203(k) Litigation

HUD, the department of Housing and Urban Development, offers a residential rehabilitation loan program under section 203(k). If a homeowner qualifies for this program, they enter into a more or less standardized contract that has a number of unique elements. The homeowner applies for the loan, the lender holds all funds, and a qualified consultant is engaged to monitor and sign off on work done prior to distributions to the contractor from the lending bank. The unique aspect of this program is that, while limited to homes, the consultant is the go-between. If consultant signs off on work done, and so long as agreed by the homeowner, the bank will disburse to the contractor. There is no deposit paid to the contractor; however, once a contractor earns the amount stated in a draw/payment request, it should be paid.

If there is a disagreement, the parties are encouraged to mediate and to resolve the issue(s). If the owner and contractor have a significant dispute that they are not able to resolve, the matter may only be resolved, if stated in the contract, by American Arbitration Association (AAA) Construction Arbitration. This is a fast process in which an arbitrator is appointed and who determines issues related to factual issues, evidentiary rulings, and the award or denial of requested relief. Either the contractor, the homeowner, or the consultant, if due money for the project, may bring an arbitration action to recover what is claimed to be due. Counterclaims are permitted.

Once an arbitration award is final, the winner may register it by filing a motion with the local county court. That judgment, once entered, is final. There is no appeal from an AAA award unless there are extraordinary circumstances.

For any party involved in such a contract/project, documentation is critical, as well as proof of work done, proof of work not done or done poorly, and costs of materials and replacement materials, if appropriate. AAA matters move quickly so anyone commencing one of these cases should consult an experienced attorney and be well prepared before filing to start a case with AAA.


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