A recent Indiana Superior Court decision concludes that a partner who takes on the additional role of contractor in the construction of a building for the partnership must disclose to the partnership any defects in the partner's own construction work. The same ruling also holds that a contractor cannot avoid liability for damages for defective construction work by invoking a standard one-year warranty in the construction contract or by asserting that the partnership did not give required notice of the defects. Judge Kenneth H. Johnson made these and other rulings in a recent decision in the Marion Superior Court, Civil Division, in the case of Fairfield Development, Inc. v. Georgetown Woods Senior Apartments Limited Partnership, et al, Case No. 49D02-9404-CP-390.

Judge Johnson held that Fairfield Development, Inc. ("Fairfield"), an Indiana corporation, had breached its construction contract with the Georgetown Woods Senior Apartments Limited Partnership ("Georgetown"), by failing to pay subcontractors and constructing a 90-unit Indianapolis senior apartment project with numerous defects. Georgetown was represented by Novack and Macey, a Chicago-based litigation law firm.

At the time of construction, Fairfield was a partner in Georgetown. Fairfield had argued that the partnership could not recover damages because it failed to provide written notice of various construction defects found by the Court. But in a ruling of apparent first impression in the Indiana courts, Judge Johnson rejected this argument.

"The Judge correctly held that because Fairfield was a part-owner of the project it could not hide behind a provision calling for the owner to provide written notice of Fairfield's shoddy construction work," said Donald A. Tarkington of Novack and Macey, lead counsel for Georgetown. Tarkington tried the case along with partner Stephen J. Siegel.

The Judge concluded that a standard one-year warranty provision in a construction contract was not an exclusive remedy that precluded the owner from bringing damage claims for defective construction. Instead, the one-year warranty merely provided an additional remedy that would require the contractor to come out to the property and actually repair defective construction if it received timely notice of the defect. Regardless of whether such notice was given during the warranty period, the owner could still sue the contractor for damages.

In addition, Judge Johnson held that, because it was also a partner, the contractor had a duty to disclose its own construction defects to the partnership. Under the court's ruling, a partner-contractor cannot hide behind a contractual provision requiring the owner to provide the contractor with notice of defects to avoid liability to the partnership for the partner's faulty construction work.

The Court awarded Georgetown damages of nearly $400,000 based on Fairfield's failure to make certain payments to subcontractors. The Court scheduled an April hearing to determine the amount of damages attributable to Fairfield's defective workmanship and Georgetown's claim for attorneys' fees.

In his ruling, Judge Johnson also pierced Fairfield's corporate veil and imposed personal liability on Don Martz of Corunna, Indiana, and several members of his family, for Fairfield's breaches of the construction contract. Martz is a long-time developer of tax-credit financed housing. The Court found that, "Don Martz and the Martz family have manipulated Fairfield's corporate form in an attempt to make it judgment proof." Indeed, the Court determined that, "the Fairfield corporate form was so ignored, controlled and manipulated by Don Martz and the Martz family that it was merely an instrumentality of the Martz family and it would be unjust not to pierce the corporate veil." Judge Johnson also found that, "Don Martz lied under oath when he swore in an affidavit submitted in another litigation that he had never been involved in the finances or operations of Fairfield."

"The Judge's decision to pierce the corporate veil and require the Martz family to personally accept responsibility for their actions delivers a strong message about how business should be conducted," explained Tarkington.

Founded in 1984, Novack and Macey is a litigation firm that concentrates on complex commercial cases. The firm has successfully represented clients in a wide variety of business disputes, including matters involving banking, contracts, construction, class actions, RICO, securities, real estate, land use, partnerships and close corporations. Novack and Macey attorneys have honed their skills in courtrooms, mediations and arbitrations nationwide. Clients include corporations, institutions, investment ventures, partnerships and individuals.

For further information about Novack and Macey, please contact Donald A. Tarkington or Stephen J. Siegel at 312-419-6900.