John sullivan/susan Sullivan v. Pulte Home Corp

IN THE
SUPREME COURT OF THE STATE OF ARIZONA
_______________
JOHN F. SULLIVAN AND SUSAN B. SULLIVAN,
Plaintiffs/Appellants,
v.
PULTE HOME CORPORATION,
Defendant/Appellee.
No. CV-12-0419-PR
Filed July 31, 2013
Appeal from the Superior Court in Maricopa County
The Honorable Jonathan H. Schwartz, Judge
The Honorable Joseph B. Heilman, Judge
No. CV2010-004898
REMANDED
Opinion of the Court of Appeals, Division One
231 Ariz. 53, 290 P.3d 446 (App. 2012)
VACATED IN PART
COUNSEL
John F. Sullivan (argued), In Propria Persona, Phoenix, for John F. and
Susan B. Sullivan
Stephen E. Richman (argued), Anne L. Tiffen, Denise H. Troy, Dickinson
Wright/Mariscal Weeks, Phoenix, for Pulte Home Corporation
E. Jeffrey Walsh, Nicole M. Goodwin, Greenberg Traurig, LLP, Phoenix,
for Amici Curiae Home Builders Association of Central Arizona, et al.
P. Douglas Folk, Christopher D.C. Hossack, Heather K. Seiferth, Folk &
Associates, P.C., Phoenix, for Amicus Curiae American Council of
Engineering Companies of Arizona
Michael J. Holden, Holden Willits PLC, Phoenix, for Amicus Curiae
Arizona Builders’ Alliance
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SULLIVAN V. PULTE HOME CORP.
Opinion of the Court
VICE CHIEF JUSTICE BALES authored the opinion of the Court, in which
CHIEF JUSTICE BERCH, JUSTICE PELANDER, JUSTICE BRUTINEL, and
JUDGE MILLER* joined.
_______________
VICE CHIEF JUSTICE BALES, opinion of the Court:
¶1 Arizona’s economic loss doctrine limits contracting parties to their
agreed upon remedies for purely economic losses. Even if a homeowner
has no contract with the builder of the home, when there are construction
defects, Arizona law allows the homeowner to sue the builder for breach
of implied warranty. This cause of action is contractual in nature but rests
on duties imposed by law. Despite the availability of this remedy, if the
homeowner does not have a contract with the homebuilder, we hold that
the economic loss doctrine does not bar the homeowner’s negligence
claims to recover damages resulting from construction defects.
I.
¶2 Because the trial court dismissed this action for failing to state a
claim upon which relief can be granted, we describe the facts as alleged in
the complaint and assume them to be true for purposes of our review.
Flagstaff Affordable Hous. Ltd. P’ship v. Design Alliance, Inc., 223 Ariz. 320,
321 ¶ 2, 223 P.3d 664, 665 (2010).
¶3 Pulte Home Corporation constructed a home and sold it in 2000 to
its initial purchaser, who in turn sold it to John and Susan Sullivan in
2003. Because the Sullivans did not buy their home directly from Pulte,
they never entered into a contract with that company. In 2009, the
Sullivans first noticed irregularities with the home’s hillside retaining
wall. They hired an engineer who determined that the wall and home site
had been constructed in a dangerously defective manner. The Sullivans
notified Pulte, hoping it would cover the cost of repair, but Pulte claimed
it was no longer responsible for any construction defects.
¶4 The Sullivans then filed this action to force Pulte to cover the cost of
repair. Their complaint alleged consumer fraud, fraudulent concealment,
negligence, negligent non-disclosure, negligence per se, negligent
misrepresentation, and breach of implied warranty. The trial court
dismissed all of the claims, ruling that the consumer fraud and fraudulent
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Opinion of the Court
concealment allegations failed to state a claim because Pulte had never
made any representations to the Sullivans; the breach of implied warranty
claim was barred because Arizona’s statute of repose precludes any
implied warranty action against a builder “more than eight years after
substantial completion of the improvement to real property,” A.R.S. § 12-
552(A); and the remaining tort claims were barred by the economic loss
doctrine. The Sullivans appealed.
