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August 29, 2014

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THE LEGISLATURE:

Construction defects law under the microscope

Fraud case refocuses spotlight on battle long waged between trial attorneys, construction industry

When the Vistana homeowners association in southwest Las Vegas settled a construction defect complaint for $19 million in 2007, the size of the settlement stood out even in the big-money world of construction defect litigation.

The huge settlement was the product of fraud, according to federal authorities. A former Vistana homeowners association board member entered a guilty plea to fraud charges last month.

The fraud alleged in this and dozens of other cases blossomed in the obscure law that governs construction defect cases.

Known as Chapter 40, for its place in Nevada Revised Statute, the law was written in the 1990s to take thousands of disputes between homeowners and builders out of the courts.

It unburdened the judicial system, but construction companies, subcontractors and developers say the law has become a cash cow for trial attorneys, a burden for the construction industry and inefficient for homeowners seeking to get their homes repaired.

A sweeping federal investigation of prominent construction defect attorney Nancy Quon and construction company owner Leon Benzer is the most high-profile example of flaws in the law, critics say.

“Chapter 40 is the honey that attracts the flies,” said Josh Griffin, a lobbyist for the Nevada Subcontractors Association. “It is the legal mechanism that is easy to abuse.”

The Justice Department, FBI and local law enforcement have been unraveling what they believe is a massive conspiracy that involved surrogates for Quon and Benzer’s firms taking control of homeowner associations in Las Vegas and steering work to Quon and Benzer. Among those entering guilty pleas in the case — 10 individuals and counting: an attorney, property managers, straw purchasers and former HOA board members. They have pleaded guilty to wire fraud and rigging homeowners association elections.

Dozens of additional pleas are expected before the investigation is complete.

The investigation and guilty pleas ensure construction defect policy will again be the focus of two powerful and wealthy interests groups — trial attorneys and the construction industry — when the Legislature meets in 2013.

•••

During the Legislature’s 2009 and 2011 sessions, a construction industry coalition lobbied to change the law. Representatives from the industry claimed that even absent fraud, the construction defect rules were a bonanza for trial attorneys and the experts they hired.

Assemblyman Ira Hansen, R-Sparks, for example, said his plumbing business had been the subject of 15 to 20 construction defect notices since 2002. Not once was he able to make a repair to rectify the alleged problems, but the insurance companies for the developers settled each case. That has caused his insurance premiums to rise, he said, hurting his business.

He said a handful of law firms in Nevada have boasted that they have grossed over a billion dollars in construction defect claims.

“It’s a bunch of highway robbery,” he said. “The law itself is clearly flawed.”

In the 2009 and 2011 sessions, legislation passed in the state Senate but failed in the Assembly. Trial attorneys argued that changes would leave aggrieved homeowners with shoddy houses and no way to seek justice.

But with federal authorities collecting guilty pleas, the construction industry has prime examples of the system being abused, and how lucrative it can be for attorneys.

Consider: The $19 million settlement for Vistana had 40 percent taken off the top for legal fees. An additional few million was deducted for experts hired by the law firm, according to a source close to the case. That left $8 million to actually make the repairs that the homeowners sued over.

“It’s an embarrassment to the Legislature that we haven’t done anything about this problem,” Sen. Mike Schneider, D-Las Vegas, said recently.

The Nevada Justice Association, the group that represents trial attorneys, has defeated efforts to change Chapter 40.

Bob Maddox, a member of NJA and a construction defect attorney for 25 years, said he expects the construction industry will try to change the law again.

He said the public shouldn’t draw broad policy conclusions from the federal plea deals.

“The lesson is: If you break the law, you might get caught and get punished,” he said. “That’s it. Those who do wrong, get punished. To change the law, taking away homeowners’ rights because some people have done bad things — that’s not how it’s supposed to work.”

•••

Las Vegas Valley subdivisions were built in a hurry to meet what seemed like an insatiable demand. Because of that, there are thousands of homes with sloping floors and leaky roofs and bad plumbing, whose owners wonder where to turn.

When the Legislature passed Chapter 40, the construction industry fought to keep from paying noneconomic damages such as pain and suffering, Maddox said.

In exchange for prohibiting emotional distress suits, the trial lawyers won a key concession: more or less automatic attorney fees in the case of a settlement, construction industry officials said. Otherwise, they argued, homeowners who won their cases would still be left short: The most they could receive would be the cost of the repairs, and out of that, and thus their own pocket, they would have to pay attorney fees.

During the boom in the 2000s, the law worked fine, with some minor skirmishes between interest groups. (In 2003, builders won the right to try to repair defects.)

But in 2009, with homebuilders and contractors laid low by the recession, developers sought to change the law, ostensibly seeking to eliminate Chapter 40 altogether — and winning in the state Senate but losing in the Assembly.

In 2011, Assembly Republicans — many of them, like Hansen, contractors who had been hit with construction defect notices over the years — tried to make reforms part of the final budget deal. But Gov. Brian Sandoval signed off on the budget without changing construction defect legislation.

The construction industry rejected a compromise on the law proposed by Assembly Speaker John Oceguera, D-Las Vegas, who is close to the trial attorneys.

Griffin, the lobbyist for the subcontractors, argued that it would not have helped the construction industry. He said the group wants to eliminate what are, in effect, guaranteed attorney fees and change the definition of what constitutes a defect. Currently, if a building deviates from the plans submitted to the city or county, it can be considered a defect even if it’s perfectly functional and safe.

Maddox called “guaranteed” attorney fees a myth.

“The judge decides whether to award attorney fees,” he said. “There’s nothing automatic.”

He said the construction industry, which profited handsomely from the building boom, is looking for someone to blame for its woes. And the small subcontractors are unwilling to take on the large contractors, who drag many of them into construction defect lawsuits.

“There’s a general malaise in the down economy,” he said. “They need a devil, someone to blame for what happened to them.”

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  1. Let's face some facts:

    1. The law never worked well for homeowners. The "huge settlements" almost never covered the actual cost of correcting the defects -- even before the attorneys fees got subtracted from the settlement.

    2. The law has not worked well for subcontractors. It bankrupted many who did nothing wrong except somehow participate in the project in some way NOT connected to the "defect". The homeowner with a defect was required to make his claim against the general contractor. The general contractor, in turn, then made claims against ALL the subcontractors. Let's say there was a claimed defect in the concrete slab. This created a case which involved the painter, the roofers, the electricians, the guy who installed the window coverings, etc. Those costs got imposed on them either directly or through higher insurance premiums from their liability insurance carriers. The Tsunami of construction defect claims for "defects" to which there was no conceivable connection with their roles in the projects could not be covered by insurance, by past profits or by changes in pricing. So this litigation helped drive the artisans -- the folks who do the actual constructing out of work. They were forced to become employees of companies large enough to afford the ever-growing insurance premiums and pay the attorneys fees.

    3. The law did nothing to help general contractors improve construction methods and build better homes. If anything, the economic incentives it created from its processes created perverse disincentives to do anything at all towards these goals. The procedure of joining the subcontractors to create comprehensive settlement pools incentivized the general contractor to rely on joining all of the skills, trades, and professions, and claim they were all somehow liable, rather than to determine what the real problem was and correct it. (This may also be recognized in another form: the pooling of loans to spread the risks of default and maximize the profits from securitizations based on those loans, where we can clearly see the consequences of risk-spreading run amok.)

    4. We are left with (A) defective construction, (B) insufficient money to fix the defects, (C) permanently injured construction trades, (D) no economic way to spread the risks through insurance, and (E) every incentive to continue defective construction.

    Our construction defects law is remarkable for one piece of legislation.