April 14, 2014

Fate and Fortune: Unauthorized Acts of the Board Cannot Be Challenged by Non-Owner Third Parties but Can Be Retroactively Cured by the Membership

In a decision that has renewed the faith of condominium law practitioners in our state’s judicial system, the New Jersey Appellate Division recently issued a strongly worded opinion in Port Liberte II Condo. Ass'n v. New Liberty Residential Urban Renewal Co. et. al., 2014 N.J. Super. LEXIS 19 (App. Div. Jan. 21, 2014) (approved for publication on January 31, 2014), that has prevented a grave injustice and allowed unit owners to control their own fates by having the power to validate unauthorized decisions of the board.

In what has been exclaimed as a “big win” for condominium associations and unit owners, the Appellate Division has determined that a condominium board’s decision to file suit without taking a pre-litigation vote, required by the association’s bylaws, can be affirmed at a later time by the membership and cannot be challenged by the defendants. Designed to protect the financial interests of the unit owners, the bylaws cannot be used by defendant developers and contractors to suppress those very same interests. Non-homeowners, therefore, do not have standing to challenge unauthorized or procedurally defunct decisions of the board.

Faced with widespread construction defects in the common elements of its 225-unit community with a price tag in excess of thirty million dollars for repairs, the Port Liberte II Condominium Association filed suit in 2008 against those responsible, the Developer and the contractors that built the development. Several years into the law suit, the defendants sought dismissal of the entire action because the Association had not obtained a community vote to approve the filing of the suit, as required by a provision of the bylaws drafted by the Developer. To rectify that oversight, the Association held two separate votes to ratify the original filing of the suit, the first in October of 2009, which was approved by the community 72 votes to 3, and a second in October of 2011, which was approved by a vote of 65 to 1. Armed with these two examples of overwhelming support in the community for the lawsuit, the Association opposed the defendants’ motions to dismiss the case arguing that the defendants, as outsiders who owned no units in the community, had no standing to enforce the bylaws, and, even if they had such standing, the original filing of the suit was overwhelming ratified by the unit owners.

With an opinion that barely filled a single page and devoid of any legal precedent or coherent reasoning, Judge Mark Baber allowed the defendants to use the Association’s bylaws, designed to protect the unit owners, as a weapon against them and dismissed the Association’s entire case, and with it the unit owners’ hopes for fixing their community.

The Appellate Division, however, reversed Judge Baber’s frayed decision. Specifically, the Appellate Division found that the “trial court misconstrued the bylaws – and disserved the unit owners’ interests – in holding that the owners could not ratify the Association’s action after the lawsuit was filed.” Additionally, the Court held that the defendants had no standing to enforce the voting provision of the bylaws.

Interpreting the Condominium Act and the spirit and purpose of the community’s bylaws, the Court found that the voting provision of the bylaws was intended to protect the unit owners' financial interests by requiring their approval of possibly expensive litigation. The Court, however, then noted that the unit owners in the Port Liberte II community also had “an equally great - if not greater - financial interest in recovering damages to repair the common areas, because otherwise they will have to pay for the repairs themselves through assessments.” The Court then concluded that it would “not enforce a statute or regulation in a manner that would produce an absurd result, contrary to its purpose. Here, it would be absurd to construe [the bylaws] in a way that would strip the owners of a cause of action designed to recoup payment for construction defects, if they are willing to authorize the litigation after it was filed.”

While provisions of the bylaws may provide a process by which a board obtains authorization to file suit i.e. an affirmative vote of the membership, unauthorized actions of the board may be cured through ratification, such as a subsequent vote, and are not deemed null and void. This means that pre-litigation voting requirements cleverly weaved into the bylaws by the developer cannot preclude an informed board from filing suit when time is of the essence and a community vote is impractical. A later vote of the membership ratifying the decision of the board will suffice; and while not technically a “pre-litigation” vote, it will nevertheless, according to the Appellate Division, comply with the spirit and intent of the bylaws and the Condominium Act.

The Court went a step further and found that the defendants, strangers to the relationship between the unit owners and the Association, lacked standing to enforce the voting provision in the bylaws. To that end, the Court observed that “because defendants' interests were adverse to the unit owners, letting them enforce the unit owners' interests would be akin to letting the proverbial fox protect the interests of the chickens.”

Turning its attention to the cases improvidently cited by Judge Baber in support of his decision to dismiss, the Court had no trouble distinguishing them as lacking any relevance and legal significance. Ascribing error to Judge Baber’s wanting decision to dismiss the Association’s entire case on a curable procedural hyper-technicality, the Appellate Division reversed and revived the original complaint to proceed on the merits.

Following Judge Baber’s dismissal of the Port Liberte II Condominium Association’s suit, word spread quickly through the defense bar about a new avenue to avoid liability for construction defects. The Appellate Division has now spread a new word – Developers and contractors cannot intrude into the affairs of a condominium association and its unit owner members by forcing strict compliance with un-amendable, onerous pre-litigation voting requirements in the bylaws.

Bookmark and Share

April 8, 2014

Cracking the Paradox: Complying with the Statute of Limitations in Construction Defect Cases

In early April, a Bergen County judge dismissed a construction defect complaint filed by a mammoth 40-story condominium complex known as the Palisades, located along the Hudson River in Fort Lee, based on the statute of limitations. While dismissal for filing suit outside the statute of limitations is nothing new or surprising, the way in which the judge reached that conclusion and applied the “law” is. According to Judge Robert C. Wilson, the six-year statute of limitations begins to run upon “substantial completion,” is not subject to the discovery rule, and is not tolled until the association is created and subsequently controlled by the homeowners. Not only does this decision render the ten-year statute of repose meaningless, it unduly prejudices the rights of condominium associations whose legislatively granted six-year window to file suit can seemingly be judicially dwindled down to two years or one year or less.

Continue reading "Cracking the Paradox: Complying with the Statute of Limitations in Construction Defect Cases" »

Bookmark and Share

September 30, 2013

Class Recourse for Individual Home Owners Suffering from Construction Defects

Until now, owners of single-family homes were left to their own devices and resources in seeking redress for construction defects. Class suits were thought to be unavailable to homeowners despite their homes having been built by the same builder and suffering from the same general defects. The differences in subcontractors used, methods of construction, location of defects, time built and nature of resulting damages defeated class certification and deterred law firms from bringing class action lawsuits alleging construction defects. The economics of bringing an individual construction defect suit weighed heavily against litigation and, as a result, homeowners ended up either living with the defects or paying for repairs out of pocket.

Fortunately for homeowners, a recent decision from the Appellate Division captioned D’Andrea v. Hovnanian, 2013 N.J. Super. Unpub. LEXIS 1484 (App. Div. June 18, 2013) has changed that landscape. According to the Appellate Division, the four prerequisites for bringing a class action lawsuit – numerosity, commonality, typicality, and adequate representation – were met by a class of plaintiffs who sued developer K. Hovnanian (“Hovnanian”) for fire safety hazards in the HVAC system installed in their homes.

Arguing against class certification, Hovnanian contended that the individualized nature of home construction made such causes of action unsuitable for class certification. Hovnanian pointed out, and Plaintiffs agreed, that there was no single deviation common to each class member’s home. Nevertheless, despite the significant differences among the construction defects, there remained a “strong commonality in the nature of the claimed defect – fire safety hazards in HVAC return systems.” Seeing the forest instead of the trees, the court focused on whether construction of the HVAC cavities met the applicable code rather than on the differences in materials and construction methods used.

According to the court, Plaintiff’s satisfied the commonality requirement because even though the improper construction varied from home to home, the effect of that construction remained the same. The court also found that common questions of fact and law predominated over individual differences between the claims. The significance of the common thread i.e. improper return cavity fireblocking, outweighed the relevance of the individual issues of damages i.e. repairs. As a result, class certification was appropriate.

Recognizing the economic realities deterring individual claimants from pursuing individual lawsuits or arbitrations, the Appellate Division agreed that the class action device was particularly useful in this case. Efficiency and consistency weighed heavily in favor of class certification, as did fairness to the class members and a lack of prejudice to Hovnanian.

This case sets important precedent for individual homeowners, especially those living within planned developments built by the same developer. Members of homeowners’ associations now have a potentially viable option of pursuing litigation as a class to recover for construction defects. Whereas expert fees and litigation costs are nearly insurmountable for individual homeowners, the class structure allows members to share those costs while still seeking full recovery of their damages. While the D’Andrea decision has opened the door for construction defect cases to be brought as class actions, time will tell exactly how large that opening is. For the time being, however, it appears that homeowners, whose homes suffer from a common defect having the same adverse effect, are suitable candidates for class membership in a class action lawsuit.

Bookmark and Share

August 1, 2013

A Breakthrough in the Law Gives Similarly Situated Individual Home Owners Suffering from Construction Defects Class Recourse

Until now, owners of single-family homes were left to their own devices and resources in seeking redress for construction defects. Class suits were thought to be unavailable to homeowners despite their homes having been built by the same builder and suffering from the same general defects. The differences in subcontractors used, methods of construction, location of defects, time built and nature of resulting damages defeated class certification and deterred law firms from bringing class action lawsuits alleging construction defects. The economics of bringing an individual construction defect suit weighed heavily against litigation and, as a result, homeowners ended up either living with the defects or paying for repairs out of pocket.

Continue reading "A Breakthrough in the Law Gives Similarly Situated Individual Home Owners Suffering from Construction Defects Class Recourse" »

Bookmark and Share

October 5, 2012

How Can Homeowners Protect Themselves When Hiring Contractors for Home Improvements?

All too often homeowners engage a contractor to perform certain home improvements and/or maintenance functions and end up in a fight with the contractor either over the work or amount of payment or both.  Recognizing the disparity in leverage and technical knowledge, the Legislature and the New Jersey Division of Community Affairs have promulgated laws and regulations designed to give homeowners powerful rights to protect them when they undertake maintenance and improvement projects.  With these enactments, the onus is placed where it belongs, on the shoulders of the home improvement contracts to insure they act fairly and honestly when performing projects that affect a person’s home.
 
Deception, fraud and misrepresentation are not tolerated.  Every home improvement contractor doing business in New Jersey is obligated to comply with New Jersey law, even if they are not aware of the law’s requirements.  The Consumer Fraud Act and the Home Improvement Act are designed to protect the rights of homeowners and to provide an effective way for homeowners to combat deceptive and inequitable practices.  The hallmark of these laws is to impose strict liability upon the contractor for any violations of the Acts’ myriad provisions.
 
Inside the Consumer Fraud Act and Home Improvement Practices Regulations
The Consumer Fraud Act (“CFA”) gives New Jersey one of the strongest consumer protection laws in the country.  The CFA protects the general public by providing consumers a private cause of action for violations of the Act and allowing for recovery of treble damages, attorneys’ fees and costs.  See N.J.S.A. § 56:8-19.  To violate the Act, a person must commit an “unlawful practice,” which may fall into one of three general categories: 1) affirmative acts; 2) knowing omissions; or 3) regulation violations.  The third category is based on violations of regulations enacted under N.J.S.A. § 56:8-4, the Home Improvement Act (“HIA”).
 
The impetus behind enacting the HIA was to protect unknowing homeowners from predatory and deceptive tactics of contractors as well as to provide standards for the terms and criteria by which home improvement work should be done.  In this regard, the regulations apply to any persons holding themselves out as contractors in New Jersey.  N.J.S.A. § 56:8-139.  Contract is defined as any person engaged in the business of making or selling home improvements, and includes corporations, partnerships, associations and any other form of business organization or entity, and its officers, representatives, agents and employees.  N.J.S.A. § 56:8-137.  Notably, the Act does not apply to architects, professional engineers or other licensed professionals.  N.J.S.A. § 56:8-140.  The regulations broadly define “home improvement” to cover nearly every conceivable type of residential improvement or repair, including, but not limited to:
 
construction, installation, replacement, improvement, or repair of driveways, sidewalks, swimming pools, terraces, patios, landscaping, fences, porches, windows, doors, cabinets, kitchens, bathrooms, garages, basements and basement waterproofing, fire protection devices, security protection devices, central heating and air conditioning equipment, water softeners, heaters, and purifiers, solar heating or water systems, insulation installation, siding, wall-to-wall carpeting or attached or inlaid floor coverings, and other changes, repairs, or improvements made in or on, attached to or forming a part of the residential or noncommercial property . . . 
 
