Statute of Limitations Update

Statute of Limitations Update

June 1, 2004

Introduction

In the six weeks between April 1, 2004 and May 15, 2004, all three branches of Minnesota State government weighed in on the correct application of the statute of limitations for claims arising under statutory warranties for new home construction provided by Minn. Stat. § 327A.02. This briefing paper discusses how the Minnesota Supreme Court’s decision in Vlahos v. R&I Construction, [1] joined with the Legislature’s amendment of Minn. Stat. § 541.051, impacts accrual of claims under section 327A.02.

In Vlahos, the Minnesota Supreme Court made two significant decisions affecting how the two-year statute of limitations applies to claims involving breach of the 10-year statutory warranty against major construction defects provided by Minn. Stat. § 327A.02, subd. 1(c):

The two-year period for breach of the 10-year statutory warranty against major construction defects (Minn. Stat. § 327A.02, subd. 1(c)) runs from the date the warranty is breached —that is, from the date when the homeowner discovers or should have discovered the builder’s refusal or inability to ensure that the home is free from major construction defects.

The term “major construction defect” in the 10-year warranty includes actual damage to load-bearing portions of a dwelling that occurs after construction is completed. The defect need not be present at the time of construction.

For its part, the Legislature amended the statute of limitations applicable to claims under § 327A.02 to make them subject to the 12-year statute of repose that pertains to other claims. This amendment, signed into law by Governor Pawlenty on May 15, 2004 , legislatively supersedes the Minnesota Court of Appeals’ decision in Koes v. Advanced Design, Inc., [2] which held that § 327A.02 claims were not subject to any statute of repose.

Vlahos v. R&I Construction

In the Vlahos case, the purchasers of a multi-million-dollar Lake Minnetonka home were allowed to bring a statutory warranty claim for damages allegedly caused by water infiltration and mold. The Supreme Court held that the homeowners’ claim was not barred by the statute of limitations, even though the Plaintiffs purchased the home from a seller who arguably knew of water infiltration problems as much as seven years earlier. The Plaintiffs, Dean and Michelle Vlahos (“the Vlahoses”), purchased the home in 1999 from the original owners, Roger and Carol Rovick (“the Rovicks”). The home had been constructed for the Rovicks in 1990 by Robert Waade & Associates, Inc. (now known as R&I Construction of Bloomington, Inc.) (“R&I”). The Rovicks moved into the completed home in 1991.

The Rovicks experienced repeated problems with water and moisture in the home. In August 1999, they entered into a purchase agreement with the Vlahoses and, in connection with the sale, provided a Seller’s Property Disclosure statement disclosing roof, wall, and ceiling damage caused by water and identifying areas of seepage, leakage, corrosion and mold. The Rovicks also indicated that “some windows may need replacement” in their Seller’s Property Disclosure Statement.

The Vlahoses hired a building inspector before the sale closed. Their building inspector provided a report before closing, detailing extensive water damage to the home. The Vlahoses used the report to negotiate a $20,000 price discount from the Rovicks to repair and replace some windows and they thereafter paid $5.1 Million to purchase the home.

Four months after closing, in April 2000, the Vlahoses began extensive renovations, and discovered significant water damage behind the walls of the home, involving decayed interior floor trusses, ceiling trusses, “and other load-bearing supports.” The Vlahoses denied any previous knowledge of these conditions despite hiring an inspector, receiving a written report, and negotiating a price discount based upon the problems identified by the inspector. The Rovicks claimed that these conditions in the Vlahoses expert’s report were different from the problems they had disclosed, which they claimed were isolated and had been repaired prior to sale.

The Vlahoses put R&I on notice of the problems in May 2000. After R&I and its insurers inspected the home, R&I refused to repair the home or pay for any of the damage. The Vlahoses repair bills totaled $1.1 Million, nearly a third of the cost of their $3.8 Million remodeling project.

The District Court Grants Summary Judgment to R&I/Subcontractors

After the Vlahoses commenced suit in April 2001, the Hennepin County District Court granted summary judgment to R&I and its subcontractors and dismissed the Vlahoses’ claims. The District Court ruled that the two-year statute of limitations found in Minn. Stat. §541.051, subd. 1(a) barred the Vlahoses’ lawsuit because the Rovicks knew or should have known of the water damage more than two years before the commencement of the Vlahoses’ claim. The District Court also ruled that the 10-year statutory warranty against major construction defects did not apply. Specifically, the District Court found the defects that caused construction damage were not “major construction defects” because they were not present when construction was completed.

