Maryland Caps Damages to Settlement Amounts Paid

By Timothy R. Hughes

A recent decision from Maryland’s highest court offers significant guidance regarding the complex world of assigned claims; claims involving settlements; and settlements involving judgments with agreements not to execute upon the judgment. The court decision in case, Pulte Home Corp. v. Parex, Inc., limited recovery to amounts actually paid in settlement.

Background

Parex manufactures Exterior Insulation and Finish System, which was installed by a subcontractor hired by Pulte. That subcontractor purchased Parex EIFS from a distributor, who received the EIFS materials directly from Parex. Pulte built homes clad with Parex EIFS in both Maryland and Virginia.

Various homeowners claimed that barrier EIFS was defective, and as a result Pulte reclad a significant number of homes. Pulte and Parex engaged in extensive litigation in Virginia with regards to a specific subdivision located in the state. Parex prevailed in that Virginia litigation on a variety of legal theories. After losing in Virginia, Pulte elected to file suit against Parex in Maryland with regards to all the Maryland homes and the remaining balance of Virginia homes.

Procedural History

Pulte filed claims against two separate applicators, two separate distributors, and Parex. Pulte asserted multiple theories of recovery against each entity. The distributors and applicators filed cross-claims against Parex.

After extensive motions practice, the bulk of claims against Parex were dismissed. On the eve of trial, Pulte settled with the applicators and distributors, who agreed to pay $725,000. In addition, each of the entities agreed to entry of a confessed judgment in varying amounts, but each judgment was for over $5 million plus various costs, interest and unspecified attorney’s fees. The applicators and distributors also assigned all their claims against Parex to Pulte.

During pre-trial motions and during the trial, Parex challenged portions of the claims. Based on these motions, the Court dismissed various indemnification claims by the applicators, distributors and Pulte. The sole claim to reach the jury was the applicators’ claims for breach of implied warranty, which were assigned to Pulte. The jury eventually ruled in Pulte’s favor, but only awarded $1.15 million in damages plus interest rather than the full amount sought in excess of $5.2 million. The jury found that a significant number of houses in the case were built outside the period of the statute of limitations.

Court of Special Appeals

The case was first appealed by both parties to the Court of Special Appeals, Maryland’s intermediate appellate court. Pulte objected to the trial court’s insistence that the statute of limitations from the uniform commercial code applied and by the trial court’s refusal to apply a discovery trigger to the statute of limitations. Parex in turn argued, amongst other things, that Pulte’s recovery should be completely capped to the total amount paid by the applicators – $725,000. The Court of Special Appeals agreed in large part with Parex, and found that the UCC statute of limitations applied and barred a significant number of houses from the case, and also capped the damages at the amount actually paid.

Court of Appeals

On appeal, the Court of Appeals basically agreed with the intermediate court. The court found that the claims that survived were breach of warranty claims rather than indemnification claims. The court ruled that the damages recoverable for breach of warranty should be limited to the amounts actually paid. While the applicators agreed to suffer judgments in amounts well in excess to the amount they paid to settle, Pulte had contractually agreed not to execute on the judgments. The court found that the inflated judgment amounts were “little more than a collusive sham.”

Conclusion

Construction litigation often involves many parties and complex procedural postures. Parties sometimes settle out on the eve of trial, and sorting out a dramatically changed landscape can be extremely complex. Finally, the use of settlement agreements, agreements not to enforce, and assignment of claims has expanded over the last several years. This recent case raises questions about the utility of that practice moving forward under Maryland law.

Timothy R. Hughes, Esq., is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C.. Mr. Hughes represented Parex, Inc. in their Virginia litigation but was not counsel of record for the Maryland litigation. He specializes in construction litigation, corporate and business related representation, and complex civil litigation. He may be reached at tim@hughesnassociates.com, or by phone at (703) 671-8200.

This article is not intended to provide specific legal advice, but instead as general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.