Snell & Wilmer
Legal Alert

Letter from the Editor

Recent Developments in Arizona Construction Law

Arizona Prime Contracting Tax Reform is Knocking at Your Door; Are You Ready?

Joint Employers in the Building and Construction Industry

Recent Developments in California Construction Law

General Contractor’s Prospective Waiver of its Lien Rights is Enforceable in California

Recent Developments in Colorado Construction Law

Nevada Construction Law Developments in 2014

Developing Issues in Utah Construction Defect Litigation

 


James J. Sienicki
James J. Sienicki
602.382.6351
jsienicki@swlaw.com
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Nicole Sornsin
Nicole Sornsin

602.382.6392
nsornsin@swlaw.com
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Craig R. McPike
Craig R. McPike

602.382.6538
cmcpike@swlaw.com
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Gerard Morales
Gerard Morales

602.382.6362
jmorales@swlaw.com
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Jeffrey M. Singletary
Jeffrey M. Singletary
714.427.7473
jsingletary@swlaw.com
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Lindsey E. Martínez
Lindsey E. Martínez

714.427.7058
lmartinez@swlaw.com
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Lyndsey A. Torp
Lyndsey A. Torp

714.427.7529
ltorp@swlaw.com
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Daniel Frost
Daniel Frost

303.634.2038
dfrost@swlaw.com
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Sarah Mead
Sarah Mead

303.634.2075
smead@swlaw.com
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Robin E. Perkins
Robin E. Perkins

702.784.5238
rperkins@swlaw.com
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Bryan M. Gragg
Bryan M. Gragg

702.784.5279
bgragg@swlaw.com
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Nathan G. Kanute
Nathan G. Kanute

775.785.5419 RNO
702.784.5200 LV
520.882.1232 TUC
nkanute@swlaw.com

Elisabeth M. McOmber
Elisabeth M. McOmber

801.257.1880
emcomber@swlaw.com
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Snell & Wilmer
Past Issues
Construction Practice

 

 

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December 2014

Letter from the Editor

Welcome to the final issue of Under Construction for 2014. The year has brought many interesting changes to the construction industry. As it comes to a close, we reflect on some notable 2014 case law and legislation that impacted the construction and design industry operating in the Snell & Wilmer footprint throughout the Western United States.

Arizona starts off this edition with a discussion from Nicole Sornsin regarding a few recent cases involving bonds, mechanic’s liens, eminent domain and the Registrar of Contractors Recovery Fund, as well as a look at some significant jury verdicts and recent legislation that will impact your industry in the State of Arizona. Craig McPike then discusses the new Arizona Prime Contracting Tax Reform and the implications it will have on the construction industry with the prime contracting transaction privilege tax.

Jerry Morales’ article describes how NLRB Associate General Counsel, Barry J. Kearny, discussed the litigation currently before the NLRB on the joint employer issue. The General Counsel of the NLRB urged the Board to adopt a new standard and construe employer status broadly under labor law, a change that would significantly expand the entities that may be liable for unfair labor practices. With a decision still pending, it is predicted that the board will issue its decision soon.

Moving west, we take a look at a few cases from California. Jeff Singletary and Lindsay Martínez analyze a group of cases that involved liability for owners, developers, contractors, subcontractors, suppliers and design professionals. They also look at some pertinent statutes, codes and regulations for 2014 and moving into 2015. Lyndsey Torp then discusses an opinion published in September entitled Moorefield Construction Inc. v. Interevest Mortgage Investment Company, et al., where the California Court of Appeal held an original contractor can contractually waive or impair the lien rights of its subcontractors.

Flying over the mountains to Colorado, Dan Frost and Sarah Mead write about some hot button issues in Colorado construction including a measure, not passed by the Legislature, intended to roll back provisions of the Construction Defect Action Reform Act, which has resulted in declining condominium projects. Dan and Sarah discuss the arguments both for and against such a measure.

Heading back west to the Silver State, Robin Perkins, Bryan Gragg and Nathan Kanute discuss a few decisions from the Nevada Supreme Court this year, most notably Byrd Underground, LLC v. Angaur, LLC. The decision focused on whether placement of fill materials and grading constituted “construction of a work of improvement” for purposes of a lien priority determination under NRS 108.225.

We wrap things up with a stop in Utah where a Utah Supreme Court decision has opened the door for creative legal arguments in construction defect cases. Elisabeth McOmber discusses developing issues in Utah construction defect litigation based on the Davencourt at Pilgrim’s Landing Homeowners’ Association case. Included in her assessment is a look at competing issues and arguments involving privity, the statute of repose and equitable tolling, as well as breach of fiduciary duty.

Finally, we are pleased to announce that Snell & Wilmer has been recognized for the fourth consecutive year as a National Tier 1 firm in Construction Litigation in the 2015 edition of “Best Law Firms” by U.S. News Media Group and Best Lawyers®. The 2015 rankings are based on the highest number of participating firms and highest number of client ballots on record. Over 17,000 attorneys provided almost 600,000 law firm assessments and almost 7,500 clients provided more than 40,000 evaluations.

The honor of being recognized as a Tier 1 firm in Construction Litigation follows the news that 123 of Snell & Wilmer’s attorneys, across 67 areas of practice, have been selected for inclusion in The Best Lawyers in America© 2015, including seven in the areas of construction law or construction litigation.

As we close out 2014 and welcome 2015, we are grateful for the numerous opportunities to serve our community and our clients. We extend to you, your family and friends joy, peace and prosperity throughout the holiday season and throughout 2015.

