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Construction Litigation Cases Are Starting to Clog the Docket.

By Christopher Annunziata

Is this the harbinger of more hard times to come or might it be a good sign for the economy?

I’ve been seeing a fair bit of construction and real estate related cases lately. I think it is safe to say that litigation in real estate and construction cases increases as the economy worsens. Buyers dry up, so homeowners sue to recover or retain earnest money on deals that collapse. As new homes sit empty, general contractors and builders begin to hemorrhage money. They often find it easier (or more prudent) to pay a bank than their subcontractors and vendors. This begets litigation.

And some of the litigation is quite difficult. The cases involving contractors and subcontractors are generally easy to deal with. Most have been through it before. The hard cases are the ones with the patently naive, foolish and some might say, stupid people who were seduced by the lure of easy money portrayed in ridiculous shows like “Flip This House” and countless AM radio advertisements.

Most of these people are completely out of their depth - intellectually, financially. They lack the experience, brains, skill and most importantly, finances to build Lincoln Logs, much less build and sell homes. Now they face foreclosure, eviction, bankruptcy - and litigation. Their cases end up in mediation and I sometimes find it hard not to tell these people that reaped what they sowed.

I recently had a party, who claimed to have a real estate license, act completely shocked to find out that signing a contract for a “flip house” on behalf of a “friend” who could not qualify for financing (but could somehow come up with a huge earnest money check) was committing fraud. She had never heard the term “straw man.”

I am left to wonder, however, whether the increase in litigation is a positive sign for the overall economy. As anyone who has studied economics understands, the construction and real estate markets operate in a cyclical fashion. As the economy improves or even begins a fast growing phase, construction increases as the newly wealthy (both businesses and individuals), desire newer, larger, more well appointed homes and offices. Growth continues until the economy worsens and then drops off precipitously. Litigation follows soon thereafter, until the cycle begins again, typically a few months behind the general economy.

Since litigation also has a life cycle of its own, often taking months or years to complete, are these cases actually a sign of a recovering economy? All I know is that I am gaining a lot of experience in real estate transactions and construction.

Maybe I’ll go out later to find some houses to “flip.” Maybe then I can retire early….

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Full post as published by CKA Mediation and Arbitration Services Blog on July 01, 2008 (boomark / email).