August 8, 2013

Condominium Association Gets Big Win Against Developer for Consumer Fraud

In late 1998 Monroe Station Associates started construction on the Belmont, a seven-story, thirty-four unit condominium building in Hoboken, New Jersey. Monroe Station served as the sponsor, developer, and general contractor of the Belmont. Prior to completing construction, Monroe Station filed a Public Offering Statement (“POS”), which stated that there were no known defects in the common elements of the Belmont building that a prospective purchaser could not determine by a reasonable inspection. Attached to the POS were certain marketing materials, which provided that the potential buyers would be getting a “Proven Developer and Construction Management Team which has overseen the building and renovation of over 400 Single Family & Condominium Homes, and over 1,000,000 Sq. Ft. of Office/Commercial/Retail Development.”

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November 5, 2012

How Does Equitable Tolling Affect the Running of the Statute of Limitations?

The doctrine of equitable estoppel prevents a defendant from asserting the statute of limitations as a defense when the defendant has engaged in conduct that was calculated to mislead the plaintiff into believing that it was unnecessary to file suit. Thus, our courts have recognized that equitable estoppel may be appropriate where a defendant has lulled plaintiff into a false sense of security by representing that a claim will be amicably settled or resolved without the necessity for litigation. Such is the case when an association is engaged in settlement discussions with a developer and the developer promises to repair all identified defects and water intrusion issues in the community.

The important caveat regarding equitable tolling is that if, after the cessation of any basis for continued reliance by a plaintiff on the conduct of a defendant, there remains a reasonable time under the applicable limitations period to commence a cause of action, the action will be barred if not filed within this remaining time. Thus, while the discovery rule defers the accrual of a cause of action and provides a full six (6) years after discovery of injury and fault to file suit, equitable tolling delays the bar of the statute of limitations once a cause of action has accrued and may provide less than the full six years to file a claim if plaintiff has “a reasonable time” after the basis for equitable tolling has ceased to file under the original limitations period. What constitutes “reasonable” is not well delineated and will likely turn on the specific facts of each case.

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October 22, 2012

How the Discovery Rule Affects the Statute of Limitations

In New Jersey, construction defect claims are subject to a six-year statute of limitations, N.J.S.A. 2A:14-1, which is subject to the discovery rule, and a separate ten-year statute of absolute repose, N.J.S.A. 2A:14-1.1, after which potential causes of action no longer exist.

Under New Jersey’s discovery rule, the accrual of a cause of action is deferred until the injured person knows or should know that he has sustained an injury and knows or should know that an injury of which he is aware is attributable to the fault of another person. The discovery rule is an equitable principle by which an accrual of a cause of action is delayed until the injured party discovers, or by the exercise of reasonable diligence and intelligence, should have discovered, that he may have a basis for an actionable claim. Once the injured party knows that it has been injured and that the injury is the fault of another, it has the requisite knowledge for the period of limitations to commence running.

Put simply, for a cause of action to accrue, the injured plaintiff must have knowledge of both injury and fault. Lynch v. Rubacky, 85 N.J. 65, 70 (1981) ("the discovery rule centers upon an injured party's knowledge concerning the origin and existence of his injuries as related to the conduct of another person"). This rule applies to complex construction defect cases involving hidden construction and design defects.

Among the relevant factors in analyzing whether the discovery rule applies are the nature of the injury and the difficulties inherent in discovering it. Vispisiano v. Ashland Chem. Co., 107 N.J. 416, 428 (1987). For example, in a toxic tort case, such as that presented in Vispisiano, diagnosing a plaintiff's injury is but the first step in establishing a chain of causation. Id. at 429. The plaintiff's suspicion that he had been poisoned, after comparing his symptoms to those of a co-worker, was not sufficient to accrue a cause of action, particularly in the face of his doctors' repeatedly rejecting plaintiff's concerns that he had been poisoned while working at a chemical plant. Id. at 436.

Applying the foregoing to the condominium construction defect setting gives rise to the argument that a plaintiff association’s cause of action accrues when it receives an engineer’s report (either during transition or afterwards) that first apprises the association of the defects afflicting its buildings and the suspected causes of those defects. However, it may be the case that the requisite knowledge is obtained at an earlier date when unit owner board members learn of defects.

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October 15, 2012

Difference Between Statute of Limitations and Statute of Repose

Statutes of repose and limitations establish different types of deadlines for the assertion of claims. Statutes of repose begin to run at an identifiable time or event and allow a claim to be filed for a specific amount of time after that event has occurred. After the expiration of the repose period, no claim will be deemed to have accrued and none may be filed. A statute of repose does not function to bar an existing cause of action; rather, it prevents what might otherwise be a cause of action from ever arising. Statutes of limitations, on the other hand, commence at the time a claim accrues and run for a specified amount of time. After a claim accrues, the statute of limitations begins to run and an action may be filed until the end of the limitations period or the end of the repose period, whichever comes first.

New Jersey follows the discovery rule, which tolls the running of the statute of limitations until the time when plaintiff has or reasonable should have knowledge of injury and fault. One fundamental difference between the statute of limitations and repose is that the statute of limitations may be tolled, whereas the statute of repose cannot. In New Jersey, the statute of repose period is ten (10) years from the date of substantial completion and the statute of limitations period is six (6) years from the date of accrual of a cause of action.

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October 10, 2011

Statute of Repose: What constitutes an unsafe condition?

In complex construction defect cases, when defendants move for summary judgment based on the statute of repose, the trial court will necessarily have to determine whether or not the subject real estate is in an unsafe and defective condition. Earlier this year, the New Jersey Appellate Division decided the case of Port Imperial Condo. Ass'n, Inc. v. K. Hovnanian Port Imperial Urban Renewal, Inc., 419 N.J. Super. 459 (App. Div. 2011), which explored this very issue. The Appellate Division upheld summary judgment in favor of defendant subcontractors under the statute of repose, finding that the improvements to real property posed a real threat to the safety and well-being of the residents, resulting in an unsafe and defective condition. The Appellate Division’s analysis and reasoning in reaching that conclusion is quite instructive and relevant for future litigants bringing construction defect claims.

Port Imperial involved 445-unit residential condominium community that was completed around 2002. None of the units in Port Imperial have basements, but rather were constructed on slab foundations. As a result of unsuitable soil conditions at the site, a ground improvement plan was designed and implemented, which consisted of deep dynamic compaction that included the dropping of a heavy weight from a crane onto loose soil, the drilling of holes in the soil and installation of wick drains to allow for removal of water from the soil, and surcharging — a process of piling rock and other debris onto the soil and monitoring the rate of settlement.

Once control of the common elements shifted to the homeowners, an engineering firm was hired to evaluate the development and to prepare a report identifying any construction defects. Numerous defects were uncovered, including cracked foundations and problems with several of the units' roofs and windows, which led to filing a complaint against the developer and the design professionals alleging numerous claims, including negligence, breach of contract, breach of express and implied warranties, and fraud. During discovery, plaintiff hired a geotechnical expert who produced reports indicating that improper design and implementation of the ground improvement plan was causing settling of the soil under various units, resulting in damage to the buildings.

In deciding whether a safety hazard was present, the Appellate Division focused on whether or not the created condition prevented the improvement to real property from functioning as intended or fulfilling its intended purpose. See also, Horosz v. Alps Estates, Inc., 136 N.J. 124 (1994) (sinking house’s foundation constituted a defective and unsafe condition resulting in a safety hazard because without the appropriate underpinning repairs to prevent continued sinking of the house, the house could not function as intended). The Port Imperial court found that plaintiff’s allegations of “willful and wanton disregard for human safety” in the construction of the condominium development and contentions that the units were “unreasonably dangerous to unit owners and to personal property” coupled with expert opinions suggesting that the magnitude of the deficiencies “could be very significant” and “largely unpredictable” was sufficient to conclude an unsafe condition existed. See, e.g., Rosenberg v. North Bergen, 61 N.J. 190, 197-98 (N.J. 1972) (holding that a negligently paved road created an unsafe condition); Cnty. of Hudson v. Terminal Constr. Corp., 154 N.J. Super. 264, 267 (App. Div. 1977) (holding that negligently installed ceramic tiles that began to crumble and fall created a hazardous condition), certif. denied, 75 N.J. 605 (1978); Salesian Soc'y v. Formigli Corp., 120 N.J. Super. 493, 496 (Law Div. 1972) (holding that the leakage of water that damaged the building's support structure created an unsafe condition), aff'd o.b., 124 N.J. Super. 270 (App. Div. 1973).

Therefore, Plaintiffs have to be very conscious of the allegations they include in their complaints as well as the contentions of their experts that may deal with safety issues. The trick is to make assertions that provide a basis for damages, but do not reach the threshold of being unsafe conditions having the potential to harm persons or property.

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October 7, 2011

Statute of Repose: Subsequent Repairs

While the statute of repose applies once a contractor substantially completes his scope of work, what happens if that same contractor comes back to do punch-list items or other repairs? The answer depends on the scope of work the contractor undertakes when he comes back.

Our Supreme Court has held that when a contractor performs repairs at some date after having fully completed its initial construction work, the statute of repose begins anew and allows the injured party to file an action against that contractor within ten years of completion of the repair work for “for defects relating solely to that repair work”. Horosz v. Alps Estates, Inc., 136 N.J. 124, 133 (1994).

