Post Date: 10/3/2013



Real Estate and Construction Attorney

September 1, 2013

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The U.S. residential construction boom throughout the late 90s and the first decade of the 2000s  left more than miles of empty subdivisions in its wake when real estate imploded after 2005-2007.  It also left an immense store of broadly defective assets.

Right along with the headlong rise in easy-money-fed, price-is-no-object consumer demand for housing came a frenzied builder scramble to scoop up all the foolish dollars blowing around.   Builders caught the green gusher with as deep of inventory tub as pre-purchase orders could finance.  It was "every inch of sail to the production wind" to catch the blizzard of buyer bucks.

Production chaos ensued.  Any Yahoo with a hammer and a pulse was put on the payroll.  Every inch of dirt—including expansive clays, collapsible sands and flood zones--was blindly wetted, back-hoed and built on before the ink was dry on the permits.  Bank and construction Regulators went deaf, dumb and blind to the rules-be-damned transgressions of the Big Five Builders as their backroom lobbyists kept their political cups full of drippings from the spoils.

It was a ten-year marketplace in which it seemed that the only financial option for a buyer or builder was to be either "the quick or the dead."   Little did either anticipate that the greed and the rule-bending would ultimately make them both.

By 2007, the builders' and banks' knuckle-busting clamor to get land and sticks jammed together to equal the bombastic buying pace had stretched consumer credit beyond its seams, ran far past the underlying economic fundamentals for any likely end-user who might inherit the glut and consequently, when the funding and spending binge suddenly awakened to that conclusion and ran dry in approximately December of 2007, it was Armageddon justly thereafter.

The rest of the U.S. Real Estate Story to just a year or so ago has been the agony of surviving the Big Bust.  What has kept much of the attention of the marketplace up to now has been applying triage to the financial hemorrhaging.   Real estate values and huge mortgage tranches have been in decimation—to the point of threatening even sovereign-level stability.

Then, after a decade of federal aid, guarantees and supports to the economy and especially mortgage bail-outs totaling about $13 trillion or so, a so-so market has recently come around. It is one in which in the more robust parts of the country have actually experienced listing shortages. The early solutions have run their course. Fix-and-flips—usually occupying the bottom third of the marketplace--have wound down in number due to the last buying frenzy or have become too expensive from over-bidding to pencil out. Upper middle homes—the ones which used to dominate listings--and jumbos still have more mortgage than value so they are effectively "off the main market" (though they would be on it in a heartbeat if they could get the appraisals they need to sell above the existing mortgage—but don't hold your breath on those with the touch new QRM rules and higher interest rates in the immediate future). And the remodels, investment rentals and flips of yesteryear are coming into their second and third post-fix/post-flip owners at compounded resale prices that have topped them out. See this Author's August, 2013 article on what to expect of those as of January 1, 2014 in the Article Archives free at

The inventory shortages have awakened the builders form their dormancy and they have now started to toss up new homes sized, located and priced in that lower market third where all of the combined demand from market-entry, move-down or low income buyers and most investors lurks and where low-end financing tops out.

How the market is going to handle these after January 1, 2014 when the lower resale buying power (and higher interest rates) go into effect is anyone's guess, but the brightest feel is will depress sale and resale values at the lowest third and bring even more quiet to the jumbo and super jumbo properties where the middle class and above is to be found.


There is, though, a second depressor in the marketplace. It is the latent construction defects lying wait in all those "midnight fix, remodels and build-outs" the Regulators let flood past—those miscreants of technical myopia hammered together by talentless and long-gone transients who were formerly employed by bankrupt (or soon to be) investors, agents, flippers, and labor-desperate contractors—that will provide the next wave of investment loss as the foundations of what they built start to crack and the paint starts to peel. 

Real estate assets that are currently being orphaned by finance will also be parentless left once again by those who built them under the second-rate construction regulation and standards of the Flip-Boom.  More than a large segment of those few builders who had licenses went broke (or would go if pushed much for upcoming warranty liabilities).  More of those properties will simply miss the statute of limitations on which to file the warranty claims by the time they land in the hands of the final end-owner—someone who can focus less on historic market fluctuations and once again more on latent, intrinsic asset condition and maintenance or rehab costs.  That "short sale" or "REO bargain" property of yesterday is becoming today's economic fiasco at any price when the ill-engineered frame finally starts to twist or the roof starts to sag or the coating-over to hide the slab cracks has started to peel off and reveal a chasm yawning down to the center of the earth.

Who is going to back up billions of dollars of construction defect fix-and-flip, or remodel damages covered by millions of non-licensed or half-skilled workman with two cents to their names? Or even the construction warranties owed by the few licensed contractors, architects and engineers who did this low-budget work with warranty disclaimers that could bar damages collection even from successive buyers in some cases-and then left no forwarding address?  This question has and will become more pressing when the 5 to 7 year-old homes start to disintegrate, neighborhoods of once immaculately-kept facades show blocks of fading, bulging and cracking exteriors, tenants replace owners at the same rate as the erosion of shabbiness, social services proportionately increase and long-term tax bases are lost.

This "second tsunami" will negatively impact everyone from owner-occupiers to tenants to investors and, finally, the socioeconomic base of larger community. 

So….if the owners have no contractors to sue for these collapses and calamities, who is left? That's right: The real estate agents who put those deals together will be sued.


With construction defects unheeded as a risk throughout the Fix-and-Flip Era and the coming "Hurry-Up-to-Build-Something-With-Doors" period poised for the bottom third of the market, the liability for the Frankenstein Properties will likely be inherited for the most part by the professional real estate community, the very group that tried hardest to save the marketplace.  Why?  Because the real estate professional has in most cases assisted in selling, buying, promoting, evaluating or managing the defective property and in those jurisdictions where the builder's warranty periods and risks have either run out or have been disclaimed by them into oblivion, the real estate licensees typically have not and, under licensure law, usually cannot.  It's a case of suing who is left.

What this tells the real estate licensee, financial advisor, portfolio manager, property manager any other professional related in the past or now to the selling, purchasing, building, repairing, remodeling, holding, inspecting and maintaining improved real property and certainly what it tells owners is that conducting due diligence for construction defects and to insist on licensed work and long warranty period and to determine accurately the pendency of warranty periods is at most an ongoing duty and at least the central component of accurately assessing value and giving sound advice.



