Sellers of real property in California have a general duty to disclose all material facts that might adversely affect the value of the property, and which the seller knows are not known by the buyer or within the buyer’s diligent attention and observation. A failure to fulfill that duty is a form of fraud.

With regard to sales involving from one to four residential units, California Civil Code Section 1102.6 goes a step further in mandating disclosure of all “significant defects/malfunctions” in a variety of construction components, including, among others, interior and exterior walls, roofs, windows, concrete slabs and foundations, and plumbing. If you are selling your home, you either have been or will be presented with a “Real Estate Transfer Disclosure Statement” requiring the disclosure of problems with these construction components, and others. Another part of the disclosure form requires disclosure of known lawsuits affecting the property, “including any lawsuits alleging a defect or deficiency” in the property or in the common areas, if the property is part of a condominium or townhome development.

The disclosure statute is silent on whether to disclose only pending lawsuits or all known lawsuits, including those that have been concluded by settlement or otherwise. However, in 2009, the California Court of Appeal strongly suggested, without squarely deciding, that a seller should disclose even prior lawsuits. (See Calemine v. Samuelson (2009) 171 Cal.App. 4th 153.) In the Calemine case, the seller disclosed a known, prior problem with water intrusion, but did not disclose the fact that two separate lawsuits involving that issue had been filed in court. The buyer promptly sued. The trial court initially found that the seller had adequately disclosed the water intrusion problem. The Court of Appeal, however, disagreed, sending the case back to the trial court to determine whether the seller also should have disclosed the prior lawsuits. Among other things, had the buyers known of the prior lawsuits, they could have obtained the court records and investigated further.

A failure to comply with the disclosure requirements embodied in the Real Estate Transfer Disclosure Statement does not invalidate a sale. However, anyone who willfully or negligently fails to comply is liable for actual damages suffered by the buyer. In addition, compliance with the Civil Code requirements does not relieve a seller of the general, common law duty to disclose anything that might affect the value of the property. The available remedies for a breach of the common law duty include not only damages, but, in an appropriate case, a judgment unwinding the sale.

In the Calemine case, the better course of action for the seller, without question, would have been to disclose the prior lawsuits, even though the underlying problem of water intrusion had been disclosed.

Lance A. Adair is Of Counsel with Kring & Chung, LLP’s Irvine, CA office. He can be contacted at (949) 261-7700 or ladair@kringandchung.com.

Indemnity provisions are a common component of construction contracts and they can wreak havoc on the profitability of a project. Therefore, you must know what your potential for havoc is before you sign any contract that includes an indemnity provision.

In California, if you sign a document, you are presumed to have read and understood it. Everyone knows that people sign documents without necessarily reading or understanding them. If you read every document while closing escrow, you would be reading for days. So there must be a certain level of trust when you deal with others. That trust can end up costing you a lot of money if there is an indemnity provision and you do not know what it means.

For example, on most projects where a subcontractor has bid through a general contractor, the subcontractor is asked to sign a standard pre-printed contract. They usually include (lurking somewhere) an indemnity provision that says you agree to indemnify, defend and hold harmless the general contractor for every related bit of property damage, personal injury or even death. The exact language used in that indemnity provision can make all the difference in the world. Depending on the wording, it may be void and unenforceable. On the other hand, a subcontractor may be held liable for all liability, including litigation costs and legal fees, due to the negligence of the general contractor, despite the complete innocence of the subcontractor.

Another example involves the owner of a property where construction is being performed who needs to obtain an additional loan, but the title insurer wants the contractor to indemnify them for any liens on the property. The contractor may agree due to the fact that the contractor feels he has control over any potential lien. However, what if the contractor is fired shortly after the loan documents are signed? The indemnity may include the duty to defend for every conceivable liability and expense. If it can be conceived, it will likely happen at some point in time, and you do not want to be on the hook when it happens.

However, all is not lost. There are many defenses to indemnity claims, and there is hope that the justice system will actually result in justice. That is where lawyers can be a valuable asset.