¶5 The court of appeals held that the trial court erred in dismissing
certain tort claims based on the economic loss doctrine but had properly
dismissed the Sullivans’ other claims. Sullivan v. Pulte Home Corp., 231
Ariz. 53, 60, 63 ¶¶ 31, 50, 290 P.3d 446, 453, 456 (App. 2012). Relying on
this Court’s decision in Flagstaff Affordable Housing, the court of appeals
concluded that, because the Sullivans had no contract with Pulte,
Arizona’s economic loss doctrine did not bar their tort claims. Sullivan,
213 Ariz. at 60 ¶¶ 30-31, 290 P.3d at 453. Accordingly, the court remanded
the case to the trial court for resolution of the Sullivans’ various
negligence claims.
¶6 We granted review to answer a recurring question of statewide
importance and to clarify the application of Arizona’s economic loss
doctrine. We have jurisdiction pursuant to Article 6, Section 5(3) of the
Arizona Constitution and A.R.S. § 12-120.24.
II.
¶7 “The scope of the economic loss doctrine presents a legal issue that
we review de novo.” Flagstaff Affordable Hous., 223 Ariz. at 322 ¶ 9, 223
P.3d at 666. We agree with the court of appeals that the Sullivans’
negligence claims are not barred by Arizona’s economic loss doctrine.
¶8 The economic loss doctrine prohibits certain tort actions seeking
“pecuniary damage[s] not arising from injury to the plaintiff’s person or
from physical harm to property.” Restatement (Third) of Torts: Liability
for Economic Harm § 2 (Tentative Draft No. 1, 2012) (“Draft
Restatement”). Although some courts apply the doctrine to generally bar
tort recovery of purely pecuniary losses, Arizona takes a narrower
approach. See Flagstaff Affordable Hous., 223 Ariz. at 323 ¶¶ 11-12, 223 P.2d
at 667. In Arizona, the doctrine bars only the recovery of “pecuniary or
commercial damage, including any decreased value or repair costs for a
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Opinion of the Court
product or property that is itself the subject of a contract between the
plaintiff and defendant, and consequential damages such as lost profits.”
Id. at ¶ 11.
¶9 We decline to extend the doctrine to non-contracting parties. Id. at
327 ¶ 37, 223 P.3d at 671 (noting that Donnelly Constr. Co. v.
Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984), “correctly
implied that [the economic loss doctrine] would not apply to negligence
claims by a plaintiff who has no contractual relationship with the
defendant”). Our express, limited holding in Flagstaff Affordable Housing
was that “a contracting party is limited to its contractual remedies for
purely economic loss from construction defects.” Id. at 326 ¶ 28, 223 P.3d
at 670. It follows that “[r]ather than rely on the economic loss doctrine to
preclude tort claims by non-contracting parties, courts should instead
focus on whether the applicable substantive law allows liability in the
particular context.” Id. at 327 ¶ 39, 223 P.3d at 671.
¶10 Arizona’s economic loss doctrine serves to encourage the private
ordering of economic relationships, protect the expectations of contracting
parties, ensure the adequacy of contractual remedies, and promote
accident-deterrence and loss-spreading. See id. at 325-26 ¶¶ 25-27, 223
P.3d at 669-70. Limiting the doctrine to contracting parties supports those
policy considerations and aligns with the most recent draft of the
Restatement. See Draft Restatement § 3 cmt. a (noting that application of
the economic loss rule “is limited to parties who have contracts.”).
¶11 The doctrine protects the expectations of contracting parties, but, in
the absence of a contract, it does not pose a barrier to tort claims that are
otherwise permitted by substantive law. See, e.g., Vincent R. Johnson, The
Boundary-Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev.
