Builder’s “Willful Misconduct” Tolls 10-Year Latent Defect Statute.

Acosta v. Glenfed Development Corp. (2005) 128 Cal.App.4th 1278.

In a case with bad news for California builders and contractors, the California Court of Appeal has held that evidence of willful misconduct on the part of a builder or its subcontractors may toll the 10-year latent defect statute of repose. The court ruled that for purposes of tolling the statute, the builder is vicariously responsible for a subcontractor's willful misconduct.

Plaintiffs were single-family homeowners who sued the builder and developer entities (Glenfed Development) for defects in their homes. The alleged defects included serious framing and structural deficiencies and leaking windows. Glenfed, in turn, cross-claimed against the various subcontractors whose work was allegedly defective. Though the homes were constructed in 1989, plaintiffs' action was not filed until December 30, 1999.

Glenfed moved for summary judgment, contending that, because notices of completion were recorded more than 10 years before filing suit, the claims were barred by Code of Civil Procedure, § 337.15. In opposition, the plaintiffs filed declarations from two experts who stated that the defects:

1. involved conspicuous failures to comply with applicable building code provisions, with the cityapproved building plans, and with basic construction industry practices;

2. were of a type that inevitably would have been recognized by any competent construction supervisor conducting even minimal day-to-day inspections of the type required in a construction project such as the one involved here, and would have caused the construction supervisor to require the responsible subcontractors to remedy the defects immediately, before work could proceed on the houses; and

3. had the financial impact of producing, in defendants' favor, substantial cost savings...

[T]he defects appeared to be the result of willful misconduct by the defendants in that they were "so serious and prevalent that they were either the result of [a] deliberate decision to 'cut corners' for cost savings or the result of a near total, virtually reckless, failure by the developer to adequately supervise subcontractors." The experts expressed the view that it was not reasonably possible for the builder, and the builder's contactors, agents, and employees, to have failed to observe or been aware of the defects.

The trial court ruled in favor of Glenfed, finding that the 10-year statute of repose barred the homeowners' claims. Plaintiffs appealed.

The Court of Appeal reversed, and it determined that a defendant relying on C.C.P. § 337.15 as a defense to a claim for construction defects must present evidence that supports each element of the affirmative defense. Glenfed in this case did so by setting forth the date that the notice of completion for each plaintiff's home was recorded, and the date that the respective homeowner was named as a plaintiff in the suit. Once Glenfed met its burden on the issue, the burden then shifted to the plaintiffs to raise triable issues of material fact of defendants' willful misconduct to toll the statute of repose.

The Court of Appeal then turned to the critical issue in the case: Whether a finding that willful misconduct which results in latent defects is sufficient to preclude a developer and general contractor's reliance on § 337.15, even though the builder/developer neither knew of nor engaged in that willful misconduct. C.C.P. § 337.15 was intended by the Legislature to provide a firm and final outside limitation period to protect construction professionals from perpetual exposure to liability. However, the Legislature in subdivision (f) of § 337.15 included an exception to this "firm and final" limitation: any action based on either willful misconduct or fraudulent concealment.

The Court of Appeal distinguished "willful misconduct" from negligence in construction defect cases as follows:

Unlike negligence, which implies a failure to use ordinary care, and even gross negligence, which connotes such a lack of care as may be presumed to indicate a passive and indifferent attitude toward results, willful misconduct is not marked by mere absence of care.

[W]illfulness generally is marked by three characteristics:

1. actual or constructive knowledge of the peril to be apprehended;

2. actual or constructive knowledge that injury is a probable, as opposed to a possible, result of the danger; and

3. conscious failure to act to avoid the peril. [Citations.] As the foregoing suggests, willful misconduct does not invariably entail a subjective intent to injure. It is sufficient that a reasonable person under the same or similar circumstances would be aware of the highly dangerous character of his or her conduct. [Citations.]

The trial court had granted summary judgment because there was no evidence that Glenfed performed the work or knowingly allowed the defects to pass inspection. In reversing, the Court of Appeals pointed to the provisions of the Business and Professions Code requiring the builder/developer to exercise control of its subcontractor and to be in a position to observe willful misconduct in the construction of the homes. Having been in a position to observe such misconduct, the builder/developer would then have a duty to report it, since the purpose of the licensing laws is for the protection of the public. Where a subcontractor commits willful misconduct in the construction of an improvement to real property, it is the builder/developer who receives the economic benefit of that misconduct. The Court held that as between an innocent third-party purchaser and the builder/ developer, the purchaser should not be required to bear the burden associated with such misconduct. Therefore, a subcontractor's willful misconduct is imputed to the builder/developer for purposes of tolling the statute of limitations under C.C.P. § 337.15.

No one wants to see a construction professional in California get away with building homes with significant and substantial defects. However, the Court of Appeal has substantially deviated from current California law. As a result of this ruling, subcontractors are, for purposes of C.C.P. § 337.15, agents of the builder/ developer and the builder/ developer is vicariously responsible for the subcontractor's conduct. This significantly increases the liability exposure of contractors for defects created by subcontractors. It also erodes the important distinction between independent contractors and agents in the field of construction. We predict that the California Supreme Court will either decertify this opinion to eliminate its value as future precedent, or accept review and reevaluate the decision.

- Ralph R. Rhoades