The BEST advice is to know what dangers lurk within the contract BEFORE you sign on the dotted line. At least then you will possess the knowledge to negotiate or refuse to sign documents that include a provision with an unfair purpose. That knowledge may make all the difference for your project.

Roland J. Amundsen is an Associate with Kring & Chung, LLP’s Irvine, CA office. He can be contacted at (949) 261-7700 or ramundsen@kringandchung.com.

Background

As most in the CD field are aware, Senate Bill 800 (“SB 800”) commonly known as the “Right to Repair Act” and codified in Civil Code § 896, et seq., reformed California CD law in 2002. Prior to SB 800, the CD field was essentially like the Wild West, with countless suits of highly questionable merit taking up valuable court resources. Builders finally started fighting back, with SB 800 being the culmination of a concerted effort to establish some semblance of order. SB 800 performs two important functions: it establishes specific definitions of construction defects to provide certainty and protection for homeowners, builders, and subcontractors, and it imposes procedures homeowners must follow prior to bringing suit against a builder. In general, this procedure requires homeowners to notify the builder of defects prior to bringing suit, thus allowing the builder an opportunity to repair the defect. Should the builder fail to repair the condition within the specified time period, the homeowner is relieved from the SB 800 pre-litigation process and may proceed with bringing suit against the builder.

Not fully satisfied with the deterrent effect of SB 800, additional attempts to protect and educate homeowners were introduced in the form of attorney solicitation law reform. The proposed legislation which best summarizes these failed attempts is Assembly Bill 2689 (“AB 2689”), which directly addressed many of the lesser known consequences of involvement in CD litigation. Subsequent attempts to legislate CD solicitation addressed smaller portions of what AB 2689 addressed. In brief, AB 2689 attempted to regulate advertising by plaintiffs’ attorneys by requiring disclosure of: (1) alternatives to litigation, such as the SB 800 process; (2) how expert fees and testing costs are determined; (3) how attorney fees will be calculated; (4) the possibility that insufficient money will remain to repair the home after attorney, expert, and testing costs have been paid; (5) whether the homeowner may be liable for costs or fees if the case is lost; and (6) whether, upon resale of the property, the owner is required to disclose the litigation and if defects were actually repaired.

The thrust of the various proposed legislation was to educate and inform homeowners of certain risks and thereby further dissuade CD litigation. Many homeowners are unaware they must disclose defects which were part of litigation, including expert reports regarding the alleged issues. Otherwise, it is considered fraud (See Civil Code § 1102.6). Clearly, such disclosure may significantly affect the resale value of the property. Additionally, most homeowners do not realize the level of intrusion that occurs throughout the lawsuit, particularly due to repeated visual inspection of the residences and, on occasion, destructive testing. Homeowners in CD suits are generally unaware that large construction teams may swarm their home to inspect alleged defects, and sometimes even rip it apart in order to conduct further defect-related testing. After these inconveniences, as well as the reduction in settlement funds for attorney and expert fees, homeowners rarely receive enough money to actually fix the claimed defects.

Supporters of AB 2689 and related proposed legislation indicate CD solicitations are misleading and induce groundless fear in homeowners. They claim homeowners need to be provided with the full slate of information in order to make an informed decision as to whether to proceed with litigation. Practically speaking, it seems many homeowners do enter these suits under the mistaken belief they can make quick, easy money with little to no associated consequences or responsibilities. Opponents of attempts to regulate CD legislation cite serious Constitutional issues, particularly an improper restraint on commercial speech in one specific area of law. In essence, they claim it creates an unduly burdensome requirement on construction defect plaintiff attorneys which causes conflicts with clients in an area that is already regulated by the State Bar (i.e., attorney solicitations in general.) For example, opponents note there is no requirement for insurance defense attorneys to disclose worst-case-scenarios during the first client contact, or for business lawyers to predict success or failure at the first meeting.

