United States: McMillin Albany LLC V. Superior Court

Author's Note: While this decision does not directly pertain to insurance law, it will impact coverage with respect to the Right to Repair Act. 

In McMillin Albany LLC v. Superior Court, 4 Cal. 5th 241 (2018), the California Supreme Court decided a common law action alleging economic loss and property damage is subject to the prelitigation notice and cure procedures of the Right to Repair Act. The Court found that the Right to Repair Act, enacted after the Court's decision in Aas v. Superior Court, 24 Cal. 4th 627 (2000), held that the economic loss rule bars homeowners from recovering damages in negligence claims for construction defects where there is no actual property damage or personal injury, and broadly displaced the common law with respect to claims for economic loss and property damage arising from construction defects. 

The plaintiffs (numerous homeowners) purchased homes from developer and general contractor McMillin Albany LLC ("McMillin") after January 2003. In 2013, the homeowners sued McMillin, alleging various construction defects and asserting claims for negligence, strict product liability, breach of contract, breach of warranty, and failure to comply with California Civil Code Section 896. The complaint alleged property damage and economic loss due to the cost of the repairs and reduction in property values. McMillin sought to stay the action in order to comply with the Act's informal process (which involves written notice, acknowledgment of receipt, inspection and testing, repairs or compensation in lieu of repair, with preservation of the homeowner's right to sue). The homeowners declined to stipulate to a stay, instead dismissing the Section 896 claim. McMillin moved for a stay, which the homeowners opposed on the basis that the Act's prelitigation process did not apply, citing Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC, 219 Cal. App. 4th 98 (2013). The trial court denied the motion, finding it was bound by the Liberty Mutual decision, but certified the issue as worthy of immediate review. The Court of Appeal granted McMillin's writ petition, disagreeing with Liberty Mutual and Burch v. Superior Court, 223 Cal. App. 4th 1411 (2014). The Court of Appeal "concluded that the Act was meant to at least partially supplant common law remedies in cases where property damage had occurred," opining the Act was intended to apply to all construction defect claims involving sales of new homes since 2003. The Court also concluded McMillin was "entitled to a stay pending completion of the prelitigation process."

The California Supreme Court noted its analysis: begins from a presumption that the Legislature did not intend to alter or displace common law, will attempt to reconcile the statutory enactment with common law, and then will only conclude the statute alters or displaces the common law "where there is no rational basis for harmonizing" the two. A legislative intent to abrogate common law may be manifest through language or an evident purpose – an express declaration is not required. While recognizing that there is a strong presumption against such displacement, the Court found there was such displacement here:

[T]he statute here leaves the common law undisturbed in some areas, expressly preserving actions for breach of contract, fraud, and personal injury. [Citation.] In other areas, however, the Legislature's intent to reshape the rules governing construction defect actions is patent. Where common law principles had foreclosed recovery for defects in the absence of property damage or personal injury (Aas, supra, 24 Cal.4th at p. 632), the Act supplies a new statutory cause of action for purely economic loss (§§ 896–897, 942–944). And, of direct relevance here, even in some areas where the common law had supplied a remedy for construction defects resulting in property damage but not personal injury, the text and legislative history reflect a clear and unequivocal intent to supplant common law negligence and strict product liability actions with a statutory claim under the Act.

* * *

We begin with the text of the Act, which "comprehensively revises the law applicable to construction defect litigation for individual residential units" within its coverage. [Citations.] The Act added title 7 to division 2, part 2 of the Civil Code. (§§ 895–945.5.) That title consists of five chapters. Chapter 1 establishes definitions applicable to the entire title. (§ 895.) Chapter 2 defines standards for building construction. (§§ 896–897.) Chapter 3 governs various builder obligations, including the warranties a builder must provide. (§§ 900–907.) Chapter 4 creates a prelitigation dispute resolution process. (§§ 910–938.) Chapter 5 describes the procedures for lawsuits under the Act. (§§ 941–945.5.)

Section 896, which codifies a lengthy set of standards for the construction of individual dwellings, begins with a preamble describing the intended effect of those standards. As relevant here, the preamble says: "In any action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction, design, specifications, surveying, planning, supervision, testing, or observation of construction, a builder . . . shall, except as specifically set forth in this title, be liable for, and the claimant's claims or causes of action shall be limited to violation of, the following standards, except as specifically set forth in this title. This title applies to original construction intended to be sold as an individual dwelling unit. As to condominium conversions, this title does not apply to or does not supersede any other statutory or common law." (§ 896.)

