In Maya v. Centex Corporation (— F.3d —-, C.A.9 (Cal.), September 21, 2011), the United States Court of Appeals for the Ninth Circuit held that a large class of homeowners may sue homebuilders over inflated sales prices and subsequent drops in home values they allege were caused by the developers marketing and financing neighboring homes to unqualified purchasers and investors who posed a high risk of foreclosure, and then concealing these practices from the homeowners. The ruling potentially opens the door for homebuilders to be found liable for the massive decline in new home values that occurred during the recent economic recession.
The Facts
Individual homeowners (“Homeowners”) purchased homes in new developments constructed by eight of the largest national developers (“Developers”) between 2004 and 2006, making down payments of at least 20 percent. Developers allegedly told Homeowners they were building “stable, family neighborhoods occupied by owners of the homes.” Implicit in Developers’ marketing scheme was that they “were making a good faith effort to sell homes to buyers who they expected could afford to buy the houses and would be stable neighbors.” Instead, Homeowners claim Developers marketed homes to “unqualified buyers who posed an abnormally high risk of foreclosure” and sold to investors who had no intent to live in the homes. Developers financed approximately 65 percent of the homes they sold. Developers allegedly financed high-risk buyers who may not have otherwise been able to obtain financing, which led to a “buying frenzy” that artificially increased both demand and prices. Homeowners claim they would not have purchased their homes if Developers had disclosed these practices.
Homeowners allege that after the high-risk buyers began to default on their loans, the high number of foreclosures and short sales drove down the value of Homeowners’ homes. They claim that the neighborhoods have been drastically altered because of abandoned homes, transient neighborhoods, multiple families living in one home, and increased crime. Homeowners claim injury at the time of sale because they paid more than their homes were worth, and injury after the sale because their homes have declined in value and desirability. The trial court dismissed the lawsuit on the ground that Homeowners lacked standing to sue the Developers.
The Decision
The court of appeals reversed the decision of the trial court and held Homeowners met all of the requirements to establish standing to sue the Developers.
Homeowners claimed that they paid more for their homes than they were actually worth and they would not have purchased the homes if Developers had disclosed their lending practices. The court concluded the Homeowners’ alleged injuries in the form of overpayment and rescission are actual and concrete economic injuries that future recovery of the housing market will not cure, and that these injuries can be fairly traceable to Developers’ actions. The court ruled that Homeowners sufficiently alleged that Developers inflated the housing “bubble” in their particular neighborhoods, which caused Homeowners to overpay for their homes. Homeowners claimed that Developers’ financing of the majority of the homes in these neighborhoods may have created a demand that would not have otherwise existed. The court also found a direct link between Developers’ failure to disclose their lending practices and the injuries suffered by Homeowners. Because Homeowners’ injuries could be redressed by a favorable court ruling, the court held that Homeowners’ had standing to make their claims of overpayment and rescission.
However, the court ruled that Homeowners’ did not meet all of the elements required for standing as to their claims of decreased value and desirability. The court concluded that Homeowners failed to establish a causal connection between Developers’ actions and their injuries, and ordered the trial court on remand to allow Homeowners to amend their petition to attempt to establish a sufficient causal connection between Developers’ actions and the decreased desirability and value of their homes. The court found that the current reduction in value of one’s home and the decrease in quality of life can constitute concrete injuries for purposes of standing. The appellate court rejected the trial court’s holding that the Homeowners’ injuries are speculative because they have not attempted to sell their homes.
The court of appeals remanded the case back to the trial court for further proceedings.
Questions
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Jon E. Goetz | 805.786.4302