NJ Superior Court Halts End Run Around the Statute of Repose

In the matter Caprioti et al. v. Beazer Homes Corp., the Superior Court of New Jersey halted some artful pleading by the Plaintiffs seemingly intended to avoid the state statute of repose. The homeowner plaintiffs claimed that the builder had violated the New Jersey Consumer Fraud Act “by selling homes . . . without including allegedly pertinent information regarding the type of septic tank used on the properties.” All the homes included a septic system comprised of a chamber tank rather than a conventional stone and pipe system. This chamber characteristic is noteworthy because chamber systems fail prematurely more often than the conventional systems.  The plaintiffs argued is that a reasonable person would want to know this information prior to purchasing the home as it speaks to the homes useful life. They also claimed that the builder had concealed or omitted this information from the plaintiffs.  Many of the plaintiffs did indeed experience major problems including failure of the system, backup, odor, and the cost of more frequent service.

The builder moved for summary judgment on the plaintiffs’ complaints that “were more than 10 years after the purchase of their homes, and are thereby beyond the applicable 10-year Statute of Repose." See N.J. Stat. 2A:14-1.1(a) (“No action, whether in contract, in tort, or otherwise, to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property . . . . shall be brought against any person performing or furnishing the design, planning, surveying, supervision of construction or construction of such improvement to real property, more than 10 years after the performance or furnishing of such services and construction.").  The builder framed the issue as one of alleged inadequate or inferior construction whereas the homeowner plaintiffs stated that their claims “[arose] out of defendant’s unlawful sales practices, not negligent design, planning or construction of their homes.”

The Superior Court sided with the builder and summarily decided and dismissed the plaintiffs’ claims.  In so deciding, the Court emphasized that statutes of repose are intended to be read broadly to “limit the expanding liability of contractors . . . .”  The Court also focused on the fact that the plaintiffs did not dispute that the chamber septic system was an “improvement to real property” alleged to be “insufficient, inadequate, and not functioning properly.”  The Court reasoned that although couched as a misrepresentation “but for the alleged septic system failures, there would be no cause of action.”

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The author, Katharine Kohm, is a committee member for The Dispute Resolver. Katharine practices construction law and commercial litigation in Rhode Island and Massachusetts. She is an associate at Pierce Atwood, LLP in Providence, Rhode Island. She may be contacted at 401-490-3407 or kkohm@PierceAtwood.com.

Texas Court Rejects General Contractor's Fraud Claims Against Owner's Lender

A Texas court of appeals recently rejected a general contractor's claims for fraud against the project owner's lender.

In that case, the general contractor did not receive several progress payments for its work on the project, and was not paid its retainage by the owner. The owner defaulted on its construction loan, which led to the lender foreclosing on its lien on the property.

The general contractor filed suit against the lender, claiming (among other things) that lender fraudulently misrepresented that it was withholding retainage from the loan amounts disbursed to the owner for the general contractor's periodic pay applications. The trial court granted summary judgment in favor of the lender on the fraud and constructive-trust claims.

The court of appeals affirmed. It pointed out that the general contractor had failed to present evidence showing the lender had made any "misrepresentations" concerning retainage. The lender's witness stated that the lender did not actually withhold any retainage, but instead forwarded the full amounts to the owner. The general contractor, in turn, did not present any evidence that its requests for payment were presented directly to the lender, or that the lender withheld any of the retained funds for the owner. Absent such evidence, the court held that the general contractor failed to raise an issue of material fact on whether the lender made any misrepresentations.

The opinion is David Wight Constr. Co., Ltd. v. FDIC, No. 14-12-01003-CV (Tex. App--Houston [14th Dist.] Feb. 25, 2014, no pet. h.).

Though the court did not discuss the issue, by analogy, some statutes in Texas expressly exempt lenders from certain obligations concerning construction loans. For example, the Texas Trust Fund Act expressly exempts lenders from any obligations to hold construction payments in trust for the contractors who work on projects. Tex. Prop. Code Sec. 162.004(a). However, this exemption would not excuse the lender from liability for any fraudulent misrepresentations to the general contractor.

Has anyone seen a successful claim for fraud or negligent misrepresentation by a contractor against a lender? Would allowing such claims expand the lenders' liability in a manner that would interfere with the normal administration of pay applications in commercial construction projects?

Texas Jury Sentences General Contractor to Three Years in Prison for Fraudulent Nonpayment of Subcontractors

The Dallas Morning News reports that a jury in Fort Worth, Texas recently gave the principal of a general contractor a three-year prison sentence for fraud in connection with his failure to pay amounts due to subcontractors for work performed on the construction of a car dealership. According to the article, the Tarrant County District Attorney's Office stated that the criminal conviction, which came after a week-long trial, was the first of its kind in the country.

The press release from the Tarrant County District Attorney's Office offers some additional details about the case. It states that the general contractor had submitted payment applications to the owner claiming all subcontractors were being paid. This turned out not to be the case, as subcontractors filed seven liens totaling about $100,000 against the owner's property. The owner filed a complaint against the general contractor's principal with the Tarrant County District Attorney's Office. The principal was then indicted, arrested, and tried on a felony charge of making a false statement to obtain property or credit.

The defendant had no prior felony convictions, and therefore faced punishment ranging from probation to ten years in prison. During the punishment phase, prosecutors presented evidence of prior civil lawsuits against the defendant filed by subcontractors, as well as repeated bankruptcy filings to avoid liability. After considering this evidence, the jury sentenced the defendant to three years in prison with a $10,000 fine.

As civil defense attorneys, we often view potential liability for nonpayment on construction projects in civil, rather than criminal terms. Has anyone else experienced situations where criminal charges were asserted? Is this the type of conduct that merits criminal punishment rather than civil liability for damages?