Corvias Military Living, LLC v. Ventamatic, LTD. ( 2017 )

No. 116,307
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
CORVIAS MILITARY LIVING, LLC,
and
CORVIAS MILITARY CONSTRUCTION, LLC,
Appellants,
v.
VENTAMATIC, LTD., and JAKEL, INC.,
Appellees.
SYLLABUS BY THE COURT
1.
The Kansas Product Liability Act, K.S.A. 60-3301 et seq., governs all product
liability actions, consolidating them into one basis for liability regardless of theory.
2.
The economic loss doctrine—which is judicially created—bars a purchaser of an
allegedly defective product from recovering from a manufacturer under a tort theory for
damages that are solely economic.
3.
Originally, the economic loss doctrine only applied to prevent recovery for
damages to the product itself. Over the years, the application of the economic loss
doctrine has been expanded to other circumstances.
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4.
Kansas courts have adopted the integrated systems approach. If a component part
or component product is considered to be part of the integrated system, the damage to
that property is considered to be damage to the product itself.
5.
In determining whether a component part and the damaged property are an
integrated system, courts must determine whether the component part is integral to the
functioning of or indistinguishable from the damaged property.
Appeal from Geary District Court; BENJAMIN J. SEXTON, judge. Opinion filed June 2, 2017.
Reversed and remanded.
Charles L. Philbrick, of Rathje & Woodward, LLC, of Wheaton, Illinois, and William J. Bahr, of
Arthur-Green, LLP, of Manhattan, for appellants.
James P. Nordstrom and Seth A. Lowry, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka,
for appellee Ventamatic, Ltd.
David E. Rogers and Daniel J. Buller, of Foulston Siefkin LLP, of Wichita, for appellee Jakel
Motors Inc.
Before BRUNS, P.J., HILL and SCHROEDER, JJ.
BRUNS, J.: Corvias Military Living, LLC, and Corvias Military Construction,
LLC, (collectively referred to as "Corvias") appeal a summary judgment granted in favor
of Ventamatic, Ltd., and Jakel, Inc., by the district court. Corvias originally filed this
lawsuit against multiple defendants, alleging that bathroom exhaust fans installed in
private housing units constructed for the families of military personnel stationed at Fort
Riley were defective. Corvias claimed that a defective motor in the exhaust fans caused
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two fires and widespread malfunctions. Ventamatic manufactured the exhaust fans, and
Jakel made the electrical motors used in the fans.
Prior to the entry of summary judgment, Corvias voluntarily dismissed all of the
defendants except for Ventamatic and Jakel. In granting summary judgment to
Ventamatic and Jakel, the district court found that the economic loss doctrine barred
recovery. Specifically, the district court found that the bathroom exhaust fans and the
housing units were integrated systems. In addition, the district court determined that
Corvias could not recover under an implied warranty theory because bathroom exhaust
fans are not inherently dangerous.
Because we find that the bathroom exhaust fans and the housing units are not part
of an integrated system, we conclude that the district court erred in finding that the
economic loss doctrine barred Corvias from proceeding on its product liability claim
against Ventamatic and Jakel. In light of this conclusion, we do not reach the issue of
whether the exhaust fans were inherently dangerous. Accordingly, we reverse and
remand this case for further proceedings.
FACTS
Corvias built, owns, and manages the Fort Riley Privatized Family Housing
Project. Over the past 10 years, Corvias has constructed a substantial number of private
housing units—including houses and townhouses—for the families of military personnel
stationed at Fort Riley. Through its subcontractors, Corvias purchased 3,785 "NuVent"
bathroom exhaust fans manufactured by Ventamatic. Although the exact number is
unclear from the record, electrical motors made by Jakel powered at least some of the
exhaust fans. It is undisputed that Corvias is not in privity with either Ventamatic or
Jakel.
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On June 12, 2012, a fire occurred in one of the housing units at Fort Riley built by
Corvias. It is alleged that a defective electrical motor in a NuVent bathroom exhaust fan
that had been installed in the unit caused the fire. Several months later, on February 5,
2013, a fire occurred in another housing unit constructed by Corvias. Once again, Corvias
alleged that a defective electrical motor in a NuVent bathroom exhaust fan caused the
fire. Shortly after the second fire, Corvias disconnected and removed all of the remaining
NuVent bathroom exhaust fans that had been installed in the housing units at Fort Riley.
Corvias then replaced the NuVent fans with bathroom exhaust fans built by a different
company.
Moreover, Corvias retained an expert who opined that the Jakel motor is defective
because it has a coil wrapped with a material that is susceptible to catching fire.
