Valley Forge Insurance Co. v. Sam's Plumbing Thomas, Thomas

FILED BY CLERK
IN THE COURT OF APPEALS MAR 19 2009
STATE OF ARIZONA
COURT OF APPEALS
DIVISION TWO DIVISION TWO
VALLEY FORGE INSURANCE )
COMPANY, )
)
Plaintiff/Appellant, ) 2 CA-CV 2008-0095
) DEPARTMENT B
v. )
) OPINION
SAM’S PLUMBING, LLC, an Arizona )
Limited Liability Company; and )
SAMUEL N. THOMAS and LOIS )
THOMAS, husband and wife, )
)
Defendants/Appellees. )
)
APPEAL FROM THE SUPERIOR COURT OF PINAL COUNTY
Cause No. CV-200600364
Honorable Robert Carter Olson, Judge
REVERSED AND REMANDED
Shughart Thomson & Kilroy, P.C.
By Robert O. Dyer and Andrew S. Jacob Phoenix
Attorneys for Plaintiff/Appellant
Rai & Barone, P.C.
By Rina Rai and Brian J. Schmidt Phoenix
Attorneys for Defendants/Appellees
E C K E R S T R O M, Presiding Judge.
¶1 The plaintiff, Valley Forge Insurance Company, appeals from the trial court’s
entry of summary judgment in favor of defendants Sam’s Plumbing, LLC, and Samuel and
Lois Thomas (collectively, “Sam’s Plumbing”). Valley Forge argues the trial court erred in
finding its subrogated negligence claim barred by the economic loss rule. We agree and
reverse and remand for the reasons set forth below.
Factual and Procedural Background
¶2 This case arose from a gas explosion in a shopping center building in Pinal
County owned by Gustav Kuhn and insured by Valley Forge.1 Viewing the facts in the light
most favorable to Valley Forge, the party opposing summary judgment, see Grand v.
Nacchio, 214 Ariz. 9, ¶ 3, 147 P.3d 763, 767 (App. 2006), we accept for purposes of this
appeal that the explosion was caused by negligent gas line work performed by Sam’s
Plumbing pursuant to its contract with a tenant leasing a space in the shopping center. The
explosion “severely damaged” Kuhn’s shopping center, but it neither caused him bodily
injury nor damaged any of his personal property. Valley Forge paid more than $1.1 million
to Kuhn “for property and business-interruption damages” caused by the explosion, which
fully compensated Kuhn for the incident.2 Valley Forge then asserted a subrogated
1
Valley Forge’s complaint was originally filed in Maricopa County. When venue
changed to Pinal County, the cause number CV-200701551 was assigned. This cause of
action was later consolidated, along with several others, into CV-200600364. See Ariz. R.
Civ. P. 42(a).
2
Although Valley Forge asserted in its opening brief that it paid Kuhn “more than $1.4
million for physical property damages and lost rents,” it failed to support this claim with
citations to the record. In any event, the precise amount of damages the explosion caused is
a factual issue irrelevant to our disposition of this appeal.
2
negligence claim against Sam’s Plumbing seeking to recover Kuhn’s damages resulting from
the explosion.
¶3 Sam’s Plumbing filed a motion for summary judgment and argued the
“economic loss rule” barred Valley Forge’s claim and therefore any claim against it sounded
in the law of contract rather than the law of tort. The trial court, relying on Carstens v. City
of Phoenix, 206 Ariz. 123, 75 P.3d 1081 (App. 2003), and Hayden Business Center
Condominiums Ass’n v. Pegasus Development Corp., 209 Ariz. 511, 105 P.3d 157 (App.
2005), disapproved of in part by Lofts at Fillmore Condominium Ass’n v. Reliance
Commercial Construction, Inc., 218 Ariz. 574, 190 P.3d 733 (2008), applied the “Economic
Loss Doctrine” to the case and found the damage to the building itself was not “qualifying
property damage for the purpose of bringing a negligence claim.” The court thus concluded
Valley Forge’s negligence claim was barred as a matter of law and granted summary
judgment in favor of Sam’s Plumbing. Following the entry of a final judgment pursuant to
Rule 54(b), Ariz. R. Civ. P., Valley Forge filed this timely appeal.