Regards,
Jim Sienicki

 

Recent Developments in Arizona Construction Law

Notable 2014 Case Law:

Bonds

In Ponderosa Fire District v. Coconino County, 235 Ariz. 597 (Ct. App. Ariz. 2014), the Court of Appeals considered whether the County had discretion to decide not to call performance bonds posted by an owner/developer to ensure completion of subdivision improvements. The owner acquired a subdivision property after the developer declared bankruptcy and abandoned the subdivision. The developer had posted bonds totaling over $4 million prior to abandoning the subdivision. The County declined the new owner’s request that the County call the bonds. The owner alleged it had acquired the subdivision with the expectation the bonds would be called to pay for the remaining improvements and infrastructure. The owner requested a judgment compelling the County to call the bonds and monetary damages. The court noted that the legislative purpose of the A.R.S. § 11-821(C) was to require developers such as the new owner to pay for the cost of subdivision improvements and the County determined that calling the bonds did not serve this interest. The court held that under A.R.S. § 11-821(C) and Coconino County Subdivision Ordinance No. 82–3, the County had discretion to decide not to call performance bonds posted by an owner/developer to ensure completion of subdivision improvements.

Mechanic’s Liens

In Weitz Co., L.L.C. v. Heth, 235 Ariz. 405 (2014), the Arizona Supreme Court held that the statute which gives mechanic’s liens priority over liens recorded after construction begins on real property did not preclude assignment by equitable subrogation of a construction loan deed of trust that was recorded before construction began on the project.

In Weitz, the developer stopped paying the contractor on a condominium development. The majority of the individual units were sold to residents and the construction lender released the deed of trust with respect to those units when it was paid off by the condominium unit lenders/owners. The contractor sued the developer, individual unit owners and their lenders, to foreclose on its mechanic’s lien. The developer, unit owners and lenders asserted that because the unit owners/lenders had paid their portions of the developer’s construction loan allocated to their units, they were equitably subrogated to the construction loan lender’s deed of trust and therefore had priority over the contractor’s mechanic’s lien. The court held that A.R.S. § 33–992(A) did not preclude equitable subrogation of a lien that is superior to a mechanic’s lien.

The court also held that although a third party generally must discharge the entire lien obligation to qualify for equitable subrogation, when a single deed of trust burdens multiple parcels, a third party may be entitled to equitable subrogation when that party has paid a pro rata amount of the obligation and obtained a full release of the parcel at issue from the deed of trust.

Eminent Domain

In City of Phoenix v. Garretson, 234 Ariz. 332 (2014), the Arizona Supreme Court held that an owner who lost access rights to an abutting street when the city constructed light-rail tracks adjacent to the owner’s property, but who retained access rights to his property from another street, was nevertheless entitled to compensation from the city. The court held that a property owner is entitled to compensation if the government either completely eliminates or substantially impairs the owner’s access to an abutting road and thereby causes the property’s fair market value to decrease. However, the court also held that a landowner who claims or establishes only substantial impairment is not entitled to compensation unless the remaining access is unreasonably circuitous.

Registrar of Contractors Recovery Fund

In Magness v. Arizona Registrar of Contractors, 234 Ariz. 428 (2014), homeowners sued a contractor who was paid to construct a bath addition to a private residence. The homeowners also named the ROC, alleging they were entitled to recover from the Fund based on claimed damages for unperformed work. The contractor failed to answer the complaint and the trial court entered a default judgment and awarded damages to the homeowner. When the homeowners filed an application for an order directing payment from the Fund, the ROC objected because the application did not satisfy the statutory requirements and requested that the court, at a minimum, order a hearing requiring the homeowners to prove the requisite matters. The trial court granted the homeowners’ recovery from the Fund. In reversing the trial court’s decision, the Arizona Court of Appeals held that an applicant seeking recovery from the Fund through a civil remedy must obtain a judgment against the contractor and meet all of the remaining statutory eligibility requirements. The court reasoned that to hold otherwise would deprive the ROC of its statutory right to raise and support its objections and would improperly relieve an “injured person” of the burden of demonstrating eligibility for payment from the Fund. 

Significant Jury Verdicts

In January 2014, a jury returned a verdict of $4,104,276.00 to homeowners who filed suit against homebuilders who constructed homes in the planned community of Sun City Grand. Two hundred seventy-nine homeowners filed a lawsuit alleging the homes contained window seals that were failing, had improperly placed Low-e coating on windows, did not comply with noise ordinances concerning Luke Air Force Base, did not have code-required weep screed in the stucco systems and were improperly constructed of parapet walls, foundation systems and ceiling systems. Following a 59-day trial and eight days of jury deliberation, a jury returned a verdict in favor of the plaintiffs.  

On May 29, 2014, a jury returned a verdict of $2,188,266.00 to plaintiffs for repair costs, loss of business revenue and payroll loss. Plaintiffs entered into a construction contract to install a fire protection system for the Hotel Legado construction project. The fire protection system in the fourth floor electrical room allegedly discharged water in May 2010 and damaged four floors of the hotel. The plaintiffs alleged the defendant was negligent in the installation of the fire system and breached the contract, causing approximately $2 million in damages to clean up and repair the water damage.

Legislation

The governor signed into law in May 2014, certain amendments to statutes regarding fall protection. AZ LEGIS 119 (2014), 2014 Ariz. Legis. Serv. Ch. 119 (S.B. 1307) (WEST). Among other things, the amendments now require that an employer must provide fall protection as prescribed by this article for “every employee who engages in residential construction activities six feet or more above lower levels.” The exception for nonrepetitive work of short duration with limited exposure, where the hazards involved in rigging and installing the safety devices required exceeds the hazards involved in the actual construction, was removed. The legislature added in an exception for work where an employee is making an inspection before the start of actual construction work or after all work is completed.

