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Construction Lenders Cannot Circumvent Stop Payment Notices

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Construction Lenders Cannot Circumvent Stop Payment Notices – Jonathan H. Finke

 

Point Center Financial, Inc., served as a construction lender for a condominium project in San Diego, California. Included in lender’s construction funds were loans obtained from third-party investors, from which lender prepaid itself interest, loan underwriting and other fees totaling over $1.5 million.

 

Brewer Corporation provided labor and materials to the project, and in June of 2007, served on lender a bonded stop notice after the project’s developer went bankrupt. Prior to California enacting stop-notice laws, a contractor who filed a mechanics’ lien against a party for failure to pay still ran the risk of inability to collect due to bankruptcy or lack of assets. Mechanics’ liens lost effectiveness when lenders began recording construction loan trust deeds before construction began. Stop-notice laws were created to provide a more secure position to one who provides services to a construction project, by forcing lenders to retain funds upon receipt of notice of failure to pay. Here, although holding sufficient unexpended construction loan funds to cover Brewer’s claim, lender failed to withhold any funds, eventually disbursing all monies in the construction loan fund.

 

As a result, Brewer and three other contractors filed suit, claiming they were entitled to the construction funds lender prepaid itself, regardless that such payments were made prior to the stop notices being served. The court agreed, holding that a construction lender must make available to stop notice claimants those amounts from the construction loan that lender has already disbursed to itself, as such a disbursement of funds constitutes an improper “assignment” of the funds under California Civil Code Section 3166 (current Section 8544). In reaching its decision, the court cited Familian Corp. v. Imperial Bank (1989) 213 Cal.App.3d 681, 686-87, which held that preallocation of construction loan funds and periodic disbursements to the lender are assignments and therefore do not take priority over stop notice claims. The Court of Appeal affirmed.

 

This case strengthens the rights of stop notice claimants by preventing construction lenders from attempting to elude their stop payment obligations at the cost of the contractors actually performing the work on the project for which the loan was created. The court admonished Point Center, stating that a lender cannot avoid such stop notice payments through wily accounting methods, nor does it matter whether the assignment is made before or after a stop notice is served, whether or not the lender made money on the project, or whether the funds were earned or unearned by the lender. While nothing in the court’s ruling prohibited such pre-allocation or prepayments by the lender, the statutory scheme is intended to protect those entitled to stop payment notices, and contractors who improved the property will have a superior right to the funds.

 

Brewer Corporation v. Point Center Financial, Inc. (2014) 223 Cal.App.4th 831

Court Confirms Privilege Between Title Insurer, Insured and Attorney

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Attorneys rely daily on the existence of the attorney client privilege to communicate openly with their clients without fear of being compelled to disclose these communications. Clients are justifiably reluctant to disclose information without assurances that their communications are protected. Our system could not function in its current form without the ability of attorneys and clients to communicate freely and without reservation.

 

This case pitted two banks against each other, each of which loaned money secured by what they thought was a first deed of trust against the same parcel. Pacific Security Bank (PSB) held a trustee’s sale where they purchased the parcel by credit bid. Bank of America (BofA) made a claim to Fidelity under their title insurance policy. Fidelity, in turn, hired an attorney to sue PSB on BofA’s behalf on the theory that PSB’s deed of trust was equitably subordinated to BofA’s. After many months of litigation, the trial court ordered BofA’s attorney to turn over all communications between the firm and Fidelity, finding no privilege applied to those communications.

 

The Court of Appeal for the Second District reversed the trial court’s order, finding that a “tripartite” privilege exists in the title insurance context just as it does in liability insurance context. The Court rejected PSB’s argument that Fidelity’s reservation of rights prevented the formation of an attorney client relationship and further rejected PSB’s argument that no privilege arises where the insurance company hires an attorney to prosecute an action rather than defend it.

 

The Court found that the communications in this case were made “relating to the joint and common purpose — the successful defense and resolution of the claim.” Because Fidelity, BofA and the attorney had formed a “loose partnership, coalition or alliance that was directed to the common goal of protecting BofA’s security position … communications exchanged among them are privileged.”

 

While this decision is not earth shattering, it is very important in that it confirms the parameters of the attorney-client relationship in the title insurance context.

 

Bank of America v. Sup. Ct. (Pac. City Bank) (2013) 212 Cal.App.4th 1076

Purchasers (Sometimes) Have Only Two Years to Sue Brokers and Agents

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Code of Civil Procedure section 2079.4 requires that purchasers bring any lawsuit against the “listing agent” within two years of the transaction; however, that section does not apply to the “selling agent.”

