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Supreme Court to sort out statute of repose

What happens when a builder’s warranty covers more years than state law allows for subsequent claims?

RALEIGH – Willful and wanton negligence will be considered in an N.C. Supreme Court appeal that could affect the pocketbooks of homebuilders, construction product manufacturers and homebuyers – and the warranties that bind them.home builders

When lawyers in Christie v. Hartley Construction Inc. file their briefs with the state’s highest court Jan. 20, they will address two issues not considered in a July 16 state Court of Appeals decision, or by the case’s original trial court.

The homeowners, George and Deborah Christie, sued the Carrboro-based builder, Hartley Construction, and GrailCoat Worldwide LLC, alleging that an exterior cladding material installed on a Chapel Hill custom home that was completed in March 2005 failed, leading to the rotting of the home’s wooden structure and cladding.

The October 2011 lawsuit didn’t make it to trial because an Orange County Superior Court judge ruled that the state’s statute of repose, which requires claims against home construction and material companies to be filed within six years of the work’s completion, barred the homeowners from pursuing their claim against Hartley or GrailCoat.

But because the appeals court decision in favor of Hartley and GrailCoat was split 2-1, the Christies were guaranteed a hearing before the Supreme Court. In filing the appeal, the Christies’ attorneys, Whitfield Bryson & Mason of Raleigh, also asked the court to consider whether the lower courts overlooked exceptions to the statute of repose.

The Supreme Court on Dec. 18 granted the petition to include the issues.

In the Court of Appeals ruling, Judge Robert N. Hunter Jr. agreed with most of his two colleagues’ decision to uphold the lower court’s dismissal of the case, but wrote that he would have reversed the dismissal of the Christies’ claim against GrailCoat for breach of express warranties.

“I would … hold that a full warranty which exceeds the time period for the statute of repose is a waiver of the statute for all claims,” he wrote. “To hold otherwise would unnecessarily impair the obligation of, and therefore the freedom to, contract.”

Under current law, the statute of repose trumps a warranty. And proving fraudulent conduct and willful and wanton negligence are among the only ways around it.

The Supreme Court will now consider whether GrailCoat, of Orlando, Fla., committed “fraudulent conduct in its advertising” of the cladding material and whether Hartley committed “an intentional and/or reckless act by defying the (N.C.) Building Code” in using the product, which the plaintiffs allege was not approved by the code.

Dueling statutes

Those arguments, not considered in the lower courts, are aimed at proving willful and wanton negligence by GrailCoat and Hartley, said the plaintiff’s attorney, Scott Harris of Whitfield Bryson & Mason.

That’s key to the case because the statute of repose allows seeking damages after six years only in cases of fraud or negligence.

If the court accepts the arguments, Harris said, GrailCoat’s 20-year waterproofness warranty should remain in effect despite the statute, and Hartley’s liability should be extended by the court beyond the contractor’s one-year materials and workmanship warranty.

The statute does not limit lawsuits seeking “specific performance,” which means compelling a defendant to fix the problem at issue.

The Christies said they had to pay another contractor $160,000 for repairs to the house, according to their Supreme Court appeal.

But the Christies did not want GrailCoat or Hartley to remedy the problem, they argued, because: 1) The cladding material couldn’t be repaired because its use was in violation of the state building code; and 2) if the Christies hadn’t paid someone else to fix the problem, the rot would have worsened during the time spent trying to compel the defendants to make the repairs, rendering the house unlivable.

These assertions are disputed by Hartley attorney Bill Pollock of Raleigh-based Ragsdale Liggett.

“Most warranties, if not all, are for replacement of faulty products and workmanship for the term of the warranty, not just giving homeowners money,” Pollock said in an interview. “I’ve never seen a warranty that said that. The plaintiffs never sued for specific performance. And that house is far from unlivable; they’ve been in it the entire time.”

If the court sides with the Christies and finds that the defendants violated unfair trade practices and consumer protection laws, the plaintiffs’ claim should be bound by the state’s four-year statute of limitations, not the statute of repose, the Christies’ appeal argues. Unlike the statute of repose, the statute of limitations begins not with the completion of construction but with the discovery of the problem, which in this case the Christies allege was not until shortly before they filed their suit.

Owner dead, company gone

The case against Hartley hinges on the plaintiffs’ accusations that the construction company installed the “non-drainable” or “barrier” cladding, violating seven prohibitions of the state building code more than a decade after “thousands of lawsuits” had been filed against contractors in the 1990s for using a faulty synthetic stucco cladding material that the Christies’ complaint says is similar to the GrailCoat product.

Pollock said that several previous cases have established that violation of building codes alone “does not in itself necessarily amount to willful and wanton negligence.”

The Christies’ appeal says the cases cited by Pollock involved “relatively minor” aspects of the code, “such as overlooking the flashing details, or failing to apply enough caulk.”

Instead, the appeal argues, Hartley violated the code by “specifying, designing and constructing the residence with a cladding system” that he, as a licensed architect and contractor, should have known was not approved and would fail because of all the synthetic stucco lawsuits, which were widely covered by the media.

The case against Hartley is somewhat unusual in that the owner of the company is dead and the company no longer exists. But the company’s liability insurance policies are still in effect, and the plaintiffs are seeking damages from the insurance company.

As for GrailCoat, the Christies’ appeal alleges the company did not test the material for waterproofness before advertising it as a “scientific breakthrough,” and knew it was faulty before the Christies’ home was constructed.

GrailCoat’s attorney could not be reached for this story.

The appeal quotes affidavits by Mike and Linda Meierer, former employees of GrailCoat, who say they resigned after determining that the GrailCoat product, which was sold under the “Superflex” brand, did not live up to the company’s billing.

In a complaint filed with the Florida Unemployment Bureau in 2007, Mike Meierer said that “GrailCoat defrauded its customers because it knowingly sold its systems to customers (in situations) that would result in substantial damages to any home on which it was applied.”

The case has captured the attention of many homebuilders and construction lawyers working in North Carolina, though few could say what the long-term effect of the Appeals Court decision would be on home warranties longer than six years.

Many homebuilders offer what is known as a “2-10” warranty, named after the Denver, Colo.-based 2-10 Home Buyers Warranty insurance company, which sells policies to about 300 homebuilders throughout North Carolina. The policies typically cover workmanship for one year, HVAC, electrical and plumbing systems for two, and structural components for 10.

One attorney, Charlotte-based Jorge Cowley, who is also a state-licensed engineer, said the decision could have a bigger impact on homeowners and on contractors trying to sue manufacturers of building materials.

“There must be a thousand different products that go into building a home,” Cowley said. “Thirty-year shingles, 50-year caulk. They all have different warranties.”

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