[N.J.A.C. § 13:45A-16.1A.]
 
Therefore, the reach of the regulations is expansive and almost all dealings between consumers and contractors related to home improvement will fall within their purview.
 
Practices Required By The Home Improvement Regulations
Generally, a home improvement contractor must obtain all necessary permits prior to commencing work, secure final inspection certificates before demanding final payment and ensure that all agreements for improvements in excess of $500.00 be in writing as well as any changes in the terms and conditions of such contracts.  N.J.A.C. § 13:45A-16.2(a).  More importantly, the regulations require that contracts must be signed by all parties to the contract, not just the customer or contractor, and detail the parties’ obligations and rights under the contract.  Specifically, the contract must accurately set forth in legible form all terms and conditions of the contract, including, but not limited to, the following:
  1. The legal name and business address of the seller, including the legal name and business address of the sales representative or agent who solicited or negotiated the contract for the seller;
  2. The contractor’s Division of Consumer Affairs registration number and the DCA’s toll free telephone number must be prominently displayed on the first page of the contract;
  3. A copy of the Certificate of Commercial General Liability Insurance required of a contractor under the Act and the telephone number of the insurance company issuing the Certificate;
  4. A description of the work to be done and the principal products and materials to be used or installed in performance of the contract;
  5. The total price, including all finance charges and, where applicable, the hourly rate for labor;
  6. The start date and completion date;
  7. A description of any mortgage or security interest to be taken in connection with the financing or sale of the home improvement; 
  8. A statement of any guarantee or warranty with respect to any products, materials, labor or services made by the contractor; and
  9. A precise and conspicuous notice of cancellation provision informing the customer of his or her right to cancel the contract by the end of the third business day after having received a copy of the contract.
Case law makes clear that proof of even a single violation of these regulations is sufficient to establish unlawful conduct under the Act.  See Cox v. Sears Roebuck & Co., 138 N.J. 2, 18 (1994).  Notably, intent to comply or not comply with the Act is not a requirement as the Act imposes strict liability for even the most minimal of violations such as not including a start/finish date on the contract or asking for final payment prior to completing the work and/or furnishing copies of the inspection certificates.
 
What Can A Homeowner Recover When A Contractor Violates the Act
The Legislature intended the Act to be both remedial and punitive in nature.  Therefore, the remedial aspect of the Act compensates for a homeowner’s loss, yet at the same time punishes the transgressor by allowing the homeowner to recover treble damages, attorney’s fees, filing fees and other related costs.  See N.J.S.A. 56:8-29.
 
Since the contractor is subject to strict liability under the Act, the homeowner is entitled to an award of actual damages when he or she has suffered an ascertainable loss as a direct result of the contractor’s violation.  These damages are then trebled and reasonable attorneys’ fees and costs are awarded.  Notably, the Act mandates an award of attorneys’ fees and costs when the homeowner is successful in proving the contractor committed a technical violation of the Act, even if no ascertainable loss is shown.  See BJM Insulation v. Evans, 287 N.J. Super. 513, 516 (App. Div. 1996).  This means that even if the homeowner has not suffered any consequential losses as a result of the contractor’s violation of the Act, he or she is still entitled to attorney’s fees and costs upon a showing that a violation has occurred.  See Performance Leasing Corp. v. Irwin Lincoln-Mercury, 262 N.J. Super. 23, 34 (App. Div.), certif. denied, 133 N.J. 443 (1993) (holding that a plaintiff proving a violation of the act but unable to demonstrate a causal connection between the violation and his damages was nevertheless entitled to attorneys’ fees).  
 
The threat of recovering attorneys’ fees is a powerful tool the homeowner has in negotiating a fair resolution of whatever dispute may arise with the contractor.  Therefore, it is important for homeowners to be familiar with the Act and the home improvement regulations in order to recognize contractor violations and build leverage in dealing with unscrupulous contractors. 

Bookmark and Share

February 9, 2012

Buyer Beware of Defects in New Construction

Gene Markin, member of Stark & Stark’s Construction Litigation Group, authored the article, Buyer Beware of Defects in New Construction, for the January 30, 2012 edition of the New Jersey Law Journal. The article discusses why the remedy under the homeowner warranty program, may not be a remedy at all.

In the article, Mr. Markin states, “Since its inception, the New Jersey Home Warranty and Builders’ Registration Act, N.J.S.A. 46:3B-1 to -20, has proven to be more of a trap for new homeowners than the safety net it was purported to be. The purpose of the act is to establish a program requir¬ing that newly constructed homes con¬form to certain construction and quality standards, as well as to provide buyers of new homes with insurance-backed warranty protection in the event such standards are not met. While the intent of the act is to provide homeowners with a prompt, convenient and cost-saving means of resolving disputes con¬cerning construction defects, in reality, its effect has been, in many cases, to strip homeowners of any meaningful means of recovery for discovered con¬struction defects.”

Bookmark and Share

February 1, 2012

Trespass Actions Under the Tort Claims Act

An action for trespass arises upon the unauthorized entry onto another's property, real or personal. A trespass on property, whether real or personal, is actionable, irrespective of any appreciable injury. Under a trespass theory, a plaintiff may "assert a claim for whatever damages the facts may lawfully warrant." Thus, a plaintiff may claim damages from the loss in value to the land trespassed upon, as well as consequential damages such as property taxes and loss of profits.

While a municipality enjoys immunity for its exercise of discretion and judgment in the development of a sewer and drainage plan, such immunity does not protect it from liability for the creation of a nuisance or actual trespass.

Bookmark and Share

January 25, 2012

When Can An Action for Nuisance Be Brought Against a Public Entity?

An action for nuisance may be brought against a public entity unhampered by the TCA. Private nuisance is but one possible theory for recovery of damages caused by the invasion of one's interest in the private use and enjoyment of land. That interest may be invaded by more than one type of conduct, i.e., the conduct may be intentional, it may be unintentional but caused by negligent or reckless conduct, or it may result from an abnormally dangerous activity for which there is strict liability. One is subject to liability for private nuisance if the invasion is either:
(a) intentional and unreasonable, or
(b) unintentional and otherwise actionable under the rules controlling liability for negligent or reckless conduct, or for abnormally dangerous conditions or activities.

[Restatement (Second) of Torts, § 822 (1979).]

The conduct necessary to make the actor liable for a private nuisance may consist of an act or a failure to act under circumstances in which the actor is under a duty to take positive action to prevent or abate an interference. Restatement (Second) of Torts, § 824 (1979). An invasion is intentional if the actor purposely causes it or knows that the invasion is substantially certain to result from his conduct. An intentional invasion of another's use is unreasonable if:
(a) the gravity of the harm outweighs the utility of the actor's conduct, or
(b) the harm caused by the conduct is serious and the financial burden of compensating for this and similar harm to others would not make the continuation of the conduct not feasible.

[Restatement (Second) of Torts, § 826.].

Water discharge from a broken storm drain pipe is most likely an actionable nuisance. See, e.g., City of Oxford v. Spears, 228 Miss. 433 (1956) (There is no question that an invasion of one's interest in the use of downstream waters may constitute a nuisance); Sterling Iron and Zinc Co. v. Sparks Manufacturing Co., 55 N.J.Eq. 824 (E. & A. 1896) (New Jersey long ago recognized that the pollution of a watercourse may constitute an actionable nuisance); Bengivenga v. Plainfield, 128 N.J.L. 418 (E. & A. 1942) (municipalities were held liable for nuisance resulting in water pollution, although the legal analysis upon which liability was based, active wrongdoing, is now outdated); Borough of Westville v. Whitney Home Builders, 40 N.J. Super. 62, 68 (App. Div. 1956) (Our courts have held that the discharge of treated sewage effluent into a running stream is not necessarily an unreasonable riparian use in today's civilization, but that it may be unreasonable if the harm from doing so outweighs the benefit).

Presented with the question of whether a public entity can be liable for a nuisance as recognized by the TCA, our Supreme Court concluded that it is for two reasons: First, sections of the Tort Claims Act may be interpreted as making public entities liable for nuisance under the standards provided by the Act, and second, in light of the history of municipal liability in this area, the Supreme Court perceived no intent to eliminate this liability.

With respect to the statutory recognition and continuation of the nuisance cause of action, the two sections of the act implicated are N.J.S.A. 59:4-2 and N.J.S.A. 59:2-2. The former creates liability for injury caused by the dangerous condition of a public entity's property. Nothing in this section has been construed to impose liability upon a public entity for a dangerous condition of its public property if the action the entity took to protect against the condition or the failure to take such action was not palpably unreasonable. Thus, this section imposes liability upon a municipality in its status as property owner for nuisance where its actions can be found to be "palpably unreasonable."

In sum, an action in nuisance may be maintained against a municipality under and subject to the standards of the Tort Claims Act, so long as Plaintiff shows that the action taken or failure to act by the public entity was palpably unreasonable. See, e.g., Lyons v. Twp. of Wayne, 185 N.J. 426, 434 (2005) ("When analyzing a nuisance . . . wrongful conduct is not limited to the creation of the condition. Rather, a failure to physically remove or legally abate that condition, resulting in the physical invasion of another's property, also constitutes wrongful conduct."); Gould & Eberhardt, Inc. v. City of Newark, 6 N.J. 240, 243 (1951) ("[A] municipality does not have the right to collect surface water and discharge it upon private property in greater quantity and with greater force than would occur from natural flow, so as to cause substantial injury."); Sheppard v. Twp. of Frankford, 261 N.J. Super. 5, 8 (App. Div. 1992) (noting that injunctive relief was appropriate because unreasonable discharge of storm waters by township onto plaintiffs' property created continuing nuisance); Black v. Borough of Atlantic Highlands, 263 N.J. Super. 445, 453 (App. Div. 1993) (allowing nuisance cause of action for failing to prune crab apple trees creating dangerous condition on adjacent private property).

In Russo Farms v. Vineland Bd. of Educ., 144 N.J. 84 (N.J. 1996), the Plaintiffs brought a lawsuit against, inter alia, the Vineland Board of Education (the Board) and the City of Vineland (the City) for damages to their crops and farmland from flooding that resulted from the improper siting and construction of a public school located across the street from their property and by an inadequate drainage system on a bordering street. Plaintiffs claimed that the Board and City were liable under a nuisance theory because the Board and City's use of their property invaded plaintiffs' use and enjoyment of their land. The Court noted that invasion was a physical invasion, which ordinarily sounds in trespass, but "the flooding of the plaintiff's land, which is a trespass, is also a nuisance if it is repeated or of long duration." See also Hennessy v. Carmony, 50 N.J. Eq. 616, 618 (Ch. 1892) (throwing water on another's property once constitutes a trespass, "to continue to do so constitutes a nuisance").

When a court finds that a continuing nuisance has been committed, it implicitly holds that the defendant is committing a new tort, including a new breach of duty, each day, triggering a new statute of limitations. That new tort is an "alleged present failure" to remove the nuisance, and since this failure occurs each day that the defendant does not act, the defendant's alleged tortious inaction constitutes a continuous nuisance for which a cause of action accrues anew each day. See also Sheppard v. Township of Frankford, 261 N.J. Super. 5, 8-9 (App. Div. 1992) (noting that disposal of water runoff onto plaintiff's property created continuing nuisance).

