Reprinted from The Washington Post
By Sandra Fleishman
Washington Post Staff Writer
Tuesday, February 22, 2000; Page E01
Condominium owners in a southern Fairfax County community are so angry about alleged construction defects that they’ve launched a novel legal challenge to a method more and more home builders use in selling properties.
The lawsuit in Fairfax County Circuit Court challenges the practice whereby well-known builders advertise developments but buyers sign purchase contracts with separate limited liability companies (LLCs).
Businesses of all types typically set up LLCs to shield their owners from liability, much as incorporation does, but still allow profits and losses to pass through to the owners for tax purposes. Since states and other legal jurisdictions started allowing LLCs about five years ago, builders increasingly have been creating separate ones for every development rather than exposing the parent company’s entire assets to legal entanglements over a single venture.
But the Fairfax condo owners contend that LLCs are being used to draw in consumers who think they are buying from a brand-name company that will make good on any defective work. The LLC method, they say, typically is just a bait-and-switch tactic that shields the brand-name company from liability. Therefore, rather than suing the LLC, they are suing the builder, his corporate partners and others associated with the parent company.
The plaintiffs own 202 units in Carrdinal Place Condominium near Beulah Road and Morning View Lane. The low-rise complex was built over a five-year period from 1994 to 1998 in a 261-acre planned community called Island Creek. Six builders developed Island Creek, but only the builder associated with Carrdinal Place is involved with the suit.
The condo association has been fighting with the LLC, Carrdinal Place I LC, for 16 months over a list of $3 million in allegedly construction flaws.
The condo owners at first sued the LLC for failing to repair items under warranty while they attempted to reach a settlement. When negotiations failed, the owners withdrew the first suit and filed a massive 108-page suit in December against veteran builder Edward R. Carr; Carrhomes Inc., the Virginia corporation over which Carr presides; Carr’s partners in Carrhomes Partnership; sales agents affiliated with Carr and the LLC; and the management company.
The suit basically contends that the warranty items should be corrected, but also that the way the properties were marketed constitutes misrepresentation and fraud, and that Carr and his partners are liable for repairs.
Carr, a longtime local builder whose lawyer is seeking to get the suit dismissed, denies fraud or misrepresentation. He is mystified by the aggressiveness over what he contends is “a warranty issue.”
But lawyer Beau Brincefield Jr., who represents the condo owners, said a larger issue is at stake.
“What most home buyers don’t realize until it is too late is that … . they usually sign a sales contract with a limited liability entity that is owned by, or affiliated with, the brand name but is a separate legal entity,” Brincefield said.
The limited liability company has little or no net worth, Brincefield said. “If or when things go down the toilet,” he said, the buyers can’t collect from the LLC because it has no money, and they can’t collect from the brand-name company because it was not a party to the contract.
“If the court accepts our theory of liability, it will require all of the major companies that use this ‘bait-and-switch’ tactic to change the way they do business … not only in the Washington area but elsewhere,” Brincefield said.
Not everyone agrees with Brincefield’s assessment of his suit’s impact. Roger D. Winston, a lawyer who has specialized for 20 years in preparing condo and homeowner association documents for developers, said the case seems not to call into question limited liability companies generally but rather how Carrdinal Place I LC has operated.
Winston, a lawyer at Linowes and Blocher in Silver Spring who has no connection to the suit, said builders for years have been able to set up separate corporations or limited partnerships to reduce risk. The LLC, he said, is an alternative. “It’s proved particularly useful for real estate development companies” building many projects at the same time, he said. Developers of condos, he said, are especially concerned about risk because associations have routinely filed multimillion-dollar lawsuits over disputed repairs.
To prove fraud the plaintiffs will have to show that the particular builder “did not make clear to the purchaser” that they were dealing with an LLC, Winston said. They also will have to show that the LLC was not legally or financially separate from any affiliated corporation. If the LLC is not separate, the affiliated company could become liable.
“If a national builder sets up an LLC, it’s not because they’re trying to get away with murder,” Winston said. “It’s because they don’t want all their assets to be at risk because they’re up against some aggressive plaintiff’s attorney or engineer” alleging defects.
“Given the litigious environment we have, companies are looking for ways they can protect themselves,” said David Jaffe, director of builder liability and legal research for the National Association of Home Builders.
Meanwhile, Carr, whose family has built about 15,000 houses in the area since 1925, contended that allegations of fraud and misrepresentation “simply have no substance.” He said, “We believe there are some legitimate warranty issues … where we intend to fulfill our warranty obligations.”
But, he said, rather than negotiate a list of repairs, the condo association’s lawyers are “attempting to win a large monetary settlement.” When the development was finished 16 months ago, Carr said the association presented a list “we thought was excessive.”
Edward H. Grove III, lawyer for defendant Armstrong Management Services Inc., also questioned the legal challenge. The suit, he said, “is impossible to understand. It makes no sense to me.”
“There is no way that [buyers] could not know” that they were buying from the limited liability company, he said. Grove said buyers signed many documents that list Carrdinal Place I LC “as the declarant.”
The condo owners, however, say they did not know that the builder and the seller were not the same.
“I understand that now,” said Julie Werner, president of the condominium association. “But at the time I thought I was buying from Carr.”
The builder’s name is on the sign at the entrance to Island Creek, Werner said, so Carr should have stepped up to make repairs sought by the association. “I’m really disappointed because I thought Carr had a commitment to quality construction … and they are fighting us tooth and nail.”
Werner was 23 in 1994, when she paid $132,000 for a two-bedroom unit in the first of 15 phases of Carrdinal Place. “From the walk-through inspection on, it was unbelievable,” said Werner, citing burn holes in the carpet and “other little nuisances.” Then, she said, her windows started leaking when it rained. Repairs were made but the windows kept leaking, and she discovered that neighbors had similar complaints.
Werner said Davidson & Associates Construction Analysts Inc. of Bethesda found “serious structural defects.”
She said, “The fire walls were not constructed properly, the flashing was not installed, the siding was installed incorrectly.” More alarming than the water that can be seen leaking, she said, “is what is going on behind the walls.”
Werner said condo owners are paying $3,500 each in a special assessment to make urgent repairs and pay for the lawsuit. “If not, we knew it would cost us a minimum of $20,000 each to make all the repairs.”
© 2000 The Washington Post Company