California Homeowners’ Suit Against Builders Revived

A federal appeals court revived a lawsuit by homeowners who accused eight major homebuilders of causing them to overpay for their homes by marketing nearby houses to high-risk borrowers who later went into foreclosure.

Against what it called “the backdrop of the national housing crisis,” the 9th U.S. Circuit Court of Appeals in San Francisco said Wednesday a lower court erred in concluding the homeowners lacked standing to pursue their fraud claims.

The plaintiffs had bought houses from 2004 to 2006 in new developments built by Beazer Homes USA Inc., DR Horton Inc., Lennar Corp., MDC Holdings Inc., PulteGroup Inc.’s Centex Homes, Ryland Group Inc., privately held Shea Homes Inc. and Standard Pacific Corp.

Many of these homeowners claimed the developers falsely represented they were building “stable, family neighborhoods” in the Inland Empire region of California, one of the hardest hit in the nation’s housing crisis.

In fact, the plaintiffs said the homeowners were marketing homes to and financing unqualified borrowers, fueling a “buying frenzy” that artificially inflated demand and prices.

When the bubble burst, foreclosures and short sales soared, causing a surge in abandoned homes, multiple families living in individual homes, unkempt yards and even crime, the plaintiffs said. They sought to hold the homebuilders responsible because their homes lost value and became less desirable.

A federal district judge in Riverside, California dismissed the complaint, saying the injuries were “speculative” because the plaintiffs had not sold their homes and any injuries were not “fairly traceable” to the defendants’ actions.

The 9th Circuit disagreed. Writing for a three-judge panel, Judge Betty Fletcher said the homeowners sufficiently alleged that the defendants’ practices “inflated the ‘bubble’ in their particular neighborhoods.”

She also said “decreased economic value and desirability” are injuries for which homeowners could recover.

The appeals court said the plaintiffs may file an amended complaint to show a stronger link between the defendants’ actions and the resulting alleged harm. It returned the case to the district court for further proceedings.

“Our clients will get their day in court,” said Richard McCune, a partner at Wright McCune in Redlands, California who represents the homeowners. “The broader significance is that it holds homebuilders accountable for the tremendous loss of value caused by their marketing and lending practices.”

Representatives of PulteGroup, the largest U.S. homebuilder by revenue, and Lennar, the third-largest, declined to comment. The remaining homebuilders and the main law firm handling their defense did not return requests for comment.

The case is Maya et al v. Centex Corp. et al, 9th U.S. Circuit Court of Appeals, No. 10-55658.

(Reporting by Jonathan Stempel in New York; editing by Andre Grenon, Phil Berlowitz)