Economic loss rule does not bar tort claims of construction lender's subsidiary

The Colorado Court of Appeals held last week that the economic loss rule does not bar residential construction defect claims against a construction professional, even when the homeowner is a corporate subsidiary of a construction lender, rather than a natural person.

Colorado has a long history of protecting homeowners from defective construction. Thirty years ago, in May 1983, the Colorado Supreme Court announced its seminal decision in Cosmopolitan Homes v. Weller, which recognized that builders have an independent duty to avoid negligence when building someone’s home. The court reasoned that that builders are in the best position to determine the structural condition of a home, that an ordinary homebuyer is seldom qualified to evaluate a house's construction, and that a house is typically a family’s largest investment. Although the court would later adopt the economic loss rule—which provides that a party suffering only economic loss from the breach of a contractual duty may not assert a tort claim—the court has consistently held that a builder’s duty to avoid negligence exists independent of any contract. Because of this, the economic loss rule does not shield builders from tort liability for negligent work and construction defects.

The August 2013 case of Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 COA 119, however, presented an interesting question: Can the subsidiary of a construction lender sue in tort over construction defects in a house it acquired after the developer defaulted on a construction loan? On the one hand, the public policy concerns that underlie a builder’s independent duty to avoid defects seem less compelling when the homeowner is a sophisticated corporation. On the other hand, there is little reason to excuse a builder’s negligence merely because a business may have temporarily owned a house that was originally intended for sale to a family.

The court noted the tension between the economic loss rule and the independent duty recognized in Cosmopolitan Homes, but it ultimately sided with the owner and allowed the negligence claim to proceed. Among other reasons, the court based its decision on the fact that limiting negligence claims to natural persons would grant the defendants a windfall based solely on the fortuity of who happened to hold title to a house when a defect manifested; the court explained:

as years pass, some houses will be foreclosed on by mortgage lenders, who, in turn, will sell the houses to new owners. If only natural persons who both owned and occupied such a house could enforce the builder’s duty, the dispositive factor would be the fortuity of who owned the house when the defect ripened, rather than the builder’s negligence and its consequences to that owner. This approach, in turn, would lead to the anomaly of a negligence duty becoming unenforceable upon sale of a home to a commercial or non-occupant owner, only to have enforceability resurrected upon acquisition by a traditional home owner.

Judge Webb wrote the majority opinion, and Judge Russell concurred. Judge Jones wrote a special concurrence urging the supreme court to revisit the issue and clarify whether recognition of a homebuilder’s duty to act without negligence is truly consistent with the economic loss rule, or whether it should simply be treated as an exception to the rule.

The full text of the court’s opinion is available on the court's website at
http://www.courts.state.co.us/Courts/Court_of_Appeals/Opinion/2013/13CA0519-PD.pdf

Firm wins arbitration award for client

The Witt Law Firm is pleased to announce that it won an arbitration award for a client in a construction dispute earlier this week.

The case arose our of a six-figure remodeling job on a single-family home. The dispute began with minor billing discrepancies but escalated when the homeowners learned that the general contractor had not been paying its subcontractors, and that the subcontractors were preparing to pursue mechanics lien claims.

Firm principal Jesse Witt represented the homeowners. He first negotiated a three-way deal to ensure that the subcontractors received payment and released their liens. He then defended the homeowners in an arbitration hearing over the general contractor's bill. Following this hearing, the arbitrator found that the general contractor's "credibility during cross-examination was severely lacking," and that the he had overcharged the homeowners for a number of items. The arbitrator ruled that the contractor was due some additional payment, but he deemed the homeowners to be the prevailing parties and awarded them reasonable attorney fees.

Cases such as this illustrate the importance of keeping accurate records on construction jobs, accounting for all subcontractor funds held in trust, and maintaining good communications between owners and general contractors.

Supreme Court upholds school financing system despite inequities

Today, the Colorado Supreme Court reversed a lower court's finding that our state's public school financing system violates the constitutional requirement that all students receive a "thorough and uniform education."

In a scathing dissent, Chief Justice Bender wrote that "a thorough and uniform system of education must include the availability of qualified teachers, up-to-date textbooks, access to modern technology, and safe and healthy facilities in which to learn. The record, however, reveals an education system that is fundamentally broken. It is plagued by underfunding and marked by gross funding disparities among districts." Justice Hobbs also dissented and criticized a regressive system that pays less for students in poorer counties. Colorado is one of the wealthiest states in the nation but ranks 49th in per-pupil spending.

Click here to read the full opinion from State v. Lobato, 2013 CO 30.

Insuring the risk of construction defects

This month, the Denver University Law Review published a new article on construction insurance by Jesse Witt and Marci Achenbach of The Witt Law Firm. Entitled "Insuring the Risk of Construction Defects in Colorado: The Tenth Circuit's Greystone Decision," the article reviews the evolution of liability insurance policies in the construction industry and examines how such policies have been interpreted in Colorado. The article explains how the insurance industry intended to provide builders with a means of insuring against the risk that their subcontractors would produce defective work, and it considers what construction defects can arise from an "occurrence" under standard policy language. It concludes with an analysis of the Tenth Circuit's decision in Greystone Construction, Inc. v. National Fire & Marine Insurance Co. and recent applications of this holding in state court.

Mr Witt and Ms Achenbach hope that their article will be prove to be a valuable resource for lawyers and other professionals who desire a better understanding of construction insurance. The article appeared in the Law Review's spring edition as part of its annual survey of significant decisions from the United States Court of Appeals for the Tenth Circuit.

Click here to read the full text.