AB 1892

Against this backdrop, Assembly Member Halderman introduced her formidable AB 1892, an act to add Section 338 to the Business and Professions Code, relating to the Department of Consumer Affairs (“DCA.”) Surely, after years of failed attempts to reform CD solicitation law, Halderman carefully crafted a bill so fine-tuned it would withstand previously voiced arguments in opposition and finally alert homeowners to the potential pitfalls of CD litigation. So, without further ado, AB 1892 in its entirety:

“The department shall post the following statement on its Internet Web site: ‘If you receive a construction defect solicitation, please check with your builder in addition to taking any further action.’”

After a decade’s worth of attempts, this is what was chosen to use the taxpayers’ time and money. The fiscal effect of AB 1892 is described as “minor and absorbable costs for DCA to post the required advisory.” As if to add insult to injury, the DCA, California State Consumer Services Agency, and the California Contractor State License Board all already have a more detailed message alerting homeowners of SB 800 posted on their respective websites. The three sites all have the following message: “Should you discover a defect in the construction of your home, prior to pursuing legal action or responding to a construction defect solicitation, you must first contact your home builder . . . Homebuilders are given the opportunity to repair your home prior to a legal action being filed . . . [.]” The message even contains four more sentences on specific requirements of the SB 800 process.

In fairness, AB 1892 did survive the introductory stages, although most likely due to apathy rather than spirited support. In fact, after numerous bill analyses, floor committee hearings, voting sessions, and the like, it passed both the Assembly and the Senate, was enrolled and sent to Governor Brown to sign into law. Narrowly avoiding a complete uprooting of the CD litigation field, Governor Brown wisely vetoed the bill, stating:

“This bill would require the [DCA] to place specific language on its website regarding construction defects. This has already been done. So in keeping with the author’soft-stated mantra that government should not be wasteful or do unnecessary things, I am returning Assembly Bill 1892 without my signature.”

It seems a better use of time would have been to craft a bill that carefully addresses and attempts to avoid the aforementioned arguments in opposition. For example, perhaps a bill requiring CD solicitations to include brief statements merely alerting homeowners to the existence of SB 800 and defect disclosure laws. Since the required disclosure could simply be a short factual notification of existing law, worded in a neutral manner, it could not reasonably be said to be an “unduly burdensome” need to discuss “worst-case-scenarios” or “predict success or failure.” Another more worthwhile endeavor could have been to join ongoing efforts to reform the statute of limitations in CD cases. Regardless, a focus on just about anything other than a one-sentence bill that addresses something that has already been done, and with essentially zero potential to generate real change within the CD field, would have been a more efficient use of precious government resources and taxpayer money.

Christopher J. Stipes is an Associate with Kring & Chung, LLP’s Sacramento, CA office. He can be contacted at (916) 266-9000 or cstipes@kringandchung.com.

Does an intervening insurance company have any legal basis for bringing breach of contract causes of action against subcontractors?

The short answer, Yes. An intervening insurance company has a legal basis for bringing a breach of contract cause of action against subcontractors. Although there are no cases directly on point, Western Heritage Ins. Co. v. Superior Court, (2011) 199 Cal.App.4th 1196, does provide insight into the rights and remedies of an intervening insurance company. Western Heritage involved claims of negligence and breach of contract against Grateful Home Care, Inc. (GHC) and its employee (Reyes) which resulted in the death of GHC resident. Western Heritage Insurance Company (WHIC) insured GHC and its employees. Upon tendering the case to WHIC, WHIC proffered a defense for both GHC and Reyes. Reyes’ counsel filed an answer on her behalf. However, it was later stricken and default entered against Reyes because it appeared she permanently left the country.

A defaulted party, like a suspended corporation, has no legal rights or remedies before a court until the default is set aside or the suspended corporation pays its taxes. (Mackie v. Mackie (1960) 186 Cal. App.2d 825; Cal. Rev. & Tax Code § 23301.) Since a default was entered against Reyes, WHIC requested to intervene on Reyes’ behalf to protect its own interests as insurer of GHC’s employees. The trial court denied WHIC’s motion to intervene on the theory that a defaulted party is unable to contest liability. Therefore, the insurance company is not permitted to defend its insured’s liability, but is allowed to litigate damages assessed against the insured.

