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WSHB Case Update: Los Angeles County Court of Appeal Issues a Pair of Important Decisions on the Right to Repair Act

February 26, 2014

On February 19, 2014, the California Court of Appeal, Second Appellate District, Division Three issued its opinion in Burch v. Superior Court, supporting the much criticized decision of the Fourth Appellate District, Division Three (Orange County) in the case of Liberty Mutual Insurance Co. v. Brookfield Crystal Cove, LLC (2013) 219 Cal.App.4th 98, holding that the Right to Repair Act (California Civil Code § 895 et seq.) is not the exclusive remedy and does not limit or preclude common law claims for damages for construction defects that have caused property damage.

Two days later, on February 21, 2014, the Second Appellate District, Division Four issued its opinion in KB Home Greater Los Angeles, Inc. v. Superior Court (Allstate Insurance Co.), holding that a builder is entitled to summary judgment under the Right to Repair Act where the claimant fails to provide the builder with notice and an opportunity to repair prior to filing suit.

These two decisions exemplify the current state of flux in court decisions interpreting the Right to Repair Act, warranting review by the California Supreme Court to resolve the uncertainty in construction defect litigation in California.

A.  Burch v. Superior Court

1.  Facts of the Case:

Plaintiff Cynthia Burch purchased a residence in the Pacific Palisades area of Los Angeles from Premier Homes (“Premier”), the developer. The residence was constructed by Custom Home Builders (“Custom”). Plaintiff Burch filed a complaint alleging construction defects against both Premier and Custom asserting causes of action for breach of contract, negligence, breach of implied warranty, unjust enrichment, and other counts. Through the negligence cause of action, Plaintiff Burch alleged that as a result of several construction defects in the residence, the residence had suffered property damage.

Premier and Custom moved for summary adjudication of the negligence cause of action contending that the Right to Repair Act (establishing a statutory cause of action for violation of the standards for residential construction) was the exclusive remedy for construction defect claims and precluded other tort causes of action for construction defects, such as negligence. The trial court granted summary adjudication in favor of Premier and Custom, holding that California Civil Code § 943 precluded the negligence cause of action. Plaintiff Burch appealed the trial court’s ruling.

On appeal, the Court of Appeal reversed the trial court’s ruling. The Court of Appeal held that “the Right to Repair Act does not provide the exclusive remedy for a homeowner seeking damages for construction defects that have resulted in property damage, as here.”

2.  Discussion:

In issuing this opinion, the Court of Appeal relied heavily upon and adopted the reasoning and holding of the Liberty Mutual decision without much discussion. Therefore, a brief discussion of the Liberty Mutual decision is necessary. In Liberty Mutual, the Court of Appeal was presented with a subrogation action filed by a homeowner insurance carrier (Liberty Mutual) where there was a pipe that suddenly burst and caused damage to the residence. Liberty Mutual filed a subrogation action against the developer alleging tort theories of negligence and strict liability and breach of contract theories, seeking to recover the relocation expenses it had paid to its insured while the residence was being repaired. After the developer’s demurrer was sustained, Liberty Mutual filed an appeal. On appeal, the Court of Appeal reversed, holding that the Right to Repair Act did not abrogate the common law tort theories for recovery of construction defects that actually caused damage.

In this case, the Court of Appeal latched onto the strained statutory construction applied in Liberty Mutual to find that the Right to Repair Act only abrogates the holding of Aas v. Superior Court (2000) 24 Cal.4th 627 insofar as it provides a remedy for construction defects which have not caused property damage. That is, the Court of Appeal adopted the flawed Liberty Mutual logic that a plaintiff homeowner in a construction defect action can proceed with a negligence and/or strict liability action against a developer and sidestep the pre-litigation requirements and standards for residential construction under the Right to Repair Act if there has been damage. The Court of Appeal held as follows:

Liberty Mutual examined the act and its legislative history and concluded that the act does not provide an exclusive remedy and does not limit or preclude common law claims for damages for construction defects that have caused property damage. We agree.”

As a result, this holding will be interpreted to mean that if there has been no damage, then the plaintiff homeowner must proceed through the Right to Repair Act. But if there is property damage, then the plaintiff homeowner may avoid the Right to Repair Act. Thus, the Court of Appeal maintains the constriction of the Right to Repair Act to only those claims for construction defects which have yet to cause damage. Of course, the result of this interpretation is that every new construction defect complaint will necessarily include allegations of actual damage in an effort to deprive the developer of the right to repair and contradict the express Legislative intent of the Right to Repair Act.

3.  Why This Case is Important:

This decision will impact all parties in construction defect litigation in California. Once the Liberty Mutual case was decided, it left the construction defect litigation community in turmoil as plaintiff attorneys, developers, insurers and defense counsel had been proceeding under the Right to Repair Act since 2003, where the trial courts were regularly dismissing common law causes of action in favor of a single cause of action for violation of the Right to Repair Act. After Liberty Mutual, plaintiff attorneys started dismissing causes of action under the Right to Repair Act in favor of negligence and strict liability causes of action and filing new complaints that made no reference to the Right to Repair Act at all. Most concerning was the fact that plaintiffs were now filing complaints for construction defects without providing the developers with notice and the right to repair that was specifically bargained for in the aptly named Right to Repair Act. Many developers, insurers and defense counsel sought to limit the impact of the Liberty Mutual decision due to the fact that it was a subrogation action where there was actual property damage.

