Q:

What Happens After the Sale of the Units?

A:

Once the development is completed, the proceeds from the sales of units are immediately transferred from the entity to the members/owners of the limited liability company.  By the time the homeowners realize that there may be defects in their development, which typically is several years after units were sold, the developer entity is often an empty shell with little or no assets and has little or no incentive to correct any significant problems that may exist at the development.

Q:

How does the use of Singe Asset Entities Impact Construction Defect Litigation?

A:

Because of the frequent use of one asset entities in developments, in prosecuting a construction defect action establishing that the project in question is defective is often the easiest part of the case from the lawyer’s perspective. The true test of the construction defect lawyer’s expertise and experience is finding someone to hold responsible for the defects that may exist at a project.

Q:

What Theories Are Available to Establish Personal Liability of the Developer?

A

There are a number of potential theories available to an association capable of establishing personal liability of the owners of the developer entity.  Some of the legal theories that an association can allege against the owners of the developer entity include:

(1) Alter ego.  Establishing under equitable principles that the separate legal existence of the developer entity should be ignored and the owners of the entity held liable for the entity’s obligations;

 (2) The Responsible Corporate Officer Doctrine.   If a corporate officer or member of a limited liability company participates in the entity’s wrongful conduct or knowingly approves of the conduct, then the individual as well as the entity may be held liable;

(3) Consumer Protection Act Claims under RCW 19.86;

(4) Fraudulent transfers:  establishing that the distribution of sales proceeds from the developer entity to the entity’s owners was a fraudulent transfer under Washington Uniform Fraudulent Transfer Act RCW 19.40;

 (5) Breach of fiduciary duty;
 
(6) Intentional or negligent misrepresentations; and

 (7) Misrepresentations or Omissions in the developer’s public report.

Q:

What is Required to Successfully Establish Liability?   

A:

Each of the seven potential theories for establishing the liability of the owners of the developer entity is extremely fact intensive and all the theories may not be available in every case. Moreover, in order to be able to survive the inevitable attacks to these theories from the owners of the developer entity, the association’s attorneys have to be aggressive in pursuing the discovery necessary to convince the Court to allow these theories to proceed to trial.

Q:

In your experience, has a judge ever granted a developer’s motion to dismiss an association’s fraudulent transfer claim?

A:

We have over ten years of experience of pursuing Uniform Fraudulent Transfer Acts against developers in Washington.  Despite repeated challenges by developers, we have never had a judge grant a developer’s motion to dismiss an association’s fraudulent transfer claim.

Q:

Are Single Entity Developer Claims Worth Pursuing? 

A:

The fact that developers may attempt to limit their potential liability for potential construction defects by using a one asset entity that can be easily stripped of assets presents a potential obstacle for an association pursuing its rights.  However, that obstacle can be overcome if the association can present viable claims against the owners of the developer entity.  Such claims not only present a potential source of recovery, but also provides additional incentive for the owners of the developer entity to put pressure on their insurance carriers to settle.  While pursuing such claims against the owners of the developer entity can be difficult and require additional discovery and experts, in most instances they are definitely worthwhile for an association to pursue.