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Fraud Just Got More Expensive - Equity as a Factor in Attorney Fee Awards

Published on: November 15, 2013

The Louisiana Supreme Court recently held that the New Home Warranty Act ("NHWA") is not the exclusive remedy for a purchaser of a new home where the builder fails to disclose known defects in the Residential Property Disclosure Act ("RPDA"). Stutts v. Melton, 2013-0557, -- So.2d. ----. The Court also upheld an award of damages and attorney fees for fraud victims who elect not to seek rescission of a sales contract despite no Civil Code article expressly allowing for attorney fees in such instances.

Builder Chad Melton completed a home in Walker, Louisiana in 2004. He and his wife lived in the home for approximately nine months prior to selling the home to James and Lisa Stutts. The Residential Property Disclosure Act, La. R.S. 9:3196, et seq., requires disclosures of known problems with a home prior to sale. Melton provided the Stutts with a disclosure form, but failed to mention that color had previously been observed bleeding onto the walls of the home from the roof.

In Stutts, it was factually established that Melton was aware of the roof defect because he had entered into a $13,600 settlement with the roof manufacturer to fund the replacement of the roof. Nevertheless, Melton cleaned the walls and installed gutters instead of the more expensive roof replacement.

Melton's gutter solution was ill-advised and unsuccessful. After discovering the problem in the summer of 2006, the Stutts filed suit seeking as damages: the repair costs for the roof; costs for additional repairs; and attorney fees.

The Stutts filed a motion for summary judgment on their fraud claim citing La. C.C. art. 1953. The Meltons opposed the motion, arguing that the NHWA provides the "exclusive remedy" available to the Stutts. The motion was granted and, after a bench trial on damages, the trial judge awarded damages to include attorney fees.

The court of appeal reversed both the summary judgment and the money judgment, holding that the Stutts' claims were untimely under the NHWA.The NHWA provides a one year warranty period for new home construction and an additional thirty day period in which to file suit under the Act. By its terms, the NHWA provides the "exclusive remedies" between a builder and an owner relative to home construction.

The Louisiana Supreme Court reversed and reinstated that lower court's judgment. The Court held that the RPDA applied in this case because the home had been occupied by the Meltons after construction was completed. Even though the NHWA claims were prescribed, the Stutts possessed a timely claim that Melton had provided a fraudulent disclosure in violation of the RPDA.

The Court next addressed the Stutts' claim for attorney fees. The Court observed that no statute specifically authorized attorney fees where the plaintiff does not seek rescission of the sale. However, the Court reasoned, citing principles of equity found in Louisiana Civil Code article 4, that the legislature surely did not intend for victims of fraud to go uncompensated if they elect not to seek full rescission of the sale. Accordingly, attorney fees were held appropriate where fraud is committed but the victim elects not to seek rescission of the contract.

The Court's holding in Stutts may have a limited impact on the NHWA because of the peculiar facts of the case, i.e. the builder of the new construction living in the completed home before selling it to plaintiffs. However, the Court's award of attorney fees is an interesting development in the law. Time will tell whether the Court may be inclined to create further exceptions to the established rule that attorney fees cannot be awarded in the absence of statutory or contractual language awarding attorney fees.

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Going Once, Going Twice ... A New Alternative to Design-Bid-Build Contracts

The 2014 Legislative Session brought new possibilities for large construction projects under the Public Contract Law. Generally, a public entity is required to separately hire a design professional to design the project, and let the project out for public bid for the construction work. "Design-build" contracts, in which the public owner contracts with one entity for the design and construction of the facility, are prohibited under Public Contract Law. However, the Legislature has now given public entities another option under the Public Bid Law: Construction Management at Risk Delivery Method (CMAR).

As a precursor to the new law, the Legislature granted special approval for use of the construction management at risk delivery method for several projects, to include the new airport terminal for the New Orleans Aviation Board at the Armstrong International Airport. This CMAR delivery method required two separate contracts for design and construction, but allowed selection of the construction contractor based on factors other than lowest construction cost. In other words, the design professional was selected in accordance with Public Contract Law, and the owner secured a lead construction firm during the design phase through an evaluation of the contender construction firms' qualifications, experience and history.

Under a construction management at risk delivery method, the selected lead contracting firm commits to deliver the final project for a maximum price. The owner has the option to award the construction contract to the firm after the design phase. Because the design professionals and the contractor are on the same team during the design phase, many industry leaders believe the construction management at risk method will help public entities control costs by allowing the contractor and designer to work together on scheduling, budgeting and constructability during the design phase. The goal also is to minimize the risk of construction and design disputes through the collaborative effort.

In 2014, via Act 782, the Legislature enacted La. R.S. 2225.2.4 which allows a public entity to use the CMAR method for projects estimated to cost 25 million dollars or more. The statute defines a CMAR contractor as one who is properly licensed, bonded and insured and can provide construction experience to the owner or its design professional and/or contracts with the owner to construct the project for a guaranteed maximum price, thus eliminating the need for a separate bid phase.