Three aspects of this text are instructive. First, the provision applies to "any action" seeking damages for a construction defect, not just any action under the title. (§ 896.) This suggests an intent to create not merely a remedy for construction defects but the remedy. Second, "the claimant's claims or causes of action shall be limited to violation of . . . the following standards, except as specifically set forth in this title." (Ibid.) This express language of limitation means that a party seeking damages for a construction defect may sue for violation of these standards, and only violation of these standards, unless the Act provides an exception. This clause evinces a clear intent to displace, in whole or in part, existing remedies for construction defects. Third, "[t]his title applies to original construction intended to be sold as an individual dwelling unit," but "[a]s to condominium conversions, this title does not apply to or does not supersede any other statutory or common law." (§ 896.) The Act governs claims concerning stand-alone homes; for such disputes, the Act's provisions do "supersede any other statutory or common law" except as elsewhere provided. (§ 896.)

The Court rejected the homeowners' contention that Section 896 should be limited in application to "claims concerning defects that have yet to cause damage," finding no such limitation in the text. The Court also rejected the homeowners' argument based on the shorter limitations period applicable, noting "there is nothing absurd about accepting these limitations periods at face value, and they supply no special reason to disregard the import of the remainder of the statute."

The Court turned to the sections governing recovery of damages:

We turn next to chapter 5 (§§ 941–945.5), which contains key provisions governing the damages recoverable in an action under the Act and the extent to which the Act provides the exclusive vehicle for recovery of such damages. The Legislature was well aware of the main categories of damages involved in construction defect actions (economic loss, property loss, death or personal injury) and their treatment under existing law. The major stakeholders on all sides of construction defect litigation participated in developing the Act. [Citation.] The Legislature also expressly considered Aas and its rule requiring property damage or personal injury, not just economic loss, for any tort suit alleging a construction defect. [Citation.] Informed by the various stakeholders' concerns, the Legislature enacted provisions that reflect a conscious effort to address how and when various categories of damages would be recoverable going forward.

The provisions of chapter 5 make explicit the intended avenues for recouping economic losses, property damages, and personal injury damages. Section 944 defines the universe of damages that are recoverable in an action under the Act. (§ 944 ["If a claim for damages is made under this title, the homeowner is only entitled to damages for" a series of specified types of losses].) In turn, section 943 makes an action under the Act the exclusive means of recovery for damages identified in section 944 absent an express exception: "Except as provided in this title, no other cause of action for a claim covered by this title or for damages recoverable under Section 944 is allowed." (§ 943, subd. (a).) In other words, section 944 identifies what damages may be recovered in an action under the Act, and section 943 establishes that such damages may only be recovered in an action under the Act, absent an express exception.

The list of recoverable damages in section 944 and the list of exceptions in section 943 have different consequences for recovery of economic losses, personal injury damages, and property damages:

Economic Loss. As noted, before the Act, tort recovery of purely economic losses occasioned by construction defects was forbidden by this court's decision in Aas. [Citation.] Section 944 now specifies that various forms of economic loss are recoverable in an action under the Act. (§ 944 [listing among recoverable damages "the reasonable value of repairing any violation of the standards set forth in this title, the reasonable cost of repairing any damages caused by the repair efforts, . . . the reasonable cost of removing and replacing any improper repair by the builder, reasonable relocation and storage expenses, lost business income if the home was used as a principal place of a business licensed to be operated from the home, [and] reasonable investigative costs for each established violation . . . "].) Consequently, a party suffering economic loss from defective construction may now bring an action to recover these damages under the Act without having to wait until the defect has caused property damage or personal injury. Were there any doubt, section 942 makes clear that "n order to make a claim for violation of the" Act's standards, "[n]o further showing of causation or damages is required to meet the burden of proof regarding a violation of a standard."

Personal Injury. In contrast, personal injury damages are not listed as a category recoverable under the Act. (§ 944.) This omission places personal injury claims outside the scope of section 943, subdivision (a), which makes an action under the Act the exclusive remedy for those damages listed in section 944. To make the point even clearer, the Legislature also included personal injury claims in a list of claims that are exempt from the exclusivity of the Act. (§§ 931 [listing any action for "personal injuries" among the causes of action not covered by the Act], 943, subd. (a) ["this title does not apply to . . . any action for . . . personal injury . . ."].) Thus, common law tort claims for personal injury are preserved.