 

Arizona Prime Contracting Tax Reform is Knocking at Your Door; Are You Ready?

By now, many within the construction industry in Arizona are aware that significant effort has been made over the past few years to reform Arizona’s state and local transaction privilege tax (TPT) system, particularly as it relates to the prime contracting TPT.[1] This reform effort has traveled many roads, having started with the 2012 Governor’s TPT Simplification Task Force, then in the 2013 legislative session with House Bill 2111 (which replaced House Bill 2657), then in the 2014 legislative session with House Bill 2389 and most recently with the Arizona Department of Revenue’s Transaction Privilege Tax Notice, TPN 14-1. Although the changes to prime contracting TPT will take effect on January 1, 2015, this reform project is not yet complete. Below, we highlight a few significant changes to prime contracting TPT that will take effect on January 1, and then we outline key aspects of the industry’s 2015 legislative effort to simplify and streamline the current structure in the 2015 legislative session. For a comprehensive review of the new law as it will take effect on January 1, be sure to check out TPN 14-1.

Current Version of Prime Contracting TPT Reform Taking Effect on January 1, 2015

Big Win for Service Contractors Performing Only MRRA Projects

After the attempted complete repeal of prime contracting TPT failed in early 2013, the Governor’s office wanted to do whatever it took to prevent businesses that focus on making service calls – those that typically perform only maintenance, repair, replacement or alteration (MRRA) activities – from having to comply with tax laws that are difficult for technicians handling high volumes of service calls to administer from their trucks as they work across multiple local taxing jurisdictions with different rules and tax rates. For those who squarely fall within this “service contractor” category, the TPT reform effort is a big win.

Rather than being forced to track the varying tax rates and the varying tax laws from one jurisdiction to another, these service contractors can cancel their state and city prime contracting TPT licenses and avoid reporting and paying tax to multiple jurisdictions each month. This means that these service contractors will need to pay tax on all materials they purchase, including paying use tax on any materials they purchase from retailers located outside of Arizona who don’t collect Arizona tax on the purchases. For those businesses falling into this category that will have materials on hand that were purchased tax-free, you’ll want to review Question and Answer #8 in TPN 14-1.

The Jury is Out for “Hybrid” Contractors Engaging in Both Modification Activities Subject to Prime Contracting TPT and MRRA Activities with Materials Subject to Retail TPT

Businesses that will perform both taxable “modification” activities – those involving “construction, improvement, movement, wreckage or demolition” of real property or improvements to real property – and MRRA activities that will no longer be subject to prime contracting TPT, have come to be known as the “hybrid” contractors. These contractors are faced with the uncertainty of determining whether a particular project will be treated as a prime contracting TPT project or whether it will be treated as an MRRA project for which tax must be paid on the materials at the time of purchase. This can be especially troublesome when it comes to bidding a project that has characteristics of both modification activities and MRRA activities. There are various scenarios in TPN 14-1 that certainly help to unravel the mystery, but the puzzle is certainly not solved.

Another impact of these reforms on the hybrid contractors involves the treatment of materials on hand as of January 1 (transition inventory) and the handling of ongoing materials purchases. For the transition inventory, contractors need to identify those materials on hand as of January 1. Then, as materials are used for an MRRA project, retail TPT must be reported and paid on the purchase price of the materials, with the tax on such materials to be sourced to the jurisdiction of the contractor’s principal place of business within Arizona. For ongoing purchases of materials, absent further legislative changes, contractors may only make tax-free purchases if the materials will be incorporated into a prime contracting TPT project (i.e., not an MRRA project). For many contractors, this will create a situation where some inventory will have been taxed and other inventory will not have been taxed. This dual treatment and the complications it brings become more significant if materials are purchased in bulk and if excess materials from a particular job are regularly brought back into inventory.

A third area of impact involves change orders. Currently, the Department of Revenue’s position, based on similar treatment for change orders when a new tax rate takes effect, is that each new change order is treated independently of the original contract and all other change orders. For example, an original contract and certain change orders will be subject to prime contracting TPT if they involve modification activities, while other change orders will be subject only to retail TPT on the materials if the change orders involve only MRRA activities. It’s not difficult to see how this dual treatment of any one project could create confusion and be difficult to administer for the industry, especially if any of the materials are pulled out of inventory.

2015 Legislative Proposal

To address the complexities brought about by this TPT reform effort, the Arizona Builders’ Alliance has spearheaded the legislative effort for the 2015 legislative session on behalf of the construction industry as a whole. The draft legislation will include many provisions aimed at addressing several of the more troubling issues facing contractors under the new law. Among other things, the proposed new legislation is slated to include:

  • Clarification as to whether a project is a prime contracting TPT project or an MRRA project
  • A uniform method for purchasing materials tax-free, whether used in a prime contracting TPT project or an MRRA project
  • For an MRRA project, the reporting and payment of retail TPT on the cost of materials based on the location of the job when the materials are used
  • A more uniform and simplified method for taxing change orders to a contract
  • A method for a contractor (whether licensed for prime contracting TPT purposes or not) to purchase materials tax-free without needing to resort to an agency agreement structure when hired for either:
    • An MRRA project for a tax-exempt hospital so that the contractor can purchase materials tax-free without the use of an agency agreement, or
    • An on-reservation MRRA project for an Indian tribe or an enrolled member of a tribe
  • A credit for taxes paid on materials in the event that a project is ultimately determined to be a prime contracting TPT project and not an MRRA project
  • Other changes to help streamline the contractors’ tax compliance requirements so they can focus on operating and growing their business

These legislative changes are critical to bring this ongoing tax reform effort to a close with as few casualties as possible, and your support of the legislative effort is important.

