California Supreme Court Confirms SB800 As The Exclusive Remedy For Construction Defect Claims

Introduction

The unanimous decision by the California Supreme Court in the highly anticipated McMillin Albany, LLC v. Superior Court, No.5229762  (1/18/2018), case resolved a previous split in California law as to the boundaries of California’s Right to Repair Act, Civil Code §§ 895, et seq. (“SB800”). In its decision, the Court settled two issues: (1) whether SB800 precludes a homeowner from pleading common law causes of action for defective conditions that resulted in physical damage to a home; and (2) whether a homeowner’s failure to comply with SB800’s pre-litigation procedures mandates a stay of proceedings where the homeowner commences litigation by asserting common law causes of action for construction defects.

The California Supreme Court answered “yes” to both, giving builders and developers a decisive win. The Court held that SB800 cuts off a homeowner’s right to creatively plead around the statute by asserting common law causes of action against a builder or developer relating to alleged construction defects, and requires that homeowners participate in the SB800 pre-litigation procedures.

Facts

The homeowner Plaintiffs purchased 37 new single-family homes built by developer and general contractor McMillin Albany LLC (“McMillin”) after January 2003. In 2013, the homeowners sued McMillin, alleging the homes were defective in nearly every aspect of their construction. The operative first amended complaint filed by the homeowners included common law claims for negligence, strict product liability, breach of contract, breach of warranty, and a statutory claim for violation of the construction standards set forth in SB800. The complaint alleged the defects caused property damage to the homes and economic loss due to the cost of repair and the reduction in property values.

McMillin sought a stipulation from the homeowners to stay the litigation so the parties could proceed through the informal pre-litigation process contemplated by SB800. The homeowners elected not to stipulate to a stay and instead dismissed their SB800 statutory claim. McMillin then moved for a court-ordered stay, which the trial court denied. In doing so, the trial court concluded it was bound to follow Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC, 219 Cal.App.4th 98 (2013), which held that SB800 was adopted to provide a remedy for construction defects causing only economic loss and did not alter pre-existing common law remedies in cases resulting in actual property damage or personal injuries.

However, the trial court certified the issue as one worthy of immediate review. McMillin sought writ relief. The Court of Appeal granted the petition and issued the writ, disagreeing with Liberty Mutual. In doing so, the Court of Appeal held the Act’s pre-litigation resolution process applied even though the homeowners dismissed their SB800 statutory claim. The Court of Appeal concluded that McMillin was entitled to a stay pending completion of the pre-litigation process.

Analysis

The Supreme Court of California granted review and affirmed the judgment of the Court of Appeal in a unanimous opinion authored by Justice Liu. The issue before the Court was whether a common law action alleging construction defects resulting in both economic loss and property damage is subject to SB800’s pre-litigation notice and cure procedures. The Court’s analysis relied heavily on statutory history and construction.

In Aas v. Superior Court, 24 Cal.4th 627, 632 (2000), the California Supreme Court held that the economic loss rule bars homeowners from recovering damages where there is no showing of actual property damage. In doing so, the Court emphasized that the Legislature was free to alter the limits on recovery and to add any homeowner protections it deemed appropriate. Two years later, the California Legislature responded by enacting comprehensive construction defect litigation reform, which was codified at Civil Code §§ 895-945.5 (commonly known as the Right to Repair Act or SB800). In addition to setting forth standards for construction of a dwelling and providing homeowners with a right to sue for deficiencies even in the absence of property damage or personal injury, SB800 also established a pre-litigation dispute resolution process, whereby builders must be given notice of alleged construction defects and an opportunity to cure the defects prior to a homeowner filing a lawsuit.

The California Supreme Court observed that the analysis turned on the extent to which the Legislature intended SB800 to alter the common law – whether SB800 was designed only to abrogate Aas by supplementing common law remedies with a statutory claim for economic loss or whether it was to go further and supplant the common law with new rules governing the method of recovery in actions alleging property damage.

The Court focused on the actual text of SB800 and the legislative history in making its ruling. Specifically, the Court noted that Civil Code § 896 expressly states that it applies to “any action” seeking damages for a construction defect, not just any action under the title. The Court also noted that the express language of SB800 states that the cause of action brought by a claimant shall be limited to violation of the standards set forth in SB800 except as explicitly set forth in SB800. The Court then points out that negligence and strict liability claims for property damage, unlike personal injury claims, are not among those specifically excepted from SB800. The Court found further support for SB800’s comprehensive nature in the Legislative history, which consistently described the Act as “groundbreaking reform” and a “major change” in construction defect litigation, designed to “significantly reduce the cost of construction defect litigation and make housing more affordable.” Finally, the Court noted that if it were to read SB800 to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of SB800, it would thwart the mandatory pre-litigation process and right to repair.

The California Supreme Court concluded that the Legislature intended SB800 to: (1) displace and supplant common law as to construction defects that cause property damage; (2) supersede the holding in Aas by providing a statutory basis for recovery for construction defects in the absence of property damage; and (3) preserve the status quo for common law claims for personal injuries arising from construction defects. Therefore, SB800, and its appurtenant provisions, constitutes the exclusive remedy for economic losses and property damage arising from construction defects affecting residential construction projects and homeowners are required to initiate and complete the pre-litigation procedures provided in SB800 prior to commencing litigation.

Learning Points: The California Supreme Court held that SB800 is the exclusive remedy not just for economic loss, but also for property damage arising from construction defects. This decision limits the causes of action homeowners can bring against builders and developers. No longer can homeowners bring common law causes of action for negligence or strict liability against a builder alleging construction defects on new houses sold after 2003. All claims seeking recovery for construction defect damages are subject to SB800’s pre-litigation procedures regardless of how they are plead in the complaint and homeowners must comply with the pre-litigation procedures before filing suit.

The McMillin Albany decision will have a significant impact on construction litigation by providing trial courts with the authority to ensure compliance with SB800, including strict compliance with the limitations periods set forth therein. Builders and developers will also be able to use SB800 to assert that homeowners’ claims are not actionable if the allegedly defective condition was unilaterally repaired or changed by a homeowner or where the homeowner failed to fully comply with SB800’s pre-litigation procedures. This is significant in that builders and developers can apply it as a defense to subrogation cases involving claims by homeowners’ insurance carriers that have repaired property damage claims submitted by the homeowner without complying with the pre-litigation procedures of SB800.

In sum, the McMillin Albany decision is a win for builders and developers and will significantly impact the handling of construction defect claims and litigation for years to come.