BRENEMAN GRUBE, plcc : Attorneys and Counselors at Law

(206) 770-7606
1200 Fifth Ave, Suite 625
Seattle, WA 98101

Construction and Condominium Defect Litigation

DO YOU OR YOUR HOMEOWNERS' ASSOCIATION HAVE CONSTRUCTION DEFECT CLAIMS AGAINST YOUR CONDOMINIUM'S DEVELOPER? YOU NEED TO ACT FAST. A RECENT WASHINGTON SUPREME COURT CASE COULD EFFECTIVELY SHORTEN THE STATUTE OF LIMITATIONS AGAINST CONDOMINIUM DEVELOPERS

IF YOU OWN A RECENTLY CONSTRUCTED CONDO, IT IS WORTH YOUR WHILE TO READ THIS BRIEF "CONDO LAW 101" ARTICLE.

Condominium developers often like to "build and scoot"— they set up a separate limited liability company ("LLC") to, well, try to limit their liability. They build, sell units, transfer control of the building to a Homeowners Association ("HOA") and then shut down their LLC as soon as they can and move on to the next project. It is in the interests of most builder-developers, and their insurance companies, to put as much distance between them and your building, as they move on to their next project. If your building has construction defects (such as water intrusion, structural and drainage issues, and mold fungus)-- and many of them do-- by the time you do an inspection of the building, it may be too late to get the builder-developer, and its insurer, to pay to fix the problems. Here's why:

In May 2009, the Washington Supreme Court issued an opinion in Chadwick Farms Owners Association v.FHC, LLC, a ruling that affects the ability of LLC's to sue and be sued following their dissolution or cancellation. This decision, (although prospectively modified by the legislature effective July 2009), has the potential to significantly limit the ability of a condo owner and HOAsuch as your HOA to recover damages for construction defects, including the significant damages associated with water intrusion, structural and drainage issues, and mold fungus.

  • A developer that wants to minimize liability could dissolve and cancel its LLC, possibly leaving HOAs with no entity to sue, and therefore no recovery of damages.

Most condominium defect claims must be brought within four years (for statutory claims) and within six years (for contract claims) of substantial completion of the project. Often, Developer-Declarant LLC's will turn over the project to the HOA, and then cease operations. The Declarant LLC will often then dissolve, intentionally, or administratively for failing to pay filing fees and file reports. Dissolved LLC's are automatically cancelled either two or five years after an LLC is dissolved, unless the LLC seeks reinstatement.

In Chadwick, the developer formed an LLC to develop the condominiums. When the project was completed, the LLC did not pay any more license fees and was administratively dissolved by the Secretary of State. The HOA then commenced a lawsuit against the LLC. During the lawsuit, the LLC was automatically "cancelled" by the Secretary of State because no application for reinstatement had been made within two years of dissolution. The Supreme Court held that because the LLC was cancelled, it no longer existed and could not be a defendant in the case. The HOA was denied relief against the LLC. 1

This holding has a significant impact for HOA's because even if the statute of limitations has not run on a construction defect claim, claims against a Declarant LLC could be barred because the LLC has been cancelled – effectively limiting HOA claims to two years following a LLC dissolution. Therefore, it is important for HOAs to monitor the corporate existence of the Declarant and to make a vigorous effort using construction professionals to promptly discover any construction defects or deficiencies.

  • Legislative changes to the statute at issue are only being applied prospectively, meaning that older condominium projects could be subject to the Chadwick holding regardless of the legislative changes.

Shortly after the Chadwick opinion, the Washington legislature amended the statute which was at issue to extend the time for reinstatement from two years to five years. Although this modification provides a little more time for HOAs to discover and prosecute claims, the effect of the Chadwick case could still result in a shortening of the time to bring breach of warranty claims under the contract documents.t. As currently interpreted by the Washington Secretary of State, the application of this legislative change is not retroactive. The Secretary of State Division of Corporations and Charities has declared that it will not reinstate any LLC dissolved July 25, 2007 or earlier.

What does this mean to you?

Prudent HOA's should perform an immediate analysis of (a) whether your building has any potential construction defects; and (b) the legal status of the builder-developers that may be responsible for fixing those defects. Sitting on your hands is not an option. Any delay may result in your being unable to force the builder and its insurer to pay to fix your building.

If you have any questions or concerns, give us a "no charge" call to discuss. We represent HOA's and condo owners in construction defect claims against condo builder-developers, and usually do so on a "contingent fee" basis (which means we charge no attorneys' fees if there is no recovery). It does not hurt to call. The potential consequences of not acting quickly to protect your rights are enormous.

To check if an LLC has been dissolved: http://www.secstate.wa.gov/corps/corps_search.aspx.

1 The Supreme Court did leave open the possibility that individual members of the LLC could be held personally liable if they had not properly wound up the affairs of the LLC to provide for “contingent, conditional, or unmatured claims and obligations.” This type of claim, however, is considerably more difficult and expensive than a claim against an insured LLC.