October 1995 - Bankruptcy protection is available to an undercapitalized corporation, land
developers, and homebuilders, creating greater problems for homeowners whose
homes have become a nightmare of workmanship defects. But just because a
builder files for bankruptcy protection to reorganize the firm's debts,
that does not mean they are completely free from responsibility for these
defects.
What rights do homeowners' associations in developments completed by the
bankruptcy builder have? Unfortunately, they may have to line up behind
other creditors, including numerous subcontractors, should any construction
deficiencies manifest themselves.
Under California Corporation law, a corporation is regarded as a legal entity
separate from its stockholders, officers and directors. However, where a
corporation is used by an individual or individuals, or by another corporation,
to perpetrate a fraud, or to accomplish some other inequitable purpose,
a court may disregard the corporate entity and treat the corporation's acts
as if they were done by the person actually controlling the firm(s).
In general, the California Supreme Court has long held that where a unity
of interest and ownership between the corporation and the individual or
organization controlling it are identical, and if failure to disregard the
corporate entity would sanction fraud, and/or work an injustice to a third
person, the corporate form will be disregarded.
While an opportunity exists for the affected homeowners to reach through
the corporate veil and claim the personal assets of the bankrupt builder,
the better and more immediate course would be to seek payment for defects
through the builders' liability insurance. The insurance coverage will not
escape the bankruptcy protection.
In other words, if the builder is insolvent, the liability insurance carrier,
in place at the time the homeowners structural problems became apparent,
must step up to the plate and pay for the builder's errors.
While bankruptcy gives the builder breathing room for all his legal and
financial obligations, there are other methods of protection also available.
For example, if you have been promised that a bankrupt builder will fix
any real problem in your homeowners' association, that promise is now without
substance. In other words, all monies are controlled by the bankruptcy court.
The builder does not have the money or the wherewithal to borrow it and
do the repairs.
At a time when a builder has filed bankruptcy, an association's board of
directors should not stand idly by and despair. It is necessary to seek
relief through the developer's and its subcontractors' insurance for construction
defects. In order to trigger such coverage, it would be necessary to file
a lawsuit against the builder.
There is only a finite amount of insurance, depending on the type of policy
purchased. The law favors the vigilant and abhors stale claims. With insurance
law, the first to file is the first to get into a legal position to collect
on that policy.
Most likely, any large builder has more claims than they would like to admit.
And each claim may ultimately reduce the amount of money left under each
policy issued to the builder.
If you have a legitimate claim for construction defects within a development
built by a bankrupt builder, it is important to protect your rights by acting
expediently. Do not get swept up in the bankruptcy process.
Newport Beach attorney Thomas E. Miller began his career more than two decades
ago representing developers and their insurance companies before changing
to the exclusive representation of homeowners associations since 1981. Miller
is the author of two legal textbooks on California construction defect and
land subsidence litigation: California Construction Defect and Land Subsidence
Litigation, 1986, and California Defect and Land Subsidence Litigation:
Residential and Commercial (John Wiley). In addition, Miller is a founding
member of the California Association of Community Managers.
© Copyright 2008 The Miller Law Firm. All rights Reserved.
If you experience problems or have questions, contact us at Info@ConstructionDefects.com.
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