Similarly, the expert opined that the NuVent fan is defective in its design because the
motor coil is exposed to airborne dust that can lead to a fire. Corvias' expert concluded
that these defects caused the fires in the two housing units at Fort Riley. In addition, the
expert concluded the defects would exist in all of the NuVent bathroom exhaust fans that
utilized electrical motors made by Jakel.
On June 11, 2014, Corvias filed an action in Geary County District Court against
Ventamatic, Jakel, and several other defendants. Subsequently, Corvias filed an amended
petition in which it asserted a product liability claim, claims for breach of express and
implied warranties, a quantum meruit claim, and a claim under the Magnuson-Moss
Warranty Act, 15 U.S.C. § 2301 (2012). Additionally, Corvias asserted a breach of
contract claim against two subcontractors involved in the purchase and installation of the
NuVent bathroom exhaust fans. Ultimately, Corvias voluntarily dismissed its claims
against all of the defendants except Ventamatic and Jakel.
Ventamatic and Jakel filed motions for summary judgment contending, among
other things, that the economic loss doctrine precluded Corvias from recovering damages
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from them. Ventamatic and Jakel also asserted that Corvias could not pursue an implied
warranty claim because bathroom exhaust fans are not inherently dangerous. The district
court agreed and granted summary judgment to both Ventamatic and Jakel. Thereafter,
Corvias filed a notice of appeal.
ANALYSIS
Standard of Review
On appeal, Corvias contends that the district court erred in granting summary
judgment to Ventamatic and Jakel. Corvias argues that the district court erred in finding
that its claim for damages against Ventamatic and Jakel was barred by the economic loss
doctrine. In addition, Corvias argues that the district court erred in finding that it could
not recover damages from Ventamatic under an implied warranty theory.
The well-known standard of review relating to summary judgments was recently
summarized in Apodaca v. Willmore, 306 Kan. ___, 392 P.3d 529 (2017):
"'When the pleadings, depositions, answers to interrogatories, and admissions on
file, together with the affidavits, show that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a matter of law, summary
judgment is appropriate. The district court is required to resolve all facts and inferences
that may reasonably be drawn from the evidence in favor of the party against whom the
ruling is sought. When opposing a motion for summary judgment, an adverse party must
come forward with evidence to establish a dispute as to a material fact. In order to
preclude summary judgment, the facts subject to the dispute must be material to the
conclusive issues in the case. On appeal, we apply the same rules as the district court.'"
392 P.3d at 533 (quoting Apodaca v. Willmore, 51 Kan. App. 2d 534, 538, 349 P.3d 481
[2015]).
See also K.S.A. 2016 Supp. 60-256(c)(2).
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Furthermore, determining whether the economic loss doctrine applies in a case is
an issue of law subject to unlimited appellate review. Rinehart v. Morton Buildings, Inc.,
297 Kan. 926, 931, 305 P.3d 622 (2013); see also David v. Hett, 293 Kan. 679, 682-83,
270 P.3d 1102 (2011); Koss Construction v. Caterpillar, Inc., 25 Kan. App. 2d 200, 201,
960 P.2d 255, rev. denied 265 Kan. 885 (1998).
Kansas Product Liability Act
For more than 35 years, the Kansas Product Liability Act, K.S.A. 60-3301 et seq.,
has governed all product liability actions, consolidating them into one basis for liability
regardless of theory. See L. 1981, ch. 231, sec. 7; David, 293 Kan. at 685. In particular,
the provisions of the Act apply to actions based on "strict liability in tort, negligence,
breach of express or implied warranty, breach of, or failure to, discharge a duty to warn
or instruct, whether negligent or innocent, misrepresentation, concealment or
nondisclosure, whether negligent or innocent, or under any other substantive legal
theory." K.S.A. 60-3302(c). Moreover, "comparative fault applies to all product liability
claims regardless of the theory of recovery." Jones v. Tanks Plus, No. 108,029, 2013 WL
678368, at *3 (Kan. App. 2013) (unpublished opinion) (citing K.S.A. 60-258[a];
Forsythe v. Coats Co., 230 Kan. 553, Syl. ¶ 1, 639 P.2d 43 [1982]; Kennedy v. City of
Sawyer, 228 Kan. 439, 450, 618 P.2d 788 [1980]).
