Federal and local law enforcement officers raided nine sites around the valley on Wednesday in a sweeping probe into possible collusion between homeowners associations and businesses benefiting from construction defect lawsuits.

The raids are part of a “pending public corruption case,” according to Federal Bureau of Investigation spokesman Dave Staretz, who refused to release details. He said no arrests were made.

коли под наемAccording to a law enforcement source, the FBI is investigating whether individuals were placed on homeowners association boards who, in turn, would direct business stemming from construction defect lawsuits to select companies.

At issue, according to the source, is whether HOA members were steering contracts to certain construction companies.

Other sources said there has long been speculation that some HOA representatives were hiring certain law firms to handle construction defect lawsuits in exchange for kickbacks.

According to this article and others, a law firm would become involved with a homeowners association in the Las Vegas area representing the board in a construction defect case. The law firm (it was always the same firm, according to law enforcement) would recommend that the repairs be made by one Leon Benzer. His construction company would front the costs of the work and thereby receive the bulk of any settlement or award at the conclusion of the law suit. If the HOA board didn’t go along, they were replaced through carefully orchestrated and possibly fraudulent election proceedings. The new HOA board would likely be comprised of members that were on good terms with either Benzer or the law firm.

Benzer is purported to be an advocate for homeowners but the implications are much different. The FBI and local law enforcement are still tight-lipped about the investigation, so little more is known at this time.

Link to Las Vegas Review Journal Article, Link to Las Vegas Now Article

Updated: A well-known construction defect plaintiff attorney, Nancy Quon, has been added to the roster:

Agents are also interested in documents related to political consultant Steve Wark, who served as president of the Vistaña Homeowners Association, as well as prominent construction defect attorneys Scott Canepa and Nancy Quon.

“A federal agency has joined some of the nation’s biggest landlords in trying to repeal stronger safety requirements for new skyscrapers that were added to the country’s most widely used building code last year, arguing that they would be too expensive to meet.

“The new provisions, which include requiring tall office buildings to have more robust fireproofing and an extra emergency stairwell, were enacted as a result of an exhaustive federal study into the collapse of the twin towers at the World Trade Center seven years ago this week.

The entire article is worth a read. Emotionally charged politics vs. economic interests of major political contributors square off. In the middle is the NIST’s report following the investigation of the WTC collapses and the ICC attempting to translate that data into applicable codes.

Link to Article, Link to ICC News Release from 2005

In Veeck v. Southern Building Code Congress, 293 F.3d 791, the United States Court of Appeals, Fifth Circuit, met en banc “because of the novelty and importance of the issues” presented before the court:

“The issue in this en banc case is the extent to which a private organization may assert copyright protection for its model codes, after the models have been adopted by a legislative body and become ‘the law’. Specifically, may a code-writing organization prevent a website operator from posting the text of a model code where the code is identified simply as the building code of a city that enacted the model code as law?”

In an exhaustive opinion that carefully traced the reasons why our laws must be public, the Honorable Chief Judge Edith H. Jones stated the conclusion of the court:

“Our short answer is that as law, the model codes enter the public domain and are not subject to the copyright holder’s exclusive prerogatives.”

So without further ado, please take the time to download the full set of the 2007 California Building Code, made available by Carl Malamud of the Public.Resource.Org as a gift to the public in honor of this country’s Declaration of Independence.

Link to Download Page, from BoingBoing.net

P.S. – Laws cannot be copyrighted.

“A Blaine County judge has rejected Tom Hanks’ second request for arbitration over what the actor says was $2.5 million in faulty workmanship by the construction company that built his sprawling compound north of this central Idaho resort town.

“Following the decision, a lawyer for the construction company said it will seek monetary damages from Hanks and his wife, Rita Wilson, for what it alleges was “abuse of process” for filing the second arbitration request.”

Link to Article

“Manhattan prosecutors are investigating whether the leading concrete testing company in the New York area, which has been hired to measure and analyze the strength of the concrete poured at some of the biggest construction projects in the city, failed to do some tests and falsified others, officials involved in the inquiry said on Friday.

