AB 1892: Attempting to Protect Homeowners from the Perils of Construction Defect Litigation… One Sentence at a Time


By: Christopher J. Stipes

Brace yourself, for you are about to be floored by how close a groundbreaking piece of legislation came to changing the landscape of construction defect litigation forever. It nearly snuck in right under our noses. If not for Governor Brown swooping in at the last minute to veto the bill, many of us may have been facing a serious downturn in business. The epic bill being referred to is Assembly Bill 1892 (“AB 1892”), introduced by Assembly Member Linda Halderman.

Background

As most in the CD field are aware, Senate Bill 800 (“SB 800”) commonly known as the “Right to Repair Act” and codified in Civil Code § 896, et seq., reformed California CD law in 2002. Prior to SB 800, the CD field was essentially like the Wild West, with countless suits of highly questionable merit taking up valuable court resources. Builders finally started fighting back, with SB 800 being the culmination of a concerted effort to establish some semblance of order. SB 800 performs two important functions: it establishes specific definitions of construction defects to provide certainty and protection for homeowners, builders, and subcontractors, and it imposes procedures homeowners must follow prior to bringing suit against a builder. In general, this procedure requires homeowners to notify the builder of defects prior to bringing suit, thus allowing the builder an opportunity to repair the defect. Should the builder fail to repair the condition within the specified time period, the homeowner is relieved from the SB 800 pre-litigation process and may proceed with bringing suit against the builder.

Not fully satisfied with the deterrent effect of SB 800, additional attempts to protect and educate homeowners were introduced in the form of attorney solicitation law reform. The proposed legislation which best summarizes these failed attempts is Assembly Bill 2689 (“AB 2689”), which directly addressed many of the lesser known consequences of involvement in CD litigation. Subsequent attempts to legislate CD solicitation addressed smaller portions of what AB 2689 addressed. In brief, AB 2689 attempted to regulate advertising by plaintiffs’ attorneys by requiring disclosure of: (1) alternatives to litigation, such as the SB 800 process; (2) how expert fees and testing costs are determined; (3) how attorney fees will be calculated; (4) the possibility that insufficient money will remain to repair the home after attorney, expert, and testing costs have been paid; (5) whether the homeowner may be liable for costs or fees if the case is lost; and (6) whether, upon resale of the property, the owner is required to disclose the litigation and if defects were actually repaired.

The thrust of the various proposed legislation was to educate and inform homeowners of certain risks and thereby further dissuade CD litigation. Many homeowners are unaware they must disclose defects which were part of litigation, including expert reports regarding the alleged issues. Otherwise, it is considered fraud (See Civil Code § 1102.6). Clearly, such disclosure may significantly affect the resale value of the property. Additionally, most homeowners do not realize the level of intrusion that occurs throughout the lawsuit, particularly due to repeated visual inspection of the residences and, on occasion, destructive testing. Homeowners in CD suits are generally unaware that large construction teams may swarm their home to inspect alleged defects, and sometimes even rip it apart in order to conduct further defect-related testing. After these inconveniences, as well as the reduction in settlement funds for attorney and expert fees, homeowners rarely receive enough money to actually fix the claimed defects.

Supporters of AB 2689 and related proposed legislation indicate CD solicitations are misleading and induce groundless fear in homeowners. They claim homeowners need to be provided with the full slate of information in order to make an informed decision as to whether to proceed with litigation. Practically speaking, it seems many homeowners do enter these suits under the mistaken belief they can make quick, easy money with little to no associated consequences or responsibilities. Opponents of attempts to regulate CD legislation cite serious Constitutional issues, particularly an improper restraint on commercial speech in one specific area of law. In essence, they claim it creates an unduly burdensome requirement on construction defect plaintiff attorneys which causes conflicts with clients in an area that is already regulated by the State Bar (i.e., attorney solicitations in general.) For example, opponents note there is no requirement for insurance defense attorneys to disclose worst-case-scenarios during the first client contact, or for business lawyers to predict success or failure at the first meeting.

AB 1892

Against this backdrop, Assembly Member Halderman introduced her formidable AB 1892, an act to add Section 338 to the Business and Professions Code, relating to the Department of Consumer Affairs (“DCA.”) Surely, after years of failed attempts to reform CD solicitation law, Halderman carefully crafted a bill so fine-tuned it would withstand previously voiced arguments in opposition and finally alert homeowners to the potential pitfalls of CD litigation. So, without further ado, AB 1892 in its entirety:

“The department shall post the following statement on its Internet Web site: ‘If you receive a construction defect solicitation, please check with your builder in addition to taking any further action.’”

After a decade’s worth of attempts, this is what was chosen to use the taxpayers’ time and money. The fiscal effect of AB 1892 is described as “minor and absorbable costs for DCA to post the required advisory.” As if to add insult to injury, the DCA, California State Consumer Services Agency, and the California Contractor State License Board all already have a more detailed message alerting homeowners of SB 800 posted on their respective websites. The three sites all have the following message: “Should you discover a defect in the construction of your home, prior to pursuing legal action or responding to a construction defect solicitation, you must first contact your home builder . . . Homebuilders are given the opportunity to repair your home prior to a legal action being filed . . . [.]” The message even contains four more sentences on specific requirements of the SB 800 process.

In fairness, AB 1892 did survive the introductory stages, although most likely due to apathy rather than spirited support. In fact, after numerous bill analyses, floor committee hearings, voting sessions, and the like, it passed both the Assembly and the Senate, was enrolled and sent to Governor Brown to sign into law. Narrowly avoiding a complete uprooting of the CD litigation field, Governor Brown wisely vetoed the bill, stating:

“This bill would require the [DCA] to place specific language on its website regarding construction defects. This has already been done. So in keeping with the author’soft-stated mantra that government should not be wasteful or do unnecessary things, I am returning Assembly Bill 1892 without my signature.”

It seems a better use of time would have been to craft a bill that carefully addresses and attempts to avoid the aforementioned arguments in opposition. For example, perhaps a bill requiring CD solicitations to include brief statements merely alerting homeowners to the existence of SB 800 and defect disclosure laws. Since the required disclosure could simply be a short factual notification of existing law, worded in a neutral manner, it could not reasonably be said to be an “unduly burdensome” need to discuss “worst-case-scenarios” or “predict success or failure.” Another more worthwhile endeavor could have been to join ongoing efforts to reform the statute of limitations in CD cases. Regardless, a focus on just about anything other than a one-sentence bill that addresses something that has already been done, and with essentially zero potential to generate real change within the CD field, would have been a more efficient use of precious government resources and taxpayer money.

Christopher J. Stipes is an Associate with Kring & Chung, LLP’s Sacramento, CA office. He can be contacted at (916) 266-9000 or cstipes@kringandchung.com.