____________________
Notes:

[1] The city tax equivalent to the prime contracting TPT is the construction contracting privilege tax. All references to “prime contracting TPT” are intended to include city construction contracting privilege tax unless otherwise specifically stated. [back]

 

Joint Employers in the Building and Construction Industry

On October 21, 2014, National Labor Relations Board (NLRB or Board) Associate General Counsel, Barry J. Kearny, discussed the litigation, currently before the Board, on the joint employer issue. Kearny predicted that the Board will issue its decision very soon.

In the case before the Board, Browning-Ferris Industries of California Inc., the NLRB General Counsel, Richard F. Griffin, asks the Board to abandon the 30-year-old standard for determining whether multiple organizations should be treated as joint employers and therefore jointly liable for the unfair labor practices and union obligations of each other.

Under the existing standard, in order to find a joint employer relationship, it must be demonstrated that organizations have “direct and immediate control over employment matters.”

The General Counsel urges the Board to adopt a new standard and construe employer status under labor law “broadly in light of economic realities.”  Under this new standard, any entity that “wields sufficient influence over the working conditions” of the employees would be an employer of said employees, even if it does not have direct and immediate control over employment matters.[1]

To say the least, this change, if adopted by the Board, would significantly expand the entities that would be liable for unfair labor practices and that would have obligations for union recognition and under union agreements. The remedial reach of the NLRB would grow exponentially. The general/subcontractor relationship in the construction industry would be significantly impacted.

Although Mr. Kearny would not predict whether the Board would adopt the test urged by the General Counsel in Browning-Ferris, he said that a majority of the current board members have stated that they do not think very highly of the current joint employer standard.

____________________
Notes:

[1] Under the new standard the Board would look at whether the following factors are present with respect to the various putative employers: (a) track data on labor costs; (b) calculate labor needs; (c) set policy on work schedule; (d) track wage reviews; (e) track time needed for employees to accomplish given tasks; (f) handle employment applications through their own system; (g) impose safety rules; and (h) impose hygiene/appearance (uniform, etc.) rules. [back]


Recent Developments in California Construction Law

Notable 2014 Case Law

Liability for owners, developers, contractors, subcontractors, suppliers and design professionals

This year, California courts decided a variety of cases with important relevance to potential liability for owners, developers, contractors, subcontractors, suppliers and design professionals. In the July 2014 case of Beacon Residential Community Association v. Skidmore, Owings & Merrill,[1] the California Supreme Court held that an architect providing design services for a residential condominium project as the principal architect owed a duty of care to future homeowners and could be sued for construction defects under the common law theories of negligence and strict liability, despite the lack of privity with the future homeowners and even if the architect did not exercise ultimate control over construction decisions. It is unclear how far this recent decision will extend potential liability for design professionals, however, because the Court determined that the duty of care arose because the architect was the principal architect on the project and was not subordinate to other design professionals.

Similarly in Burch v. Superior Court[2] the California Court of Appeal held that a general contractor owed a duty of care supporting negligence liability to future residential home purchasers, and allowed claims by a homeowner directly against a homebuilder for negligence and breach of implied warranty. This affirmed that California’s Right to Repair Act is not the exclusive remedy for construction defects and may not provide procedural protections for suits under common law claims.

These two decisions represent a growing trend towards easing privity requirements, especially in suits against developers, owners, architects, contractors and design professionals in the residential housing arena.

Subrogation Actions

For subrogation actions under the Right to Repair Act, however, the California Court of Appeal determined in KB Home Greater Los Angeles, Inc. v. Superior Court[3] that if a subrogation action is brought under the Right to Repair Act, the statutory requirement of notice must be given before actual property damage repairs are made, even where the repairs are funded by insurance. In KB Home, the insurance company’s lack of notice under the act was ultimately fatal to its claims under the Right to Repair Act.

Patent Defects

Another 2014 construction defect case, Delon Hampton & Associates, Chtd. v. Superior Court,[4] refined the definition of what constitutes a patent defect. The Court of Appeal rejected the argument that only a “technical reading of the applicable building codes” could reveal a construction or design deficiency and determined that the existence of Building Code provisions demonstrates that the defects should have been discovered on reasonable inspection.

Pertinent Statutes, Codes and Regulations for 2014 and 2015

New Energy Efficiency Standards

A new set of energy efficiency standards went into effect on July 1, 2014. The California Energy Commission’s Energy Efficiency Standards (Standards) are periodically updated to allow for consideration and incorporation of new energy efficient technology and advances. The Standards are part of the California Building Standards Code, Title 24 of the California Code of Regulations, and are also known as “The Energy Efficiency Standards for Residential and Nonresidential Buildings.”

Public Contract Code Section 4104(a)

Assembly Bill 44 also took effect on July 1, 2014, amending Section 4104(a) of the Public Contract Code. This bill requires prime contractors to list the contractor license number of subcontractors when bidding on public construction projects. The bill also requires that public agencies include the new requirement placed on prime contractors on their public bid forms.

California Paid Sick Leave

On September 10, 2014, California signed into law the Healthy Workplaces, Healthy Families Act of 2014, with an effective date of July 1, 2015. With the signing of this law, California becomes the second state to mandate that certain employers provide paid sick leave to employees. This law has limited exceptions, and provides that employers with California employees need to provide at least 24 hours of paid sick time per year.

