Under New Ownership

Construction lawsuits are not known for their brevity. Often spanning multiple years and involving a vast number of parties, these cases tend to wear out their welcome with the risk managers, claims personnel, and even attorneys who are handling them.

But it is important to overcome the temptation to check out. A routine timeline in the land of construction litigation is ample time for plaintiff homeowners to sell their homes, sometimes unbeknownst to their own attorneys. A little due diligence by way of a title search can go a long way in reevaluating, reducing, or altogether eliminating claims and damages. Consider the following issues:

•    Did any plaintiff claimants sell their home or commercial building during the litigation?
•    If so, did they disclose the particular defects alleged in the lawsuit to the buyers?
•    Did the alleged defects affect the sale price of the home or building? Can the homeowner prove it?
•    How does the alleged reduction in the home or building’s value, as evidenced by the sale price, compare to the damages alleged in the lawsuit?

Who Owns the Property?
It is a quick and painless process to check the current ownership of a property in litigation, as public-records searches are common and widely available. The easiest and most surefire way to get not only the current owner information, but also past history of ownership is by getting records via a title company. Again, most search requests can be handled in a day, online or over the phone, for a nominal fee.  

It is particularly important to conduct such searches at either end of the economic housing markets. Housing booms—particularly at the top of the market, where we are now—often result in sales by home and building owners seeking to cash in their equity at its highest value. On the other hand, housing busts often result in homeowners selling their homes out of desperation, or because of job movement. In addition, there are often accompanying foreclosures and short sales in those down cycles that could potentially affect the ownership of the property in question.

Disclosure Requirements
Homeowners selling their homes are typically statutorily required to make detailed disclosures to prospective buyers regarding the home’s condition. Most states have rigorous requirements and required forms for disclosure of physical and legal claims that could affect the value or enjoyment of the property. These disclosures involve many of the same issues that form the basis of construction-defect litigation: the home’s structural integrity, plumbing, mechanical and electrical systems, windows/doors, and water intrusion such as roof leaks, among other considerations. While requirements vary by state, the forms—sometimes called Transfer Disclosure Statements—must typically be delivered before or directly after a written response to an offer is made. The idea is that the existence of any material defects will be known to both parties and factored into the final sales price.

Commercial building owners generally do not have the same requirements, but their duties to disclose are often contained in the purchase and sale agreements and escrow instructions. Typically, there are places in such sales agreements for the commercial owner to disclose any material defects in the property in question to the buyer.  

By way of contrast, during foreclosures, a subsequent buyer most often buys a property “as-is,” with the onus put upon the buyer to discover and value any alleged defective conditions.  

Why Transfer of 
Ownership Matters
So your plaintiff home or building owner doesn’t own the relevant property anymore—what does that do to the claim?    

First, you need to find out who now owns the claim—did the plaintiff expressly retain the claim in the purchase agreement? Was the claim expressly transferred to the new owner of the property? Or, is the issue unclear, either because the plaintiff failed to disclose the claim to the new owner in the purchase, or because neither party thought of the claim enough to specifically allocate who would own it? Sometimes, the seller and new owner will even expressly split the claim 50/50.  

It is important for you to find out because there can be some legal ramifications to the pending claim. If the new owner now owns the claim, in whole or in part, you may have a person or entity that needs to be a necessary party to the litigation for it to continue. Often, the new owner was either unaware of the details of the claim, or has a different vision from the original owner for how to use, develop, or finance the property. In those circumstances the new owner will sometimes elect not to pursue the claim, either because she does not want the hassle of dealing with it, or she does not want to have to disclose it to other buyers or future financiers.         

If the original owner retains ownership of the claim, he can most likely continue prosecuting it, as ownership of the claim can be different than ownership of the property in question. However, it may be worth it to file a motion to dismiss based on standing. Also, sale of the property may eliminate some remedies he may be seeking, including rescission, injunctions, and statutory remedies that depend on homeownership.  

