Statute of Repose? What Statute?

By Valentine S. Hoy

For the builder of residential real estate only four things are certain: death, taxes, construction defect litigation and the 10-year statute of limitations. Now you can make that three things.

On April 29, the Second District of the California Court of Appeal issued its decision in Acosta v. GlenFed Development Corp. 2005 Cal. App. LEXIS 687. Although the decision purports to be no more than an application of existing law to an express statutory exception to the "firm and final" 10-year limitation period, it is likely to encourage the filing of more construction defect cases on older buildings. It may also raise the specter of uninsured claims.

Acosta v. GlenFed involved garden-variety construction defect causes of action filed by 59 plaintiffs who purchased homes in a residential subdivision developed by GlenFed Development Corp. GlenFed recorded notices of completion for most of the plaintiffs' homes more than 10 years before those plaintiffs filed a complaint alleging construction defects. GlenFed moved for summary adjudication of the complaint as to the tardy plaintiffs based on the ten-year statute set out in California Code of Civil Procedure §337.15. The trial court granted the motion as to 47 of the 59 plaintiffs.

It sounds like an open and shut case, right? Wrong.

With their opposition to the motion for summary adjudication, plaintiffs filed the declarations of two forensic expert witnesses. In their declarations, the two experts expressed the opinion that the defects were "so serious and prevalent that they were either the result of [a] deliberate decision to cut corners for cost savings or the result of a near total, virtually reckless, failure by the developer to adequately supervise subcontractors."

Plaintiffs left it at that: the defects were caused by the deliberate or reckless conduct of contractors or subcontractors unknown. The trial court found plaintiffs' proof to be insufficient in the absence of evidence that GlenFed knew of the defects.

The Court of Appeal disagreed. It held that the plaintiffs did not need to prove that GlenFed knew about the defects or acted willfully. The court concluded that GlenFed could be held liable for the willful misconduct of others involved in the project more than ten years after completion of the work of improvement.

The court's rationale was that GlenFed, as the developer and general contractor, owed a non-delegable duty to supervise the work of its subcontractors. The court relied on the general rule that the willful misconduct of an agent, such as a subcontractor, is imputed to the agent's principal, i.e., the general contractor.

The court was also persuaded by its perception that the public would benefit from a rule encouraging developers and builders to closely supervise their projects and choose subcontractors wisely.

Finally, the court emphasized the wording of subdivision (f) of Code of Civil Procedure §337.15, which states that the 10-year limitation period shall not apply to actions based on willful misconduct. In other words, the court said, "it is only necessary that the action be based on and arise from willful misconduct by someone."

Will the plaintiffs in every construction defect case be able to make the same argument successfully?

To the extent plaintiffs can find an expert witness willing to testify that a defect "must have resulted from the willful misconduct of someone" it is difficult to see how a developer or contractor can win a summary judgment motion based on the ten-year statute. Even more problematic for developers and subcontractors, such cases may create uninsured liability, either because the 10-year tail for completed operations has expired or because the cause of action necessarily requires proof of willful misconduct.

Acosta does not open the floodgates to all manner of stale claims. Claims arising from alleged latent defects must still be filed within three or four years after the plaintiff discovers the defect, or should have done so. That has not changed.

It may be that plaintiffs will not find evidence of willful misconduct in every case. GlenFed has 40 days to petition for review by the California Supreme Court.

Hoy is a partner in Luce, Forward, Hamilton & Scripps LLP's San Diego office.