the end of the day, the Supreme Court found in Palisades that it could not determine the accrual date of the statute of limitations, and that a hearing would have to be held with respect to when each of the three owners knew or should have known of a cause of action as against each defendant. It remanded the case for that purpose.

Analysis
Back to the beginning: a statute of limitations analysis must be conducted at the start of each case. In Palisades, the motions to dismiss based on the statute of limitations were filed at the conclusion of all discovery. While an initial analysis might yield the conclusion that certain discovery will be needed to ascertain the appropriate accrual date (or dates, in the case of multiple defendants), counsel will then know what discovery to seek during the discovery period.

In addition, as a practical matter − and if the managing judge or counsel are in agreement − discovery limited to the statute of limitations can be conducted in the beginning of the case, early motions can be filed, and an early hearing held, potentially obviating the need for a lengthy full-discovery period.

…And potentially winning the case on an affirmative defense short of trial for one of those resigned, but now pleasantly surprised, clients.

New Jersey Senate Passes Bad Faith Bill

Jason Cleri | Property Insurance Coverage Law Blog | June 10, 2018

Recently, the New Jersey Senate passed S-2144, entitled the New Jersey Insurance Fair Conduct Act. While the bill still must go through the Assembly and be signed by the Governor, this is much welcomed news by insureds and their representatives. Since 1993, insureds have had basically no right to bad faith claims against their insurers under the blanket of the Picket v. Lloyd “fairly debatable” standard.1

That standard set the bar so low for the insurance carrier to overcome that most cases could only proceed under the breach of contract claim. The new bill states:

a. In addition to the enforcement authority provided to the Commissioner of Banking and Insurance pursuant to the provisions of P.L. 1947, c.379 (C.17:29B-1 et seq.) or any other law, a claimant may, regardless of any action by the commissioner, file a civil action in a court of competent jurisdiction against its insurer for:

(1) an unreasonable delay or unreasonable denial of a claim for payment of benefits under an insurance policy; or

(2) any violation of the provisions of section 4 of P.L. 1947, c.379 (C.17:29B-4).

b. In any action filed pursuant to this act, the claimant shall not be required to prove that the insurer’s actions were of such a frequency as to indicate a general business practice.

c. Upon establishing that a violation of the provisions of this act has occurred, the plaintiff shall be entitled to:

(1) actual damages caused by the violation of this act;

(2) prejudgment interest, reasonable attorney’s fees, and all reasonable litigation expenses; and

(3) treble damages

This could be a huge win for insureds in New Jersey if it passes as-is. Not only could a Plaintiff recover extra-contractual damages but those damages can also be tripled (treble damages).

In addition, removing the requirement to show a pattern or practice by the insurance company allows a single litigant the ability to collect under this act. Stay tuned for more developments as this bill makes its way through the New Jersey legislature.

I leave you with a quote from Matt Mead, Governor of Wyoming who stated: Connectivity is important to our state, including the opportunity for our citizens to see our legislative process at work. Let’s hope the New Jersey legislature does the right thing here and passes this bill.
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1 Picket v. Lloyd, 131 N.J. 457 (1993).

Subcontractor Lien Claims “Salvaged” in New Jersey

Adam J. Sklar | Cole Schotz | June 4, 2018

Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner$250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.

New Jersey Court Finds Insurer Can Deny Or Reserve Coverage Despite Insured’s Failure To Respond To Offer Of A Defense

Charles W. Stotter | Bressler, Amery & Ross PC | April 2, 2018

In a recent decision for publication, a New Jersey intermediate appellate court clarified certain circumstances in which an insurer can deny coverage even though the insured did not respond to the insurer’s offer of a “courtesy defense.” In Northfield Ins. Co. v. Mt. Hawley Ins. Co. et al., Slip Op., No. A-1771-16T4 (App. Div. March 28, 2018), the Appellate Division of the New Jersey Superior Court, finding fact issues, held that an insurer would not be estopped from denying coverage where it offered a “courtesy defense,” received no response from the insured, and then proceeded to control defense of the underlying litigation.

The court found there was insufficient evidence to grant summary judgment to the insured on the coverage issue as a matter of law under the estoppel doctrine first recognized in Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 127 (1962). In Eggleston, the New Jersey Supreme Court had found that an insurer was estopped from denying coverage where it reserved its rights or denied coverage while at the same time it failed to request it’s insured’s consent to control the defense of the underlying action. The Court stated that “[c]ontrol of the defense is vitally connected with the obligation to pay the judgment,” that “it would be unfair to permit a carrier to control the defense without the consent of the insured and then leave the judgment for his payment,” and then ruled that “if a carrier wished to control the defense and simultaneously reserve a right to dispute liability, it can do so only with the consent of the insured.” Id.

In Northfield, a roofing contractor, CDA, insured by Northfield, did roofing work on a hotel, Empress, pre-Superstorm Sandy. The hotel was damaged by Sandy. The hotel submitted a claim to CDA, asserting the damage was due to CDA negligence. The hotel and its insurer, Mt. Hawley, subsequently sued CDA alleging that pre-Sandy roof problems leading to damage were due to CDA negligence (Empress Lawsuit).