Workplace Bullying Prevention Bill

On September 9, 2014, Governor Brown signed into law Assembly Bill 2053 amending California Government Code § 12950.1. This provision requires an employer, defined as “any person regularly employing 50 or more persons or regularly receiving the services of 50 or more persons providing services pursuant to a contract,” to include prevention of abusive conduct as a component of the sexual harassment training and education required in Subdivision (a) of Government Code § 12950.1.

Serious Injury or Illness or Death Reporting Requirement

There is a new Cal/OSHA “Serious Injury or Illness or Death” reporting requirement starting January 1, 2015. Assembly Bill 326 amended California Labor Code § 6409.1. Subdivision (b), and requires every employer to make an immediate report to the Division of Occupational Safety and Health by telephone or email of every case involving an employee’s serious injury or illness or death.

These cases and statutes cover some of the many legal updates pertinent to California owners, developers, general contractors, subcontractors, suppliers and design professionals in 2014.

____________________
Notes:

[1] (2014) 59 Cal. 4th 568. [back]

[2] (2014) 223 Cal.App.4th 1411. [back]

[3] (2014) 223 Cal.App.4th 1471. [back]

[4] (2014) 227 Cal.App.4th 250. [back]

 

General Contractor’s Prospective Waiver of its Lien Rights is Enforceable in California

In an opinion published in September 2014, entitled Moorefield Construction, Inc. v. Intervest Mortgage Investment Company, et al., D065464, the California Court of Appeal held an original contractor can contractually waive or impair its own lien rights, even before it gets paid or performs work, as long as it does not waive or impair the lien rights of its subcontractors. In Moorefield, the court of appeal reversed a trial court’s decision awarding a general contractor $2.2 million on its mechanic’s lien. In doing so, the court of appeal upheld a subordination agreement that the general contractor, Moorefield Construction, Inc., signed with the lender, Intervest Mortgage, “subordinating” the general contractor’s mechanic’s lien claim to the lender’s deed of trust, which was security for the construction loan.

In Moorefield, a developer, DBN Parkside, LLC (DBN), purchased property in San Jacinto, California, with a loan from BankFirst. DBN planned to construct a medical office complex. In anticipation of construction, DBN asked Moorefield to “clear and grub” the project site – till the soil to remove vegetation and roots, and smooth out the land. Later that month, DBN entered into a construction contract with Moorefield.

DBN then obtained a construction loan from Intervest. As a part of the loan, Intervest paid off DBN’s earlier debt to BankFirst. In connection with the loan agreement, Intervest required DBN to assign its rights and remedies under the construction contract (but not its obligations) to Intervest. Moorefield was required to consent to the assignment, which provided in part:

“…any and all payments made or payable to it pursuant to the Contract shall remain subordinate to the Loan at all times during the term of the foregoing assignment, and that any and all liens for labor done and materials and services furnished pursuant to the Contract or otherwise shall be subordinate to the Deed of Trust.”

DBN eventually defaulted under the construction loan agreement and Moorefield did not receive payment for its work, totaling approximately $2.2 million. Three weeks after completing its punch list work, Moorefield filed a mechanic’s lien against the property and then filed its lawsuit, eventually adding Intervest as a defendant to its foreclosure of mechanic’s lien claim. Intervest filed a cross-complaint for declaratory relief, that its deed of trust was superior to Moorefield’s mechanic’s lien, and for equitable subrogation, quiet title, and judicial foreclosure. Meanwhile, Intervest assigned its interest in the deed of trust to Sterling Savings Bank, who then foreclosed and obtained the property by credit bid.

The trial court entered judgment in favor of Moorefield, finding that Moorefield’s mechanic’s lien was valid, timely recorded and had priority over Intervest’s deed of trust. The trial court further found that the subordination clause in Moorefield’s consent to DBN’s assignment to Intervest was unenforceable and the doctrine of equitable subrogation did not apply. Specifically, the trial court found that the subordination clause violated public policy because it deprived Moorefield of its mechanic’s lien priority right guaranteed to it as a contractor under the California Constitution. In addition, former California Civil Code section 3262(d) also provided that such waiver is void unless it substantially followed the language in former section 3262(d)(1) through (4).

The court of appeal disagreed and reversed.

The court of appeal analyzed California’s mechanic’s lien statutes and noted that they placed limits on the abilities of certain persons to waive or otherwise impair mechanic’s lien rights. Former Civil Code section 3262, subdivision (a), provided in relevant part as follows:

“Neither the owner nor original contractor by any term of a contract, or otherwise, shall waive, affect, or impair the claims and liens of other persons whether with or without notice except by their written consent, and any term of the contract to that effect shall be null and void. Any written consent given by any claimant pursuant to this subdivision shall be null, void, and unenforceable unless and until the claimant executes and delivers a waiver and release.”

The parties disputed whether section 3262 (now sections 8120 through 8138) applied to an original or general contractor. The court of appeal agreed with Intervest and held that while section 3262 prevented an owner or original contractor from waiving or impairing the claims of other liens of other persons, it did not prevent an owner or original contractor from waiving or impairing its own mechanic’s lien rights. In addition, section 3268 provided further support, as it allowed a party to waive or release the benefits of the mechanic’s lien laws, unless otherwise prohibited by statute or public policy. Relying on Santa Clara Land Title Co. v. Nowack & Associates, Inc. (1991) 226 Cal.App.3d 1558, the court of appeal concluded that “section 3262 simply does not apply to waivers and releases by original contractors,” and under section 3268, “an original contractor is empowered to waive or release its mechanic’s lien as it so chooses—including prospectively.”