The statute of repose applies to improvements to real property; therefore, simple punch-list items completed after substantial completion do not extend the date of substantial completion. However, substantial repairs undertaken after substantial completion serve to create a new statute of repose period. The threshold issue will be whether the subsequent repairs constitute improvements to real property, and if so, the plaintiff will have a new statute of repose period to bring claims associated strictly with that repair work.

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October 3, 2011

Statute of Repose: Unsafe Condition

A party seeking to avoid liability by asserting the defense of the statute of repose bears the initial burden of proof that the statute bars the claims asserted. In order for the statute of repose to bar a claim against those protected by the statute, the claim must be that a defective condition exists, and that the condition has resulted in an unsafe condition.

The statute of repose provides in pertinent part that:

No action . . . arising out of the defective and unsafe condition of an improvement to real property, nor any action for contribution or indemnity for damages sustained on account of such injury, shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction.

[N.J.S.A. § 2A:14-1.1 (emphasis added).]

The statute as plainly worded applies to parties whose “professional work is functionally related to and integrated with a building plan or design, [and] which gives rise or contributes to a defective and unsafe condition.” See E.A. Williams Inc. v. Russo Development Corp., 82 N.J. 160, 169 (1980) (emphasis added).

Unlike the model Statute of Repose, New Jersey’s Statute of Repose expressly requires that a claim be barred only if it arises from deficiencies in the design, planning, supervision or construction of an improvement to real property, and relates “to a resulting condition which is itself defective and unsafe.” The New Jersey Supreme Court in E.A. Williams specifically pointed out that the Statute of Repose “does not provide that all claims against planners, and designers, including surveyors, vanish after the passage of ten years from the performance of services.” Rather, the Court expressly observed that New Jersey’s Statute of Repose “very pointedly includes . . . as a significant limiting qualification” the requirement that a condition be both defective and unsafe. To illustrate the point of this limitation, the E.A. Williams Court cited a North Carolina case involving a leaky roof as an example of a claimed defective condition that would not be barred by New Jersey’s Stature of Repose because the claim did not also involve an unsafe condition.

Our Supreme Court has specifically held that the “defective and unsafe” requirement of the statute of repose operates to limit the type of cases that fall under the statute. Thus, in determining which actions fall within the statute, a court must first determine, as a threshold issue, whether the claimed condition is one that can be classified as "defective and unsafe." The Supreme Court’s holdings in E.A. Williams, supra, and Newark Beth Israel Medical Center v. Gruzen and Partners, 124 N.J. 357 (1991), illustrate this difference.

In E.A. Williams, the New Jersey Supreme Court was confronted with the issue of whether a surveying error, resulting in improper spacing between buildings, rose to the level of a dangerous and unsafe condition. The Court found that it did not, concluding that the surveying mistake created merely a “functional impairment with consequential economic losses entailed in its correction,” a defect that may well “cause the owner dismay and economic injury.” The Court recognized that the statute’s major impetus was to limit liability of contractors and professionals, for damages from injury to persons and property, and consequences that ordinarily flow from unsafe conditions. The surveyor was not protected by the statute because a surveying error did not create a defective and unsafe condition.

In contrast, in the Newark Beth Israel case, the defendants (architects) were hired by the plaintiff (a hospital) to design an addition to the hospital. During the design phase, defendants were aware that plaintiff was planning to construct an addition to the structure. Twelve years later, when plaintiff attempted to construct an addition, it learned of structural problems with defendants’ design. The architects asserted the Statute of Repose as a defense. The Supreme Court determined that the Statute of Repose did in fact apply to bar plaintiff’s action. The Court found that even though the statute did not apply in the case of general functional impairments, the functional impairment in this case was directly related to an “unsafe condition” because additional stories made the building “dangerously” vulnerable to wind. The design created an unsafe condition that prevented the property from being used for its intended purposes. The Court distinguished its decision from E.A. Williams, by finding that safety considerations dominated.

The Newark Beth Israel Court addressed the meaning of “functional impairment” as espoused in E.A. Williams, and held that “[e]very defective and unsafe condition will impair a building functionally, in that one cannot use it if it is unsafe. The converse however, is not necessarily true – every functional impairment does not necessarily carry with it an unsafe and defective condition.” In the Court’s view, “expensive and inconvenient changes based on efficiency” were deemed insufficient to trigger the Statute of Repose.

In 2002, our Appellate Division reiterated that a threshold determination must be made as to whether the Statute of Repose applies to a claim against a party seeking the statute’s protection. The Court in Diana v. Russo Development Corp., 352 N.J. Super. 146 (App. Div. 2002), a case involving a worker that was killed at a construction site after falling from a ladder, reiterated the concept that “if the plaintiff cites a particular defect or error that does not constitute an unsafe condition, the statute does not apply”.

Therefore, Plaintiffs have to be very conscious about the allegations they make in construction defect cases because there is a fine line between asserting damages and creating a foundation for the application of the statute of repose.

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September 21, 2011

Statute of Repose: Substantial Completion

In New Jersey, in addition to the statute of limitations, litigants need to be conscious of the statute of repose as well. Statute of repose issues most often arise in the construction defect setting where suit is brought more than ten years after the construction of the subject building or development.

The Statute of Repose provides, in relevant part, that:

[n]o action ... to recover damages for any deficiency in the design, ... or construction of an improvement to real property, ... shall be brought against any person performing or furnishing the design, ... or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction.

[N.J.S.A. § 2A:14-1.1.]

New Jersey courts have explained that in an important respect, a statute of repose is unlike the typical statute of limitations because the time within which suit may be brought under the statute of repose is entirely unrelated to the accrual of any cause of action. Unlike a statute of limitations, the statute of repose “does not bar a cause of action; its effect, rather, is to prevent what might otherwise be a cause of action from ever arising. For that reason, injury occurring more than ten years after the negligent act allegedly responsible for the harm forms no basis for recovery.

Notably, the statute requires that the complaint be filed within ten years after the completion of the work done. In reviewing the history of the statute and the reasons behind it, New Jersey courts have determined that the Legislature most likely meant that when a person rendered any construction-related services on a particular job, finished them and walked away from the job-site with the work accepted, that person could look back ten years and one day “after the performance or furnishing of such services and construction,” and know there was repose from liability. Welch v. Engineers, Inc., 202 N.J. Super. 387, 396 (App. Div. 1985). The Welch court went on to conclude that the Legislature did not intend to let repose turn on serial cut-off dates accruing through various stages of the work, turning on fact-sensitive determinations and various analytic approaches to construction staging. The Court fashioned a clear and simple rule for determining when the statute of repose starts to run against a contractor who performed work on a project: the date when the ten-year time-bar matures under the statute of repose and the period of repose begins must be measured from the final date the person claiming repose and immunity from suit furnishes any and all services or construction which it has undertaken at the job site.

The Welch court specifically rejected the parsing of work in order to make the statute of repose applicable to various parts or stages of work by stating that it did not condone a piece-meal concept of repose where the contractor is involved in multiple phases of the undertaking.

The importance of prohibiting piece-meal application of the statute of repose cannot be understated. Should it be allowed, contractors would overwhelm courts and plaintiffs with motions seeking to definitively parse their work into those items that were completed more than ten-years before the date of the complaint and those that were completed after. In many instances, there are conflicting construction documents and lack of evidence to allow for an accurate division. Moreover, that difficulty is compounded in those instances where an item, such as a balcony or lake, is partially constructed at the ten-year relation back date. The door would be opened for contractors to argue down to the nail what portion of a partially constructed item should be excluded from plaintiff’s case by operation of the statute of repose.

Luckily, that is not the state of the law and substantial completion is determined by the date upon which a contractor can leave the job site with all of his responsibilities completed. See, e.g., Daidone v. Buterick Bulkheading, 191 N.J. 557 (2007) (if the contractor has no further functions to perform in respect of that construction project, then the start date for Statute of Repose purposes is the date on which the contractor has completed his or her portion of the work); Hopkins v. Fox & Lazo Realtors, 242 N.J. Super. 320, 328 (App. Div. 1990) (the ten-year Statute of Repose commences “when the architect or contractor completes its task with respect to the property involved in the claim”).

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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.

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July 16, 2010

Stark & Stark Attorneys Obtain $1,200,000 Settlement for Bergen County Condominium in Construction Defect Case

Stark & Stark attorneys, Mark M. Wiechnik, David J. Byrne and Thomas J. Pryor have obtained a $1.2 million settlement for a condominium located in Bergen County, New Jersey after experiencing roof leaks, window deficiencies and other construction related issues. These problems began shortly after the unit owners were elected to the Board of Directors of the Association.

You can read more on the case here.

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April 16, 2009

Expansion of the New Jersey Consumer Fraud Act

The New Jersey Supreme Court announced a sweeping expansion of the NJ Consumer Fraud Act, N.J.S.A. 56:8-2 ("CFA"), to include work done by contractors performing interior work on new construction. In Czar Inc. Heath, A-114-07, decided 3/13/09, the Supreme Court ruled 6-1 that new homeowners who act as their own general contractors for interior finish work have a right to assert claims under the CFA against the Czar, Inc ("Czar"), the subcontractor responsible for doing installation of kitchen cabinets, doors, chair railing and other interior finishes.

The owners of the home were unhappy with the subcontractor's work and withheld $80,000 from the bill. When they were sued by the subcontractor, the owners counterclaimed based on, among other things, violations of the CFA. Czar moved to dismiss the CFA claim arguing that HOW and its implementing regulations specifically exclude application of the CFA because this case involved "construction of a new residence" . The trial court agreed and dismissed the CFA claim.

