July 18, 2019

Frederick Skillern: Real Estate Case Law — Construction Defects

Editor’s note: This is Part 9 of a series of posts in which Denver-area real estate attorney Frederick Skillern provides summaries of case law pertinent to real estate practitioners (click here for previous posts). These updates originally appeared as materials for the 32nd Annual Real Estate Symposium in July 2014.

frederick-b-skillernBy Frederick B. Skillern

Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc.
Colorado Court of Appeals, August 1, 2013.
2013 COA 119

Construction defects; economic loss rule; duties of builder-vendor run to commercial entity that purchases house built for residential purpose.

Alpine Bank was lender on a construction project. The builder-developer defaulted. The bank threatened foreclosure, and ultimately took a deed in lieu of foreclosure. Consistent with its usual practice, the property was conveyed to the bank’s REO subsidiary, which then sued for construction defects on the property.

The soils and structural engineers appeal an order denying their motion for summary judgment on the plaintiff’s negligence claim. Does a commercial entity — a wholly owned subsidiary of a construction lender — have the rights of a residential consumer to sue design professionals for negligence, under the claims set out in Cosmopolitan Homes v. Weller, or are such claims barred by the economic loss rule? The court of appeals affirms the district court’s ruling that the “independent duties” outlined in Cosmopolitan Homes and its progeny inure to the benefit of a commercial entity that buys a residential property, so that the claim is not barred by the economic loss rule.

The court reviews the economic loss rule and holds that there is an independent duty of care on the part of a builder in residential construction that renders the economic loss rule inapplicable in that context. Of course, the independent duty, which arises from the holding of our supreme court in Cosmopolitan Homes, would not apply to the typical commercial construction project.

The court then looks to whether Mid Valley — whose sole function is to hold foreclosure property for resale by the bank — falls within the class of plaintiffs who may enforce this independent duty of care. It concludes that the duty arises from the residential nature of a project, not from the characteristics of the owner of that property. While Mid Valley is not a traditional homeowner, the court reasons that allowing defendants to avoid liability for this reason would afford them a “windfall” resulting from the fortuity that the latent defect caused damage before Mid Valley sold the house. Accordingly, the denial of summary judgment was affirmed and the case was remanded for further proceedings. The Supreme Court has accepted the case for review:

Petition for Writ of Certiorari GRANTED, March 3, 2014, S K Peightal Engineers v. Mid Valley Real Estate Solutions V, LLC

Summary of the Issues:

  • Whether the economic loss rule bars a homeowner’s negligence claim against a construction professional when the owner is a commercial entity rather than a natural homebuyer.
  • Whether the interrelated contract doctrine as defined in BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004), can apply to a wholly-owned subsidiary that did not exist when the initial contracts were drafted but instead was created after work on the relevant contracts had been completed.

Frederick B. Skillern, Esq., is a director and shareholder with Montgomery Little & Soran, P.C., practicing in real estate and related litigation and appeals. He serves as an expert witness in cases dealing with real estate, professional responsibility and attorney fees, and acts as a mediator and arbitrator in real estate cases. Before joining Montgomery Little in 2003, Fred was in private practice in Denver for 6 years with Carpenter & Klatskin and for 10 years with Isaacson Rosenbaum. He served as a district judge for Colorado’s Eighteenth Judicial District from 2000 through 2002. Fred is a graduate of Dartmouth College, and received his law degree at the University of Colorado in 1976, in another day and time in which the legal job market was simply awful.

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  1. Are construction defects a common problem in the real estate market? I’m looking for a new piece of property for a new office for my firm. I want to make sure that the building that I would buy is in good condition though. Perhaps I would be better off hiring a lawyer to help me find a good piece of property that would benefit my company.

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