“The investigation has uncovered problems with tests the company conducted on concrete poured over the last two years at the new Yankee Stadium in the Bronx and the foundation of the Freedom Tower in Lower Manhattan, along with as many as a dozen other projects, said several of the officials, who spoke on the condition of anonymity because the investigation is continuing.

“The investigation has also raised questions about past work done by the company, Testwell Laboratories Inc., at a wide range of sites around the city. Construction and inspection practices in the city are already under scrutiny as a result of a series of fatal accidents and arrests on corruption charges.”

This article is fascinating on a number of levels. First, who would have thought that the New York Times would run an article that goes into such detail about concrete testing, specifically slump tests? Secondly, and perhaps more notable, law enforcement is conducting an investigation into the practices of a noted high profile concrete testing firm. But it isn’t just any law enforcement division, it is the Manhattan District Attorney Office’s Labor Racketeering Unit. Racketeering? That’s a serious charge.

It should be noted that Testwell Laboratories, Inc. (website appears to be down – here is the Google cache of the site) provides much more than concrete testing, offering a full range of testing services including geotechnical, metallurgy, construction materials, petrographic and chemical. Testwall Laboratories, Inc. describes itself (ironically) as “an independent full-service testing, inspection, quality control and quality assurance organization that has earned a valued reputation for reliability and professionalism in the construction industry“. [Emphasis added.]

Link to Article

Link to Part 1, Link to Part 2, Link to Part 3

California’s residential construction industry is approaching uncharted waters as a housing slump, tight liability insurance coverage and new laws for handling construction defect litigation all collide.

The collision makes an already challenging business environment fraught with even more danger. Some attorneys, especially those representing subcontractors, say they fear for their clients’ future.

“This is going to be a big problem,” said Blane Smith, an insurance-coverage attorney.

Link to Article

“In a case that is being closely watched in the multi-family housing industry, the Ninth Circuit Court of Appeals yesterday released its opinion affirming the lower court’s holding that the 2-year statute of limitations for a private civil action alleging violation of the Fair Housing Act’s accessibility requirements for design and construction is triggered, i.e., the violation is complete, at the conclusion of the design and construction phase, which occurs on the date the last certificate of occupancy is issued.”

It seems that for the foreseeable future, accessibility claims under Fair Housing Act will be subject to a two year statute of limitations after all. This means that plaintiffs only have two years from the occupancy date to file a claim for such violations. This is quite favorable for developers, contractors and designers but may go against the intent of the Fair Housing Act, as illustrated by dissenting Circuit Court Judge, Hon. Judge Fisher:

“The majority erroneously treats a building’s improper design and construction as the event that triggers the Fair Housing Act’s (FHA) two-year statute of limitations. It does so by finding an ambiguity in the statute and then resolving that ambiguity contrary to the overall purpose and structure of the FHA and its legislative and judicial history.

“I believe instead that the most plausible reading of the statute is that the limitations period begins (at the earliest) when a disabled person actually experiences discrimination — either in attempting to buy or rent a noncompliant housing unit, in “testing” such a unit or upon moving in as a tenant.

In other words, Fisher feels that the two year statute should begin following discovery of such a violation. However the majority opinion from the Ninth Circuit felt that this two year statute should begin once the work is done. So what happens if a property is completed, but nobody moves in for two years? According to this decision, if there is a violation of the Fair Housing Act that creates a situation that is discriminatory, nothing happens at all.

Link to Article, Link to Post from Ninth Circuit Opinions Blog, Link to Opinion (PDF)

The number of local construction-defect lawsuits has risen alongside the valley’s population. And one reason for this may be the heavy regulatory burden assumed by the area’s building and safety officials who oversaw all the area development.

County officials say that at the height of the building boom some inspectors were doing as many as 70 inspections a day. In response to reports that county building inspectors were conducting as many as 120 inspections a day during 2004 and 2006, Clark County Director of Development Services Ron Lynn said those numbers never got higher than between 60 and 70.

