business

Like many neighborhoods hit hard by the housing bust, an unfinished townhouse development in Lakeville suffers from too many empty lots and not enough homeowners.

But townhouse residents in Donnelly Farms are struggling with bigger problems after their builder, M.W. Johnson Construction, declared bankruptcy and shut down two years ago.

In one row, residents recently discovered water seeping into the basements and mold in the walls. Unpaid subcontractors have refused to fix plumbing problems and other damage. And the homeowners association is embroiled in a lawsuit after discovering that buyers don't have clear title to the land surrounding some townhouses because the company failed to properly transfer ownership.

The bankruptcy of M.W. Johnson has left homeowners around the metro with big headaches and little recourse. Many are waiting in line as unsecured creditors in the bankruptcy, but they don't have much confidence that they will get any help. Amanda Daniels, who bought her townhouse shortly after M.W. Johnson declared bankruptcy in 2008, thought she was protecting herself by insisting on a home warranty before her closing. Now that she has discovered mold growing on her basement walls, she's concerned that there could be bigger problems lurking in her house. "You take pride in your house, and now it's tainted," she said. "It makes me question the quality of everything."

Homeowners have limited options if a builder goes bankrupt, said Charlie Durenberger, head of the Minnesota Department of Labor and Industry's contractor enforcement unit.

Homeowners can pursue a claim to the state's Contractor Recovery Fund if they have a court judgment against the builder, but payouts are limited to $75,000 per homeowner. Durenberger said his office has directed some M.W. Johnson homeowners to file claims against the company's insurance policies.

"This is a catastrophic period," Durenberger said.

M.W. Johnson, based in Lakeville, was one of the state's biggest homebuilders. Two sons of company owners Bill and Maureen Johnson have since started a new company called Fieldstone Family Homes.

"You don't get that large being a bad contractor. ... Unfortunately, due to the collapse of the housing market, this is not a story that is unique to M.W. Johnson," said attorney Dean Thomson, who represents Fieldstone.

Allegations of fraud

While M.W. Johnson failed to pay more than $3.7 million to subcontractors, the company fraudulently transferred property worth $408,515 to Trent Johnson, one of the owners' sons, according to a complaint filed by the trustee overseeing the case.

The family claims the transfers were proper because another company owned by Trent Johnson was owed the money.

Trent and Troy Johnson, who served as vice presidents in their parents' company, started their new homebuilding business two months before M.W. Johnson filed for bankruptcy.

"Those are the same people," said Tiana Richardson, who sued M.W. Johnson over her damaged townhouse in Lakeville's Morgan Square development. "I don't feel they should be in business."

Richardson sued after she found water seeping through the walls of her basement and her patio shifted 4 inches. She said other contractors won't complete work on her unfinished basement because of the water problem.

A Dakota County judge moved her claim to bankruptcy court, where Richardson discovered she would be at the end of a long line of unsecured creditors. "I just have to sit and wait it out," Richardson said.

Thomson, Fieldstone's attorney, said he sympathizes with homeowners who have been hurt by the failure of M.W. Johnson. "I understand the pain of that, but I'm not sure the sons should bear the burden of that," Thomson said.

He said Trent and Troy Johnson have a right to start over.

"There is nothing legally wrong or morally wrong with starting a new company," Thomson said. "The alternative is that because their parents' company failed, they could never work again. That's certainly not an acceptable alternative."