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Focus Column
Construction Defects
By Daniel Lee Jacobson
When it comes to construction defects, in whom
does the right to sue in tort accrue - the original
owner of a piece of real property or the subsequent
owner? An examination of three leading state Court of
Appeal cases reveals that there are two opposing answers
to this question.
The split of authority is over whether the
"discovery rule" applies to the issue of when a
construction defect action accrues in tort. Under the
discovery rule, an action accrues when the factual basis
for a suit is or reasonably should have been discovered.
Leaf v. City of San Mateo 104 Cal.App.3d 398
(1980) (disapproved on another point in Trope v. Katz
11 Cal.4th 274 (1995).
One line of Court of Appeal cases holds that
only the original property owner "owns" a cause of
action for construction defects. These cases announce
that accrual of an action happens at the moment that
there is "actual and appreciable harm" to the property.
Under this theory a subsequent owner would have no cause
of action if such actual and appreciable harm occurred
before the subsequent owner took ownership of the
property.
Another line of cases embraces the discovery
rule and says that a cause of action accrues in a
subsequent owner if that subsequent owner is the first
to discover actual and appreciable harm to the property.
Keru Investments Inc. v. Cube Co.
63 Cal.App.4th 1412 (1998), decided by the 2nd District
Court of Appeal, and Krusi v. S.J. Amoroso
Construction Co. 81 Cal.App.4th 995 (2000), decided
by the 1st District Court of Appeal, teach that the
right to bring a construction defect case in tort
accrues in the original owner.
The May 20 case of Siegel v. Anderson Homes
2004 DJDAR 6005 (Cal. App. 5th Dist. May 20, 2004),
decided by the 5th District Court of Appeal, professes
that the discovery rule applies to such cases, and thus
the right to sue might accrue in the original owner - or
it might accrue in a subsequent owner, depending upon
the timing of the discovery (or the timing of when there
reasonably should have been such discovery).
Keru dealt with a general contractor's
1988 seismic retrofit to an apartment building. Despite
the retrofit, the building allegedly suffered severe
damage during the 1994 Northridge earthquake. After the
earthquake the building was sold to Keru Investments,
the subsequent owner.
The land sales contract had a clause in it
stating that the subsequent owner was taking the
building "as is" and that it knew that the building had
suffered "severe earthquake damage." Nonetheless, the
subsequent owner sued the seismic retrofit contractor
for negligence. The Keru court observed, "not
only was the defective construction work done on behalf
of a previous owner, the building itself sustained the
damage for which ... [the subsequent owner] seek[s]
recovery prior to the transfer of ownership ... This
leads to the question of whether ... [the subsequent
owner] suffered any injury for which tort recovery is
warranted."
The subsequent owner argued that it had not
discovered the damage until the property had been
transferred to it. (Somehow it made this argument even
in light of the land sales contract's explicit
acknowledgment of at least some of the damage.) The
court generally defined when a cause of action accrues.
"'A cause of action accrues at the moment the
party who owns it is entitled to bring and prosecute an
action thereon.' [Citations.]" "That is said to occur
when '... events have developed to a point where
plaintiff is entitled to a legal remedy, not merely a
symbolic judgment such as an award of nominal damages.'"
[Citation.]
Then the court applied that general definition
to the facts of the case. "Under this definition of
accrual, a tort cause of action arose against appellant
[the contractor] either when the defective work was
completed or when the building sustained damage as the
result of the Northridge earthquake. Neither the
wrongful act [the performing the retrofit in a negligent
manner] nor the damages [which happened during the 1994
earthquake] occurred while Keru Investments was the
owner."
The court decided that standing to sue accrued
in the original owner, and not the subsequent owner,
because the actual and appreciable harm happened to the
building when the original owner owned it. In coming to
this conclusion the court relied in part on Vaughn v.
Dame Construction Co. 223 Cal.App.3d 144 (1990). The
Vaughn court had to decide "whether a real party
in interest somehow loses standing to sue for damages
suffered as a result of defective construction by the
subsequent sale of the defective premises." In other
words, Vaughn looked at the accrual issue from
the opposite end than did Keru. In Vaughn
the plaintiff sold the property, and then made a claim
for construction defects.
The Vaughn court observed, "the real
party in interest is the party who has title to the
cause of action, i.e., the one who has the right to
maintain the cause of action. ... [T]he essential
element of the cause of action is injury to one's
interests in the property - ownership of the property is
not [an essential element]." So, even though the
plaintiff no longer owned the property, the plaintiff
had owned the property when it experienced actual and
appreciable harm, giving the plaintiff standing to sue.
Perhaps to assuage the fears of the defendant of
perpetual litigation from continually succeeding owners,
the Vaughn court said, "Since it was the
plaintiff's interest in the property which was injured
by the defendant's defective construction, she is the
owner of the cause of action entitled to maintain the
present action." "No one other than plaintiff can
recover for the damages she sustained as owner of the
property at the time the injury occurred."
In answer to the argument that the cause of
action should accrue upon discovery of damage, the
Keru court said, "Respondents cannot claim to own
the cause of action simply because they discovered the
reason for the damage after the building was
transferred. Under respondents' reasoning, every party
who purchased a hulk of a building would automatically
have a right to bring a lawsuit if they could find some
previously unknown factor which contributed to the
building's destruction."
So, Keru stands for the proposition that
accrual of a construction defect action in tort does not
exist in a subsequent owner. But, note that (a) Keru
recognized that the question is who owns the cause of
action, as opposed to who owns the real property; (b) in
Keru the original owner had discovered the actual
and appreciable harm before the sale to the subsequent
owner; and (c) despite its protestations to the
contrary, the subsequent owner knew of at least some of
the construction defects upon taking title to the
building. So, there wasn't an issue as to what happens
to a subsequent owner who is the first to discover the
defects, and who first discovers those defects after
buying the impacted property.
