Story #7 of 10 in Haight’s series of Top Ten Stories in California Construction for 2015
15 years ago, the California Supreme Court held in Aas v. Superior Court, 24 Cal.4th 627 (2000), that homeowners could not recover for construction defects unless the defects caused consequential damages to the building. In other words, a homeowner could not sue for windows that were installed incorrectly, unless the defect caused secondary problems such as water damage to the interior of the house.
In response to the Aas decision, the California legislature enacted California Senate Bill 800, known as “The Right to Repair Act” (“the Act”). SB 800 overturned Aas and provided homeowners who purchased homes after January 1, 2003, with a statutory cause of action to recover purely economic damages related to construction defects even if there was no consequential property damage. Under SB800, litigation was stayed while the parties worked on a potential fix to the claimed defects. The Act’s stated purpose was to limit the number of court cases by allowing a builder to resolve construction defect claims by agreeing to repair the homeowners’ residence. The hope was that by allowing builders to fix problems homeowners would be able to avoid suing. For almost a decade, the construction bar followed the Act’s statutory scheme.
In 2013, the Act was upended when the Court of Appeal for the Fourth Circuit ruled in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, that homeowners did not have to follow SB800 if they only brought common law construction defect tort causes of action. Under the holding, homeowners could avoid the act’s prelitigation requirements, including the right to repair, and proceed straight to litigation, if they only brought tort causes of action. The decision was viewed by many in the builder community as gutting the statutory intent of the Act.
In August 2015, the Court of Appeal for the Fifth District repudiated the holding of Liberty Mutual, and held that plaintiffs in construction defect actions must comply with the statutory prelitigation inspection and repair procedures mandated by the Act regardless of whether they plead a cause of action for violation of the Act.
In McMillin, 37 homeowners filed a lawsuit against the builder of their homes, alleging eight causes of action, including strict products liability, negligence, and breach of express and implied warranty. Plaintiffs’ third cause of action alleged SB800 violations. The plaintiffs did not follow the Act’s notification procedures and filed their lawsuit without providing the builder with an opportunity to repair the alleged defects.
Plaintiffs and the builder attempted to negotiate a stay of the lawsuit to complete the Act’s prelitigation procedures. When talks broke down, plaintiffs dismissed their SB800 cause of action and contended they were no longer required to follow the Act’s prelitigation procedures. McMillin filed a motion to stay with the trial court.
The trial court denied McMillin’s motion concluding that under Liberty Mutual, “[plaintiffs] were entitled to plead common law causes of action in lieu of a cause of action for violation of the building standards set out in [the Act], and they were not required to submit to the prelitigation process of the Act when their complaint did not allege any cause of action for violation of the Act.”
McMillin filed a writ petition seeking to reverse the trial court’s holding. The Court of Appeal granted the writ, and held that all homeowners must comply with the Act’s prelitigation procedures even if their complaint only alleges common law causes of action. The Court writes:
“[W]e conclude the Legislature intended that all claims arising out of defects in residential construction, involving new residences sold on or after January 1, 2003 (§938)’, be subject to the standards and the requirements of the Act; the homeowner bringing such a claim must give notice to the builder and engage in the prelitigation procedures in accordance with the provisions of Chapter 4 of the Act prior to filing suit in court. Where the complaint alleges deficiencies in construction that constitute violations of the standards set out in Chapter 2 of the Act, the claims are subject to the Act, and the homeowner must comply with the prelitigation procedures, regardless of whether the complaint expressly alleges a cause of action under the Act.” (Emphasis added).
The Court’s conclusion was based on its finding that the holding of Liberty Mutual was contrary to the Legislature’s stated intent of reducing construction defect litigation, and encouraging builders to take responsibility for basic building functionality standards. The Court found that the Legislature did not intend to allow a plaintiff to “plead around” the Act, or avoid its mandatory prelitigation provisions by only pleading tort causes of action. The Court writes:
We doubt the Legislature would have viewed the legislation as ‘groundbreaking reform’ or a ‘major change[]’ in the law of construction defects if its provision were mandatory only when the defect had not yet caused damage, and the homeowner could still sue for damages under any common law theory once property damage occurred, without being subject to the [Act’s] statutory prelitigation procedures.
The McMillin decision is remarkable in that it unambiguously challenges and rejects the Second Appellate District’s holding in Liberty Mutual. Where the Liberty Mutual court found tort causes of action were separate from and not subject to the requirements of the Act, the court in McMillin focused squarely on the legislative intent of the Act and found that the Legislature intended the Act to cover all construction claims of any sort involving new residential construction.
McMillin’s holding that a plaintiff cannot evade the Act’s “right to repair” requirements by only pleading in tort, created a direct conflict with the holding in Liberty Mutual. On November 24, 2015, the California Supreme Court granted review of McMillin. The Supreme Court will now have to decide whether the Act was intended to cover all construction defect claims, or only claims brought pursuant to the Act. A decision by the Court is expected in 2016.
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