Discussion
¶4 Valley Forge argues the “economic loss rule” does not apply to this case
because Sam’s Plumbing’s negligence did not simply cause physical harm to the piping
system—the “subject of th[e] bargain” with the tenant—but instead caused extensive damage
to the shopping center building owned by Kuhn. On appeal from summary judgment, we
determine de novo whether genuine issues of material fact exist and whether the trial court
erred in its application of the law. See Wells Fargo Bank v. Ariz. Laborers, Teamsters &
3
Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474, ¶¶ 13-14, 38 P.3d 12, 20
(2002). We conclude the trial court erred in finding Valley Forge’s negligence claim barred
as a matter of law.
¶5 Generally, one may recover in tort for negligently caused property damage. See
Restatement (Second) of Torts § 281 (1965) (invasion of protected interest of another
element of negligence action); see also Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439,
445, 690 P.2d 158, 164 (App. 1984) (“‘Property interests . . . have generally been found to
merit protection from physical harm.’”), quoting Crowder v. Vandendeale, 564 S.W.2d 879,
882 (Mo. 1978). However, when the property damaged is the subject of a contract or
warranty, a typical feature of product liability and defective construction cases, the question
arises whether the plaintiff’s claims, if any, should sound in contract or tort. E.g., Salt River
Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 375,
694 P.2d 198, 205 (1984), abrogated on other grounds by Phelps v. Firebird Raceway, Inc.,
210 Ariz. 403, 111 P.3d 1003 (2005); Woodward v. Chirco Constr. Co., 141 Ariz. 514, 515,
687 P.2d 1269, 1270 (1984). This issue is resolved on a case-by-case basis with the court
analyzing the purposes of the respective bodies of law and applying whichever law is most
appropriate. Salt River, 143 Ariz. at 375-76, 694 P.2d at 205-06.
¶6 Contract law protects the expectation that the parties will receive the benefits
of their bargain and encourages the efficient private ordering of liabilities by allowing parties
to negotiate and distribute their respective responsibilities, while tort law promotes safety and
protects personal and property rights by imposing a baseline duty of care. See id.; Carstens,
4
206 Ariz. 123, ¶ 10, 75 P.3d at 1084. Accordingly, in the context of property damage,
contract law focuses on standards of quality as defined by the contracting parties; tort law on
the objective reasonableness of certain conduct and the actual harm it causes. Carstens, 206
Ariz. 123, ¶ 10, 75 P.3d at 1084.
¶7 With these principles in mind, our supreme court has directed Arizona courts
to consider three non-dispositive factors to determine whether tort or contract law should
apply to a particular claim: (1) the nature of the defect causing loss, (2) how the loss
occurred, and (3) “the type of loss for which the plaintiff seeks redress.” Salt River, 143
Ariz. at 376, 694 P.2d at 206. The first factor turns on whether quality or safety concerns are
primarily implicated. See id. at 376-77, 694 P.2d at 206-07. The second factor looks to
whether the loss results from a slow deterioration or a sudden accident or calamity. See id.
at 377-78, 694 P.2d at 207-08. The third factor examines the nature of the loss claimed as
well as any other contemporaneous losses. See id. at 379, 694 P.2d at 209. If damage occurs
suddenly and accidentally and the defect poses an unreasonable risk of danger to people or
other property, the claim will sound in tort, even if, as in Salt River, the only property
damaged is the defective product itself. See id.
¶8 Applying those principles here, we find no reason to bar Valley Forge’s tort
action. Sam’s Plumbing contracted with the tenant to do limited work to the tenant’s units,
and the resulting explosion severely damaged not only those units, but other parts of the
shopping center as well. The deficient work on the gas pipes did not simply fall below the
quality standards specified in the tenant’s contract, thereby disappointing the tenant’s
5
commercial expectations. Rather, that work presented an extreme risk of danger to everyone
and everything around the piping. And, the explosion was the very type of “sudden calamity
or . . . extraordinary event” that is the hallmark of tort liability. Id. at 378, 694 P.2d at 208.
Finally, the record suggests the losses suffered went far beyond damage to the gas lines
themselves and caused extensive damage to the shopping center. Thus, analysis of each of
the criteria our supreme court established for determining whether a claim should sound in
tort or contract clearly shows that the claim we consider here sounds in tort.