The Appellate Division reversed the trial court holding that the exemption for construction of a new residence in the home improvement regulations under HOW did not apply to the work of the subcontractor. The Appellate Division panel reviewed the Contractor's Registration Act ("CRA") and noted that it regulates contractors who are involved in the home improvement business. The CRA exempts from its reach any person who is required to register under the New Home Warranty and Builder's Registration Act ("HOW") and who were already subject to a registration requirement. The Appellate Division reconciled the regulatory schemes set forth in the CRA and HOW, noting that HOW created a warranty program and an election of remedies by the homeowner. By contrast, instead of requiring warranties, CRA requires insurance and disclosures and, through its implementing regulations, defines unlawful practices which are punishable under the CFA.

The Court noted that Czar had not registered as a new home builder under HOW and had not provided the required warranties. The Court refused to allow Czar to simultaneously escape the requirements for the warranty under HOW while also escaping from the registration requirements of the CRA and the remedies afforded to consumers protected by the CRA. Essentially, the Court declined to allow Czar to have its cake and eat it too. Since Czar did not register as a builder of new homes under HOW, the Court rejected its argument that it was involved in building new homes. Czar therefore did not fall within the ambit of HOW, was not entitled to the safe harbor of the exclusion for new home builders and was subject to the CFA.

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July 17, 2008

Claims may exist under Consumer Fraud Act whether or not direct contact occurred between consumer and violator of Act

Matera et. al. v. M.G.C.C. Group, Inc. et. al., Docket No. L-1812-04


Judge Louis Locascio of the New Jersey Superior Court recently ruled in the matter of Matera et. al. v. M.G.C.C. Group, Inc. et. al., Docket No. L-1812-04, that a cause of action under New Jersey’s Consumer Fraud Act exists where there is no direct contact between the parties but there is a connection between the defendants’ “alleged violation of the Consumer Fraud Act and plaintiff’s ascertainable loss.”


The Plaintiffs, homeowners who purchased homes in a development called Crystal Creek Estates, argued that the defendant Bank of America (“BOA”) had concealed information and made misrepresentations to its purchaser, Defendant Developer M.G.C.C. Group, Inc., and to the Howell Township Planning Board, in order to gain approval for constructing the final phase of Crystal Creek Estates, known as Section III. The Plaintiffs all bought homes within Section II of Crystal Creek Estates and began experiencing flooding in their basements and back yards after defendant M.G.C.C. Group, Inc. constructed Section III of the development.


BOA, as the successor to the original financier of the project, took title to two undeveloped lots in Section II and all of the undeveloped lots in Section III of the Crystal Creek Estates development. BOA obtained approvals for the construction of Section III of Crystal Creek Estates from the Howell Township Planning Board before selling the land to Developer M.G.C.C. Group, Inc. In obtaining those approvals, BOA failed to disclose to either the Howell Township Planning Board or M.G.C.C. Group, Inc. that BOA knew about serious drainage problems that would occur in Section II of the development if Section III was constructed as planned and approved. BOA also knew but concealed that Section II of the development would have to be re-graded in order to deal with excessive drainage to the section caused by the planned construction of Section III, and that an engineer had provided BOA with an opinion that there were serious drainage issues between the two sections.


Judge Locascio found that BOA’s misrepresentations and omissions were not only made directly to the Howell Township Planning Board, but were also “intended to be conveyed to the buyer” (defendant M.G.C.C.), because obtaining planning board approval “was necessary to complete the real estate transaction with defendant M.G.C.C.” Id. at 5. The Judge concluded, therefore, that BOA’s misrepresentations and omissions were “in connection with the sale of real estate,” a requirement for application of the Consumer Fraud Act.


The Judge then went on to find that a “causal nexus” existed between the Plaintiffs’ damages and BOA’s misrepresentations and omissions to M.G.C.C. Group and the planning board. Noting that the Consumer Fraud Act does not require privity between a defendant and a consumer, Judge Locascio concluded that the Plaintiffs did not need to be directly exposed to BOA’s misrepresentations and omissions because the Consumer Fraud Act states that a violator of the Act “is liable for any misrepresentations whether ‘any person has in fact been misled, deceived, or damaged thereby’ ... [the Act] did not say any party.” Id. at 6 to 8 (emphasis in original). The Judge found, therefore, that because BOA’s misrepresentations to the planning board and to M.G.C.C. Group ultimately damaged the Plaintiffs, there existed “a causal nexus” between BOA’s violation of the Consumer Fraud Act and the Plaintiff’s “ascertainable losses.” The Judge reasoned that if BOA “did not misrepresent facts to the Howell Township Planning Board, the planning board would not have granted the letter of compliance and section III would not have been built, or in the alternative, the drainage problems would have been corrected before the letter of compliance was granted.” Id. at 9. “Under either scenario, plaintiffs’ properties would not have been flooded.” Ibid. Therefore, it is “proper to hold BOA liable for the damages under the Consumer Fraud Act even though BOA had no contact with plaintiffs.” Ibid.


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

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March 25, 2008

$5 Million Verdict In Favor Of New Jersey Residential High-Rise Building

On March 11, 2008, in the matter of Camelot Condominium Association, Inc v. Dryvit Systems, Inc., pending before the Superior Court of New jersey, Docket No. BER-L-012457-04, a jury entered a verdict in favor of the Plaintiff and against Dryvit Systems, Inc ("Dryvit") for violations of the New Jersey Consumer Fraud Act. Dryvit Systems is the largest manufacturer of Exterior Insulation and Finish Systems for residential and commercial construction in the United States.


With settlements the Plaintiff obtained before and during trial from other defendants, the total irecovery for the Plaintiff following the jury verdict was $5,046,000.


The case involved a joint repair project done in 1998 on what was then a 16 year old high rise building clad with roughly 300 panels coated with Dryvit's EIFS. The jury returned a verdict that charged Dryvit with knowledge that the Dryvit EIFS finish coating on the buildng's exterior panels softened when exposed to substantial water penetration. That softening caused cohesive failures at critical caulk joints, which resulted in openings for water to penetrate inside the building and cause catastrophic damage to the framing and sheathing on the building.


The jury found that Dryvit made knowing omissions and affirmative misrepresentations of material fact in connection with the repair of the Exterior Insulation and Finish System (EIFS) on the building located in Hackensack, New Jersey. This is the first time in New Jersey that an EIFS manufacturer has been subjected to a jury verdict for violations of the New Jersey Consumer Fraud Act. There will be no appeal.


John Randy Sawyer and Donald B. Brenner Shareholders of Stark & Stark’s Construction Litigation group represented the Plaintiff in the case.

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September 26, 2007

District Court Defines "Residential Construction"

As the real estate market contracts, contractors, subcontractors and suppliers with unpaid balances will need to protect their interests by, among other things, taking advantage of applicable lien laws. In construing New Jersey’s lien laws, definitions of “residential” and “commercial” construction have long been considered by many to be a gray area.

The Bankruptcy Court for the District of New Jersey recently addressed the distinction. It held that agreements with general contractors or developers in which contractors, subcontractors, and suppliers agree to provide work, services, material or equipment to large-scale residential developments are residential construction contracts. In re: Kara Homes, ____ F.Supp. _____ (D.N.J. August 29, 2007).This means that such contractors, subcontractors and suppliers must follow the more complex provisions applicable to residential construction contracts when they wish to secure an unpaid balance with a construction lien.

In New Jersey, the Construction Lien Law (“CLL”) (N.J.S.A. 2A:44A-1 et seq.) distinguishes residential construction contracts from construction contracts that are commercial in nature. The CLL defines a residential construction contract as

any written contract for the construction or improvement to a one- or two-family dwelling, or any portion of a dwelling, which shall include any residential unit in a condominium subject to the provisions of P.L.1969, c. 257 (C.46:8B-1 et seq.), any residential unit in a housing cooperative , any residential unit included in a fee simple townhouse development, any residential unit contained in a horizontal property regime as defined in section 2 of P.L.1963, c. 168 (C. 46:8A-2), and any residential unit contained in a planned unit development as defined in section 3.3 of P.L.1975, c.291 (C. 40:55D-6).

N.J.S.A. 2A:44A-2.

No lien shall attach for work, services, material or equipment provided as part of a residential construction contract unless the provider strictly complies with the requirements of N.J.S.A. 2A:44A-20 and 21, which impose additional requirements for liens filed on residential construction. N.J.S.A. 2A:44A-5c. The Legislature premised the additional requirements for perfecting liens on residential construction on the need to preserve and enhance the State’s economy, promote a stable marketplace in which families can purchase homes with expedience and certainty, allow lending institutions to conduct their business in a stable environment. N.J.S.A. 2A:44A-21a.

The defendants in Kara Homes, which were various contractors and subcontractors of Kara Homes and/or one or more of its affiliated entities, contended that contracts relating to construction of numerous homes within Kara’s developments were not residential construction contracts in that Kara’s construction of homes for resale was commercial in nature and in that the scope of Kara’s developments exceeded the “one- or two-family dwelling” that was the target of the additional lien-filing requirements. Kara Homes and its affiliates argued that, because the developments were residential, their contractors and subcontractors needed to have strictly followed the provisions of N.J.S.A. 2A:44A-20 and 21 for a valid lien claim to have been filed and perfected.

After observing of the few available unpublished cases considering the question “that the issue of whether a large scale construction project is residential or commercial in nature is unsettled and the analysis arbitrary,” the Bankruptcy Court concluded that the literal language of the statute was not dispositive of its intended scope. In light of the legislative purpose articulated in N.J.S.A. 2A:44A-21a, said the court, large scale residential projects must be included among residential construction contracts. Accordingly, contractors, subcontractors and supplier should be careful to observe the additional requirements applicable to residential construction contracts when working on large scale developments.

