June 16, 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.

Colorado Court of Appeals: Regardless of Homeowner Protection Act’s Application to Commercial Entities, Retrospective Application Not Allowed

The Colorado Court of Appeals issued its opinion in Taylor Morrison of Colorado, Inc. v. Bemas Construction, Inc. on Thursday, January 30, 2014.

Construction Defect—Homeowner Protection Act of 2007.

Taylor Morrison of Colorado, Inc. (Taylor) was the developer of a residential subdivision known as Homestead Hills (Project). Pursuant to written contracts with Taylor, Terracon Consultants, Inc. (Terracon) performed geotechnical engineering and construction material testing services at the Project. Bemas Construction, Inc. (Bemas) performed site grading.

After many of the homes were constructed, Taylor began receiving complaints about cracks in the drywall of homes. Taylor remedied the defective conditions, and then sued Terracon and Bemas for breach of contract and negligence, among other things.

Ten months after the deadline to amend pleadings, Taylor moved for leave to add claims against Terracon for gross negligence, negligent misrepresentation, and fraudulent misrepresentation/concealment, as well as a demand for exemplary damages. These claims were based, in part, on allegations that Terracon had willfully and wantonly breached duties to Taylor when it ignored or concealed inadequate subsurface soil conditions at the Project. The trial court denied the motion to amend the pleadings.

Taylor also moved for determination as to whether the Homeowner Protection Act of 2007 (HPA) invalidated the limitation of liability clauses in the contracts with Terracon. The trial court denied the motion on the ground that the HPA applies to residential property owners but not to commercial entities.

Terracon moved for leave to deposit into the court’s registry $550,000, representing the maximum amount that Taylor could recover from Terracon under the contractual limitation of liability clauses and the court order. It also requested that upon acceptance of such deposit, the court should declare Taylor’s claims against Terracon moot and dismiss them with prejudice. The trial court ruled in favor of Terracon. The money was deposited and the claims were dismissed with prejudice.

Taylor then went to trial against Bemas. The jury returned a verdict in Bemas’s favor on all of Taylor’s claims against it. Taylor appealed.

Taylor argued that it was error to rule that the HPA did not invalidate the limitation of liability clauses in Taylor’s contracts with Terracon. The Court of Appeals affirmed the trial court’s judgment, but for different reasons. The Court held that regardless of whether the HPA applies to commercial entities, retroactive application of the HPA to these facts would be unconstitutionally retrospective. The Courtconcluded, however, that further proceedings were necessary to determine whether Taylor should have been permitted to introduce evidence of Terracon’s willful and wanton conduct to attempt to overcome Terracon’s assertion of the limitation of liability clauses.

Taylor also argued that if a new trial is ordered against Terracon, a new trial as to Bemas also should be granted. The Court held that the Bemas’s liability was distinct and separable from Terracon’s liability and there would be no injustice or unfairness to Taylor in allowing the verdict for Bemas to stand. The judgment was affirmed and the case was remanded to the trial court to determine whether Taylor should have been permitted to introduce evidence of Terracon’s willful and wanton conduct for the sole purpose of attempting to overcome Terracon’s assertion of the limitation of liability clauses at issue.

Summary and full case available here.

Colorado Court of Appeals: Homeowners’ Association Must Follow Nonprofit Corporation Rules When Amending Declaration Without a Meeting

The Colorado Court of Appeals issued its opinion in Triple Crown at Observatory Village Association, Inc. v. Village Homes of Colorado, Inc. on Thursday, November 7, 2013.

Construction Defect—Interlocutory Review—Revised Nonprofit Corporation Act Relation to Colorado Common Interest Ownership Act—Consumer Protection Act.

Triple Crown at Observatory Village (Triple Crown) is a common interest community organized under the Colorado Common Interest Ownership Act (CCIOA). The developer of Triple Crown, Village Homes of Colorado, Inc. (Village Homes), was Triple Crown’s declarant under CCIOA § 38-33.3-103(12). Village Homes drafted and recorded Triple Crown’s Declaration of Covenants, Conditions, and Restrictions (Declaration). The Declaration created the Triple Crown at Observatory Village Association, Inc. (Association). It was organized as a nonprofit corporation under the Colorado Revised Nonprofit Corporation Act (CRNCA).

Article 14 of the Declaration established a dispute resolution procedure for claims arising from the design or construction of Triple Crown. It required arbitration of claims under American Arbitration Association rules if good faith negotiation and mediation efforts were unsuccessful.

On January 14, 2012, the Association began collecting votes from its members to revoke Article 14. After sixty days, 48% of the members had cast votes in favor of revocation. After another sixty days, the Association had obtained the required 67% of votes to revoke Article 14. The Association recorded the amendment revoking Article 14. The Association then brought this action against Village Homes and several of its principals and employees (collectively, respondents), alleging negligent construction, Colorado Consumer Protection Act (CCPA) violations, and breach of fiduciary duties.

