The Nevada Supreme Court has found that homeowner associations have standing to pursue "representative" claims on behalf of any new purchasers who bought their units after the association had already initiated its lawsuit. In High Noon at Arlington Ranch HOA v. The Eighth Judicial District Court of the State of Nevada (2017) 133 Nev., Adv. Op. 66, Nevada's high court considered whether a homeowners' association was entitled to pursue "representative" claims on behalf of homeowners who purchased their homes after the association had already initiated its lawsuit under the pre-2015 version of Nevada's Chapter 40 statutes.
Case Background
The High Noon case involved a homeowner association's claims for construction defects in a 342-unit Las Vegas condominium project. The Association was pursuing claims arising from two areas of the project: (1) a traditional claim for defects in the common areas of the development and (2) "representative" claims on behalf of their members for damages inside their private condominium units. The Association pursued these latter claims under the pre-2015 version of Nevada Revised Statutes ("NRS") 116.3102(1)(d), which provides that the Association can assert claims "in its own name on behalf of itself or two or more units' owners affecting the common interest development." (emphasis added).
Several years into the High Noon litigation, the developer (DR Horton) sought to limit the scope of Association's "representative" claims. Noting that at least 230 of the 342 units had been sold during the pendency of the litigation, the developer argued that the Association should not be able to pursue "representative" claims as to these units. Its rationale for this argument was that the new homeowners had bought their units after the litigation commenced with full knowledge of the alleged defects, and presumably were able to negotiate a reduced purchase price of the home as a result. Hence, these homeowners had suffered no damage since they had received a discounted purchase price to reflect the allegedly defective conditions. To allow these homeowners to now pursue defect claims against the developer for the same defects would, in essence, be a windfall.
The developer argued that, while the Association could not pursue claims on behalf of the new owners, it was also precluded from pursuing claims on behalf of the prior owners, for a different reason - those owners were no longer members of the Association. The net result, it argued, was that the Association has no standing to pursue any "representative" claims for homes sold after the inception of the lawsuit.
As a secondary argument, DR Horton asserted that the claims were procedurally barred because, even if the Association could pursue claims on behalf of new homeowners, this particular Association had failed to take the necessary procedural steps to do so. Namely, the Association failed to amend its Chapter 40 pre-litigation notice to assert "representative claims" on behalf of the new owners. Hence, the claims should be barred for this reason as well.
The High Noon trial court agreed with the developer and found that the Association did not have standing to pursue claims on behalf of the new homeowners for damage to the interiors of any of their units. However, the trial court also found that the Association could pursue the former owner's claims for "loss of use and market value, repair and temporary housing expenses, attorneys fees and the like." The Association appealed to the Nevada Supreme Court.
Nevada Supreme Court Ruling
The Nevada Supreme Court, after considering the issues for several years, issued an opinion in late October reversing the trial court's ruling. In essence, the Supreme Court felt that to bar the Association from pursuing claims on behalf of new owners would be inconsistent with the public policy and goals of Nevada's Chapter 40 statutory system to allow "common defects throughout a community [to] be addressed in the most efficient method possible." Moreover, the Court held that "interpreting the statute to mean a homeowners' association representative standing decreases each time a unit's ownership changes during the pendency of a litigation would lead to unreasonable results" and would undermine the Association's "ability to represent the entire community and would undermine the Legislature's intent." Similarly, in a footnoted portion of the opinion, the Court also rejected DR Horton's argument that the change in ownership would necessitate a new or revised the Chapter 40 pre-litigation notice, holding that such "redundancy" was unnecessary, because the Association had already provided notice of the construction defects.
As such, the Supreme Court held that under the pre-2015 version of Nevada's Chapter 40 statutes, the Association had "standing to pursue construction defect claims regardless of ownership changes during the pendency of litigation." With regard to the claims on behalf of former owners, the Supreme Court agreed with DR Horton and concluded that the Association had no standing to prosecute those claims, because the prior owners were no longer members of the Association.
The bottom line is that the Nevada Supreme Court has determined that where an action is subject to Nevada's original Chapter 40 statutory procedures (i.e. the original claim notice was served prior to February 25, 2015), NRS116.3102(1)(d) allows the Association to assert claims on behalf of all of its current homeowners, regardless of whether they purchased their homes after the litigation began. However, the Association is not permitted to pursue any claims on behalf of prior owners, as those individuals are no longer members of the Association and thus outside of the scope of the Association's standing under NRS 116.3102(1)(d).
Glimmer of Hope Remaining for the Defense?
While this was a victory for construction defect plaintiffs, all hope is not lost for the defense. During the long pendency of the High Noon appeal, a Nevada federal court opened the door to an entirely different ground to seek the same relief sought by DR Horton in the High Noon case. In The Platinum Unit-Owners' Association v. Residential Constructors, LLC (D. Nev. 2015) 2015 U.S. Dist. LEXIS 33152, a Nevada federal court ruled that a more recent revision to the very statute the High Noon Association had relied upon (NRS 116.3102) could be applied retroactively to earlier filed cases. That revision strictly limits an Association's right to pursue "representative" claims to assertions involving the common areas of the project. The issues raised in the Platinum Unit case could not be considered by the High Noon court due to the narrow scope of that appeal. Therefore, even in cases filed before 2015, an avenue remains to argue that an Association's standing to pursue claims on behalf of its individual members should be severely restricted.
We will continue to monitor developments in Nevada and will provide updates regarding these issues in future issues of the Construction Group Newsletter.
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