This article seems to echo the sentiments of many outsiders to the construction defect industry – that it is the responsibility of the local building departments (i.e.: the government) to prevent construction defects by policing contractors. In order for such a situation to exist, the local official would have to be on site at all times, or at least on a daily basis, at every single project. Instead, officials perform periodic inspections at certain key points in the construction of a project. For this reason, it is almost unheard of to see successful legal action taken against building officials for construction defect claims. Although some forward-thinking developers employ third party consultants to maintain an active presence during construction, this is not commonplace, especially in the production housing segment. Those developers that have relied upon such quality control consultants, have very little exposure in terms of construction defect claims, as problems are corrected as they arise. Until this practice becomes more widespread, homeowners will continue to rely upon construction defect consultants, such as SHCC, Inc., to aid in resolving these issues.

Link to Article

The billable hour is the dandelion of law practice: pervasive and not so popular.

So, when seeking to avoid the neg ative effects of a system that provides the profits for many a firm, there can be as many approaches as there are landscapers in the phone book.

Three law firms were among those changing the billable equation last year in hopes of reducing associate and client dissatisfaction. Each took a different approach, and though it’s still early, each firm’s leaders like the current results.

In summary, the concepts largely relate to reducing requirements for first-year attorneys, not billing clients for work by first-year attorneys, and flat-fee billing. This last concept is not discussed at much length in the article, but is worth exploring further. 

The Shepard Law Group, an employment law firm out of Boston, ditched billable hours completely in favor of flat fees. They call this “Up-Front Pricing” on their website, explaining that for the client, “You will always know how much our work is going to cost before we do it.” As they also state, “you don’t pay for our time — you pay for the work we do and the value you receive.” What a concept. 

Link to Article, Link to Shepard Law Group

“A case heard last week by the 9th U.S. Circuit Court of Appeals involving a North Las Vegas apartment complex has potential for ‘groundbreaking’ ramifications, a local attorney for one of the defendants said Monday.

“An organization for disabled citizens has sued multiple defendants who had any part in designing and building Craig Ranch Villas, formerly the Villas at Rancho del Norte, in 1997 for violations of the Fair Housing Act, alleging inadequate sidewalk ramps for wheelchairs, lack of accessible building entrances and undersized interior doorways, among other things.

“The case has been incorporated into a lawsuit from Idaho (Garcia v. Brockway) and is being followed nationally by major multifamily and fair housing organizations, said Bill Curran of Ballard Spahr Andrews & Ingersoll. The Las Vegas law firm is representing Michael Turk, one of the principal builders who has since sold his majority interest in the property and moved to California.

“The outcome of the court’s ruling will determine the statute of limitations for violations of the Fair Housing Act for all multifamily apartments and condos built after 1991, Curran said.”

This case may have a significant affect on the world of construction defect litigation, as pointed out later in the article. The major point behind this ruling is not whether or not accessibility should be a consideration in multifamily construction, but whether or not there should be a statute of limitations regarding accessibility claims.

Link to Article
 

The two companies that managed the design and construction of the costly Big Dig project here will pay more than $400 million in an agreement with the government over leaky tunnels and a fatal ceiling collapse.

State and federal officials said Wednesday that the companies, the Bechtel Infrastructure Corporation and Parsons Brinckerhoff, had acknowledged oversight failures and agreed to pay the state and federal governments $407 million. Several smaller companies will pay an additional $51 million, they said.

Michael J. Sullivan, the United States attorney in Boston, called the agreement “evidence of our commitment to vigorously investigate and prosecute those who have perpetrated a fraud on American taxpayers.” The Big Dig, long considered the nation’s most complex highway project, has cost about $15 billion over nearly two decades.

Link to Article

The secret room in the old mill home on Whitten Street in Greenville’s Dunean section contained a handwritten letter from the previous owner titled, “You Found It!”

“Hello. If you’re reading this, then you found the secret room. I owned this house for a short while and it was discovered to have a serious mold problem. One that actually made my children very sick to the point that we had to move out,” Kerri Brown read from the letter.

According to the note, there was so much mold, it made the last family who lived there sick, and they were forced to move out.