Northfield disclaimed coverage of the Empress Lawsuit to CDA and although denying an obligation to indemnify CDA, it stated that it was “willing to provide [CDA] with a courtesy defense for this lawsuit.” Id., Slip Op. at 6. Northfield also reserved its right to withdraw from the defense of the Empress Lawsuit at any time and all other rights as to its coverage decision. CDA did not respond to the offer (the appellate court noted that based on the factual record CDA was “defunct”). Northfield then filed an action seeking a declaration that it had no obligation to defend or indemnify CDA in the underlying Empress Lawsuit (DJ Action). Empress and Mt. Hawley sought summary judgment in the DJ Action, on the ground that Northfield was estopped from denying coverage because it did not have consent from CDA to control the defense of the Empress Lawsuit. The trial court granted summary judgment to Empress and Mt. Hawley, concluding that Northfield could not deny coverage because it had not obtained consent from CDA to control the defense of the Empress Lawsuit. The appellate court disagreed and reversed that ruling on appeal.

The Appellate Division observed that Eggleston did not “impose only one way in which the insured’s rights upon a disclaimer or coverage denial may be observed.” Id., Slip Op. at 10. Rather, the court noted that here the offer of a “courtesy defense” could be viewed as the offer of a defense in the underlying action, not that the insurer was insisting on controlling the defense. That led the court to find that “if interpreted as an offer, CDA’s following silence could be interpreted as acquiescence in Northfield’s control of the defense; such a circumstance would not offend Eggleston.” Id., Slip Op. at 12. The Appellate Division concluded that the trial court’s “application of the doctrine of estoppel was precipitous and cannot stand.” Id., Slip Op. at 13. It further found that there were “too many factual uncertainties to allow for the application of estoppel as a matter of law,” and remanded the case for further proceedings. Id., Slip Op. at 14, 21.

The takeaway is that there are situations where the estoppel doctrine of Eggleston will not apply, and the issue of an insured’s consent to an insurer controlling the defense will be heavily fact-sensitive. Coverage counsel should be aware of that when advising insurers who seek to reserve rights or deny coverage, while at the same time offering to control or controlling the defense of an underlying litigation.

Appellate Division Ruling in Construction Defect Case Highlights Importance of Timely Expert Testimony and Adherence to Discovery Schedules

John D. North and Charles J. Vaccaro | Greenbaum, Rowe, Smith & Davis LLP | April 23, 2018

A recent decision by the Superior Court of New Jersey Appellate Division underscores the fact that in construction defect litigation, where general contractors, project managers, architects and engineers are the primary defendants, it is imperative that qualified experts be retained and properly utilized by the parties in a timely manner. The failure of a party to timely make use of a qualified expert and abide by the trial court’s discovery schedule can be fatal to a plaintiff’s claims for construction defects, and can also severely hamper the defense of such claims.

This principle was exemplified by the Appellate Division’s February 2018 ruling in Riva Pointe at Lincoln Harbor Condominium Association, Inc. v. Riva Pointe Development, LLC, in which the plaintiff, a condominium association, filed suit against the developer, general contractor/project manager, architect, and other parties involved in the construction of a condominium complex. The association’s complaint, which was first filed in October 2012 and amended five times, alleged that defective construction caused water infiltration into condominium units and common areas, causing extensive damage.

After “numerous” extensions for the deadlines of expert reports, the association served a “preliminary” expert report setting forth the negligence of each defendant. The association thereafter told the trial court and defendants that this report would be final. As a result, the Court said the association could only submit a supplemental expert report for the sole purpose of addressing the defense experts’ reports, and not to introduce any new issues or opinions. The submission deadline for any such supplemental report was June 24, 2015.

Over a month after the supplemental expert report was due, the association submitted a report that, contrary to the Court’s earlier ruling, set forth new issues, opinions and conclusions regarding construction defects and increased the claim for damages by $8 million. The Court then threw out the portions of the report that raised new issues and increased the association’s damages claim. When the association failed to produce their expert for depositions, the judge precluded the expert from testifying at trial.

On the day of trial, the association’s counsel argued that “it would be fruitless and futile to continue with the case given that we don’t have a liability expert” as the Court precluded him from testifying. The Court then dismissed the association’s case.

The association filed an appeal. The Appellate Division affirmed all of the trial court’s rulings and added a few brief comments. The three judge panel ruled that the trial court had not abused its discretion. The panel highlighted that the trial court held multiple case management conferences and issued five case management orders specifying discovery deadlines, which were adjusted as necessary to accommodate reasonable delays. The Appellate Division also affirmed the trial court’s refusal to allow the association’s expert to add new issues and $8 million to his calculation of damages only three months prior to trial.

Expert testimony is often needed in construction defect litigation to establish and explain how design and construction work was deficient and how it can be corrected, as well as the cost of corrective work. Expert testimony assists the jury on issues related to building codes and compliance, building delays, construction costs, and construction defects. With respect to architects and engineers, expert testimony is needed to establish the higher professional standard of care that must be followed and any deviations from that standard.

The holding in Riva Pointe should serve as a cautionary tale to community associations and builders alike that they should not drag their feet in prosecuting claims for construction defects. Experts should be retained early so that they can provide comprehensive input and set forth all of their opinions and conclusions before critical deadlines have passed.