How can this risk and duty be coped with by those real estate and management professionals in the post-fix up, post-builder loop who bear the risk right along with the Flippers, contractors and builders and sometimes more risk for a failure to find the buried investment and construction defects than the others? 

First, the professionals can realize that even in the over-selling present market, a detailed, highly-competent, pre-closing inspection, whether in a conventional sale, short-sale, foreclosure or REO and especially for those "great buys" (that are sometimes "great" for a tragic reason) are STILL important.  Liberal inspections are surely important in commercial properties, where warranties tend to be few and short and so vigorous inspections are the only real professional protection; but this due diligence has to be assumed as equally important in residential properties where the warranties tend to be longer, wider and more "generous", if preserved properly.  The asset evaluation should not miss a defect issue or reject a property for what could be a fully compensable or low-repair-cost shortfall.  Due diligence focuses like this are not just to ferret out the "DOA" properties that one may want to avoid handling at all, but to know the actual status of even impaired but readily-repairable properties in order to use the issues to make better bargains. Of course, for management purposes, it also pays to know about and have the ability if elected to press significant construction defect claims and make warranty corrections or recoveries while they are still actionable in properties already had.  In most cases, no transfers whether by re-sales, short sales or foreclosure, can terminate the builders' warranty or duty of care responsibilities and claims may not only be direct, but also might include access to the insurance, bonds and state recovery funds even for contractors long out of business.   For residential properties, the legal rights to take action for losses usually runs with the property, irrespectively of how obtained, though in some states it is a warranty or contract claim and in others it is a negligence or tort claim and in some it is a statutory creature that is often a bit of both.  Indeed, for the sharks, the unappreciated construction defect claim that is large and still valid may even be one of the best "hidden bonuses" in a potential purchase of a property.

Second, it would surely make sense in every deal to check into when the property was built and by what builder (or when fixed or remodeled, as repaired properties and remodels are also warranted or expose the contractor to some form of defect liability) to determine whether there are defect or claims coverages in the event a construction issue is found or ever arises.  One does not even have to locate a written warranty from the builder—in most states, the mandatory warranty or professional tort responsibility is spelled out by law.  Access to state statutes or state appellate case precedents are usually enough to know what one is looking for.  A continuing, valid warranty with a solvent builder still in business is a competitive property "PLUS" in any sale or purchase—even a short-sale or a foreclosure—that ought to be known and certainly ought to be given asset value by the professionals.  Most of the time, regrettably, real estate professionals neglect to research that significant factor and often fail to appreciate the value-added reality of valid, existing warranties.

Third, after discovery of the construction, fix, or remodeling issues by inspection and determining by due diligence that the contractor or builder is "still alive", one obviously needs to know what is covered, what the warranty or negligence action period is and after determining that the period is not over, one should ask how does one actually make any eligible claim to stop the statute of limitations? The following is a thumbnail answer for those questions.  It covers rules of thumb for two state methods, with anecdotes taken as examples from Arizona and California, two of the five states with the highest historic rate or number of construction defect claims.  The laws and procedures noted do not always include all states so one must consult the local laws and cases for local applicability.

Fourth, and probably needless to add, one has to have an experienced attorney facilitate (or defend) these claims. This area of law is not your average area of law practice. Frankly, the best lawyers it did something other than get checks from their Family Trust and go to Harvard in between surfing and skiing lessons. They usually worked in the construction or engineering trades long before they got to law school and usually even during it to pay for tuitions. Said another way:

There is no lawyer more competent in this area of practice than one who ate a lot of dirt and sawdust in the construction industry long before they got to Court as a construction lawyer.


Obviously, anyone in the real estate business or supportive services, and certainly builders, remodelers, fix-and-flippers, tradesmen, inspection and service vendors and naturally the real estate licensees (who have exposures here) need to know what constitutes "defects" and what the duties and rights are in these liability areas.  In the remainder of these analyses, defects are indentified, rights regarding them are discussed and remedies for them—the steps that need to be taken to preserve any rights for correction or recovery—are explained.

Essentially, all states allow two directions with construction defects claims.  One is administrative in which one can complain to the construction regulators, such as the state Registrar of Contractors of Licensing Boards (general contractors and subtrades), Boards of Technical Registration (architects, engineers) and the like and one can utilize non-regulatory administrative processes for a solution.  The other is pure litigation--i.e. the use of a court or separate private arbitration organization—a more formal solution. 

It is also important to note that there are two types of claim properties—one is a residential property where state law usually has a number of required ("implied") consumer protection laws and warranties which usually as matters of building code and licensure law which cannot be disclaimed by the builder and the other is a commercial property with shorter complaint times, fewer mandatory warranties and where the builder can often disclaim warranties that are not for matters otherwise required by state law for health and safety.


If complaints are made administrative/regulatory, these are usually heard after complaint first in an informal site examination by a regulatory inspector, who makes a subsequent report on which the regulator makes a finding of whether the property has shortfalls or not.  If the disputants do not agree to the findings, the complaint usually gets a formal hearing through administrative law procedures with an administrative law judge.  Invasive site testing by the regulatory inspector does not take place.  If any is done, it needs to be done by the complainant and open for the inspector when he or she gets there.  Rarely does the process award damages and it never awards attorney's fees and costs to the prevailing party.  It can but rarely does order "restitution" (i.e. giving back money paid).  The regulator or judge usually simply orders the builder to make workmanship like repairs at the builder's own cost.  Regulatory complaints must usually be filed within a short period of time after the structure or work was substantially completed.  Two years is the average regulatory time and if the complaint arises after that, the regulator rarely has any further immediate regulatory jurisdiction over the builder.  In addition, notice of an intent to claim against a bond or a state recovery fund must be given in writing to the regulator within the same period as the complaint—even if one is going to sue in a court instead of handle the matter regulatorily and even if the ultimate judgment comes long after the end of the regulatory period.  If the notice of intent to claim against the bond or recovery fund is given in a timely manner, the recovery can be years after the notice.  The time to bring regulatory complaints is usually short.  In California for example, it is generally 4 years after COO and in Arizona it is 2 years after the COO. Do remember that the COO can come BEFORE CLOSING, which means that it can start running even before the home is purchased.