This story received quite a bit of press, but not everyone told the same story. After further research here is a brief summary:

• George and Tricia Leventis purchased a home at Number 6 Whitten Street in Greenville, South Carolina. After living in the home, several members of the family became very ill. Mold was found in the home, and doctors blamed the mold on the medical conditions.
• The family could not afford to remediate the mold condition, so they walked away from the home. Foreclosure ensued.
• Before leaving, George Leventis left a note in a concealed area describing the condition. His reasoning: once the house went back on the market, the bank/realtor/other interested parties would not want such a serious mold problem readily visible, so leaving the note in the open would have been fruitless.
• Jason and Kerri Brown later bought the home. As Mr. Leventis suspected, the Browns never received disclosure regarding any mold condition. The pre-purchase inspection likewise did not turn up any mold concerns, as the problem was somewhat concealed. (Don’t take the word of a pre-purchase home inspector as final!)
• The Browns, upon discovering the mold and the letter from Leventis, hired Hendrix Consulting Engineers to evaluate the home. Samples came back with elevated levels of various mold species including the infamous Stachybotrys – the so-called toxic mold of lore. According to the company’s principle, Steve Hendrix, the house was “probably a seven,” on a scale of one to ten, in terms of infestations.
• The estimated remediation costs allegedly exceed the purchase price of the home.
• The Browns filed a lawsuit against the realtors and the lender, Fannie Mae.
• Fannie Mae has recently agreed to purchase back the home at the original price of $75,000, and have thus been released from the litigation.
• The lawsuit against the real estate firm and the agent that sold the home.

Link to Article, from Boing Boing and BLDGBLOG

Undersize gusset plates in the Interstate 35-W bridge in Minneapolis were “the critical factor” in the bridge collapse last year that killed 13 people and injured 100, the National Transportation Safety Board said Tuesday.

Chairman Mark Rosenker said the plates, which connected steel beams, were roughly half the thickness they should have been because of a design error. Investigators found 16 fractured gusset plates from the bridge’s center span, he said.

“It is the undersizing of the design which we believe is the critical factor here. It is the critical factor that began the process of this collapse. That’s what failed,” Rosenker said.

Interestingly, the bridge was found to be deficient structurally according to the federal government for nearly 2 decades, calling in to question the state’s maintenance. The legal outcome of this should prove interesting.

Link to Article, from Drudge Report

Ernest Svenson, an attorney in New Orleans at the forefront of using technology in the legal industry, recently taught a CLE for Louisiana attorneys on the concept of Digital Workflow. As part of the reference materials for his talk, he used the above clip that highlights the perils of new technology, from the perspective of folks from a long time back.

Link to Article (with links to his materials for the presentation)

“The Massachusetts Institute of Technology is suing renowned architect Frank Gehry, alleging serious design flaws in the Stata Center, a building celebrated for its unconventional walls and radical angles.

“The school asserts that the center, completed in spring 2004, has persistent leaks, drainage problems and mold growing on its brick exterior. It says accumulations of snow and ice have fallen dangerously from window boxes and other areas of its roofs, blocking emergency exits and causing damage.”

The article goes on to state that the plaintiffs assert that the issue is not construction, but design. Third party consultants pointed this out prior to completion of construction but Gehry refused to budge. Normally architects are not brought into construction defect lawsuits, because it is so difficult to attribute responsibility. But occasionally there are design flaws that a general contractor or subcontractor may not be able to compensate for or anticipate. Or in the case of Gehry, the designs are so complex and so unique, that no conventional knowledge can be applied to evaluate construction details.

Besides, who is going to question Frank Gehry?

Link to Article

Update:The NY Times has another article with more information

“A double glazing salesman launched a violent assault on a customer moments after discovering they had spoken to a rival company, a court was told yesterday.”

