BILL ANALYSIS Ó
AB 20
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Date of Hearing: March 15, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 20 (Halderman) - As Introduced: December 6, 2010
SUBJECT : attorney-CLIENT COMMUNICATIONS: residential
construction defects
KEY ISSUE : Should ATTORNEYS WHO CONSULT WITH OR SOLICIT CLIENTS
REGARDING THE FILING OF LEGAL ACTIONS CONCERNING residential
construction defectS be SINGLED OUT to MANDATE PROVISION OF A
WRITTEN NOTICE TO THE CLIENT ABOUT POTENTIAL FUTURE EVENTS?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill is similar to measures the Committee once saw
frequently when builders and homeowner representatives fought
repeated battles regarding liability for construction defects.
Those disputes have been mostly quiet in recent years since the
passage of a landmark measure (SB 800) giving builders the right
to repair alleged defects before any suit can be filed. The
last measure of this sort came before the Committee in 2005,
sponsored by the California Building Industry Association. This
bill is not sponsored by the CBIA, but does enjoy its support.
According to the author and supporters, homeowners are subject
to various predatory practices and misinformation by attorneys
representing or seeking to represent them in claims regarding
construction defects. The bill would uniquely mandate that this
particular segment of lawyers provide clients and potential
clients with a written statement regarding specified matters.
Supporters argue that homeowners should be presented with these
statements so that they have all necessary information to make
an informed decision before pursuing litigation. Opponents
argue that the bill is unnecessary, inequitable, and will
inappropriately discourage victims of construction defects from
pursuing proper legal remedies. Opponents also express doubts
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about the constitutionality of the bill's restraint on speech.
SUMMARY : Regulates attorney-client communications regarding
certain construction defects. Specifically, this bill
1)Requires an attorney who solicits or consults with a client or
potential client for purposes of filing an action for defects
in the design or construction of an improvement to residential
real property to provide a written notice at the time of the
solicitation or consultation, including but not limited to the
following:
a) There is no guarantee of financial recovery from the
action.
b) Any funds recovered from the action may first be used to
satisfy liens on the property.
c) For clients other than a homeowner's association, a
description of the responsibility of a seller of real
property to disclose facts materially affecting the value
or desirability of the property. This description shall
explain the particular disclosures required under Section
1102.6 of the Civil Code, including, but not limited to, a
seller's duty to disclose any lawsuits by or against the
seller threatening to or affecting the property.
d) For homeowner's associations, a description of the
disclosures that the client is required to make to
association members under Chapter 9 of Title 6 of Part 4 of
Division 2 of the Civil Code.
2)Provides that it shall constitute cause for the imposition of
discipline of an attorney within the meaning of this chapter
for an attorney to fail to comply with this section.
EXISTING LAW :
1)Provides that the relationship between an attorney and client
is a fiduciary relationship of the very highest character and
all dealings between an attorney and client that are
beneficial to the attorney will be closely scrutinized with
the utmost strictness for unfairness. (See, e.g., Giovanazzi
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v. State Bar (1980) 28 Cal.3d 465, 472.)
2)Prohibits an advertisement by an attorney from containing
false, misleading, or deceptive statements or omissions, and:
(a) any guarantee or warranty regarding the outcome of a legal
matter as a result of representation by the attorney; (b)
statements or symbols stating that the attorney can obtain
immediate cash or quick settlements; (c) impersonations,
dramatizations, and spokespersons, unless there is disclosure;
(d) a statement that an attorney offers representation on a
contingent basis unless it also advises whether a client will
be held responsible for any costs advanced when no recovery is
obtained. (Business and Professions Code sections 6157.1,
6157.2.)
3)Requires a contingent fee attorney to provide a copy of the
contingency fee agreement to the client in writing, including
the following: (a) a statement of the contingency fee rate
that the client and attorney have agreed upon; (b) a statement
as to how disbursements and costs incurred in connection with
the prosecution or settlement of the claim will affect the
contingency fee and the client's recovery; (c) a statement as
to what extent, if any, the client could be required to pay
any compensation to the attorney for related matters that
arise out of their relationship not covered by their
contingency fee contract, including any amounts collected for
the plaintiff by the attorney. (Business and Professions Code
section 6147.)
4)Requires an attorney, in non-contingency fee cases where it is
reasonably foreseeable that total expense to a client,
including attorney fees, will exceed $1,000, to provide a copy
of the contract for services to the client in writing,
containing the following: (a) any basis of compensation
including hourly rates, statutory or flat fees, and other
standard rates, fees, and charges applicable to the case; (b)
the general nature of the legal services to be provided to the
client; (c) the responsibilities of the attorney and the
client as to performance of the contract. (Business and
Professions Code section 6148.)
