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Warranty Suits Against Contractors Reined In

DES MOINES, Iowa (CN) - The list of parties who can claim damages against a builder for construction defects remains narrow, thanks to two Iowa Supreme Court opinions.

Justice Thomas Waterman wrote both of the Friday rulings, which involve attempts to expand the doctrine of implied warranty.

One ruling notes that a 2008 expansion of the doctrine aimed to protect "innocent home buyers to address their disparity in expertise and bargaining power with sophisticated builder vendors."

Luana Savings Bank sought to expand it further in the case at issue after finding black mold in residential apartment complexes it acquired through a deed in lieu of foreclosure.

"Investigation revealed that the mold resulted from improper installation of windows and air conditioning units, and inadequate attic ventilation," Waterman wrote.

An Allamakee County judge had granted Pro-Build Holdings summary judgment, however, as to the implied warranty of unworkmanlike construction, and the state high court affirmed.

"The bank's effort to recover from Pro-Build under this implied warranty as a foreclosing lender is akin to trying to pound a square peg into a round hole," Waterman wrote.

Distancing Luana from an innocent home buyer residing in a defective home, the court noted that Pro-Build did not construct the home with the intent to sell it. Rather, the former owners, Ronald and Karen Wahls, contracted Pro-Build to build to specifications, according to the ruling.

"A defective dwelling is not the same problem for the lender that it is for the homeowner living in it so long as the borrower can repay the loan," Waterman wrote. "Moreover, lenders can protect themselves in a variety of ways. For example, in this case, the bank could have stated in the loan documents that, upon default, all claims of Wahls against other parties (such as Pro-Build) would be assigned to the bank." (Parentheses in original.)

Rosauer Corp. is the plaintiff in the similar case that the court resolved Friday. It sought damages regarding allegedly substandard work of grading, backfilling and compacting certain raw farmland in southeast Sioux City.

"We decline to extend the implied warranty to the sale of land between developers able to protect themselves through express contract terms and simple soil tests," Waterman wrote here.

Anthony Rosauer, the owner of Rosauer Corp., allegedly bought the lot with the intention of building two townhomes on it.

"Before he purchased lot 13, Rosauer heard rumors that homes in the development were settling due to soil compaction problems," the opinion states. "Rosauer nevertheless failed to request any soil tests on lot 13 before he bought it."

Soil tests that Rosauer's lender later required "revealed undocumented fill with inconsistent moisture levels," and all existing fill had to be replaced.

The court noted that Rosauer began included contractual clauses enabling rescission of the sale pending soil test results as he continued to buy lots in the subdivision.

Neither a Woodbury County judge, nor an appellate panel sided with Rosauer in his claim for $75,000 against SAPP, and the state's high court affirmed here as well.

"For many persons, the home is the largest investment they will ever make, involving a major percentage of their income and savings," Waterman wrote. "Substandard construction of their homes may lead to health hazards or financial ruin. We do not see the same reasons to protect developers speculating in real estate for profit."

Justice Brent Appel joined separate dissents by Justices David Wiggins and Daryl Hecht dissented in Luana Bank.

The dissent by Wiggins says "that a genuine issue of material fact exists as to whether the builder breached the implied warranty of workmanlike construction."

"This breach affected the habitability of the building," Wiggins wrote. "This breach occurred no matter who owned or resided in the dwelling units.

"Therefore, I would find the warranty applies to the bank and let the jury arguing a material fact dispute, best left to a jury, over fault in making the building uninhabitable."

Hecht fought the majority's attempt to distinguish between a homebuyer and a bank's so-called "innocence."

"Their knowledge of balance sheets, income statements, interest rates, and security instruments does not equip them with the same type of sophistication required for perceiving defects in construction materials or latent defects in the quality of workmanship," Hecht wrote.

Wiggins and Appel concurred specially in Rosauer. Hecht took no part.

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