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Jury Finds Subsidiary of National Developer Hovnanian Enterprises Inc. Liable for Breach of Contract and Violation of the New Jersey Consumer Fraud Act

MORRISTOWN, NJ & FORT LAUDERDALE, Fla. – June 5, 2017 – Becker & Poliakoff secured a landmark $9 million-plus jury verdict Thursday against a subsidiary of Hovnanian Enterprises, Inc. (NYSE: HOV). The award includes punitive (treble) damages for violation of the New Jersey Consumer Fraud Act and also entitles the plaintiff to recover attorneys’ fees, costs and prejudgment interest. The jury found that Hovnanian Enterprises used the subsidiary as an instrument to commit a fraud or injustice on purchasers of condominium units. The ultimate recovery against all parties, including the project architect and geotechnical engineer, could exceed $20 million.

After a six-week trial in New Jersey Superior Court (Docket No. HUD-L-2560-13), the jury agreed that Hovnanian, after learning that the condominium building was being improperly constructed with plywood flooring in violation of the building code, chose to nevertheless continue construction. Hovnanian then sought to reclassify the building type. The jury agreed with the plaintiff’s position that the reclassification was never approved by governmental authorities. The units were then sold without disclosing the code violations or the lack of approval to the buyers. The claim arose out of construction problems with the six-story, 132-unit residential and commercial building in Port Imperial, West New York, NJ.

Matthew Meyers, a Shareholder in Becker & Poliakoff’s Morristown office, represented the homeowners and initiated the suit against Hovnanian. “Hovnanian knew that the use of combustible materials in the flooring was in violation of the building code, and instead of fixing the mistake, attempted to change the building’s classification. They then sold units knowing that the change in classification had never been approved. They continued to arrogantly defend their conduct at trial but the jury would have none of it. Hopefully, after this verdict, Hovnanian will get the message.”

“A key point making this landmark case particularly unique is that the parent company, Hovnanian Enterprises, was found to have used its shell subsidiary to perpetrate an injustice on the condominium unit buyers,” said Becker & Poliakoff shareholder John Cottle, who was first chair/lead trial counsel in the case representing the homeowners. “This is a rare instance in which the ‘corporate veil’ was pierced, and we expect the result of this will be that Hovnanian Enterprises will ultimately be held responsible for the judgment.”

In addition to Cottle, the Becker & Poliakoff trial team from Florida included: Perry M. Adair, Miami managing shareholder and a board-certified construction law attorney; and Sanjay Kurian, a shareholder and board-certified construction law attorney. The New Jersey team included Vincenzo Mogavero, a shareholder and litigation Chair and Martin Cabalar, in addition to Mr. Meyers.

About Becker & Poliakoff
Becker & Poliakoff, with headquarters in Fort Lauderdale, Fla., is a multi-practice commercial law firm with attorneys, lobbyists and other professionals at offices across the United States. More information is available at www.bplegal.com.

In this 2 part blog post I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted living facility or hotel they share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.  Considerations 1 to 3 are here.

The fourth consideration is the type of recovery available.  Generally the cost of repairing the defective condition is the damage that can be recovered.  In the event that such repair would be economically wasteful courts may consider diminution of value to be a valid damage.  In addition, depending on the type of property there may also be lost rents, lost profits claims for the time that the property was not able to be used for its intended purpose or for partial loss of use.  Attorney’s fees are often not recoverable in defect claims in most jurisdictions. The exception to the “American Rule” is where the fees are awarded to the prevailing party through contract or statute or what is called a “proposal for settlement” or “Offer of Judgment.”  The question of recovery is maybe the most important one for owners because no one wants to spend money on experts and lawyers where the damages do not warrant such claims.

The fifth consideration is the defenses available.  I have never handled a defect claim where there was no claimed defense by one of the parties identified above.  The typical defenses are that the owner failed to maintain the condition, that the damages were not mitigated, lack of notice of the condition, failure to comply with a statutory notice procedure, the repair is a betterment, the repaired items consist of first costs that the owner would have incurred anyways.  The determination as to the validity of a given defect claim or defense rests with the trier of fact, whether that be a judge, jury or arbitrator.  The applicability of a defense is based upon the specific facts of each case.

The sixth consideration is the cost in moving forward with such claims and the prospects of recovery. Given the complicated nature of these cases they often settle.  Driving settlement is the cost of moving forward in the litigation as well as likelihood of recovery from the named defendants or their sureties or insurance carriers. Not evaluating these items at each step of a case is a trap for the unwary client or counsel.