The Kansas Product Liability Act applies to "any claim or action brought for harm
caused by the manufacture, production, making, construction, fabrication, design,
formula, preparation, assembly, installation, testing, warnings, instructions, marketing,
packaging, storage or labeling of [a] product." (Emphasis added.) K.S.A. 60-3302(c). The
Act defines the term "harm" to include property damage, personal injuries, and death. It
also includes "mental anguish or emotional harm attendant to . . . personal physical
injuries, illness or death." K.S.A. 60-3302(d). However, the definition of the term "harm"
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under the Act does not include "direct or consequential economic loss" caused by a
defective product. K.S.A. 60-3302(d).
Economic loss is defined as "loss of use of the defective product, cost of replacing
the product, loss of profits to plaintiff's business, or damage to plaintiff's business
reputation from use of the product." Elite Professionals, Inc. v. Carrier Corp., 16 Kan.
App. 2d 625, 633, 827 P.2d 1195 (1992). Economic loss includes the "loss of the bargain,
repair, and replacement cost, loss of profits, and/or goodwill, including diminution in
value." In other words, economic loss is those damages that arise as a "result of the
failure of the product to perform to the level expected by the buyer, which is the core
concern of traditional contract law." Northwest Arkansas Masonry, Inc. v. Summit
Specialty Products, Inc., 29 Kan. App. 2d 735, 742, 31 P.3d 982 (2001).
Economic Loss Doctrine
What has become known as the "economic loss doctrine" was judicially created by
the California Supreme Court in Seely v. White Motor Co., 63 Cal. 2d 9, 45 Cal. Rptr. 17,
403 P.2d 145 (1965). Subsequently, the economic loss doctrine was also adopted by the
United States Supreme Court in East River S.S. Corp. v. Transamerica Delaval, 476 U.S.
858, 106 S. Ct. 2295, 90 L. Ed. 2d 865 (1986). Twelve years later, this court adopted the
economic loss doctrine in Koss, 25 Kan. App. 2d 200. Since that time, the scope of the
doctrine in Kansas has continued to unfold. See Rinehart, 297 Kan. at 932-36; see also
David, 293 Kan. at 683-95; Breer and Pulikkan, The Economic Loss Rule in Kansas and
Its Impact on Construction Cases, 74 J.K.B.A. 30 (2005); Treaster, The Confusion
Continues: The New Dynamic of the Economic Loss Doctrine in Kansas, 62 Kan. L.
Rev. 1325 (2014).
In East River, the United States Supreme Court considered a product liability
case—arising in the context of admiralty law—in which four oil tankers were allegedly
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damaged by defective high-pressure turbines. In considering the issue of whether the
plaintiff could recover in tort for damage to the tanker caused by the defective turbines,
the Supreme Court expressed concern that if an injured party was allowed to recover
purely economic loss in a product liability action, "contract law would drown in a sea of
tort." 476 U.S. at 866. The Supreme Court reasoned that "[e]ven when the harm to the
product itself occurs through an abrupt, accident-like event, the resulting loss due to
repair costs, decreased value, and lost profits is essentially the failure of the purchaser to
receive the benefit of its bargain—traditionally the core concern of contract law." 476
U.S. at 870 (citing E. Farnsworth, Contracts § 12.8, pp. 839-40 [1982]). Thus, the
Supreme Court unanimously held "that a manufacturer in a commercial relationship has
no duty under either a negligence or strict products-liability theory to prevent a product
from injuring itself." 476 U.S. at 871.
In 1998, this court adopted the economic loss doctrine in the context of a
commercial product liability action in Koss, 25 Kan. App. 2d 200. In Koss, the plaintiff
sued the manufacturer in tort for damage to a vibratory roller—used to compact materials
in highway construction projects—allegedly caused by defective hydraulic hoses. In
affirming the district court's granting of summary judgment to the defendant, this court
found that "East River provides a rule that is straightforward and predictable and that
establishes a logical demarcation between cases properly pursued as tort actions and
those which are warranty claims." 25 Kan. App. 2d at 205. It noted that this approach was
consistent with Restatement (Third) of Torts: Products Liability § 21(c) (1998) as well as
with the rationale articulated in Elite Professionals, 16 Kan. App. 2d at 633. Koss, 25
Kan. App. 2d at 205-06. Accordingly, this court held that "[u]nder Kansas law, the
economic loss doctrine applies to a claim for damage to the product itself." 25 Kan. App.
2d at 207.
The following year, this court expanded the economic loss doctrine to include
consumer transactions in Jordan v. Case Corp., 26 Kan. App. 2d 742, 993 P.2d 650
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(1999), rev. denied 269 Kan. 933 (2000). In Jordan, the plaintiff alleged that he
purchased a combine with a defective engine. The engine subsequently caught on fire,
destroying the combine as well as some unharvested wheat. On appeal, this court found
that the engine was a component part of the combine and held "that the rule set forth by
this court in Koss applies equally to a consumer of defective goods as well as to
commercial buyers of defective goods." 26 Kan. App. 2d at 744.