The Court of Appeals Affirms

The Vlahoses appealed, and the Minnesota Court of Appeals affirmed the summary judgment in favor of R&I/subcontractors. [3] The Court of Appeals agreed that: (1) the two-year statute of limitation of Minn. Stat. § 541.051, subd. 1 commenced when the defects were known or should have been known to the Rovicks, and (2) the Rovicks’ knowledge was imputed to the Vlahoses. The Court of Appeals also concluded that the defects did not constitute “major construction defects” because they arose after water penetration damaged the original construction.

The Minnesota Supreme Court Reverses and Remands for Trial

On April 1, 2004 , the Minnesota Supreme Court reversed both lower courts’ rulings. First, the Supreme Court ruled that summary judgment was not appropriate, because it could not determine when the Vlahoses or Rovicks discovered or should have discovered that R&I had breached the 10-year warranty. Second, the Supreme Court held that both lower courts had incorrectly interpreted the meaning of the term “major construction defects” in Minn. Stat. §327A.02, subd. 1(c) and expressly found that actual damage to load-bearing portions of the dwelling occurring after the completion of construction is a “major construction defect” protected by the warranty.

1.  The Statute Of Limitations Accrues from the Date of Breach, Not the Date of Injury.

The Supreme Court began by discussing the statute of limitations which applies to statutory home-warranty claims, Minn. Stat. §541.051, subd. 4. At the outset, the Supreme Court noted that both the District Court and the Court of Appeals had applied the wrong statute, § 541.051, subd. 1, which is the general statute applicable to claims for damages arising out of improvements to real property. Under that general rule, a damage claim must be brought within two years after discovery of the “injury.” Minn. Stat. § 541.051,

subd. 1.

Statutory home-warranty claims are specifically exempted from that general provision, however, by Minn. Stat. § 541.051, subd. 4. Subdivision 4 provides that statutory home-warranty claims must be brought “within two years of discovery of the breach.” Although this may seem like a small difference, it made all the difference in the world to the Vlahoses and R&I.

a.  A party discovers a breach of warranty when the builder fails or refuses to comply with the warranty.

The Supreme Court next ruled that a party does not discover a “breach” of a statutory warranty until the builder providing the warranty fails or refuses to comply with it. To that end, the Court held that the 10-year statutory warranty is a warranty of future performance. The warranty provides a guarantee that the home will perform in the future as promised, in this case, that it will be free from major construction defects for ten years “from and after” the warranty date. The Court accordingly held that the statute of limitations begins to run “when the homeowner discovers, or should have discovered, the builder’s refusal or inability to ensure that the home is free from major construction defects.” [4]

b.  Transfer of title does not re-start the statute of limitations.

The Court also noted that the transfer of title to the Vlahoses did not extend or re-start the statute of limitations, citing Minn. Stat. §327A.01, subd. 6. Instead, the Court ruled that any discovery of a breach by any purchaser triggers the two-year statute. As a result, if the Rovicks had (or should have) discovered a breach by R&I, then the statute could still have run against the Vlahoses.

Nevertheless, the Supreme Court ruled that it could not determine the date when the statute of limitations was triggered in this case because the record did not reveal the date on which the Rovicks or the Vlahoses should have discovered that R&I refused or was unable to ensure that the home was free from major construction defects. According to the Vlahoses, the Rovicks had never requested that R&I repair any defect to the load-bearing portions of the home, and the Vlahoses were the first to make such a demand. If that was the first time anyone discovered or should have discovered a breach, then their action was timely, as it was brought less than two years later.

R&I argued that the Rovicks should have known of the breach far earlier, because they had experienced extensive water-related damage since 1992, but had failed to pursue legal action and the Vlahoses did not commence suit until April 2001. The Supreme Court found the Rovicks’ failure to sue irrelevant, however, based on its interpretation that the statute was triggered by the discovery of the breach. The record submitted to the Supreme Court did not include any evidence of any date earlier than May 2000 that R&I refused or was unable to repair the home, so the Court reversed the summary judgment and remanded the case.

2.  Major Construction Defects Include Actual Damages that Occur After Construction is Complete.

The Supreme Court next turned to the proper interpretation of the term “major construction defect” in Minn. Stat. § 327A.02, subd. 1(c). The Court noted that the statute defines the term as follows:

actual damage to the load-bearing portion of the dwelling or the home improvement, including damage due to subsidence, expansion or lateral movement of the soil, which affects the load-bearing function and which vitally affects or is imminently likely to vitally affect use of the dwelling or the home improvement for residential purposes. Minn. Stat. § 327A.01, subd. 5.

