Friday, December 19, 2014
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C.A. Declares Homebuilder Indemnification Clause Unconscionable
Panel Says Lennar’s Suit to Recover Litigation Costs From Buyers Was SLAPP
By KENNETH OFGANG, Staff Writer
A homebuilder, having successfully defended a federal suit by buyers who claimed they were defrauded in connection with the purchases, could not recover litigation costs on the basis of contractual indemnity because the indemnity clauses in the buyer’s contracts were unconscionable, the Fourth District Court of Appeal ruled yesterday.
Div. Two affirmed a judgment, based on the granting of an anti-SLAPP motion, in favor of Stella Stephens, Timothy Young, and Melissa Young. Justice Thomas Hollenhorst authored the opinion, explaining in a footnote that the parties settled their dispute after the panel issued its tentative opinion, but that the panel felt the legal issues in the case should be resolved in a published opinion.
The plaintiffs bought homes from Lennar Homes, one of the state’s largest builders—Stephens in 2005 and the Youngs in 2006. In 2009, Stephens sued the company for fraudulent and negligent misrepresentation, asking that the matter proceed as a class action.
Additional Plaintiff
Timothy Young was added as a plaintiff by amendment. The case was eventually consolidated with several similar suits in the Central District of California, and was later dismissed.
While the buyers appealed the dismissal, Lennar sued them in Riverside Superior Court. It alleged that all of them, including Melissa Young—who was not a party to the federal case—were liable under an indemnity clause in the “Homebuyer Disclosure Statement” reading:
“Wherever in this Disclosure Buyer has been informed regarding disclosure items, Buyer represents that Buyer will not make any claims against Builder for nondisclosure of disclosure items or for alleged improper disclosure of such items. Buyer shall indemnify, protect, defend and hold harmless Builder from any costs, expenses (including, without limitation, attorneys’ fees and costs), liabilities, actions, demands and damages arising out of claims made by Buyer for nondisclosure or incomplete disclosure of the general disclosure items and items separately disclosed to Buyer in writing, or damages or harm to Buyer arising from such items.”
Stephens and the Youngs filed an anti-SLAPP motion, alleging that the suit arose from constitutionally protected activity—the federal lawsuit. Lennar responded that Melissa Young had not engaged in protected activity, because she was not a plaintiff in the federal action, and that the motion should be denied as to all of the defendants because Lennar was likely to prevail on its indemnity claim.
Trial Court Affirmed
Riverside Superior Court Judge Daniel A. Ottolia ruled for the defendants on both issues, and Hollenhorst said both rulings were correct.
The underlying lawsuit, the justice said, implicated Melissa Young’s rights, regardless of her non-party status. “[W]e find the circumstance that Timothy Young asserted causes of action owned equally by his wife, arising out of a transaction to which she was a party, for purchase of a house that is itself community property, to be sufficient basis to conclude the lawsuit to constitute an act in furtherance of Melissa Young’s right of petition,” Hollenhorst declared.
Since the suit arose from the defendants’ exercise of petition rights with respect to a judicial proceeding, the justice went on to say, the burden shifted to Lennar to show a probability of prevailing. It could not do so, he explained, because the indemnity clause is unenforceable and unconscionable.
Violates Public Policy
Not only is it part of a contract of adhesion, he wrote, but it violates substantive public policy by purporting to hold the buyers liable for costs incurred by the builder in defending its own conduct, regardless of the merits.
“Here, under the bare language of the indemnity clause, there is not even the theoretical possibility a homebuyer could be made whole for any damages arising from fraud committed by Lennar with respect to disclosures,” the jurist reasoned. “The clause is a paradigmatic example of a ‘heads I win, tails you lose’ proposition, purporting to bar any possibility of meaningful recovery for claims falling within its scope, regardless of merit….We find this to establish a high degree of substantive unconscionability, at least within the circumstances of this case—sufficiently high as to outweigh the relatively low degree of procedural unconscionability.”
The justice rejected Lennar’s argument that the unconscionability analysis should be limited to the facts of the specific case, and that there was nothing reprehensible about shifting the costs of the federal litigation to the losing parties.
“[U]nder the circumstances of this case, only by refusing to enforce the indemnity clause at all do we provide Lennar any incentive to conform the language of its contracts with consumers to the limits of enforceability under California law,” Hollenhorst wrote.
The case is Lennar Homes of California, Inc. v. Stephens, 14 S.O.S. 5783.
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