August 19, 2019

Colorado Court of Appeals Kicks the Can as to Whether HPA Voids Limitations-of-Liability Clauses in Residential A/E Contracts Between Construction Professionals

Tim_GordonBy Timothy Gordon

Colorado’s Homeowner Protection Act (the “HPA”) protects homeowners by voiding any contractual provision that would result in the waiver of a homeowner’s rights under the Construction Defects Action Reform Act. C.R.S. § 13-20-806(7)(a). But some have argued that this same law should also void certain waivers and releases in agreements between construction professionals working on residential projects. Recently, the Colorado Court of Appeals was faced with, but did not decide, this issue.

The HPA provision in question provides as follows:

In order to preserve Colorado residential property owners’ legal rights and remedies, in any civil action or arbitration proceeding described in section 13-20-802.5 (1), any express waiver of, or limitation on, the legal rights, remedies, or damages provided by the “Construction Defect Action Reform Act”, this part 8, or provided by the “Colorado Consumer Protection Act”, article 1 of title 6, C.R.S., as described in this section, or on the ability to enforce such legal rights, remedies, or damages within the time provided by applicable statutes of limitation or repose are void as against public policy.

C.R.S. § 13-20-806(7)(a).

The reference to “section 13-20-802.5(1)” is to the definition of the word “Action”, which is defined as “a civil action or an arbitration proceeding for damages, indemnity, or contribution brought against a construction professional to assert a claim, counterclaim, cross-claim, or third party claim for damages or loss to, or the loss of use of, real or personal property or personal injury caused by a defect in the design or construction of an improvement to real property.” So the basic argument is that construction professionals who bring cross-claims or third party claims for indemnification against other construction professionals should be protected under C.R.S. § 13-20-806(7)(a).

In Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc., et al., 2014 COA 10, Taylor Morrison hired Terracon to perform certain geotechnical engineering and construction materials testing for a residential subdivision that Taylor Morrison was developing. After many homes were constructed, homeowners began complaining about cracks in the drywall. Taylor Morrison investigated the complaints and ended up spending significant amounts of money to remedy the defective conditions.

Taylor Morrison then sued Terracon to recover the money that it spent remedying the defects. Terracon’s contract with Taylor Morrison limited Terracon’s liability to $550,000, but Taylor Morrison was seeking more. So Taylor Morrison filed a motion with the trial court, asking the trial court to determine whether the HPA invalidated the limitation of liability in its contract with Terracon. The trial court ruled in favor of Terracon, holding that the HPA did not apply to invalidate a limitation of liability clause in a contract between it and Taylor Morrison because the HPA was meant to protect homeowners, not commercial entities. The Court of Appeals affirmed, but on different grounds. Specifically, the Court of Appeals held that the HPA could not apply retroactively to the contract between Terracon and Taylor Morrison. So the issue of whether the HPA would void a limitation of liability in an engineer’s agreement with a developer remains unresolved at the appellate level.

Consider the outstanding issue in light of the Court of Appeals’ decision in Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., et al., 2013 COA 119. There, the Court of Appeals held that a bank holding title to residential property qualifies as a “homeowner” for purposes of the economic loss rule, and therefore may bring tort claims against construction professionals for construction defects. The Court’s reasoning in Mid Valley Real Estate Solutions is broad enough to include just about any person or entity holding title to residential property. So query the following:

  • Can developers who still hold title to homes that they have developed sue their own subcontractors and consultants in tort for alleged construction defects under Mid Valley Real Estate Solutions?
  • If so, are the developers bound by limitations of liability in their contracts with their subcontractors and consultants, or does the HPA void such limitations?
  • Finally, does it make sense to make a distinction between developers who still hold title to homes and developers who no longer hold title to homes when deciding whether or not the HPA applies?

Timothy Gordon represents construction and commercial real estate clients in complex disputes, and understands the interrelationship between the long-term real estate development, project construction, and property management. A thought leader in construction law, he currently authors Construction Law in Colorado, a blog that provides insight on key cases and developments relevant to construction law in Colorado, where this post originally appeared on February 21, 2014. He is the Co-Managing Editor of The Practitioner’s Guide to Colorado Construction Law, a three-volume treatise on construction law in Colorado.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Timothy Gordon: Including Accrued Interest in Lien Statement Does Not Render it Void as Excessive

Editor’s Note: The Colorado Court of Appeals’ opinion in Honnen Equipment Co. v. Never Summer Backhoe Service, Inc. can be read here.

