The Illinois Appellate Court Expands Rights of Homeowners against Builders for Latent Defects in Residential Properties

October 18, 2016 Firm News

A Laurie & Brennan article featured in the Construction Law Corner Winter 2014 eNewsletter.

by Kendall E. Woods

Continuing the trend of protecting the innocent purchaser of a residential property, the Illinois Appellate Court recently answered two certified questions in 1324 W. Pratt Condominium Ass’n v. Platt Const. Group, Inc., 2013 IL App (1st) 130744, clarifying and expanding the application of the holding in Minton v. Richards Group of Chicago, 116 Ill. App. 3d 852 (1st Dist. 1983) to allow homeowners to assert claims against contractors or subcontractors where the builder-developer is insolvent.

In its 1983 opinion, the Minton court held that “where the innocent purchaser has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor, the warranty of habitability applies to such subcontractor.”   Minton, 116 Ill. App. 3d at 855.   Since Minton, several cases have analyzed and applied its holding to allow claims to proceed against subcontractors.

The case of 1324 W. Pratt Condominium Ass’n v. Platt Const. Group, Inc. has given rise to three appellate decisions analyzing the application of the implied warranty of habitability to subcontractors.   Pratt is a construction defect lawsuit arising from the faulty construction of a residential condominium building built in 2005 at 1324 W. Pratt Boulevard, Chicago, Illinois (the “Project”).   Between 2004 and 2005, the developer 6801 N. Wayne LLC (“Wayne”) engaged in the construction of the Project.   Wayne hired Platt Construction Group, Inc. (“Platt”) as the general contractor.   Platt hired several subcontractors, including EZ Masonry.   After the sale of the units at the Project, Wayne was involuntarily dissolved.   Soon thereafter, the unit owners discovered water leaks at the Project.   The condominium association filed a complaint naming, among others, Wayne and Platt as defendants.   Subsequently, the condominium association filed a second amended complaint, naming EZ Masonry as a defendant.   Since then, the litigation has proceeded against both Platt and EZ Masonry.   To date, three appeals have been decided stemming from this litigation.   See 1324 W. Pratt Condominium Ass’n v. Platt Const. Group, Inc., 404 Ill. App. 3d 611 (1st Dist 2010) (“Pratt I”); 1324 W. Pratt Condominium Ass’n v. Platt Const. Group, Inc., 2012 IL App (1st) 111474 (“Pratt II”) and 1324 W. Pratt Condominium Ass’n v. Platt Const. Group, Inc., 2013 IL App (1st) 130744 (“Pratt III”).

The Pratt I Court expanded the reach of the implied warranty of habitability by holding that the warranty applies to builders of residential homes regardless of whether they are involved in the sale of the home.   Pratt I, 404 Ill. App. 3d at 618.   The Pratt II Court acknowledged that it had recently expanded the reach of the implied warranty of habitability itself in Pratt I when it extended the implied warranty of habitability to apply to builders who are not vendors of the new homes.   Pratt II, 2012 IL App (1st) 111474,  ¶ ¶23-26.   The Pratt II Court again expanded the application of the implied warranty of habitability by reversing the trial court and holding that a waiver of the implied warranty of habitability does not extend beyond the contracting parties that agreed to the waiver.   See id.,  ¶32.   The Pratt II Court also confirmed that to extend the implied warranty of habitability to subcontractors, the builder-vendor had to be insolvent.   See id.,  ¶39.

After the Pratt II Court remanded the case to the circuit court, the condominium association filed a fourth amended complaint, alleging that Platt was insolvent.   The circuit court allowed limited discovery on the issue of Platt’s insolvency and held that “Platt is insolvent, but remains a corporation in good standing with limited assets.”   Pratt III, 2013 IL App (1st) 130744,  ¶9.   The circuit court also held that the relevant date for determining insolvency of a general contractor is the date on which the complaint is filed against the general contractor.

The circuit court then certified two questions to the Pratt III Court pursuant to Illinois Supreme Court Rule 308:   (1) whether the relevant date for determining the insolvency of a general contractor for purposes of the exception set forth in Minton is the date that a complaint (or latest amended complaint) is filed against the general contractor, or when the construction is completed; and (2) whether the condominium association may pursue its claims against a subcontractor when the general contractor is insolvent, but is in good standing with limited assets.

In answering the certified questions, the Pratt III Court first looked to the public policy underlying the implied warranty of habitability:

[t]he implied warranty of habitability is a “creature of public policy” that was explicitly designed by our courts “to protect purchasers of new houses upon discovery of latent defects in their homes.”

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The rationale for the application of the policy has been threefold.   First, purchasers of new homes generally do not [have] the ability to determine whether the houses they have purchased contain latent defects.   Second, [t]he purchaser needs this protection because, in most cases, [he or she] is making the largest single investment of his or her life and is usually relying upon the honesty and competence of the builder, who, unlike the typical purchaser, is in the business of building homes.   And finally, [i]f construction of a new house is defective, its repair costs should be borne by the responsible builder-vendor who created the latent defect, rather than the innocent and unknowing purchaser.

