Right to Recovery for Construction Defects in Foreclosed Home – Does It Matter Who Owns the Home?

The recent flurry of foreclosures in California results in the ownership of a foreclosed home being forcibly transferred to new owners, often the bank lenders.  Sometimes these foreclosed homes also are in the middle of lengthy construction defect litigation.  When a home is foreclosed upon in the middle of litigation, this can result in a dispute over who can recover damages for the alleged defects.  For example, what rights do the former homeowners, who started the case, have against the contractors for construction defects in homes they no longer own and what rights do the bank lenders have as the new owner?  Turns out, despite no longer owning the home, the former homeowner still maintains the right to recover money for the construction defects unless the right was assigned to the bank lenders.

It is well settled in California that construction defect claims are personal property.  (See Siegel v. Anderson Homes, Inc. (2004) 118 Cal.App.4th 994.)  As personal property, the right to construction defect claims can be assigned to subsequent owners, but the right is not automatically transferred with a change in ownership of the house.

In Vaughn v. Dame Construction Co. (1990), the California Court of Appeal held the former owner of a condo – who had sold the condo and then filed a lawsuit for construction defect claims against the contractor – was still the real party in interest and could continue her lawsuit.  In reaching the decision, the court emphasized that the “essential element of the cause of action is injury to one’s interests in the property – ownership of the property is not.”  Accordingly, a homeowner who files a lawsuit against a contractor for construction defects and then has the house foreclosed on during the litigation will most likely be able to continue with the construction defect case and recover damages even though he or she no longer owns the home.

In the foreclosure context, it is unlikely that the homeowner will make any assignment of the construction defect rights at the time the bank takes the home away.  Nevertheless, not all is lost for the bank.  If a bank lender can show the former homeowner assigned his or her rights in any legal cause of action relating to injury or damage to the home at an earlier point in time, the bank can pursue the construction defect causes of action, not the former homeowner.  (See Kasdan, Simonds, McIntyre, Epstein & Martin v. World Sav. & Loan (9th Cir. 2003) 317 F.3d 1064.)

There is no magic document for a homeowner to assign his or her cause of action to another.  Common places to find an assignment are the deed of trust or the home loan documents between the bank and the homeowner.  These documents may contain provisions stating that the assignments of the construction defect cause of action/damages are effective upon foreclosure of the home.  Accordingly, the loan documents and deed should be reviewed anytime a home involved in construction defect litigation is foreclosed upon to determine who can pursue the litigation to recover damages.

Image courtesy of Flickr by Jeff Turner