Residential home buildier Lennar Homes cannot recover the cost of defending against a class action by buyers because its indemnity clause is unconscionable, a California appeals court has held.
The Fourth District Court of Appeal ruled last week that while there is “nothing generally absurd or unconscionable about prevailing party clauses” in this case Lennar went too far.
Under the terms of the indemnity clause, a home buyer who brings a claim against Lennar is not only responsible for paying Lennar’s attorney fees and costs, “no matter whether the buyer prevails on the claim or not. The buyer is also responsible for any ‘liabilities, actions, demands and damages’ arising out of such a claim,” the court said.
In other words, a buyer with a legitimate claim for fraud is prevented from recovering their losses and any judgment obtained would be payable by the buyer, not Lennar, and in addition the buyer would be responsible for lawyers’ fees.
“The clause is a paradigmatic example of ‘heads I win, tails you lose,’” wrote Justice Thomas Hollenhorst. “We therefore conclude that the indemnity clause is unconscionable,” he said.
The home buyers, Timothy Young, Stella Stephens and Melissa Young, bought homes in 2005 and 2006 then sued the company in 2009 in federal court for fraudulent and negligent misrepresentation.
The class actions were consolidated and eventually dismissed. Lennar sued in Riverside County Superior Court to recover damages.
The buyers filed an anti-SLAPP motion, arguing the case should be thrown out as a violation of their First Amendment rights as a suit designed to thwart their constitutionally protected rights. SLAPP stands for Strategic Lawsuit Against Public Participation.
Hollenhorst said the indemnity terms of were a contract of adhesion that violates public policy and is unenforceable and unconscionable.
Case: Lennar Homes of Calif. Inc v. Stephens, No. E057280
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