The Court of Appeal overturned the trial court’s denial. It did so on the following basis:

“It is therefore apparent that an intervening insurer is not limited to those defenses to which its insured might be restricted due to the procedural default. The entire purpose of the intervention is to permit the insurer to pursue its own interest, which necessarily include the litigation of defense its insured is procedurally barred from pursuing.”

Accordingly, an intervening insurance company may utilize the same defenses available to its insured had the insured not been procedurally barred. This leads to the subsequent question:

Is a breach of contract cause of action considered a “defense?”

The answer is dependent on the terms of the insurance policy. Many insurance policies commonly use commercial general liability forms regarding assignments. If a policy contains a broad assignment of rights, an insurance company may stand in the shoes of its insured and sue for breach of contract (including failure to obtain additional insured endorsements, and breach of a duty to defend). The breach acts as a defense to any potential liability the insured may face, and thus the potential liability of the insurance company itself.

On the other hand, if an insurance policy does not contain a broad assignment of rights, a determination as to whether the breach of contract claim is a defense would be necessary. We turn to Bramalea and Patent Scaffolding for guidance. These cases ponder and suggest if a windfall or affirmative recovery will occur, then the claim must cease. In addition, should the claim being sought by the insurance company not be directly and contractually linked to the damages sought by plaintiffs, it would be unjust to allow the insurance company to bring such a claim. (Bramelea California, Inc. v. Reliable Interiors, Inc. et al.(2004) 119 Cal.App.4th 468; Patent Scaffolding Co. v. William Simpson Const. (1967) 256 Cal.App.2d 506, 511.)

Suppose the intervening insurance company sues for 1) Breach of Contract – Additional Insured Obligations, 2) Breach of Contract – Duty to Defend, and 3) Breach of Express Warranty. Where the breach of contract action can be directly linked to the damages sought by plaintiffs (i.e. breach of express warranty), this is considered a defense, and allows an intervening insurance company to continue the claim. Otherwise, it would prevent the intervening insurance company from arguing but for the breach of express warranty by the subcontractor, it would not be defending against plaintiffs’ claims for damages to their property.

Conversely, where the breach of action is for failure to provide additional insured endorsements (AIE) to the contractor, or a breach of contractual duty to defend (we are presuming here a duty to defend is inherent and taken as a given), we believe a court will find this claim to be an affirmative recovery action and not a defense. This leads into a two part question on whether the court will determine the claim an affirmative recovery or a defense.

Is there a link to the damages sought by plaintiffs and the claim, and under what theory does the insurance company claim it has a right to bring such a claim?

On one hand, the argument may stand if an insurance company is entitled to sue, and later receives a judgment for breach of contract for a subcontractor’s failure to provide an AIE to the contractor and/or its failure to defend the contractor, it could be considered unjust and a windfall to the insurance company. An insurance company is paid a premium to defend its insured against losses. Based on the above-mentioned theory of recovery, the insurance company is now recouping those loses and keeping the premiums paid (i.e. a windfall). On the other hand, an insurance company may have an argument it is a third party beneficiary to the contract in that it is excess to any AIEs and a subcontractor’s duty to defend the claims. These arguments as a third party beneficiary would be speculative and challenging. Either way, it will be a question for the trier of fact.

What should a subcontractor do if sued by an intervening insurance company for breach of contract?

A subcontractor should ensure the intervening insurance company does have a legal basis for suing under the theory of breach of contract. Although it appears an intervening insurance company does have the right to bring breach of contract causes of action, some may be outside the rights afforded to the insurance company.

Michelle L. Wiederhold is an Associate with Kring & Chung, LLP’s Sacramento, CA office. She can be contacted at (916) 266-9000 or mwiederhold@kringandchung.com.