 

In William L. Lyon & Associates, a purchaser sued a real estate broker and its agent, who were dual agents in the transaction, in connection with the purchase and sale of a residential property.

 

The broker and agent asserted in a motion for summary judgment that all claims were barred because the two-year statute of limitations imposed by Civil Code section 2079.4, and contained in the standard form contract for residential property, had already passed before suit was filed against them. The trial court denied the summary judgment motion, and the broker and agent appealed.

 

The Court of Appeal, interpreting the limitations period in Section 2079.4 narrowly, found that it applied only to the statutory duties of the listing agent to the purchaser (i.e., the duty to visually inspect and disclose conditions affecting the desirability of property). Here, because the broker and agent acted as not only the listing agent, but also the selling agent, the Court held they were not entitled to the benefit of Section 2079.4’s shorter limitations period.

 

William L. Lyon & Associates, Inc. v. Sup. Ct. (2012) 204 Cal.App.4th 1294

Not a Riddle – When is a Non-navigable River Navigable?

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This case, Sumner Hill Homeowners Assoc., Inc. v. Rio Mesa Holdings, LLC (2012) 205 Cal.App.4th 999, involved two issues: whether homeowners had private access rights to the San Joaquin River, which turned on whether a portion of that river is “navigable” within the purview of the Harbors & Navigation Code, and whether a plaintiff claiming slander of title must prove damages beyond the mere payment of its attorneys’ fees.

 

Sumner Hill was a gated community located on part of the former Peck Ranch overlooking the San Joaquin River (“River”). Killkelly Road was located adjacent to Sumner Hill and within the same subdivision. In creating the Sumner Hill Subdivision, the former owner of the Peck Ranch (“Peck”) recorded a subdivision map which dedicated the subdivision’s streets and easements for public use (“1985 Map”). While it was Peck’s intention to give the Sumner Hill residents some right to access the River, he never formally did so. The residents of Sumner Hill, believing they had the right, used Killkelly Road to privately access the River for fifteen years, installing a locked gate and performing road maintenance. In 2003, Rio Mesa purchased the remainder of the Peck Ranch, asserted ownership rights in Killkelly Road, and eventually barred access to the Sumner Hill residents.

 

Sumner Hill filed suit in Madera County Superior Court seeking to quiet title to Killkelly Road and claiming damages for slander of title. Rio Mesa filed a cross-complaint, also to quiet title. The dispute turned on whether the portion of the River accessed by Killkelly Road constituted “navigable waters” and was therefore required to allow for public access. Under section 105 of the Harbors & Navigation Code, the portion of the River declared to be “navigable” did not include the Killkelly Road access point. Sumner Hill cited an 1856 California Supreme Court case (American River Water Co. v. Amsden) which held that where the legislature makes a finding that a portion of a river is navigable, the remainder of the river is by legislative implication “non-navigable.” According to Sumner Hill, the point where Killkelly Road accessed the River was therefore non-navigable. Rio Mesa, on the other hand, argued in favor of factual navigability, which is found if a small boat or canoe can be floated on the river. Based on this test, the trial court found that the River was in fact factually navigable.

 

The Court of Appeal, Fifth Appellate District, was left with two options: follow the 1856 Supreme Court authority which would lead to a bizarre finding that a factually navigable river was nonetheless non-navigable, or disregard the Supreme Court authority to make what it may have felt was the correct finding. Instead, in a punt worthy of Ray Guy[i], the court decided that Rio Mesa was barred from challenging the 1985 Map based on expiration of the 90-day statute of limitations. The court then urged the legislature or Supreme Court to clarify the issue of which standard of navigability – factual or statutory – should control.

 

The Important Issue Actually Decided

 

After finding that Sumner Hill should have prevailed on each of their claims, the court addressed a very important question: whether a plaintiff asserting a claim for slander of title must prove actual damages, i.e., pecuniary damage to the salability of the property, or may rely solely on its attorneys’ fees and costs to establish damages. The court held that while the slander of title cause of action is primarily intended as a means of “protection from injury to the salability of property” and that damages may be awarded for “loss of a particular sale, impaired marketability or depreciation in value,” a plaintiff is not required to prove any of these damages and that its payment of attorneys’ fees and costs alone constitutes pecuniary damages.

 

            Comment: Damages issues such as this one are very important in real property cases. In some cases, a defendant may be found liable but ultimately prevail because the plaintiff is unable to prove actual damages.