Link to Article

• First up is a story that has come up before. It involves a homeowner, a builder, some defective construction and a binding arbitration clause. The homeowner is in foreclosure and cannot afford to continue through arbitration. The author that received a letter from the homeowner has experience in construction and offers his take on the situation:
  

  “Based on my experience, I think we can safely predict that defective construction and the gross violations of consumer/homeowner rights by big builders and frightened municipalities (it’s hard to sue a city and win, by the way) will only grow as a national issue as the housing bubble bursts.” Link to Article

• In a Washington state case a condo developer was denied a claim against an insurance carrier involving water intrusion caused by defective construction. Link to Article
• And finally, comes an article that offers advice to contractors to avoid construction defect claims that is worth a read. Link to Article

In Nevada, a homeowner has two options, they may either file a claim with the Nevada State Contractors Board at no charge or they may contact a lawyer and file a Chapter 40.  Chapter 40 was written to protect homeowners with homes that have true defects.  A Chapter 40 done by a reputable attorney should only cost the homeowner $40; all other costs are recouped in court from the builder.  An attorney that is implementing Chapter 40 in this way, which is the way the legislature intended, will NOT take a case they cannot win because they will not be paid.

According to Reese, some attorneys are including a cancellation fee in their contracts with homeowners similar to what mobile phone carriers use. If a case will not proceed under Chapter 40 rules, the attorney charges the homeowner a $6,000 fee. More reputable attorneys, he points out, will instead recommend homeowners utilize the free services of the Nevada State Contractors Board which may result in a speedier resolution to construction defect issues. Perhaps the windfalls associated with construction defect litigation in Nevada are not so easy to come by…

Link to Article

“The court specifically found that the seller could not have been unaware of the serious water problems and resulting mold throughout the house. Carpet which had been installed just before the sale was soaking wet when lifted. There was black mold in the utility closet, obscured by boxes and storage items. Wood support beams were visibly stained and rotted through, in areas where sheet rock was missing from the walls, so the seller could not have missed it. The evidence appears to have been overwhelming that the house was in terrible condition. The court did not discuss the contents of the home inspector’s report. It appears that the defendant’s deception and untruthfulness was hugely significant and overcame any argument that the home inspector should have noted these deficiencies.”

The Connecticut Superior Court judge that heard the case ordered the seller to compensate the buyers for not only the repairs but additional money. Sounds good, right – justice was served. The reason that this is surprisingly not too common has to do with what we like to refer to as the Construction Defect Lawsuit Life-cycle. Most homeowners join construction defect lawsuits because they have genuine concerns over the construction of their home. The first step in the process is for the attorney representing the homeowner to pay for an expert to thoroughly investigate the home to produce a preliminary defect list. The next step is the investigation and mediation phase whereupon myriad attorneys, insurance adjusters, experts and others representing plaintiffs (homeowners or HOA generally) and defense (developer, architects, general contractors, subcontractors, etc.) evaluate and debate the nature and extent of any construction defects. Following this, the case is eventually resolved through one of (at least) three ways: either the case is dropped, settled out of court, or decided in trial. If the homeowner comes out ahead and receives money at the conclusion of the case (their attorney usually gets 30 – 40%), what happens next? That is the part that hasn’t been addressed in any meaningful way yet.

Here is the homeowner with a fairly large check (depending on the plaintiff attorney and various factors the homeowner will average $10,000 up to about $60,000) and a home that according to many experts, is riddled with construction defects. Does the attorney provide the homeowner with a punchlist of items to be addressed by a reputable contractor with references to contractors specializing in those types of repairs? I should think not. Does the expert that testified on behalf of the homeowner oversee repairs to the home that they recommended under oath perhaps? Hardly ever. Following a trial, the homeowner could theoretically obtain transcripts and try to piece together the testimony and reports of the various experts, but ultimately, the homeowner is usually left with nothing but a check and a vague notion of the major defects. Without a lot of direction, addressing truly defective or improperly installed components and associated damages is very difficult. Often times homeowners try to address some of the major issues as best as possible. Often they end up upgrading some of the finishes. Sometimes they spend the money on other things (or so we’ve heard). According to many Southern California realtors, rarely if ever do homeowners disclose during a sell that their home was involved in a construction defect lawsuit – especially if it was settled out of court. The homeowners that were plaintiffs in a construction defect lawsuit have profited, their attorneys profited, the experts hired by their attorney profited, often (strange as it seems) the defense attorneys profit (they are paid by the hour), the experts for the defense profit and even the mediators profit. Insurance carriers recoup their expenses by raising premiums, developers charge more for their homes and the cycle begins anew at a different location. And the house is still defective, no repairs have been made, and yet for some reason, none of this is disclosed to future buyers.

