14.

Commitments and Contingencies

Surety Bonds and Letters of Credit. The Company is required to obtain surety bonds and letters of credit in support of its obligations for land development and subdivision improvements, homeowner association dues, warranty work, contractor license fees and earnest money deposits. At March 31, 2012, the Company had issued and outstanding surety bonds and letters of credit totaling $62.0 million and $19.1 million, respectively, including $6.2 million in letters of credit issued by HomeAmerican. In the event any such surety bonds or letters of credit issued by third parties are called, MDC could be obligated to reimburse the issuer of the bond or letter of credit.

Mortgage Loan Loss Reserves. In the normal course of business, the Company establishes reserves for potential losses associated with HomeAmerican's sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other things: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; and (2) a current assessment of the potential exposure associated with future claims of fraud in mortgage loans originated in prior periods. The Company's mortgage loan reserves are reflected as a component of accrued liabilities in the Financial Services Segment of the Consolidated Balance Sheets, and the associated expenses are included in expenses in the Financial Services segment of the accompanying Consolidated Statements of Operations.

The following table summarizes the mortgage loan loss reserve activity for the three months ended March 31, 2012 and 2011.


	Three Months Ended March 31,
	2012			2011
	(Dollars in thousands)
Balance at beginning of year	$	442		$	6,881
Expense provisions		294			—
Cash payments		(97	)		(207	)
Adjustments		—			962

Balance at end of period	$	639		$	7,636

During 2011, HomeAmerican reached settlements with third parties concerning claims and potential claims to repurchase certain previously sold mortgage loans, including a comprehensive settlement with Bank of America. The Company believes that the settlements substantially reduce its future exposure to liabilities associated with previously sold mortgage loans.

Legal Accruals. Litigation was filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. ("RAH West Virginia") and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs sought compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation was comprised of the following actions:

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia ("Joy"). This action was filed on May 16, 2008, by 66 plaintiffs from 15 households. The Company and RAH West Virginia answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia ("Bauer"). This action was filed on October 24, 2008, by 86 plaintiffs from 21 households. This action was consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia ("Saliba"). This action was filed on November 7, 2008, by 35 plaintiffs from nine households. This action was consolidated for discovery and pre-trial proceedings with the Joy action.

Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia ("Thorin"). This litigation was filed on May 12, 2010, by 40 plaintiffs from 11 households in Jefferson and Berkeley Counties. This action was not consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case were substantially similar to the Joy, Bauer and Saliba cases.

These cases have been settled and Orders dismissing the cases with prejudice were entered by the Court on March 5, 2012. The March 5, 2012 Orders entered by the Court in the Joy, Bauer and Saliba cases also vacated default judgments that had been entered against MDC and RAH West Virginia. The settlement payments made by the Company did not exceed the amounts already recognized by the Company in prior periods.

On September 28, 2011, a shareholder derivative lawsuit was filed by Martha Woodford in the United States District Court for the District of Delaware, Civil Action No. 11-00879-RGA. In the lawsuit, the plaintiff made claims against our board of directors and certain executive officers for alleged breaches of fiduciary duty, violation of Section 14(a) of the Securities Exchange Act, corporate waste and unjust enrichment relating to the Company's executive officer compensation practices. The plaintiff sought monetary damages and injunctive relief on behalf of the Company, and attorneys' and other professional fees and costs.

The parties settled this lawsuit and the settlement was approved by the Court on March 8, 2012, thereby dismissing the lawsuit with prejudice. Under the terms of the settlement, the Company agreed to implement certain corporate governance procedures and paid legal fees of the plantiffs. The Company's directors and executive officers admitted no liability. The legal fees paid by the Company to the plantiffs did not exceed the amounts already recognized by the Company in prior periods.

Lot Option Contracts. In the normal course of business, the Company enters into lot option purchase contracts ("Option Contracts"), generally through a deposit of cash or a letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. The use of such land option and other contracts generally allows the Company to reduce the risks associated with direct land ownership and development, reduces the Company's capital and financial commitments and minimizes the amount of the Company's land inventories on its consolidated balance sheets. The Company's obligation with respect to Option Contracts generally is limited to forfeiture of the related cash deposits and/or letters of credit. At March 31, 2012 the Company had cash deposits and letters of credit of $4.8 million and $3.6 million, respectively, at risk associated with 1,464 lots under Option Contracts.