In light of this decision pertaining to an action filed by a homeowner against the developer for garden variety construction defects, it arguably expands the impact of the ill-advised Liberty Mutual decision beyond subrogation matters. However, the appellate court decisions have only come from the Orange County and Los Angeles County jurisdictions. It is anticipated that an opinion to the contrary will come out of a jurisdiction that takes a wholesale look at the statutory language and legislative intent behind the Right to Repair Act, thereby setting up the matter for ultimate resolution by the California Supreme Court.

B.  KB Home Greater Los Angeles, Inc. v. Superior Court

1.  Facts of the Case:

Dipak Roy bought a new home from KB Home in 2004. The purchase and sale agreement contained an addendum that Roy signed which set forth the pre-litigation procedures under the Right to Repair Act and identified the address for Roy to send a notice of defect claims. Roy’s homeowner insurance carrier was Allstate Insurance Company (“Allstate”).

In March 2010, a water leak was identified in the residence. As a result, a mitigation company was hired to remove the excess water, damaged drywall and carpet. The repairs were completed through Allstate in June 2010. In July 2010, after all repairs were complete, Allstate sent KB Home a notice of its intent to pursue a subrogation action to recover the costs spent to remedy the water damage. In November 2010, Allstate’s counsel sent a demand for settlement of the loss to KB Home. When KB Home did not respond, Allstate filed a complaint in subrogation against KB Home, asserting causes of action for negligence, breach of implied warranty, and strictly liability.

After a series of demurrers and writ petitions based upon the trial court’s rulings, Allstate filed a second amended complaint for property damage in subrogation, alleging causes of action for negligence, strict liability, breach of implied warranty, and violation of the Right to Repair Act. On KB Homes’ demurrer, all causes of action were dismissed, leaving only the single cause of action for violation of the Right to Repair Act. As to this cause of action, KB Home filed a motion for summary judgment contending that Allstate failed to provide timely notice of the construction defects to KB Home pursuant to California Civil Code § 910. Allstate filed its own motion for summary judgment contending that KB Home had violated the construction standards of the Right to Repair Act and that the Right to Repair Act did not require notice to KB Home prior to repairs.

The trial court denied KB Home’s motion for summary judgment finding that Allstate substantially complied with the notice requirements of the Right to Repair Act when it sent settlement demand letters to KB Home after the repairs were performed and that KB Home lost the right to repair when it failed to respond. The trial court then granted Allstate’s motion for summary judgment finding that KB Home breached the construction standards and that Allstate did not have to prove its damages. On KB Home’s petition for writ of mandate, the Court of Appeal directed the trial court to grant KB Home’s motion for summary judgment; however, the trial court declined to comply with the Court of Appeal’s directive in light of the recently decided Liberty Mutual decision. The appeal then followed.

2.  Discussion:

On appeal, Allstate argued that the Liberty Mutual decision resolved the issue before the Court of Appeal because under Liberty Mutual, the Right to Repair Act does not apply in cases of actual property damage, and therefore, Allstate had valid common law tort claims to assert. However, the Court of Appeal indicated that the appeal of the motion for summary judgment only dealt with the sole remaining cause of action—violation of the Right to Repair act. Therefore, the Court of Appeal declined to address the issue in Liberty Mutual indicating that “whether the Act or tort common law applies in this case is not an issue properly before us at this time.”

The Court of Appeal then went on to address the key issue in the case: whether the Right to Repair Act requires that notice be given to a builder before repairs are made. The Court of Appeal held that Allstate was required to provide written notice pursuant to Civil Code § 910 to KB Home prior to performing repair because “completing repairs before giving notice of defect turns the prelitigation procedure on its head and precludes the builder from inspecting and making an offer to repair.” The Court of Appeal went on to reverse the trial court’s order denying KB Homes’ motion for summary judgment, concluding as follows:

“Where, as here, it is undisputed that the builder was not given notice and an opportunity to inspect or repair a plumbing defect that caused damage to a vacant home, we see no injustice in interpreting the statute as altogether barring the claim for damages.

The failure to give KB Home timely notice and an opportunity to inspect and offer to repair the construction defect excuses KB Home’s liability for damages under the Act.”

3.  Why This Case is Important:

This case is important as it demonstrates a Court of Appeal strictly enforcing the notice requirements under the Right to Repair Act. Allstate had argued that in subrogation cases where there is a catastrophic and emergency loss, the notice requirements of the Right to Repair Act should not apply. The Court of Appeal could have relaxed the notice requirements, but it did not. Instead, it flatly rejected Allstate’s position. As a result, this decision provides builders with strong arguments to challenge subrogation actions and those filed by individual claimants or homeowners’ associations where the claimant fails to provide the builder with timey notice and an opportunity to inspect and repair. This case also demonstrates the ongoing battleground on the implications of the Right to Repair Act and the common law and a builder’s absolute right to repair set forth in the Right to Repair Act after the Liberty Mutual decision. Decisions like this will hopefully get the attention of the California Supreme Court and/or the Legislature to take up this issue to resolve the current uncertainty in this area.

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