June 24, 2008
The Returning Liability for Improvements to Real Property
"Just when I thought I was out, they pull me back in."
--Michael Corleone (Al Pacino), The Godfather III, 1990
In 2007, the Minnesota legislature amended the statue of repose for contribution and indemnity claims. Recently, the Minnesota Court of Appeals confirmed the amendment has a retroactive effect. The Court’s ruling will have significant implications for general contractors, subcontractors, design professionals, developers and owners.
I. Minnesota’s Statutes of Limitations and Repose
Minn. Stat. § 541.051 subd. 1 addresses the statute of limitations and repose for improvements to real property:
[N]o action by any person in contract, tort, or otherwise to recover damages for any injury to property, real or personal, or for bodily injury or wrongful death, arising out of the defective and unsafe condition of an improvement to real property, shall be brought against any person performing or furnishing the design, planning, supervision, materials, or observation of construction or construction of the improvement to real property or against the owner of the real property more than two years after discovery of the injury, nor in any event shall such a cause of action accrue more than ten years after substantial completion of the construction. Date of substantial completion shall be determined by the date when construction is sufficiently completed so that the owner or the owner's representative can occupy or use the improvement for the intended purpose.
Despite the ten-year limitation for commencing a lawsuit, “an action for contribution or indemnity arising out of the defective and unsafe condition of an improvement to real property may be brought no later than two years after the cause of action for contribution or indemnity has accrued, regardless of whether it accrued before or after the ten-year period referenced” above. Minn. Stat. § 541.051 subd. 1(b). This clause (the “2007 Amendment”) was added in 2007 and went into effect retroactively from June 30, 2006.
The 2007 Amendment was recently addressed by the Minnesota Court of Appeals in
Lundgren Bros. v. Zimmerman Stucco & Plaster, Inc. No. 27-CV-06-18451 (Minn. Ct. App. filed May 13, 2008). The Court of Appeals held that the 2007 Amendment applied retroactively, that it revived a claim that previously expired, and the revival of the expired claim did not violate due process.
II. Lundgren Brothers
In Lundgren Bros., a home owner sued the general contractor on May, 4 2004, for claims related to a stucco sided house that was completed in 1994. After resolving that case, the general contractor then sued the stucco subcontractor on May 3, 2006, seeking indemnification and contribution. The subcontractor argued that the general contractor’s claims were barred by the ten-year repose period; the district court, agreed and granted the subcontractor’s motion to dismiss the case. The general contractor appealed, and while the appeal was pending, the 2007 Amendment went into effect.
The Minnesota Court of Appeals found that the legislature intended the 2007 Amendment to apply retroactively, and held that the retroactive application did not violate due process rights. Constitutional scholars will be interested in the Court of Appeal’s holding that “[t]he Fourteenth Amendment of the United States Constitution prohibits a legislature from enacting retroactive legislation that divests a private vested interest.” Id. at 5. However, the 2007 Amendment did not divest the subcontractor of a vested right. There “is no vested right in an existing law nor in an action until final judgment has been entered therein.” Id. quoting Holen v. Minneapolis-St Paul Metro. Airports Comm’n, 84 N.W.2d 282, 287 (Minn. 1957). Because the Lundgren Bros. case was pending in the Court of Appeals when the 2007 Amendment became law, the Court of Appeals held that the subcontractor had no vested right that would implicate the Fourteenth Amendment. Id. at 6. Although scholars like to analyze constitutional principles, contractors, subcontractors, design professionals, developers and owners are more interested in the effect of this constitutional principle: the legislature acted appropriately and construction participants are potentially at risk for third party indemnification or contribution claims to infinity and beyond.
The Court of Appeals also noted that “when a claim is barred by a statute of repose, subsequent repeal of that repose period cannot revive the claim” unless the “amendment is clearly intended to be retroactively applied.” Id. at 6 citing to Larson v. Babcock & Wilcox, 525 N.W.2d 589, 591 (Minn. App. 1994). In Larson, the Court of Appeals had held that an earlier change in the statute of repose did not apply retroactively to revive a claim. Further, the Larson court stated that the defendant had been vested in its right not to be sued; however, the Larson opinion suggested, in language that was not part of the holding of the case, that the outcome would have been different if the legislature had clearly stated that the amendment applied retroactively. The Lundgren Bros. court adopted the rule of statutory construction suggested in Larson, but concluded that the legislature intended for the 2007 Amendment to apply retroactively.
The ultimate effect of the Lundgren Bros. decision is that the general contractor had no vested right that the claim was time barred because it did not have a final judgment, and claims against it, which everyone believed expired in 2004, were revived by the retroactive effect of the 2007 Amendment.
III. Now What?
Prior to the 2007 Amendment, you could comfortably put potential liability for improvements to real property behind you twelve years after the substantial completion of work. This is no longer true. Because you can now be “pulled back in” to defect litigation, it is important to consider the following:
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Adequate Insurance Coverage: Insurance policies should now be negotiated to properly reflect the increased and on-going exposure. Further, occurrence based insurance policies should never be discarded because coverage under those policies does not end when the policy period expires.
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Contractual Provisions: Special attention should be paid to indemnity clauses, contractual flow down provisions and additional insured requirements.
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Third Party Litigation: When confronted with claims, consideration should be given to potential contribution and indemnity claims. From a tactical point, the case can be defended by the general or sub that has been sued and wait to commence a contribution or indemnity action, or assert a third party claim in the main action.
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If, in Yogi’s words, “it ain’t over til it’s over”, that could be a very long time.
Disclaimer©2008 Dorsey & Whitney LLP. This article is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by reading this article. Members of the Dorsey & Whitney LLP group issuing this communication will be pleased to provide further information regarding the matters discussed therein.