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COMMENTS : In support of this bill, the author writes:
Assembly Bill 20 is a straightforward consumer protection
measure. This bill ensures that homeowners get all that
facts before entering into a construction defect lawsuit
against their home builder.
Current law provides countless ways that consumers must be
warned about a product before they purchase it. Cigarettes
have warning labels about health risks, McDonald's coffee
cups warn you that the contents may be hot, commercials for
pharmaceuticals list potential side effects? the list goes
on forever. Our society has unequivocally stated that
consumers should have all the facts before they decide to
buy a product or engage in a service. Currently there is no
requirement that an attorney must disclose to you the
potential negative consequences of entering a construction
defect lawsuit. This is a unique situation where engaging
in litigation can have serious negative long term costs to
the plaintiff, that they may be unaware of when they first
agree to be part of a lawsuit.
In Assembly District 29, many homeowners have joined class
action construction defect lawsuits without a full
understanding of consequences, and have later regretted
being part of the litigation. Frequently the homeowner
realizes that there was nothing really wrong with the home
in the first place, yet now whenever they sell the home
they must disclose to the potential buyer that they sued
the builder over construction defects. They have to
disclose what "defects" were claimed in the litigation and
whether they were repaired. Often, the money they recover
from the lawsuit is not enough to make the repairs, so when
they try to sell the home they must disclose how much the
estimated repair costs are to the buyer, thereby devaluing
the home. If only someone had disclosed to the homeowner at
the time of solicitation the potential outcomes and their
obligations to then disclose the lawsuit and the defects to
a potential buyer, the homeowner could make a fully
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informed decision on whether or not to join the lawsuit.
This bill would solve the problem by making sure a
homeowner is fully informed about the consequences of
entering a construction defect lawsuit. This addresses a
specific predatory practice of attorneys telling a
homeowner there is something wrong with their home to
engage them in a lawsuit. It does not impact a homeowner
who feels their home has a defect and their requests for
repairs have been ignored by their builder, and who
proactively seeks out an attorney.
Similar Prior Legislation Failed Passage In This Committee . The
last measure heard by the Legislature on this subject was AB 108
(Houston), put forward in 2005 by the California Building
Industry Association which similarly sought to regulate
communication between plaintiffs' attorneys and their clients or
prospective clients. AB 108 failed passage in this Committee.
That proposal was in some respects not as broad as the current
bill in that it applied only to attorney advertising, while this
bill covers any "solicitation" or "consultation" (discussed in
more detail below.) Like the current bill, AB 108 would have
required an advertisement by an attorney or law firm that urges
a person or entity to take an action that may lead to the filing
or a claim for residential construction deficiencies to make
certain prescribed "disclosures," including that the homeowner's
financial recovery may not justify the proceeding, that
litigating the defect may affect the value of the home or
prospects for financing or re-sale, and specifically that upon
sale of the property, the owner will be required to disclose:
(a) the litigation; (b) whether enough money was collected to
fully fund the repair of the defects; (c) whether the defects
were actually repaired.
Existing Law Enacted in 2002 With The Support of The Building
Industry Gives Builders Prior Notice And a Right To Repair Any
Alleged Defects Before A Lawsuit Can Be Filed. Residential
construction defects are subject to a special pre-litigation
procedure, enacted at the request of the building industry,
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giving builders prior notice of, and a right to fix, any alleged
defect before a homeowner can file suit. Under SB 800 of 2002,
a homeowner must send a written notice to the builder setting
out the nature of the claim. The builder may then elect to
conduct inspection and testing of the alleged defect within a
specified period, and must provide certain documentation to the
homeowner on request regarding building plans and
specifications. Most importantly, the builder may then offer to
repair the alleged violation within a prescribed period.
Existing Law Already Regulates Attorney Solicitations And
Representations Regarding Outcomes. The relationship between an
attorney and client is a fiduciary relationship of the very
highest character, and all dealings between an attorney and
client that are beneficial to the attorney will be closely
scrutinized with the utmost strictness for unfairness. (See,
e.g., Giovanazzi v. State Bar (1980) 28 Cal.3d 465, 472.) This
fundamental rule of universal application to all lawyers is
intended to cover a wide range of circumstances, including the
construction defect matters addressed by this bill. Lawyer
ethics rules also govern loyalty, competence, communication with
a client, and similar matters.
