Do Subcontractors Get a Free Pass for Construction Defects?

March 16, 2012

A recent trend in Colorado law relating to statutes of limitations and repose—the deadlines that limit the amount of time a homeowner has to bring a claim—may give some subcontractors a free pass for construction defects.

In these tough economic times, Colorado has seen several homebuilders go out of business.  In some cases, builders have left housing developments only partially built, and badly in need of repairs.  When their builder has gone out of business, some HOA’s have to  turn to their homebuilder’s subcontractors to pay for repairs to construction defects.

One difficulty with this strategy is that many HOA’s have no idea who the subcontractors are who worked on the various components of their homes.  Even if the homeowners know the identity of the subcontractor responsible for the defects, the HOA typically does not elect a homeowner controlled board of directors until the builder has sold 75% of the homes.   Before 75% of the homes are sold, it is the builder who appoints the HOA’s board of directors and runs the HOA.  By the time the homeowner-elected HOA board discovers it has construction defects and identifies the responsible subcontractor, several years may have passed after the subcontractor finished work on the project.  With a short two-year statute of limitations to file a construction defect lawsuit in Colorado, the Association’s claims could be barred before the HOA is able to file a lawsuit.

In the current case Villa Mirage Condominium Owners’ Association, Inc., v. Stetson 162, LLC, et al., in El Paso County District Court, we asked the judge to give us an early legal determination that time limits that apply to the HOA’s direct claims against the builder’s subcontractors did not start ticking until after the date the HOA elected it’s first homeowner controlled board of directors.  We asked for this early determination because one of the subcontractors had argued that the builder was aware of its defective work early on in the construction.  The subcontractor argued that if the builder knew about the defects, and the builder controlled the HOA, then the HOA knew about the defects as well.  In the case of this particular subcontractor, it argued that the HOA knew about the defect for more than two years before the HOA ever elected a homeowner controlled board of directors.

If this subcontractor’s logic is correct, then the HOA had to rely on the builder to file a construction defect lawsuit on behalf of the HOA, or else the subcontractor would be relieved of any liability—not a likely possibility.

Because this subcontractor’s loophole is not squarely addressed by either the  Colorado law governing homeowner associations (CCIOA) or the Colorado law regulating construction defect cases (CDARA), we urged the court to declare that the HOA was under a “legal disability” during the period of builder  control, relying on C.R.S. § 13-81-103.

C.R.S. § 13-81-101(3) is the statute that gives extra time to file lawsuits to minors under the age of 18, who are mentally incompetent, or “a person under other legal disability.”  The statute does not define what qualifies as a “legal disability” or a “person.”  The word “person” has been interpreted to include corporations in many instances in Federal as well as Colorado law—with the recent Citizens United Supreme Court case merely one example.  It doesn’t seem such a stretch that a homeowner association which was created to represent the interests of the homeowners but is under the control of the builder would be considered to have a “legal disability” until the homeowners are able to control their own association.

The Villa Mirage judge ruled that the tolling did not apply stating: “[w]hile the plaintiff’s tolling arguments are creative, they are not convincing.”

The HOA’s claims against its subcontractors remain in tact, for now.  If the law stands as the judge ordered, the subcontractors will still have to prove that the builder had knowledge of the defects two or more years before the homeowner controlled HOA brought its claims.  The HOA’s dilemma is that it has no way of knowing what the builder knew or when he knew it as the builder is out of business, out of state, and not exactly cooperative with the HOA in the lawsuit.  The HOA may have to wait until after all sides have spent a lot of money pursuing the construction defect lawsuit until the HOA learns if its claims will hold up in court, or in response to a motion for summary judgment, which may be many months away.