Under the statute, the public entity must advertise a request for qualifications to award a contract to a CMAR contractor for preconstruction and construction services in the official journal and website of the public entity. After the responses to the RFQ are received, a selection review committee makes a recommendation to the owner. This committee consists of one design professional not involved in the contract, one licensed contractor not involved in the contract, a representative of the owner and two members from the general public.

Once the CMAR contractor is awarded the contract, the contractor and the design professional are required to furnish the owner with a probable cost of the project at the 60% and 90% design completion phases. The CMAR contractor must provide the public entity a guaranteed maximum price for construction of the project. If the owner agrees with the guaranteed maximum price and the construction phasing and sequencing, the owner can award the construction contract to the CMAR contractor. If the public entity and the CMAR contractor cannot agree, the construction phase of the project will be re-advertised and let out for public bid.

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Sudden Shifts - Burden Shifting under Louisiana Law

Winning or losing in court often comes down to who possesses the burden of proof. Like a driver at a four-way stop, a litigant has to know when it is their turn.

Civil Procedure Article 966, the "Summary Judgment Article," provides that the mover bears the burden of proof. The Louisiana Supreme Court recently addressed this burden in Dan Veuleman & Jody Veuleman v. Mustang Homes, LLC, 2013-C-190 (La. 4/5/13), - So. 3d - in the context of insurance coverage.

The general rule in Louisiana is that an insurer bears the burden of proving that a loss falls within a policy exclusion. In Veuleman, the insurer argued that the loss was excluded through a "work product" exclusion. However, the "work product" exclusion contained a "subcontractor" exception. The plaintiffs argued that the work was performed by a subcontractor and should for that reason be covered under the policy.

At the hearing, the insurer introduced its policy as evidence of the exclusion. However, it offered no evidence to show who performed the work at issue. The plaintiffs attempted to introduce an affidavit to establish that the work was performed by a subcontractor. The court of appeal rejected the affidavit as insufficient and concluded that the plaintiffs did not establish that their claims were spared from the work product exclusion.

The Louisiana Supreme Court disagreed. It stressed that the insurer, not the plaintiff, possessed the burden of proving that the policy exclusion applied. The Court stated that "[t]he insurer offered no proof to accomplish its burden." Id. at 1.　

The Veuleman Court held that the appellate court "erroneously shifted the burden of proof on the motion for summary judgment" to the plaintiffs and that the insurer had the burden to show that "the exception [to the exclusion] is not met." In keeping, the Court vacated the summary judgment and remanded the matter for further proceedings.

The Veuleman decision reminds that a litigant should be aware when it is their turn to go.

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Good Restrictions Can Make Good Neighbors

Picture it – you purchase a new home in a quiet, family-friendly neighborhood. On your first night, you notice that the neighbors are having a party – a big loud party. Your haven of peace and tranquility is interrupted by thumping bass and the shrieks of people jumping into a pool. The next day, the neighbors are gone, and the block is quiet again. However, the party returns the next weekend, bigger and louder than before. You do some research and find the house is listed on a popular website for short term rentals. What do you do?

This is the exact question that was posed to the Louisiana Court of Appeals for the Second Circuit in Marina Homeowners Association, Inc. v. Cahill. In that case, the Marina Homeowner’s Association filed a petition seeking declaratory judgment against the owner of the house on the basis that the use of the home as a short-term rental violated the covenants of the homeowner’s association. In response, the property owners argued that the covenants had expired and were no longer applicable. Therefore, they claimed they were free to use their property as they saw fit.

Many homeowners in Louisiana are familiar with building restrictions. Authority for the issuance of building restrictions is found in Louisiana Civil Code article 775. A building restriction is a real right under Louisiana Civil Code article 777. However, Louisiana Civil Code article 778 provides that if there is doubt as to the existence, validity, or extent of building restrictions, the issue should be resolved in favor of the unrestricted use of the immovable. These articles also provide a subsequent purchaser of the immovable property is also bound by the building restrictions if they are recorded in the public records.

The building restrictions for the subdivision at issue provided that the restrictions had a term of twenty years and then would renew automatically in ten-year periods. These restrictions bound the original property owners and all subsequent property owners. The court found that even though the original twenty-year term for the building restrictions had expired, the restrictions would automatically renew unless amended by the Association. Therefore, the property owner’s house was subject to the building restrictions.

Importantly for this case, the building restrictions specifically prohibited the use of the property for any reasons other than residential purposes. Therefore, the operation of a short-term rental was a violation of the building restrictions.

The Homeowners Association prevailed in this case – the property owners were no longer able to use their property for short term rentals. As the moral of the story – to be a good neighbor – it helps to follow the rules. And it is always important to check the fine print to know what those rules are!

References:

Marina Homeowners Ass'n, Inc. v. Cahill, 56,423 (La. App. 2 Cir. 8/27/25), 420 So. 3d 782.