¶9 Although Salt River specifically addressed the application of tort and contract
law in the products liability context, the economic loss rule contemplated in Salt River
involves the same policy concerns as those present in defective construction cases. See
Sidney R. Barrett, Jr., Recovery of Economic Loss in Tort for Construction Defects: A
Critical Analysis, 40 S.C. L. Rev. 891, 897 (1989) (noting rationales for limiting tort claims
and observing “[t]he economic loss doctrine often is described as a creature of product defect
litigation”). And, we can find no basis for distinguishing Salt River from Woodward, a
defective construction case decided by the supreme court approximately three months earlier.
See Woodward, 141 Ariz. at 515-16, 687 P.2d at 1270-71 (recognizing both contract and tort
claims may be available in construction defect cases). Woodward only briefly suggested
what types of damages would be presumptively actionable under contract and tort law
respectively and did so only in dicta. See id. at 516, 687 P.2d at 1271 (“For example, if a
fireplace collapses, the purchaser can sue in contract for the cost of remedying the structural
defects and sue in tort for damage to personal property or personal injury caused by the
6
collapse.”). That reasoning fell far short of concluding tort claims are categorically
precluded when a claimant has exclusively suffered damage to property subject to warranty
or contract. Indeed, in its far more comprehensive treatment of the topic in Salt River, the
supreme court characterized the type of loss suffered as merely one of several factors to be
considered when determining whether property damage is actionable in tort. 143 Ariz. at
376, 694 P.2d at 206. We therefore do not read Woodward, a construction defect case, as
setting forth a different rule for resolving application-of-law questions than Salt River, a
products liability case.
¶10 Nevertheless, Sam’s Plumbing contends, and the trial court found, that
controlling Arizona jurisprudence in the defective construction context has expressly barred
recovery for property damages in tort when the plaintiff has suffered neither personal injury
nor damage to personal property. Indeed, several court of appeals cases have applied a per
se rule, barring negligence claims when damage involves only the structure itself. In Nastri,
a case decided before Salt River, this court held that, in an action between a homeowner and
a builder, only bodily injury or damage to personal property was actionable in tort, not
damage solely to the structure. Nastri, 142 Ariz. at 444-45, 690 P.2d at 163-64. Citing
Nastri, Division One reiterated that holding in Carstens, a case decided after Salt River.
Carstens, 206 Ariz. 123, ¶¶ 2, 11, 13, 75 P.3d at 1082, 1084-85. 3 There, the court
3
Carstens, like Nastri, interpreted Woodward v. Chirco Construction Co., 141 Ariz.
514, 687 P.2d 1269 (1984), to require that holding. See Carstens, 206 Ariz. 123, ¶ 13, 75
P.3d at 1084-85; Nastri, 142 Ariz. at 445, 690 P.2d at 164. However, as discussed, supra,
¶ 9, that interpretation of Woodward cannot be harmonized with the reasoning of Salt River.
7
specifically rejected any consideration of the dangerousness of a building defect in
determining whether an action could sound in tort, reasoning that to do so would “undermine
the bright-line test of actual injury set out by the economic loss rule.” Id. ¶¶ 20-21 & n.3, 75
P.3d at 1085-86 & n.3; see also Hayden Bus. Ctr. Condos. Ass’n, 209 Ariz. 511, ¶¶ 26-27,
105 P.2d at 162 (holding condominium association could bring tort action only for personal
injury or damage to personal property), disapproved of in part by Lofts at Fillmore Condo.
Ass’n.
¶11 As our discussion of Salt River makes clear, however, our supreme court
provided a list of factors, not a bright-line test, for determining whether to apply tort or
contract law to a given situation when property has been damaged. 143 Ariz. at 376, 379-80,
694 P.2d at 206, 209-10 (“Each case must be examined to determine whether the facts
preponderate in favor of the application of tort law or commercial law exclusively or a
combination of the two.”). And Carstens overlooks that one of the factors articulated by the
court as relevant to a determination of whether a property damage claim sounds in tort is the
dangerousness of the defect. Salt River, 143 Ariz. at 376, 694 P.2d at 206. Furthermore, Salt
River teaches, in direct contradiction to the per se rule advocated by Sam’s Plumbing, and
adopted in Carstens, that a claimant may recover in tort when only the defective property is
damaged. Id. at 378-79, 694 P.2d at 208-09.4
4
Although we acknowledge that Salt River does not address the topic, we also
question Carstens’s conclusion that the availability of contractual remedies to the claimant
is irrelevant in assessing the availability of tort remedies in the defective construction
context. See Carstens, 206 Ariz. 123, ¶ 17, 75 P.3d at 1085 (“[I]rrespective of a plaintiff’s
contractual claims against a defendant, the [economic loss] rule bars recovery of economic
8
¶12 Notably, the United States Supreme Court has adopted the per se rule for
determining whether a claim sounds in tort or contract in federal maritime cases. See E.