It is pretty well settled that periodic flooding due to defective construction of a drainage system constitutes a continuing tort. The Russo Farms court held that a nuisance is continuing when it is the result of a condition that can be physically removed or legally abated. In such a case, it is realistic to impute a continuing duty to the defendant to remove the nuisance, and to conclude that each new injury includes all elements of a nuisance, including a new breach of duty. On the other hand, when the nuisance cannot physically be removed, it is unfair to impose a continuing, impossible to fulfill duty to remove the nuisance.

Accordingly, the continued flooding of a landowner’s property would be considered an actionable continuous nuisance. See Russo Farms, supra, 144 N.J. at, 97-105 (holding that TCA permits nuisance and negligence causes of action for damages caused on private property by dangerous condition on public entity's property created by school drainage and municipal storm-water drainage system); Medford Lakes, supra, 90 N.J. at 591-96 (allowing action for nuisance for damage to lake caused by discharge from municipally owned and operated sewage treatment plant); Saldana v. DiMedio, 275 N.J. Super. 488, 499 (App. Div. 1994) (allowing cause of action against municipality for dangerous condition on its property for fire that spread from city-owned abandoned building to privately-owned property); Sheppard v. Township of Frankford, 261 N.J. Super. 5 (App. Div. 1992) (in a nuisance case that involved a public entity's disposal of storm-water runoff onto private property the court found a continuous nuisance existed where the storm-water drainage system at issue "enhanced, concentrated, and sped up the flow of the storm water into the drainage ditch," thereby causing flood damage on the plaintiff's property).

Bookmark and Share

January 11, 2012

Discretionary Immunity and Negligent Operation

Public entities, however, are not liable for discretionary activities. The section that confers immunity based upon discretionary activities reads as follows:

(a) A public entity is not liable for an injury resulting from the exercise of judgment or discretion vested in the entity;

(b) A public entity is not liable for legislative or judicial action or inaction, or administrative action or inaction of a legislative or judicial nature;

(c) A public entity is not liable for the exercise of discretion in determining whether to seek or whether to provide the resources necessary for the purchase of equipment, the construction or maintenance of facilities, the hiring of personnel and, in general, the provision of adequate governmental services;

(d) A public entity is not liable for the exercise of discretion when, in the face of competing demands, it determines whether or how to utilize or apply existing resources, including those allocated for equipment, facilities and personnel unless a court concludes that the determination of the public entity was palpably unreasonable. Nothing in this section shall exonerate a public entity for negligence arising out of acts or omissions of its employees in carrying out their ministerial functions.

[N.J.S.A. 59:2-3.]

Subsection (a) concerns the "exercise of judgment or discretion" in making basic policy -- the type made at the planning, rather than the operational level of decision-making. Moreover, immunity is contingent upon proof that discretion was actually exercised at that level by an official who, faced with alternative approaches, weighed the competing policy considerations and made a conscious choice.

In Birchwood Lakes Colony Club v. Medford Lakes, 90 N.J. 582, 601 (N.J. 1982) our Supreme Court acknowledged the validity of a pre-Tort Claims Act case, Barney's Furniture Warehouse v. Newark, 62 N.J. 456, 467-68 (1973), which held that although a municipality is not liable for the gradually increasing functional incapacity of its sewer system, it remains liable for negligent operation or repairs and would be liable if in actual operation the system expels artificially collected sewage upon a claimant's property (Barney's Warehouse, supra, involved claims of damage by property owners whose premises were periodically flooded by water backup following rainfall. The Court concluded that "by far, the greater portion of the floodwaters . . . consists of either precipitation or back-flow of surface water. . . ." Id. at 462. The Court held there was no affirmative municipal duty to keep its storm water system abreast of municipal growth and no showing that "collected waters" were cast upon plaintiffs' lands. Id. at 468. The court distinguished from the matter before it such cases as those of private damage resulting from lack of repair or from the connection of additional laterals to a sewer whose existing incapacity was already demonstrated, or from the casting into a sewer of "sewage beyond its capacity to conduct to the common outlet so that it must empty itself upon the private property" and the case of a common sewer outlet emptying directly on private property. It was said that in all of such instances the public body is generally held responsible.).

Accordingly, the Medford Lakes court held that a public entity will be immune from liability for claims of damages from public sewer discharges when the amount of discharge is incorporated into the plan and design "approved in advance" by the body exercising "discretionary authority to give such approval," N.J.S.A. 59:4-6, so long as the works are thereafter operated with reasonable care and in accordance with the permit requirements.

As the Barney’s Furniture court acknowledged, the duties of the municipal authorities in adopting a general plan of drainage and in determining when and where sewers shall be built, of what size and at what level, are of a quasi-judicial nature, involving the exercise of deliberate judgment and discretion, and depending upon considerations affecting the public health and general convenience throughout an extended territory; and the exercise of such judgment and discretion in the selection and adoption of the general plan or system of drainage is not subject to revision by a court or jury in a private action for not sufficiently draining a particular lot of land. However, the construction and repair of sewers, according to the general plan so adopted, are simply ministerial duties, and for any negligence in so constructing a sewer or keeping it in repair, the municipality which has constructed and owns the sewer may be sued by a person whose property is thereby injured.

The view that liability does not attach for defects in the general plan of a municipal sewerage system is generally held. A few jurisdictions, however, have followed a minority rule to the effect that if a sewer system as established proves inadequate "to keep pace with the increasing demands upon the resources of the artificial channels it has established" it must be changed to accommodate such demands at peril of liability. See, e.g., City of Louisville v. Cope, 296 Ky. 207 (Ct. App. 1943); City of Macon v. Cannon, 89 Ga. App. 484 (Ct. App. 1954); City of Holdenville v. Griggs, 411 P.2d 521 (Okl. Sup. Ct. 1966). More frequently, however, it is held that if a sewer is adequate when constructed the municipality is not liable because of subsequent inadequacy occasioned by the growth of the municipality and the increased demands made upon the sewer. This position is qualified to the extent that liability will follow if in actual operation the system expels artificially collected sewage, whether sanitary or storm or both, into plaintiff's home or onto his land.

Thus, flooding of a plaintiff’s property as a result of waters cast upon it out of sewer lines would be a basis for imposing liability on the public entity in control of the sewer lines through application of the doctrine of the “collected water” cases cited above. Moreover, liability attaches when damage results because of a public entity’s failure to remedy a condition of disrepair.

Accordingly, public entities remain liable for negligent operation or construction. In our State, the operation of a sewer system by a municipality is held to be the exercise of a proprietary function, and liability is determined under ordinary principles of negligence, without regard to the municipal character of the tortfeasor.

When a municipality constructs and operates a sewer system it becomes its duty to keep it in repair and free from conditions that will cause damage to private property. Its duty to keep its sewers in repair is not performed by waiting to be notified by citizens that they are out of repair, and repairing them only when the attention of municipal officials is called to the damage they have occasioned by having become dilapidated and defective. Its duty involves the exercise of a reasonable degree of watchfulness in ascertaining their condition from time to time, and preventing them from becoming dilapidated and defective. Where dilapidation and defects are the ordinary result of the use of the sewer which ought to be anticipated and could be guarded against by an occasional examination by tests or otherwise, the failure to make such examinations is a neglect of duty which renders the municipality liable for damage proximately caused thereby.

The rule of damages applicable to damage sustained to real property of a plaintiff allows recovery based upon the diminution in value of said property caused by the defendant public entity’s negligence. Additionally, evidence of the reasonable cost of repairs necessary to restore such property to its former condition may be considered in determining such loss.

Bookmark and Share

January 4, 2012

Inside the Tort Claims Act

The New Jersey Tort Claims Act (the “TCA” or the “Act”) provides that "a public entity is not liable for an injury" caused by an act or omission "[e]xcept as otherwise provided by this act." N.J.S.A. 59:2-1a. Under the TCA, immunity is the rule and liability is the exception. The TCA defines public entities to include counties and municipalities, and therefore townships also fall within the scope of the TCA. N.J.S.A. 59:1-3.

One relevant exception to the general rule of immunity covers dangerous conditions on public property. N.J.S.A. 59:4-2. That section provides:

A public entity is liable for injury caused by a condition of its property if the plaintiff establishes that the property was in dangerous condition at the time of the injury, that the injury was proximately caused by the dangerous condition, that the dangerous condition created a reasonably foreseeable risk of the kind of injury which was incurred, and that either:

(a) a negligent or wrongful act or omission of an employee of the public entity within the scope of his employment created the dangerous condition; or

(b) a public entity had actual or constructive notice of the dangerous condition under section 59:4-3 a sufficient time prior to the injury to have taken measures to protect against the dangerous condition.

Nothing in this section shall be construed to impose liability upon a public entity for a dangerous condition of its public property if the action the entity took to protect against the condition or the failure to take such action was not palpably unreasonable.

[N.J.S.A. 59:4-2.]

Chapter 4 of the Act, specifically N.J.S.A. 59:4-2, imposes liability on a public entity for injury caused by a condition of its property if the plaintiff establishes that the property was in dangerous condition at the time of the injury, that the injury was proximately caused by the dangerous condition, and that the dangerous condition created a reasonably foreseeable risk of the kind of injury incurred. The plaintiff must also establish that the public entity was responsible either through its employees for creating the dangerous condition or had actual or constructive notice of the condition sufficiently before the injury to have taken measures to protect against the dangerous condition, provided that the entity will not be liable if the action taken to protect against the condition was not "palpably unreasonable." N.J.S.A. 59:4-1(a) defines "dangerous condition" as "a condition of property that creates a substantial risk of injury when such property is used with due care in a manner in which it is reasonably foreseeable that it will be used."

The TCA defines "public property" as property that is "owned or controlled by the public entity." N.J.S.A. 59:4-1c. However, liability is not limited to an event occurring on public property. In fact, our Supreme Court has concluded that public entities may be liable for creating a dangerous condition on private property that is under the "control" of the public entities.

Nevertheless, whether a dangerous condition exists is ultimately a question for the jury. In order for plaintiffs to be successful at trial, they must not only prove that public property created a dangerous condition, but that the condition created a foreseeable risk of the kind of injury that occurred, that the condition proximately caused the injury and that the action the public entities took to protect against the dangerous condition or the failure to take such action was palpably unreasonable. The term "palpably unreasonable" connotes "behavior that is patently unacceptable under any given circumstance." A dangerous condition under the TCA relates to the physical condition of the property itself and not to activities on the property. See Roe ex rel. M.J. v. New Jersey Transit Rail Operations, Inc., 317 N.J. Super. 72 (App. Div. 1998), certif. denied, 160 N.J. 89 (1999) (held that a permanently bolted-open gate on New Jersey Transit's property constituted a dangerous condition under N.J.S.A. 59:4-2 because it invited the public to enter a high-crime area).

Bookmark and Share

December 14, 2011

Public Employee Immunity and the Tort Claims Act

Under the New Jersey Tort Claims Act (the “Act” or “TCA”), N.J.S.A. 59:1-1 et seq., public entities are liable for their negligence only as set forth in the Act and in accordance with the fair and uniform principles contained therein. The TCA seeks to provide compensation to tort victims without unduly interfering with governmental functions and without imposing an excessive burden on taxpayers. The Act establishes sovereign immunity for public entities, but does not similarly shield public employees. Thus, with respect to public entities, immunity is the rule, and liability the exception. The analysis for determining public-employee liability under the Act differs from the analysis for determining public-entity liability.

Accordingly, when public employees are involved in activities that require discretionary decisions regarding the allocation of resources, they are liable only when their actions have been palpably unreasonable. See N.J.S.A. 59:3-2(d) (providing qualified immunity for discretionary decision-making). On the other hand, when qualified immunity for discretionary decision-making does not apply, public employees are liable in tort under common-law principles of ordinary negligence.

Nevertheless, the Act grants an absolute immunity to both public entities and their employees from liability for injuries caused by a failure to enforce the law. See N.J.S.A. 59:2-4 (“A public entity is not liable for an injury caused by adopting or failing to adopt a law or by failing to enforce any law"); see also N.J.S.A. 59:3-5 ("A public employee is not liable for an injury caused by his adoption of or failure to adopt any law or by his failure to enforce any law"). Under these sections, public entities and their employees are not liable for their failure to enforce safety ordinances, regulations or the law generally.