California law also specifically regulates all attorney
solicitation, and prohibits an advertisement by an attorney from
containing false, misleading, or deceptive statements or
omissions, and: (a) any guarantee or warranty regarding the
outcome of a legal matter as a result of representation by the
attorney; (b) statements or symbols stating that the attorney
can obtain immediate cash or quick settlements; (c)
impersonations, dramatizations, and spokespersons, unless there
is disclosure; (d) a statement that an attorney offers
representation on a contingent basis unless it also advises
whether a client will be held responsible for any costs advanced
when no recovery is obtained. (Business and Professions Code
sections 6157.1, 6157.2.)
Lawyer ethics rules however do not specifically prescribe
certain statements that a lawyer must make to a client, as this
bill proposes to do for the cases to which it applies.
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This Bill Would Single-Out One Type of Attorney-Client
Relationship For Special Treatment: Residential Construction
Defects. While all attorneys are subject to the same foregoing
obligations and prohibitions, this bill would create a special
rule for only one type of case, and on only one side of the
case. Only construction defect cases would be covered, and only
with respect to residential defects, not commercial
construction, and only as to the plaintiff's side of the case.
No other type of attorney and no other type of case is believed
to have a special disciplinary rule.
It May Not Be Clear When This Bill Applies With Respect To
Attorney Solicitations. The written notice required by the bill
is triggered when an attorney solicits or consults with a client
or potential client when that solicitation or consultation has
one enumerated purpose - "filing an action for defects in the
design or construction of an improvement to residential real
property."
Because the bill applies to solicitation of prospective clients
it appears to include any advertisement by an attorney.
Existing law defines "advertisement" to mean "any communication,
disseminated by television or radio, by any print medium
including, but not limited to, newspapers and billboards, or by
means of a mailing directed generally to members of the public
and not to a specific person, that solicits employment of legal
services provided by a member, and is directed to the general
public and is paid for by, or on the behalf of, an attorney."
(Bus. & Prof. Code section 6157.) It is not clear how the
notice required by the bill could be meaningfully made in
advertisements directed to the general public.
Constitutional Issues Raised by the Bill . The U.S. Supreme
Court has held that "Commercial speech that is not false or
deceptive and does not concern unlawful activities?may be
restricted only in the service of a substantial government
interest, and only through means that directly advance that
interest." (Zauderer v. Office of Disciplinary Counsel of
Supreme Court of Ohio, 471 U.S. 626, 638 (1985).) In the area
of attorney advertising, the Court recognized that "unjustified
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or unduly burdensome disclosure requirements might offend the
First Amendment by chilling protected commercial speech," and
held that disclosure requirements must be reasonably related to
the State's interest in preventing deception of consumers. (Id.
at 651.)
This Bill Appears To Regulate Not Only Clients Solicitations But
Also Consultations. As noted above, the bill applies not only
to solicitation but also to consultation. "Consultation" is not
a defined term in the bill or in existing law or rules, but is
generally understood to mean any oral or written communication
between a lawyer and a client for the purpose of obtaining legal
advice. The bill appears to be unique in this respect. While
attorney solicitation is regulated as an area of potential
concern, no existing law or rule is believed to regulate the
content of attorney-client consultations. Moreover, the bill
states that the required written notice must be given "at the
time of the ? consultation." Because consultations may occur
frequently in the course of the representation, it is not clear
whether the required written notice must be given on each
occasion.
The Need For Lien Statements Required By The Bill Is Not
Evident. The bill specifies that the required notice must state
that "any funds recovered from the action may first be used to
satisfy liens on the property." According to the author, the
reason for this requirement is that "most mortgages have a
clause that dictates that awards from construction defect
lawsuits would be forfeited to the lender. Homeowners either do
not realize this or ignore it and keep their awards. The lender
is unlikely to know about the defect lawsuit or the awards,
therefor does not pursue the borrower for that money. We would
like to make sure that homeowners are aware that any awards they
receive from a construction defect lawsuit are legally are
required to be forfeited to their bank if they have a mortgage
on their home."
The Committee has not been able to validate the existence or
frequency of such clauses. Nor is it clear that such clauses
would establish a lien against the property within the meaning
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of the bill. Notwithstanding the potential for such a clause,
it is not clear why a lender would be entitled to the proceeds
of a construction defect lawsuit, particularly if the funds are
used to correct the problem and to compensate the homeowner for
the disruption and other consequential damages.
As the Committee's recent inquiries into the ongoing foreclosure
crisis has revealed, most home mortgages are divided,
securitized and frequently transferred to a sequence of
investment pools, making it potentially impossible to know to
whom homeowners would have to turnover their award.
Written Notice Regarding The Specified Issues Would Apparently
Not Be Sufficient To Comply With The Bill. The bill specifies a
list of particular issues that must be covered by the written
notice. However, the bill states that this written notice must
include but is not limited to the specified statements. It
therefore appears that the notice obligation is not satisfied by
compliance with the specified statements. However, it is not
clear what more must be done.
