Nevada home builders could eventually have more than individual homeowners to worry about over construction defect complaints.

The state’s Supreme Court is now considering five cases that include homeowner associations which are asserting their rights to file defect-related lawsuits on behalf of owners in their respective communities.

Defendants in those cases, which have been consolidated, include D.R. Horton and Richmond American, as well as local developers.

Nevada law, under the statute NRS 116, allows what’s known as common-interest homeowner associations to file lawsuits on behalf of two or more owners if the claim concerns a life-safety issue. Any legal action needs to be ratified by the homeowners in the community.

“The issue at hand is one of standing,” explains Scott Canepa, a partner with the Las Vegas law firm Canepa Riedy Rubino, which specializes in construction defect litigation but does not have a client involved in these cases. Canepa speculated that the court probably won't opt for a one-size-fits-all ruling. “But the question itself requires a case-by-case factual inquiry.” Canepa thinks HOAs might have a legitimate concern if, for example, a plumbing defect in one housing unit could lead to the damage of other homes or common areas in that community if it’s not fixed. “It will be up to the Supreme Court to provide guidance on the contours of this issue,” he tells BUILDER.

But developers and builders argue that current law, as well as any declarations that turn over a community's property to an association, limit HOA's jurisdiction to common areas such as swimming pools, clubhouses, and parks, and do not extend to individual housing units.

“If a homeowner has a warranty claim, it should go directly to the builder or developer,” says Jack Juan, whose firm, Marquis & Arbach, represents D.R. Horton in the cases before the Supreme Court. Juan points out that owners don’t need HOAs to sue for them, because they aren’t shy about filing complaints on their own: Of the 159 construction defect complaints filed in Clark County (which includes Las Vegas) between January 1, 2008, and April 30, 2009, homeowners submitted 100.

Juan insists that builders and contractors are generally predisposed to address defect complaints, “even after the warranty is expired,” rather than risk litigation. But Canepa observes that since the recession hit Vegas, it’s been much tougher for get builders to fix defects because, he explains, “there isn’t a workforce to address them.” Owners who try to resolve their defect complaints through insurers are also running into roadblocks. “This is not a good time to be a homeowner with a construction defect problem.”

Builders in Nevada have been lobbying the state for some kind of regulatory agency through which construction defect complaints could be evaluated and resolved. However, “legislators have not endorsed that idea,” Canepa says, although the state does allow builders and owners to submit questions to the Nevada Contractor Board to get an opinion.

What particularly irks builders is the practice by HOAs to extrapolate construction defects in a community based on minimal inspections. Juan points specifically to Horton’s 375-unit Allante community where, he says, the HOA inspected about 15 units, found seven that it claimed had a particular defect, and extrapolated in its complaint that half of all the units had the same defect. He points to another community where a jury found only one of 100 defect claims filed by its HOA to be legitimate.

Canepa counters that Nevada courts accept extrapolation as a legitimate practice, “as long as the sample size is adequate.” But he also notes that extrapolation is beside the point in the cases before the Supreme Court, which will rule solely on whether HOAs have the right to sue for their owners to resolve defect problems.

So far, HOAs haven’t had much luck convincing lower courts of their right to sue, though. The Las Vegas Review-Journal reports that a district court ruled that one HOA, Monarch Estates Homeowners Association, did not have the legal standing to sue Richmond American and another developer, Johnson Communities, over alleged defects in a Monarch Estates wall because each unit owner owned a part of the wall that abutted their property. Only one of the HOAs that are plaintiffs in the cases before the Supreme Court has gotten a favorable ruling from a lower court.

The credibility of all HOAs in Nevada also took a major hit last September when the FBI and Las Vegas detectives served search warrants on seven communities as part of a sweeping corruption investigation into whether individuals had been planted on HOA boards in order to direct business from construction defect lawsuits to certain attorneys and contractors. Law enforcement officers also raided the offices of at least one contractor and two law firms.

Natalie Collins, a public affairs specialist for the U.S. Attorney’s office in Las Vegas, confirms that the investigation is ongoing, although no indictments or criminal complaints have been made.

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Las Vegas, NV.