Report From Counsel - Winter 2004

Report From Counsel

WINTER 2003/2004 ISSUE

CLASS ACTIONS SPROUTING UP OVER HOME-CONSTRUCTION DEFECTS

Suburban sprawl has its detractors, but there's at least one benefit to living on a subdivision of houses or condos that are all pretty much the same: You can join in a class action against the developer.

That's what's happening in Burlington County, where -- thanks in part to the initiative of local lawyers -- disgruntled homeowners are banding together to sue builders for fraud over construction defects, and winning.

Five housing-defect class actions have been lodged in the county in the past two years. In two of them, the homebuilder settled and paid the plaintiffs' attorneys' fees. A judge has certified a third case as a call action. Four of the five cases were brought under the Consumer Fraud Act, N.J.S.A. 56:8-1, et seq.

What makes a class-action status colorable is that owners of cookie-cutter homes have a better than even chance of meeting the requirement of commonality of claims. One of the cases began after carbon monoxide buildup was discovered at the Laurel Place condominiums in Mount Laurel. The problem was traced to utility rooms that violated the state building code because of a lack of space around the gas-powered furnace, water heater and clothes dryer. Township inspectors found that the problem existed in more than 3,700 homes built in Mount Laurel by the same company, Orleans Homebuilders Inc. of Bensalem, Pa.

Superior Court Judge Ronald Bookbinder last March approved a $1.4 million settlement that called for Orleans to inspect the homes of class members and install ventilation where needed. Melnick v. Orleans Homebuilders, Inc., BUR-C-152-01.

Norman Shabel says the idea for a consumer-fraud class action in the Mount Laurel case came from the daunting prospect of pursuing individual claims for more than 3,700 people. "The major problem you have is cost [of preparation]," he says. "Every case we file, we have experts and every expert costs a lot of money -- these are not run-of-the-mill experts," says Shabel. "If you have five or six people with a couple thousand [dollars] each in damages, it's not worth it."

Rare Remedy

Still, class actions over housing defects are rare in New Jersey, as most aggrieved homeowners pursue claims under the state's New Home Warranty and Builder's Registration Act, N.J.S.A. 46:3B-1, et seq. The statute requires sellers of new homes to provide a 10-year guarantee against major construction defects, a two-year guarantee on electrical, plumbing, heating and cooling systems, and a one-year guarantee on material and workmanship. But the law requires owners to choose between making a claim under the warranty or going to court.

"The benefit you get from pursuing a remedy under the warranty is it's a more streamlined process, it tends to be quicker. But you don't have the potential for such great damages" as with a suit under the consumer fraud statute, says Richard Coe, Jr., a construction lawyer in Westmont.

The "great damages" factor has certainly worked in favor of Shabel and his partner, Stephen DeNittis. Articles in local newspapers about the Orleans case brought in more business. Last year, they and Fuoco filed another class action against Orleans on behalf of townhouse owners at the Laurel Creek development whose bay windows lacked flashing and were leaking. Owners of 250 homes had similar complaints, though all bur 57 were knocked our by New Jersey's 10-year statute of repose on suits against homebuilders. When the case settled in February, with lump-sum payments of $4,000 to each of the 57 owners, Bookbinder approved $114,000 in fees for Shabel, DeNittis and Fuoco.

The same three plaintiffs' lawyers filed suit last November against J.S. Hovnanian & Sons, alleging poor ventilation in utility rooms on behalf of the 900 homeowners in the Holiday Village East development in Mount Laurel. Bookbinder granted class action status in that case in August.

J.S. Hovnanian's lawyer, Richard Hunt, a partner at Marlton's Parker, McCay & Criscuolo, says the plaintiffs' definition of the class is overbroad and that the court's granting of class action status to the case is insignificant because the standard for certification is "extremely liberal."

Another suit, filed by Shabel, DeNittis and Fuoco in July, has the potential for a much broader class than the others. The suit, against Public Service Electric & Gas Co., was prompted by a gas explosion in February that destroyed three townhouses in Mount Laurel. The explosion occurred when a motorist, losing control of her car on an icy driveway, struck a gas meter on the front wall of her townhouse.

The putative class covers all PSE&G customers whose gas lines were allegedly installed in violation of an internal policy against installation of gas lines or gas meters within 36 inches of a driveway, parking space or garage. DeNittis says he has no idea how large the class might be.

The suit seeks injunctive relief in the form of inspection, notice and repair of the problem, which DeNittis says may be remedied by installation of a safety valve. Judge Bookbinder remanded the case to the Board of Public Utilities for fact-finding but retained jurisdiction. The attorney for PSE&G, Robert Egan, a partner at Haddonfield's Archer & Breiner, declines comment on the case.

A fifth housing class action filed by Shabel, DeNittis and Fuoco, which names Orleans as a defendant, cites central air conditioning units in second-floor utility rooms that leak condensation through the first-floor ceilings at the 274-unit Stonegate condominiums in Mount Laurel. The suit was filed on Sept. 19 and the plaintiffs have not received an answer yet from Orleans or the other defendants, air conditioning manufacturer York International Corp. and the contractor that installed the units, J. Wittman & Sons Inc., now known as Conectiv Services.