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September 12, 2007

Construction Defect Case Frequent Claim

A component product’s failure to perform as represented by its manufacturer is a frequent claim in a construction defect cases. Often, defendants of such claims attempt to hide behind general disclaimers and limitations of warranty. Addressing the failure of a component product of yachts, the Federal Court for the New Jersey District recently denied a manufacturer’s summary judgment motion, having concluded that a general disclaimer of warranty will not automatically defeat an express warranty created by representations, descriptions and affirmations set forth in a product bulletin. Viking Yacht Co. v. Composites One LLC, ___ F. Supp.2d ___, 2007 WL 2153243 (D.N.J. July 26, 2007).

Defendant’s distributor sold the plaintiffs, two New Jersey yacht manufacturers, the gel coat used as the outermost surface of the yachts. Gel coat provides an attractive finish while protecting the yacht from water and other materials. Prior to their purchase of gel coat, defendant provided the plaintiffs with its literature for the product, touting its improved flexibility and weather resistance, as compared to a prior gel coat that plaintiffs had purchased from defendant. The literature included a descriptions of the gel coat’s characteristics, a product bulletin, and test data supporting defendant’s claims that the new product was an improvement over the old. Defendant also provided a limited warranty that the gel coat met specifications when shipped as well as a general disclaimer and limitation of warranty, stating that a buyer’s exclusive remedy was replacement of the product or refund of the purchase price.

Plaintiffs conceded that they had not purchased the gel coat based on its improved flexibility. Instead, each tried the new product, hoping that it would demonstrate better “buffback qualities” than the earlier product. Unfortunately, both plaintiffs discovered that the new gel coat cracked extensively on boats that were stored or used in cold weather. Plaintiffs sued defendant, alleging that it new of the gel coat’s inherent problems and failed to disclose them. Defendant replied that it had been unaware that the product was subject to cracking, that the cracking could have been attributable to the plaintiff’s errors in using the gel coat, and that, under the limited warranty, it was not liable for plaintiffs’ damages.

The court disagreed with defendant. Governed by the Uniform Commercial Code, express warranties arise whenever a seller states a fact or makes a promise about the goods becomes part of the basis of the bargain or whenever the seller’s description of the product, specification list, expression of a standard, representation of quality, or provision of a sample or exemplar is a basis of the bargain. A disclaimer of such an express warranty may only be effective if it is “clear and conspicuous,” and written so that “a reasonable person against whom it is to operate ought to have noticed it.” And even if the disclaimer is clear and conspicuous, it will not be found effective to the extent that it is inconsistent with express warranties extended by the seller. Here, the properties of the gel coat were trumpeted on the first page of a flyer while the limitation of warranty was buried within it. Accordingly, the court declined to grant summary judgment to defendant based on its disclaimer and limited warranty.

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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.

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June 29, 2007

To determine who is responsible for repair or replacement, read your documents

In an unpublished case addressing a peculiar repair, the Appellate Division recently reiterated one of the basics of common interest ownership: When in doubt, read your documents. Waldstein v. Highview at Hawthorne Ass’n, Inc., A-2281-05T1 (June 12, 2007).

Shortly after purchasing their town home as a resale in 2003, Plaintiffs Jay and Kathleen Waldstein discovered a broken sewer pipe was leaking water and sewage below the concrete slab that formed the lowest floor of their town home. Further investigation revealed that the pipe had ruptured when the slab failed as a result of a construction defect: the interior foundation of the home had never been built. Plaintiffs repaired the sewer pipe and rebuilt the floor slab, then requested reimbursement from the Homeowners’ Association.

After the Association declined payment, the plaintiffs brought a declaratory judgment action, asking the court to determine that the Association was responsible for the cost of the repairs and to award them fees and costs. The trial judge declined to do so, finding that, the Declaration of Covenants and Restrictions applicable to the development included no provision making the Association responsible for such a repair. On appeal, the Appellate Division agreed.

Plaintiffs relied on a provision of the Declaration that reads as follow:

Each townhouse Owner, by acceptance of ownership, agrees and covenants that if his townhouse, including any party walls, shall be fully or partially destroyed by fire or otherwise, the Association shall reconstruct said townhouse expeditiously, pursuant to plans approved by the Board of Trustees. Any such reconstruction shall be subject to all other applicable provisions of this Declaration and applicable governmental regulations.

Plaintiffs also pointed out Declaration provisions requiring the Association and the Owners to carry fire and casualty insurance as well as extended coverage.

The appellate judges rejected Plaintiff’s argument, limiting the Association’s responsibility to reconstruct under the cited provision to situations in which a townhouse is fully or partially destroyed by fire or similar casualty. Because Plaintiff’s repairs were necessitated by defective construction, the Association was not required to repair or reconstruct.

The court also rejected Plaintiff’s alternative argument that the Association was required to reimburse them since it maintained a reserve account for repair, replacement and improvement. Analyzing the Declaration as a whole, the judges concluded that the reserves were explicitly intended to fund repair, replacement and improvement of common property and the exteriors of the townhouses. No provision required the Association to fund the repair and reconstruction of an interior structural flaw in a town home, caused by a construction defect.

Finally, the court rejected Plaintiff’s argument that an easement provision granting the Association the right to enter a town home to repair breaks of leakage in the water, sewer or sprinkler systems that threaten damage to common property obligated the Association to reimburse them, finding that no evidence suggested that the leak below Plaintiff’s town home threatened the common property in any way.

The Waldsteins’ futile attempt to pass their repair bills on the Association is another reminder that no one formula sets forth responsibility for repairs and maintenance in common-interest communities. New Jersey law permits sponsors and developers great flexibility in designing the maintenance provisions of their communities, and the many variations in governing documents reflect factors such as marketing decisions, architectural requirements, and site anomalies, among others. Careful reading and analysis of the governing documents, that is, the Declaration or Master Deed, is always the first step in determining responsibilities for performing and paying for repairs.

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January 22, 2007

Selecting the Consulting or Litigation Expert

There are two classes of experts: consulting experts who will not be testifying at trial and trial experts whose testimony you do intend to rely upon. All documents and oral communications exchanged between counsel and the consulting expert are generally privileged --except in rare instances where the opposing party can show a hardship that justifies allowing the consulting expert's files to be discovered or that allows the consulting expert to be deposed. That would only happen in a situation where the opposing party could show that there was no other way that he/she could get anyone else to offer an opinion on the same issue--for example, because the evidence was destroyed. In New Jersey, discovery is allowed into the documents and oral communications between the testifying expert and counsel to the extent, in formulating his or her opinion, that the expert relied upon any information exchanged or communicated between them. This distinction is important because counsel's communications with consulting experts--even those that lead to the development of opinions harmful to the case--are not discoverable. This gives counsel the freedom to be aggressive in speaking with prospective experts so that counsel can find the expert best suited to the case.

There are many factors to consider in hiring an expert. The nature and value of the claim, the factual background of the matter from which the claim arises, and the scope and timing of the work must be considered. The credentials and experience of the expert must also be considered since the fees charged by the expert usually are a direct reflection of those factors. You must also decide whether the expert is going to be a consulting expert or an expert who will be testifying at trial. This is a particularly important consideration given the privilege that attaches to communications between the attorney and the consulting expert.

Some or all construction and design claims may involve extremely complex factual or technical issues. The entire case may rise or fall on the quality of the experts selected to handle the claims in issue. Extraordinary care must therefore be given to the entire process of finding and hiring consulting and testifying experts. The initial expert retained by the client may be an architect or engineer with broad experience in areas of design or construction. As counsel's investigation continues with the assistance of the consulting expert, it may be necessary to bring in additional experts who have specific expertise in particular areas. The amount in controversy will often have a major impact on this process. If the case is a construction and design defect case involving water infiltration from roofs, windows and siding, and claims relating to improper design of a sea wall, and deficient construction of the fire suppression systems in a large condominium, and the amount in controversy is $5 million, it may make sense to engage an expert with particular expertise in handling just the roofs, windows and siding, a different expert with particular expertise in sea wall design /construction issues and yet another expert with particular expertise in design/construction of the type of fire suppression system involved in the case. Counsel may also wish to hire yet another expert with substantial expertise in cost-estimating to compile the damages report.

As a general matter, it is advisable to make sure that your experts have experience testifying in depositions and at trial. That is a very different experience for most experts. No matter how well educated and experienced an expert may be, it is not unusual for an expert who has never testified before to look tentative, become defensive or combative or otherwise have difficulty under cross -examination by skilled counsel. If the claim is worth bringing, and it is substantial enough for the client to incur the expense of hiring an expert, then it is worth the time and trouble to make sure that, in the interview process, due consideration is given to making sure that the prospective expert has testimonial experience. These considerations all need to be thoroughly reviewed with the client before these decisions are made.

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January 18, 2007

Use of Experts in Construction Litigation

Construction litigation requires the use of experts in many contexts. For example, a typical project starts with the "design phase" in which civil engineers, geotechnical engineers, hydrologists, environmental engineers, surveyors and architects are involved in shaping the contours and features of the project design. The design phase is followed by the "construction phase" in which numerous design professionals are involved. These include, among others, architects, structural, mechanical and electrical engineers, among others. All of these design professionals must coordinate their activities with those of the general contractor and subcontractors.