Because the subordination clause was valid, when Intervest foreclosed on the deed of trust, Moorefield’s mechanic’s lien was extinguished. Moorefield could no longer maintain its action for foreclosure of the property. Intervest’s deed of trust exceeded its successful bid for the property at the trustee’s sale, so there were no surplus funds for the trustee to distribute to subordinate lienholders, including Moorefield. Accordingly, the court of appeal reversed the trial court’s judgment with instructions to enter judgment in favor of Intervest.

This decision establishes that via a valid subordination agreement, a lender’s deed of trust is in first position, trumping the general contractor’s mechanic’s lien. Construction lenders that obtain similar waivers from a direct contractor in these circumstances will likely be in first position in the event of a default. Direct contractors should carefully review their contracts or their consents to assignments for such waivers, as it is likely that such a waiver will be enforced under Moorefield—and they may be left out in the cold when there are no surplus funds to distribute to subordinate lienholders.

 

Recent Developments in Colorado Construction Law

Hot Button Issues in Colorado Construction

Liability for owners, developers, contractors and design professionals

A construction defects measure, which was introduced to the state legislature in the 2014 session, was not passed to the dismay of its supporters in the construction industry. The measure was intended to roll back provisions of the Construction Defect Action Reform Act which allow homeowners’ associations (HOAs) to file large, class-action lawsuits against builders for construction problems associated with new, for-sale housing units, such as condominiums.[1] The law only requires a majority vote of the members of the HOA board to begin the suit, which can be as few as two or three people. The law has reportedly led to a significant decline in the construction of condominiums and other residential construction projects which are managed by HOAs.[2] In recent years, permits for building condominium units have dropped significantly. In 2012, 108 permits were filed in metro Denver, while only 13 were filed through July of 2013, and new condominiums currently represent only 4.6 percent of the total new home starts in Metro Denver today. Experts attribute much of this negative change to the Construction Defect Action Reform Act.

Past measures to amend the law have failed, including one which would have added a “right to repair” step to the law, which would have allowed builders to fix defects before facing legal action. The measure failed due to concerns about limiting the rights of property owners.[3] The recent measure put before the 2014 Colorado legislature failed for what most analysts have stated to be “timing issues,” as the amendment was not introduced into the legislature until the last few days of session.[4] The amendment, introduced as Senate Bill 220, would have prohibited condominium HOAs from eliminating mediation or arbitration dispute resolution provisions for resolving defect claims if those remedies were specified in the original bylaws.[5] Further, it would have required HOAs to notify all owners in a condominium building, and receive written consent from most of those owners, before filing suit for construction defects.[6]

Arguments against any alteration of the Construction Defect Action Reform Act point to the fact that builders could just build to code and not suffer consequences. The counterargument is that the influx of construction defect claims has caused insurance rates to go up significantly for condominium and other affected construction projects, causing the overall cost of these construction projects to skyrocket, which also contributes to the low numbers of new condominium projects. Such costs and fears of potential litigation have also caused affordable housing projects in Denver to slow significantly.[7]

In response to these issues, the municipality of Lakewood, Colorado (located outside Denver) has passed a city ordinance designed to “soften the effects of Colorado’s construction-defects law.”[8] The law gives developers the “right to repair” defects before facing litigation and would require condominium HOAs to obtain consent from a majority of homeowners before filing suit.[9] In other words, the municipality of Lakewood put into place what the Colorado legislature could not push through this year or last year. Lakewood’s measure may serve as an example when the issue is taken up by Colorado legislature in 2015.

Notable Case Law in 2014

The Homeowner Protection Act of 2007 protects homeowners by voiding any contractual provision that would result in the waiver of a homeowner’s rights under the Construction Defects Action Reform Act.[10] This year, the Colorado Court of Appeals considered the issue of whether that law should also void certain waivers and releases in agreements between construction professionals working on residential projects.[11] The Court of Appeals left this issue unsolved. However, the Court held that the HPA could not be applied retroactively as such application was unconstitutional.[12]

____________________
Notes:

[1] City Targets Construction Defect Law, Durability & Design, (October 20, 2014), http://www.durabilityanddesign.com/news/?fuseaction=view&id=12168; Ed Sealover & Dennis Huspeni, Lawsuit Risk Slowing Condo Development; Defects Law a Target, Denver Business Journal, (August 16, 2013, 4:00 PM),  http://www.bizjournals.com/denver/print-edition/2013/08/16/lawsuit-risk-slowing-condo.html?page=all. [back]

[2] The law doesn’t affect apartment buildings as much because apartment units are not individually owned, and are not managed by HOAs, whereas condominium buildings are managed by homeowners’ associations. [back]

[3] City Targets Construction Defect Law, supra, note 1; Lawsuit Risk Slowing Condo Development, supra, note 1. [back]

[4] City Targets Construction Defect Law, supra, note 1. [back]

[5] S.B. 220, 69th Gen. Assemb., 2d Reg. Sess. (Colo. 2014); Peter Blake, Condo Shortage Likely to Continue in Denver, The Complete Colorado, (June 6, 2014), http://completecolorado.com/pagetwo/2014/06/04/blake-condo-shortage-likely-to-continue-in-denver. [back]

[6] Id. [back]

[7] Ed Sealover, Hancock Calls for Reforming Colorado’s Construction Defects Law, Denver Business Journal, (Jan. 6, 2014, 3:01 PM), http://www.bizjournals.com/denver/news/2014/01/06/denver-mayor-calls-for-construction.html?page=all. [back]