I have represented numerous owners, condominium associations, contractors and developers in these types of cases and I can guarantee that none of them wanted to be in this type of litigation.  However, sometimes construction projects go wrong and everyone bears some of that eventual cost.

In this 2 part blog post I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted living facility or hotel they share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.

The first consideration is who is the true owner and is that entity able to recover for the defective construction.  Is there a condominium association or building owner? Maybe it is the hotel or facility operator that is the aggrieved party or is the developer of the building?  Knowing who has the rights to make the defect claims is a critical first step.

The second consideration is to determine against whom any claims may be asserted.  Is there a claim against the developer of real property who designed, built and sold the units or buildings in questions? Or maybe there are claims against the general contractor and subcontractors who coordinated and performed the work?  What about the design professionals who designed the building improvements?  The reality is that all of these entities could be responsible for defects in the improvements.  How much each of them is responsible for is dependent upon the warranties, contracts and legal theories at play where the property is located as well as any contracts that may exist between the parties.

The third consideration is what types of claims available depend greatly on the jurisdiction you are in.  There may be contractual express warranties which would arise out of the contracts negotiated between parties. There are implied warranties pursuant to the common law that may be at play.  In some jurisdictions and depending on the type of property, Florida condominiums for example, statutory implied warranties may exist that protect the owner.  Most states still allow claims for negligence in the construction or design of the structures.  An important note is that not every claim can be made against every party. Careful consideration is needed as to what parties should be asserted against whom.

Part 2 next week.

As previously noted, House Bill 87 modified some of the requirements of Chapter 558, Florida Statutes.  The statute was recently signed by Governor Rick Scott and the changes will take effect Oct. 1.

The original intent of Chapter 558, enacted in 2003, was to require compliance with a mandatory pre-suit process before claims for construction defects could be brought in court.  Originally the claims subject to Chapter 558 were limited to residential defect claims but now include all residential and commercial project claims for defects.  All public projects are also included except for projects involving the Florida Department of Transportation.  In my experience the pre-suit process does not resolve many claims and add barriers and costs to owners and end-users.  A cynic might believe that the statute is working as intended.

Chapter 558 requires written notice from the claimant to the construction or design professionals believed to be responsible for defects or deficiencies and provide timeframes for the construction or design professionals to review the claims, inspect the property and respond. Responses from recipients of the claims could include an offer to repair the defects at no cost to the claimant, pay a monetary settlement, dispute the claim and decline to remedy or pay for some or all of the claimed defects, or a combination of these options.

Should the claim not be resolved then litigation may ensue. The defense remedy if a claimant does not comply with Chapter 558 is a stay of the lawsuit until compliance.

The amendments to Chapter 558 add a variety of requirements that, in my opinion, will make resolution pre-suit more difficult and continue to enact barriers to a claimant’s access to the courts.

  • Section 558.001, previously stated that the “contractor, subcontractor, supplier, or design professional” should have the opportunity to resolve the claim without further legal process but now includes “the insurer of the contractor, subcontractor, supplier, or design professional” as parties that should have such an opportunity.  However, there remains no requirement that notices of claim be served on insurers which from the claimants standpoint is appropriate as they often will not know who the insurers are.
  • Section 558.001 was further changed to add that such opportunity to resolve claim was “through confidential settlement negotiations” which is a point that may have been assumed previously.
  • Section 558.004(1)(b) had several changes made. The first is that the words “if known” were added to modify the requirement that claimant identify the damage or loss resulting from the defect.
  • The second change to 558.004(1)(b) is potentially more significant for all parties involved. The notice of claim must now “identify the location of each alleged construction defect sufficiently to enable the responding parties to locate the alleged defect without undue burden.”  Such identification must be based upon a visual inspection.  Such a requirement for identification may be easy for a single family home or an obvious defect.  However, such a requirement becomes exponentially more difficult in condominiums, hotels, schools and other end users with multiple units or rooms.  I expect there to be much argument, and litigation, about the quality of the notice of claim and what the terms “undue burden” mean.  This section will undoubtedly be used as a sword by recipients of notices not to resolve claims on the merits but on procedural grounds which is anathema to the alleged intent of the statute.  Further, this provision takes some of the “burden of proof” that a claimant may have at trial and attempts to force claimant to incur those costs up front.  Once again a cynic may view this as an attempt to set up barriers to claimants from pursuing claims.
  • The third change made to section 558.004(1)(b), is stating that the claimant has “no obligation to perform destructive or other testing for purposes of this notice.”  This change does make clear that the visual observation referenced previously is just that, a visual observation.  Given the costs for ASTM or other types of testing this provision does help owners.  However, given that there was no previous requirement for claimants to perform testing this provision clarifies the existing law.
  • Section 558.004(13) provides that a notice of claim does not constitute a claim for insurance purposes which was modified by “unless the terms of the policy specify otherwise.” I have yet to see a policy make the notices of claim a policy claim so this change may be of little impact.
  • Section 558.004(15) requires exchange of certain documents related to the alleged defects in the notice of claim. This section was revised to delete the requirement that “design drawings or specifications” be exchanged.  This change hurts owners who are less likely to be in possession of those documents than are the professionals hired to design and build.
  • Section 558.004(15) is further revised to require that maintenance records can be requested. Although the failure to maintain components may be a defense to some claims, the requirement to turn over maintenance records pre-suit, upon request of the claim recipients, is unnecessary and another cost for the owner.
  • Section 558.004(15) no also requires that, upon request, “documents related to the discovery, investigation, causation, and extent of the alleged defect” be produced. These documents would include many items protected by the attorney-work product or attorney-client privilege. Such documents would not be limited to those of the owner as designers and contractors who actually investigate the claims could be adversely impacted. Fortunately, the next change provides that a party may assert any privilege recognized under Florida law.  This latter portion may do away with the worst applications of the former.
  • Completion of a building has been modified to include temporary certificates of occupancy to reflect the actual practice of building departments in allowing occupancy of buildings.