Property Damage. As with economic losses, the Act expressly includes property damages resulting from construction defects among the categories of damages recoverable under the Act. (§ 944 [a homeowner may recover "the reasonable cost of repairing and rectifying any damages resulting from the failure of the home to meet the standards"]; see § 896 [the Act applies to "recovery of damages arising out of, or related to" construction defects].) This places claims involving property damages within the purview of section 943, subdivision (a), which makes a claim under the Act the exclusive way to recover such damages. And unlike personal injury claims, negligence and strict liability claims for property damages are not among the few types of claims expressly excepted from section 943's exclusivity. (§ 943, subd. (a); see § 931 [noting claims for personal injury, but not property damage, fall outside the Act's coverage].)

To sum up this portion of the statutory scheme: For economic losses, the Legislature intended to supersede Aas and provide a statutory basis for recovery. For personal injuries, the Legislature preserved the status quo, retaining the common law as an avenue for recovery. And for property damage, the Legislature replaced the common law methods of recovery with the new statutory scheme. The Act, in effect, provides that construction defect claims not involving personal injury will be treated the same procedurally going forward whether or not the underlying defects gave rise to any property damage.

The homeowners argued Section 943(a) "should be read to make the Act the exclusive remedy only for claims concerning defects that have yet to cause damage." The Court disagreed, determining "this view cannot be reconciled with the portion of section 943, subsection (a) making the Act the exclusive means of recovering any of the categories of damages listed in section 944 – categories that, as noted, include resulting damages from construction defects, not just economic loss." The Court also noted that, if the Act was intended to solely abrogate the Aas rules as to negligence claims and recovery of economic losses, then the Act would have no effect on breach of contract, fraud, and personal losses – which are expressly preserved by Section 943(a).

Section 897, which applies to elements of construction not otherwise addressed in section 896, is also relevant. Although section 896 was intended to be comprehensive, section 897 provides a supplemental standard for any building components that section 896 may have overlooked: Any part not otherwise covered is defective and "actionable if it causes damage." (§ 897.) This use of damage to measure defectiveness is not unusual; many of the more specific standards in section 896 likewise use the causation of damage as part of the test for whether a given part is defective. (§ 896, subds. (a)(3), (6), (7), (9), (11), (12), (18), (c)(1).) Thus, a claim under the Act, whether predicated on a violation of section 896 or section 897, often may involve circumstances where an alleged defect has resulted in property damage.

The Court again rejected the homeowners' interpretation that Section 897 provides a basis for any listed defect to be the basis for a common law claim, finding no support for this interpretation in the statutory language.

The homeowners' alleged Section 910's prelitigation requirements apply only to statutory claims. The Court disagreed: "[S]ection 943 disallows claims other than those predicated on the Act's standards, with exceptions not applicable here. And if a claim for property damage alleges a violation of section 896 or section 897, then section 910 by its terms subjects the claim to the Act's prelitigation procedures."

Finally, the Court addressed the homeowners' argument that abrogation requires an express statement from the Legislature:

It does not. [Citation.] Moreover, both sides agree that the Legislature in passing the Act sought to abrogate the common law, even though the text contains no express statement of that intent. They differ only in degree: The [homeowners] contend that the Legislature sought only to overrule the common law limits on recovery identified in Aas, whereas McMillin contends that the Legislature went further in supplanting certain common law claims with statutory ones. As explained above, we agree with McMillin's reading of the Act.

* * *

The legislative history of the Act confirms that displacement of parts of the existing remedial scheme was no accident, but rather a considered choice to reform construction defect litigation.

First, language in the Legislature's analyses of the Act's effects reflects an intent that the Act would govern not only no damage cases, but cases where property damage had resulted. The Act's standards were designed so that "except where explicitly specified otherwise, liability would accrue under the standards regardless of whether the violation of the standard had resulted in actual damage or injury." [Citation.] Both halves of this intended application are significant: Liability under the standards would attach even in the absence of actual damage, thus effectively abrogating Aas. And liability under the standards would also attach in cases of actual damage; in other words, the Legislature anticipated that passage of the Act would result in standards that governed liability even when violation of the standards had resulted in property damage. The Legislature thus recognized and intended that claims under the Act would cover territory previously in the domain of the common law.