The other option, litigation, can be by filing a suit in a court of law or by a notice of arbitration where the sale or construction contract calls for one and where mandatory arbitration is enforced—many states like California will first test to see that a builder's arbitration clause is not onerous to the residential consumer in one way or another before it enforces mandatory arbitration.  If it finds it onerous—that is denying fairness either substantively or procedurally, it may void the arbitration clause in whole or part and allow the consumer who wishes to go to court and have access to a jury to do so.  Most states, however, tend to enforce these under various readings of the Federal Arbitration Act. In states like Arizona, the swing lately has been the other way. Construction lobbyists control the legislature and regulators more there than the more consumer-friendly California systems, with the result that recently consumer protections that mostly mimicked California's have been eroded.


Here are the residential warranties for Arizona and California, which are being used as examples for this analysis. It must be remembered that these cannot be disclaimed by the builder. They are required by law.



(1)  GENERALLY:   There are three types of claims in Arizona for a construction defect. 

    A.  BREACH OF CONTRACT:  One claim is in express or implied contract.  In "express" contract the breach would be failure to build according to an expressly-stated standard or term and in "implied" contract the breach is the failure to do a workmanship like job and to provide a habitable structure, a duty that is implied in the job a professional has the duty to do, whether or not written into a contract.  Kubby v. Crescent Steel, 105 Ariz. 459, 466 P.2d 753 (1970), (habitability) Nastri v. Wood Brothers Homes, Inc. 142 Ariz. 439, 690 P.2d 158 (1984).  The warranty cannot be disclaimed by the builder in writing or otherwise, Hembree v. Broadway Realty & Trust Co., 151 Ariz. 418, 729 P.2d 288 (1986) and applies even if the builder was not building the house originally for resale, such as a model or for himself, Dilling v. Fisher, 142 Ariz. 47, 688 P.2d 693 (1984), as the purpose of the warranty is strictly to protect ALL home purchasers directly from the builder or contractor by holding home builders accountable for their work, Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 678 P.2d 427 (1984).  Upon until the last few years, even a disclaimer against the very item that is defective contained in the original builder's agreement with the first buyer will not affect a successor buyer's rights against the builder in warranty, Nastri.  See The Lofts at Fillmore v. Reliance Comm'l Const.  CV-07-0416-PR (Ariz. S. Ct., 2008). However, in the Arizona Supreme Court, in the case of Sullivan v. Pulte Home Corp, CV-12-0419-PR (July 31, 2013), this implied or express contract warranty to successive buyers has been eroded or clouded (see Sullivan analyses, below).

It appears that in commercial properties, contract-based construction warranties may need to be expressly assigned between subsequent owners after the original new-build, though professional negligence claims would not.  Most well-written commercial agreements do assign such rights. With the Sullivan case, id., it may also make sense to expressly assign the original buyer's or contractor's contract warranties in residential contracts, as well. The licensee who fails to get these express assignments is begging for a malpractice claims and most Arizona standard form sale agreements have no such clause, so they must be expressly written in.

    B.  PROFESSIONAL NEGLIGENCE:  Another claim is in professional negligence, i.e. a breach of the professional duty to build the property habitably and in a workmanship like manner.   Non-contract claims like this are called "torts" in law parlance.   The builder can be sued for personal injury or damage to some property interest other than the structure under a negligence claim.  The builder can also be sued for other torts such as fraud and other statutory claims such as consumer fraud, but absent a showing of some kind of egregious conduct above and beyond bad workmanship, these claims are not favored. Under the Sullivan case, successive buyers/owners (those coming after the first buyer or owner who directly contracted with the contractor/builder) who do not or cannot avail themselves of the statutory claims of ARS 12-1361 will only be able to sue for construction defects in a tort-like or negligence theory (with the implied warranties being not contract rights capable of a contract action but rather standards of professional care in a tort claim). If the original buyer's contract warranty is, however, specifically assigned from successive buyer to buyer—a measure as yet untested since the Sullivan case (below), but one always worth writing into the resale agreement—a contract warranty claim "might" still survive for subsequent buyers. This is important because only contract warranty claims will allow the claimants' attorneys fees if they prevail. Tort actions produce no attorney's fees awards to the prevailing party.

    C.  STATUTORY CLAIMS: The third method is to make a statutory claim under A.R.S. § 12-1361, et. seq., elaborated, below.  For residential claims, A.R.S. § 12-1361 is now likely the only claim that needs to be made, as it appears that the statute intended to supersede the common law of pure contract and pure negligence claims.  Moreover, it grants certain types of relief to the consumer claimant in residential properties that was unavailable or unclear in the former claims types, such as attorney's fees and litigation forensic and expert witness costs that were not clearly recoverable before.  The generosity of the relief has a price though, and that is in the tougher pre-litigation steps a claimant has to take to qualify for the remedy, as noted, below. It is unclear how the Sullivan case (below) may impact this statute as to successive resale buyers. It is doubtful that the Arizona Appellate Courts can change a statute that sought to create a purely statutory (and not common law) claim, but this will need to play out for a few years in Arizona to clarify the "friction points." It may just be that as to timely claims filed under ARS 12-1361, the Sullivan case—involving a claim beyond the time limits of ARS 12-1361—will have no ultimate bearing at all.

Contrary to local myth, there is no "Registrar's Warranty" of 2 years.  That is a corrupted description of the Arizona Registrar of Contractor's 2-year jurisdiction over builders for making Regulatory or administrative claims for poor workmanship, see above.  The Registrar does not warrant the property or require a builder to issue a warranty.  These claims must be made through the Registrar as noted above, and do not in most produce any monitory remedies—only a corrective repair.

The Nastri court and others since, including the recent Sullivan case also held that there is only a contract claim and not a negligence claim when there is damage to the structure, only, with Nastri and Sullivan clarifying that only the first buyer from the builder or contractor has a contract warranty claim (later buyers on resales have ARS 12-1361 or non-contract implied warranty or negligence claims).  These damages relate to the bargain between the parties.  A tort claim such as negligence will arise for the original buyer only when there is damage to separate personal property or a personal injury or some other injury caused by the defect other than to the property, itself.  Nastri, 690 P.2d at 444-5.  See also Menendez v. Paddock Pool Const. Co., 172 Ariz. 258, 836 P.2d 968 (App. 1991); Colberg v. Rellinger, 160 Ariz. 42, 770 P.2d 346 (App. 1988) and accord in Sullivan.  "For example, if a fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural defects and sue in tort for damage to personal property or personal injury caused by the collapse."  Woodward v. Chirco Const. Co., Inc., 141 Ariz. 514, 687 P.2d 1269, 1271.  This is called the "separate economic loss" doctrine, observed in Arizona and upon which there has been much recent litigation in commercial settings, with the most dispositive case being Flagstaff Affordable Housing LP v. Design Alliance, Inc., Ariz S. Ct. CV-09-0117-PR (Feb., 2010) and now Sullivan (see below).