523, 555 (2009) (“The purpose of the economic loss rule is not to leave
injured persons remediless for economic losses but to ensure respect for
private ordering by relegating a plaintiff to contract remedies in cases
where there is an agreement between the parties allocating economic
risks. If there is no contract between the parties to litigation, there is no
boundary-line function to be performed by the economic loss rule.”);
Thomas E. Lordan, Arizona’s “Economic Loss Rule” and Flagstaff Affordable
Housing, 4 Phoenix L. Rev. 85, 137 (2010) (“Restricting the application of
the [economic loss rule] to contracting parties makes sense. If the purpose
of the [economic loss rule] is to limit parties to the ‘benefit of their
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Opinion of the Court
bargain,’ the [economic loss rule] should only apply where there is a
bargain to which it might be applied.”).
III.
¶12 Pulte argues that even though it had no contract with the Sullivans,
their tort claims should be barred by the economic loss doctrine because
they had a contractual remedy under Arizona law. As subsequent
purchasers, the Sullivans had an actionable claim against the builder
Pulte, despite the parties’ lack of privity, via the implied warranty of
workmanship and habitability. See Lofts at Fillmore Condo. Ass’n v. Reliance
Commercial Constr., Inc., 218 Ariz. 574, 577-78 ¶¶ 15-19, 190 P.3d 733, 736-
37 (2008); see also Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 245, 678
P.2d 427, 430 (1984) (noting that “privity is not required to maintain an
action for breach of the implied warranty of workmanship and
habitability”). The Sullivans’ implied warranty claim, however, was
barred by Arizona’s statute of repose, A.R.S. § 12-552, before they filed
this action. See Sullivan, 231 Ariz. at 57 ¶ 14, 290 P.3d at 450.
¶13 We are not persuaded that the economic loss doctrine should apply
to bar the negligence claims simply because the Sullivans had a possible
contractual remedy under an implied warranty claim. Such a remedy was
imposed as a matter of Arizona’s common law; it did not result from any
opportunity the Sullivans had to negotiate with Pulte over remedies. See
Woodward v. Chirco Constr. Co., 141 Ariz. 514, 516, 687 P.2d 1269, 1271
(1984) (noting that law imputes warranty into construction contract and
allows subsequent purchasers a cause of action). Furthermore, allowing
the Sullivans’ tort claims to proceed does not frustrate the policy of the
statute of repose. That statute applies only to actions “based in contract,”
including actions based on “implied warranties of habitability, fitness or
workmanship,” A.R.S. § 12-552(A), (C), (F); it does not address actions
based in tort. Whether the common law economic loss doctrine should be
expanded to encompass non-contracting parties does not hinge on the
scope and effect of a statute governing contractual remedies.
¶14 Our holding that the economic loss doctrine does not bar the
Sullivans’ tort claims does not, of course, imply that those claims will
ultimately succeed. Cf. Flagstaff Affordable Hous., 223 Ariz. at 327-28 ¶ 39,
223 P.2d at 671-72 (directing courts to consider applicable substantive law
to determine if non-contracting parties may recover economic losses in
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Opinion of the Court
tort); Draft Restatement § 6(2), reporter’s note to cmt. c (noting division of
authority but concluding that subsequent home purchasers should not
recover in tort from homebuilder for negligent construction). As the court
of appeals noted, Pulte made other arguments challenging the legal
sufficiency of the tort claims that were not addressed by the trial court,
which may consider those arguments in the first instance on remand.
Sullivan, 231 Ariz. at 62 ¶ 45, 290 P.3d at 455.
IV.
¶15 We did not grant review on issues decided by the court of appeals
other than the application of the economic loss doctrine, and we
accordingly do not comment on those issues. We vacate paragraphs 24-31
of the court of appeals’ opinion and remand this case to the trial court for
further proceedings consistent with this opinion.
* Justice Timmer recused herself from this case. Pursuant to Article 6,
Section 3 of the Arizona Constitution, the Honorable Michael Owen
Miller, Judge of the Arizona Court of Appeals, Division Two, was
designated to sit in this matter.
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