Perhaps this scenario will change in the future, but regardless it is clear that there is a definite gap in the life-cycle. And just to clarify: this isn’t the fault of anyone in particular, and the integrity of the industry as a whole (both the construction defect industry and residential construction itself) has definitely improved over time.

Link to Article

A component product’s failure to perform as represented by its manufacturer is a frequent claim in a construction defect cases. Often, defendants of such claims attempt to hide behind general disclaimers and limitations of warranty. Addressing the failure of a component product of yachts, the Federal Court for the New Jersey District recently denied a manufacturer’s summary judgment motion, having concluded that a general disclaimer of warranty will not automatically defeat an express warranty created by representations, descriptions and affirmations set forth in a product bulletin.

Link to Article

These days, it is practically impossible to turn on the television without immediately seeing some show involving scenes in the courtroom. So, how realistic are the television shows compared to real life courtroom situations?

To say the courtroom dramas are a popular subject on television would be a minor understatement. From shows like CSI to Law & Order to whatever happens to draw your attention, the ratings do not lie. Millions upon millions of people watch the shows. In truth, I often watch them. They’re pretty dramatic, but are they a realistic representation of what goes on in a courtroom?

Link to Article

No doubt: someone was negligent in the collapse of the Big Dig tunnel in Boston that killed one. The Latin phrase res ipsa loquitur comes to mind.

But it’s hard to understand why Massachusetts officials are going after Powers Fasteners, Inc.

Powers received an order for standard-set epoxy to be used in the tunnel ceiling, and sold $1287 worth. The construction company then used a different, fast-set, epoxy that was not designed for such long-term use. As a result, ceiling panels fell, crushing a car and killing one person. But Massachusetts is indicting Powers. Given that the penalty is a $1000 fine, the only purpose of this use of taxpayer dollars is to carry water for trial lawyers—or, perhaps, to help spread blame in the eventual suit against the Massachusetts Turnpike Authority by having a criminal conviction in hand.

Link to Article

Mix a love fest with Europe, a little bit of Home Depot Expo and the craftsmanship of the average American homebuilder and you get an ugly statement about this housing boom. Mortgage-liquidity architecture dots the landscape as a reminder of our real estate excess.

Shoddy construction is another consequence as homebuilders slapped up homes faster than at any period in history. Building inspectors, like mortgage regulators, often turned a blind eye as they raced to keep up with the builders.

The litigators are having a field day, representing homeowners who are suing over a myriad of defects. Poor workmanship becomes evident to homeowners when their property depreciates — a bad market brings out the bitterness in us all. The investor lawsuits from the dot.com crash are still being sorted out, and I suspect housing defect litigation will persist for a decade, which is the statute of limitations period for new construction in many states.

Link to Article

Many remodelers and house flippers will fall under the purview of a state agency that regulates the building industry starting next month.
New changes to a state law have made home builders slightly more accountable if they build a defective home, and also have broadened the definition of who qualifies as a builder.

Starting Sept. 1, remodelers who do more than $10,000 of work to a home will have to register with the Texas Residential Construction Commission. And if they get into a quarrel with a homeowner over the quality of work, the fight will have to go through the agency’s dispute-resolution process.

That remodeling work will have the same warranty that a builder gives on a new home — 10 years for structural elements, two years for systems such as water and air conditioning and one year for workmanship and materials, San Antonio attorney Gary Javore told members of the Greater San Antonio Builders Association last week.

Link to Article

Experts estimate that the average new house will exhibit three to 14 construction defects. Some builders have a reputation for standing behind their work and quickly fixing problems, whereas others drag out repairs.

No one keeps a comprehensive public record of construction defects or the building industry’s response to them, making it difficult for the average home buyer to research a builder’s track record of quality and customer service.

Chief among the points made that indicate bias are regarding builders’ response to defects and the “new legislation in California.” (That would be SB-800.) In the article the reporter slams builders that repair defects quickly without disclosing such repairs. Some of the points made about binding arbitration are well taken, but a builder that responds with repairs to homeowner complaints is good customer service – not deceptive practices. Overall, the article attacks builders but does not offer any proposed solution to the problem.