[8] John Aguilar, Lakewood Passes Measure, Takes on Colorado’s Construction Defects Law, Denver Post, (Oct. 14, 2014, 12:56 AM), http://www.denverpost.com/news/ci_26723518/lakewood-passes-measure-takes-colorados-construction -defects-law. [back]

[9] Id. [back]

[10] Colorado Homeowner Protection Act, Colo. Rev. Stat. § 13-20-806(7)(a) (2007). [back]

[11] Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc., et. al., No. 12CA2428, 2014 WL 323490 (Colo. Ct. App. Jan. 30, 2014). [back]

[12] Id. at *4-5. [back]

 

Nevada Construction Law Developments in 2014

This is an off year for Nevada’s biennium legislative session; but even though the Legislature was quiet, Nevada’s electorate was not. Nevadans approved State Question No. 1 at the ballot box. This measure amends the Nevada Constitution to create an intermediate Court of Appeals. Currently all appeals must go directly to the Nevada Supreme Court, which is experiencing a significant backlog. The creation of this new intermediate court should correspond to a significant increase in the number of binding decisions in all areas of litigation, including construction law.

Also, in a victory for the mining industry, Nevadans narrowly rejected State Question No. 2. This legislatively referred constitutional amendment would have removed the current five percent taxation cap on the mining industry and would have allowed the Legislature to raise taxes on mining activities and profits.

Additionally, the Nevada Supreme Court handed down some notable decisions this year.

In Byrd Underground, LLC v. Angaur, LLC, 332 P.3d 273 (2014) the United States Bankruptcy Court for the District of Nevada certified three questions to the Nevada Supreme Court. The questions focused on whether placement of fill materials and grading constituted “construction of a work of improvement” for purposes of a lien priority determination under NRS 108.225. The question, for purposes of priority, is whether the improvements are visible upon a reasonable inspection.

The Court held that the question of whether improvements are visible upon a reasonable inspection is a question of fact for the trial courts. The preparatory work could constitute a “work of improvement” and that the trier of fact needs to “look to the entire structure or scheme of improvement as a whole...rather than solely evaluating the activities based on whether they are preparatory or structural or vertical construction, in determining whether construction on a work of improvement has commenced.” The Court also found that the construction contract dates and permit issuance dates were irrelevant to the question of whether a “work of improvement” had commenced. The Court did point out, though, that the permits or contracts can help determine the scope of the work of improvement, which would assist in the determination of when visible work began. As a result, we can expect more battles in the trial court regarding the priority of liens. Accordingly, construction lenders should take additional precautions and obtain additional protections from property owners and title insurance.

In DTJ Design, Inc. v. First Republic Bank, 317 P.3d 814 (2014), the Nevada Supreme Court considered whether a foreign architectural firm can bring or maintain an action in Nevada to foreclose a mechanic’s lien, when the firm has not complied with the registration requirements of Nevada Revised Statute (NRS) 623.349(2). This statute requires any form of business organization or association to demonstrate compliance with all provisions of the statute, obtain and pay for a certificate of registration, and be qualified to conduct business in Nevada. The Court noted that the statute applies to individuals and business entities alike. Here, plaintiff DTJ Design, Inc. failed to comply with NRS 623.349(2), and the Supreme Court affirmed the lower court’s ruling that DTJ Design, Inc. was thus barred from bringing and maintaining its action for recovery of compensation for its architectural services performed in Nevada.

It is important for individuals or entities desiring to perform or provide services in Nevada to be aware of and comply with all of the various requirements to conduct business in the State, in order to ensure the opportunity to seek protection and redress from the court system if necessary.

In Oxbow Construction, LLC v. Eighth Judicial District Court, 335 P.3d 1234 (2014), the Nevada Supreme Court looked at the available remedies under Chapter 40, Nevada’s residential construction defect statutes in the context of a mixed-use development. As is common with large projects, construction was completed in several stages. Upon completion of each phase, the developer leased many of the units as apartments. Once the entire project was completed, the owner sold all the units to Regent Group II, LLC (Regent). Regent then sold all of the units to individuals. After the units were sold, Regent at Town Centre Homeowners’ Association (the HOA) served Oxbow with notice to pursue NRS Chapter 40 construction defect claims. Ruling on several motions, the district court, among other things, found that the previously leased units were not considered “new residences” for the purpose of construction defect claims and that the HOA could only pursue claims for construction defects in limited common areas assigned to multiple units where at least one unit was a new residence.

The Nevada Supreme Court upheld the district court’s rulings. In doing so, the Court reaffirmed a prior ruling that previously leased units become “residences” under NRS 40.630 once title to a dwelling is transferred to a home purchaser. Here, Regent filed CC&Rs converting the apartment complex into a common interest community. Therefore, the developer’s transfer of title to all individual units to Regent transformed those previously leased units into “residences.” The Court then separately analyzed what it means to be “new” under Chapter 40. The HOA argued that a “sliding scale” analysis should be used to define the meaning of “new.” The Court declined to adopt this approach and stuck with its precedent of rejecting “amorphous, sliding-scale tests” in favor of defining “new” in terms of original construction, lack of occupancy and the point of original sale. A residence is “new” for construction defect purposes “if it is a product of original construction that has been unoccupied as a dwelling from the completion of its construction until the point of its original sale.” So any unit that was previously occupied as a leased apartment before the original sale cannot be classified as new and could not pursue claims under Chapter 40.

This reaffirmed the Court’s previous holding which defined a “new residence” under the same objective criteria. The Court has been reluctant to add any subjective criteria to this definition for fear of widening the flood gates for construction defect litigation.