Respondents moved to dismiss for lack of jurisdiction, citing the mandatory arbitration provision in Article 14. They argued that because the Association had not amended Article 14 within the time limits in the CRNCA, they were still bound by the Article 14 dispute resolution procedures. The trial court granted the motion, dismissed the case, and ordered the parties to follow Article 14.

The trial court ruled that when an association amends its declaration without a meeting under CCIOA, the association must comply with the sixty-day time limit provided in CRNCA § 7-127-107. The Court of Appeals agreed. Because the Association did not comply, the amendment was ineffective.

The Court also agreed that CCIOA established the power of unit owners’ associations to “[i]nstitute, defend, or intervene in litigation or administrative proceedings . . . on the matters affecting the common interest community” and that “litigation” includes both judicial proceedings and arbitrations. Therefore, the mandatory arbitration provision did not infringe on the Association’s statutory power to institute litigation.

The Association argued that CCIOA § 38-33.3-302(2) invalidated Article 14. The trial court rejected this argument. The Court agreed with the trial court, finding that the CCIOA section forbids only restrictions unique to the declarant. Article 14 controlled disputes between all parties.

The trial court rejected the Association’s argument that its CCPA claims were not subject to mandatory arbitration, because CCPA provisions “shall be available in a civil action. The Court agreed that such a right can be waived, and Article 14 was such a waiver. The trial court’s order was affirmed and the case was remanded.

Summary and full case available here.

Colorado Court of Appeals: Summary Judgment Reversed Where Non-Traditional Homeowners Suffered Loss in Residential Transaction

The Colorado Court of Appeals issued its opinion in Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc. on Thursday, August 1, 2013.

“Homeowner” for Purposes of Construction Negligence Action—Summary Judgment—Economic Loss Rule.

Defendants, Hepworth-Pawlak Geotechnical, Inc., Steve Pawlak, and Daniel E. Hardin (collectively, H-P), the project soils engineer; and S K Peightal Engineers, LTD (SKPE), the project structural engineer, challenged an order denying their motion for summary judgment on the negligence claim of plaintiff, Mid Valley Real Estate Solutions V, LLC (Mid Valley), a wholly-owned subsidiary of Alpine Bank (bank), the construction lender. The Court of Appeals affirmed and remanded the case with directions.

A developer entered into a written contract with H-P to analyze the soils on which houses would be built for resale. H-P’s report recommended a particular type of foundation. The developer’s general contractor entered into an oral contract with SKPE to provide structural engineering services, including foundation design. The general contractor built the house at issue according to H-P’s recommendations and SKPE’s design.

The developer couldn’t sell the house and eventually defaulted on the construction loan agreement with the bank. The default was resolved with a deed-in-lieu agreement. The bank received $355,000 and title to the house was transferred to Mid Valley, which entity was created to hold the house, its sole asset, for resale. The balance of the construction loan was forgiven.

Structural damage then began to appear, beginning with foundation cracks. Mid Valley sued defendants for negligence in failing to indentify expansive soils and specify an appropriate foundation and sought costs of repair.

The Court reviewed the economic loss rule and found that there is clearly an independent duty of care on the part of a builder in residential construction that renders the economic loss rule inapplicable in that context. This is not the case, however, in the commercial construction context.

The Court then looked to whether Mid Valley fell within the class of plaintiffs who may enforce this independent duty of care. It concluded that because the duty arises from the services provided and the residential nature of a project, the attributes of the owner harmed when the latent defect ripens does not limit the scope of the duty. Thus, while Mid Valley was not a traditional homeowner, 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.

Summary and full case available here.

Colorado Court of Appeals: Actions of County Requiring Posting of Bond Discriminatory Against Same-Sex Couple

The Colorado Court of Appeals issued its opinion in Rodgers v. Board of County Commissioners of Summit County on Thursday, April 25, 2013.

Building Regulations—Same-Sex Couple Discrimination—Colorado Civil Rights Act—Exhaustion of Administrative Remedies—Inverse Condemnation—Directed Verdict—Section 1983.

Plaintiffs Jason L. Rodgers and James R. Hazel, a same-sex couple, appealed the trial court’s judgment dismissing two of their claims and its entry of a directed verdict in favor of Summit County on their inverse condemnation claim. The judgment was affirmed in part and reversed in part, and the case was remanded with directions.

Plaintiffs built a home in Summit County that included a septic system. County employees found it did not comply with the County’s regulations or the approved building plan obtained by the previous owner. The County found that the septic tank was too small and required a subsurface drain that had not been installed. It also found that during the installation, the subcontractor had damaged wetlands on the property.