Bookmark and Share

December 7, 2011

Why the Homeowner Warranty Program Remedy is no Remedy At All – Part 5

This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will discuss important considerations for new homebuyers. You can access previous installments of this series online here.

Considering the stringent ramifications of proceeding under the warranty program, the take-away is BUYER BEWARE. While the Act is in place to protect buyers of newly built homes, in practice, it actually greatly limits a buyer’s potential for recovery for damages arising out of construction defects. The real world application of the Act serves to exacerbate the divide between homeowners and builders when there is a dispute over defects. The remedy it offers – mediation and arbitration – is no remedy at all because once invoked it becomes the sole and exclusive remedy available to the homeowner. The homeowner has lost the option to bring a lawsuit and the best result that can be achieved through the warranty program is a determination that the defects claimed are covered under the warranty. However, in such a case, the builder, who supposedly created the defects, is then required to come back and make the appropriate fixes. Thus, a successful outcome through the warranty program does not appear to be as attractive as a successful lawsuit where the homeowner is awarded money damages.

In light of the onerous and prohibitive consequences of proceeding under the warranty program, there are a number of practical tips that homeowners should be aware of:
(1) Document and record all discovered defects and suspected defects (photographs & video);
(2) Provide prompt and detailed notice to your builder and/or warranty service representative of your builder;
(3) Engage in meaningful discussions with your builder regarding discovered and suspected defects as well as the remediation process;
(4) DO NOT be hostile, combative or adversarial;
(5) Be amenable, cooperative and amicable in all communications with the builder;
(6) Maintain a file of all written communications with the builder and/or warranty company;
(7) When necessary, consult with independent engineers, architects, construction professionals and/or attorneys in order to evaluate extent of defects, adequacy of proposed fixes and potential legal claims;
(8) DO NOT perform any repair, replacement or other corrective work yourself, unless absolutely necessary, and in that case, make sure to provide notice to your builder and/or warranty service administrator;
(9) CAREFULLY CONSIDER all options before deciding to avail yourself of the dispute resolution procedures afforded by the warranty program.

Bookmark and Share

November 30, 2011

Why the Homeowner Warranty Program Remedy is no Remedy At All – Part 4

This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will discuss when the election of remedies provision is triggered. You can access previous installments of this series online here.

Recently, the Appellate Division had the occasion to decide whether simply submitting a claim to the DCA, in accordance with the Act, barred plaintiffs from pursing a lawsuit against the builder. The Appellate Division found that it did, stating that by submitting their claim to the DCA, plaintiffs made an election of remedies that precluded them from pursuing a lawsuit for defects to their newly-constructed home. See Maloney, et al. v. Ali, et al., A-0950-10T4 (October 17, 2011).

In Maloney, the plaintiffs contracted with the defendants for the construction and purchase of a single-family home. After living in the home for about a year, plaintiffs submitted a claim to the DCA under their new home warranty. Plaintiffs included a copy of a home inspection report as well as identified certain defects that had not been addressed by the builder. Thereafter, the DCA informed plaintiffs that their claim had been closed because they had not submitted a concise list of the defects they were complaining about. Moreover, the DCA stated that because the warranty was in its second year many of the defects listed were only covered in the first year of the warranty.

Plaintiffs did not proceed any further with the DCA and instead filed an action in Superior Court two years later. Plaintiffs asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, negligence, promissory estoppel, unjust enrichment and consumer fraud. Soon after, defendants filed a motion for summary judgment, arguing that plaintiffs’ lawsuit was barred by the election of remedies provision in the Act. The trial court granted defendants’ motion. The Appellate Division affirmed finding that the act of submitting a claim to the DCA under their new home warranty triggered the election of remedies provision. Thus, because the filing of a claim against the warranty constituted the election of a remedy, plaintiffs were statutorily precluded from pursuing any other remedies, such as a lawsuit.

Bookmark and Share

November 23, 2011

Why the Homeowner Warranty Program Remedy is no Remedy At All – Part 3

This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview remedy preclusion under the New Jersey Home Warranty and Builder’s Registration Act. You can access previous installments of this series online here.

Nevertheless, as innocuous as the claims process sounds, the Act contains what can only be described as a death knell for homeowners who choose to proceed through the warranty program. Section 46:3B-9, known as the “election of remedies” provision provides as follows:

Availability of any legal remedy to owner; election of remedy. Nothing herein shall affect the other rights and remedies available to the owner. The owner shall have the opportunity to pursue any remedy legally available to the owner. However, initiation of procedures to enforce a remedy shall constitute an election which shall bar the owner from all other remedies. Nothing herein shall be deemed to limit the owner’s right of appeal as applicable to the remedy elected.
The significance of this provision cannot be under-emphasized. Should a homeowner decide to pursue a claim for defects under the warranty, he or she is thereafter statutorily barred and precluded from bringing a lawsuit against the builder. This means that the homeowner must pick at the outset whether to proceed under the Act i.e. mediation and arbitration, or pursue a legal remedy through the court system. It is either or and never both. See Marchak v. Claridge Commons, Inc., 134 N.J. 275, 280 (1993) (a new home buyer may seek recovery through one of two mutually exclusive mechanisms, “either (1) conciliation or arbitration, or (2) filing a lawsuit . . . . but not both”).

As the Appellate Division explained, once a homeowner opts for binding arbitration pursuant to the Act, all of the homeowner’s potential claims for damages against the builder, including common law fraud and alleged violations of the Consumer Fraud Act, are subsumed by the homeowner’s election of remedies under the Act. Konieczny v. Micciche, 305 N.J. Super. 375, 381 (App. Div. 1997). The Appellate Division emphasized that even initiation of the claims process is enough to trigger the election of remedies provision and bar the homeowner from all other remedies.

Bookmark and Share

November 16, 2011

Why the Homeowner Warranty Program Remedy is no Remedy At All – Part 2

This blog is the second in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview of how to file a claim under the New Jersey Home Warranty and Builder’s Registration Act. You can access previous installments of this series online here.

New Jersey Home Warranty and Builders’ Registration Act (The Act) provides a multi-step process for filing a claim. First, the homeowner has to notify the builder of whatever defects exist and allow the builder a reasonable amount of time, usually 30 days, to make the necessary repairs. If the builder fails to make the requisite repairs, the homeowner may submit claims for defects covered by the warranty to the Commissioner of the Department of Consumer Affairs (the “DCA”) (or through whatever warranty program servicing the homeowner’s warranty). The Commissioner is then required to investigate the claim and determine its validity, after affording the parties an opportunity to be heard at a hearing. Methods of claim resolution include independent third party mediation and legally binding arbitration.

Bookmark and Share

November 9, 2011

Why the Homeowner Warranty Program Remedy is no Remedy At All – Part 1

This blog is the first in a series of blogs discussing the New Jersey Home Warranty and Builders’ Registration Act. This blog will provide an overview of the homeowner warranty program. Be sure to check back for more installments in this blog series.

Since its inception, the New Jersey Home Warranty and Builders’ Registration Act (the “Act”), N.J.S.A. 46:3B-1 to -20, has proven to be more of trap for new homeowners than the safety net it was purported to be. The purpose of the Act is to establish a program requiring that newly constructed homes conform to certain construction and quality standards as well as to provide buyers of new homes with insurance-backed warranty protection in the event such standards are not met. While the intent of the Act is to provide homeowners with a prompt, convenient and cost-saving means of resolving disputes concerning construction defects, in reality, its effect has been, in many cases, to strip homeowners of any meaningful means of recovery for discovered construction defects.

Pursuant to the Act, all builders must be registered with the New Jersey Department of Consumer Affairs in order to engage in the business of constructing and selling new homes. Any builder who fails to register is subject to, inter alia, a statutory penalty of $2,000 for each offense. The Act requires that builders provide owners with a new home warranty by either participating in the New Home Warranty Security Fund or an acceptable alternative program. The builders are then required to provide new home owners with a warranty that affords coverage and protection against defects, falling within three time-sensitive categories:

(1) During the first year after the warranty date, (the first occupation or settlement date, whichever is sooner )warranty coverage extends to defects caused by faulty workmanship and defective materials (this includes plumbing, electrical and mechanical systems, appliances, fixtures and equipment, and major structural defects);

(2) During the first two years after the warranty date, warranty coverage extends to defects caused by faulty installation of plumbing, electrical, heating and cooling delivery systems, however, with respect to appliances, this warranty does not exceed the length and scope of the warranty offered by the manufacturer; and

3) During the first ten years after the warranty date, warranty coverage extends to only major construction defects (any actual damage to the load bearing portion of the home including damage due to subsidence, expansion or lateral movement of the soil (excluding movement caused by flood or earthquake) which affects its load bearing function and which vitally affects or is imminently likely to vitally affect the use of the home for residential purposes).

Simply stated, the warranty covers all ordinary defects in the first year, then faulty installation of systems (plumbing, electrical, heating and cooling) in the second year, and then dwindles down to providing coverage for only major defects in the third through tenth years. Due to the stringent definition of “major construction defects”, the warranty affords no coverage unless the house is practically collapsing and/or is uninhabitable. Common issues such as leaks, cracks, mold, excessive settling, and system malfunctions are not covered. Invariably, the warranties will also contain numerous exclusions that chip away at the actual attainable coverage, such as, but not limited to:

• failure of the home owner to give notice to the builder or its warranty insurer of any defects;
• improper maintenance by the home owner;
• changes of the grading of the ground around the new home by the new home owner or anyone other than the builder;
• failure on the part of the new home owner to take timely action in emergent case to minimize any loss or damage;
• any defect in, or caused by, materials or work supplied by the new home owner or anyone other than the builder;
• normal wear and tear or normal deterioration in accordance with normal industry standards;
• accidental loss or damage from acts of nature (e.g., fire, explosion, radon gas, smoke, water escape, changes which were not reasonably foreseeable in the level of the underground water table, glass breakage, windstorm, hail, lightning, fallen trees, aircraft, vehicles, flood, earthquake, or insect damage);
• any loss or damage which arises while the home is being used primarily for non-residential purposes;
• changes, alterations or additions made to the home by the new home owner or anyone other than the builder after initial occupancy, except for those performed by the builder in accordance with its obligations under the warranty;
• any materials and/or workmanship furnished and installed that does not comply with the specifications in the purchase-sale agreement or contract with the builder which is not defective;
• consequential damages to personal property.

Thus, the homeowner warranties provided by the builder generally contain a labyrinth of exclusions and qualifications that invariably set the stage for disputes and disagreements over what is or is not covered.

Bookmark and Share

November 22, 2010

New Jersey Supreme Court Reverses Appellate Division in Seminal Economic Loss Rule Case

On Monday, November 15th, 2010, the New Jersey Supreme Court issued its highly anticipated decision in the controversial case of Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), cert. granted, 200 N.J. 207, 976 (2009). The contested issue in Dean was whether the economic loss doctrine, a judicial construct which bars recovery in tort for damage a product causes only to itself, applied to bar a homeowner’s tort claim for a defective exterior finishing system installed on their home during construction. The salient question the Supreme Court had to answer was whether a home built with the exterior siding product, in this case manufactured by defendant Sto Corporation (“Sto”), was considered the “product itself” for purposes of delineating Sto’s tort liability. If the exterior siding product was considered to be fully integrated into the home, then home purchasers would be precluded from pursuing products liability relief against manufacturers of allegedly defective products permanently affixed to the outside of the home, for damage those products caused to the home. In a triumph for home purchasers, innocent builders and developers, the Supreme Court held that Sto’s exterior finishing product, Exterior Insulation and Finish System (“EIFS”), was a separate product from, and not fully integrated into, plaintiffs’ home. A cause of action, therefore, exists against Sto to the extent that its EIFS product caused damage to the house or its structural components.