 

Developing Issues in Utah Construction Defect Litigation

Following the Utah Supreme Court’s decision in Davencourt at Pilgrim’s Landing Homeowners’ Association v. Davencourt at Pilgrim’s Landing, which clarified the law regarding the claims for which homeowner’s associations (HOAs) could sue developers and builders for construction defects, a number of lawsuits have been filed on behalf of HOAs throughout the state. These suits, which typically involve first and third-party actions and multiple defendants, have proved extremely complex and costly.

Privity

The Davencourt decision established that an HOA acting on behalf of homeowners can sue a developer or builder for breach of the implied warranty of workmanlike manner and habitability, but only where there is privity of contract between the parties. This requirement comports with Utah’s statutory scheme in construction defect cases which provides that “[a]n action for defective design or construction may be brought only by a person in privity of contract” as set forth in Utah Code Ann. § 78B-4-513(4). However, Davencourt’s privity requirement has led to some interesting rulings from trial courts that have either eliminated or limited the claims asserted by plaintiff HOAs. For example, one trial court held that the HOA could not establish privity of contract based on a provision in the HOA’s declaration stating that the HOA shall provide for exterior maintenance of the living units in the townhome development at issue. The HOA argued that the provision gave it authority to act on behalf of the homeowners with regard to any damage to association property, including damage to the exterior of living units due to alleged construction defects. The court found that the declaration did not contemplate the right of the HOA to sue third parties on behalf of the homeowners for damage to the living units and therefore did not provide either any authorization from the homeowners to pursue the breach of implied warranty claims at issue or any independent authority of the HOA to pursue such claims. The plaintiff HOA requested interlocutory review of this decision. In another case, the trial court found that a claim for breach of the implied warranty of workmanlike manner and habitability applied only to purchasers of new construction from the developer and not to subsequent purchasers. Accordingly, the court found that the plaintiff HOA could not establish privity with subsequent purchasers. These decisions emphasize the importance for plaintiff HOAs to ensure that they have the necessary authority to bring their claims prior to filing suit and for defendants to target discovery at determining whether a plaintiff HOA has such authority and standing to bring the claims being asserted as it may be possible to eliminate or at least curtail the claims.

Statute of Repose and Equitable Tolling

The time period that governs when a suit for a construction defect must be brought in Utah is found in Utah Code Ann. § 78B-2-225(3)(a), which provides that: “an action by or against a provider based in contract or warranty shall be commenced within six years of the date of completion of the improvement[.]” The Utah Supreme Court has established that Utah Code Ann. § 78B-2-225(3)(a) is a statute of repose. This means that Utah Code Ann. § 78B-2-225(3)(a) cuts off claims six years after “completion of construction” and it is not based of the “time of an injury.” Utah trial courts have applied these rulings and similarly found that Utah Code Ann. § 78B-2-225(3)(a) is a statute of repose and applies to the construction defect cases being brought by HOAs. Typically, courts have held that any claim against a developer, builder or subcontractor brought more than six years after the certificate of occupancy is issued for a given unit or home will be barred by the statute. Where Utah trial courts have differed in their decisions regarding the statute is in determining whether or not equitable tolling can be applied to toll the six-year repose period. Several trial courts have held that equitable tolling cannot apply to a statute of repose, because such a statute is not the same as a statute of limitations and creates an absolute bar not subject to tolling of any kind. At least one trial court, however, has held the exact opposite, finding that equitable tolling based on “exceptional circumstances” does apply under certain sets of facts. Where equitable tolling has been applied, the determination has turned on when a party had enough information to constitute sufficient notice that a potential defendant could be liable for the alleged construction defects and should be brought into the suit. The takeaway on this issue is that it is critical for a plaintiff to evaluate the basis for bringing in potential defendants as soon as possible, while for a defendant a critical issue is to obtain the documentation needed regarding completion dates as soon as possible in discovery to evaluate whether the statute may bar the plaintiff’s claims.

Breach of Fiduciary Duty

Recently, plaintiff HOAs and third-party plaintiff developers have begun asserting that breach of fiduciary duty claims by an HOA against a builder or developer can be passed through to third-party defendants via contract-based claims. Again, the basis for the breach of fiduciary duty claims lies in the Davencourt decision. A key issue in Davencourt was whether and how the economic loss doctrine should apply to negligence claims based on construction defects. The Utah Supreme Court made clear in Davencourt that the economic loss rule applied to construction defect claims. However, Davencourt did carve out a limited exception to the economic loss rule for breach of fiduciary duty tort claims brought by an HOA against a developer. It is via this limited exception to the economic loss rule that plaintiff HOAs and third-party plaintiff developers are now asserting that first-party breach of fiduciary duty claims against a developer or builder can be passed through to third-party defendants based on contractual breach of warranty and indemnity claims. Trial courts have taken differing positions on this issue. One trial court found that there was a link between breach of warranty claims for construction defects and breach of fiduciary duty claims for failure to set aside sufficient reserves to maintain and repair the units. In another case, the plaintiff HOA requested that the court reconsider a summary judgment ruling dismissing all claims against the third-party subcontractors, claiming the ruling should be reversed because the fiduciary duty claims passed through to the third-party defendants and had not been dismissed. The court upheld its prior ruling. This issue is continuing to play out in the trial courts and litigants should be aware of the pertinent arguments on both sides, particularly in the context of bringing and defending against summary judgment motions.

Conclusion

In sum, while it is likely these issues will eventually be clarified by appellate court decision, awareness of these developing issues can help guide owners, developers, general contractors, subcontractors and design professionals to best position themselves in these complex and specialized construction defect cases. 

 

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