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April 18, 2014

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CONSTRUCTION DEFECTS:

Trapped by lawsuits, subcontractors seek relief

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Sam Morris

Sens., from left, Valerie Wiener, D-Las Vegas, Terry Care, D-Las Vegas, and David Parks, D-Las Vegas, listen to testimony during a Senate Judiciary committee meeting this month. Care, the committee chairman, has created a subcommittee to draft a bill on homeowner associations because of alleged corruption involving construction defect law firms.

Pete King Nevada Corporation helped build 1,200 homes in Nevada last year. In the fourth quarter alone, the company received 110 notices of alleged construction defect.

Perhaps it seems as if the company must do shoddy work. In fact, the company is a victim of the state’s system for dealing with construction defects.

That system squeezes subcontractors between aggressive lawyers for homeowners and general contractors, whose first response to any notice of a potential lawsuit is to sweep in all their subcontractors, even if the alleged problem has nothing to do with their work.

So drywallers get sued when the roof is leaking, and so on.

“Once the attorneys are involved, it’s not about repairing the house, it’s about collecting fees,” said Bruce King, president of Pete King Nevada Corporation.

Nevada’s development and construction industry, including builders and subcontractors, is the one of the most powerful in the state, despite the recent steep downturn.

It has enlisted a legion of lobbyists, who in turn are working the Legislature hard for relief.

The construction industry will square off against another powerful interest, trial lawyers, who say they want to protect the rights of homeowners confronted with unexpected problems resulting from defective work.

Scott Canepa, one of Nevada’s most respected defect litigators, said the efforts of builders and their allies in Carson City will take the state “back to the dark ages when people had no rights against faulty construction.”

Regardless, the drive to change construction defect law has real momentum, in part because of an apparent FBI investigation into whether homeowner associations and their elections were manipulated by businesses — including possibly construction defect law firms — so they could bring suits against builders.

In these alleged schemes, people would buy 1 percent stakes in homes and then win seats on homeowners boards, after which they would bring construction defect lawsuits and steer the legal work to favored firms.

Reform legislation is on the way on homeowner associations, including criminal penalties for those who corrupt them.

Also, last week, state Sen. Terry Care, chairman of the Judiciary Committee, created a special subcommittee to draft a construction defect bill. He said his chief concern is protecting subcontractors who get caught up in the lawsuits undeservedly.

For plaintiffs’ attorneys, Care’s impartiality is an issue. One of his law partners, Paul Georgeson, is general counsel for the Nevada chapter of Associated General Contractors and said he has talked to Care about the issue.

There is no dispute that in southern Nevada’s rapid growth and red-hot real estate market, a shortage of skilled craftsmen and difficult working conditions led to some slipshod building, though it’s unknown how many structures are defective. Civil attorneys estimate 31,000 Clark County homes need faulty Kitec brass pipe fittings replaced, for instance.

The law governing construction defect lawsuits, known as chapter 40 for its place in Nevada statutes, was a compromise developed during the mid-’90s building boom, a process to resolve disputes before litigation. As part of the compromise, if the homeowner wound up suing, he couldn’t sue for non-economic damages, such as emotional distress.

In 2003, at the behest of the builders, the Legislature instituted what’s called “right of repair,” which gave builders the right to repair damaged homes while limiting attorney fees and the hassle of legal proceedings.

Now the builders are back, with an ambitious goal: They want to eliminate chapter 40.

“The net effect of chapter 40 is that the victims are homeowners and subcontractors,” said Craig Marquiz, general counsel for the Nevada Subcontractors Association.

Marquiz said the Nevada State Contractors Board provides homeowners a place to register complaints that can be investigated and fixed, while imposing sanctions on builders.

Who’s on the board? Contractors, including King.

But Marquiz said the current situation is untenable, and explained why.

He said the statute requires a chapter 40 notification letter to say what’s wrong, where the defect is, and its nature and severity.

Instead, he said, most of the letters are broad and generic. They list anything that could possibly be wrong, from drywall to soil engineering, doors, electrical work, etc.

The builder or often its insurance company then informs all the subcontractors, essentially making them party to the lawsuit.

Attorneys have tremendous incentive to bring chapter 40 complaints, the vast majority of which are settled out of court, because the statute guarantees attorney and expert fees, Marquiz and a number of contractors said.

Once they’re named in the lawsuits, the subcontractors say, they have no incentive to fix any problems because they won’t be released from the suits, as the general contractor or his insurance company seeks to spread the cost around.

Canepa acknowledged that subcontractors are a “thorny issue.” He said he hopes the Legislature can find a way to insulate subcontractors who aren’t at fault.

But otherwise, Canepa offers a forceful argument on behalf of chapter 40.

He notes that the statute says the court can deny attorney’s fees and award attorney fees to the contractor if it finds the plaintiff “unreasonably rejects a reasonable ... settlement.”

Without some guarantee of fees, homeowners would have to pay a $5,000 retainer to get an attorney, which would prevent many from getting their defect fixed.

Repealing chapter 40 would deal a severe blow to the rights of homeowners, he said. Without chapter 40, Nevada case law denies homeowners the right to sue for negligence. Instead, they could sue only for breach of contract, Canepa said. Builders would then force homebuyers to sign contracts that protect them from liability.

“The remedy would be determined by the four corners of a contract, written by the people who built the bad house,” he said.

Canepa said he fears Nevada will become known as a place where the consumer has no protection.

“Why make it harder for people who bought bad houses?” he said.

But from Bruce King’s perspective, current law is making it harder for people like him to stay afloat and build good houses: “This has been an albatross, a millstone ...”

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