Jacobsen Construction was the general contractor on a condominium project in Jackson Hole, Wyoming. Teton Builders was the rough framing subcontractor. Jacobsen was insured by St. Paul Mercury (“Mercury.”) Teton was insured by Mountain West. Mountain West issued an additional insured endorsement to Jacobsen, agreeing to defend Jacobsen from any claims arising from Teton’s work.

Jacobsen completed 90% of the project and then was fired by the developer. Jacobsen sued the developer for breach of contract. The developer cross-complained against Jacobsen for construction defects at the project. The developer’s expert filed a report citing numerous construction defects, many of which involved the framing. Jacobsen cross-complained against Teton and other subcontractors in the construction defect action. Jacobsen tendered its defense to Mountain West as an additional insured on Teton’s policy. Mountain West refused to accept the additional insured tender. However, it did retain defense counsel to defend Teton and did participate in settlement negotiations in the case.

The construction defect case eventually settled for $3,070,000. Of this total amount, Jacobsen (through Mercury) contributed $2,265,000. Teton contributed only $100,000. The settlement agreement released all claims by and between Jacobsen and Teton, but reserved all claims by Jacobsen’s insurer, Mercury, against Teton’s insurer, Mountain West. Mercury spent $1,780,000 defending Jacobsen in the action.

Mercury filed an equitable contribution action against Mountain West, contending that both it and Mountain West were jointly obligated to defend Jacobsen, and that Mercury paid more than its fair share of both defense costs and indemnity costs for Jacobsen. Accordingly, it demanded that Mountain West reimburse Mercury for a portion of defense and indemnity costs Mercury incurred in the case.

At a bench trial, the Court found:

1) That Mountain West had a duty to participate in the defense of Jacobsen and failed to do so.

2) That Mountain West’s fair share of the $1,780,000 spent by Mercury in defending Jacobsen was 43%, or $731,000.

3) That Mountain West fair share of the $3,070,000 total paid to settle the case was also 43%, or $1,320,000.

The trial court’s assessment of 43% as Mountain West’s fair share of both defense and indemnity was based on evidence produced at trial by Jacobsen’s expert showing that a large percentage of the construction defect claims in the case related to the framing.

On appeal, the court sustained the trial court’s finding, reasoning as follows:

1) Mountain West claimed that, by retaining defense counsel to defend Teton in the case, it defended the framing allegations and discharged its defense obligation to Jacobsen. The Court rejected this argument, stating that the additional insured endorsement issued by Mountain West to Jacobsen required Mountain West to directly participate in the defense of Jacobsen, which means paying a fair share of Jacobsen’s attorney and expert fees.

2) Mountain West claimed it was unfair to saddle it with 43% of Jacobsen’s defense costs when it was one of 18 subcontractors who were named as cross-defendants. The court rejected this argument because equitable contribution requires a co-insurer to pay its fair share, not its pro rata share. Given how much of the claim was based on alleged framing defects, it was fair for the trial judge to allocate 43% of the settlement and of defense costs to the framer’s insurance company.

3) The court held that, by failing in its duty to defend Jacobsen, Mountain West was precluded from challenging the reasonableness of either the settlement amount paid by Jacobsen’s insurance carrier, or the amount of defense costs incurred and paid by Jacobsen’s insurance carrier.