In Honnen Equipment Company, Inc. v. Never Summer Backhoe Service, Inc. (Colo. App. July 7, 2011), a division of the Colorado Court of Appeals held that the inclusion of interest in a lien statement does not render the lien void as an excessive lien.  In doing so, the Court had to distinguish prior Supreme Court precedent holding that a mechanics’ lien may not include late charges.

Generally, the Colorado mechanics’ lien statute provides that a lien claimant is entitled to a lien in the amount of the value of the services rendered or labor performed and materials furnished for the improvement of real property.  C.R.S. § 38-22-101(1).  When recording a mechanics’ lien, one must be careful not to overstate the amount.  The reason is that anyone who knowingly records an overstated lien not only forfeits their lien rights but also can be liable to the owner for costs and fees.  C.R.S. § 38-22-128.

In Honnen Equipment Co., the lien claimant included accrued interest in its mechanics’ lien.  The owner argued that interest may not be included in a lien because interest does not represent the value of the work performed to benefit the property.  Therefore, according to the owner, the inclusion of accrued interest in a lien statement renders it excessive and therefore invalid pursuant to C.R.S. § 38-22-128.

The Court of Appeals disagreed.  In its holding, the Court of Appeals distinguished the Colorado Supreme Court’s holding in Independent Trust Corp. v. Stan Miller, Inc., 796 P.2d 483 (Colo. 1990).  In Independent Trust Corp., the Supreme Court held that late charges recoverable by contract were not lienable.  While the Court of Appeals acknowledge that interest, like late charges, does not represent the value of the work performed, the Court of Appeals held that interest is lienable because it is specifically mentioned in the mechanics’ lien statute as being recoverable.  See C.R.S. § 38-22-101(5).  According to the Court, “[t]he intent of section 38-22-128 is to punish and deter those who abuse the mechanic’s lien statute by knowingly and intentionally claiming excess amounts that are totally unrelated to the construction project.”

Timothy Gordon is a partner at Holland & Hart who focuses his practice on the construction and commercial real estate industries. He is the author of the firm’s Construction Law in Colorado blog, where this post originally appeared on August 9, 2011.He is also one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction Law.

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Timothy Gordon: Arbitrator Decides Amount of Lien while Court Decides its Procedural Validity

In Sure-Shock Electric v. Diamond Lofts Venture (Colo. App. June 23, 2011), a division of the Court of Appeals held that, on confirmation of an arbitration award, the district court retains jurisdiction to decide the procedural validity of a mechanic’s lien even after the arbitration award confirms the claimant’s right to a lien under the mechanic’s lien statute.

The contract between Sure-Shock and Diamond Loft Venture (“DLV”) included an agreement to arbitrate any claim arising out of or related to the parties’ contract.  After Sure-Shock filed a lawsuit for breach of contract, unjust enrichment, and foreclosure of its mechanic’s lien, DLV moved to stay the proceedings and to compel arbitration, which was granted.

The arbitrator found in Sure-Shock’s favor, and made detailed findings of fact regarding the recording of the lien, the amount, and the date that it was recorded, and awarded Sure-Shock the principal amount of its claim plus interest at 12% (the interest rate found in the mechanic’s lien statute).  Upon motion, the district court confirmed the arbitration award, confirmed the amount of Sure-Shock’s lien, and ruled that Sure-Shock will be entitled to participate in the foreclosure of its lien.

DLV appealed, arguing that the district court did not have jurisdiction to determine the validity, amount, and enforceability of the lien.  DLV further argued that Sure-Shock failed to “affirmatively raise the argument that the lien was procedurally valid in arbitration” and was therefore barred from raising the issue.  The Court of Appeals did not agree.

The Court of Appeals notes that the amount of the lien was properly submitted to arbitration.  According to the Court, “we read the arbitrator’s award to conclude that Sure-Shock had established the right to a lien or claim under the mechanic’s lien statute.”  The Court of Appeals also notes in its opinion that “the arbitration award clearly noted the filing of the lien, the amount listed on the lien statement, and the date it was recorded . . . .”  Yet the Court of Appeals “assume[s] that Sure-Shock did not provide copies of the notice of intent and lien statement to the arbitrator” because it “ha[s] on appeal no record of the arbitration” and “because Sure-Shock does not dispute that the procedural validity issue was not arbitrated . . . .”

The Court of Appeals then went on to address “whether the procedural validity issue may be properly decided by the court as part of the foreclosure proceedings, or whether either [the parties were] required to raise it in arbitration under their agreement requiring all claims and disputes to be submitted to arbitration.”  The Court of Appeals ultimately held that the issue of procedural validity may be properly determined by the Court, but that it holds this power concurrently with the arbitrator.