Why Is Class Preferred?

Patrick O'Keefe, chief executive officer of the New Jersey Builders Association says the recent housing class action suits by Shabel, DeNittis and Fuoco appear to be an isolated phenomenon. He says such class actions are rare because of the breadth of the home warranty statute.

"I don't know why, on the face of it, it's a matter of preferred action to bring it as a class action, if in fact there are defects in the units and the warranty program provides that those defects will be corrected," he says, adding that the prospect of a builder being hit with treble damages and attorneys' fees is "a great device of extortion."

O'Keefe says he is concerned that any expansion of such litigation would reduce the supply of low-cost multifamily housing, the segment most vulnerable to such suits. A similar litigation-related slowdown of low-cost housing construction occurred in California, before the enactment of an industry-backed "right-to-repair" law, he says.

DeNittis is will aware of the housing industry's distaste for such litigation. "There are those cases out there that have given [class actions] a bad rap," he says. But he adds, "In the cases that we've brought, the consumers have received real recoveries and we feel they've been made whole."

Shabel says careful screening of such cases is essential. "Before we bring any class action suit, we prepare for months and months before we even notify the defendant. We don't want to file any frivolous suits," he says.

Shabel and DeNittis hesitate to predict whether construction defect cases will become a significant portion of their practice in the longer term. But the firm is expanding is work in class actions, a "natural ascendancy" from its past work in product liability and professional malpractice work, says DeNittis.

Along with Fuoco, Shabel & DeNittis won a $5.1 million settlement in 1998 from Waste Management Inc. on behalf Florence residents who claimed their property values were reduced by odors from the company's landfill across the Delaware River in Pennsylvania.

The defense lawyers in the class action suits against Orleans were Dennis Estis, a partner at Greenbaum, Rowe, Smith, Ravin, Davis & Himmel of Woodbridge, and Linton Turner Jr., a partner at Cherry Hill's Crawshaw, Mayfield, Turner, O'Mara, Donnelly & McBride. They did not return phone calls seeking comment. -- The New Jersey Law Journal October 13, 2003 edition.

CLASS ACTION ALERT!

If you or a loved one had a mortgage with OptionOne Mortgage Company and were forced to pay a pre-payment penalty as a result of paying off your mortgage to refinance your home or purchase another home, your rights may have been violated. If so, call the Law Office of Shabel & DeNittis for a free consultation 866-0330.

SHABEL & DENITTIS VOTED BEST ATTORNEYS IN SOUTH JERSEY

In the August 2003 edition of South Jersey Magazine, attorneys Norman Shabel & Stephen DeNittis received accolades as being two of the top attorneys in South Jersey. Over the summer, South Jersey Magazine sent out nomination forms to all of the practicing attorneys throughout South Jersey. SJ Magazine asked the attorneys in South Jersey to nominate their peers and colleagues they believe to be the best in the particular fields of practice. Norman Shabel received the honor of being the best attorney in South Jersey for products liability cases and Stephen DeNittis received the distinction of being the best attorney for consumer law matters including consumer fraud. The award is quite an honor since it did not require patronage or advertising to the magazine in order to qualify for the said award. It was simply an independent nomination by the attorneys of South Jersey. Both Shabel & DeNittis are honored to be voted by their peers for such an award.

HIGHLIGHTS OF THE NEW FEDERAL TAX ACT

On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 became law. Much of this federal tax law applies only to the years 2003 and 2004, after which provisions in the 2001 Tax Act will again become effective. Nonetheless, the Act contains some significant changes for individuals as well as businesses.

Individuals

The child tax credit increases from $600 to $1,000, which is an acceleration of a scheduled phase-in that was to have occurred between 2005 and 2010. In 2005, the credit will fall to $700, but will then gradually rise to $1,000 again by 2010 by virtue of the 2001 Act.

The standard deduction for married couples will double to twice the amount of the standard deduction for single taxpayers. Married taxpayers filing a separate return will claim the same standard deduction as a single person. Similarly, for 2003 and 2004, the upper limit of the 15% income tax bracket for married couples will increase to a dollar amount that is twice that for a single taxpayer.

For 2003, income levels for the 10% tax bracket will increase to $7,000 for single taxpayers and $14,000 for joint filers. In 2004, these levels of income will be indexed for inflation. Retroactive to January 1, 2003, the new tax rates for individuals are 10%, 15%, 25%, 28%, 33%, and 35%. For transactions taking place from May 6, 2003 to December 31, 2007, the maximum capital gain tax rate has dropped from 20% to 15%, and from 10% to 5% for lower-income taxpayers.

To reduce the double taxation of corporate earnings, dividends received by an individual shareholder from a domestic or qualified foreign corporation will be taxed like capital gain income. This means a rate of 15% for most taxpayers and 5% for those at lower-income levels, assuming the stock is held for at least the holding period set by law. Dividends from certain corporations are not eligible for this new treatment, such as those from tax-exempt charities, farmers' cooperatives, and particular foreign companies.