Design professionals also have to be careful to make sure that materials specified for the project are fit for their intended purposes and will not cause or exacerbate construction deficiencies. Many construction materials become code compliant as alternate materials under the building code and their manufacturer's installation specifications become the standard for Code compliance. Communication with the manufacturer or distributor becomes very important in determining whether materials can be used on a particular project.

Assuming litigation ensues after design or construction defects are found, experts will almost certainly be required to render reports and testify at depositions and at trial. Counsel will also need to consult with experts during various stages of the case. Typical issues that may require use of expert testimony or require counsel to consult with experts include, among many others:

1. whether work was performed deficiently;

2. Whether materials were defective;

3. whether certain work was within the scope of work of a particular contract;

4. whether the work of a contractor conformed to the scope of work in the contract;

5. whether the design or workmanship was deficient or the materials were defective, or some combination of the three;

6. the applicable standard of care governing that work;

7. Whether there were delays that are actionable;

8. the cause of the deficiency or defect;

9. the damages flowing from delays or deficient workmanship or materials;

10. what needs to be done to repair the defective materials or deficient workmanship.

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January 16, 2007

Depositions

Depositions are a critically important part of the plaintiff's strategy. They enable the plaintiff to bring out facts that trigger insurance coverage. They also enable the plaintiff to obtain testimony that, among other things: (a) authenticates important documents; (b) lays foundations for other testimony; (c) provides fodder for impeachment of witnesses at trial; (d) gives plaintiff the opportunity to create a record that can be used to defeat summary judgment motions at the close of discovery and to support the opinions of its expert; and, (e) most importantly, enables the plaintiff to sustain its burden of proof at trial. We often spend months preparing for depositions of important witnesses such as project managers, design professionals and product manufacturers, since those depositions can be of seminal importance. A great deal of thought, preparation, experience and skill is required in planning and executing your deposition strategy because those depositions—properly done—set up the entire case.

The Stark & Stark Construction Litigation Group spends substantial amounts of time and money doing intensive investigations of non-parties and their documents. Disgruntled former employees, competitors and municipal officials can be a fountain of useful information. In addition, representatives of manufacturers of materials that were used on the project often do site inspections that result in interesting meetings, letters, e-mail and other documents that can be extremely useful at trial. Counsel should do plenty of thinking about discovery strategy, because it can turn a valuable case into a gold mine if properly conceived and executed.

We are amazed at the lack of knowledge of many project managers and superintendents we depose. These project managers and their subordinates are entrusted with supervising the work of hundreds of people costing tens of millions of dollars. We typically prepare by learning every nuance of the details and specifications governing the issues in the case. We spend quite a bit of time mastering those details and specifications because we have learned over time that the project managers and their subordinate superintendents typically do not have much understanding of those details and specifications. Devastating testimony can be developed by going through those details and specifications with the project manager and his subordinates. The obvious goal is to elicit testimony from then that enables counsel to put on testimony at trial raising the question: how can you possibly evaluate the acceptability of the work of the subcontractors in a competent way if you do not understand what they were supposed to do?

One final example is worth describing. You never know where your next bombshell is going to come from. That is why we try to talk to as many people who worked the project as possible. We spend a great deal of time and money tracking down missing subcontractors –especially those who are out of business and may have a good story to tell. Disgruntled former employees and subcontractors are a veritable fountain of valuable information about what transpired on a job. We have taken depositions where disaffected subcontractors who were not paid a few thousand dollars and were thrown off the job come back years later at depositions and do enormous harm to the developer-general contractor. For example, in one particular instance, the now- defunct subcontractor responsible for applying the roofs to a series of condominium buildings was upset because he did not get paid his last $20,000 of a contract worth over $1 million. When asked why he did not follow the manufacturer’s installation specifications for installation of ice and water shield and why he failed to use ventilated, pressure treated stirrups to attach the concrete roof tiles, he threw the project manager under the proverbial bus with great enthusiasm. He testified that he pointed out the details and specifications of the roof tile manufacturer to the project manager but the project manager told him to ignore them because the builder did not want to spend the money for these details. He even went so far as to get his ex-wife, who held the defunct company’s records–to give us documents he had that we used to help support his story. The carriers for the roofer and the general contractor eventually threw in their full policies to settle the claims.

It takes years of experience to be able to effectively handle a complex construction litigation case involving claims arising from design defects and /or construction deficiencies. These cases are an interesting challenge and a great deal of fun to handle. There is nothing quite like being the plaintiff representing completely innocent, totally victimized clients in a complex case involving tens of millions of dollars in claims and appearing at depositions, court hearings and trial with 50 or more lawyers arrayed against you. The fact that your clients had nothing to do with creating any of the construction n deficiencies and design defects in question gives you a powerful moral and legal advantage over the defendants. Careful thought, planning, preparation, use of the right experts, and lots of hard work and hopefully some good luck can get you a result that is emotionally fulfilling and financially rewarding for both your client and your firm

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January 12, 2007

Plan Ahead: Have a Strategy

Joining parties in a complex construction litigation case involving millions of dollars of damages is not to be done lightly. If counsel is not careful, it is easy to wind up with 50 or more parties, each of whom has to be served with every pleading, motion, letter, discovery request, expert report and everything else that is sent out in the litigation. This can cost tens–sometimes hundreds-- of thousands of dollars each year that the case continues.

If a party is going to be joined, careful thought must be given to what it will cost to add that party, and what recovery is likely to be obtained. We have seen complex cases where a party is joined because of a relatively small claim. That party then files a third party complaint, and brings in two other parties seeking contribution or indemnification. The three of them get involved in a series of disputes about who did what on the project. Each party serves extensive discovery requests on the plaintiff and on each other. Experts have to be hired for each party and site inspections have to be arranged. By the time everyone gets done with all of that work, the amount to be recovered has been dwarfed by the amount of attorney's and expert fees and costs expended. This causes aggravation and delay for all involved and in the end, no one is happy with the outcome. Thus, even if the plaintiff has a perfectly valid claim, careful consideration has to be given to whether it is economically sensible to assert that claim.

Generally, experienced counsel knows that you follow the money in a construction litigation case. Common sense dictates that you assert and spend most of your time on the most valuable claims. You must make sure that you have a good understanding of insurance coverage issues, as well as the best experts you can find. Care has to be taken to plead your claims in such a way as to make it as likely as possible that the insurance carriers will refrain from disclaiming insurance coverage. For example, you will want to try to frame your pleadings to describe negligent rather than intentional conduct. Typically, CGL policies exclude claims for intentional conduct but cover negligent conduct. In a similar vein, counsel will want to carefully consider whether he/she wants to plead fraud claims because they involve proof of intentional conduct that is beyond the scope of CGL policies.

Once the initial investigation and preparation of pleadings is complete, counsel has to assimilate the documents and interrogatory answers, and then get ready for depositions. This is the most important part of discovery because you are getting answers directly from the witness without counsel coloring the answer as typically occurs when interrogatories are answered by counsel and then affirmed by the client.

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January 10, 2007

Who Do You Sue?

Generally, in determining who to sue and what claims to make, Stark & Stark's Construction Litigation Group is guided by our client’s knowledge of the history of the project, our experts and by our experience. We also review whatever documents are available and make reasoned judgments as to who to join in the original complaint. It is especially helpful to have the original as built plans, the records of the construction office of the local municipality, and any other local, state and federal agencies who may have played any role in approving the design of the development or project in question. We understand that we are going to have to amend the complaint—probably several times—until we have all parties joined who belong in the case.

We start with the developer and general contractor, and then add any subcontractors whose identities are known to us and who we have a good faith reason to believe have liability for the defects in question. If there are any defective products, we try to determine who the manufacturer and distributor are so we can join them to the suit. We frequently ask the developer-general contractor for a list of responsible subcontractors. They are usually willing to provide this information, since the developer-general contractor is typically looking to be indemnified by these subcontractors and design professionals anyway under the terms of the contracts between them or under state law.

Once the complaint is filed, we serve extensive requests for documents relating to, among other things, the approvals, design, construction and inspection of the project, insurance coverage and any deficiencies discovered or complaints by any unitowners, homeowners or other buyers or residents. We also serve written interrogatories on all parties to elicit important information such as: (a) who did what in connection with the project; (b) who supplied the materials in question; (c) who inspected the work; (d) what changes were made in the work; (e) what problems arose during the project; (f) what payments were made for the work or materials in question; and (g) what disputes arose during or after the project. After several months of discovery, we can usually identify most of the important players. We do additional amendments of the complaint as go forward and identify other responsible parties, such as subcontractors of subcontractors and repair contractors who may have come in after the job was well under way to fix someone else’s deficient work and thereby exacerbated already deficient work.

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January 8, 2007

Avoiding Trouble: Spoliation of Evidence

When engineering work is being done, careful consideration must be given to the doctrine of spoliation of evidence. This is a doctrine that says that before any repair work or invasive testing is done that substantially affects the original condition of the property in question, fair notice must be given to any person who may have an interest in that work. Failure to give fair notice in advance of the work can mean that the plaintiff doing the work can have its proofs barred at trial.

The point of the spoliation of evidence doctrine is to make sure that contractors, material suppliers, design professionals and anyone else who may eventually be sued for design or construction-related claims has adequate notice and a fair opportunity to view the existing "as- built" condition of the property before any repairs or major invasive testing are done. The theory is that if such a person is deprived of the opportunity to inspect the as- built condition of the property, the person is essentially deprived of the ability to mount an effective defense, or to make claims against third parties it believes is responsible for the loss. Notice should be given if the property is about to be repaired; it may also be necessary if extensive invasive testing is going to be done.

