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September 27, 2013

On August 28, 2013, the California Court of Appeal, Fourth Appellate District, Division Three, filed its opinion in the matter of Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC.  A focus of intense controversy over the interpretation of Senate Bill 800, this appeal concerns the breadth of California’s “Right to Repair” Act. 

Liberty Mutual brought this subrogation action against Brookfieldfor the recovery of relocation expenses and other damages incurred after a fire sprinkler line or pipe suddenly burst in a home built by Brookfield.  The lower court initially sustained a demurrer by Brookfield with leave to amend on the basis that Liberty Mutual’s action failed to comply with Senate Bill 800 and was time barred.  After Liberty Mutual did not file an amended complaint within the specified time, Brookfield filed an ex parte application for dismissal of the action and entry of judgment.  The Court granted the application, and Liberty Mutual brought this appeal.  The Court of Appeal disagreed and reversed.  In reaching this decision, the Court concluded that Senate Bill 800 does not provide the exclusive remedy in cases in which actual damage has occurred as a result of construction defects.  Brookfield filed a Petition for Rehearing with the Court of Appeal on September 12, 2013, which the Court denied on September 26,2013, and has now filed a Petition for Review with the Supreme Court.

Facts of the Case

Eric Hart purchased a new home in Newport Coast,California, from Brookfieldin November 2004.  According to Liberty Mutual’s complaint, a fire sprinkler or pipe suddenly burst in the home in January 2008. Brookfield repaired the damage to the home caused by the broken line.  Liberty Mutual paid over $75,000.00 for related relocation expenses and other damages caused by the pipe burst under a homeowner’s policy issued to Mr. Hart.  Standing in the shoes of Mr. Hart, Liberty Mutual brought this action on August 8, 2011, after Brookfield failed to reimburse the expenses.    

Liberty Mutual’s First Amended Complaint alleges causes of action for (1) Strict Liability, (2) Negligence, (3) Breach of Contract, (4) Breach of Warranty, (5) Equitable Estoppel, and (6) Declaratory Relief.   Claiming that Senate Bill 800 was Liberty Mutual’s exclusive remedy and barred the action, Brookfield demurred to the First Amended Complaint.  The Court sustained the demurrer with leave to amend.  As noted above, Liberty Mutual did not amend its Complaint and brought this appeal after the Court dismissed the action. 

In deciding to reverse the judgment, the Court of Appeal made a series of findings that underlie the present Petition for Rehearing and are anticipated to form the basis of a Petition for Review, should the Court be unwavering in its position.  Specifically, the Court of Appeal found that Senate Bill 800 does not provide an exclusive remedy for construction defect claims in cases where actual damage has occurred.  The Court of Appeal rejected arguments that the Legislature intended to eliminate common law causes of action in such instances, to eliminate subrogation rights, and to repeal the statutes of limitation for patent and latent defects under California Code of Civil Procedure §§337.1 and 337.15. 

Brookfield has filed a petition for rehearing and requested permission to submit briefing to shed light on how a correct textual interpretation of Senate Bill 800 applies to Liberty Mutual’s action.

The Court of Appeal finds Senate Bill 800 Does Not Provide an Exclusive Remedy:  Focusing heavily on the origins of Senate Bill 800, the Court of Appeal concluded that Senate Bill 800 was not intended to limit remedies for construction defect claims involving actual damage.  The Court correctly noted one of the motivating factors behind the legislation was the Supreme Court’s holding in Aas v. Superior Court (2000) 24 Cal.4th 627,632, that construction defects must cause actual damage to be actionable in tort.  However, the Court of Appeal then arrived at a series of conclusions that are at odds with the language and clear intent of the statute.