We conclude that, here, the issue of procedural validity may be properly determined by the court. Given that only a court is vested with the authority to foreclose a mechanic’s lien, it may concurrently determine any procedural validity issues connected with that foreclosure even when the underlying contract includes a broad arbitration clause, at least where, as here, neither party raised the issue in arbitration.

Part of the Court’s reasoning is the fact that the in rem action to foreclose a mechanic’s lien will often involve additional parties beyond those involved in the arbitration.  And in the case at issue, there were additional owners who would be defendants to the foreclosure action who were not parties to the arbitration, and who may challenge the validity of the notice and filing of the lien.

Ed. Note: The Colorado Court of Appeals’ opinion in Sure-Shock Electric, Inc. v. Diamond Lofts Venture, LLC can be read here.

Timothy Gordon blogs at Holland & Hart’s Construction Law in Colorado and this post originally appeared here on June 23, 2011. Gordon is one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction Law. Click hereto read all posts by this author.Click here for more Construction Law Updates.

Timothy Gordon: Colorado Court of Appeals Addresses “Actual Damages” Under the Construction Defect Action Reform Act

In Hildebrand v. New Visa Homes II, LLC (Colo. App. Nov. 11, 2010), a division of the Colorado Court of Appeals addressed, among other things, what the proper measure of damages is for a construction defects claim under the Construction Defect Action Reform Act (“CDARA”). In doing so, the Court of Appeals clarified that the plaintiffs need not present alternative methods of computation of damages. Additionally, the Court of Appeals held that “inconvenience damages” were recoverable under CDARA. Finally, the Court held that the plaintiffs were not entitled to prejudgment interest for its damages based on cost to repair.

After the movement of their basement floor slab caused damage to their new home, the Hildebrands sued the home builder, New Vista Homes and its manager, Richard Reeves, for negligence, negligent misrepresentation, violation of the Colorado Consumer Protection Act (“CCPA”), lack of proper soils disclosure, and breach of warranty. The trial court entered a directed verdict in favor of Reeves, and the jury returned a verdict in favor of the Hilderbrands against New Vista Homes. Both parties appealed.

Directed Verdict for Reeves Was Improper

Since the matter involved the construction of a home, the plaintiffs could maintain negligence claims against the home builder. And in Colorado, “[c]orporate agents are liable for torts of the corporation if they approved of, sanctioned, directed, actively participated in, or cooperated in such conduct.” “Such an agent may ‘be held personally liable for his or her individual acts . . . even though committed on behalf of the corporation, which is also held liable.'” Because the question of whether an individual’s conduct is sufficient for liability to attach is a question of fact for the jury to decide, and because the plaintiffs presented sufficient evidence, the Court of Appeals held that the plaintiffs’ negligence and negligent misrepresentation claims against Reeves should have gone to the jury.

Waiver In Purchase Agreement Did Not Bar Warranty Claim

The Court of Appeals also held that the disclaimer in the purchase agreement did not bar plaintiffs’ claim for breach of the implied warranty of habitability. According to the Court of Appeals, the warranty of habitability “has been likened to strict liability for construction defects, and proof of a defect due to improper construction, design, or preparations is sufficient to establish liability in the builder-vendor.” Plaintiffs presented evidence that the defects in their home were caused by installing a slab-on-grade basement floor rather than a structural floor and failing to install a sump pump, which might have limited slab movement by dewatering the soil below the slab. As such, the disclaimers in the purchase agreement did not bar the warranty claim.

Plaintiffs’ CCPA Claim Rejected

The Court of Appeals held that plaintiffs failed to present sufficient evidence to support their claim for violation of the CCPA. Basically, plaintiffs failed to prove that defendants’ conduct significantly impacts the public as actual or potential consumers. “Although 38 of the homes were constructed with slab-on-grade basement floors, this fact does not alone show public impact arising from defendants’ alleged misrepresentations concerning soils and flooring.” And there was no evidence that the other homes had any problems with respect to the slab-on-grade basement floors.

Actual Damages Under CDARA

New Vista Homes attacked the damage award, arguing that the trial court erred (1) in not capping plaintiffs’ repair-cost damages at the fair market value of the home, and (2) in awarding inconvenience damages to plaintiffs. The Court of Appeals rejected both arguments.

With respect to damages for the defects themselves, CDARA provides in relevant part as follows:

“Actual damages” means [1] the fair market value of the real property without the alleged construction defect, [2] the replacement cost of the real property, or [3] the reasonable cost to repair the alleged construction defect, whichever is less . . . .

