California Supreme Court Confirms the Right to Repair Act as the Exclusive Remedy for Seeking Relief for Defects in New Residential Construction

The California Supreme Court recently issued its decision on a critical issue in the residential construction industry – the claims for construction defects that a California homeowner can bring against a builder or seller of new residential properties in California.

Holding

In McMillin Albany v. The Superior Court of Kern County, the Court held that California’s Right to Repair Act (California Civil Code, sections 895, et seq.) (the “Act”) is the exclusive remedy for homeowners claiming defective construction of new residences in California.

Why this Case is Important

After years of dispute at the trial court and court of appeal levels on whether homeowners were limited to statutory claims or if they could opt to alternatively plead common law claims or seek common law claims alone for construction defects, the Supreme Court took up the McMillin case to decide whether a homeowner’s common law action alleging construction defects is subject to the Act’s pre-litigation notice and cure procedures.

The Court looked at the causes of action available under the Act, the attendant damages scheme, and the legislative purpose behind the Act’s pre-litigation procedures, and found that the Act bars common law causes of action, and mandates pre-litigation obligations. This is a profound decision that will impact the area of construction defect litigation, narrowing the type of claims and exposure for homebuilders and contractors in California.

Background

California’s Right to Repair Act (“Act”) is a 15-year-old statutory scheme which contains an elaborate statutory framework delineating procedural and substantive rights of parties in disputes involving new residential construction in the state. Written in response to the California Supreme Court’s decision in Aas v. Superior Court (2000) 24 Cal. 4^th 627, which held that tort theories could not support a claim for purely economic damages for construction defects, the Act provides California homeowners a statutory right to recover such damages. Additionally, as noted below, the Act sets forth a lengthy set of building construction standards, contains obligations that builders must fulfill, including warranties to be provided, contains elaborate pre-litigation procedures and deadlines, and procedures for lawsuits under the Act.

McMillin Homeowners’ Bring Claims of Both Common Law and SB 800 Violations

In McMillin, a group of homeowners sued the builder of their homes asserting both common law causes of action, and statutory causes of action under the Act. The builder claimed that the Act allows defendants to informally inspect and to test alleged defects before litigation and thus sought stipulation to stay the action to complete such inspections. The homeowners declined to stipulate. Further, Plaintiffs later dismissed their statutory causes of action, electing to proceed only on common law grounds. The developer, McMillan, then moved the trial court to stay the action until Plaintiffs complied with the pre-litigation procedures under the Act. Following the law of sister appellate districts, the trial court denied the stay.

Procedural History

On appeal, the Fifth District Court of Appeals declined to follow conflicting interpretations of the Act upheld by the Fourth District in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, and by the Second District in Burch v. Superior Court (2014) 223 Cal.App.4th 1411, and granted the stay.

As discussed below, the Court reviewed the Act and ultimately found that the Act is the “virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” Accordingly, the defendant property developer was entitled to a stay of the litigation until plaintiffs complied with the Act’s pre-litigation notice, inspection and repair procedures.

California Supreme Court’s Examination and Finding that the Right to Repair Act is THE Remedy for Tort Claims

The Court reviewed the history of the Act and the underlying legislative history, as well as the specific damages scheme under the Act to develop its finding. The Court examined Civil Code Section 944, which provides that an aggrieved homeowner can claim damages for a builder’s failure to meet the building standards established in Sections 896 and 897. The Court found the lengthy list of building standards contained in Section 896, coupled with the catchall of Section 897, as evidence of the Legislature’s intent to supplant common law causes of action for construction defects in residential construction.

Further, the Court found that Section 943(a), which contains the phrase “no other cause of action for a claim covered by this title or for damages recoverable under Section 944 is allowed,” also supports its finding that Section 944 “defines the universe of damages that are recoverable under the Act” and Section 943 makes the Act, the “exclusive means” to recover such damages.

As such, the Act is the exclusive means of recovering damages for violations contains in Sections 896, and 897, and those sections are to be interpreted broadly to include almost all construction defect claims, a reading warranted by their text.