The lessons to be drawn from this case by subcontractors and insurance carriers are:

1) If you are an insurance carrier who has issued an AI endorsement, you refuse a tender of defense from the general contractor at your own peril;

2) If you are a subcontractor who has been issued a Crawford tender of defense from the general contractor, put pressure on your insurance carrier to honor its AI endorsement if it issued one, since developer will use this case, in combination with Crawford, to come after you for your “fair share” of its defense costs at the end of the case;

3) If you are an insurance carrier who has issued an AI to the general contractor, simply hiring a defense counsel for your subcontractor insured will not discharge your defense obligations to the general contractor, even though your defense counsel is defending the allegations relating to your insured’s work. You must also pay your fair share of the developer’s attorney’s fees;

4) If you are a subcontractor who has retained your own defense counsel to defend the case, it is unclear whether doing so will allow you to satisfy your Crawford defense obligation to the general contractor. The general contractor will use this case to argue that you must also pay your share of its defense costs. You will argue back that you are not an insurance carrier and that this case only interprets the obligations of insurance carriers;

5) The fair share of the general contractor’s defense costs to be borne by any particular subcontractor will be determined by evaluating the plaintiffs’ defect report and cost of repair estimate and determining how much of the claims and costs relate to a particular subcontractor’s work. The framer may be required to pay the most; and

6) Finally, if you are an insurance carrier who has refused an AI tender, be mindful that a settlement of the case which reserves AI issues not only leaves you open to a suit for defense costs, it can also leave you open to a suit for reimbursement of indemnity costs.

Paul T. McBride is a Partner with Kring & Chung, LLP’s Sacramento, CA office. He can be contacted at (916) 266-9000 or pmcbride@kringandchung.com.

Scenario A: In a 35-home construction defect lawsuit arising from a large project in Sacramento, plaintiffs’ expert picks six windows at six separate homes for spray testing. Our insured is the stucco subcontractor. Our expert attends plaintiffs’ testing. Our expert reports that none of the windows selected for testing showed any evidence of water leakage in the past. There are no stains on the window sills or on the drywall below the windows. When the plaintiffs’ expert removes the drywall below the windows, there are no stains on the framing. The plaintiffs’ expert runs the spray test. At two of the six homes, water from the spray rack enters into at least one of the stud cavities below the window. Plaintiffs’ expert uses this result to claim that 1/3rd of the windows at the litigated homes will require repair, due to the 1/3rd “failure rate” observed during investigative testing.

Scenario B: In a 40-home construction defect lawsuit arising from a large project in Fresno, plaintiffs’ expert picks ten windows at ten separate homes for spray testing. Our insured is the stucco subcontractor. Our expert attends plaintiffs’ testing. Our expert reports that none of the windows selected for testing showed any evidence of water leakage in the past. There are no stains on the window sills or on the drywall below the windows. When the plaintiffs’ expert removes the drywall below the windows, there are no stains on the framing. The plaintiffs’ expert runs the spray test. None of the windows leak. However, at each window, plaintiffs’ expert sees unsealed staple penetrations through building paper. He also sees reverse laps of sill flashing paper at two of the windows. He uses these observations to claim that 100% of the windows at the litigated homes will require repair due to “defects in building paper installation” observed at 100% of the windows inspected.

In defending against either claim, you will of course argue that the absence of water stains on the drywall and framing below the windows means the windows do not leak in a real rainstorm and therefore do not require repair. This common sense argument may be bolstered by referring to ASTM (American Society for Testing & Materials) Standard E2128-12, “Evaluating Water Leakage at Building Walls.” This standard was first published in 2001 and most recently updated in 2012. It is a 36-page page technical manual which details how to carry out a window leak investigation. Of most immediate importance to construction defect practitioners, the standard states that investigative testing, such as the spray testing described in our two scenarios, should not be carried out absent evidence of prior leaks at the window to be tested. ASTM E2128-12 provides, at paragraph 8.1.1.1:

“The primary purpose of investigative testing is to recreate leaks that are known to occur. Investigative testing is not intended to demonstrate code compliance or compliance with project documents unless such deviations are actually related to the leakage problems.”

In our two scenarios, there is no evidence that prior leaks have occurred at any of the windows tested. Rather, the plaintiffs’ experts conducted blind experiments to see if they could make the windows leak or, at the very least, uncover technical violations of building code or project standards. ASTM E2128-12 states, however, that “investigative testing is not intended to demonstrate code compliance.” It should only be used to recreate leaks “that are known to occur.” Accordingly, in defending against plaintiffs’ claims in this case, we would argue that the investigative testing carried out by the plaintiffs’ expert violated ASTM E2128-12.

