Tolling Provision Does Not Necessarily Extend 10-Year Period for Bringing an Action Based on Latent Construction Defects.

Inco Dev. Corp. v. Sup. Ct., San Bernardino (August 4, 2005) __ Cal.App.4th __.

Based on the interaction of federal bankruptcy law and California Code of Civil Procedure § 356, the filing of a developer bankruptcy under normal circumstances would extend the time for commencing an action, or put another way, would toll the statute of limitations. But in Inco Dev. Corp. v. Sup. Ct., the Court of Appeal found that the tolling provision contained in Section 356 does not necessarily extend the 10- year period for bringing an action based on latent construction defects set forth in Code of Civil Procedure § 337.15.

Inco developed and constructed 216 homes in the Reunion subdivision in Adelanto, which were completed on or before May 16, 1993 (commencing the period for filing suit for latent construction defects). The first of the lawsuits brought by 14 individual residents was filed 10 years later on May 16, 2003. Inco moved for summary judgment on the ground that the 10-year limit under Section 337.15 had run for bringing an action based on latent construction defects. Plaintiffs countered that for 19 months Inco was in bankruptcy and the 10-year limit was tolled. Accepting plaintiffs' analysis, the trial court denied summary judgment on the ground that the 10-year limitations period is subject to the tolling provision of Section 356. The Court of Appeal reversed.

Relying on the reasoning in the 2003 California Supreme Court decision Lantzy v. Centex Homes, the Court of Appeal concluded that Section 337.15 is a statute of repose, not a statute of limitations. Section 337.15 has nothing to do with the date of injury and is not dependent upon traditional concepts of claim accrual, but rather bars all suits after the expiration of a specified time from an objectively determined and verifiable event, i.e., the date of substantial completion. In Lantzy (where the issue was tolling of the 10-year limit during contractor attempts to repair), the Supreme Court stated: "A broad tolling-for-repairs rule would contravene the Legislature's clear intent, at the time it adopted Section 337.15, to ensure a generous but firm cutoff date for latent-defect suits. Moreover, the extraordinary length of the limitations period set forth in Section 337.15 weighs strongly against the need for such a tolling rule as a matter of fair procedure."

The Court of Appeal also explained that the existence of an automatic stay under federal bankruptcy law does not provide for the tolling of any externally imposed time bars, but only provides for extending the applicable time deadlines for 30 days after notice of the termination of bankruptcy stay. This distinction was significant because Inco had emerged from bankruptcy almost two years before the suit was filed. The decision makes clear the basis of the ruling on the circumstances of this case. If Inco's bankruptcy had been pending at the expiration of the 10-year period, then the period would be extended for 30 days after the termination of the bankruptcy stay.

This case further solidifies the principles explained in Lantzy v. Centex Homes: (1) Section 337.15 was enacted as a result of concerns about the damaging consequences of indefinite liability exposure on the construction industry; (2) the lengthy period allows a potential plaintiff ample time to discover construction defects and bring suit despite such circumstances as were present here; and (3) the Legislature meant the generous 10-year period set forth in Section 337.15 to be final.

- Randel J. Campbell