Has The Factual Predicate For This Bill Been Shown? The author
reports that many homeowners in her district have joined class
action construction defect lawsuits without a full understanding
of consequences, and have later regretted being part of the
litigation.
The author provided information to the Committee in the form of
a spreadsheet, which according to the author, was "compiled by a
local Fresno attorney Ýthat] lists construction defect cases
filed in Fresno County within the last 10 years. There are a
total of 2,067 homes which have been involved in construction
defect cases. There are 71 different construction defect
actions which have been filed against 24 builders." No other
information has been provided to the Committee regarding these
cases, their underlying facts or outcomes, any representations
made by the attorneys, the impact of the cases on the resale
value of the homes affected, or any regrets felt by any of the
plaintiffs.
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The author provided that Committee with a complaint alleging
malpractice in one case in Sacramento last year. The complaint
appears to allege misconduct by the lawyers in the settlement of
the plaintiffs' action, but it does not appear to allege that
the plaintiffs were harmed by the failure of the construction
defect lawyers to make the statements required by this bill.
The author states that the bill is needed to correct the further
"predatory practice of attorneys telling a homeowner there is
something wrong with their home to engage them in a lawsuit."
According to the author, "Frequently the homeowner realizes that
there was nothing really wrong with the home in the first
place?." In addition, the author alleges that "Often, the money
they recover from the lawsuit is not enough to make the
repairs?." However, it is not clear how these problems would be
addressed by the bill because there are no provisions regarding
what attorneys can or must tell clients regarding the alleged
defects or the relationship between the defect and the potential
damages that might be recovered in a lawsuit.
Despite The Author's Worthy Concerns And Objectives, The Most
Important Disclosure Required By A Seller May Be The Fact Of A
Construction Defect, Rather Than The Fact That A Lawsuit Was
Filed To Correct The Defect. The author is commendably
concerned that homeowners be fully informed about the impact
that construction defect litigation can have on the resale value
of their homes. To that end the bill requires a description of
the responsibility of a seller of real property to disclose
facts materially affecting the value or desirability of the
property, which "shall explain the particular disclosures
required under Section 1102.6 of the Civil Code, including, but
not limited to, a seller's duty to disclose any lawsuits by or
against the seller threatening to or affecting the property."
It is true that Civil Code section 1102.6, establishing the real
estate transfer disclosure statement, requires disclosure of any
lawsuits by or against the seller threatening to or affecting
the property, including any lawsuits alleging a defect or
deficiency in the property. But it should be noted that there
is a more general obligation under this section to disclose any
known defects, regardless of any litigation. Failure to file
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suit does not relieve the seller of the obligation to disclose
the defect.
ARGUMENTS IN SUPPORT : The California Building Industry
Association supports the bill, stating:
Attorneys owe a fiduciary duty to their clients to put the
client's interests above their own. It is the obligation of
all attorneys to advise their clients not only of the
liability associated with failing to take action, but also
the relative liability of following their attorney's
advice. AB 20 would specify that an attorney must inform
their client that when the client attempts to sell the
home, the client must disclose to prospective purchasers
whether or not the home has been involved in litigation.
This protects subsequent purchasers by informing them of
facts that may materially affect the value of the home.
This information will put subsequent purchasers on notice
to enquire further regarding the nature of the defect and
whether or not it has been repaired. Prior litigation may
also preclude defect claims regarding the same alleged
defect because money has been paid to the seller even if
the seller didn't use the money to make repairs.
The language in AB 20 is taken from California Civil Code
section 1102.6 - California's Transfer Disclosure
Statement. In Calemine v. Samualson, 171 Cal. App. 4th 153
(2009), the Court held that the litigation disclosure is
not limited solely to litigation that is pending at the
time of sale, but also to litigation at any time during the
seller's ownership. AB 20 protects subsequent purchasers of
homes by including this broader disclosure policy. AB 20
also requires the attorney to advise his or her client that
any financial award may first be required to be used to
satisfy liens on the property. Oftentimes, a deed of trust
(a type of lien) requires the borrower to give any funds
received from the litigation to the lender and the lender
will decide whether the funds will be used to make repairs
or reduce the balance on the mortgage. That
notwithstanding, clients are often given the impression
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that, regardless of the merits of the case, they will
receive money which they can use however they wish.
Finally, AB 20 requires the attorney to notify a client
that there is no guarantee of a financial recovery. This is
a reasonable requirement and is something a consumer of
legal services should be told before embarking on a path of
litigation.
