Johnston v. Centennial Log Homes

Johnston v. Centennial Log Homes, 2013 MT 179 (July 8, 2013) (6-1) (Baker, J., for the majority; McKinnon, J., dissenting)

Issue: (1) Whether the district court properly granted summary judgment to Centennial on the basis that Johnstons’ claims were barred by the statute of limitations; (2) whether the release executed by the Leonards is binding on the Johnstons; and (3) whether the district court abused its discretion in granting Johnstons’ motion to dismiss Keeko Log Homes, Ltd. as a defendant.

Short Answer: (1) No, because factual issues regarding Johnstons’ discovery of the defects are in dispute; (2) no, because Johnstons owned 36% of the house at the time of the release and were not parties to the release; and (3) yes, as it did not allow Centennial to file a brief in opposition pror to dismissing Keeko..

Reversed and remanded

Facts: Robert and Sandy Leonard bought property in Bigfork in 2001. They entered into contracts with Centennial for a log home kit and construction of a custom log home on the property. After the home was built, they moved in. In July 2002, they granted 36% of the property to the Johnstons, who are Sandy Leonard’s parents.

In the fall of 2002, the Leonards noticed the wood floors beginning to bubble, heave, and raise, and they discovered extensive mold under the flooring. They discussed this with the Johnstons, who suggested they hire an attorney. The Leonards hired Peter Leander; Johnstons did not attend any meetings with Leander. In December 2002, Leander wrote a letter to Centennial with a non-inclusive list of problems with the home, including cracked tile grout, a broken shower light, missing soap dish, stairs that were not built to code, and the splitting apart of a corner of a wall.

In April 2003, Leonards executed a general release in favor of Centennial for defective construction of their home, mold infestation and eradication, and bodily injury claims from mold. Centennial paid Leonards $6,000, extinguished the remaining $59,704.13 due on the construction contract, and released its construction lien. Leonards, Centennial and all of Centennial’s subcontractors were parties to the release. The Johnstons were not.

In March 2004, the Johnstons granted their 36% interest to the Elvira Johnston Trust. A year later, Leonards granted their 64% interest to the same trust.

In 2004 and 2005, Johnsons employed Innovative Builders to conduct routine maintenance of the log home, which resulted in about $50,000 of repairs.

The Leonards moved out in 2005 and rented the house. In 2007, James Johnson and his wife began renting the home. In the spring of 2008, Johnsons observed the logs in the home beginning to split in an unusual manner. A home inspection in April 2008 resulted in a recommendation that the Johnstons hire a structural engineer because of the severity of the log splitting and structural movement of the log roof beams. Based on the engineer’s recommendations, the estimated repairs were $125,000 for the problems visible at that time; additional repairs could  be necessary.

In December 2008 a pipe burst due to a failure to insulate the upper floor space. The inspection found significant gaps between the soffit and siding, which allowed rodents to enter and chew on electrical wires and creating a substantial risk of fire.

In 2010, the Johnstons hired Rocky Mountain Design to deconstruct and rebuild the home. Many more defects were discovered upon deconstruction.

The Johnstons filed suit against Centennial in October 2009, alleging negligent construction, breach of warranty, and violations of the Montana Consumer Protection Act and Montana Unfair Trade Practices Act. The Johnstons amended their complaint in May 2010 to add the company that prepared the log home kit, Keeko Log Homes, Ltd., as a defendant.

Procedural Posture & Holding: Centennial moved for summary judgment on the grounds that Johnstons’ claims were time-barred and that Leonards’ release waived all claims. The district court granted summary judgment to Centennial on both grounds. Johnstons then moved to dismiss their claims against Keeko, which the district court granted. Johnstons appeal the summary judgment to Centennial, and Centennial cross-appeals the dismissal of Keeko. The Supreme Court reverses and remands.

Reasoning: (1) Johnstons’ claims for negligence and breach of warranty were subject to a three-year statute of limitations, while their UTPA claims were subject to a two-year statute. They argue their claims should be subject to the discovery rule, which applies when facts are by their nature concealing. When disputed issues of fact underlie the question of whether the statute of limitations bars an action, the issue is for the jury. The district court held that the repairs made to the home in 2004 and 2005 should have put the Johnstons on notice that an inspection was required. Johnstons contend that the routine maintenance in 2004-2005 bore no relationship to the hidden defects, and that whether they should have known of them was an issue for the jury to decide. The Supreme Court agrees. Factual questions are in dispute as to whether the 2004 and 2005 repairs should have alerted Johnstons to the more serious underlying structural defects, and whether those defects were self-concealing.

(2) Johnstons argue that they were not parties to the Leonards’ release and it therefore applies only to the Leonards’ interest in the property. They also argue the release related to mold and flooring issues, not the significant structural defects later discovered. The Court agrees that the release did not apply to Johnstons’ 36% interest in the property, but hold that it did waive all of Leonards’ subsequent claims. That both Leonards and Johnstons later transferred their interests to the Johnston Trust does not change the analysis. Any decision in Johnstons’ favor applies only to their 36% interest.

(3) Because the motion to dismiss Keeko was opposed by Centennial, the district court should have allowed Centennial to file a brief in opposition before ordering Keeko’s dismissal. Reversed and remanded for full briefing.

Justice McKinnon’s Dissent: Justice McKinnon would affirm the lower court’s holding that Johnstons’ claims were barred by the statute of limitations. She believes the undisputed facts establish that Johnstons had actual notice of the house’s defects as early as 2002, and “cannot conclude that there is any genuine factual dispute concerning application of the discovery rule sufficient to submit the issue to a jury.” ¶ 59.