Second, the Act "establishes a mandatory process prior to the filing of a construction defect action," with the "major component of this process" being "the builder's absolute right to attempt a repair prior to a homeowner filing an action in court." [Citation.] These purposes, the creation of a mandatory prelitigation process and the granting of a right to repair, would be thwarted if we were to read the Act to permit homeowners to continue to sue as before at common law, without abiding by the procedural requirements of the Act, for construction defect claims involving damages other than economic loss.

Third, although there is no doubt that the Act had the intended effect of overriding Aas's limits on construction defect actions, that effect was treated in both the Assembly and Senate as one consequence of the overall reform package, not as the principal goal of the Act. The Assembly Committee on the Judiciary described as a "principal feature of the bill" the establishment of construction defect standards and then observed that one consequence of the "standards [is to] effectively end the debate over the controversial decision in the Aas case." [Citation.] In a similar vein, the Senate Judiciary Committee described the Act as creating standards that would "govern any action seeking recovery of damages arising out of or related to construction defects" and then noted that "n addition" the rules for liability under the standards would "essentially overrule the Aas decision and, for most defects, eliminate that decision's holding that construction defects must cause actual damage or injury prior to being actionable." [Citation.] If the [homeowners'] interpretation of the Act were correct, then the legislative analyses certainly bury the lede.

In sum, the legislative history confirms what the statutory text reflects: The Act was designed as a broad reform package that would substantially change existing law by displacing some common law claims and substituting in their stead a statutory cause of action with a mandatory prelitigation process.

The homeowners, echoing an argument made in Liberty Mutual, argued the prelitigation requirements cannot be applied to defects that "create a sudden loss requiring emergency repairs." The Court noted that was not the case here as no party had to take emergency action, and "the emergency scenario does not give us reason to doubt that the Act applies to property damage cases." The Court also noted that "the maximum response periods [for builders] set forth by the Act do not necessarily insulate a builder from damages when the builder has failed to take remedial action as promptly as is reasonable under the circumstances. The Act's liability provisions thus supply builders and homeowners clear incentives to move quickly to minimize damages when alerted to emergencies." The Court continued:

The tension between the Act's timelines and the occasional need for expeditious action in exigent circumstances does not provide a sufficiently compelling reason to disregard the numerous indications in the Act's text and history that the Legislature clearly intended it to govern cases involving actual property damage. We disapprove Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC, supra, 219 Cal.App.4th 98, and Burch v. Superior Court, supra, 223 Cal.App.4th 1411, to the extent they are inconsistent with the views expressed in this opinion.

Returning to the claims actually at issue, the Court affirmed the judgment of the Court of Appeal and remanded for further proceedings, concluding:

The [homeowners] voluntarily dismissed without prejudice their cause of action for violation of Section 896's standards. Even so, the operative complaint includes claims resting on allegations that McMillin defectively constructed the foundations, plumbing, roofs, electrical conduits, framing, flooring, and walls of plaintiffs' homes. This suit remains an "action seeking recovery of damages arising out of, or related to deficiencies in, the residential construction of plaintiffs' homes (§ 896), and McMillin's liability under the [homeowners'] negligence and strict liability claims depends on the extent to which it violated the standards of Sections 896 and 897. Thus, the [homeowners] were required to initiate the prelitigation procedures provided for in the Act. [Citation.]

In holding that claims seeking recovery for construction defect damages are subject to the Act's prelitigation procedures regardless of how they are pleaded, we have no occasion to address the extent to which a party might rely upon common law principles in pursuing liability under the Act. Nor does our holding embrace claims such as those for breach of contract, fraud, or personal injury that are expressly placed outside the reach of the Act's exclusivity. (§ 943, subd. (a).) That limit does not help the [homeowners'] position here, for while the complaint includes breach of contract and breach of warranty claims, it also includes claims for strict liability and negligent failure to construct defect-free homes, to which no statutory exception applies. Accordingly, the [homeowners] must comply with the Act's prelitigation procedures before their suit may proceed. Because the [homeowners] have not yet done so, McMillin is entitled to a stay.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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