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Corporate Dissolution Precludes Homeowners' Construction Defect Claim
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October 22, 2007
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ConstructionWebLinks.com
The Minnesota Supreme Court has held that a 10-year statutory warranty against construction defects was circumscribed by a two-year statute of repose provided in the state's corporate dissolution law.
The dispute involved a residence built in 1993 by Todd and Leiser Homes. The builder commenced voluntary corporate dissolution proceedings in 1997 and obtained its certificate of dissolution in 1999. The Camachos purchased the home two months later in July 1999, but it was several years before an inspection revealed that water intrusion had caused mold growth and other damage.
To recover the cost of repairing the damages, the Camachos brought suit against the builder for negligence and breach of statutory warranty. The homeowners' complaint alleged that the builder's faulty workmanship and failure to follow applicable building standards had caused the moisture intrusion that damaged the home. The builder argued that its adherence to the statutory dissolution provisions operated to bar the homeowners' claims. These provisions permit an entity to dissolve without providing notice to creditors so long as it allows two years to pass between filing a notice of intent to dissolve and filing the articles of dissolution. The statute forecloses subsequent claims against former corporate entities dissolved in accord with these provisions.
The issue before the trial court, therefore, was how to harmonize the construction defect warranty (which creates a cause of action for homeowners damaged by construction defects that arise within the 10 years after completion of construction) and the corporate dissolution statute (which precludes all claims against former entities that have been dissolved in accordance with its provisions). The Camachos argued that the statutes could not be applied simultaneously.
The trial court agreed with the homeowners but was reversed by the Court of Appeals, which held that the Camachos were required to bring their claims within the dissolution statute's two-year notice period. The Court of Appeals further held that the homeowners were not entitled to any recovery from liability insurance carried by the dissolved builder during construction. The Camachos appealed to the Minnesota Supreme Court, which affirmed. Camacho v. Todd and Leiser Homes, 706 N.W.2d 49 (Minn. 2005).
The homeowners raised two issues in the Supreme Court: First, whether they were properly barred from bringing their claims by the dissolution statute; and second, whether they were entitled to recover from the now-dissolved entity's former liability carrier.
In resolving the first issue, the Supreme Court explained that it considered the functions served by each of the apparently conflicting statutes. In this case, the two-year corporate dissolution statute was labeled a statute of repose. Like a statute of limitations, a statute of repose limits a plaintiff's time for filing suit. However, a statute of repose is less accommodating than a statute of limitations, as it will bar any suit, even if the repose period ends before a plaintiff is injured. The Supreme Court explained that such a harsh limitation of a would-be plaintiff's ability to bring suit is an unavoidable consequence of the functional purpose such statutes serve: To afford defendants finality and create "a substantive right in those protected to be free from liability after the legislatively-determined period of time." The dissolution waiting period, once satisfied, should therefore disallow any later-filed claims.
On the other hand, the Supreme Court determined that the function of the construction defect warranty provision was to grant homeowners a substantive right to a cause of action. The 10-year duration of the warranty was merely a means of defining the defects it covered (those arising within 10 years of construction). According to the Supreme Court, this did not affect the issue of the period for bringing the warranty-based claim to vindicate the substantive right that the warranty defines. The two-year statute of repose serves this latter function.
Having cast the two statutes according to the functions they serve, the Supreme Court explained: "the fact that the warranty statute benefits individual homeowners does not dictate the extent to which statutes instituting time limitations affect a substantive right." Therefore, although the Camachos may have had a substantive right because the defect arose within the first 10 years following construction, that right became unenforceable as against the dissolved builder once it has satisfied the dissolution procedures.
With this reasoning in mind, the court found against the homeowners on the insurance issue. The court relied on a Minnesota common law rule forbidding third parties from maintaining direct actions against an insurer without first obtaining a judgment against the insured. The court reasoned that because its resolution of the first issue foreclosed plaintiff from obtaining relief against the builder, any insurance carried by the dissolved builder was unavailable to the Camachos.
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