Under the economic loss doctrine in Arizona, as noted above, the first buyer of a residential property from a builder or contractor is precluded from bringing a claim of negligence for any defective construction. It is a warranty claim, only. Also, under the Flagstaff Affordable case, above, the owner is limited to the agreed upon contractual remedies provided for in the contract. Most Arizona builders attempt to preclude many of the losses that would be actionable in other states and were once actionable in Arizona, such as stigmatization losses or other tort damages or consequential damages from a defect.

In Sullivan v. Pulte Home Corp, CV-12-0419-PR (Az.Sup.Ct.,July 31, 2013), held that a subsequent home purchaser (not the original purchaser from the home builder) was not barred from bringing a tort claim for negligence against the homebuilder for a defect discovered even though more than nine years had elapsed since the house was sold to the original owner of the home. Under the Pulte contract the original purchaser would have been barred from bringing such a claim against Pulte. The next and subsequent owners, the court held, could have a claim for breach of an implied warranty (a type of contract action) but such a claim would lapse after eight or nine years (depending on when the defect was discovered) under A.R.S. § 12-552, but the subsequent homeowner also have the right to bring a claim against the contractor for negligent construction for two years after the homeowner discovered the defect even if it was more than eight or nine years after the initial sale of the property.

The problem for the homeowner suing in implied warranty or negligence is that the homeowner is not entitled to recovery of attorney fees, meaning that the homeowner "eats" all of what could be substantial fees in bringing the successful claim. If the damages recovered were the costs to repair, then the homeowner still ends up "net" far short of a full repair and recovery.

The court, also going on to create new Arizona law on the subject of the economic loss doctrine held that the economic loss doctrine did not apply to subsequent purchasers. Under the economic loss doctrine in Arizona a claim for money damages, including any decreased value of the property or repair costs for the property itself, is the subject of a contract between the owner and the builder or contractor and consequential damages such as lost profits are not recoverable. The initial owner who contracts with the contractor is subject to the economic loss doctrine limitations and is limited to the remedies provided for in their contract. But subsequent purchasers are not limited by this doctrine. This modifies Flagstaff Affordable to that extent.

Obviously, real estate licensees are going to need to know the difference, create any assignments that are necessary to conserve rights in the deal and be able to articulate and disclose to their clients the differences these rules make in their investment.


Residential claims by consumers against Arizona builders are governed now by A.R.S. § 12-1361 and that is the statute most often used—bypassing a lot of the other claims avenues discussed here which each have their own problems.  That statute provides a "notice and preliminary right to repair" process that is required before a claim against a builder may be filed.  It provides that a "purchaser" may maintain a "dwelling action" against a "seller" for damages, expert costs and attorney's fees as set forth in the statute unless otherwise agreed by contract between the parties.  The claim is available for successor buyers of the defective property who had no connection with the original builder.  A.R.S. § 12-1361(6).  A builder "seller" is any person, firm, partnership, corporation, association or other organization that is engaged in the business of designing, constructing or selling dwellings (obviously including subs and obviously including fix-and-flips and remodels).  A.R.S. § 12-1361(7).  Note that a "seller" could, however, be a real estate licensee in the initial sale between a builder and a purchaser, though does not include a real estate broker or real estate salesperson that provides services in connection with a later resale of a dwelling following its initial sale. That makes it clear that a real estate licensee in the initial sale could be held accountable for construction defect damages under this statute.  A.R.S. § 12-1363 mandates that at least 90 days before filing an action, the purchaser must give written notice by certified return receipt mail specifying in reasonable detail the basis of the "dwelling action."  A.R.S. § 12-1263(A).  If this is not done, the court may stay or dismiss the action for 90 days to allow compliance.  A.R.S. § 12-1362.  After receipt of the notice, the seller may inspect to determine the nature and cause of the alleged defects and the repairs needed to remedy them.  The purchaser is required to make the dwelling available no later than 10 days after the notice was received.  A.R.S. § 12-1362(C).  Within 60 days after receipt, the seller must send (certified return receipt) a good faith written response.  This response may include an offer to repair, to have the defects repaired, or monetary compensation.  There is no mention or provision for rescission.  The offered repairs must be described in reasonable detail.  A.R.S. § 12-1362(D).  If not provided within 60 days of the purchaser's notice, the purchaser may file an action without waiting for the 90 days to expire.  The purchaser, after receiving the seller's offer has 20 days to provide a good faith written certified return receipt response.  If the offer is rejected, the purchaser must include a basis for the rejection.  A counteroffer may be included.  Within 10 days, the seller may make a "best and final offer."  A.R.S. § 12-1362(F). If there is a judgment more favorable than the offer made or received in the procedures above, the party will be deemed the successful party from the date of the offer or best and final offer.  In that event, the court SHALL award reasonable attorneys' fees, expert costs and taxable costs from the date of the offer.

A.R.S. § 12-1361 EXCLUDES SOME TYPES OF CASES:  The A.R.S. § 12-1361 claim is NOT applicable in some situations, one of which is where the claims relate solely to seeking recovery of monies expended for repairs to alleged defects that have been repaired by the purchaser.  This is where, for instance, the homeowner elects to make the repairs himself with his own contractor and then sue the original builder for the costs.  It also appears that the law may not apply to an action for rescission of the contract, as it is not a claim to enforce it.


The first statute of limitations is if the claim is in contract and it is six years pursuant to A.R.S. § 12-548, but subject to discovery and the ultimate repose statutes, below.

The second, for a construction claim in tort, is governed by A.R.S. § 12-542, is a two year statute, subject, of course, to the "discovery rule" noted, below. Other torts like fraud or statutory claims like consumer fraud go by their own statutes of limitations. See Sullivan, above.

The third is A.R.S. § 12-552, which is not really a "statute of limitations" as much as a "statute of ultimate repose" (meaning a time by which in any event all claims, known or not, are over) provides a limitation of eight years after substantial completion of improvement to real property. However, if the injury occurs in the eighth year (or was not discovered until then), an action may be brought within one year after the date of the injury or discovery of the latent defect. The cases above seem to extend that to be from the time the cause of action accrued by the failure of the component, though this is still not entirely clear in Arizona.