ASTM standards are considered the gold standard for building investigation. For instance, plaintiffs’ window experts typically testify at deposition that they conduct their window spray testing in “strict compliance” with ASTM Standard E1105, “Standard Test Method for Field Determination of Water Penetration of Installed Exterior Windows.” However, ASTM Standard E1105 merely explains how to conduct spray testing. It does not discuss when to conduct it. ASTM E2128-12 makes clear that spray testing should not be conducted absent evidence of prior leaks at the window to be tested. Accordingly, in both scenarios described above, defense counsel may wish to file a motion in limine to prevent the plaintiffs’ expert from testifying as to the results of his investigative testing on the grounds that the investigative testing violated ASTM E2128-12.

Copies of ASTM E2128-12 may be downloaded for $59 here.

Paul T. McBride is a Partner with Kring & Chung, LLP’s Sacramento, CA office. He can be contacted at (916) 266-9000 or pmcbride@kringandchung.com.

When a property owner chooses to act as an owner-builder, he or she is assuming all of the responsibilities usually handled by a general contractor. This may prove challenging if the owner-builder has no experience in construction. It is up to the owner-builder to schedule and supervise the work, as well as to procure all necessary materials and supplies. The owner-builder must obtain all building permits and arrange for building inspections. The owner-builder is also responsible for ensuring that the project passes all relevant building codes.

It is possible for a homeowner to become an owner-builder without intending to do so. Some unlicensed contractors may attempt to have property owners obtain owner-builder building permits without alerting the property owner of the permit’s significance. If a property owner obtains a building permit as an owner-builder, they assume responsibility for all aspects of the project. Obtaining such a permit in the property owner’s name will place the property owner at risk if any unlicensed workers are injured while on the property. A property owner should carefully review their own insurance coverage before agreeing to act as an owner-builder.

Furthermore, if an owner-builder hires anyone other than a California licensed contractor or a family member to perform the work, then the owner-builder may be considered an employer. As an employer, the owner-builder must register with the state and federal governments. Additionally, the owner-builder would be responsible for providing for state and federal taxes, social security taxes, workers’ compensation disability insurance, and unemployment compensation contributions.

Property owners can avoid this responsibility by hiring licensed California contractors and having them pull all building permits in the contractor’s name. However, any property owner risks the filing of a mechanic’s lien if they fail to pay their contractors promptly. A mechanic’s lien can complicate the sale of any property.

There can be benefits to acting as an owner-builder. However, there are many issues and pitfalls which the property owner must take into account. Kring & Chung, LLP has over two decades of experience representing both homeowners and contractors, and can provide guidance for any type of project.

Richard C. Hatem is an Associate with Kring & Chung, LLP’s Irvine, CA office. He can be contacted at (949) 261-7700 or rhatem@kringandchung.com.

These protections include a requirement that lenders try to discuss alternatives to foreclosure with at-risk homeowners. There is also an important change in that lenders are now required to provide notice of postponement of foreclosure sales. Prior to this, homeowners were often unaware of the status of their foreclosure, not knowing if a foreclosure sale had gone forward or been postponed.

Significantly, the Homeowner Bill of Rights also creates a new right to sue lenders for violation of foreclosure law. The new rules continue to require that applications to a lender for a loan modification are complete and correctly documented. Failure to follow these steps can render the protections moot for a homeowner.

The law is expected to reduce foreclosures, and to improve conditions in the California housing market. “These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite,” said Governor Brown.

Brendan J. Coughlin is an Associate with Kring & Chung, LLP’s Irvine, CA office. He can be contacted at (949) 261-7700 or bcoughlin@kringandchung.com.