Pre-Litigation Procedures Must Be Followed For Any Claims of Construction Defects in Residential Construction

Armed with the interpretation above, the Court went further and analyzed the Act’s pre-litigation procedures and found that Civil Code Section 910 provides builders of residential construction a right to remedy the defects before litigation. The Court held that this goal of the Act necessitates a holding that common law claims are also subject to pre-litigation procedures because a determination to the contrary would frustrate the purpose of the law, the purpose of Section 910. Stated another way – the Court held that allowing homeowners to bring common law claims without first abiding by Act’s prelitigation procedures would thwart the Act’s purpose in providing builders a pre-litigation right to repair.

The Supreme Court’s full opinion issued on February 2, 2018, is available at: McMillin Albany LLC v. Superior Court, S229762 (2018) __             Cal.4th __.

Is California’s Right to Repair Statute the Only Basis for a Claim for Residential Construction Defects? The California Supreme Court Will Weigh in Shortly.

In McMillin Albany, LLC v. Superior Court, real parties, including Carl Van Tassell and 36 other homeowners, filed a first amended complaint alleging eight causes of action against the builder, McMillin Albany, LLC, including strict products liability, negligence, and breach of express and implied warranties. Plaintiffs alleged the homes were defectively constructed and that the alleged construction defects resulted in damage to their homes. The third cause of action of the first amended complaint alleged violation of the building standards set forth in Civil Code Section 896, part of the Right to Repair Act.

Plaintiffs did not give McMillin notice of the alleged defects before filing suit. The parties, in turn, attempted to negotiate a stay of the judicial proceedings to complete the pre-litigation process under SB 800, but plaintiffs subsequently withdrew from these negotiations, dismissed plaintiffs’ third cause of action, and argued that plaintiffs were no longer required to comply with the statutory pre-litigation process under SB 800, as they had dismissed their cause of action alleging violation of the Right to Repair Act. McMillin then filed a motion for a stay of the proceedings, which plaintiffs’ vigorously opposed.

The trial court denied the motion for stay of the proceedings, concluding real parties were entitled to plead common law causes of action in lieu of a cause of action for violation of the building standards set out in Section 896 and they were not required to submit to the pre-litigation process of the Act when the operative complaint did not allege any cause of action for violation of the Right to Repair Act. The court sited Liberty Mutual as the basis for their decision. McMillin, in response to this ruling, filed a petition for a writ of mandate, seeking a writ directing the trial court to vacate its order denying McMillin’s motion for a stay and to enter a new order granting a stay pending completion of the pre-litigation process under SB 800.

In considering McMillin’s writ petition, the 5th District Court of Appeal in Fresno found that the only issue before the court was whether McMillin’s motion for a stay pending completion of the pre-litigation procedures of Chapter 4 of the Act was properly denied. In order to make that determination, the Court of Appeal considered the scope of the Act and whether the Albany McMillin homeowners were required to comply with the SB 800 pre-litigation process before filing suit against McMillin, regardless of whether the plaintiff homeowners were asserting any claims or causes of action reliant upon SB 800.

Ultimately, the 5th District Court of Appeal concluded that the Legislature intended that all claims arising out of defects in residential construction, involving new residences sold on or after January 1, 2003 (Civ. Code § 938), be subject to the standards and the requirements of the Right to Repair Act and that homeowners bringing such claims were required to give notice to the builder and engage in the pre-litigation procedures in accordance with the provisions of Chapter 4 of the Act prior to filing suit in superior court. The court concluded that the plaintiff homeowners did not comply with the requirements of Chapter 4 allowing McMillin the absolute right to attempt repairs. Further, the Court of Appeal held that McMillin was entitled to a stay of the action until the statutory pre-litigation process has been completed.

On December 1, 2015, the California Supreme Court, noting an irreconcilable conflict between Liberty Mutual and McMillin Albany, ordered the 5th District’s McMillin Albany decision de-published pending review by the Supreme Court.

The Supreme Court has now set the case for oral argument on November 7, 2017, and we will see if the court makes the determination that SB 800 is an “exclusive remedy” after all.