Businesses

The Act increases the amount of investment that may be deducted immediately by small businesses from $25,000 to $100,000. The amount of this deduction is reduced by the amount that the cost of the business assets exceeds $400,000. Under prior law, this phase-out of the deduction began at $200,000.

The additional first-year bonus depreciation deduction is increased from 30% to 50% for investments acquired and put into service between May 5, 2003 and January 1, 2005. Qualifying property still must be brand new, with a class life of 20 years or less.

TELECOMMUTING AND UNEMPLOYMENT

Maxine worked in New York for a financial information services provider. When she moved to Florida, her employer agreed to allow her to telecommute. Maxine was responsible for the same tasks that she had handled in New York, only now from her laptop in Florida she logged onto her employer's mainframe computer each workday.

Two years into the telecommuting arrangement, Maxine's company decided to end it. When she turned down an offer to return to New York, Maxine was without a job. She was denied unemployment benefits in Florida following a ruling that she had voluntarily quit her job without good cause. However, the Florida agency advised Maxine that she might be eligible to receive unemployment benefits in New York.

In what may be the first court decision of its kind on interstate telecommuters, New York's highest court also ruled that Maxine was ineligible for benefits, but for a different reason. Under New York law, a threshold requirement for eligibility is that the employee's entire service for the employer, except for incidental work, must be "localized" in New York. Maxine argued unsuccessfully that her services were localized in New York, at her employer's mainframe computer, notwithstanding that she initiated this service on her laptop in Florida. The court ruled instead that the physical presence of the employee determines in which state a telecommuter is located. For work done while she was located in Florida, Maxine was not eligible for unemployment compensation in New York.

When the new economy met the old unemployment insurance system in Maxine's case, the court stayed with principles that predate the age of computers. The outcome was dictated by two rules that are uniformly recognized: All of an individual's employment should be allocated to one state, which should be solely responsible for paying benefits; and that state should be the one in which it is most likely that the individual will become unemployed and seek work.

Unemployment has the greatest economic impact on the community in which the unemployed individual resides, and benefits generally are linked to that area's cost of living. Legislators and judges from previous generations could not have foreseen today's world of interstate telecommuting, but the rules they created are still valid. For better or worse, Maxine was tied to Florida, where she was physically present, and she could not look to New York for unemployment benefits.

ESTATE PLANNING WITH LONG-TERM CARE INSURANCE

Longer life expectancies and the coming surge in the retirement-age population have increased the demand for long-term care, as well as for insurance as one means of paying for that care. Long-term care encompasses a broad range of services for those with a prolonged illness, disability, or mental disorder. Unlike the focus of traditional medical care exclusively on certain medical problems, the goal of long-term care is the maintenance of an individual's level of functioning.

Types of Care

The two main types of care are skilled care, provided by medical personnel for medical conditions according to a treatment plan, and personal care. Personal care, sometimes called custodial care, is assistance with the activities of daily living that can be provided in many settings, including nursing homes, adult day-care centers, or the individual's own home.

Whether the purchase of long-term care insurance makes sense for a particular individual depends on age, health status, overall retirement objectives, and income. As with any type of insurance, it is critical to understand what is and is not covered among the types of long-term care services that are available. Exclusions and limitations are common. Equally important is knowing where services are covered. Some policies cover care in any state-licensed facility, but others may specifically include or exclude particular types of facilities.

Key Features

Since the amount of coverage is dictated by the type of service, coverage amounts will vary depending on the service. Most policies have a "total lifetime benefit" for the duration of a policy. In addition, benefits are often payable up to maximum amounts per day, week, month, or year.

A provision on when benefits are payable, sometimes called a "benefit trigger," is another key feature that can vary significantly among policies. Some states have legislated benefit-trigger requirements, making it a good idea to check with state insurance departments. Typically, benefits become payable because of the insured's inability to perform a certain number of the activities of daily living. Policy language on mental incapacity also allows for benefits when the insured fails mental functioning tests. Such a benefit trigger is especially important for those afflicted with Alzheimer's, even though most states prohibit the outright exclusion of coverage for that disease.

Although they can add to the cost of a policy, there are optional policy provisions that can help to tailor a policy to individual circumstances. Third-party notification authorizes the insurer to notify a designated third party, such as a relative or friend, if the policy is about to lapse for nonpayment of the premium. A waiver of premium clause allows the insured to stop paying premiums once he or she is in a nursing home and the insurer has begun to pay benefits. Nonforfeiture benefits return some of the investment in the policy if coverage is dropped. If an insured has paid premiums for a certain number of years, some policies allow a death benefit to the estate consisting of a refund of premiums, minus any benefits the company has paid.

Tax Implications

Premiums paid for long-term care insurance are deductible as a medical expense, as long as all medical expenses exceed 7.5% of adjusted gross income. Since premiums on average increase more than tenfold between the ages of 40 and 70, this deduction increases substantially with age. The maximum long-term care premium you can add to your other deductible medical expenses is based on your age at the end of each tax year.

Employer contributions to long-term care insurance for their employees are tax deductible for the employer, and premium payments are not taxable income to the employees. Benefits from a long-term care plan are excluded from income up to the lesser of the actual costs incurred or $63,875 per year. The annual limitation will increase with inflation in future years.