The development was declared structurally unsound five years after it was built. Housing NZ immediately moved its tenants, leaving the owners with a ruined building, a big rates bill and no rental income. It has since spent $290,000 of public money on lawyers and experts defending itself.
Court documents released to the Weekend Herald show the case has moved on from the legal claim by the owners.
Statements of claim filed with the High Court at Auckland show the council has filed a counter-claim against Housing NZ.
The council claimed Housing NZ "breached its duty of care" to 31 investors who funded the project. The council is also suing the original builders, plasterers and project manager.
Housing NZ, which has denied the claims against it, would not be drawn on the case, which is likely to be heard next year.
A spokesman said it expected to recover legal costs - so far about $290,000 - from the 31 investors.
A spokesman said: "Housing NZ is confident of defeating the plaintiffs' claim and expects to recover a substantial portion of its external costs from them in due course."
The spokesman added it was up to property owners to do their own checks before buying.
"While we sympathise with the owners and their plight, it's unreasonable to suggest that Housing NZ is liable for the quality of a complex we didn't build and don't own, and never have."
Documents filed at the court claim Housing NZ knew of the building's poor quality before it was finished.
Lawyers for the owners quoted Housing NZ documents which said: "Corporation staff felt that construction ... was undertaken at below best practice and the corporation considered not accepting the units ..."
The Housing NZ document went on to say the units were accepted because the council had issued a Code of Compliance and it was under pressure to provide more state accommodation in the area.
"Problems became apparent during the construction phase and subsequent reports confirm the construction quality was very poor," the document said.
The owners' lawyers have told the court Housing NZ has not produced all the documents.
Lawyers David Bigio and Paul O'Neil told the court Housing NZ had blamed "IT failures" for losing important paperwork, including board minutes.
In response to a recent Official Information Act request Housing NZ stated that it had since determined it was most unlikely that any data or archived emails were lost as a result of the upgrade to Housing NZ's computer system in 2010.
Auckland Council has not revealed its legal bills, which are paid under an outsourced agreement with an external insurance company.
Investors seeking relief from rates burden
Judy Anderson feels let down. The 62-year-old is one of 31 owners of Pepperwood Mews units. She has been agitating on behalf of small investors in a Housing NZ scheme gone wrong.
Mrs Anderson was raised in a state house, worked from age 15 and "worked like a dog" to buy her first home in her 20s.
Later in life, living in Auckland's eastern suburbs, Mrs Anderson and her husband of 20 years found themselves mortgage-free and contemplating retirement.
"I rang Housing New Zealand to ask if it had any lease properties," she said.
She was passed to NZ Invest Property Holdings, the company hired to market the Pepperwood Mews.
But a few years later, in 2009, Housing NZ moved its tenants out of the complex it had helped design, and the Auckland Council, successor to the local body which had approved the building, declared it unsafe.
The building is now derelict. Thieves have stolen the carpets, wiring, ranchsliders, balcony safety railings and the 32 kitchen sinks.
The owners' faith in the institutions they previously trusted is gone.
Mrs Anderson went to an Auckland Council committee on Thursday to ask for rates relief.
The owners spent $300,000 before the legal case started. Although they now have litigation funding, the cost is crippling. Some have sold their houses, others have had to return to work.
"It is now a concrete bunker of a building," she told councillors. "It is a travesty of a building."
Mrs Anderson said the owners were billed about $40,000 a year in rates yet received no services.
There is no one to use the water or collect rubbish.
"This small section of land delivers to the council a disproportionately large amount of cash."
Please review our rates, she asked. The lawsuit will not be heard until next year.
"We thought this would be over two years ago."
She left the Auckland Town Hall, with fellow owner Adrian Chitty. Her task was complete, the result uncertain.