Two years after Keru came Krusi v.
S.J. Amoroso Construction Co. 81 Cal.App.4th 995
(2000). Krusi dealt with a commercial building.
The fourth owners of the building brought a construction
defect negligence action against the original architects
and contractors who designed and built the building.
(The first two owners were related entities, and it is
unclear as to whether the third owner was related to the
first two.)
Prior to the fourth owners' (the subsequent
owners') purchase, the third owner discovered
manifestations of construction defects (leaks and a
problem with the gypcrete underlayment on the second
floor). There is an indication that the price of the
building may have been reduced because of the cost of
repairing the leaks.
The subsequent owners claimed that the only
defective conditions about which they knew before they
bought the building were the leaks, and those they
thought had been fixed.
They contended that since their purchase of the
building it "has sustained damages such as new leaks in
the decks and deteriorating interior underlayment on the
second floor." They claimed that those conditions
resulted from "building wide deficiencies in the
original design and construction of the subject
building," and that the "nature and cause for the
defects and resultant damages ... were not and are not
exposed, open or evident without an invasive
inspection," and that they would not be apparent to
laymen.
The Krusi court cited CAMSI IV v.
Hunter Technology Corp., 230 Cal.App.3d 1525
(1991) for the rule that "a cause of action for damage
to real property accrues when the defendant's act causes
"'immediate and permanent injury'" to the property or,
to put it another way, when there is 'actual and
appreciable harm' to the property." It cited San
Francisco Unified School District v. W.R. Grace & Co.,
37 Cal.App.4th 1318 (1995), for the rule that a property
damage case accrues "when 'damage' or 'physical injury
to property' occurs."
As did Keru, the Krusi court
recognized Vaughn and its admonishment that, "No
one other than plaintiff can recover for the damages she
sustained as owner of the property at the time the
injury occurred."
With these precedents in mind the Krusi
court stated its rule. "[I]f owner number one has an
obviously leaky roof and suffers damage to its building
on account thereof, a cause of action accrues to it
against the defendant or defendants whose deficient
design or construction work caused the defect.
"But, if that condition goes essentially
unremedied over a period of years, owners two and three
of the same building have no such right of action
against those defendants, unless such was explicitly
(and properly) transferred to them by owner number one.
But owners two and three could well have a cause of
action against those same defendants for, e.g., damage
caused by an earthquake if it could be shown that
inadequate seismic safeguards were designed and
constructed into the building. Such is, patently, a new
and different cause of action."
But, note that the Krusi court took pains
to explain that the subsequent owners' claims of new and
different defects were belated and contradicted other
evidence put forth by the subsequent owners themselves.
So, in Krusi, as in Keru, there is
stated a strong rule of accrual at the time of actual
and appreciable injury. Note the underlying similarities
between Keru and Krusi: (a) both
recognized that the question is who owns the cause of
action, as opposed to who owns the real property; (b)
both observed that the original owner had discovered the
actual and appreciable harm before the sale to the
subsequent owners; and (c) in both the subsequent owners
had at least some knowledge about some of the defects
prior to their purchase of the property.
In Siegel, two people each purchased a
home built by Anderson Homes. They did not purchase the
homes from Anderson, they were subsequent purchasers.
Like the Keru and Krusi courts,
the Siegel court recognized that the question is
who owns the cause of action, as opposed to who owns the
real property. Unlike the previous owners in Keru
and Krusi, the previous owners in Siegel
knew nothing of the alleged construction defects.
Also unlike the facts in Keru and
Krusi, the Siegel subsequent owners knew
nothing about any construction defects before they
purchased their homes. (Or, at least the Siegel
court assumed that this was the state of the facts for
the purpose of its opinion.)
So, while the Keru court, faced with a
subsequent owner who knew of the construction defects,
if not the cause of those defects, was concerned about
embracing a discovery rule that would allow "every party
who purchased a hulk of a building [the ability to] ...
automatically have a right to bring a lawsuit if they
could find some previously unknown factor which
contributed to the building's destruction," the
Siegel court was faced with subsequent owners who
knew nothing about the construction defects.
Thus, the Siegel court was concerned
about embracing a rule of accrual at the time of
property damage that would be '"manifestly unjust ...
[in that it would] deprive plaintiffs of a cause of
action before they are aware that they have been
injured."' Siegel, citing Leaf, supra (Leaf
disapproved a different point in Trope.).
Commenting on the rule announced in Keru
and Krusi, the Siegel court said, "We
disagree with the definition [of accrual of a
construction defect action] insofar as it fails to take
account of the owner's discovery of the damage, and we
believe it was unnecessary to employ this very
restrictive definition of accrual to reach the results
in Keru and Krusi."
In trying to reconcile the law, facts, and
policy concerns raised by Keru, Krusi,
Vaughn, CAMSI IV and its own case, the
Siegel court stated a rule that may satisfy all of
those things, "The answer seems to be that the cause of
action belongs to the owner who first discovered, or
ought to have discovered, the property damage.
"It is only then that some entity capable of
maintaining a legal claim will have suffered a
compensable injury, e.g., the cost of repair and/or the
loss in the property's value (inasmuch as the owner then
has a duty to disclose the damage to potential buyers).
This rule is entirely consistent with the results in
both Keru and Krusi (if not with their
statements of the rule)."
Daniel Lee Jacobson is an attorney at
Veatch, Carlson, Grogan & Nelson and a professor at
Pacific West College of Law.
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