As noted above, there are many changes and they do not make it easier for owners to make claims.  Also, it is likely that more amendments will be made in the next few years as some of the new changes prove unworkable.

Interesting opinion issued last week by the Florida’s Fifth District Court of Appeal on the statute of repose.  The opinion can be found here.  It is not yet final.

The Cypress Fairway Condominium was a conversion condominium.  The suit was brought by the Association “individually” and also as assignee of claims by the general contractor.  Suit was filed against parties involved in the original construction and also the conversion.

Suit was filed on February 2, 2011. There is no reference to when the certificate of occupancy was issued.  Rather, the last non-settling defendant argued that the statute of repose period began when application for final payment was made on January 31, 2001, which was they argued was the completion date of construction.  The Association argued that the repose period did not begin until February 2, 2001, when final payment was actually made.  The trial court granted summary judgment to the defendant on this basis.

The 5th DCA reversed based on the fact that final payment had not been made until February 2, 2001.  The 5th DCA reasoned that under the plain meaning of Section 95.11(3)(c), the last act for completion of the contract was the final payment not when the application for payment was made.  There was no discussion of the certificate of occupancy or whether the Association’s legal standing came from the assignation of the general contractor or arose under Rule 1.221.

The opinion may be modified before becoming final.  However, as it stands, the opinion makes less clear when the statute of repose actually begins to run for condominium defect cases and potentially creates significant factual issues precluding summary judgment on the statute of repose.

The regular Florida legislative session is almost concluded.  The House adjourned on Tuesday and the Senate is in session until Friday.  A special session to address the state budget is expected but not yet set.  I previously addressed two construction related bills being considered this year: HB 87/SB418 related to construction defects, as noted here, and HB 501/SB 1158 related to shortening the statute of repose from 10 years to 7 years, as noted here.

The Chapter 558 bill, HB 87, was amended to address many of the concerns raised in my prior blog post.  The amended bill passed the House on a vote of 112 to 0. The House bill was substituted for the “companion” Senate bill, SB 418, and passed 35-4.  The bill will be sent to the Governor for his consideration. The Governor will have 7 days to veto, sign or allow the bill to become law without his signature, IF his office officially receives it during session (by May 1); if not sent to him until after May 1st, he will have 15 days to act.  It is expected that the governor will not veto this legislation and that the changes to Chapter 558 will take effect on July 1, 2015.  Although not perfect, the Chapter 558 bill, is significantly better than it was.  The text of the final bill can be found here.

The other pending construction bill, HB 501/SB 1158 regarding Statute of Repose, appears to be done for the year as it was not considered and passed in either chamber.  Although the bills could be considered as part of the special session, that is not likely.  The good news is that this legislation appears to be dead for this year.  The bad news is that this type of anti-owner legislation will come back, in the near future if not next year.  It will be important for all owners, public or private, in construction projects to watch for such legislation and oppose vigorously.

