A shocking court decision might free builders from responsibility for home defects
This is just what you homeowners need.
After all, home sales in parts of the Valley have slowed to a trickle. (Thought you could buy a new house and flip it in a few months? Ha! You're locked in for years.) And, because of the sub-prime scourge, thousands of Arizona residents are upside down on their mortgages. Kind of hard to sell at a discount when you owe three times more than what the place is worth.
Yep, these are lousy times to be a homeowner — and it may get much worse in this state.
That's thanks to a recent court decision that consumer advocates believe will dramatically weaken new homebuyers' rights. The ruling basically lets builders off the hook for construction defects, saying that unless homeowners have a contract with their builder, they can't sue him.
Here's the rub: Many homeowners simply do not have contracts with their builder. Instead, they contract with a developer — the guy who assembles the land, deals with city codes, handles sales, and hires someone else to do the actual construction. That guy, the builder, does much of the work, but he's not actually on the contract.
And now that means the builder's likely off the hook.
So, your foundation has developed a crack the size of the San Andreas Fault? Mold is sprouting, petri-dish style, on your walls? Don't bother complaining to the guy who actually built the house.
If the decision stands, advocates say, it could create a giant loophole affecting the majority of new homebuyers in Arizona — "millions of owners," in the words of one lawyer.
An informal coalition of condominium associations, professional home inspector organizations, and consumer groups are now petitioning the Arizona Supreme Court to consider the case. All argue that the appellate decision could have catastrophic consequences.
"If this decision stands," writes John F. McGuire, the lawyer arguing the case, "Arizona will become the only state where an owner is left without a remedy while the builders who caused the construction defects walk away with no responsibility."
So, where's Governor Janet Napolitano's point person? Where's Attorney General Terry Goddard? Okay, then, why isn't a bill moving through the Legislature to fix this mess so the court doesn't have to?
As the first loft-style condos in downtown Phoenix, the Lofts at Fillmore were supposed to herald this city's long-awaited urban renaissance.
Instead, the project is at the center of the legal tussle that could affect millions of homeowners.
Nobody at the Lofts returned my call, but court files tell the story. The project, which opened in 2001, was a rehab of a 1929 apartment building. After the building was gutted, and stylish loft-style details (exposed brick, industrial-looking ductwork) were created, the 18 units were sold to the sort of well-off urban pioneers who had long avoided downtown Phoenix.
Then came the rains. Apparently, the place suffered serious water damage — not the most common construction defect in the bone-dry Valley, but bad enough in this case to cause flooding. I've been told by two sources that damages topped $1 million.
In Arizona, new homebuyers enjoy seven-year warranties, and the flooding came early enough that the Lofts residents expected a fix. Not so. When the project's developer refused to make good, they sued.
The problem is, the developer had few assets. As with many infill projects today, the developer was merely a limited liability company, formed specifically for the project at hand. After selling the units, the LLC essentially closed up shop. (Under Arizona law, the individuals who form the LLC aren't personally liable for anything that goes wrong; they may have the bucks, but homeowners will never get a penny.)
That being the case, the Lofts at Fillmore Condominium Association also sued the general contractor, Tucson-based Reliance Construction. But the superior court judge threw out that part of the suit, saying that the builder had no contract with the homeowners. Last November, the appeals court upheld the decision.
The issue now before the Arizona Supreme Court is whether to consider if the two lesser courts were wrong.
To consumer advocates, the case could have a major impact.
That's because, for insurance and tax purposes, few homes today are developed and built by the same entity. Even big companies, like Pulte and KB Homes, tend to form separate LLCs for each project. Pulte Construction may have built your home, but you probably bought it from an entity like Pulte Desert Vista Bloom LLC. The court is saying that only a single entity that both builds and develops is responsible for construction flaws.
And if that stands as law, why would anyone choose to both build and develop?
You can see where this is going — and why construction-defect lawyers and consumer advocates are freaking out. After all, a home is the biggest investment most people will make.
I talked to Reliance's lawyer, John J. Belanger, who says his client isn't responsible for the flooding at the Lofts at Fillmore. He blames a faulty city storm drain. Bigger picture, though, he says the appeals court ruling won't have a huge impact on other cases. In most cases, he says, if homeowners sue their developer, the developer will then sue the builder.
Belanger also expresses skepticism that construction giants like Pulte would take advantage of any loophole created by the decision. If, for example, Pulte Desert Vista Bloom LLC is formed to build a development, that company can hardly claim it bears no relation to Pulte Construction in court.
"It might take one more layer to connect the dots," Belanger says, "but they're all under the same umbrella. They're not going to hang one another out to dry."
But advocates who battle the construction industry are less likely to take it on trust. They say that builders and developers often win cases by wearing down the buyer. The more roadblocks they can throw up, the more likely a homeowner is forced to abandon the fight.
This could be a big roadblock.
In an amicus brief on behalf of the Arizona Consumers Council, attorney Lisa Borowsky argues, "If the decision of the court is left to stand, countless Arizona homeowners will surely be left with no legal recourse for damages resulting from the defective construction of their homes."
You'd think that kind of rhetoric would catch the attention of state officials.
You'd be wrong.
Although the appellate court decision makes it clear that homebuilder liability may be ripe for legislative debate, the Legislature has all but ignored it. Representative Rick Murphy, R-Glendale, introduced a bill that would hold builders accountable, albeit only in cases of condo conversions, but even that is languishing in committee.
Could it be because homebuilders are always among the top donors to state legislators? Or because homebuilder associations enjoy enviable popularity among politicians?
The regulatory agency for homebuilders is the Arizona Registrar of Contractors, or ROC. Clearly, the agency should care about the biggest threat to new homebuyers in years.
Yet, the Registrar of Contractors hasn't raised hue and cry with the legislators who might be allied with consumer groups. The ROC hasn't even filed an amicus brief with the Arizona Supreme Court.
It hasn't been for lack of an invitation.
Jim Eckley is a construction-defect lawyer in Phoenix. A true believer on the issue of homebuyer rights, he was shocked when he read the Lofts at Fillmore decision.
"This isn't about the survival of my practice," he says. "These types of cases are such a small part of what we do. But this has enormous ramifications for everybody in the state."
In December, Eckley e-mailed Fidelis Garcia, the Napolitano-appointed director of the Registrar of Contractors. Eckley titled his message "A freight train potentially coming for the ROC," and the language inside was no less dramatic.
"The ROC probably needs to be involved with something to reverse this, such as an amicus in an appeal to the Supreme Court," Eckley wrote.
In a two-line e-mail, Garcia promised to follow up with the attorney general. When Eckley e-mailed again last month, Garcia never wrote back. (Montgomery Lee, the assistant attorney general whose section represents the registrar, confirms that Garcia never asked for an amicus brief to be filed.)
Brian Livingston, a spokesman for the registrar, told me that the agency felt the matter was out of its jurisdiction; it's charged with disciplining builders who screw up, not assisting in litigation. The agency, he e-mailed, decided that "intervention is not warranted."
The Legislature isn't paying attention, the Registrar of Contractors isn't interested, and the attorney general is out of the loop.
And so it goes.
These days, I'm glad I'm a renter.
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