For example, if you have a client who is going to demolish extensive portions of one side of a building to see what the condition of the sheathing or framing is, or to observe and document mold conditions, then notice should be given. If your expert is just going to do some small test cuts of the exterior cladding, then notice probably does not have to be given, since you are not affecting the ability of the defense experts to either re-open the test cuts done by your expert or do test cuts of their own.

Giving notice is a judgment call for counsel. The Stark & Stark Construction Litigation Group recommends that counsel err on the side of caution and give as much notice to as many people as possible. For example, we do a lot of cases involving deficient installation of building envelopes. We often have no idea who the manufacturer of the defective exterior cladding is. Before we allow our clients to tear off the cladding and fix their buildings, we give notice to every product manufacturer and distributor we can think of. We also ask the developer or general contractor to give written notice to all contractors and design professionals who worked on the project. By being as expansive as possible, you limit your exposure to the spoliation of evidence defense.

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January 4, 2007

The Importance of Experts

Another important consideration is whether the association is going to be willing to hire and pay for the qualified experts necessary to win the case. You can have a great case, but if you have the wrong expert, it can quickly turn into a disaster. The best way to avoid this problem is for counsel to give the client a thorough and honest estimate of what the case will cost and what the timing of the case will likely be. What does counsel base this assessment on?

Many lawyers file suit based upon transition engineering reports. These reports are often perfunctory, and were done just to give the association a general idea of what issues might be of concern. Many explicitly state that no invasive testing was done and that additional investigations are needed.

We like to get as much engineering work done as possible before the complaint is filed, so that we have a good understanding of the strengths of the case. For that reason, we prefer to hire experts who we will rely upon at trial to do a thorough investigation of whatever defects have been identified or are suspected. These investigations involve extensive test cuts and as many photos as are needed to properly document conditions. They can take weeks to complete and can result in extensive reports that cost tens of thousands of dollars or more. Counsel has to use good judgment on a case-by-case basis to guide the client as to what level of engineering work is needed or appropriate before the complaint is filed.. Generally, the more complex the issues, the more detailed the investigation will have to be. For example, if the case involves roof claims on 45 buildings, a decision has to be made as to whether you are going to have your experts test all 45 buildings or try to test just a representative sample. If you have issues relating to deficient installation of fire suppression systems because the wrong anti-freeze was put into the CPVC pipes, causing damage from environmental stress cracks, a careful analysis will need to be mdeas to what type of experts you need. Depensding upon your proofs, if you do not havw busrt pipes yet, you may needd to hire an expert who is a chemist and hwo can tetsify about environmental stress cracks and how they can or will cause consequential damage in the near future. The list of possible examples is limitless. The pijnt is that close consultation between the clients, counsel and the experts is obviously needed in making this judgment.

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January 2, 2007

Case Intake: Applicable Statutes and Insurance

When evaluating a new case, it is important to look at many factors. One of the first considerations is applicable statutes of limitation or repose. The statute of limitations is a statutory limit on when a claim can be brought. It is an equitable statute. The case law allows the statute to be extended if a reasonable person could not, through the exercise of reasonable diligence, have known about the defect. This is known as the "discovery rule."

A statute of repose is different in that, rather than allowing a claim to be brought within a specified number of years that can be extended by the "discovery rule," this statute simply says that within "x" number of years after substantial completion of work, no claims exist—ever. For example, in New Jersey, the statute of limitations on negligence claims resulting in property loss is six years, which is then extended by the discovery rule. The statute of repose in New Jersey, and in many other states, is absolute, even if the builder, subcontractor or design professional intentionally and fraudulently concealed known defects. There is no extension of this statute under any circumstances, and the discovery rule is inapplicable. Thus, at the case intake stage, it is absolutely imperative that counsel be familiar with these statutes and understand how they are going to deal with arguments based upon those statutes.

Another important factor in evaluating a new case is available insurance policies for the general contractor, subcontractors and design professionals. We recommend that clients who have reason to believe that there is no insurance hold off on spending substantial money on expert and legal fees until the availability of insurance is determined in discovery. Many states have court rules allowing quick discovery of insurance information, a simple process that can provide critically needed information early in a case. If the case is being taken on a contingency, it is a good idea to have an agreement in advance of filing suit that counsel will hold off aggressively litigating until counsel gets the insurance policies in discovery, and can make certain that there are no obvious exclusions that destroy coverage. (For example, if you are litigating over damages caused by EIFS , you will want to know as quickly as possible if the developer and the EIFS applicator have insurance policies that contain EIFS exclusions. If it turns out that there is no insurance, the case can be dismissed before the association spends substantial money on litigation that is going to be fruitless in generating a recovery.

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December 28, 2006

The Value of Contingency

Handling a major construction litigation case takes three to five years in most state courts–sometimes longer. A complex case with 50 or more defendants can cost upwards of $1 million in legal fees, plus hundreds of thousands more in expert fees and costs. Most clients cannot afford to finance such litigation. As a result, in appropriate cases, Stark & Stark's Construction Litigation Group will handle large, complex, multi-million dollar cases on a full or partial contingency. This decision is made on a case-by-case basis depending upon many considerations such as: (a) the facts; (b) the projected legal issues; (c) the insurance coverage issues that we can anticipate based upon our experience; (d) what experts will we need and approximately how much they will cost; (e) how long it will take and how much we think the case will cost to get to trial; and (e) what we think the range of anticipated recovery may be. This enables the association to minimize the need to upset the members of the association with enormous special assessments during the pendency of the litigation. It also enables counsel to assign all of the attorneys that it needs to the case without worrying about whether the client can afford it.

We are often able to assign two or more partners and multiple associates to complex construction litigation cases; therefore, we can move the cases ahead much more quickly than would ordinarily be the case if the client had to pay hourly for counsel's time. The client does not care how many attorneys work the case because the client is not paying hourly fees. In fact, the client is most often quite impressed with the effort that counsel is making. This tends to make for a very close working relationship between counsel and client, because the client sees that counsel is investing an enormous amount of resources into the case. In effect, the lawyer has become a true partner of the clients in the case.

Counsel gets the added benefit of putting the most talented attorneys on those aspects of the case that they are best suited to handle, without regard to what that will cost the client. This enables counsel to work a very complex case with great efficiency, skill and speed. In the end, both the client and the plaintiff's lawyers benefit from a tightly handled case that realizes a great result—and in less time than would be the case if counsel was constrained by concerns about the ability of the client to pay the legal bills every month.

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December 22, 2006

The Importance of Clear Communication with the Client

One other way that counsel can add value for the client is by helping the association’s board of directors inform the unitowners about the litigation. This takes a lot of pressure off the board and allows the community to see and hear from the attorneys who are handling the case a first-hand report on the progress of the litigation. Counsel must be mindful that these open public meetings may not be covered by the attorney-client privilege. Therefore, considerable care has to be given to making sure that nothing is disclosed in these meetings that could be construed as waiver of the privilege. Handled skillfully, a public meeting at which counsel and /or experts give a top-quality presentation about the case and answer questions can be an opportunity for the board to galvanize public support for the case. This can be particularly important where a special assessment is being contemplated to pay for the litigation.

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December 20, 2006

Selection of Experts

A lot of careful thought has to be given to what claims are worth fighting about, because the association will likely have scarce resources available to it. Much of the value that counsel brings to this process is counsel's experience and judgment and counsel's relationships with experts who are particularly skilled in disciplines that are responsive to the needs of the association.

Counsel also adds value to the process by making sure that the association does not take unrealistic positions regarding the claims that it makes. This means keeping client expectations within line of what we think we can probably get through litigation or mediation of each claim. It helps to have considerable experience when you are trying to give advice to a client about what their reasonable expectations should be regarding the amount that the association can realistically expect to recover from the litigation. This is one of counsel’s most important responsibilities because the decision of the client regarding how much to spend on the case and what to settle the case for are dependent upon counsel’s advice. Myriad factors need to be considered in making this critically important evaluation. Are there statute of limitations or statute of repose issues? If so, how much of a concern are they? How good are plaintiff’s experts? How strong are plaintiff’s proofs on liability and damages–especially consequential damages as is discussed in detail below? Can the proofs be understood by the jury? Do the defendants have any chance of dismissing all or part of plaintiff’s case on pre-trial motions? How long will trial take and does the client have the money to fund the case through trial? If not, is counsel willing to advance the costs and expert fees and take a piece of the recovery? Do the defendants have any assets? How much insurance coverage is there? What coverage issues are there and how can the plaintiff overcome them?

Counsel has to see and anticipate issues well in advance to prevent a client from spending huge sums of money taking discovery and then having claims unexpectedly dismissed before trial. For example, suppose you have a construction defect case involving a defective exterior cladding that was negligently applied by the applicator. The building was substantially completed in 1993 and the product was applied in 1992. The developer did not immediately sell all of the units. Instead, the developer rented out the majority of the units in the building. Eventually, in 2005, 12 years after substantial completion of the building, the developer sold off the last units needed to trigger transition of control of the association’s board of directors. The unitowner-controlled board hired experts who discovered severe water penetration through the defective cladding caused mold and other massive damage to the structural framing of the building. You sue the developer, all subcontractors, design professionals involved in selecting the material and the manufacturer and distributor of the material.