River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 870-71 (1986). And the
authorities cited by Carstens explaining such a rule in construction defect cases each referred
to the Court’s reasoning in Delaval. See Calloway v. City of Reno, 993 P.2d 1259, 1263-64
(Nev. 2000), overruled on other grounds by Olson v. Richard, 89 P.3d 31 (Nev. 2004);
Barrett, supra, at 915-17. Delaval, in turn, adopted the per se rule based on the reasoning
and holding of Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 1965). See Delaval, 476
U.S. at 871. Our supreme court, however, expressly rejected Seely’s approach in Salt River.
143 Ariz. at 379, 694 P.2d at 209. Thus, Carstens not only set forth an economic loss rule
at odds with the analysis required by our supreme court in Salt River, but it anchored its
reasoning in a stream of legal authority expressly rejected in Salt River.5
¶13 We are not at liberty to disregard the clear holdings of our supreme court even
when, as here, those holdings have been overlooked by subsequent case law from our
intermediate appellate courts. See State v. Bejarano, ___ Ariz. ___, ¶ 6, 200 P.3d 1015, 1017
(App. 2008). We conclude, therefore, that the trial court erred when it dismissed Valley
damages in tort because such damages are not cognizable in tort absent actual injury.”). But
see Woodward, 141 Ariz. at 516, 687 P.2d at 1271 (suggesting contract remedies most
appropriate in home construction context when “defects render the home less than the
purchaser bargained for”); Dan B. Dobbs, An Introduction to Non-Statutory Economic Loss
Claims, 48 Ariz. L. Rev. 713, 726 (2006) (cautioning “the contractual economic loss rule
should not bar tort relief to strangers whose rights against the defendant do not arise out of
a consensual arrangement that is expected to limit tort rights”).
5
The trial court also relied erroneously on Delaval.
9
Forge’s tort claims in reliance on those appellate cases and did so on the exclusive grounds
that Valley Forge’s subrogee had suffered no personal injury or personal property loss arising
from the alleged defective workmanship on the gas line.
¶14 We acknowledge the public policy goals of the economic loss rule, which the
trial court identified in its scholarly order: to assure that contract law does not “drown in a
sea of tort” and to encourage parties to efficiently negotiate the distribution of potential
liabilities arising from their contractual relationships. Delaval, 476 U.S. at 866. But, as our
supreme court’s extensive discussion of the problem in the context of products liability aptly
demonstrates, the law of tort also pursues important societal goals. Salt River, 143 Ariz. at
376-78, 694 P.2d at 206-08 (emphasizing role of tort law in protecting public and
“preventing accidents by deterring the distribution of unsafe products”). For that reason,
Sam’s Plumbing had a general duty under tort law, separate from any contractually assumed
obligation, to exercise reasonable care in any work undertaken. This duty included the
specific duty to take precautions to avoid dangerous gas explosions. Insofar as Sam’s
Plumbing breached that duty—a factual question that remains to be determined—it is liable
for the actual damages it caused. See U.S. Fid. & Guar. Co. v. Davis, 3 Ariz. App. 259, 263,
413 P.2d 590, 594 (1966) (actual damages those “‘in satisfaction of, or in recompense for,
loss or injury sustained; such compensation or damages for an injury as follow from the
nature and character of the act, and will put the injured party in the position in which he was
before he was injured’”), quoting 25 C.J.S. Damages § 2 (1966); see also Strawberry Water
Co. v. Paulsen, 535 Ariz. Adv. Rep. 25, ¶ 42 (Ct. App. Jul. 29, 2008) (“[L]ost profits may
10
be considered as part of actual damages but are not the sole measure of actual damages.”)
(citations omitted).
¶15 The trial court’s judgment dismissing Valley Forge’s subrogated negligence
claim is reversed and the case remanded for further proceedings.
____________________________________
PETER J. ECKERSTROM, Presiding Judge
CONCURRING:
____________________________________
J. WILLIAM BRAMMER, JR., Judge
____________________________________
GARYE L. VÁSQUEZ, Judge
11