The New Jersey Products Liability Act (the “Act”) creates a tort cause of action against a manufacturer or seller of a defective product. N.J.S.A. 2A:58C-2. However, the Act specifically limits recovery to the harm done to people or property, other than the product itself. N.J.S.A. 2A:58C-1b(2). If a defective product causes damage exclusively to itself, the loss is said to be strictly “economic” and the claimant does not have a cause of action in tort. Thus, the judicial construct known as the “economic loss rule” was embodied by the legislature in the Act and serves to bar tort remedies in strict liability or negligence when the only claim is for damage to the product itself. See Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555 (1985).

In Dean, the plaintiffs, Robert, Jennifer, and Mary Sue Dean, purchased a home in 2002 from its original owners. The home had been built with EIFS. Prior to closing, plaintiffs hired a home inspector to conduct an investigation. The inspection report raised some concerns regarding the EIFS siding. Later, plaintiffs learned that their insurer would not transfer their existing homeowner’s policy to the new property, allegedly because of the EIFS. Nonetheless, plaintiffs purchased the home and moved in. About one year after moving in, they started noticing black lines on the exterior of their home and consequently hired an industrial hygienist to inspect their house. The industrial hygienist found toxic mold that he attributed to leaks from the EIFS. Plaintiffs eventually had all of the EIFS cladding removed and replaced. In May 2004, plaintiffs filed suit against multiple defendants including Sto Corp., the manufacturer of the EIFS. As the case progressed, plaintiffs settled with all of the defendants except Sto. Sto moved for summary judgment, which the Court granted, reasoning that the EIFS was so integrated into the home that the home itself was the product and any damage to its structural elements was strictly an economic loss. In other words, the Court used the integrated product doctrine to conclude that the attachment of the EIFS to the home made the home itself the “product” at issue and then relied on the economic loss rule to bar plaintiffs’ tort claim against Sto because their cause of action only alleged damage to their house, the “product”. On appeal, the Appellate Division affirmed the trial court’s grant of summary judgment. Appeal to the New Jersey Supreme Court followed.

The Supreme Court granted certification to decide first, whether it will adopt the integrated product doctrine and, if so, whether the EIFS was sufficiently integrated into plaintiffs’ home that the economic loss rule bars any recovery for damages to the EIFS or to the home. The Court reasoned that “a product that is merely attached to or included as part of the structure is not necessarily considered to be an integrated part thereof”, particularly in the case of homes. Noting that California courts have declined to apply the integrated product doctrine to products used in building houses, the Court concluded that the affixed EIFS did not become a fundamental part of the house structure itself, and at all times was distinct from the house. Holding that the EIFS was a separate and distinct product from the home itself, the Court concluded that the economic loss rule precluded plaintiffs from recovering for damage to the EIFS itself i.e. cost of replacement, however, they were not precluded from recovering for damage “the EIFS caused to the house’s structure or to its environs.” Thus, “to the extent that the EIFS caused damage to the structure of the house or its immediate environs,” plaintiffs retained a viable cause of action against Sto, the product’s manufacturer.

Bookmark and Share

May 18, 2009

New Jersey Appellate Division Resurrects Deceased Contributory Negligence Doctrine: Consumer’s Pre-Purchase Notice of Product Defect Bars PLA Recovery of “Other Property” Damage Inflicted After Purchase

Contributory negligence is the common-law construct whereby any negligence by a plaintiff acts as a total bar to recovery against a negligent tortfeasor. The contributory negligence doctrine has been uniformly criticized as overly harsh, allowing culpable parties to avoid the consequences of their actions, and leaving relatively innocent plaintiffs without recourse. 57A AmJur2d 752, Negligence, § 856. In response, the vast majority of states, including New Jersey, have replaced the contributory negligence doctrine with some form of comparative negligence, whereby the fault of a plaintiff is compared with the negligence of the defendant and may serve to reduce the plaintiff's recovery of damages instead of completely barring the plaintiff's action. Id. See, e.g., Muldovan v. McEachern, 271 Ga. 805, 810 (Ga.,1999). In this way, states have modified the doctrine to achieve results more consistent with modern notions of fairness. The 1973 enactment of New Jersey’s Comparative Negligence Act (the “Act”), N.J.S.A. 2A:15-5.1 to -5.8, adopted this construct, providing that the fault of a plaintiff may be considered in allocating liability among the parties, but may only act as a total bar to recovery if it exceeds the fault of the defendants. Subsequent decisional law has construed the Act broadly, applying it not only to negligence claims, but also to claims sounding in strict liability. See, e.g. Cruz-Mendez v. ISU/Insurance Services of San Francisco, 156 N.J. 556, (N.J.,1999)

Notwithstanding the clear legislative and judicial repudiation of contributory negligence, a recent Appellate Division decision appears to revive that antiquated notion as applied to homeowner claims against manufacturers of defective building components. In Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division upheld the application of the “economic loss rule” to shield manufacturers of defective building materials from liability to the purchasers of pre-owned houses that incorporate the materials and sustain physical damage as a result. The economic loss rule, as codified by the New Jersey Product Liability Act, limits the availability of tort remedies to plaintiffs who have suffered personal injury or “physical damage to property other than the product itself.” N.J.S.A. 2A:58C-1(b)(2). (For a more extensive critique of the rule see The Economic Loss Doctrine: A license to sell defective building products?).

Even though the concurring majority in Dean, led by Judge Sabatino, acknowledged that the defective component, in that case—a synthetic stucco product known as Exterior Insulation and Finish System (“EIFS”)—had caused injury to property beyond “the product itself,” the court nevertheless barred plaintiffs’ tort remedies, finding that the unique circumstances of the underlying transaction weighed in favor of a restrictive application of the economic loss rule. Critical to the concurring majority’s analysis was the fact that plaintiffs received a home inspection report, prior to their purchase of the home, disclosing the potential defects in the EIFS:

In my view, [an] innocent home purchaser should be able to recover, under the Product Liability Act, N.J.S.A. 2A:58C-1 to -11 (“PLA”), reasonable compensation from the manufacturer of that defective component for the physical harm the component caused to other portions of the home and to any other property owned by the plaintiff.

In the present case, however, we are not dealing with [an] entirely latent defect, but one that was pointed out to the Deans, both orally and in writing, by their astute home inspector before they purchased the house. I agree with Judge Carchman that, whatever the proper scope of the economic loss doctrine may be, tort principles should not cover those losses in the particular setting of this transaction. Once alerted to the potential risks of the sheathing, the Deans could have insisted on a warranty from the builder to guard against future consequential harms, or demanded that the sheathing be replaced, or walked away from the purchase altogether. They did none of those things. The defect in the EIFS was no longer, with respect to the Deans, latent. Given this particular transactional context, I have no problem in confining plaintiffs to other remedies that are not based in tort or under the PLA.

Dean, supra, at 475, 483 (Sabatino, J., concurring) (emphasis added).

While differing on the issue of whether consequential damage to collateral components of the home constitutes damage to “other property,” Judge Carchman, writing for the court, agreed with the concurring majority that plaintiffs’ opportunity to avoid the loss asserted, and failure to take reasonable precautions to protect their own interests warranted foreclosure of their tort remedies:

We recognize the thoughtful and well-articulated concerns expressed by our concurring colleagues regarding the application of the economic loss rule as a bar to innocent purchasers recovering under the PLA from a manufacturer of a defective component of the home, where that component causes physical damage to other portions of the home; however, that is not the case we have before us on this appeal. As our concurring colleagues observe, plaintiffs, here, had appropriate opportunities to protect themselves from the potential of loss caused by the defective component.

Id. at 472 (emphasis added).

Though couched in terms of the economic loss rule, the effect of the Dean holding is the application of a contributory negligence standard to product liability claims asserted by homeowners against building component manufacturers. Where a homeowner knew or should have known of an injurious product-defect prior to purchase, no recovery may be had in tort for subsequent damage to “other property” caused by the defect. Yet, the New Jersey Legislature and Supreme Court have made clear that a comparative fault standard should govern the analysis of the relative "innocence" and "blameworthiness" of the victim and tortfeasor:

The final issue concerns the effect of plaintiff's comparative negligence on the [defendant's] liability under N.J.S.A. 21:3-5. That issue requires consideration of the Comparative Negligence Act, N.J.S.A. 2A:15-5.1 to -5.8, which provides that a plaintiff's own negligence may be considered in allocating liability among the parties. . . . The Act applies in strict-liability actions. Gennari v. Weichert Co. Realtors, 148 N.J. 582, 608-09, 691 A.2d 350 (1997); see also Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 164 (1979) (holding that Act provides a defense in most strict-liability actions, except in some workplace injury cases in which worker had no meaningful choice whether to encounter risk). A plaintiff's fault is an affirmative defense in a strict-liability action if his or her conduct constitutes an “unreasonable and voluntary exposure to a known risk.Lewis v. American Cyanamid Co., 155 N.J. 544, 559, 715 A.2d 967 (1998); Cartel Capital Corp. v. Fireco of N.J., 81 N.J. 548, 563, 410 A.2d 674 (1980). To establish an affirmative defense, therefore, the Insurers must prove that plaintiff voluntarily encountered the risk with actual knowledge of the danger. The mere fact that plaintiff was negligent will not suffice.

Id. (emphasis added). See Cepeda v. Cumberland Eng'g Co., Inc., 76 N.J. 152, 185, 386 A.2d 816 (1978) (holding that “contributory negligence in the sense of mere carelessness or inadvertence” is not a defense in strict liability cases), overruled in part on other grounds Suter v. San Angelo Foundry & Mach. Co., 81 N.J. 150, 177, 406 A.2d 140 (1979). Under New Jersey law, even where a manufacturer proves that a consumer failed to take reasonable precautions against a product defect of which he knew or should have known, the result is a mere reduction of the plaintiff's recovery, not a complete bar, unless the jury makes a determination that a majority of fault lies with the plaintiff (a quintessential fact determination). In New Jersey, and in a vast majority of jurisdictions, an injured consumer’s “notice” of a product defect will not foreclose tort remedies unless the manufacturer meets a burden of establishing the consumer’s subjective knowledge of the danger and unreasonable conduct in the face thereof. See Id. See, e.g., Martinez v. Triad Controls, Inc., 593 F.Supp.2d 741 (E.D.Pa.,2009); Anderson v. Four Seasons Equestrian Center, Inc., 852 N.E.2d 576, 582 (Ind.App.,2006); Krajewski v. Enderes Tool Co., Inc., 396 F.Supp.2d 1045, 1052 -1053 (D.Neb.,2005); Warner Fruehauf Trailer Co., Inc. v. Boston, 654 A.2d 1272, 1274 -1275 (D.C.,1995)

Dean’s emphasis on plaintiff homeowners’ “innocence” is particularly problematic given the underlying purpose of the economic loss rule. The rule “defines the boundary between the overlapping theories of tort law and contract law by barring the recovery of purely economic loss in tort, particularly in strict liability and negligence cases.” Dean, supra, at 470 (citation and internal quotation marks omitted). It acts as a shorthand means of determining which duty has been violated by the defendant—that is, was it one that arose solely under contract, or did it also arise incident to the common-law obligation to avoid unreasonable risks of harm to persons or property? See Id. The Dean court essentially looked to the purchaser's fault to determine the source of a manufacturer's breached duty. This seems incongruous. The fact of the Deans’ "notice" does not change the quality of the manufacturer's culpable conduct, which presumably occurred long before plaintiffs purchased their home. The notice issue would have been more appropriately addressed in terms of comparative fault. While the Supreme Court did sanction an examination of unique transactional circumstances in applying the economic loss rule in Alloway v. General Marine Industries, L.P., 149 N.J. 620, 629 (1997), the purpose of that examination is to avoid an overly restrictive application of the rule, not to facilitate it.

