The United States Court of Appeals for the Fourth Circuit recently held that federal preemption precluded a project owner from seeking indemnity from its architect based upon the failure of the architect's design to meet the accessibility requirements for the disabled imposed by the Fair Housing Act2 ("FHA") and the Americans with Disabilities Act3 ("ADA"). This case has immediate impact on project owners who rely upon their design professionals to provide designs that comply with the FHA and/or ADA. No longer can project owners look to the designer for indemnity for errors and omissions in design that create FHA or ADA violations.
The case, Equal Rights Center & Archstone Multifamily Series I Trust v. Niles Bolton Associates, No. 09-1453 (4th Cir. Apr. 19, 2010) involved a suit filed by several disability advocacy groups in U.S. District Court in Baltimore against a number of defendants, including Archstone, the developer and owner of 71 apartment communities, and Niles Bolton, Archstone's architect for 15 of the apartment communities. The disability groups alleged that the defendants failed to design and construct 71 apartment buildings so they would be accessible to persons with disabilities as required by the FHA and ADA.
Archstone settled with the plaintiff disability advocacy groups, agreeing in a consent decree to retrofit the 71 properties to make them compliant with the FHA and ADA, and to pay plaintiffs $1.4 million. Niles Bolton entered into a separate consent decree with the plaintiffs. Archstone claimed the cost to retrofit the sites designed by its architect, Niles Bolton, exceeded $2.5 million, and, in order to recover these damages, filed a cross-claim against Niles Bolton asserting the following four state-law causes of action: (1) express indemnity, (2) implied indemnity, (3) breach of contract, and (4) professional negligence. Thereafter, the parties conducted discovery for three years. After discovery closed, Archstone requested leave to amend its complaint to add a claim for contribution. However, the district court denied leave because amendment at such a late date would prejudice Niles Bolton, and also because amendment would be futile since, in the court's view, a state-law claim for contribution would be preempted under federal law. The district court also granted Niles Bolton summary judgment on the four state-law claims that Archstone asserted against it as architect. The court reasoned that (1) Archstone's claims all were either express or de facto indemnity claims for violations of the FHA and ADA, (2) no right of indemnification existed under these laws, and (3) allowing indemnification under state-law claims would be antithetical to the purposes of the FHA and ADA, and thus preempted under federal law under the doctrine of conflict or obstacle preemption.
Archstone appealed, and the Fourth Circuit affirmed. The court found its prior case law on "obstacle preemption," particularly its decision that the Securities Exchange Act of 1933 preempted a state-law claim for indemnity for a violation of that act, directly applicable to state-law claims for indemnification based upon violations of the FHA and ADA. The court noted that both laws were "regulatory rather than compensatory," and that compliance with them is "non-delegable." Thus, the court reasoned, "it is clear that . . . the regulatory purposes of the FHA and ADA would be undermined by allowing a claim for indemnity."
The Fourth Circuit agreed with the district court that Archstone's breach-of-contract claim and professional negligence claim were de facto claims for indemnification since they sought recovery from Niles Bolton of 100 percent of Archstone's losses at the 15 sites where Niles Bolton was architect. The Fourth Circuit did not reach the issue of whether Archstone's contribution claim against Niles Bolton was also preempted because denial of the late amendment to add that claim was sustainable on the alternative ground that its untimliness was prejudicial to Niles Bolton.
The most immediate implication of the Fourth Circuit's opinion in Niles Bolton is that project owners within the area of the Fourth Circuit4 may not seek indemnification in federal court from designers whose errors or omissions cause violations of the FHA or ADA resulting in a suit against the owner. State courts within the Fourth Circuit's geographic area also may likely find the Fourth Circuit's reasoning in Niles Bolton persuasive, even though the case would not be binding precedent for them. Courts in other circuits and other state courts may also find Niles Bolton persuasive and follow it.
Niles Bolton would not appear to extend to claims by a project owner against an architect whose errors or omissions result in FHA and ADA violations, but are not the subject of a lawsuit by the United States or a disabled person, but rather are discovered by the project owner or its consultants. Also, Niles Bolton may not preclude a claim for contribution, rather than indemnity, although the district court did hold a contribution claim also to be preempted. Further, Niles Bolton does not expressly hold that a duty to defend under a hold-harmless agreement is preempted. Finally, Niles Barton does not necessarily preclude a breach-of-contract claim against an architect that does not seek the equivalent of indemnity.
What is a project owner to do? Certainly, after Niles Bolton, project owners will want to redouble their efforts to ensure compliance with the FHA and ADA. Use of an FHA/ADA consultant to review the design and construction carefully for accessibility and FHA/ADA compliance may be even more prudent now that indemnification from the designer for errors and omissions resulting in FHA/ADA violations may be unavailable. Also, project owners may want to consider changing future contracts with architects to address the issue of FHA/ADA violations differently. For example, if the owner includes in the contract with its architect that a specified portion of the architect's fee is for FHA/ADA compliance, and that it is returnable if there is a material FHA/ADA violation caused by the design, the owner may have some redress despite Niles Bolton. Finally, obtaining insurance coverage to protect against this potential liability may also be worth exploring.
The Fourth Circuit's recent decision in Niles Bolton may preclude project owners from seeking indemnification from their designers for errors or omissions in the design that cause violations of the FHA or ADA. Accordingly, project owners must use increased diligence to ensure that their projects comply with FHA and ADA requirements. Also, project owners may wish to consider changing future contracts with architects to ensure some redress if errors or omissions in design cause FHA or ADA violations. Finally, project owners may wish to explore insurance coverage to protect themselves against this potential liability.