The ruling, which overturns years of policy enforced by the state Department of Community Affairs, came out of a dispute between Montgomery Township code officials and DKM Associates, the builder of the Cherry Valley Country Club development.

The three-judge Appellate Division panel wrote in its decision that the township wrongfully issued notices of violation to DKM over leaking exterior siding on the homes because the builder had sold the homes, and therefore no longer had access to fix them.

"The notice must go to one with power to correct the alleged violation and bring the property into compliance with the construction code, meaning either an owner, or a builder or contractor whose inspections and certificate of occupancy have not yet been completed," they said.

The court ruled that even though the Department of Community Affairs has held that it can pursue builders even 20 years after houses are completed, nothing in the state's Uniform Construction Code "suggests a grant of authority to pursue a builder years after its construction work has been completed, certificates of occupancy issued and titles conveyed," the judges wrote.

DKM completed construction of the upscale homes, built around a golf course, between 1995 and 1998. As part of the construction, a faux stucco finish, called Exterior Insulation and Finish System, or EIFS, was installed.

Homeowners went to the township to complain after the siding began to leak, causing water damage and mold. In February 2001, the township code official began issuing notices of violation to DKM regarding the finish, and told the company to fix it. More than 60 citations were issued.

DKM appealed the citations but lost before the trial court; it agreed to offer residents new siding to fix the homes, and some of those residents took the deal. Others sued in an attempt to get DKM and others responsible for the siding to pay.

In its decision, the appeals court said the matter was a private one between homeowners and DKM, and should be solved in court between those parties, not by the township.

"By utilizing the public enforcement proceedings to advance their cause, affected homeowners can impose the costs of pursuing private claims upon unaffected taxpayers in their municipality," the judges said. "Their complaints against the builder, no matter how meritorious, should be addressed through remedies available to them under powers legitimately derived and financed by private means -- either through their homeowners' warranty or in litigation."

Michael A. Lampert, DKM's attorney, said the builder couldn't be held liable because it no longer owned the homes and therefore didn't have the authority to fix the problem.

"We've established the principle that the government regulatory enforcement system ought to be directed to people capable of bringing violations into compliance," Lampert said. "That's the homeowners in this situation."

The company has not acknowledged that there is a violation or that its installation of EIFS caused the problems; in its decision, the court did not address that issue, but only the legal question of whether the code official had the authority to issue violations to DKM.

Art Skaar, a Cherry Valley homeowner and attorney who represented some residents in their lawsuit against DKM, said many have already settled with the developer. The other cases have been put on hold because of problems with insurance companies for the defendants, which also include the manufacturer of the stucco siding and others involved in putting it on the houses.

Montgomery attorney Trishka Waterbury said township officials had not yet discussed the decision or discussed where to go from there.

"In a sense, I think this is more of a loss for the Department for Community Affairs," she said. "It's a loss for Montgomery, but it's also a loss for the Department of Community Affairs."

Department spokesman E.J. Miranda said that while the department was not party to the lawsuit, it would be reviewing the court's decision.