Bookmark and Share

December 19, 2008

New Jersey’s Consumer Fraud Act Applied to Home Improvement

In a recent unpublished decision under New Jersey’s Consumer Fraud Act, the Appellate Division in D. Wyatt Stone and Stone Foundation, LLC v. Kahr Properties, LLC, December 2008 App. Div. 09-2-2471), decided the appeal of a judgment in the Plaintiff’s favor for damages, attorneys' fees and costs arising from a home improvement project. The Plaintiff was a limited liability company engaged in the business of buying, renovating and reselling residential properties. The Defendant was a family-owned company whom the Plaintiff contracted with to renovate a residential property. The project met with delays, shoddy workmanship and overcharges, which prompted suit by the Plaintiff under the Consumer Fraud Act. The Defendant appealed the judgment in Plaintiff’s favor by arguing that the Consumer Fraud Act was not intended to apply to a corporate entity such as the Plaintiff that is engaged in the business of buying, renovating and reselling residential properties. The Appellate Division disagreed, finding that the Consumer Fraud Act applied to the transaction between the parties, based upon testimony from the Defendants that established they were involved in the sale or advertisement of home improvement services, either directly or indirectly to the public, and finding that the Act was meant to protect both business entities like the Plaintiff as well as individual consumers.

Bookmark and Share

October 2, 2008

Nevada Supreme Court Denies Builder's Request in "Stucco Case"

Last Thursday the Nevada Supreme Court denied attempts from Del Webb (a national builder of active adult communities) and their contractors seeking to limit the number of homeowners within a community from pursuing construction defect claims. The court stated that subsequent buyers of a home (in addition to the original owners) which had been deemed defective have the right to sue under the Nevada State defect law.


The ruling, also referred to as the “Stucco Case,” found in favor of 700 homeowners who had been involved in litigation since the original complaint was filed in June 2003. Defects in the stucco installation resulted in the formation of mold, which caused the homes to be deemed dangerous and hazardous to residents.


According to several of the homeowners’ attorneys, not including attorney’s fees and interest accrued over the past five years, the estimated cost to repair the damage to the homes was nearly $90 million. Though the case is expected to be appealed to the United States Supreme Court the outcome is sure to have in impact on similar cases across the country.

Bookmark and Share

July 2, 2008

Municipalities Cannot Require Builders to Provide Common Open Spaces

The New Jersey Appellate Division ruled this month in two companion cases, New Jersey Shore Builders Association v. Township of Jackson, A-5805-06 (June 23, 2008) and Builders’ League of South Jersey v. Egg Harbor Township, A-1563-07 (June 23, 2008), that municipalities cannot require as a condition of approval that builders and developers provide on-site recreation areas or facilities, or common open space, outside the context of planned unit developments. The Court also held that municipalities cannot require payment of monies to built such facilities off-site in lieu of providing them on-site. The Court found that ordinances requiring such conditions of development approvals were not authorized under the Municipal Land Use Law (MLUL). Through this ruling, the Court has ended a longstanding practice of municipalities to exact these types of conditions from developers, and, for developers who have in the past been made to remit payments in lieu of providing on-site recreation areas, facilities, or common open space, the decision may open a floodgate of demands for reimbursement of those payments.


Ordinances in two municipalities, Egg Harbor Township, Atlantic County and Jackson Township, Ocean County, were the subject of the attack. Both ordinances compelled developers seeking approvals to set aside a certain amount of acreage on-site for use as public open space and/or recreational facilities such as tot lots, tennis and basketball courts, and baseball, soccer and football playing fields. Both townships’ ordinances also provided for payments in lieu of providing those facilities on-site for use in constructing such facilities off-site.


The Appellate Division found that both ordinances were not permitted under the MLUL did not permit the recreational open space exactions required by the ordinances. The Court rejected the Townships’ arguments that the MLUL should be read expansively to implicitly authorize the imposition of open space and recreation exactions. The Court held instead that the MLUL contains explicit language specifically limiting municipalities’ powers in that regard. The Appellate Court held that while providing public open space and recreation facilities is an important goal of New Jersey land use law under the MLUL, it is a goal that can only be accomplished within the strict and specific limits of the MLUL. Municipalities cannot require developers to provide common open space and recreation facilities on-site as a condition of development approval, or require payments in lieu thereof, outside the context of planned unit developments.

Bookmark and Share

October 1, 2007

New Jersey Federal Court Declines to Hear Minnesota Insurance Coverage Dispute.

Judge Noel L. Hillman of the United States District Court for the District of New Jersey, sitting in Trenton, recently dismissed a case before her on the grounds that the New Jersey court was an inappropriate place to hear the dispute. The case is First Colonial Insurance Co., et. al, v. Custom Flooring, Inc., et. al., 2007 WL 1651155 (D.N.J. June 4, 2007). The claims in the case involved a flooring project in a building in Minnesota. The general contractor on the job was a New Jersey Corporation named Stone Cor. There was a suit filed in Minnesota over defects in the flooring installation against Stone Cor and its subcontractor Custom Flooring, Inc. This suit was eventually settled, with participation from one of Custom Flooring’s insurance companies, First Colonial. Stone Cor was also an additional insured on a policy issued by Farmer’s Insurance Exchange, which denied coverage in the Minnesota case and declined to provide a defense. The New Jersey action was filed by First Colonial and Stone Cor against Farmers, seeking a declaratory judgment on coverage, e.g. that Farmer’s was obligated to provide a defense to Stone Cor in the Minnesota action, and that it owed a share of the settlement. There was also pending litigation in Illinois, which Stone Cor and First Colonial were parties to, which involved many of the same claims.

In examining the case under the doctrine of forum non conveniens, Judge Hillman saw a case about construction in Minnesota, governed by Illinois law, against Farmers, a California corporation, and where the majority of evidence was located outside New Jersey. Farmers argued that the New Jersey case should be dismissed, because the concurrent Illinois action involved the same parties, the subject matter of the claims and the evidence are all outside New Jersey, and it would be easier for all involved to resolve all the issues in a single alternate forum, in Illinois.

Stone Cor argued that the alternate forum was not an adequate forum, since its claims would be subject to a Statute of Limitations defense there. In fact, Stone Cor had filed a claim against Farmers in Illinois, and had voluntarily withdrawn it, rather than face a motion to dismiss on Statute of Limitations grounds. The New Jersey action was begun shortly thereafter. The Judge found that, other than the fact that Stone Cor was located in New Jersey, nothing else about the case had any connection at all with the state. None of the other parties were citizens fof New Jersey, and none of the events underlying the lawsuit took place in New Jersey. The fact that Stone Cor may not be able to recover on its claims in Illinois was insufficient to avoid dismissal. Stone Cor’s withdrawal of its claims in Illinois suggested forum shopping, and the court was not inclined to reward that behavior. The case was dismissed in favor of the still-pending action in Illinois.

Bookmark and Share

September 18, 2007

Consumer Fraud Case Hits New Jersey Supreme Court - Appellate Division

The New Jersey Supreme Court Appellate Division recently upheld a judgment against a stucco/masonry contractor under the New Jersey Consumer Fraud Act in Briggs v. Luisi, et al.. The case involved allegations by the owners of a single family home that the stucco/masonry contractor negligently performed repair work on the exterior of the house and on cracks in the home's foundation, and that the contractor violated the Consumer Fraud Act through affirmative misrepresentations and knowing omissions in connection with a five year warranty issued covering the work.

After performing only a portion of the scope of work he was retained to complete, the contractor gave the homeowner a guarantee on the exterior stucco surface and the foundation of the entire house against cracks and defects for a period of five years. In discovery, however, the contractor admitted that he did not complete all of the work that was described in the warranty. He also acknowledged that the plaintiff and the plaintiff's lending institution relied on the warranty. Based on this evidence, the Appellate Court affirmed the $89,485 judgment against the contractor and in favor of plaintiff, as well as affirming the jury verdict apportioning twenty percent of the total damages against the contractor as attributable to the contractor's violation of the Consumer Fraud Act, which portion was then trebled by the Court and was the basis for an award of counsel fees.

Bookmark and Share

August 27, 2007

Statute of Repose

On June 26, 2007, the Supreme Court of New Jersey held that the statute of repose begins to run on the date upon which the contractor or design professional has completed his or her portion of the work, In Daidone v. Nuterick Bulkheading, et al., Docket No. A-60, 2007 N.J Lexis 706, the plaintiffs had hired an architect to design their new home. The plans were completed in June 1993 and the architect had no further involvement in the project.

Beginning in 1999, settlement of the home caused problems with several pipes and an electrical panel. The plaintiffs nevertheless waited until mid-July 2002 to complete repairs and until June 2004 before suing the architect. Thus, although they were within 10 years from completion of the home and the date of issuance of a c/o, they were more than 10 years past the date when the architect had completed its work. The Supreme Court of New Jersey held that "this led to but one conclusion: as a matter of law, plaintiffs causes of action against [the architects] relating to design and construction defects are deemed never to have arisen. " the court rejected the plaintiffs' argument that it was against public policy to require plaintiffs to make individualized determinations as to when a designer or contractor has completed performance because such a requirement is unduly burdensome.

Bookmark and Share

July 9, 2007

Proposal would toughen ban on fake stucco: Illnesses attributed to use of siding's synthetic version

In a unanimous vote of 26-0, Oregon State Senators, led by Senator Jackie Winters (R-Salem), voted to ban the use of synthetic stucco on Oregon homes. This decision came after Senator Winters told the story of an 11-year old Salem resident, Whitney McClain, who is currently being treated for multiple brain tumors after a mold outbreak in her home. The girl is Senator Winters’ granddaughter, and just one of many sufferers of several diseases (including brain tumors, pneumonia and bronchitis) caused by mold infestations in their homes.

After the unanimous vote by the Senate, the bill was sent to the House of Representatives. Representative Paul Holvey (D-Eugene), led an initiative to deny the bill, until it also includes banning stucco on commercial buildings. While this would increase the safety for the residents of Oregon, many feel the ban on commercial properties is not necessary. A conference committee was assigned to reconcile House and Senate approaches in HB 2112-B.

While the bill is still awaiting final approval, the Oregon senators hope this vote will ensure that other families will not have to endure the devastating side effects of insufficient Exterior Insulation and Finish Systems (EFIS), like the McClain family had to.

You can read more on the bill, and the McClain's story here.

Bookmark and Share

July 6, 2007

New Jersey's Prompt Payment Act

The New Jersey Legislature has recently enacted a new Act called the “Prompt Payment Act.” The Act entitles all contractors, subcontractors, sub-subcontractors and product suppliers to prompt payment on all public and private projects. By its terms, the Act is only applicable to contracts entered into after September 1, 2006.

The Act requires a project owner to pay a contractor not later than thirty (30) days from the date the contractor’s bill is received. The Act applies only when the bill has been “approved and certified.” However, the Act states that a bill will be deemed “approved and certified” if twenty (20) days after the owner receives it, the owner has not objected to the bill, in writing, and specified the amount objected to and the reasons for the objection. The Act has different procedures, however, for certain public entities that have approval mechanisms for payment of contractors on public projects. Subcontractors, sub-subcontractors, and suppliers are entitled to receive payment from contractors they are under contract with or supplied material to within ten (10) days of the contractor’s or subcontractor’s receipt of periodic payments from the owner, unless otherwise agreed to in writing.

The Act also provides for payment of interest on unpaid amounts at prime plus one (1%) percent in the event payment is not made within the time period provided by the Act. In addition, the Act allows a contractor, subcontractor and sub-subcontractor to suspend work upon seven (7) days written notice if; a) the unpaid party is not provided a statement of the amount withheld and the reason for the withholding, and b) the payor is not engaged in a good faith effort to resolve the reason for the withholding of payment.

The Act provides that a party who sues under the Act and wins is entitled to an award of statutory costs and attorneys fees for bringing the action.

If you have any questions about how the Prompt Payment Act may affect your contracts or work, please contact John Randy Sawyer, Esquire.