 

Sumner Hill Homeowners Assoc., Inc. v. Rio Mesa Holdings, LLC (2012) 205 Cal.App.4th 999

 

 

[i] Ray Guy was an NFL punter who won three Super bowls with the Oakland/Los Angeles Raiders between 1973-86. He remains the only punter to be selected in the first round of the NFL draft. After one of his punts hit the giant video screen at the Louisiana Superdome during the 1976 Pro Bowl, the NFC team pulled the ball to have it tested for helium, which test came back negative. Although nominated to the Pro Football Hall of Fame in 1994, he has yet to be inducted which is considered to be a travesty by some in this law firm.

Subcontractor Without California License Not Barred From Collecting For Work On Federal Project

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Subcontractor Without California License Not Barred From Collecting For Work On Federal Project – K. Nina Reynolds

 

In general, California law prohibits an unlicensed contractor from bringing an action to recover payment for work that requires a license. (Bus. & Prof. Code § 7031 (“Section 7031”).)   Two recent cases have addressed Section 7031. As made clear in Technica LLC v. Carolina Casualty Insurance Co. and E.J. Franks Construction v. Sahota, while the prohibition in Section 7031 remains firmly in place, it does not preempt federal law and will not be applied where the circumstances establish no actual violation of license laws.

 

Technica and the Miller Act

 

Technica was a sub-subcontractor on a federal construction project in California but was not a licensed contractor in the state. After receiving only partial payment for its work, Technica filed suit against the prime contractor and its surety. Defendants filed a motion for summary judgment based on Section 7031 and the case was dismissed by the District Court for the Southern District of California.

 

The Ninth Circuit Court of Appeal reversed, holding that California’s restriction on the right of a non-licensed contractor to bring an action for collection of unpaid services (Section 7031) does not apply to an action under the Miller Act. The Miller Act is a federal statute that requires the general contractor on a federal construction project to furnish a payment bond for the protection of all those who provide labor and materials to the project. The Act was intended to remedy the historical dilemma faced by subcontractors who were denied payment on public projects but had no direct contract with the government and were barred by federal law from asserting liens on federal property.

 

Following decisions of the U.S. Supreme Court, as well as the Eighth and Tenth Circuits, the Ninth Circuit court observed that federal subcontractors routinely bid on projects throughout the country and perform contracts that span multiple states. Requiring them to comply with contractor licensing requirements in any given state would create procedural and substantive hurdles that would undermine the Congressional intent of the Miller Act.

 

The court clarified that state laws can still control the application of the substantive law of contracts in Miller Act claims, such as calculation of damages or the existence of implied agreements for additional work, but that state laws cannot impair the rights established by the Act. (Technica LLC ex rel. U.S. v. Carolina Cas. Ins. Co. (9th Cir. 2014) __ F. 3d __, 2014 WL 1674108, April 29, 2014.)

 

E.J. Franks and Section 7031

 

Edward J. Franks obtained his contractor’s license in 1995 and operated as a sole proprietor. During construction of a home for the Sahotas in 2005, Franks incorporated his company and his license was reissued to the corporation. When the Sahotas failed to pay for additional work outside of the contract, E.J. Franks Construction sued them for “quantum meruit”, the well-established principle that payment should be made for services that were not part of the contract but were understood to require compensation.

 

The Sahotas unsuccessfully argued that Section 7031 barred recovery because the corporation was not yet licensed when the contract was formed. The Merced County trial court rejected the Sahotas’ contention, correctly finding that the change in business entity status did not constitute unlicensed work. The work was initially done by the licensed sole proprietor and later by the licensed corporation, so there was no point in time where work was done by an unlicensed contractor. The Court of Appeal affirmed. The court also distinguished the case from instances where a contractor’s license was misrepresented as belonging to a corporation when it was actually issued to an individual. In such cases, Section 7031 would prevent recovery. (E.J. Franks Construction, Inc. v. Sahota (2014) __ Cal.App.4th __, 2014 WL 2526978, June 5, 2014.)

Listing Broker Not Liable to Buyer for Validity of Outdated Geologist’s Report

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Listing Broker Not Liable to Buyer for Validity of Outdated Geologist’s Report – Henry Walker

 

This case, Saffie v. Schmeling, stems from statements in a Multiple Listing Service (“MLS”) listing regarding the development potential of a commercial lot in an earthquake zone in Riverside County. The listing broker included statements in the MLS listing that 1) the parcel was declared buildable by the investigating licensed geologist and 2) the geologist’s report was available for serious buyers. After the sale, the buyer learned that the property was not, in fact, buildable. The buyer sued the listing broker (among others), claiming that he purchased the property in reliance on the MLS listing which wrongfully suggested that the property was buildable and that the listing broker should have disclosed that the geologist’s report was, in fact, almost 25 years old and not based on current standards put in place after the 1994 Northridge earthquake. The trial court, after a bench trial, found the listing broker not liable to the buyer. The Court of Appeal affirmed the decision.