Pratt III, 2013 IL App (1st) 130744,  ¶ 14 (internal citations omitted).   The Pratt III Court then set forth the history of the continuous expansion of the implied warranty of habitability to advance the public policy and purpose to protect innocent purchasers:

[o]n the basis of this rationale, our courts have steadily expanded the application of the warranty to serve the underlying public policy of protecting new homeowners and holding those responsible for the construction of the buildings accountable for latent defects in residences that they construct. See, e.g., Redarowicz, 92 Ill.2d at 183 (expanding the class of plaintiffs with standing to sue for a violation of the implied warranty of habitability to successive purchasers); VonHoldt v. Barba & Barba Construction, Inc., 175 Ill.2d 426 (1997) (expanding the type of structures covered by the warranty to include new additions to existing buildings); McClure v. Sennstrom, 267 Ill.App.3d 277 (1994) (expanding the warranty of habitability to include a house built on a preexisting foundation); Briarcliffe West Townhouse Owners Ass’n v. Wiseman Construction Co., 118 Ill.App.3d 163 (1983) (expanding the warranty to a vacant common lot of a townhouse development); Herlihy v. Dunbar Builders Corp., 92 Ill.App.3d 310 (1980) (expanding the warranty to apply to common elements of condominiums); Park v. Sohn, 89 Ill.2d 453 (1982) (expanding the class of potential defendants to include a builder-vendor who is not in the business of building); Hefler v. Wright, 121 Ill.App.3d 739 (1984) (expanding the class of potential defendants to include a builder who erected a house manufactured by another party); Minton v. The Richards Group of Chicago, 116 Ill.App.3d 852 (1983) (extending the warranty to subcontractors where a builder-vendor is insolvent and the purchaser has no available recourse against it); Tassan v. United Development Co., 88 Ill.App.3d 581 (1980) (extending the warranty to developers).

Adhering to these same public policy principles, in Minton, we specifically expanded the application of the implied warranty of habitability to subcontractors to “protect innocent purchasers” who had “no recourse to the builder-vendor and [had] sustained loss due to the faulty and latent defect in their new home caused by the subcontractor.” Minton, 116 Ill.App.3d at 855.

Pratt III, 2013 IL App (1st) 130744,  ¶15-16.

Following the trend to expand the application of Minton to serve the underlying public policy of protecting the innocent homeowner, the Pratt III answered the first certified question and confirmed that the date for determining the insolvency of the developer or general contractor is the date of the latest amended complaint.   In so holding, the Pratt III court specifically recognized that “a general contractor may become insolvent after the filing of the initial lawsuit, and even perhaps as a result of the lawsuit.”   See id.  ¶17 (emphasis added).   Thus, if a builder-vendor becomes insolvent during the course of litigation, the plaintiff can maintain a claim for breach of the implied warranty of habitability against the contractors or subcontractors.

As to the second certified question, the Pratt III Court held that insolvency was all that was necessary to bring a claim for breach of the implied warranty of habitability against a contractor or subcontractor.   In Pratt III, the subcontractor argued that it would be “unfair to permit the condominium association to pursue its claims against [the subcontractor] where [the general contractor] is a viable corporation that has succeeded in defending itself in this litigation for years.”   Id.  ¶19.   In support of its argument, the subcontractor contended “that there remains uncertainty as to whether the determining factor in whether a purchaser can proceed against a subcontractor is ‘solvency,’ ‘no recourse’ or ‘the viability’ of a corporation.   See id.   The Pratt III court “strongly disagreed” with and rejected the subcontractor’s argument and held that an innocent purchaser “[m]ay proceed on a claim for the breach of the implied warranty of habitability against a subcontractor where the builder-vendor is insolvent.”   Id.  ¶20.   In so doing, the Pratt III court definitively ended the debate over the meaning of “no recourse” language in Minton.   The Pratt III Court specifically held:

we hold and clarify that for purposes of determining whether a purchaser may proceed against a subcontractor on a breach of implied warranty of habitability claim, the court must look to whether the general contractor is solvent.   Insolvency simply means that a party’s liabilities exceed the value of its assets, and that it has stopped paying debts in the ordinary course of business.   See Black’s Law Dictionary, 799 (7th ed. 2007); see also 740 ILCS 160/3 (West 2010) (“(a) A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.   (b) A debtor who is generally not paying his debts as they become due is presumed to be insolvent.”)

Id.  ¶25.   The Pratt III Court allowed the condominium association to proceed against the subcontractor even though the general contractor was in good standing with limited assets.   See id.  ¶26.

After the Pratt III decision, it is clear that in Illinois a homeowner can bring a claim against a contractor or subcontractor so long as the builder-vendor or general contractor is insolvent, even if the builder-vendor or contractor becomes insolvent during the course of litigation.