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New risks to homeowners in pursuing claims for construction defects

Real estate agents are often involved in the discovery of construction defects by their clients during the purchase agreement and inspection phase of a real estate transaction. The Minnesota Supreme Court recently decided the case of Camacho v. Todd and Leiser Homes, A04-599, filed November 23, 2005, which directly affects some homeowners with construction defect claims. Specifically, the Camacho decision acts to bar homeowner claims against builders and subcontractors who dissolve their corporate existence under Minnesota law.

Plaintiffs Arturo and Kristi Camacho sued Defendant Todd and Leiser Homes, a Minnesota corporation (Builder) for negligence and breach of construction warranties under Minnesota Statutes section 327A.02. The Builder originally constructed the home in 1993; the Camachos purchased the home from the original owners in 1999. During the Camachos inspection of the home prior to closing, their inspector discovered significant moisture intrusion in the home, resulting in deterioration and rot of exterior sheathing, studs, windows, and other structural components. Upon further investigation, the Camachos learned that the moisture intrusion and resulting damage was caused by the Builders faulty workmanship and failure to follow appropriate building standards. The Camachos received estimates to repair the home, which exceeded $200,000.

In 2003, the Camachos sued the Builder to recover their damages. Several years prior to the Camachos lawsuit, the Builder filed a notice of intent to dissolve its corporate existence with the Minnesota Secretary of State. The Builder filed articles of dissolution on May 6, 1997, and the Minnesota Secretary of State issued a certificate of dissolution to the corporation on the same day. In response to the Camachos lawsuit, the Builder defended on the basis that the Camachos lawsuit was barred under Minnesota law.

Under Minnesota law, any corporation may voluntarily dissolve and end its corporate existence. See Minn. Stat. §302A.701 and §302A.711. When the articles of dissolution have been filed with the secretary of state, . . . the corporation is dissolved. Minn. Stat. §302A.734, subd. 1. While the Minnesota legislature lessened the effects of dissolution by creating specific time periods for claimants and creditors to commence a claim against the dissolving corporation after notice of dissolution, the finality of corporation dissolution is absolute upon completing the dissolution process. Minn. Stat. §302A.727, subd. 3.

All powers of a corporation, including the power to sue and be sued, abate at the end of the corporate existence. Koplos Inc. v. Bridgeman Creameries, Inc., 79 N.W.2d 921 (Minn. 1956). A creditor or claimant to whom notice is given who fails to file a claim according to the procedures set forth by the corporation on or before the date set forth in the notice is barred from suing on that claim or otherwise realizing upon or enforcing it. Minn. Stat. §302A.727, subd. 3(c). Under the corporate dissolution procedure, a dissolving corporation may provide notice by actually mailing notice to all known creditors or by publishing notice in a legal newspaper. Id.

The Minnesota appellate courts have strictly construed time limits for asserting claims against dissolved corporations. See Abad v. ISCO, Inc., 537 M.W.2d 620 (Minn. 1995); Podvin v. The Jamar Company, 655 N.W.2d 645, 649 (Minn. Ct. App. 2003). Once the time periods expire, all claims are barred, regardless of actual notice by the creditor.

In the Camacho decision, the Minnesota Supreme Court conclusively affirmed the above analysis by determining that the Camachos claims against the Builder for defective construction were barred two years after its corporate dissolution was completed on May 6, 1997. The Camachos commenced their lawsuit against the Builder in 2003, more than six years after the Builder dissolved its corporate existence under Minnesota law. As such, the Minnesota Supreme Court determined that the Camachos claims against the Builder were forever barred.

In light of the Minnesota Supreme Courts decision that the Camachos claims against the Builder were barred, the Camachos requested that they be allowed to pursue their claims against the Builders insurance company. As a prerequisite to acquiring and maintaining a residential building contractor license, Minnesota law requires all contractors, including the Builder, to maintain a certificate of liability insurance and public liability insurance. See Minn. Stat. §326.89 and §326.94. In construction defect actions, it is common for the general contractor to put its insurance carrier on notice of a homeowner claim, and then the insurance company defends the general contractor in the lawsuit and pays any settlement or damages award.

The Minnesota Supreme Court denied the Camachos request to pursue their claims against the Builders insurance company, because of the courts decision that the corporate dissolution barred the Camachos claims after two years. Minnesota law recognizes the common law rule that a third party may not pursue direct action against the insurance company until it has a judgment against the insured. Since the Camachos claims against the Builder were barred by its corporate dissolution, the Camachos could never obtain a judgment against the Builder, a prerequisite to pursuing a direct action against the Builders insurance company. The Minnesota Supreme Court therefore determined that the Camachos claims were barred, both against the Builder and the Builders insurance company.

The Camacho decision is a potentially serious blow to homeowner claims for construction defects. However, alternative methods of recovery exist when the builder (general contractor) dissolves its corporation.

As set forth above, the plaintiff homeowners in a typical construction defect lawsuit pursue their claims against the defendant builder (general contractor). The builder defends the action, directly or by tendering defense to its insurance company. The builder generally names a number of third party defendants, who include all of the subcontractors that worked on the home.

In a case involving a builder (general contractor) who dissolves its corporate existence to bar the homeowners direct claims, the first alternative method of recovery is to pursue damages against the subcontractors that worked on the home. The subcontractors will then directly defend the action or tender the claim to their insurance companies. These defendants provide available means to collect the homeowners damages to the extent that the subcontractors contributed to the total damages.

The second alternative method of recovery involves the filing of a claim with the homeowners insurance company. However, homeowners must promptly file their claims upon notice of the construction defect damages to avoid general claims limitations under the insurance policy. While this method of recovery remains subject to the language in the homeowners insurance policy and unsettled legal precedent, it has been successfully pursued on a number of cases.

Finally, another alternative method of recovery involves a claim against the prior owner of the property, if any, to the extent that the prior owner had knowledge of the construction defects and failed to disclose them to the current owner. Such claims may often be subject to shorter time periods in which to bring the claim due to language in any arbitration agreement included with the purchase agreement. These claims, like all construction defect claims against builders, subcontractors, homeowners insurance companies and prior owners, must be promptly pursued to avoid the statute of limitations from barring the claims.