 

This case is different from many “disclosure” cases in that it involves the interpretation of section 1088 of the California Civil Code, which holds real estate brokers and appraisers responsible for the accuracy of all information they place on the MLS. Since its enactment in 1982, only two prior cases have interpreted section 1088.

 

Two important holdings came out of the court’s decision in this case: First, the court carefully examined the language of the statements made in the MLS and found that they were not false. Crucial to this determination was the broker’s attribution of the “buildable” statement to the geologist’s report. The court found the broker’s description was correct, even if the report had been rendered invalid in the intervening years since its issuance. The court noted that, had the listing broker failed to clearly attribute the statement to the geologist’s report, the result may have been different.

 

The court’s next holding rejected buyer’s arguments that the listing agent’s reference to the geologist’s report implied it was current and valid, and that he should have at least warned that the report was almost 25 years old. The court found the buyer was not damaged by the statement in any event because he received a copy of the report during escrow which included the 1982 issuance date on the front page. In the court’s words, “notification that the report itself was available for ‘serious buyers,’ and actually providing the report, cured any such mischaracterization.” While the listing broker had a duty of “honesty, fairness and full disclosure to all parties”, including a duty to ensure the information it provided was correct, once the report was provided the buyer and his own broker were charged with determining its validity.

 

Although the listing agent in this case avoided liability, the buyer’s broker did not. In a portion of the judgment which was not appealed, the buyer obtained a judgment for damages of $232,000 for his agent’s failure to properly advise him regarding the implications of the report, and thus breaching his fiduciary duties to the buyer. This outcome serves as a strong reminder of the distinctions between duties owed to one’s own clients as opposed to those owed to parties on the other side of the transaction.

 

Saffie v. Schmeling (2014) 224 Cal.App.4th 563.

 

Scope of Easement Limited to Historical Use

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Scope of Easement Limited to Historical Use – M. Henry Walker

This case involved the determination of the scope of an easement over property in Kings Beach, Lake Tahoe. Plaintiffs Rye, owners of the property (i.e., the “servient tenement”), sued defendant Tahoe Truckee Sierra Disposal Company to prevent expansion of the easement historically used for parking garbage trucks and storage. The dispute centered on the interpretation of a 1981 grant of easement from plaintiff Rye’s predecessor in title to Tahoe Truckee and a separate 99 year lease transaction in 1982.

The 1981 grant of easement provided for “an easement for ingress, egress, parking, storage, utilities over a portion of Parcel One”. While the exact area to be used by Tahoe Truckee was not defined in the 1981 grant, evidence at trial established that Tahoe Truckee limited its use to a small, paved portion of the easement area (and a nearby smaller unpaved portion). In 2004, Tahoe Truckee sought to expand their use of the easement to the entire area identified in the 1981 grant of easement.

Meanwhile, the 1982 Lease provided for a 99 year lease to Tahoe Truckee of the same property as identified in the 1981 grant of easement to Tahoe Truckee. The circumstances surrounding the execution of the lease agreement, and even whether that document was ever executed by the proper parties, were “murky” according to the trial court. Moreover, the parties themselves never performed according to the 1982 lease agreement (which, among other things, required Tahoe Truckee to pay taxes.)

Tahoe Truckee argued that the both the 1981 easement and the 1982 lease allowed it to use the entire encumbered property as identified in those agreements. Rye countered that the use should be limited to the historic use. The trial court, looking askance at the lease agreement, found that even if the lease was ever fully executed, it was nonetheless abandoned by 22 years of non-use. The easement, the court found, was never intended to allow the use of the entire property and limited the use of the easement to its historic use. The Court of Appeal upheld the trial court’s ruling, holding that the word “over” in the grant of easement indicated the intent to allow only a portion of the encumbered property to be used. The Court also noted that, were it to adopt Tahoe Truckee’s position, Rye would be effectively barred from using his own property whatsoever, a result certainly not intended by the parties.

Rye v. Tahoe Truckee Sierra Disposal Company, Inc. (2013) 222 Cal.App.4th 84, review filed (Jan. 27, 2014), opinion modified on denial of reh’g, (Cal. Ct. App., Jan. 10, 2014, C067970) 2014 WL 98652.