Winter was approaching and the issues couldn’t be fixed until spring, so the County offered a temporary certificate of occupancy requiring plaintiffs to fix the septic system, mitigate the wetlands damages, and post a bond for the estimated costs. Plaintiffs did not post the bond, the certificate of occupancy was not issued, and plaintiffs lost their home in foreclosure.

The trial court dismissed three of plaintiffs’ five claims under CRCP 8 and 12(b)(5). The parties agreed to bifurcate the inverse condemnation claim from the 42 USC § 1983 equal protection claim. The court entered a directed verdict on the inverse condemnation claim in the County’s favor during a bench trial. After plaintiffs rested in the jury trial on the § 1983 claim, the court directed a verdict in favor of the County on three of the four actions on the basis of which the plaintiffs asked that the jury be instructed that “taken as a whole collectively establish[] that the County treated them in a discriminatory manner.” The jury returned a verdict for the County on what remained of the § 1983 claim.

Plaintiffs argued it was error to dismiss their first and third claims for relief. The Court of Appeals disagreed. The first claim asserted that County officials discriminated against them by requiring certain actions not required of heterosexual couples before it would issue a certificate of occupancy. This claim seemed to arise under the Colorado Civil Rights Act. Under that Act, any person alleging discrimination must file a complaint with the Colorado Civil Rights Commission (CCRC). Plaintiffs never did so, and therefore it was not error to dismiss this claim for failure to plead exhaustion of administrative remedies.

Plaintiffs’ third claim asserted that the County deprived them of their constitutional rights of due process, equal protection, and freedom of association under the U.S. and Colorado Constitutions. These claims were appropriately dismissed because plaintiffs were not entitled to recover damages through such a direct claim. Section 1983 is the remedy for a person who has been deprived of a constitutional right by state action; under the Colorado Constitution a direct claim for damages will lie only where no other adequate remedy exists.

Plaintiffs then argued it was error to direct a verdict for the County on their inverse condemnation claim and on three of the four actions that formed the basis for the § 1983 claim. The Court affirmed on the inverse condemnation claim but reversed on the § 1983 claim.

Inverse condemnation is a claim for relief against a regulatory taking. The trial court found that the County’s regulations and response regarding the septic issues were reasonably applied to plaintiffs and the County did not deny them an economically viable use of their property. Moreover, the County’s septic regulations were reasonable and contributed to the legitimate public purpose of protecting groundwater and adjoining properties from contamination. The record clearly supported the trial court’s determination that no regulatory or per se taking had occurred.

On the § 1983 claim, plaintiffs alleged the County’s requirements were unreasonable and differed from requirements imposed on similarly situated heterosexual homeowners in four ways. The trial court analyzed each of the alleged discriminatory actions separately and entered a directed verdict in the County’s favor on three of them, allowing only an allegation that it was discriminatory to require plaintiffs to post a bond. It found plaintiffs had not presented sufficient evidence of similar situations, even when taken in the light most favorable to them, that could have established an equal protection claim.

Plaintiffs argued it was error to analyze the County’s conduct as discrete actions, rather than as a pattern of discriminatory conduct. The Court agreed, finding that at the directed verdict stage, the trial court’s role is not to separately weigh individual aspects of the evidence offered to support a single claim; its function is to decide whether the totality of the evidence would permit a reasonable jury to return a verdict against a defendant. The trial court may not “parse evidence presented” and grant a “partial directed verdict” on a claim. The partial directed verdict on the single § 1983 claim was error, and this claim was remanded to be retried.

Summary and full case available here.

SB 13-052: With Respect to Certain Real Property Construction Defect Actions, Creating the “Trans-Oriented Development Claims Act of 2013”

On Wednesday, January 16, 2013, Sen. Mark Scheffel introduced SB 13-052 – Concerning Real Property Construction Defect Actions, and, in Connection Therewith, Enacting the “Transit-Oriented Development Claims Act of 2013.” This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

With respect to construction defect actions involving transit-oriented development, the bill makes the following changes to the law:

  • Creates the “Transit-oriented Development Claims Act of 2013.”
  • Institutes a right to repair for construction professionals that receive a notice of claim with respect to a construction defect in a transit-oriented development.
  • Institutes a binding arbitration requirement for claims against construction professionals with respect to transit-oriented development. This section also makes construction professionals immune to suit for environmental conditions including noise, odors, light, temperatures, humidity, vibrations, and smoke or fumes causally related to transit, commercial, public, or retail use.

With respect to construction defect actions in general, the bill clarifies the statute of repose for the six-year statute of limitations for actions against architects, contractors, builders, builder vendors, engineers, or inspectors involved in improvements to real property. The bill is assigned to the Judiciary Committee.