In most cases, the claim time starts ticking from the date of "discovery."  Arizona has long followed the "discovery rule."  See, i.e., Matusik v. Dorn, 157 Ariz. 249, 756 P.2d 346 (App. 1988).  Under the discovery rule, "cause of action does not accrue until the plaintiff discovers, or by the exercise of reasonable diligence should have discovered, that he or she had been injured by the defendant's negligent conduct."  Matusik, 756 P.2d at 347, 157 Ariz. at 250; Gust Rosenfeld & Henderson v. Prudential Ins. Co. of America, 182 Ariz. 586, 898 P.2d 964 (1995); Logerquist v. Danforth, 188 Ariz. 16, 932 P.2d 281 (App. 1996). The court in Matusik extended the discovery rule to tortuous injuries to property.  Furthermore, the Matusik court held that contract claims arising out of deficient design or construction were subject to the discovery rule and do no accrue until the plaintiff knows or should know (with reasonable diligence) of the injury.  Matusik, 756 P.2d at 349, 157 Ariz. at 251.  "Thus, there is an underlying notion that plaintiffs should not suffer where circumstances prevent them from knowing they have been harmed.  And often this is accompanied by the corollary notion that defendants should not be allowed to knowingly profit from their injuree's ignorance."  Gust Rosenfeld, 182 Ariz. at 589, 898 P.2d at 967.  Ultimately the court found that "the important inquiry . . . is whether the plaintiff's injury is difficult for the plaintiff to detect, not whether the action sounds in contract or tort.  Gust Rosenfeld, 182 Ariz. at 590, 898 P.2d at 968. See approval in Sullivan, above.



GENERALLY:  California law is much like Arizona because Arizona copied some of it.  The claims for construction defects in California are usually (all or one):  Strict Liability, negligence, breach of implied warranties, breach of express warranties, other non-construction commercial torts and statutory claims as also noted above for Arizona, are also actionable in California outside of the statutory SB 800 process noted, below.  And, of course, there can also be administrative claims through the builder's licensure authority, the California Contractors State License Board.  It has jurisdiction over all contractors, licensed or unlicensed, for 4 years after substantial completion of the defective work.

    STRICT LIABILITY CLAIM:  The claim of strict liability only lies for residential property.  There is a requirement that there be resultant damage as a result of the construction defect for strict liability claims.  Resultant damage is where one building component causes damage to another.  For example, if a roof leaks when it rains, then recovery against the builder under strict liability requires that the leaking water causes adjacent damage, such as degrading adjacent walls.  The recovery sought is the repair of the construction defect and the repair of the additional damage caused by the construction defect.

    BREACH OF CONTRACT CLAIM:  The owner is entitled by law to a building free of defects.  Again, this is much like the Arizona law in that it is divided into "express" and "implied" contract warranties, that is to say, between a warranty that is written into an agreement and the general ones of good workmanship and habitability  that are implied into all professional construction, whether or not written.  In implied contract, the proof of a defect due to improper construction, design, or preparation is sufficient to establish liability of the builder or developer.

    NEGLIGENCE CLAIMS:  Negligence is the breach of a duty that results in or causes damage.  The duty of the builder and/or subcontractor who constructed a building is to exercise the standard of care of reasonable tradesmen conducting the same type of work.  If a breach of this standard of care occurs, resulting in a construction defect which causes damage, the property owner may file a lawsuit against the builder and any responsible subcontractors that worked on the property during the original construction.  This cause of action can be available to the property owner whether the property owner directly purchased the property from the builder or a third party.

    STATUTORY CLIAMS:   Residential claims were overhauled by Senate Bill 800 (SB 800), which establishes building standards that, if violated, may allow a homeowner to file a claim against the builder. The building standards of SB 800 are applicable to new residential construction when the original purchase agreement for residential property was signed by the seller on or after January 1, 2003.  Like A.R.S. § 12-1361 for Arizona, above, SB 800 contains pre-litigation requirements for construction defect claims, such as the consumer's duty to generate a punch list of issues and serving them on the builder prior to filing any claims and a builder's right to inspect for them and rebut or propose a remedy to settle them.  However, builders are allowed to opt out of the SB 800 pre-litigation procedures.  At the time the purchase and sale agreement is signed, the builder must choose whether to utilize the pre-litigation procedures or opt out of the pre-litigation procedures.  Under SB 800, if the builder's contract writes in the pre-litigation procedures of SB 800 (or if the builder failed to make an election to opt out) then the homeowner is required to give the pre-litigation punch list notice of the violations of the building standards, and then the builder has the opportunity to inspect the home and respond.  If the builder fails to make an offer to repair, fails in the repair, or fails any of the obligations that the builder has during the SB 800 pre-litigation process, only then does the homeowner have the right to file a lawsuit.  The lawsuit may claim damages, attorney's fees, forensic and expert costs. SB 800 is overlaid with a construction defect process before January 1, 2003 referred to as the "Calderon" rule which is included by mention, below, but does not need to be elaborated upon in this analysis.


The statutory process of making a claim for those inside SB 800 is much as noted above for Arizona:  Before any litigation is filed, a written punch list of issues must be developed by the owner and be served on the builder and the builder gets a review, rebuttal and proposal right.

From SB 800:  "The claimant or his or her legal representative shall provide written notice via certified mail, overnight mail, or personal delivery to the builder . . . of the claimant's claim that the construction of his or her residence violates any of the standards."  Within 30 days of a written request by a homeowner or his or her legal representative, the builder must provide copies of all relevant plans, specifications, mass or rough grading plans, final soils reports, Department of Real Estate public reports, and available engineering calculations, that pertain to a homeowner's residence specifically or as part of a larger development tract. Furthermore, the builder shall provide to the homeowner or his or her legal representative copies of all manufactured products maintenance, preventive maintenance, and limited warranty information." 

Within fourteen days of receiving the claim the builder must complete the initial inspection.  A second inspection may be made if notice of that inspection is given within three days of the initial inspection.  If a builder intends to hold a subcontractor, design professional, individual product manufacturer, or material supplier, including an insurance carrier, warranty company, or service company, responsible for its contribution to the unmet standard, the builder shall provide notice to that person or entity sufficiently in advance to allow them to attend the initial, or if requested, second inspection of any alleged unmet standard and to participate in the repair process.  The second inspection must be completed within forty days. The cost of the investigation is borne by the builder.