Buyer Sufficiently Alleged That Purchase Agreement Provision Calling for Nonrefundable Deposit Was Unenforceable

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Buyer Sufficiently Alleged That Purchase Agreement Provision Calling for Nonrefundable Deposit Was Unenforceable – K. Nina Reynolds

 

Buyer contracted to buy a mobile home park in Sunnyvale, California. Buyer delivered a $3 million deposit directly to seller, which the contract provided was nonrefundable unless seller materially breached the purchase agreement or failed or refused to close. The parties twice agreed to extend the closing date, and buyer inquired about seller financing. Just prior to close, seller advised that it would receive a better tax benefit if it was not in contract to sell and could pay taxes based on the original value rather than the higher sales price. Seller promised that if buyer let the closing date pass, it would sell the property to buyer after filing its tax returns. In reliance, buyer did not tender the full purchase price on the closing date. Some months later, seller advised that the agreement was no longer in place and that buyer had lost the deposit.

 

Buyer sued seller to recover the deposit under various theories of recovery. The trial court sustained seller’s demurrer and dismissed the action. The Court of Appeal reversed the judgment and allowed buyer to proceed on several causes of action commonly used in real estate cases.

 

The court observed that in a contract for the sale of real estate, the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions. As such, neither party is in default until one party performs or tenders performance. Here, since both sides failed to perform, buyer could not argue that seller “material breach[ed]” the contract by failing to tender the deed. However, buyer’s claim that seller’s “failure or refusal to close” was a separate basis for breach was reasonably susceptible to such interpretation and thus could proceed, even if this theory of recovery later proved invalid.

 

Similarly, buyer was permitted to proceed with a claim for “money had and received”. Such claim can be made in the real estate context if seller receives money for the use and benefit of buyer and gives nothing of value in return. Where there is a total failure of consideration, the law implies a promise to repay those funds. The court acknowledged seller’s argument that a party in default cannot sue for failure of consideration, but held there was no default here because neither party performed under the contract.

 

The court also held that buyer properly stated a quasi-contract claim for restitution based on unjust enrichment. Normally, where there is an express contract, a party must sue for breach and cannot seek restitution based on an implied-in-fact or quasi-contract theory. However, restitution may be awarded in lieu of contract damages when a contract was procured by fraud or is otherwise unenforceable or ineffective for some reason. Here, buyer alleged the contract provision making the deposit nonrefundable regardless of breach was an unlawful penalty or forfeiture contrary to public policy and the court allowed the claim to proceed.

 

The court affirmed the dismissal of buyer’s claims for conversion and promissory fraud. Because the deposit here was paid directly to seller and not held in escrow, title to the deposit vested in seller when it accepted the contract, and buyer did not retain the ownership or right to possession necessary to claim conversion. As to fraud, buyer properly alleged misrepresentations with the intent to defraud, but did not sufficiently allege “justifiable reliance” upon the misrepresentations because it failed to allege facts showing it could have obtained the necessary financing to close escrow from a source other than seller.

 

It is important to note that the court did not rule in agreement with any of buyer’s theories of recovery, but allowed buyer to proceed based on the liberal pleadings rules which allow a plaintiff to pursue claims if there are any possible theories for recovery, even if they are not properly alleged. The plaintiff still must prove its case at the evidence stage, which is a much higher burden.

 

 

Rutherford Holdings v. Plaza Del Rey (2014) 223 Cal.App.4th 221

 

Sellers Required to Provide Transfer Disclosure Statements to Buyers of Mixed-Use Properties

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Sellers Required to Provide Transfer Disclosure Statements to Buyers of Mixed-Use Properties – Jonathan Finke

 

In Richman v. Hartley, Hartley entered into a written agreement with Richman to purchase a single parcel of real property (the “Property”) owned by Richman containing two structures, a residential duplex and a commercial building. Under a simultaneously executed lease agreement, Hartley leased the Property from Richman pending the close of escrow.

 

Two years passed without a close of escrow, as Hartley cited Richman’s failure to provide the Transfer Disclosure Statement (“TDS”) required by the Transfer Disclosure Law, codified in California Civil Code §1102. The Transfer Disclosure Law requires a transferor to provide to a prospective transferee a TDS for sales or other transfers of “real property…improved with or consisting of not less than one nor more than four dwelling units.” (Cal.Civ.Code §1102.5.) For failure to close on the sale, Richman sued Hartley for breach of contract, against which Hartley moved for summary judgment, arguing that Richman’s failure to deliver the TDS as required negated his breach of contract. The trial court agreed with Hartley, granting summary judgment on the basis that a TDS was required under Civil Code §1102.5, even though the Property was mixed use commercial and residential.