This reminds me of a story from a decade or so ago… A man purchased a Rolls Royce and was motoring along (you don’t cruise or drive a Rolls, you motor along in one) when he noticed a problem. One of the struts was broken. The new owner was somewhat perturbed, understandably, and contacted the nearest Rolls Royce dealer. Shortly thereafter a mechanic showed up and replaced the strut on the side of the road. He wouldn’t accept payment of any kind. The owner of the vehicle tried in vain the next day to contact Rolls Royce regarding his repair – after all, a part like that in a Rolls would probably cost over $1000. He at least wanted to thank the man that helped him out. Finally someone at the company explained to the owner, there was no such repair man – “a Rolls Royce does not break down on the side of the road.” That story may not be true, but it does make a point.

Link to Article

Beazer Homes USA Inc. said Monday that an informal Securities and Exchange Commission inquiry to determine if any person or entity related to the company violated securities laws has become formal.

The Atlanta-based homebuilder said in an SEC filing issued after the market closed that on Friday it received a “formal order of private investigation” issued by the SEC in this matter.

“Beazer Homes will continue to cooperate fully with the SEC regarding this matter,” the company said in the filing.

It did not elaborate on the review.

Link to Article

Don Neff is president of La Jolla Pacific Ltd., an Irvine-based consulting firm that advises homebuilders on ways to improve the quality of their construction and avoid construction-defect claims. The firm operates in 10 states and claims to have assisted 1,000 clients in the building of more than 50,000 homes. Register reporter Jeff Collins spoke with Neff (not related to prior Insider Q&A guest Doug Neff of IHP Capital) about the state of the housing market and the current quality of homebuilding.

This question and answer session is interesting on a number of levels. La Jolla Pacific provides quality assurance and quality control risk management services to builders. The key to understanding such a firm is that risk management component. Risk is the quotient upon which the entire insurance industry is built upon. Insurance carriers are almost universally responsible for financing the construction defect litigation industry. If a developer/general contractor is sued by a group of homeowners or a homeowner association, usually the first thing that happens is that the builder’s insurance company is notified. The insurance company (after checking that the policy is still good!) hires a law firm to represent the builder. The law firm representing the builder then hires a team of experts and at the same time, files cross-complaints against the subcontractors that worked on the project in question. Now there are certainly exceptions to the rule, but that is the general method of operation in the CD industry.

From the moment the case is filed against the builder, their insurance company begins paying out money. Defense attorney firms bill by the hour. The experts designated bill by the hour. Documents have to be copied and organized and submitted. Even if the case is settled out of court, and even if the subcontractors and their respective insurance carriers pay the lion’s share of the settlement amount, the carrier for the builder will pay substantial amounts of money to their lawyers and experts. If the case goes to trial, the trial preparation costs for defending the builder will often run well over $100,000 alone. The only time that the builder’s insurance carrier recoups any of those costs is in the rare occasion that a jury finds in favor of the defense. So how does the insurance company remain solvent and return a profit to shareholders? Pretty easily, actually.

The insurance carrier reduces pay out on claims by reducing risk in the first place. One way of reducing risk is to insure builders with excellent track records – not unlike auto insurers providing better rates to drivers with fewer accidents. In construction, the high cost of litigation has prompted the carriers to go a step farther. On larger developments (more risk), the carriers are requiring better quality control/assurance (QA/QC) and are sometimes even requiring third party consultants to assist in that process. The cost of such services is prohibitively expensive to smaller developers, but the offset in insurance premiums is advantageous to the larger builders. (Builders that have seen numerous construction defect claims pay much higher premiums and as a result, some developers have resorted to insuring themselves.)

So what does this have to do with the article? Don Neff is asked by the reporter to weigh in on the relationship between the real estate market slow down and the potential for construction defect litigation. Mr. Neff asserts that even though the profit margin is decreasing due to significantly less demand, the construction quality overall will be better. He insists that builders will be more likely to spend more money for better quality control (i.e.: hiring firms like his) even though the profit is less. Economics must not have been offered at his school. History has shown us time after time that when profits go down, companies cut costs in order to boost the profit margin. The U.S. auto industry responded to decreased demand for domestic vehicles by cutting jobs – tens of thousands of jobs. Without such cutbacks, many of those companies would probably not be in place today. The auto industry did not increase quality control practices which would therefore increase labor costs and charge more to the consumers.