In 2001, this court considered the economic loss doctrine in the construction
context in Northwest Arkansas Masonry, Inc., 29 Kan. App. 2d 735. In Northwest, the
plaintiff was hired as a subcontractor to build concrete walls for a new Home Depot store.
The plaintiff alleged that cement powder it had purchased from the defendant to make
mortar was defective, causing it to have to tear down and rebuild the walls after 20,000
concrete blocks had been laid. Although a jury ruled in favor of the plaintiff, the district
court set aside the verdict. In affirming the district court's decision, this court found that
the allegedly defective cement powder was used to make mortar and had been
"integrated" into the final product—the masonry wall—and, as a result, the economic loss
doctrine barred the recovery of the damages sought by the plaintiff. 29 Kan. App. 2d at
745.
Three years later, in Prendiville v. Contemporary Homes, Inc., 32 Kan. App. 2d
435, 83 P.3d 1257, rev. denied 278 Kan. 847 (2004), a panel of this court applied the
economic loss doctrine in a residential construction case. In 2011, however, the Kansas
Supreme Court overruled the holding in Prendiville in David, 293 Kan. at 703.
Specifically, our Supreme Court held in David that "[t]he economic loss doctrine should
not bar claims by homeowners seeking to recover economic damages resulting from
negligently performed residential construction services." 293 Kan. 679, Syl. ¶ 2.
Subsequently, this court applied the holding in David in the case of Coker v. Siler, 48
Kan. App. 2d 910, 917, 304 P.3d 689 (2013).
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Also in 2013, the Kansas Supreme Court reexamined the economic loss doctrine
in Rinehart, 297 Kan. 926. In Rinehart, the owners of a preengineered building—
intended to be used for both residential and commercial purposes—sued the builder for
damages under several theories, including negligent misrepresentation. Our Supreme
Court held that "negligent misrepresentation claims are not subject to the economic loss
doctrine because the duty at issue arises by operation of law and the doctrine's purposes
are not furthered by its application under these circumstances." 297 Kan. at 941.
In summary, it appears that the trend to expand the economic loss doctrine has
slowed in recent years. As noted by the Kansas Supreme Court,
"[i]n one sense, the 'economic loss doctrine' or 'economic loss rule' is a well-recognized
tort concept, but a review of the caselaw across various jurisdictions shows it has proven
difficult to define because there are a number of permutations. Johnson, The Boundary-
Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523, 524 (Spring
2009)." David, 293 Kan. at 683.
This case presents one such permutation—the application of the integrated
systems approach.
Application of Integrated System Approach
In granting summary judgment in favor of Ventamatic and Jakel, the district court
concluded "that the 'integrated systems' rule applies to the bathroom exhaust fans and the
housing units into which they were installed." It is undisputed that "Kansas has adopted
the integrated systems approach in which damage by a defective component of an
integrated system to the system as a whole or any system component is not damage to
'other property.'" Coker, 48 Kan. App. 2d at 916. Thus, we must determine whether the
integrated systems approach is applicable in this case.
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In Northwest Arkansas Masonry, Inc., this court held "that '[d]amage [caused] by a
defective component of an integrated system to either the system as a whole or other
system components is not damage to "other property" which precludes the application of
the economic loss doctrine.'" 29 Kan. App. 2d at 744 (quoting Wausau Tile, Inc. v.
County Concrete Corp., 226 Wis. 2d 235, 249, 593 N.W.2d 445 [1999]). Accordingly,
we concluded that "when component materials become indistinguishable parts of a final
product, and there is harm resulting from a defective component of the product, the
product itself has caused the harm." (Emphasis added.) 29 Kan. App. 2d at 744; see also
Restatement (Third) of Torts: Products Liability § 21 (1998).
Our decision in Northwest Arkansas Masonry, Inc. provides insight to the question
of when the integrated systems approach is applicable. As noted above, in that case this
court determined the final product was the masonry wall and that the cement powder used
to make mortar was an integrated component product necessary or essential to make the
wall. Moreover, the cement powder used to make mortar to bind the concrete blocks
together became an indistinguishable part of the wall. Here, even if we assume that the
final product was the housing units themselves rather than the bathroom exhaust fans, we
do not find that the fans became an indistinguishable part of the house once they were
installed. Rather, we would suggest that the bathroom exhaust fans were easily
distinguishable from the other property that was damaged in the fires.