Every service contract to repair, remodel, alter, convert, modernize, or add to a residential property, signed by a homeowner or tenant, must include specific language outlining the consumer’s rights. California Business and Professions Code § 7159.10 (e) (12)(A) states that every service contract must identify the buyer’s right to cancel the work when 1) the buyer receives the contract signed and dated by the contractor and 2) at any time before the contractor starts the work.

However, even if the work has begun, the buyer may still cancel the contract within three business days of signing the contract for normal service and repairs, or within seven business days of signing a contract to repair or correct conditions resulting from any sudden or catastrophic event for which a state of emergency has been declared by a governmental entity. In such a situation, the buyer may still have a right to cancel if any of the following is true:

1. The buyer may cancel the contract if the price, including all labor and materials, is more than $750;
2. The buyer may cancel the contract if the buyer did not initiate the contact with the contractor to request the work;
3. The buyer may cancel the contract if the contractor sold the buyer goods or services beyond those reasonably necessary to take care of the particular problem that caused buyer to contact the contractor; or
4. The buyer may cancel the contract if the payment was due or the contractor accepted any money before the work was complete.

A contractor’s failure to provide a home solicitation contract to a homeowner with a proper notice of cancellation is grounds for disciplinary action and fines by the Contractors’ State License Board. Handyman Connection of Sacramento, Inc. v. Sands (2004) 123 Cal.App. 4th 867.

There are many more important rules governing the required content of Service and Repair Contracts, and each situation is unique. Many contractors have been surprised by consumers who intentionally sign agreements without the proper buyer’s notices, and then refuse to pay for services performed. Kring & Chung has over 25 years of experience representing both contractors and homeowners. Should you need assistance in preparing enforceable home improvement agreements, if you have a question about an agreement you have been asked to sign, or if you simply want to review the contracts you currently present to consumers, please do not hesitate to contact us.

Anna Greenstin Kudla is an Associate with Kring & Chung, LLP’s Irvine, CA office. She can be contacted at (949) 261-7700 or agreenstin@kringandchung.com.

Under California law, alter ego liability will be imposed where two conditions are met: (1) there is such a unity of interest and ownership that the separateness of the individual (or another entity) and the business entity has ceased; and (2) recognizing the business entity as being separate from the individual (or other entity) would, under the particular circumstances, “sanction a fraud or promote injustice.”

The meaning of the above standard is subject to considerable judicial interpretation and, as is often the case in litigation, the courts assess a variety of factors in deciding whether to impose liability on an alleged alter ego. The factors are numerous and the case law is not always consistent. Moreover, alter ego liability can be imposed where some of the factors, but not others, are present. Nonetheless, most alter ego cases have at their core an allegation that the defendant has failed to maintain proper separation between his or her personal affairs (or the affairs of another owned business entity) and those of the company being sued.

Here are a few simple guidelines for contractors and other business owners (including members of a California limited liability company) seeking to avoid the prospect of a personal judgment for the obligations of a corporation or LLC:

1. Observe all corporate formalities. Devote the necessary time and attention to this task. It will be well worth it in the long run.
2. Never commingle assets (or liabilities). Maintain separate bank accounts and keep them separate. Always avoid commingling the funds of separate corporations or LLC’s, and always keep personal and corporate funds separate from corporate funds. Never pay the debts of one using an account maintained by the other. (Contractors in California should also be aware of the potential civil and criminal penalties for diverting funds from one job to another—which is a topic for another update.)
3. Never use corporate funds to purchase services or items for personal use. Pay yourself first, then use your own personal funds for your purchases.
4. Never hold yourself out as being responsible for the debts or obligations of your company.
5. Have adequate capitalization for your intended operations and purchase adequate insurance.

Following the basic guidelines above will not protect you from an alter ego judgment in all circumstances; every case is unique and calls for individualized legal advice and attention. If you have questions about avoiding alter ego liability, or if you are sued as an alleged alter ego, seek prompt legal advice.

Lance A. Adair is Of Counsel with Kring & Chung, LLP’s Irvine, CA office. He can be contacted at (949) 261-7700 or ladair@kringandchung.com.