The California Chamber of Commerce and the Civil Justice
Association of California state that the bill "is a common sense
solution to the predatory practice of a minority of plaintiffs'
attorneys who prey on homeowners to build frivolous class action
suits against homebuilders. It increases transparency by
requiring that an attorney disclose material information to
homeowners about how involvement in a claim for construction
defects can affect the value of their home, so that they can
make an informed decision about the merits of participating in
such a lawsuit. Without the protections established by AB 20
(Halderman), many homeowners will continue to be lured by false
promises of large damage awards for nominal defects to their
homes. Importantly, this bill leaves homebuilders liable and
accountable for defects they cause, but by limiting shakedown
lawsuits against them, AB 20 (Halderman) protects them from
unnecessary and costly litigation that simultaneously harms
homeowner interests."
ARGUMENTS IN OPPOSITION : The Executive Council of Homeowners
(ECHO) representing community associations opposes the bill,
stating "ECHO finds this bill inappropriately holds attorneys
professionally accountable in the event certain information is
not provided, particularly to a 'potential' client. From a
consumer point of view, when, for example, a roof in a common
interest development is leaking because of faulty construction,
the proper party under long-standing consumer protection
theories should be required to make it right. There is a
builder 'fix it' law, mandatory mediation of defect claims and
process under CC 1375 et seq. These provide proper protections
and accountability and, if indeed, these are not adequate, those
laws should be amended rather than a collateral action against
attorneys."
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Consumer Attorneys of California opposes the bill for the
following reasons:
The onerous disclosures required by this bill are nothing
more than an attempt to dissuade litigation by unfairly
prejudicing consumers. Specifically, this bill requires
that an attorney inform her potential client, "Any funds
recovered from the action may first be used to satisfy
liens on the property." Additionally, AB 20 applies to an
area that is already regulated by the State Bar. For
example, AB 20 requires attorneys to disclose, "There is no
guarantee of financial recovery from the action." This
language is wholly redundant to Business and Professions
Code Section 6157.2(a), which currently prohibits an
attorney advertisement from containing or referring to "Any
guarantee or warranty regarding the outcome of a legal
matter as a result of representation by the member."
Do we require that insurance defense counsel state every
consequence of legal representation during the first client
contact? Do we require that every business lawyer inform
her client of the future implications of their legal
representation? The same requirements set forth in AB 20
could be imposed in any practice area, including personal
injury, medical malpractice, or business litigation. This
bill unfairly singles out construction defects cases,
apparently to make it more expensive and difficult to
pursue claims.
Construction defects cases are already subject to what can
only be described as a labyrinth of statutes. Consumers and
their attorneys are already required to navigate the
arduous Calderon process that sets up an elaborate
timetable for the real property defect claims procedure,
gives builders an absolute right to repair before the
homeowner can sue, and provides a legal bar to any action
that fails to comply with the extensive filing requirements
outlined within Civil Code section 895, et seq. AB 20 just
seems to be an attempt to interfere with the attorney
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client relationship.
We have grave doubts about the constitutionality of AB 20,
both as a restraint on speech and as a violation of equal
protection. We acknowledge that commercial speech which
serves individual and societal interests by assuring
informed and reliable decision making is entitled to First
Amendment protection. Virginia Pharmacy Board v. Virginia
Consumer Council, 425 U.S. 748 (1976). This type of effort
to single out one group of attorneys is of very dubious
legality because the courts have frowned on restrictions on
attorney advertising as long as the advertisement is not
deceptive or misleading. Bates v. State Bar of Arizona, 435
U.S. 350 (1977). Attorneys are already strictly governed in
their contracts and advertising by Business and Professions
Code Sections 6147 and 6157, et seq.
Prior Related Bills. AB 2803 (Parra) of 2006, AB 612 (Houston)
of 2006, AB 108 (Houston) of 2005, 2689 (Houston) of 2004, and
AB 752 (Briggs) of 2001 all sought to impose special disclosure
requirements on attorneys for plaintiffs in residential
construction defect litigation. Those bills either failed
passage or in many cases the authors chose not to present them.
AB 2371 (Bates) of 2004 would have placed a number of
substantial restrictions on contingent fee attorneys and
required them to disclose specified information, including how
disbursements and costs will affect the contingency fee and the
client's recovery. This bill failed passage in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Atmos Corporation
Bonadelle Constr.
California Building Industry Association
California Chamber of Commerce
California Senior Legislature
Civil Justice Association of California
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Granville Homes
Hodges Electric
Interwest Ins. Services, Inc.
Madera Glass and Mirror Co.
Richards Plumbing
Opposition
Consumer Attorneys of California
Executive Council of Homeowners
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334