We wrote about this issue last year, noting that two of the six appellate districts in California had previously issued opinions in line with the Supreme Court’s (later) ruling in McMillin. Clarity from the high court was needed after uncertainty had resulted in the construction defect (“CD”) community in California after the 4th Appellate District Court issued its opinion in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC in 2013, holding that the pre-litigation procedures in the Act are mandatory only where the homeowners plead statutory causes of action under the Act. In Liberty Mutual, the court held that since the homeowners only brought causes of action in common law (i.e., negligence and/or strict liability), and did not include any claims under the Act, the pre-litigation procedures in the Act, including the automatic stay, did not have to be followed. We noted at the time that while the Supreme Court had not yet issued its opinion in McMillin, the two appellate rulings regarding the Act were “a source of optimism to those in favor of overturning Liberty Mutual.”
The genesis of the creation of the Act is found in Aas v. Superior Court (2000) 24 Cal.4th 627, 632 (Aas), where the California Supreme Court held that the economic loss rule bars homeowners suing in negligence for construction defects from recovering damages where there is no showing of actual property damage or personal injury. Emphasizing long-standing case law, the court in Aas explained that requiring a showing of more than mere economic loss was necessary to preserve the boundary between tort and contract theories of recovery, and to prevent tort law from expanding contractual warranties beyond what home builders had agreed to provide. The court essentially invited the California Legislature to alter the Aas limits on recovery and to add whatever additional homeowner protections it desired. Within two years, after the stakeholders in California’s CD community (homeowner and home builder construction interest groups) provided significant input, the Legislature passed the Act.
The court’s opinion in McMillin focused on the intent of the Legislature in enacting the Act and concluded that the Act was intended not to merely alter the common law (i.e. abrogating Aas by supplementing common law remedies with a statutory claim for purely economic loss), but rather to supplant the common law “with new rules governing the method of recovery in actions alleging property damage.” Where the court held that the Act is “the virtually exclusive remedy” for economic loss and property damage claims arising from construction defects, it made clear that the only areas that the Legislature intended to preserve for common law claims in a residential CD setting are breach of contract, fraud and personal injury. “For economic losses, the Legislature intended to supersede Aas and provide a statutory basis for recovery,” the court wrote, adding for personal injuries, the Legislature preserved the position and kept the common law as an avenue for recovery. “And for property damage, the Legislature replaced the common law methods of recovery with the new statutory scheme.”
The opinion provided the following concise summary of its key finding, as follows:
“[T]he legislative history confirms what the statutory text reflects: the Act was designed as a broad reform package that would substantially change existing law by displacing some common law claims and substituting in their stead a statutory cause of action with a mandatory prelitigation process.”
Prior to the Supreme Court ruling in McMillin, it was typical for plaintiffs to ignore the pre-litigation notice and procedures contained in the Act, thereby depriving homebuilders of the benefits associated with that notice and procedures. With this ruling, the state court judges in California now have clarity that the Act serves as plaintiffs’ exclusive remedy for economic loss and property damage claims in the residential construction setting.