The builder is also obligated to notify all responsible parties of the time inspection so that they may attend the inspections.  Within thirty days of the completion of the inspection the builder must make an offer to repair all applicable damages.  "Any such offer shall be accompanied by a detailed, specific, step-by-step statement identifying the particular violation that is being repaired, explaining the nature, scope, and location of the repair, and setting a reasonable completion date for the repair.  The offer shall also include the names, addresses, telephone numbers, and license numbers of the contractors whom the builder intends to have perform the repair.  Those contractors shall be fully insured for, and shall be responsible for, all damages or injuries that they may cause to occur during the repair, and evidence of that insurance shall be provided to the homeowner upon request.  The offer shall also advise the homeowner in writing of his or her right to request up to three additional contractors from which to select to do the repair . . . " "Upon receipt of the offer to repair, the homeowner shall have 30 days to authorize the builder to proceed with the repair. Within 20 days after that presentation, the homeowner shall authorize the builder or one of the alternative contractors to perform the repair."

"The offer to repair shall also be accompanied by an offer to mediate the dispute if the homeowner so chooses.  The mediation shall be limited to a four-hour mediation, except as otherwise mutually agreed before a nonaffiliated mediator selected and paid for by the builder. At the homeowner's sole option, the homeowner may agree to split the cost of the mediator, and if he or she does so, the mediator shall be selected jointly.  The mediator shall have sufficient availability such that the mediation occurs within 15 days after the request to mediate is received and occurs at a mutually convenient location within the county where the action is pending.  If a builder has made an offer to repair a violation, and the mediation has failed to resolve the dispute, the homeowner shall allow the repair to be performed either by the builder, its contractor, or the selected contractor."  At any time during the dispute resolution process a builder may offer to pay cash rather than make the repairs.

The builder often blames the issues on poor maintenance by owners and that can be a better defense in California than in Arizona.  "A homeowner is obligated to follow all reasonable maintenance obligations and schedules communicated in writing to the homeowner by the builder and product manufacturers, as well as commonly accepted maintenance practices.  A failure by a homeowner to follow these obligations, schedules, and practices may subject the homeowner to the affirmative defenses . . ."  SB 800.   Often, the builder has not communicated any such obligations or schedules and then the homeowner needs to argue that whatever maintenance he did was "correct and reasonable."  The "homeowner's maintenance duty" does not include paying for the cost of correcting the builders defects which caused the need for repairs, service or maintenance.


In California, the time period to bring a construction defect action against the builder is based on (1) the time period after the substantial completion of the property, (2) the nature of the defect, and (3) when the defect was discovered by the property owner.   
Like Arizona, California statutes of limitation are also divided into two categories:  those imposing time limits on actions which are triggered by the discovery of damage or the occurrence of some event that leads to damage; and those that impose outside limits on the right to sue regardless of when the damage occurs or is discovered—the "ultimate repose" statutes.  For negligent claims or breach of contract claims, no action may be brought later than the dates established by various statutes of repose.

For sales prior to January 1, 2003, CCP 337.15 applied, which applied a limitation period of ten years starting with the earliest of four different definitions of the "substantial completion" of a project.  In January 1, 2003, SB 800, provided shorter statutes of repose for actions for damage to certain specific components of a building.  Therefore, the first task in all cases is to determine which statute applies, and thereafter, how its provisions govern the right to bring an action against the builder.  CCP 337.15, CC P 895(e), CCP Section 941.

JANUARY 1, 2003:

If the project was sold before January 1, 2003, it is not subject to the provisions of SB 800, so all civil litigation-type claims can be brought as late as ten years after the defective act or omission as long as the claims are filed within three years of the time of discovery of the problem.

JANUARY 1, 2003:

For properties first sold after January 1, 2003, SB 800 applies, so the time to file actions to recover for defects is governed by the type of defect, which can be one year for cosmetic matters and up to ten years for foundation and structural issues. That is to say, for example, if a claim for a cosmetic defect is to be made, the claimant has 3 years from discovery to file it but an ultimate repose of 4 years to file, assuming it was discovered on the last day of the one year warranty period. If it was a foundation defect, which has a 10-year implied warranty, then one would be required to file it within three years of discovery, but not later than 3 years after the end of the 10-year implied warranty.


Also, as in Arizona, California has "Discovery" Statutes. Actions times run from the date of discovery. Claims in strict liability, negligence, implied warranty, express warranty, negligent misrepresentation and intentional acts such as fraud have their own statutes of limitation and for properties sold before January 1, 2003, those would be very relevant. CCP 337 governs actions for damage arising from the breach of a written contract which must be brought within four years from the date of the breach. CCP 339 governs actions for breach of an oral contract which must be brought within two years from the date of breach. For those sold after January, 2003, though, SB 800 provides only for a single, statutory cause of action for each type of component in the event that a component does not meet the standards set forth in that code. Claims there would be governed by CCP 338 which provides that actions must be taken within three years from date of the claimant's "discovery" of the facts supporting the claim. If these shorter limitation periods apply, regardless of what the "outside" time limit may be in a particular case, an action brought by a community association (or any other plaintiff) has to meet these time requirements even thought the applicable statutes of repose may be longer. Of course, the most prudent course is to act to suspend all limitation periods well before their expiration.

As noted, since SB 800 has for the most part set the statute for most residential claims for properties built on or after January 1, 2003, a review of it is usually the more informative. As stated, above, SB 800 provides a required "length of service free of defects" time limit for each individual building violation addressed with time periods ranging from one year (cosmetic matters) to 10 years (foundation and structural matters), depending on the building component. Upon discovery of the problem during that time period, one has 3 years to file. It is important to note that the various SB 800 building standards that are affected by statutes of limitation are different from the warranty sometimes provided by the builder. The warranty builders provide in their written agreements typically lasts for one or two years and likely has no impact on one's rights to a remedy pursuant to the SB 800 building standards. That is to say, the builder cannot shorten or conclude the period of the builder's construction liability. It is a violation of public policy.


As noted, above, all states have their own rules but all of them will be have one or other of the various rights and one of the complaints or complaint systems noted above. What changes state-by-state is complaint resolution methods and the statutes of limitations.