Bookmark and Share

April 27, 2007

A Certificate of Occupancy is No Guarantee of Building Quality or Code Compliance

In New Jersey, a buyer of a newly constructed home generally can’t move in until the municipality (or other governmental entity) has issued a certificate of occupancy, often referred to as a “C.O.” Issuance of a C.O certifies that the construction to which it relates has been completed in compliance with the construction permit and applicable provisions of the Uniform Construction Code. N.J.S.A. 52:27D-121; N.J.S.A. 52:27D-133. Commentator David Frizell has opined that “[i]t is clear that the Legislature . . . intended the C.O. to be conclusive (except in cases of obvious mistake or fraud) evidence of compliance and the right to occupy.” 36 N.J. Prac., Land Use Law §13.8 (3d ed. 2006-07).

Not surprisingly, builders and contractors frequently assert the municipality’s issuance of a C.O. as an iron-clad defense to a property owner’s allegations of negligent construction. The defense is not a sure winner. New Jersey’s courts do not view C.O.’s as the final word on compliance with the Uniform Construction Code (UCC) when code violations are identified after the C.O. has been issued and the property conveyed from the builder to the property owner.

Court holdings rejecting C.O. finality have twice emerged in cases in which governmental bodies sought to enforce UCC provisions. In DKM Residential Properties Corp. v. Montgomery Tp., 182 N.J. 296, 308-09 (2005), the Supreme Court held that the municipal code enforcement entity could issue notices of violations to the builder/developer even after C.O.’s had been issued and the properties conveyed. And, in Cyktor v. Aspen Manor Condo. Ass’n, 359 N.J. Super. 459, 464 (App. Div. 2003), the Appellate Division recognized the propriety of the Department of Community Affairs bringing a post-C.O., post-conveyance enforcement action against a builder/developer so long as the action was initiated within the ten-year period prescribed by the statute of repose.

Long before, the Appellate Division held that issuance of a certificate of compliance for a new septic system did not preclude the property owner’s action against the vendor when usage revealed that the system did not meet code. Andreychak v. Lent, 257 N.J. Super. 69 (App. Div. 1992).

New Jersey has abolished the doctrine of caveat emptor in real estate sales, imposing an implied warranty of habitability and fitness for use. McDonald v. Mianecki, 159 N.J. Super. 1, 14 (App. Div. 1978), aff’d, 79 N.J. 275 (1979). Imbuing the C.O. with finality on questions of compliance would effectively foreclose buyers’ actions against builders and contractors on any construction maters governed by UCC provisions. That result would be contrary to the recourse against negligent builders that the Court gave home buyers when it abolished the doctrine of caveat emptor in McDonald.

Bookmark and Share

April 16, 2007

Could you lose your deposit in a developer bankruptcy?

Contract purchasers of homes in the six Kara Homes developments auctioned recently reportedly have lost hundreds of thousands of dollars in deposit monies, according to reports in yesterday’s and today’s Asbury Park Press. The federal bankruptcy court’s approval of the sale of the six developments recently auctioned to other developers cancelled the contracts of those purchasers who had not closed on uncompleted homes when Kara went under. These purchasers must now stand in line as unsecured creditors who are entitled to repayment only if any funds remain after Kara’s secured creditors have been paid. Their hope of recovery is slim.

Apparently, Kara’s sales contracts provided that purchasers could bond their deposits for an additional fee but many purchasers failed to purchase such extra protection. One purchaser quoted in the Press’s report lost a deposit of $135,000. If this is a typical amount lost, the purchasers’ apparently large-scale failure to bond their deposits is remarkable.

In New Jersey, the deposits of purchasers of units in common interest communities subject to the Planned Real Estate Development Full Disclosure Act (“PREDFDA”) (N.J.S.A. 45:22A-21 to 56) are entitled to the protection of a separate escrow account or bonding as a condition of registration. The regulations provide that the Public Offering Statement must include:

A statement that all monies paid to the developer prior to closing will be held in a separate trust account and the name and location of the institution where the trust account is maintained and the name and address of any trust or escrow agent, until closing or termination of the contract or until a bond or other guarantee acceptable to the Agency [the Department of Community Affairs] is provided.

N.J.A.C. 5:26-4.2(a) 14.

Accordingly, in New Jersey, the deposits for home purchases in common interest developments should be protected through escrow or bonding.

The web is burning with posts demonizing Kara Homes and its lenders. No one appears to be focusing on the cautionary lesson for new home buyers, especially those purchasing new construction outside of common interest communities. Real estate is a cyclical business, and developers can and do encounter financial difficulties. Home buyers, and their financial and legal advisors, should be certain that the contract of sale provides protection for the buyer’s deposit.

Bookmark and Share

December 8, 2006

Proposed Amendment to the New Jersey Uniform Construction Code

Construction Code Officials are generally hard working individuals who protect the safety of the residents of the State of New Jersey. However, there are some officials who are unable or unwilling to do their job properly and to ensure compliance with the building code by builders and contractors across the state. Part of the problem stems from fragmentation of the employment process of these individuals. The Department of Community Affairs is in charge of licensing, evaluating and hiring construction officials and subcode officials, but has very little contact with those officials after they are employed. On the other hand, the Municipalities in which the code officials work can only regulate the number of weekly hours an official must work. Despite the fact that the Municipalities work closely with the officials and are better situated to judge a code official=s performance, they are presently unable to discipline or terminate the code official.

However, Assemblymen Peter Biondi, Vincent Prieto and Jerry Green have proposed an amendment to the "State Uniform Construction Code Act" which would give the municipality the power to supervise individual code enforcement officials, and to take disciplinary actions against officials when they fail to carry out their official duties, including terminating the code enforcement official. Senate Bill, No. 149 (2006). The proposed legislation allows a municipality to institute disciplinary action when the code official=s conduct violates any municipal ordinance, when the code official violates conflict of interest rules or when the code official exhibits misconduct in the performance of his or her duties. This may provide residents of New Jersey with a more qualified, better equipped group of code officials who are more likely to observe and correct code violations, which may lead to better construction practices overall.

Bookmark and Share

November 29, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 5

This is part 5 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2, 3 & 4 here.

Section 87, subsection (e)

Subsection (e) of UCIOA’s Section 87 is further evidence of the vague wording throughout the bill and the hastened procedure created to attempt to deal with what are ordinarily complex issues. Subsection (e) provides:

§87(e) - Within 30 days of receipt of the settlement offer, the association shall notify the declarant of two business dates during the 45-day period following the date of the association's notice, the first of which will not be earlier than 10 days following the date of the association's notice, on which a majority of the executive board will be prepared to meet with the declarant to discuss the association's claims and the settlement offer. The association and the declarant may be represented at the meeting by attorneys and independent consultants.

The first sentence of subsection subsection (e) is poorly worded. This language appears to require the Association to provide two meeting dates within 45 days of its original notice to the developer of the defect claim, which would of course be absurd because by the time the developer’s settlement offer comes, those 45 days would likely have passed.

Also worth noting is that, by the time subsection (e) comes into play, the 180 day tolling period for the applicable statutes of limitation provided under subsection (b) will have run. The timing in subsection (e) above when added to time periods in other subsections will erase the 180 day tolling period. That means that the statutes of limitations on the Associations’ claims will begin to run before the arbitration process required in Section 87 makes any real headway.

In addition, the timing of the procedure up to this point in Section 87 makes no practical sense. Those experienced in construction defect litigation in community properties know that many if not most construction deficiencies in a condominium project develop slowly over a few years and do not become visible until several freeze/thaw cycles have occurred from the changing seasons have taken place. UCIOA’s procedure do not allow sufficient time for the Association to identify all of its claims before requiring negotiation between the Association and the Sponsor/Developer.

Bookmark and Share

November 27, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 4

This is part 4 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2 and 3 here.

Section 87, subsection (d)

Subsection (d) of UCIOA’s Section 87 is quite troubling. This section requires the developer to submit a written statement setting forth its proposed settlement of the Association’s construction defect claim to the Association within 60 days of the completion of its investigation into the Association’s claims as provided under subsection (c):

§87(d) - Within 60 days after completion of its inspections and testing, the declarant shall submit a written statement to the association setting forth declarant's proposed settlement of the claim, which shall be referred to as the "settlement offer." If the declarant does not deliver the settlement offer within the 60-day period, the association may institute an action without satisfying any other condition of this section.
The glaring problem with subsection (d) is that there is no requirement whatsoever that the settlement offer by the developer must be “reasonable.” In other words, a developer whose only interest is to drag the matter out and bleed the Association of its limited resources could force the Association into the alternative dispute process contained in UCIOA and then offer only $1 to settle the claim. There is no provision that allows the Association to get out of this mandated process in the event the developer reveals its bad faith in this fashion. The Association, after obviously rejecting that offer, would still be obligated to continue on with the arbitration proceedings even with the knowledge that the developer was acting in bad faith.

In addition, it is extremely troubling that the statute makes no effort to include the Sponsor/Developer’s insurance carriers in the settlement process. Given that most Sponsor/Developers are shell companies with no assets that are set up only to handle the specific project in question, a settlement offer from a Sponsor/Developer without support from its insurance carriers is in our experience often meaningless. UCIOA should mandate the involvement of the insurance carriers at the outset of the alternative dispute procedure, since in our opinion this is the only real way of giving the settlement process any hope of succeeding.

Another problem that becomes more clear here is the 180 day tolling of the statute of limitations under subsection (b) of Section 87, discussed in my previous blog post. Under subsections (c) and (d) combined, the developer has had 60 days from the date of its reply to the Association’s notice of a defect claim to conduct its investigation, and then another 60 days from the completion of its investigation to issue a settlement proposal. That is a total of 120 days of the 180 day tolling period already gone.

Bookmark and Share

November 21, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 3

This is part 3 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1 and 2 here.

Section 87, subsection (c)

Subsection (c) of Section 87 of UCIOA gives the Sponsor the right to conduct inspections and destructive testing in connection with any claimed construction defect in the community. The language of this subsection, quoted in full below, has a number of glaring problems:

§87(c) - Upon receipt of the declarant's reply, the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice. All inspections and testing, including testing that may cause physical damage to the subject property, shall be at declarant's sole cost and expense, shall be performed during the business week unless the association and declarant agree otherwise, and shall be completed within 60 days from the date of the declarant's reply. The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing. "Destructive testing" shall mean any act causing substantial physical change in the condition of the premises which would necessitate a repair to restore the premises to the condition that existed prior to the testing. The testing shall be performed to determine the existence, type, extent, or cause of a defect in the design or construction of the development. Acts of repair or maintenance by the association shall not constitute destructive testing. Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.

Problem #1 – The language of subsection (c) is vague - “the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice.”

This portion of the provision is sure to cause significant litigation as to its meaning. What exactly does the phrase “to the extent practicable” mean? An Association, despite making every possible effort to allow the developer to inspect those parts of the Association’s property that are the subject of its claims, could find itself being dragged into Court by the Developer for allegedly not making the property available “to the extent practicable.” This could result in costs to the Association that will waste valuable resources.

Problem #2 – Subsection (c) potentially allows the destruction of evidence - “The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing.”

This language discusses “destructive testing.” Subsection (c), however, completely ignores the effects, if any, of the doctrine of spoliation of evidence. The doctrine of spoliation of evidence generally provides that a party seeking to assert claims against another party cannot destroy or alter the evidence supporting the claim before giving all potentially responsible parties an opportunity to inspect the evidence in order to defend themselves against the claims. Here, the developer is given permission to conduct destructive testing, however there is no provision requiring the developer to place the subcontractors, manufacturers and design professionals it used to build the project on notice of the testing. At this stage, the developer would know the identities of those parties and the Association, more likely than not, would not have that information. Under these procedures, the Association runs the risk of a defense being asserted in later litigation by these parties who will argue that the developer destroyed evidence when it conducted invasive testing, but did not place them on notice so that they could preserve evidence in advance of that testing to defend their interests.