 

On appeal, Richman argued that the requirements of Civil Code §1102 applied only to strictly residential property, and therefore did not apply in this situation, as the property was used for both commercial and residential purposes. The Court of Appeal disagreed and upheld the ruling of the trial court.

 

The court examined the legislative intent of §1102, holding that the words of the statute were clear and unambiguous in that neither the original Transfer Disclosure Law nor subsequent amendments have ever limited its application to properties that only contain residential units. Therefore, simply examining its language, §1102 applies to any transfer of real property on which are located one to four residential units, regardless of whether the property also has a commercial use. The court opined that “if the legislature had intended the Transfer Disclosure Law not to apply to a transfer of mixed use properties, it could have done so by adding the word “residential” before “real property” in §1102. It did not.”

 

Richman also argued that a TDS should not be required because the “essence of the transaction” was for commercial purposes, and because Hartley was a “sophisticated buyer.” The court rejected both arguments, reasoniing that neither should be considered a factor when determining the requirement of the seller to provide a TDS.

 

Richman v. Hartley sets a clear standard for the requirements of a seller to include a TDS: if the property in question contains one to four residential units, a TDS is required, regardless of the property being mixed use commercial and residential.

 

Richman v. Hartley (2014) 224 Cal.App.4th 1182

Right to Repair Act Not Exclusive Remedy Where Construction Defects Cause Actual Damages

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Hart bought a newly constructed home developed and built by Brookfield. Several years later, a pipe in the home’s sprinkler system burst, causing flooding and significant damage. Brookfield acknowledged liability and repaired the damage. Hart’s homeowners’ insurer, Liberty Mutual, paid his hotel and relocation expenses incurred while he was out of the home during the repairs. Liberty Mutual later sued Brookfield in subrogation to recover those expenses. The trial court dismissed the case as time-barred under the Right to Repair Act, Civil Code section 895, et seq., because it was not brought within four years after close of escrow. The Court of Appeal reversed.

 

The court first looked at the history of the Right to Repair Act. Enacted in 2002, the Act established a mandatory process to manage residential construction defects prior to litigation. The Act set forth building standards, the violation of which constitute construction defects. Prior to litigation, homeowners must follow certain notification procedures and builders must inspect, test, and offer to repair the defects. The Act also prescribes statutes of limitations, affirmative defenses, and recoverable damages.

 

The Act sought to abrogate the 2000 decision in Aas v. Superior Court, in which the California Supreme Court held that construction defects in residential properties must cause actual property damage or injury prior to being actionable. The Act, by contrast, was intended in part to grant statutory rights where construction defects caused economic damage alone. The Act made major changes to the law governing construction defects, and sought to respond to builders and insurers concerned about litigation costs as well as giving homeowners the ability to have defects identified and corrected before they caused actual harm.

 

There was no question that the defective sprinkler pipe in Hart’s home was a component that would be covered by the Act. However, the court held, the Act did not eliminate the property owner’s common law rights and remedies where, as here, actual damage occurred as a result of the defect.

 

The court noted that the legislative intent of the Act was to provide for identification and repair of construction defects before they cause actual damage to the structure or its contents, not to provide the sole remedy to recover actual damages that have occurred as a result of construction defects. For example, provisions of the Act setting forth detailed timeframes for notification, inspection, and the offer to repair would not make sense in the case of actual damage requiring immediate attention and repair. Requiring exclusive compliance with the notice provisions of the Act under those circumstances would effectively extinguish the subrogation rights of homeowners’ insurers who promptly cover their insureds’ losses and later seek reimbursement. Nothing in the Act shows the legislature so intended.

 

In addition, unlike common law claims for actual damage, homeowners need not prove causation and damages to bring claims under the Act. The elimination of these basic elements of proof only makes sense where the defects have not yet caused actual damage.

 

Further, in creating the Act, the legislature did not repeal the existing limitations periods for construction defects, both patent (4 years) and latent (10 years), meaning those periods would still be in effect for use in litigation not brought under the Act.

 

Here, because Hart had common law remedies against Brookfield for the actual damage to the property, Liberty Mutual’s complaint in subrogation was not time-barred for failing to comply with the limitations period set forth by the Act.

 

Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) __ Cal.App.4th __, 2013 WL 4538693.