HB 501 to reduce the statute of repose in construction cases was heard by the House Civil Justice subcommittee.  There was an amendment to the bill to allow any claims that are currently over 7 years, but less than 10 years, to have until July 1, 2016, to file suit.  This “savings clause” is similar to the one used in 2006 when the statute of repose was then reduced from 15 years to 10 years.  The bill passed the subcommittee on a vote by 8-6.  For those interested in watching the hearing you can do so here beginning at the 7:18 mark.  Special recognition to Ronald Woods, P.E. of Woods Engineering and Tom Miller, P.E. of Structural Engineering and Inspections, Inc. for appearing and speaking out against the bill.

In addition to the proposed legislation to substantially change Chapter 558, link here, the Legislature is considering other legislation that will materially impact owners and taxpayers.  HB501 proposes to reduce the time owners have to pursue construction defect claims from 10 after completion to 7 years after completion.  Specifically, the proposed legislation reduces the time frame within which a claim can be brought for latent defects (a defect you did not know about or had no reason to know about) in the design, planning or construction of improvements to real property from the current 10 years to 7 years.  This reduction of time to pursue claims apply to claims where the building code was violated.  Why should Florida provide less protection to owners when historically, and now again, the biggest building booms have been occurring in Florida.  Even the AIA Form Agreements, not always owner friendly, provide for a 10 year statute of repose. More time should be provided because significant defects cannot often be discovered earlier.

In the Firm’s practice some of the most frequent defects which evidence themselves more than 7 years after completion:

  • the failure to properly treat post tension cables in high rise projects. The ends are not capped or treated with grout and waterproofing;
  • improper concrete cover over reinforcing steel on balconies;
  • stucco delamination;
  • bursting condenser sensor water pipes behind walls that have seams or improper fitting that fail;
  • roof membranes improperly installed and leaking into structural deck and trusses causing structural damage;
  • roof tiles improperly fastened and not compliant with wind codes;
  • a roof that appears new yet it is discovered it covers and old existing roof and has not adhered;
  • window frames with a useful life in excess of 20 years fail in year 10 by pitting and blistering;
  • sink hole issues that all should be familiar with in Florida;
  • poorly compacted soil;
  • concrete that is of less than the required compressive strength starts to crumble impacting structural members;
  • columns and beams with insufficient steel that is not apparent until a failure occurs ;

The attempt to reduce the time frame for the Statute of Repose for latent defects affects owners in existing buildings as the clock is running on those buildings already.  It is important that every condominium owner realize that this bill is a further stripping away of the rights of condominium unit owners and deserves to be soundly defeated.  Repair of significant defects will be solely on the owners rather than the parties that created the defective situation. However, not only are condominiums impacted but public construction such as schools, hospitals, roadways and public facilities such as stadiums. If deficiencies exist where the statute has expired, the public will pay for the corrective work as opposed to those that created the condition through faulty workmanship and design. The burden to pay should be borne by those accountable for the issue.

Why in this climate is legislation helping shoddy construction being pushed?  The only beneficiaries are construction professionals that perform lousy work that can avoid liability for their poor performance by waiting out the clock. The bottom line is that it is the consumer and taxpayer that are impacted by this legislation designed to help contractors, design professionals, subcontractors and suppliers.

The Legislature will be considering legislation this year to change Chapter 558, Florida Statutes.  Chapter 558 is  required process for any party seeking to pursue claims for construction defects.  The original goal of Chapter 558 was to provide an opportunity to settle defect claims without litigation or arbitration, and not to create another source of dispute or litigation.  This bill is contrary to that original intent. The proposed bill would create new rights and defeats any realistic hope to amicably resolve claims as more fully explained below.  These changes, if enacted, will negatively impact all owners of construction improvements including hospitals, doctor’s offices, school buildings, condominiums, single family homes and commercial buildings.  The proposed legislation can be found here and the specific problems are noted below.

Lines 66-76:

Requiring the notice to specify the location of each alleged defect is impossible relative to any structure of any size.  To require a claimant to inspect all buildings (20, 30, 40 or 50+) and identify with specificity every instance where a specific defect (e.g. crack in the stucco) appears would be prohibitively expensive, and not necessary at this stage.  The parties to whom a notice of claim would be sent are the construction professionals – they should be able to locate the defects if the Notice of Claim describes “in reasonable detail sufficient to determine the general nature of each construction defect.” The last sentence, which provides that the failure to provide the information is prima facie evidence of a defective notice, invites disputes over the sufficiency of a notice of claim.  Once the nature of the defect is identified, the notified parties can inspect and draw their own conclusions just as easily as the claimant can.  The only thing this will accomplish is to create a “gotcha” for claimants.