As we did in Northwest Arkansas Masonry, Inc., we again look to a Wisconsin
case for guidance. In State Farm Fire and Cas. Co. v. Hague Quality Water,
International, 345 Wis. 2d 741, 826 N.W.2d 412 (2012), aff'd 352 Wis. 2d 308, 841
N.W.2d 819 (2014), the Wisconsin Court of Appeals considered the issue of whether a
plaintiff could recover under a tort theory from the manufacturer of an allegedly defective
water softener unit that caused substantial damage to the drywall and woodwork in a
house. The trial court granted summary judgment to the manufacturer on the grounds that
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the economic loss doctrine barred recovery. On appeal, the Wisconsin Court of Appeals
reversed and remanded the case for further proceedings.
In reversing the trial court's decision, the Hague court clarified the test applied in
determining whether a defective product and damaged property are part of an integrated
system. 345 Wis. 2d at 747-48. Referring to the Wisconsin Supreme Court's decision in
Wausau Tile, the Wisconsin Court of Appeals found "that the defective product must be
an 'integral' part of the larger system that includes the damaged property for the two to
be considered parts of an integrated system." (Emphasis added.) 345 Wis. 2d at 748
(citing Wausau Tile, 226 Wis. 2d at 251). "Therefore, a defective product must be
integral to the function of the damaged property before the defective product and the
damaged property may be considered part of the same integrated system." (Emphasis
added.) 345 Wis. 2d at 748.
The Hague court went on to point out that the defective component product in
Wausau Tile was cement that became "integral to the creation" of the damaged final
product—concrete paving blocks. 345 Wis. 2d at 748-49 (citing Wausau Tile, 226 Wis.
2d at 251-52); see also Cincinnati Insurance Co. v. AM International, Inc., 224 Wis. 2d
456, 463, 591 N.W.2d 869 (1999) (defective component product was a gear that was an
integral part of a damaged printing press). The Wisconsin Court of Appeals contrasted
these cases, and others, in concluding that "the water softener at issue in this case was not
integral to the functioning of [the house's] drywall, flooring, and woodwork." 345 Wis.
2d at 749. Thus, the court held "that the water softener and damaged drywall, flooring,
and woodwork [in the house] are not part of an integrated system." 345 Wis. 2d at 749.
Like the Wisconsin Court of Appeals, we conclude as a matter of law that a
defective product must be integral to the function of the damaged property before the
defective product and the damaged property may be considered part of the same
integrated system. We note that the word "integral" means "[e]ssential or necessary for
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completeness; constituent." The American Heritage Dictionary 911 (5th ed. 2016).
Accordingly, in order to be integral, the damaged property must be unable to function
properly without the allegedly defective product.
We find this conclusion to be consistent with the holdings in previous Kansas
product liability cases. Just as the cement powder and mortar was essential for the
construction of the masonry wall in Northwest Arkansas Masonry, Inc., the hydraulic
hoses in Koss were essential for the functioning of the vibratory roller. Northwest
Arkansas Masonry, Inc., 29 Kan. App. 2d at 744; Koss, 25 Kan. App. 2d at 207.
Similarly, in Jordan, the engine that caught on fire was essential to the operation of the
combine. 26 Kan. App. 2d at 743-44.
In each of these cases, the allegedly defective product was an integral, necessary,
essential, or indistinguishable part of the property that was damaged. In contrast, we find
that the bathroom exhaust fans at issue in this case are not integral, necessary, essential,
or indispensable to the functioning of the damaged housing units. We, therefore, hold that
the allegedly defective bathroom exhaust fans and the housing units are not part of an
integrated system.
Conclusion
We find as a matter of law that the bathroom exhaust fans and the housing units
constructed at Fort Riley were not part of an "integrated system" as that term is defined in
the context of product liability law. As such, we further find as a matter of law that the
economic loss doctrine does not preclude Corvias from asserting a product liability claim
against Ventamatic and Jakel. Thus, we conclude that Corvias may proceed on its claim
for damages under the Kansas Product Liability Act.
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In light of our conclusion, it is unnecessary for us to address the issue of whether
the bathroom exhaust fans were inherently dangerous. As the district court correctly
noted, the Kansas Product Liability Act "consolidates all product liability actions,
regardless of theory, into one basis for liability." David, 293 Kan. at 685; see also Griffin
v. Suzuki Motor Corp., 280 Kan. 447, 461, 124 P.3d 57 (2005); Patton v. Hutchinson Wil-
Rich Mfg. Co., 253 Kan. 741, 756, 861 P.2d 1299 (1993). Accordingly, we will not
consider the implied warranty claim separately.
Reversed and remanded for further proceedings.
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