This case is a mine-field of complex issues. Counsel will have to evaluate how the statutes of repose and limitations will impact the handling of this case. If the defendants can prove that the developer-controlled board of directors of the association knew about the water penetration and failed to file suit beyond the statute of limitations, then it is possible that the unitowner-controlled association could have all of its claims against all subcontractors, design professionals, the manufacturer and distributor dismissed. This would leave the association with a remedy only against the developer and general contractor on the theory that during the period when they were in control of the board of directors of the association, they had a fiduciary duty to bring these claims against all possible defendants. Having failed to do so, they should be stopped from asserting the statutes as a defense.

Counsel have to be sensitive to these kinds of issues because community associations and other kinds of clients are simply not going to be sophisticated enough to understand that they even exist–let alone how to evaluate and deal with how they impact the association’s reasonable expectations for the value of the case, how much the association should be willing to invest in attorney’s fees, expert fees and other costs in order to get a fair return on their money.

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December 11, 2006

Spoliation of Evidence - Leveling the Playing Field

If you are planning to sue to recover damages relating to construction defects, don't destroy the evidence of the defects before the defendants have had a reasonable opportunity to inspect and document them. Such premature destruction of evidence could destroy the strength of your case.

In a recent unpublished case (Tribble v. Mytelka , A-2735-05T5 (November 30, 2006)), the Appellate Division reiterated that if the defendants are unable to challenge plaintiff's evidence because the plaintiff has destroyed it ("spoliation"), the trial court must not only "level the playing field" by barring the plaintiff from using any evidence that the defendants cannot effectively challenge because of the spoliation but may also need to instruct the jury that the excluded evidence must be presumed to weigh against the plaintiff who destroyed it.

Three or four months after Plaintiff Diane Tribble purchased a home from Defendants David and Mildred Mytelka, termites began to fenestrate the living room floor. In April 2003, Tribble's exterminator discovered that the termites were coming from the foundation of the adjacent greenhouse. In January 2004, Tribble had another contractor remove sheetrock from the foundation. He discovered the foundation to be water-soaked, rotted and termite-infested. Tribble photographed it.

After meeting defendants' real estate agent and representatives of her firm in April 2004, Tribble received no further response from the Mytelkas. In May 2004, Plaintiff's home inspector re-inspected the property and concluded that defendants had installed the sheetrock deliberately to conceal the deteriorated foundation. Tribble's attorney notified all the defendants of the greenhouse's condition, demanded reimbursement, and warned that the greenhouse and foundation were uninhabitable and in danger of collapse. In July 2004, before the defendants had an opportunity to inspect or photograph the greenhouse or retain a structural engineer, Plaintiff hired a contractor to demolish the greenhouse and replace it with a new sun room.

The trial judge found that Tribble's demolition of the greenhouse constituted spoliation, that is, unjustified destruction of evidence, and determined that Tribble's expert reports and photographs had to be excluded as evidence. Reasoning that Tribble's case could not stand without the photographs and reports, the judge then dismissed Tribble's lawsuit.

The Appellate Division agreed that the trial judge had properly determined that "'spoliation of evidence' in a prospective civil action occurs when evidence pertinent to the action is destroyed, thereby interfering with the action=s proper administration and disposition," and that Tribble's destruction of the greenhouse was spoliation. Emphasizing that discovery was ongoing when the greenhouse was demolished, the appellate court rejected Tribble's argument that equitable considerations, including laches, estoppel, and waiver, constituted defenses to the spoliation under the facts of the case. The court also rejected Tribble's contention that spoliation could not apply if the defendants had not expressly demanded that plaintiff preserve the evidence.

The appellate court disagreed with the trial court only in its ultimate determination to grant summary judgment dismissing the case. The appellate court concluded that, after excluding the photographs and expert testimony, trial could have proceeded, with Tribble's and other witnesses' fact testimony as evidence, so long as the jury was instructed of a "spoliation inference," which would instruct the jury that "all things must be presumed against the destroyer" and that they must assume that the missing evidence would have been damaging to Tribble.

The practical effect of "leveling the playing field" can be evisceration of the case of the party that destroyed the evidence. Both plaintiffs and defendants in construction defect cases must, therefore, proceed with caution even when the defect or deficiency requires timely remediation to prevent further damage to the structure as a whole or to remediate life-safety issues. The party contemplating work that may destroy evidence must provide the opposing party with notice of the alleged defective condition and the proposed remedial action as well as an opportunity to inspect, evaluate and document it and to observe the remedial wok as it occurs.

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December 1, 2006

Documentation of remediation projects - a picture is worth a thousand words.

Whenever one of Stark & Stark's Construction Litigation Department's clients advises us that they intend to repair and/or remediate their home, condominium or other structure, it is our typical practice to advise the client to coordinate the repairs and/or remediation through our office. That way, we can ensure that all parties that may have potential liability for the clients' claims can be notified in a reasonable time to permit them to inspect the condition of the home, condominium or other structure before the existing conditions are changed in any way through the repair process. If such notice is not properly given, there is a possibility that the client's ability to pursue its claims may be adversely affected through a legal doctrine called spoliation of evidence. The doctrine is, generally, just what is sounds like - a doctrine that provides remedies to aggrieved parties when their ability to defend claims against them has been hampered by the destruction (or spoiling) of evidence. It is also the our practice to advise our clients to retain an engineering expert or other qualified professional to formulate specifications or a protocol for the remediation, provide on-site supervision of the work, as well as documenting the work through video, photographs and personal observation in order to prepare a report summarizing the evidence of damage to the structure discovered during the repair process.

The above is the ideal scenario for preserving evidence of damage to a home, condominium or other structure for use in litigation. We have had clients, however, who were not in a financial position to afford to retain a professional to be present throughout an entire remediation project to document the damage that is found. For those situations, and generally for homeowners or condominium owners who desire to repair and/or remediate their homes immediately, but may not be considering litigation, the firm still recommends that notice of the repair work be provided to all parties that may have potential liability for any defects in question, and that the following protocol, or one like it, be followed in order to preserve evidence of the damage to the structure:

1. Prior to the inception of any work, the condition of the structure should documented by video camera or digital camera showing the date and time of the images recorded. Images should include distance shots of each elevation of the structure and closeup shots of all details on each side of the structure, including window & door details, terminations at ground level and roof lines, areas where flashing exists or should exist, floor lines, joints between dissimilar materials such as wood or stone or vinyl, and all attachments such as light fixtures, gutters, shudders, etc. A record of the photos taken should be maintained so that these photos may be matched with photos taken of the same areas throughout the later stages of remediation.

2. The process of removing whatever part of the structure is being repaired or remediated should be documented via video camera or digital camera showing the date and time of the images recorded. The level of detail of these images should be sufficient to show a time lapse progression of the work on all sides where it exists. A record of the photos taken should be maintained so that these photos may be matched with photos taken of the same areas throughout the earlier and later stages of remediation. Close up photographs should be taken of any notable areas of damage, improper construction detailing, insect infestation, etc. The photographs should be taken close enough to the matter being photographed with the idea in mind that these photos or video will be the only evidence of the condition later on once the structure is completely repaired.

3. Samples should be taken from areas where water damage or other damage is revealed as the work progresses. The samples should be marked with a letter or number. On a separate sheet of paper, for each letter or number there should be a corresponding notation of the date and time of removal, a description of the location of the house the sample was taken from, the name of the individual who removed the sample and the individual who marked the sample. If it is the same individual it should be noted as such. The samples should be wrapped or sealed in a container of some kind to remove the possibility of exposure to ambient conditions altering the condition of the sample over time.

4. Prior to removal and replacement of any damaged sheathing, roofing, windows or other part of the structure, the damaged condition should be documented via video camera or digital camera showing the date and time of the images recorded. As with the initial images, these images should include distance shots and closeup shots of areas where damage is noted, regardless of the severity of the damage. A record of the photos taken should be maintained so that these photos may be matched with photos taken of the same areas throughout the earlier and later stages of remediation.

5. During repair of the damaged areas of the structure, samples of any damaged wood, gypsum sheathing, roofing materials, windows, or other element should be taken from each area where same is replaced. The samples should be marked with the date and time of removal, a description of the location of the house the sample was taken from, and the name of the individual who removed the sample and the individual who marked the sample (if same individual it should be noted as such).

6. All areas where sheathing, roofing, windows or other elements of the structure are replaced with new materials should be documented via video camera or digital camera showing the date and time of the images recorded. A record of the photos taken should be maintained so that these photos may be matched with photos taken of the same areas throughout the earlier and later stages of remediation.

7. The process of installing the new materials, be it a new exterior cladding, windows, roof, etc., should be documented via video camera or digital camera showing the date and time of the images recorded. The level of detail of these images should be sufficient to show a time lapse progression of installation of the new siding on all sides of the home where it is installed. These photos should be identifiable as to the side of the home from which they were taken to be matched to photos described above.

8. The end result of above should be a well documented progression, by video or digital photos or both, of the remediation work from start to finish with a focus on those areas where damage was discovered and repaired.

9. A summary report should be prepared that describes each of the steps outlined above, describes the damage found and the steps taken to repair same, and the steps taken to install the new construction materials. The report should also read as a progression of the remediation from start to finish. In addition, the report should incorporate and refer to the photos and samples taken as outlined above in the appropriate points of the report, identifying same using either numbers or letters. For example, if the report discusses the removal and replacement of damaged wood beneath a window on the east side of the home, there should be a reference to the photos showing the damaged wood and the new wood placed in that area after repair.