It is important in these analyses is the effect of disclaimers.  Virtually every builder in all states attempts to disclaim the duty to meet any kind of habitability or workmanship standards and liability for any type of defect.   Most state laws provide that the warranties given by statute or common law at the appellate level or in licensure law are PULBIC POLICY and cannot be disclaimed by the builder.  The concept is that there can be no "AS IS" work or product where professional standards of care are publicly mandated.  In California and Arizona, for example, the licensure regulations for builders expressly prohibit or void and such builder disclaimer clauses—even calling them a violation of licensure if they are used—and the reasoning is simple—a builder has no legal ability to hold that he or she will not build to the standards of care his or her licensure authority has mandated that he must.  One of those regulatory duties is also to comply with building codes and things like city and county permit laws, which also mandate defect-free construction to various standards.  In Arizona, see Nastri, discussed above.  The "law does not look with favor upon one exacting a covenant to relieve himself of the basic duty which the law imposes on (him) . . . . This would tend to promote carelessness.  Salt River Project Agric. Imp. & Power Dist. v. We, 143 Ariz. 368, 368; 694 P.2d 198 (1984).   The subdivision laws of all states, including California and Arizona, do not permit a builder or a subdivider to ask the buyer to waive or disclaim material representations relied on by the purchaser and hold that any attempt to do so is void.  The builder or remodeler is also a "seller" and in all of the western and southwestern states, the "seller" must disclose known, latent defects to a buyer before he buys.  S Dev. Co. v. Pima Capital Mgmt. Co., 201 Ariz. 10, 31 P.3d 123 (App. 2001).

In California, the law recognizes an implied covenant of good faith and fair dealing as to the "dickered deal" in every contract that neither party will do anything which will injure the right of the other to receive the benefits of the agreement, which, when applied to a construction, remodeling or repair contract, means that the customer has the right to assume a non-disclaimable promise from the workman to avoid implementing defects or a failure-prone status into the product being purchased.  The law of most states does not favor boilerplate clauses which seem to run against the entire intent of the parties or purchase.  "Boiler plate" clauses will not change the "actual deal" which the parties bargained for or could anticipate, including warranties implied by law.  The buyer is entitled to his "dickered deal" and the reasonable expectations of the bargain.  These are not defeated by the boiler plate exculpatory terms of a standardized purchase contracts that were not the subject of negotiation.  In California, see Comunale v. Traders & General Ins. Co. 50 Cal.2d 654, 658 ,328 P.2d 198 (1958); Carma Developers (Cal.), Inc. v. Marathon Dev. Calif., Inc., 2 Cal.4th 342, 371-372, 826 P.2d 710 (1992); Guz v. Bechtel National, Inc., 24 Cal.4th 317, 349-350, 8 P.3d 1089 (2000); In Arizona, see Wagonseller v. Scottsdale Mem. Hosp., 147 Ariz. 370, 383, 710 P.2d 1025 (1985) (on the covenant of good faith and fair dealing) and Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984) (on the impact of boiler plate on the "dickered deal").  

The covenant of good faith requires that neither party do "anything that will injure the right of the other to receive the benefits of their agreement" and the duty not to act in bad faith or deal unfairly is part of contract, and remedy for its breach generally is on contract itself.  Wagonseller.  In California, the breach of the implied covenant of good faith is itself a separate cause of action both in tort and contract.  In Arizona, the tort claim is usually only available in insurance bad faith cases and some fiduciary cases.


Due to the great economic collapse of recent years, a new use for construction defect claims is emerging:  It is being raised COLLATERALLY or DEFENSIVELY against an enforcement of a sale contract or loans secured by the property as an indemnity for the investment mistake or loss.  Buyers and debtors who are either not happy with the investment wisdom of former purchases or the size and terms of loans against their properties or unable to pay them are defending against them by raising construction defects in what they were sold or in what the lender loaned against as a defense or counterclaim.  The argument by a buyer against the seller ranges from allegations of a fraudulent sale (non-disclosure of known latent defects) or a rescission based upon mutual mistake (a transaction in which both sides were ignorant of a substantial defect and it would be unfair to allow the seller to profit from it or the seller to be panelized by it).  The argument against the lender (unless the lender is also the seller such as in an REO on which event the borrower uses the "seller" argument) is usually an allegation that the lender failed in its loan due diligence, such as by obtaining a negligent site review, inspection or appraisal which missed or misstated the issue.  The argument against the collateral people is the usual one, i.e. " . . . how did I get put into this dog-eared investment or property . . ."

In both California and Arizona and many other states, the borrower is allowed to rely on  lender-conducted appraisals as being a valid, well-researched statement of condition and a value based upon an actual condition competently determined. 

Obviously these defenses and affirmative claims also go for actions against inspectors, real estate agents and the like.  The buyer/borrower has been deemed in most states to have rights to rely and claim against those who facilitated the deal for various due-diligence failures, such as inspectors and real estate licensees.  Builders may even be sued for the loans taken against the property on the contention that the plaintiff ". . . would not have made the purchase or have taken out the loan had he known of the builder's defect . . ."

Cases in which construction defects are raised as a method of defending against enforcement of a sale agreement or a loan are now as plentiful as those against the builder for pure construction claims.  The buyers/borrowers of the world are no longer interested anymore in a repaired building (worth less than half of what was paid due to the downturn).  They are interested now in ridding themselves of it as a "bad buy" and collecting damages or getting their money back for being put into it.  This is not a true "construction complaint" in fact, but a "real estate investment remorse" claim disguised as one.  Moreover, this approach works for those who are suffocating in a "bad buy" or "bad loan", have considerable personal liability and are out of other options or ideas to solve the problem.  A builder's defect claim or a professional malpractice claim is seen as a legitimate strategy for "leveraging" out of the problem.

A suit for rescission of the entire agreement by reason of a substantial, unknown error or defect in the property or in information supplied about the actual condition of property is possible in most states.  In California, buyer or borrowers look to CC 1688 et seq. The rescission remedy assumes that the contract was properly formed, but finds that there never was a true meeting of the minds on the essential terms, as the parties to it labored under ignorance of a material fact that vitiated the purpose of the transaction, such as a huge undiscovered defect in the property.  In a rescission, monies and properties are all returned back to where they started.  In Arizona, see Renner v. Kehl, 50 Ariz. 94, 722 P2d. 262 (1986).  The rescission rules trump boilerplate disclaimers, integration clauses  and "AS-IS" clauses in the contract, rescinding them, too.


