Construction Defects & HOAs: Part III

We closed our last installment with a promise that the next post on this subject would examine a typical construction defect case to better explain how these dramatic tragedies are likely to unfold. As luck would have it, Yours Truly was recently involved in the examination of a local HOA for a client who had ordered a CRC REPORT®, only to find that the Association had recently settled a lawsuit it had filed three years earlier against the builders and developers of the project for….you guessed it, construction defects!

Since the lawsuit had been settled our client was able to obtain considerable information about the lawsuit that otherwise would have not been made available. In the end, this buyer’s due diligence effort was well worth the paltry $350 they had paid for the CRC REPORT®, as it was determined that there was a potential liability of as much as $15,000 that the buyer of a unit in this development would be liable for, after the lawsuit yielded less than the desired result.

So, the HOA Detective thought that this would be the perfect time to complete this trilogy on the whole construction defect/civil litigation melodrama that seems to plague the vast majority of newly built condominiums and attached housing developments.

This particular lawsuit and its ultimate outcome serve as a textbook example of the absurdity of the entire exercise; beginning with the obvious issue of why it is that no one seems to be able to build a building that doesn’t leak and continuing on through to the final outcome of such a case which, as it turns out, is not at all uncommon.

To protect the privacy of our client and the other innocent homeowners who had the misfortune of purchasing a home in this development, we must refrain from using real names in the telling of this sorrowful tale. Otherwise it would be with much delight that the HOA Detective would gladly reveal the names of the principal characters who are, as has been indicated in previous posts, among a relatively small group of tightly connected attorneys, consultants and contractors whose names appear again and again like a child stuck on a merry-go-round from which they cannot escape.

We begin our story on a cold, blustery day back in October of 2012 when a prominent local attorney whose practice specializes in litigating construction defect cases on behalf of homeowners associations, files a civil lawsuit in the circuit court of the second most populated county in the state of Oregon; said county being largely a suburban outpost on the fringes of beautiful Portland, OR.

The civil complaint alleged actual damages in the neighborhood of $10.3 million with an additional $4.1 million claimed in punitive and other compensatory damages. Actual damages being the amount that the plaintiff was asserting would be needed to remedy the alleged defects, with another $4 million or so thrown in just for good measure!

Moving right along we fast-forward thirty-three months to that hot, parched summer of 2015 and more specifically to late July of that year, when the lawsuit was finally settled with no less than twenty-five individual defendants named in the settlement agreement.

As is the case with most of these lawsuits the predominant claim was that the buildings that had been built by the defendants suffered from water-intrusion related problems….problems that would cost $10 million  to repair and problems which were so egregious that the plaintiff was surely entitled to an additional $4 million just for good measure.

During this long and tortured period during which the case was being litigated it was all but impossible for anyone who owned a home in the development to sell their unit due to the unwillingness of most mortgage companies to approve loans when an HOA is a party to ongoing litigation. Some might say that this is just the price you pay for progress, but before we get too excited about the settlement reached on behalf of the beleaguered HOA, let us review the terms of the settlement:

As it turns out, the “settlement value” of the case was far, far less than the “claim value” asserted in the 2012 complaint in which the plaintiff’s counsel “prayed” for relief in the amount of $14.5 million dollars….

Yes that’s right folks. As it turns out the actual settlement awarded by an arbitration panel was exactly $3.1 million dollars! Or to put it another way, the plaintiff in this lawsuit recovered 21 cents for every dollar of “damages” claimed in the original lawsuit.

The fact that the case was settled by an arbitrator means that the attorneys in the case never actually took part in a trial….No melodramatic description of the grievous harm that had been done to the plaintiff at the hands of the defendants….No Perry Mason theatrics….No dramatic ending. Just a meeting with an arbitration panel who, by the time of the meeting, had already reviewed the “facts” of the case and very likely had already reached a conclusion about what they felt a reasonable settlement would be.

In the end the plaintiff is expected to receive somewhere between $2.2 and $2.4 million of the $3.1 million that was awarded by the arbitrator. Pity the poor attorney who litigated the case on behalf of the plaintiff, as it appears that their take from the insurance booty will likely be no more than $700,000 to perhaps $800,000….A pittance for almost three years of blood, sweat and tears from our legal crusader!

The fact that the plaintiff agreed to the settlement, much less to arbitrate the case in the first place, probably means they had little reason to believe that they would have been any more successful at trial.

Hence, the $14.5 million claimed in damages that had been thought to exist a mere thirty-three months earlier appears to have been more on the order of 20% of that amount, which raises a number of questions worthy of consideration by inquiring minds:

  1. If the alleged construction defects were actually expected to cost $10.3 million to repair in 2012, then wouldn’t they be even more expensive to repair three or four years later?
  2. If the answer to question 1 is in the affirmative then why would the plaintiff settle for 20 cents on the dollar almost three years after filing the original $14 million claim?
  3. If the repairs were expected to cost no more than $2.2 and $3.1 million at the time of settlement, then why would a claim have been filed for $10.3 million three years earlier; much less a claim for $14.5 million?
  4. Doesn’t the outcome of this case strongly suggest that the monetary value of the original claim was spurious at the very least and perhaps borders on attempted insurance fraud?

Seriously, if the actual cost to remediate the defects is closer to $3.1 – or even twice that amount – while the plaintiff is claiming that they should be entitled to recover two, three or perhaps five times the amount needed to actually repair the damage, then doesn’t the claim seem at least somewhat disingenuous?

Suppose for a moment that the plaintiff had prevailed for the full $14.5 million only to find that the repair work could be completed for $3.1 million. By what rationale would they be able to argue that they had been entitled to $14.5 million?

In the end what we have with this case, as with so many others, is an abuse of the legal system that is allowed to occur because everyone involved in the process benefits, while the people who end up paying for this abuse have no voice and no influence. Equally significant is the fact that the outcome of this particular case is not at all uncommon and in fact, is probably closer to a “typical” outcome than it would have been if the plaintiff had prevailed in a meaningful way.

The true “cost” of these cases is seen in the form of higher insurance premiums for all types of insurance; higher housing prices; the unnecessary waste of natural resources that occurs when a building ends up being rebuilt only a few years after it is constructed, for no other reason than the fact that nobody is forcing the contractors who build these buildings to build them properly in the first place and the unnecessary increase in the carbon footprint that results when a building has to be substantially reconstructed shortly after it is built.

While some may question that last statement, consider that every piece of discarded siding; every piece of discarded plywood; every discarded shingle as well as every mile driven by every worker and every delivery truck that participates in the repair project represents an unnecessary and unacceptable contribution to the carbon waste footprint of the human race.

Meanwhile the attorneys who litigate these cases become wealthy. As do many of the contractors and consultants who work in concert with these attorneys, resulting in what is arguably a conspiracy of sorts.

The ultimate absurdity is that if any of the parties to this charade were to put half as much effort into finding a permanent solution to the problem, then the problem of construction defects could largely be resolved once and for all. But alas, it appears that there is far more money to be made by attending to the problem than there is by actually solving the problem.