Another major problem arising from the “destructive testing” allowed by the statute is that there is no requirement that the developer place its insurance carrier on notice of the testing activities. In fact, there is no requirement anywhere in the statute that the developer place its insurance carrier on notice of the Association’s claims at all. The same holds true of the developer’s subcontractors’, manufacturers’ or design professionals’ insurance carriers - there is no requirement that the developer place them on notice of any claims or testing either. The developer will have likely been named as an additional insured on some of these parties’ insurance policies. The developer, therefore, will know who the applicable insurance carriers are for the project. If these carriers are not given proper notice, they will likely later disclaim coverage under their policy language, arguing that the developer and the named insureds, such as the developer’s subcontractors, violated the notice requirements of the policy, which typically require that the insured put the carrier on notice of any known claims immediately or within a short time period such as 90 days.

Problem #3 – More vague language - “Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.”

This language is sure to result in significant litigation. Anyone in the construction defect litigation field will admit, and in fact common sense dictates, that once an existing condition on a condominium structure is disturbed, be it the roof, the windows, the siding, etc., it is impossible to restore that part of the structure “to the condition that existed immediately prior to the testing.” This language does nothing more than give the unit owners in a condominium who are unhappy with the appearance of repairs to test cuts and other invasive testing that is necessary for litigation purposes a weapon to pester the Association with demands and even lawsuits over whether the Association failed to ensure that the developer properly repaired invasive testing “to the condition that existed immediately prior to the testing.”

Problem #4 - The Association has no control over repairs by the developer. The language of Subsection (c) of Section 87 provides that the developer must “repair” any invasive testing it conducts. However, the statute gives no control whatsoever to the Association as to what those repairs should be, whether those repairs are sufficient or, once performed, whether the repairs were adequate. The statute provides the Association with no avenue of redress in the event that the developer’s repair is poorly done, or for that matter not done at all.

Problem #5 – More vague language - “Acts of repair or maintenance by the association shall not constitute destructive testing.”

This language of subsection (c) to the extent it talks about “acts of repair or maintenance by the association” is undefined and unclear. What acts would constitute repair or maintenance under this language? What if repairs were necessary to a roof in a condominium and the Association, to ensure the maintenance was done properly, decided to have an expert present to observe the repairs? Does that convert the repairs to destructive testing? What if the expert happens to observe something during the repair that informs the Association of a claim against the Sponsor for the first time. Is the evidence not usable? It is clear that this language will also engender disputes and considerable litigation to flesh out its meaning, litigation that will result in considerable financial burdens to community associations.

Bookmark and Share

November 1, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 2

This is part 2 of Randy Sawyer's 16 Part series on UCIOA. You can read Part1 here.

Section 87, subsection (b)

Subsection (b) of UCIOA’s Section 87 contains the initial process of the “alternative dispute” procedure imposed upon Associations by the bill. The language is as follows:

§87(b) - Within 30 days of the receipt of the notice from the association, the declarant or its agent may send a written request to investigate the association's claim, which shall be referred to as the "declarant's reply." The declarant's reply shall include a stipulation by the declarant that all statutes of limitation applicable to any claim by the association against the declarant shall be tolled for 180 days or such shorter period of time as set forth in the cancellation notice delivered pursuant to subsection c. of this section. The tolling of the statutes of limitation shall be effective as of the date of the declarant's reply. If the declarant fails to send the declarant's reply within 30 days or fails to stipulate to the required tolling of all applicable statutes of limitation, then the association may institute an action without satisfying any other condition of this section.

Under this subsection, once the developer, called the “declarant,” has received the Association’s notice of a claim for some construction defect in the community, it has the ability to force the Association into the alternative dispute procedures outlined in Section 87 simply by sending a written request to investigate the Association’s claims (called the “declarant’s reply”), so long as the reply includes a stipulation that all applicable statutes of limitations are tolled for 180 days from the date of the reply. The tolling of applicable statutes of limitation was obviously included to create the impression that participation in the process would not jeopardize the Association’s ability to file a lawsuit in the event the process failed. The 180 day time period, however, is wholly inadequate. Anyone who is involved on a regular basis in construction defect claims arising in a community property setting knows that 180 days is far too short a time period to accomplish anything of substance. The statute should have been written to toll the applicable statutes of limitation for the entire life of the alternative dispute procedures that an Association must follow under Section 87.

The 180 time period is one of many examples in the statute that (apparently intentionally) force things to happen quickly before an Association can get its ducks in a row. The old adage “haste makes waste” comes to mind.

Moreover, the tolling provided in the statute only applies to claims against the developer. It does not apply to subcontractors, design professionals, product manufacturers and other potential defendants against whom the Association may have claims. The applicable statute of limitations for these claims would continue to run and could easily run out as to those parties while the Association waits for the alternative dispute procedures required under UCIOA to conclude. Since UCIOA does not require the Sponsor/Developer to disclose to the Association the identities of the various subcontractors, manufacturers, product distributors, design professionals and others involved in the construction of the project who may be liable for defects, the process required by UCIOA is actually very prejudicial to the Association because there is nothing stopping the Sponsor from refusing to disclose the identities of these various parties while the precious time the Association has to pursue those claims runs out during the time it takes for the mandatory procedures under UCIOA to run their course.

If you are interested in more information on this topic or have any questions, please call John Randy Sawyer, Esq. at (609) 895-7349, or email him at jsawyer@stark-stark.com

Bookmark and Share

October 23, 2006

UCIOA – A Wolf In Sheep's Clothing – Part 1

On February 23, 2006, the Uniform Common Interest Ownership Act (UCIOA) was voted out of the Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. That same day, the bill was received by the Senate and referred to the Senate Community and Urban Affairs Committee. The bill has not yet come out of consideration by the Senate Community and Urban Affairs Committee.

UCIOA has been touted by its supporters as a “first of its kind” that will help protect the rights of homeowners living within a community association, while also helping community associations operate more efficiently. The bill will purportedly consolidate various laws applicable to New Jersey's common interest communities, will provide numerous protections for owners in such communities, and will clarify the powers of community association boards. According to one of the bill’s primary sponsors, Assembly-member Wilfredo Caraballo:

“This bill . . . establishes a consistent set of board powers and limitations that will apply to all associations, thereby ending confusion over the rights of boards. Some of the issues addressed are the ability to borrow money, grant easements over the common property, and adopt rules and regulations governing certain types of negative behavior. Unit owners will benefit from this new-found clarity that addresses the powers and limitations of the homeowner association boards that are elected.

Sounds great, right? So what’s the problem? The problem is that those who live in planned communities, or are considering purchasing a home within such a community in New Jersey, should look past the rhetoric and examine the motivations behind the supporters of the bill. When one considers that organizations such as the New Jersey Association of Home Builders, large developers that build condominium and other community developments in New Jersey, and law firms that represent large developers, are all lining up to sing UCIOA’s praises, a prudent mind should question whether the bill is, in reality, a wolf in sheep’s clothing.

Stark & Stark’s Construction Litigation Department has carefully analyzed UCIOA in light of our experience handling construction litigation cases on behalf of condominium and homeowner associations throughout the State of New Jersey. Contained deep within UCIOA’s pages are two sections, Sections 87 and 88, that greatly restrict a community association’s ability, in fact its very right, to avail itself of the court system of our State to sue the builder of the community for damage caused by construction defects. What follows in this blog and several to come is a line by line analysis of Sections 87 and 88 of UCIOA with our thoughts on the vagaries of the language itself and the overall restrictive effect of these sections of the bill:

Section 87, intro paragraph

The first paragraph of UCIOA’s Section 87 establishes the requirement that the Association go through a lengthy and cumbersome “dispute resolution process,” before filing “any form” of construction defects litigation, with the following language:

§87. (New section) Except for applications for emergent relief, prior to the commencement of any form of construction defects litigation on behalf of an association against a declarant or any members of the executive board appointed by the declarant, the following alternative dispute procedure shall be followed:”

Right out of the gate Section 87 takes away an Association’s choice to file litigation against a developer for “any form of construction defects litigation” without first jumping through the hoop of an alternative dispute procedure. The language used in this intro paragraph, moreover, is apparently intentionally drafted to be as broad as possible. Specifically, the term “any form of construction defects litigation” is not defined and amounts to a significant ambiguity in the statute. Considerable litigation is sure to occur over exactly what types of claims fall within this language. Litigation community associations cannot afford. Obvious cases involving defectively constructed roofs, water penetrating through improperly installed exterior cladding, etc., may clearly fall within the category of “any form of construction defects litigation.” What is not so clear, however, is whether cases involving, for example, a breach of warranty for windows that do not meet required specifications, product liability claims for damage caused by faulty construction components such as defective pipes, roof shingles, etc., or design claims arising from improper structural designs or roof designs, also fall within the category of “any form of construction defects litigation.” Are these types of claims “construction defects” claims, or are they design defect claims, product defect claims, or something else?

If claims such as design defect claims and product defect claims are not “construction defect” claims, what happens in a case that involves both (1) claims that fall within the statute’s category of “any form of construction defects litigation,” and (2) claims that do not fall within that category? Must the Association pay for two separate, ongoing, adversarial procedures – one alternative dispute resolution procedure against the developer under UCIOA and a separate litigation against design professionals and product manufacturers in state court? The statute also makes no reference whatsoever to claims against subcontractors who worked for the developer when the community was built. Would an Association have to file a separate lawsuit against subcontractors while going through the alternative dispute resolution process with the developer outlined in UCIOA?

The expense of these approaches would likely be prohibitive to most Associations. The question is, was this intentional?

Bookmark and Share

July 9, 2006

UCIOA - Developer Transition and Arbitration

During the time the developer controls the board, it can force a transition and obtain a release through creation and manipulation of a transition committee. The developer can force that committee to do a construction study within only 120 days at the association's expense. It is our view that a comprehensive transition study cannot be done within 120 days since defects and deficiencies often do not surface until after water has had several years to work its way into or out of walls or substrates and often it takes several freeze and thaw cycles for problems to appear. Nevertheless, a release can actually be signed by this transition committee which is arguably binding on the association, before the association is even controlled by the unitowners. The developer can force this committee into mediation with the AAA, and then arguably force the association into more "non-binding" arbitration as described above. As noted above, if the non- binding arbitration is unsuccessful, the association is back to the owner- approval of litigation again. All of these costs are borne by the non-developer owners.

Bookmark and Share

July 7, 2006

Uniform Common Interest Ownership Act (UCIOA) – New Jersey

The proposed Uniform Common Interest Ownership Act (UCIOA) statute contains restrictions on any community association that wants to be able to sue a developer for construction defects and will have a devastating impact on our construction litigation practice.

On February 23, 2006 the Uniform Common Interest Ownership Act (UCIOA) was voted out of The Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. The bill will now go to the Senate for its consideration.

While the Bill was intended, in part, as a measure that would be helpful to owners of units in condominiums, cooperatives and single family home communities governed by a homeowner's association, the Bill imposes preconditions on community associations needing to bring suit for construction and design deficiencies. In pertinent part, before any association can start an action for construction defects, the association has to provide written notice to the developer of its causes of action. The developer has 30 days to investigate, and 60 days to test to see if it agrees with the association's description of the nature and cause of the deficiency. 60 days after the testing, the developer must provide a settlement offer. Within 30 days, the association has to provide at least 2 dates for a meeting. If there is no settlement, either party can demand arbitration; however, the arbitration is "non-binding". Either party can cut off the arbitration at any time or prolong it (even if it intends to reject the results of the arbitration after forcing the other side to spend tens or hundreds of thousands of dollars on expert fees and counsel fees). The Association still cannot sue unless half of its members vote in favor at a meeting, with a 33% quorum-- unless a lower amount is authorized in the by-laws (which is not typically the case) and unless each owner (even in a 500 unit condominium) gets, via mail, at the Association's cost, a copy of: (1) a statement of claims and defects; (2) the developer's settlement offer; (3) the arbitrator's findings (if any); (4) a statement that the suit may not recover enough money; (5) a statement of the estimated litigation costs; (6) a copy of the lawyer's fee agreement; (7) and anything else the Association thinks is important.

Bookmark and Share