As noted, when the claims for defective fix, remodel, rebuild or build find no construction (or licensed construction) defendant to bring them against or no warranty left on which to make a claim, this is when the real estate licensees find themselves suddenly becoming the bulls-eye. Claims for negligence, breach of fiduciary duty and allegations of consumer-type frauds and incompetencies often last longer as they only start form the date of discovery of the failure and that could be a long, long time after the deal closed and all of the jobbers—including event the property inspector--have disappeared. Even the usual (almost always toothless) step of blaming the property inspector does not work for three main reasons: (1) the licensee always has some co-responsibility to detect and report issues; and, (2) the licensee often referred the inspector to the owner and (3) the failure to get good disclosures and warranties and proofs of work done from the seller or contractor is a contract or transactional matter that is in the exclusive hands of the agent and no other player in the transaction. All failures in any of the foregoing will get the licensee involved as a target in the claims, sometimes because the contractor is no longer around, sometimes just putting the licensee in the co-defendant's chair right beside the contractor. The answer? Know the law and the risks and take care to do it right!


To be thorough on this important subject, some final vignettes:

First, there is a bit more about determining and punch listing the defects and adverse conditions:  Examining the property to determine the defects and issues and punch listing them is really more than what a home inspector is trained for and certainly, in those states where home inspectors have been registered, licensed or "listed" by state regulation, such as Arizona (though California has not) it is often more than they are authorized by law to do.  It is probably best to engage licensed builders, plumbers, electricians or registered engineers or architects to make these statutory kind of examinations and make those punch lists.  In most cases, for damages purposes, the investigator also has to make cost estimates for repair and generating building repair invoices is far beyond the scope of what home inspectors should be doing.  Moreover, in almost all states (certainly California and Arizona) the inspector may later have to qualify as an expert for purposes of testimony if litigation ensues.  One of the surest challenges to such an expert by the other side would be that he or she is not properly licensed for the trade or professional they are testifying about.  Moreover, the other side will oppose the claimant's experts with high-level ones of their own and the claimant can be sure those opposing experts will have all of the credentials.  This said, it is also then wise to engage experts right up front that have been qualified by courts as experts in this area before—they have "been to the Rodeo",  know what is expected of them, know the roles, are fully credentialed for them and are comfortable in court.  Consumers, owners, builders, real estate licensees or other professionals that need such an expert can contact National Buildmasters at (800) 811-8380 or by email to Expert names for most states and issues are typically available.

Second, there is a bit more to add about where else to file claims:   With insurers!   Not necessarily builders' insurers, though one always wants that to happen; but instead with past or present casualty insurers for the property.  Some of the defects or losses may be covered by past or present policies insuring losses against the property. Some policies may have exclusions for "construction defects" but not have exclusions for "resulting losses" from them.  In "insurance-speak" a "resulting loss" is one that insures damage from another cause other than the cause's own failure, which could even be an otherwise excluded cause.   For example, a roofer does a bad roof repair and rainwater subsequently leaks down into the home and destroys furniture and flooring.  The roofer filed Chapter 7 three years ago.  The owner's casualty policy states that it excludes "workmanship defects or vice", but it cover "resulting loss."  Net coverage:  The repair of the roof workmanship defect is not covered by the policy, but the damage that "resulted" to what was below it is.  Do not be dissuaded from filing by insurance claims managers who poo-poo the claim or warn that "rates might be increased" or one might get "cancelled."   We all know that game and why it is played by insurers: 

"It's all about premiums and no payouts."  The defect loss could be substantial enough to make concerns like those risks minor to moot.  And even after cancellation, the insurer is still on the hook for the claim made before the cancellation.  Most policies want filing of a claim to be done within 30 days or so after discovery (defined about the same way as defined for law suits, above) to get coverage, so "holding back" might miss the reporting period.  Since most property casualty policies are an "occurrence" type policy, even expired policies could have coverage if the incident of loss occurred during the policy period.   Many components also have their own warranties.  One example is an air-handling system.  Many of these have long manufacturer's or installer's warranties (10 years is not unusual) which run with the property, so even a subsequent buyer can make claims.  But they or their agents and jobbers and have to do their due diligence to find these claims and coverages and make claim reports within the narrow periods!  

When a big defect is found and especially one after statutes of limitations have run on the builder or in cases with a known-to-be-flakey or out-of-business builder, it is likely SOP to file that notice of claim with the insurer every single time, regardless of how coverage turns out.


There is always more to be said on this immense issue and obviously every state has some law variations, but this is the "main thrust" of these type of risks and claims and what to do about them.

The long and short of it is that our past vigorous, let-it-all-hang-out economy made for haste, a lot of mistakes and a lot of market apathy about the impact of defects and the length and scope of warranties to intrinsic condition and value.  Changes in the economy makes for a "morning after" discovery of those mistakes, a reconsideration of the financial impact of them . . . and a lot of resultant claims not just against the builders who committed them but all those professionals in the transactional loop who did not look for or find them or by-passed ways to avoid them or insure against them.   These claims are likely to cause a lot of heart pangs for the next 10 years for those who were in the transactional chain and got sloppy.  That's the negative part of this story.

The positive part is that armed with these reminders,  the owner and the professional community now knows enough to more thoroughly inspect for them and contract to cover them in what they have and what they buy or sell and now knows what to do if they are found.  The first sin may have been to have missed the defect or warranty lapse in the first place and not do anything to discover it today even with existing holdings, but the second and worst sin is to know of one or find one and do nothing about it when something could have been done.  Letting a warranty period or that statute of limitations or statute of ultimate repose blow by without taking action (or, if one is a professional like a real estate licensee, property manager, maintenance manager, investment advisor, attorney) without detecting the issue now and advising the client (seller, buyer or current owner or investor) that the client needs to check not for conditions and if found take action, is stepping off the cliff's edge.  Unlike Wiley Coyote who only falls over the cliff if he notices that he ran past the edge, we in the real world will suffer that bloody fall whether we see the edge or not.

The solution?  It's as the old police Sergeant used to say after he gave the bulletins of the day to his patrolmen in the 1970s hit TV serial "Hill Street Blues":  "Hey!  Let's be careful out there!"

'Nuff said.





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