Section 13-20-802.5(2), C.R.S. 2010 (bracketed numbers added).

The Court of Appeals rejected New Vista Homes’ argument that the court should have capped plaintiffs’ repair-cost damages at the fair market value of the home. According to the Court, plaintiffs do not have to present evidence on all three measures of damages. Instead, New Vista Homes bore the burden of proof if it wished to argue that the cost to repair were more than the fair market value of the home.

The Court of Appeals also rejected New Visa Homes’ argument that plaintiffs were not entitled to inconvenience damages. In addition to damages for the defects themselves, CDARA also allows for the recover of other damages. Specifically, “Actual Damages” can also include:

relocation costs, and, with respect to residential property, other direct economic costs related to loss of use, if any, interest as provided by law, and such costs of suit and reasonable attorney fees as may be awardable pursuant to contract or applicable law. “Actual damages” as to personal injury means those damages recoverable by law, except as limited by the provisions of section 13-20-806 (4).

Section 13-20-802.5(2), C.R.S. 2010.

For claims for noneconomic loss or injury caused by a construction defect, “‘noneconomic loss or injury’ has the same meaning as set forth in section 13-21-102.5 (2) (b) . . . .” Section 13-20-806(4)(a), C.R.S. 2010. And “‘[n]oneconomic loss on injury’ means nonpecuniary harm for which damages are recoverable by the person suffering the direct or primary loss or injury, including pain and suffering, inconvenience, emotional stress, and impairment of the quality of life.” Section 13-21-102.5(2)(b), C.R.S. 2010.

Based on the plain language of CDARA, the Court of Appeals upheld the award of “inconvenience damages” to plaintiffs, which included compensation for plaintiff’s anger, sleeplessness, and loss of use.

No Prejudgment Interest for Repair Costs Damages

Finally, the Court of Appeals affirmed the trial court’s refusal to award prejudgment interest on plaintiffs’ repair cost damages. In short, because plaintiffs had not yet spent the money to repair the defects, it would not be proper to award damages on such costs that had not yet been incurred.

Timothy Gordon blogs at Holland & Hart’s Construction Law in Colorado and this post originally appeared here on November 19, 2010. Gordon is one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction LawClick here to read all posts by this author.

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Timothy Gordon: Lis Pendens Still Required, Even If Mechanics’ Lien Is Bonded

Today, in Weize Company, LLC v. Martz Supply Co., 09CA1369 (Colo. App. June 10, 2010), a division of the Colorado Court of Appeals held that a subcontractor suing to enforce its rights to a mechanics’ lien that has been substituted by a bond and thus discharged must still record a lis pendens. So, according to the Court of Appeals, bonding over a mechanics’ lien will not clear title, despite the clear language of the statute.

Prime contractor Colorado Regional Construction, Inc. (“CRC”), subcontracted with Weize Company, LLC (“Weize”). CCR failed to pay Weize for the work that Weize completed, so Weize recorded a mechanics lien and commenced a lawsuit. Weize’s supplier, Martz Supply Co. (“Martz”), also recorded a lien and joined in the lawsuit.

Weize filed its lawsuit in December of 2007. “Before year end, CRC substituted bonds for the liens and the court ordered the liens released.” Probably because the mechanics’ liens were released, neither Weize nor Martz recorded a lis pendens. The trial court entered a directed verdict in CCR’s favor as to the lien claims for failure to record a lis pendens, and the Court of Appeals affirmed. This author assumes that Weize and Martz were attempting to enforce their rights against the bond, and not foreclose their previously-discharged liens. When a lien is substituted, the lien claimant may bring an action against the bond (C.R.S. § 38-22-133), but the cause of action is essentially the same as a claim to foreclose a lien. Mountain Ranch Corp. v. Amalgam Enters., Inc., 143 P.3d 1065, 1068 (Colo. App. 2005).

In holding that a lis pendens still must be recorded even though a mechanics’ lien substitution bond had been approved and the liens discharged, the Court of Appeals in Weize relied on the plain languge of Section 38-22-110, which provides that:

No lien claimed by virtue of this article . . . shall hold the property longer than six months after the last work or labor is performed . . . unless an action has been commenced within that time to enforce the same, and unless also a notice stating that such action has been commenced is filed for record within that time in the office of the county clerk and recorder of the county in which said property is situate. (Emphasis by Court of Appeals).

There are some academic and practical problems with the Court’s decision.

Once a lien has been discharged, the lien is no longer “hold[ing] the property”. Instead, “upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien . . . .” C.R.S. § 38-22-132 (emphasis added).