I guess we shall see whether Mr. Neff’s optimistic outlook is correct or not.

Link to Article

In a unanimous vote of 26-0, Oregon State Senators, led by Senator Jackie Winters (R-Salem), voted to ban the use of synthetic stucco on Oregon homes. This decision came after Senator Winters told the story of an 11-year old Salem resident, Whitney McClain, who is currently being treated for multiple brain tumors after a mold outbreak in her home. The girl is Senator Winters’ granddaughter, and just one of many sufferers of several diseases (including brain tumors, pneumonia and bronchitis) caused by mold infestations in their homes.
After the unanimous vote by the Senate, the bill was sent to the House of Representatives. Representative Paul Holvey (D-Eugene), led an initiative to deny the bill, until it also includes banning stucco on commercial buildings. While this would increase the safety for the residents of Oregon, many feel the ban on commercial properties is not necessary. A conference committee was assigned to reconcile House and Senate approaches in HB 2112-B.

This is a follow up to an earlier post. As you may recall the ban is focused upon the product, as opposed to the improper installation of EIFS on residential construction projects. As this proposal has moved forward, more information has come to light.

Specifically, the ban is proposed to be extended to commercial construction as well, in order to pass. The other important piece of information comes to us via the Oregon Staff Measure Summary which clarifies that this ban only applies to barrier-type systems, not the preferred drainage-type systems. (Barrier-type EIFS does not incorporate a drainage mechanism or a specific weather-resistive membrane in the design, whereas drainage-type EIFS does – thus the name.) These two points are very important.

In regards to extending the ban to commercial construction, the industry representatives are clearly preparing for battle. Phillip Loscoe, Jr., a spokesman for Dryvit, a leading manufacturer of EIF systems, stated “that’s a concern to us and we would probably go to litigation phase.” Barrier-type EIFS is used in commercial construction over concrete shells and solid sheathing in a fashion similar to the product’s original application in Europe – as an exterior insulating finish system. Furthermore, the ICC has required the use of drainage-type systems over open framing (typical of residential construction) for some time now. But, according to Oregon Representative Mike Schaufler, “I think there is a direct correlation between this product and the mold problem,” a statement not supported by scientific evidence. This is what is known to researchers as a logical fallacy.

Is barrier-type EIFS as a product inherently bad? There is no correct answer to that question because the answer depends upon too many variables. Is barrier-type EIFS appropriate over open-framed residential housing without the addition of a weather-resistive membrane? Not according to the building code. Nor is acceptable to EIFS manufacturers that explicitly call for a drainage-type system for such an application. Is a barrier EIFS product safe to use on commercial construction? It is if the building is one of the approved substrates that are clearly listed in both ICC Evaluation Reports and manufacturer recommendations. Does EIFS cause mold? Only if it is installed incorrectly, or if the wrong product is used for the wrong application. But then any building product that creates an environment conducive to mold growth will cause mold. Should Oregon ban all building products, just to be on the safe side?

Link to Article, Link to Another Article, Link to HB 2112-B Summary

Our over twenty year old condos started with construction defects like improperly built patio/balcony structures resulting in sub-frame, frame and interior sub floor decomposition. Our patios/balconies are not the property of the owners, but rather the property of the HOA. How lucky we are to have the right to exclusive use, but the repairs are reserved for the unlicensed contractors.
We have interior and exterior mold. This is a health hazard. We don’t know the true condition of our building structures, but many of us do know that they are deteriorating.
Some of us know that we also have improperly installed insulation (now banned as it is a fire hazard) in the attic space that is falling from the sheathing under the roof and onto the suspended drywall ceiling. Some of the fallen insulation is laying on top of the electrical wiring that was once fastened to the ceiling joists with staples and braces made of metal rods.

Link to Article