Where a foreclosure or short sale has taken place, you should carefully review the original mortgage documents. Often, those documents expressly assign to the bank any claims regarding defects in the property. In those situations, the bank likely owns the claim, whether the claimant wants to admit it or not. In many cases, those banks do not want to pursue the claim.  

The Next Order of 
Business—Damages
Assuming that the former or current owner of the property wants to continue pursuing the claim for defects in the property, the next step is considering damages.  

At this point, you should be aware if the claim of defects was disclosed to the new owner. If it was not, and the old owner is still pursuing the claim, then the defense has evidence that calls into ques-tion the veracity of the claimant. Once the claimant has been shown to be less than forthcoming about one thing, it is considerably easier to convince a trier of fact that he is unlikely to be trustworthy concerning other aspects of his claims. Most states have jury instructions that cover that circumstance explicitly.

For a seller who retains ownership of the claim, the measure of damages will now be different. Whereas, for a property owner, the cost to repair defective items is often the correct measure of damages, for a person or entity who no longer owns the property, that measure of damages would now be irrelevant. Instead, the measure of damages would be the alleged loss in value of the sale due to the defects. And because the plaintiff has the burden of proof to prove all aspects of his claims, he has the burden to show he was, in fact, damaged by such defects.  

If the seller failed to disclose the claim during the sale, how can he have any damages? If a disclosure was not made, then he could not point to any loss of value of the property due to the defects. In addition, powerful questions could be asked before the trier of fact: If the seller thought so little of the claim so as to fail to disclose it, then how bad could the claim/damages be?

For a seller who did disclose the claim during the sale, he has the burden to show evidence that the sale price was negatively affected by the claimed defect. Without a specific document expressly reducing the sale price of the home due to the claim of defects (which is exceedingly rare), it will be difficult for the claimant to carry that burden.
It is also possible that a comprehensive, truthful disclosure simply did not affect the home’s sale price. This could be proven where a buyer’s offer remained the same after the seller disclosed the defects at issue in the claim.

A similar strategy should be pursued when a buyer now owns the claim. When a disclosure is made regarding the claim of defects, the buyer again has a difficult burden to carry, as she presumably got the property cheaper because of the disclosure and has no damages.

If the buyer claimant obtained the property without any notice of the claim for defects, then she may still be able to prove damages in support of such claim. In that situation, the defense professional should examine the inspection report performed on behalf of the buyer during the sale process. If the defective conditions are noted and a later sale took place, then it can be argued that any loss in value to the property was already taken into consideration in the sale, with no or little damages to the buyer as a result.     

Even when a claimant owner has evidence to show that the alleged defects resulted in a decreased sale price, the amount of that decrease may be substantially less than the amount of damages alleged in the lawsuit.

While the above scenarios can be confusing, the central tenet to keep in mind is that the claimants have the burden to prove that they were damaged. If they don’t have evidence to support that claim, or if the evidence actually seems to indicate otherwise, then their claims can be ripe for challenge.  

This strategy should be implemented in the form of a general, habitual practice of running title searches on homes or buildings that remain in litigation, before major case events such as settlement conferences or trial. If a case is lengthy in time, more than one title check should be done. When the search reveals a sale, a demand letter should be drafted to the claimant or the claimant’s counsel explaining the results of the search and the implications regarding standing ownership of the claim and damages.

If the selling claimant is just one among many in the lawsuit, it is common for plaintiffs’ attorneys to simply drop the selling claimant from the case. Sometimes, unscrupulous claimants or their counsel will attempt to “fix” this issue after the property has already been sold via a new “assignment” of rights of the claim to a party. However, this assignment may be void for lack of consideration (a contract requirement that directs each party to a contract to obtain something of value), and may also be in direct contravention of the terms of the purchase and sale agreement. Such “assignment” should be vigorously challenged if it took place after the sale of the property at issue.

When disputes do arise regarding the implications of a sale, defense professionals are in a good position to dictate a dismissal or settlement on favorable terms. It does not cost much in terms of time or money to ask for relevant sale and disclosure documentation, and the upside is worthwhile when facing substantial defect and damage allegations.