The Court Places a Non-Existent Limitation on the Statute:  The Court concluded that Senate Bill 800 was intended to only address cases where construction defects caused economic damage.  In response to the Aas case, the Right to Repair Act does clearly allow for recovery in such instances.  For example, Civil Code §944 expressly provides that a homeowner may recover damages for “the reasonable value of repairing any violation” of the construction standards set forth under the Act.  However, the list of damages recoverable under the Act does not stop with costs to repair a defective condition.  Rather, Section 944 expressly provides for recovery of “the reasonable cost of repairing and rectifying any damages resulting from the failure of the home to meet the standards”, i.e. actual damages caused by construction defects.  Similarly, the functionality standards are rife with examples of “actionable defects” specifically tied to causation of actual damage.  For example, the entirety of Section 896(a) is devoted to conditions allowing water intrusion.  Accordingly, the Court has placed an artificial limitation on recovery of damages under the Right to Repair Act that simply does not exist.    There is no reason the Right to Repair Act may not apply to both scenarios, and the language of the statute clearly indicates it is intended to do so.

The Court’s Interpretation of Remedies is Inconsistent with the Statute:  For situations in which construction defects caused actual damage, the Court of Appeal found the legislation created no limitations on common law remedies.  Even without delving into legislative history and despite the Court’s protestations to the contrary, the clear language of the statute is at odds with this conclusion.  First, Section 942(a) states that “[e]xcept as provided in this title, no other cause of action for a claim covered by the title for damages recoverable under Section 944 is allowed.“  Civil Code §944 addresses damages recoverable under the Right to Repair Act.   Immediately thereafter, Section 942(a) specifies the causes of action to which the Act does not apply:  actions to enforce a contract or express contractual provision, any action for fraud, personal injury claims, and actions for violation of a statute.  Accordingly, the Court of Appeal’s statutory construction ignores the language of the statute.

Contrary to the Opinion, the Limitations Periods in Senate Bill 800 Govern Construction Defect Claims:  In another cornerstone of its decision, the Court concluded the statutes of limitation in Code of Civil Procedure Sections 337.1 and 337.15 still apply.  Civil Code §896 lays out limitations periods for actionable defects.  Furthermore, Civil Code §941(d) expressly states that Code of Civil Procedure sections 337.1 and 337.15 do not apply to actions under the title.  Among the changes to existing law discussed in the Senate Judiciary Committee Report for the 2001 – 2002 Regular Session on SB 800 are those relating to statutes of limitation.  The report states that the bill would provide for a ten year statute of limitations for construction defects with certain limited exceptions.   If the Legislature intended no change to statute of limitations, then the introduction of limitations periods and an express statement that the provisions of Code of Civil Procedure section 337.1 and 337.15 do not apply into the Right to Repair Act would be nonsensical.   

Why This Case is Important

If left to stand, this case would effectively eliminate in certain actions involving “actual damage” the pre-litigation procedures established by Senate Bill 800 by improperly limiting their reach and bringing the Builder’s right to repair guaranteed by the Act into question.  The Court of Appeal’s interpretation of the Right to Repair Act artificially narrows the application of the Act and suggests that common law remedies beyond those specifically exempted in the Act survive.  Furthermore, it seems to give a plaintiff an election of remedies and claims that was not contemplated in the language of the statute or by the Legislature.  Finally, the Court of Appeal’s decision appears to miss certain specific language of the statute, which is the starting point for any Court’s evaluation of Legislative intent. 

As an initial step in addressing the Court’s interpretation, Brookfield requested a rehearing.  In response, the Court simply bolstered its language and denied the request.  The next steps are twofold.  First, a request has been made to the California Supreme Court that the decision be depublished.  Second, Brookfield has filed a Petition for Review with the Supreme Court.   This matter should be closely watched in the appeal process through the Court system.  For those who do not wish to stand on the sidelines, we recommend you lend your support to the judicial process.  For example, the California Building Industry Association plans to take an active role in supporting the appeal.  Ideally, the judicial process will provide appropriate redress.  If not, we urge the construction industry to take prompt action to press the Legislature to clear any muddy waters.  

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