The warranty against major construction defects applies for ten years, “from and after” the warranty date (the earlier of the date of first occupancy or the date the buyer takes legal or equitable title to the dwelling). Minn. Stat. § 327A.02, subd. 1(c). R&I argued that this language required the construction defect to exist both immediately after construction is completed and persist thereafter.

a.  “Major Construction Defects” need not be present at the time of construction.

The Supreme Court once again disagreed with the lower courts. It noted that the Legislature routinely uses the phrase “from and after” to set out the computation of time, and found Minn. Stat. § 541.051 no different. In that context, the phrase “from and after” merely indicated to the Supreme Court that the period for calculating the two-year limitation begins the day after discovery of the breach. The Supreme Court concluded that under the “plain meaning” of the statute, the warranty against major construction defects extends to actual damage to load-bearing portions of the dwelling occurring after the completion of construction.

As further support for its decision, the Supreme Court noted that the statute’s definition of “major construction defect” includes damage due to soil movement. According to the Supreme Court, such damage necessarily occurs only after construction is complete, and therefore, could not be present at the end of construction. The Court similarly pointed out that several of the statutory definitions’ exceptions to the term, such as the owner’s failure to maintain the property, likewise necessarily would occur only after construction was complete. If the term “major construction defects” included only items present at the end of construction, those exceptions would have been unnecessary. The Supreme Court therefore held that the Legislature intended the broader meaning, reaching both initially present defects and damage occurring only after construction was complete, in order to give meaning to the term.

b.  The Vlahoses’ Expert Affidavit Sufficiently Supported Their Claims of Major Construction Defects.

The Supreme Court found that the Vlahoses had submitted sufficient evidence of a major construction defect. Their expert witness, a licensed professional engineer, submitted an affidavit detailing:

numerous and serious construction defects, including severe structural damage, substantial water infiltration, substantial wall and wood decay and rot, extensive mold growth, substantial moisture and active water infiltration from improper and defective construction of patio decks, and decay of interior floor trusses, ceiling trusses and other load bearing supports throughout the house, all of which posed serious hazards and vitally affected the Vlahoses use and enjoyment of the house for residential purposes. 676 N.W.2d at p. 681 (paraphrasing the expert’s affidavit).

The Supreme Court ruled that the expert’s affidavit was sufficient evidence of major construction defects to avoid summary judgment.

3.  The Supreme Court Specifically Approved Koes v. Advanced Design, Inc.

It is worth noting that the Supreme Court specifically approved and followed the Minnesota Court of Appeals’ decision in Koes v. Advanced Design, Inc. [5] In the Koes decision, the Minnesota Court of Appeals held that there was no statute of repose for statutory home-warranty claims under chapter 327A. Under Koes, such cases could be brought any time after the construction of the home, so long as the claimant brought the case within two years of accrual of the cause of action. In Vlahos, the Supreme Court specifically noted that Koes had “accurately explained” the interplay between the statutes creating that result, Minn. Stat. § 327A.02 and § 541.051.

As a result of a combination of Vlahos and Koes, a claim could be brought any time within two years of the time that a homeowner discovers (or should have discovered) that the original builder failed or refused to ensure that the home was free from major construction defects. Under Vlahos, such a defect could occur any time within the ten year warranty, not just at the completion of construction. Under Koes, a claim involving such a defect could be brought many years later, so long as it is brought within two-years of discoveries that the builder would not repair the defect.

Legislature supersedes Koes v. Advanced Design, Inc.

Koes was superseded by a recent statutory amendment just six weeks after Vlahos was decided. As discussed, May 15, 2004 , Governor Pawlenty signed a bill into law that creates a statute of repose for claims under chapter 327A. Under the new law, actions to enforce a breach of statutory warranty must be brought within two years of discovery of the breach, but no later than 12 years after the warranty date. 2004 Minn. Laws ch. 196. The effective date of this new law is August 1, 2004 . See Minn. Stat. § 645.02 (providing that any law passed without a specific effective date becomes effective August 1 directly following enactment). Although the Legislature overruled Koes, it did not change the language stating that the statute is triggered by discovering the “breach” of one of the statutory warranties. The Vlahos decision therefore will continue to govern the application of the statute of limitations to such claims, so long as the claims are brought within 12 years.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

Fabyanske Westra Hart & Thomson
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