As recently reported in The Post and Courier (Charleston, S.C.), residential construction defect claims—particularly in the Lowcountry of South Carolina continue to soar as development expands. Multi-family units and large planned unit developments are particularly prone to class-action construction defect litigation. These lawsuits raise a variety of unique defense issues, including the interaction of Rule 23 and the South Carolina Notice and Opportunity to Cure Construction Dwelling Defects Act (Right to Cure Act) and strategies for moving the litigation to non-state court forums.
Many of these issues were litigated over the past ten years by Gordon & Rees South Carolina partners Vic Rawl and Hal Frampton on behalf of national homebuilder PulteGroup, Inc. and its subsidiaries in a series of cases alleging stucco defects at Sun City Hilton Head, an age-restricted development near Hilton Head Island. These cases were litigated in numerous forums, including state court, arbitration, federal district court, the U.S. Court of Appeals for the Fourth Circuit, and the Supreme Court of the United States.
The South Carolina Right to Cure Act requires that a homeowner give 90 days’ notice of the intent to file a lawsuit over residential construction defects and allow the contractors or subcontractors to inspect and potentially repair the property. In the Sun City cases, Pulte argued that the Right to Cure Act’s requirement of individual notice and an opportunity to cure precluded certification of a class action involving single-family homes, as absent class members would not have complied with the Right to Cure Act. The South Carolina Supreme Court disagreed but left it to the trial court to figure out how to harmonize the requirements of the Right to Cure Act and Rule 23. The trial court attempted to harmonize the two by certifying the class on a “preliminary” basis, ordering class members to complete questionnaires concerning their claims, and allowing defendants to complete walk-around inspections of each house. This process resulted in the settlement of many claims and a reduction in the size of the putative class. The trial court’s method of harmonization was not appealed because the matter settled before trial. Issues related to the harmonization of Rule 23 and the Right to Cure Act will continue to be litigated, and defendants should continue to press for their right to pre-litigation notice and an opportunity to cure any alleged defects, even in a putative class action.
Rule 23 of the South Carolina Rules of Civil Procedure is intentionally more liberal than Federal Rule 23 because South Carolina courts have a stated public policy favoring the certification of class actions. Further, the certification of a class actions in state court is not immediately appealable, so there is typically no potential for relief from an erroneous certification decision until after a full trial on the merits. It is therefore highly disadvantageous for class action defendants to remain the state court. In the one of the Sun City matters, Pulte successfully removed one of the cases, Craft v. Del Webb, to federal court under the Class Action Fairness Act (“CAFA”), and the federal court ultimately denied class certification. While CAFA removal is easier than a traditional removal because it does not require complete diversity, defendants must craft their removal pleadings and arguments carefully to avoid the local controversy and home-state exceptions to CAFA jurisdiction. Those exceptions are designed to keep disputes that are limited to one state out of federal court, and it is often challenging to demonstrate that construction class actions, which are often inherently confined to one state, do not fit within them.
Pulte also successfully moved nearly 100 Sun City cases to arbitration and successfully argued to the U.S. Court of Appeals for the Fourth Circuit that no class action arbitration should be allowed. The Fourth Circuit’s opinion in Del Webb v. Carlson was a forerunner to the Supreme Court’s recent decision in Lamps Plus v. Varella, which confirmed on a nationwide basis that class arbitration will not be allowed if the underlying arbitration agreement does not specifically allow it. The inability to pursue arbitration on a class-wide basis is reason alone for construction defect defendant to look long and hard at whether there is any basis on which to compel arbitration. Notably, even if the underlying construction defect case was filed in state court, defendants can often bring a standalone petition to compel arbitration in federal court, thus avoiding unfavorable state law on the availability of arbitration.
While South Carolina is a challenging venue for defendants in class action construction defect cases, the Sun City cases demonstrate that there are often a number of strategies available to mitigate the risk. For one, the Right to Cure Act arguably gives defendants the right to clear notice and an opportunity to attempt to cure alleged defects on each house. Insisting on this right can place defendants in a better position to settle cases early and to avoid the risk associated with a certified class. Further, there are often opportunities to move the case to other forums, such as arbitration or federal court, and these opportunities should be evaluated fully. These and other strategies bear full exploration because there is no end in sight to class action construction litigation in South Carolina, as the state has one of the harshest climates in country combined with a massive housing boom created by the influx of businesses, industry, and people.