Overall, the proposed procedure will increase the burden on owners (residential and commercial) to go beyond what a court would require to prove a case at trial. It will also have a chilling effect because the cost to do so would be exorbitant and many would simply not be able to get it done and afford it. Chapter 558 was created to lower expense as opposed to increasing the cost to reach a resolution.  This will effectively stop homeowners and owners from being able to make a claim when legitimate defects exist in residential and commercial construction.

All of these issues were addressed in 2003 when Chapter 558 was originally enacted and then later revised to clarify and resolve some early inequities in the process. Why is this being revisited now?  This will place the burden of defective construction on claimants as opposed to shifting responsibility to the party that created the problem.

Further, requiring the notice to specify the specific provisions of the Building Code that are violated would again impose prohibitive costs on claimants, who would have to pay consultants for hours of analysis and report preparation which, again, is not necessary at this stage.  The intent of Chapter 558 is to require notice and give an opportunity to inspect and allow a cooling-off period for the parties to talk before suit is filed.  The purpose of Chapter 558 and the notice procedure is to not have trial specific proof but enough information to allow the parties to discuss the defects and achieve a possible remediation or settlement.

Collectively, these changes are not designed to facilitate resolution, but are instead punitive toward claimants.

Lines 120-129:

There is no need for another statutory provision allowing fees for “frivolous” claims.  Section 57.105 already exists for that purpose.  Further, the courts already have inherent jurisdiction to sanction parties for bad faith or egregious conduct.  See Bitterman v. Bitterman, 714 So. 2d 356 (Fla. 1998) .

Lines 154-157:

Requiring claimants to produce maintenance records and “other documents” pre-suit imposes costs on claimants but is not helpful at this stage.  The statute already allows for visual inspections and destructive investigation.  An inspection, destructive or otherwise, will allow the notified party to form an opinion about whether the alleged defect is truly a defect or merely the result of a lack of maintenance.  Producing records will be neither helpful nor relevant unless and until suit is filed as they are matters of proof.  Having these records does not assist a party in responding to the notice of claim as the recipients will either agree to fix the problem, make a monetary offer or not.  Once again, the point of Chapter 558 is to allow the inexpensive and efficient resolution of disputes, not create obstacles to filing suit.

Lines 166 – 181:

This section creates a mini-litigation process of its own.  The whole point of creating Chapter 558 was that it was to be an alternative to litigation.  Chapter 558 does not currently require a notified party to do anything.  A notified party is not required to retain consultants, review documents, provide a remediation or do anything at all under the existing statute.  In fact, a notified party can simply not respond to a notice of claim and no punishment is afforded under current law.  The idea that contractors must spend substantial sums investigating and defending against Chapter 558 claims is not true.  There is no purpose to be gained by adding subsection (16) except to create a club with which to threaten claimants.

At the end of the day, these changes will make pursuing real construction defects more difficult and will pass along the liability for those defects to the owners and purchasers rather than those that constructed the improvements.

For those of us who live or work in a condominium, it is easy to lose sight of all of the infrastructure that operates behind the scenes to make a condominium a home.  When that infrastructure fails, it can be inconvenient, or it can easily be disastrous in the case of a water leak.  While the damage from a water leak can be immense, there are ways to avoid or at least reduce the impact from them, if you are proactive before and after they occur, and know your rights and responsibilities.  

Taking steps like establishing inspection, maintenance and replacement schedules, and installing water leak detection systems, air conditioner pan alarms and remote sensors wired to master valve shut-offs can prevent problems from becoming a disaster.  In the event of a water leak, condominium associations should take advantage of their right to access units to protect common elements and other units, and prevent mold from forming.  Both the association and all affected unit owners should notify their respective insurance companies immediately, in writing, so their carriers’ adjusters can inspect the damage and advance cleanup, dry-out and repair costs.

While there might be a dispute over which insurance company should pay for what damage, as long as the required maintenance and replacements were performed and the damage was not the result of intentional conduct or negligence, some insurance coverage should apply to defray the financial impact of the leak.  Alternatively, taking the appropriate steps before and after a leak will enable the impacted parties to hold accountable those entities truly responsible for the leak, like contractors, suppliers and service providers.

The foregoing issues and others will be addressed during a continuing education course presented by Becker & Poliakoff, P.A. attorneys Lisa Magill and Ryan Carpenter on April 24, 2014 from 9:00am to 11:00am at 1 East Broward Boulevard in Fort Lauderdale, Florida (CAM credit available).  If you would like to attend, please register online by clicking here: http://callbp.com/event_registration.php?event_id=321.