10. Finally, the report should also itemize the cost of the remediation from start to finish, breaking the elements out into the labor costs for removing whatever elements of the existing structure was necessary, the labor and materials costs for repairing the damaged wood substrate, the labor and materials costs for re-installing the new construction materials, and any other costs associated with the remediation work (permits, insurance, debris removal, landscaping replacement, mold remediation, etc.).

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November 3, 2006

Living Next Door To Your Condo's Builder?

The front page of Sunday's New York Times Real Estate section headlined the dubious proposition that, if a builder chooses to live in one of his own condominiums, the condo would "most likely work for the buyer" since "the developer's eye is on every detail." (Vivian S. Toy, "If It Seduces the Builder . . ., New York Times, Real Estate, Section 11, p. 1 (October 29, 2006).) Our experience suggests that there are better ways to evaluate the quality of a potential condominium purchase than the builder's decision to buy a unit himself.

Attention to detail has not been apparent in an ocean-front community that we represent, even though approximately one in three initial sales was to a principal of the developer, a subcontractor, or a party with financial connections to the developer. From our point of view, another factor that Toy identified is much more important to a developer's decision to purchase a unit in a condominium he or she has built: the opportunity to "get first choice, sometimes at a substantial discount." Speculating that his unit might sell for $6 million, one developer reflected to Toy that he paid "more than it cost to build and less than market value." Often a developer's purchase price is less than the unit cost to build, with the difference made up by skimping on construction and materials elsewhere in the development.

The advantage of first choice is especially apparent when certain units boast extraordinary advantages, such as ocean frontage or a magnificent view. The developers that Toy profiled selected such units as a "penthouse with sweeping city views" and a Brooklyn waterfront unit with "views of eight different bridges." Non-developer unit owners in one of our client communities were surprised to discover that what had appeared to be common green space above the beach in the plans and models was actually the back yards of the beach front units, which were, for the most part, owned by the developer and his associates. Prospective condo buyers need to look carefully at both the prospectus and what is actually being built to ensure that apparent amenities are not disproportionately allocated to the builder and his cronies, with other unit owners footing the bill through inflated purchase prices or maintenance fees.

Builder's options are enhanced by early choice and limited only by constraints imposed by one's business partners, reported Toy. The profiled developers incorporated into their units additional space and custom features, such lap pools, rooftop party spaces, and casitas for the grandchildren, without the necessity of approval from condo associations that were not yet formed. Toy does not acknowledge that condo associations might reasonably frown on upgrades that have the capacity to increase the association's insurance or maintenance costs, to pose a threat of water leakage, or to overtax the building's structure.

Focusing on the congenial developers interviewed for her story, Toy extolls the advantages of unit owner/developers who can "hurry the contractor[s] along," resolve plumbing and electricity issues as they occur, and make sure "the lobby's going to be clean." The author seems not to have encountered the overextended builders and developers that we construction litigators too often see: cutting corners on construction, rushing closings in hopes of quieting the creditors, and ignoring unanticipated (and unbudgeted) defects and deficiencies because adequate funding simply isn't there. The importance of keeping the lobby clean fades when the builder is desperately trying to pay the dry wall contractor enough to keep him on the job until the last units are finished. As the real estate market cools, more builders and developers will find themselves shortchanging construction quality and customer service in order to satisfy unanticipated carrying charges.

"Having a developer living on site should also assure buyers that the typical problems that come up as any development is being completed will be dealt with quickly," Toy gushes. The unacknowledged assumption underlying Toy's premise is its dependence on the builder/developer's self-interest being concurrent with that of other unit owners. Conflicts of interest between the developer and other unit owners quickly emerge when construction goes bad or the money runs out. In short, the fact that the builder has been "seduced" by his latest project offers no assurance that purchasing a unit will work for an unrelated buyer.

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October 19, 2006

Kara Homes Bankruptcy

Kara Homes, one of the largest builders of condominiums and single-family homes in New Jersey, filed for protection from creditors under a Chapter 11 bankruptcy on October 6, 2006. Under its Chapter 11 bankruptcy, Kara Homes will be allowed to remain in business while it comes up with a reorganization plan and tries to regain financial stability. Creditors’ claims for monies owed them by Kara are frozen by the bankruptcy’s “automatic stay” while the company continues to operate as it attempts to reorganize.

The affects of Kara’s bankruptcy are far-reaching as the filing lists thousands of creditors. The creditors affected by Kara’s bankruptcy are mostly financial lenders, and lumber, construction, plumbing, concrete and electrical businesses. Amboy National Bank tops the list of lenders and is owed over 60 million dollars on construction financing connected to several Kara projects. A company called A-1 Bracket, Inc. of Morrisville, Pa., tops the list of other businesses and is owed more than $1.85 million. The list of creditors, unfortunately, also includes thousands of individuals with claims for thousands of dollars each, including purchasers of homes not yet constructed or completed who paid Kara deposits.

The bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is ever going to complete the developments it currently has under construction so that it can make good on its debts connected to those projects and deliver completed homes to waiting purchasers. The news has left people who have houses in the pipeline with Kara Homes anxious and uncertain. Many homeowners feel they have been left in the lurch, as some developments have been left with unfinished clubhouses, swimming pools, roads and landscaping, while many home purchasers have paid deposits on homes that have not been started or are in various states of construction.

Although the main focus of concern over Kara’s bankruptcy appears to be the affect the company’s Chapter 11 reorganization will have on its uncompleted projects, the company’s recent financial woes should also raise concerns for condominium and home owners who purchased from Kara in the last ten years. Specifically, the following question for these condominium and home owners may linger – Since I purchased my home/condo from Kara Homes during the last ten years, who will I look to now that Kara Homes has filed bankruptcy if I discover that my home/condominium has construction defects or damages caused by the original construction?

It has been the experience of Stark & Stark’s Construction Litigation Department in representing homeowners and condominium owners throughout the tri-state area that often times builders or contractors file bankruptcy after completion of construction of a home or condominium complex, but before the discovery of defects or damages by the purchasers of the homes/condominiums. Once Stark & Stark files suit for its client in these types of cases, the bankrupt builder or contractor always takes the position that the client’s claims against it were discharged in the bankruptcy and there is no recovery to be had. Stark & Stark’s Construction Litigation Department, however, has, under certain circumstances, been able to obtain relief for its clients despite the bankruptcy proceeding.

If the General Contractor or Subcontractors who constructed the home or condominium in question had in force during the construction a commercial general liability policy, or any other policy of insurance that provided coverage for the construction activities, there may still be an avenue of recovery for construction defects or damages despite the protections given to builders and contractors in the bankruptcy courts. Stark & Stark’s Construction Litigation Department has in the past been able to, either by negotiation with the bankruptcy trustee or by way of motion, obtain relief from the automatic stay in the bankruptcy proceeding to pursue in a state court action recovery for our clients’ claims for construction defects and damages directly from the insurance polices that named the bankrupt builder or contractor as an insured, to the extent those policies provided coverage for the claims at issue. In our experience, bankruptcy courts have allowed state court actions seeking recover from a bankrupt builder’s insurance policies to proceed despite the stay in place from the bankruptcy because the insurance policies themselves are not considered assets of the debtor and are not subject to claims of all the debtor’s creditors. Stark & Stark’s Construction Litigation Department, in these situations, will seek relief from the automatic stay to pursue the bankrupt contractor’s insurance policies from the bankruptcy court while simultaneously seeking leave from the state court to serve the bankrupt contractor’s insurance company directly with the lawsuit in what is referred to as “substituted service” under the Court Rules.

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

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October 17, 2006

Taking Pictures

In Construction Defect cases, the best and most persuasive evidence we have is often photographs. The more pictures we have to look at, the more pictures we can show the jury, and the better presentation we can make. Many of the photographs we use come from our experts, but an increasing number of cases feature large numbers of photographs taken by the homeowner. As a homeowner, we recommend that you take pictures of your house as often as possible. If you have a digital camera, it is very inexpensive, and your pictures could help prove a claim later on.

If you are building a new house, you should photograph the construction process as often as possible. Try to get a shot of the subcontractor's trucks, if they identify the name of the subcontractor. (You would be amazed how often there are no records of which subcontractors did what on a house) You never know what mistakes may be made and there may be errors that you don't notice, so you should try to document each step of the process. Once your home is finished, a comprehensive photographic record can help you get proper attention from the builder during the warranty period, and/or provide persuasive evidence of problems that the builder has refused or failed to remedy. If you start having water intrusion problems, you should photograph everything - drips, puddles, buckets, towels, stains. If the house is settling too much, photograph the cracks on a periodic basis, such as once or twice a month to see if they are getting bigger, or there are more and more of them over time. If you see any water stains in your attic, take some pictures.

Should any repairs be necessary to your home after the expiration of the warranty period, you should still give the builder notice of any repair work, since the repairs may destroy evidence that could prove useful in later litigation. If the builder has notice of the repairs before they happen, the cannot argue that they were denied a chance to inspect the home in it's pre-repair state. You should to this in writing to the builder, and of course save a copy of the letter. The builder is also obligated to notify all potentially responsible subcontractors, design professionals, and material suppliers of the pending repairs as well. When and if you have to make repairs to your home due to construction deficiencies, document that process as well, including what you or your contractors find when they peel back the siding, or the roof. Pictures can provide solid compelling evidence, and they can be invaluable for refreshing your recollection about conditions or events that may have occurred years prior. If there is little or no cost to you, and a potentially huge advantage later on, snap away!

If you would like more information you can contact Christopher Geary at 609.895.7261 or cgeary@stark-stark.com.

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