Recording a lis pendens seems completely contrary to the intent of the lien substitution provisions in the mechanics’ lien statute. The clear purpose for bonding a mechanics’ lien, as stated right in the statute itself, is to “release[ the property] from the lien and from any action brought to foreclose such lien.” C.R.S. § 38-22-132. Yet a “lis pendens notice effectively renders title unmarketable and prevents its transfer until the litigation is resolved or the notice is expunged.” Pierce v. Francis, 194 P.3d 505, 508 (Colo. App. 2008), citing Kerns v. Kerns, 53 P.3d 1157, 1164 n.6 (Colo. 2002).

In fact, it seems improper to record a lis pendens once the mechanics’ lien has been discharged. A lis pendens can only be recorded when “relief is claimed affecting the title to real property . . . .” C.R.S. § 38-35-110(1). Once a mechanics’ lien has been discharged, the bond becomes substituted security, and there is no longer any claim affecting real property.

upon the filing of a bond or undertaking . . . the real property described in such bond or undertaking shall be released from the lien and from any action brought to enforce such lien, and the bond or undertaking shall be substituted. . . . [T]he certificate of release [issued by the clerk] shall show that the property has been released from the lien and from any action brought to foreclose such lien.

C.R.S. § 38-22-132 (emphasis added). Thus, once the bond is approved, there can be no action to enforce the mechanics’ lien, and therefore no action affecting title to real property. As such, pursuant to Section 38-35-110(1), no lis pendens should be recorded.

The Court of Appeals, without referencing Section 38-22-132, reasoned that the bonding of the lien does not completely free up title. In doing so, however, the Court of Appeals relied on a section of the mechanics’ lien statute dealing with payment bonds, not substitution bonds. According to the Court:

despite bonding, the validity of a lien would still be of concern to a person interested in title to the liened property because the surety could become insolvent. In that event, “any lien claimant shall be entitled to enforce such lien claim in the same manner as if no bond had been filed.” § 38-22-129(5). Hence, if a lis pendens was not required, its absence could mislead a person seeking to obtain an interest in the liened property into concluding that even if the surety became insolvent, the property was not subject to a lien foreclosure action because the claimant here failed to [record a lis pendens].

Again, the Court’s reasoning is confusing, Once a mechanics’ lien substitution bond is approved and recorded, the property indeed is no longer subject to a lien foreclosure action. Instead of a mechanics’ lien foreclosure lawsuit, the former lien claimant can maintain an action upon the bond or undertaking. C.R.S. § 38-22-133.

Additionally, Section 38-22-129(5), which the Court of Appeals quotes above, applies only to situations where a general contractor obtains a payment bond prior to commencing work, and the payment bond surety becomes insolvent. Ironically, earlier in the opinion, the Court of Appeals clearly distinguishes payment bonds from lien release bonds in addressing CRC’s trust fund defense.

Weize also argued that having to record a lis pendens after a lien has been released would put it at risk of violating the spurious lien statute. The Court of Appeals rejected the argument, reasoning that “a lis pendens ‘provided for by specific Colorado . . . statute’ is excepted from the definition of a spurious lien.” The Court’s reasoning ignores the holding in Pierce v. Francis, 194 P.3d 505 (Colo. App. 2008), where a different division of the Court of Appeals specifically held that a notice of lis pendens is not exempted from the spurious lien statute. Specifically, the Court in Pierce held that “because a notice of lis pendens can be a spurious document, it falls under the spurious lien statute.” Id. at 508. Now in dicta, the Court in Weize suggests that a lis pendens is excepted from the spurious lien statute, thus creating a split of authority.

In addition to putting Weize at risk under the spurious lien statute, recording a lis pendens where there is no claim affecting title to real property could put Weize at risk for a slander of title claim by the property owner. Fountain v. Mojo, 687 P.2d 496, 500-01 (Colo. App. 1984) (improper filing of lis pendens can amount to tort of slander of title).

The holding in Weize may cause serious problems for property owners who want to free title from mechanics’ liens. As the appellate courts in Colorado have acknowledged, the recording of a lis pendens effectively renders title unmarketable. The reason a property owner bonds over a lien, or requires its general contractor to bond over a lien, is to free up title. That’s in fact what the statute says. But now, in light of Weize, bonding over a mechanics’ lien will no longer free up title, since the lien claimant will be required to record a lis pendens once an action is filed.

Timothy Gordon blogs at Holland & Hart’s Construction Law in Colorado and this post originally appeared here on June 10, 2010. Gordon is one of the managing editors for CBA-CLE’s Practitioner’s Guide to Colorado Construction LawClick here to read all posts by this author.

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