Rosauer Corporation v. Sapp Development, L.L.C., Todd Sapp, Whispering Creek, L.L.C., and W.C. Development, Inc., A/K/A Morningside Investors, L.C.

IN THE COURT OF APPEALS OF IOWA
No. 4-065 / 13-1285
Filed April 16, 2014
ROSAUER CORPORATION,
Plaintiff-Appellant,
vs.
SAPP DEVELOPMENT, L.L.C.,
TODD SAPP, WHISPERING CREEK,
L.L.C., and W.C. DEVELOPMENT, INC.,
a/k/a MORNINGSIDE INVESTORS, L.C.,
Defendants-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Woodbury County, Duane E.
Hoffmeyer, Judge.
A land purchaser appeals the grant of summary judgment in favor of a
residential developer for an alleged breach of an implied warranty of good
workmanship or reasonable fitness for a particular purpose with respect to a
residential lot. AFFIRMED.
Paul D. Lundberg of Lundberg Law Firm, P.L.C., Sioux City, for appellant.
Patrick L. Sealey and John C. Markham of Heidman Law Firm, L.L.P.,
Sioux City, for appellees.
Considered by Tabor, P.J., McDonald, J., and Goodhue, S.J.*
*Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2013).
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TABOR, P.J.
Land purchaser Rosauer Corporation challenges the district court’s grant
of summary judgment in favor of Todd Sapp, president of W.C. Development,
L.L.C. The district court concluded the implied warranties of workmanlike
construction and reasonable fitness for an intended purpose did not apply to
Sapp’s conduct in selling a residential lot.
On appeal, Rosauer seeks to extend the holding in Speight v. Walters
Dev. Co., 744 N.W.2d 108, 114–15 (Iowa 2008) to subsequent purchasers of
building lots. We decline to extend Speight under these circumstances, deferring
such a decision to our supreme court. Accordingly, we affirm the grant of
summary judgment.
I. Background Facts and Proceedings
Lot 13 of Royal Highlands, Third Addition, was farmland before Todd Sapp
and his company, W.C. Development, L.L.C., created the residential subdivision
on the southeast side of Sioux City. Sapp contracted with Burkhardt Earth
Moving to perform excavation work, including scraping the crown off the lot which
sat atop a hill and filling in the valley with “some dirt.” Sapp asserted his
company hired Certified Testing Services (CTS) to ensure the fill and soil
compaction in the development met industry standards.
In April 2003, Sapp sold Lot 13 to realtor Kenneth Beaulieu. Beaulieu
marketed the hilltop lot for its views of the backside of Whispering Creek Golf
Course. In July 2007, Rosauer Corporation purchased Lot 13 from Beaulieu for
$50,000. The building lots were subject to restrictive covenants. Rosauer
3
planned to build two townhomes on the lot. Rosauer had heard “rumors through
the grapevine that there were houses that were settling [in the Whispering Creek
development], and some dirt problems on certain areas.” But Rosauer did not
ask Beaulieu about those rumors before purchasing Lot 13.
After the purchase, Rosauer hired CTS to perform boring and soil testing
on Lot 13. The testing was required by Rosauer’s lender. The September 2007
test results showed the fill was not compacted properly. The main concern of the
soil engineers was “undocumented fill material in the top 15 feet to 18.5 feet of
the borings.” The report stated: “CTS does not recommend that the structure be
placed on the existing fill material in its present condition.”
In addition to being the developer, Sapp served on the architectural design
review committee for the Royal Highlands, Third Addition. As a lot owner,
Rosauer was required to submit his townhome plans to that committee and
receive approval before starting to build. By September 2007, Rosauer had not
yet received approval from the design review committee.
Upon receiving the CTS report, Rosauer called Sapp to discuss the fact
Rosauer would have to “do an overdig” before starting construction of the
townhomes. Rosauer recalled a second conversation in which Sapp said:
[H]e had this problem on several other lots up there. He said
usually what happened was the builders went ahead . . . completed
the dirt work as needed, and then upon completion, any of that
extra work that would have been above and beyond normal, the
development had taken care of the extra costs of doing so.
Rosauer alleges he spent $76,858.84 to remove and replace the
improperly compacted soil on Lot 13 in the fall of 2007. Rosauer acknowledges
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approximately $69,995 of the work was completed by his own landscaping
company. Rosauer eventually built two townhomes on Lot 13. Rosauer also
testified that in subsequent property deals he has asked two different realtors if
he could do soil testing before purchasing a residential lot, and he was told “no”:
“they both gave me the same reasoning, that they couldn’t have the liability of
someone testing before it was owned.”
On June 11, 2012, Rosauer filed a lawsuit naming Sapp and his limited
liability corporations, as defendants.1 The suit alleged:
After purchasing Lot 13 in Royal Highlands Third Addition,
plaintiff learned, through soil testing, that the lot was unsuitable for
residential construction without undergoing substantial over
excavation and compaction to address improperly compacted fill
material placed on the land by one or more of the defendants.
Rosauer’s suit advanced two legal theories: negligence and breach of implied
warranties. Sapp filed an answer on July 20, 2012.
On March 21, 2013, Sapp moved for summary judgment, alleging first,
Rosauer’s economic losses were not recoverable in tort, and second, “[t]he Iowa
Supreme Court had not recognized a claim for implied warranties for the sale of
unimproved land against a third-party lacking privity of contract.” Rosauer
resisted the motion for summary judgment, conceding he could not pursue a
negligence action, but alleging genuine issues of material fact precluded
summary judgment on his implied warranty claims. The district court granted
1
Rosauer’s original petition named Todd Sapp individually, as well as Sapp
Development, L.L.C., and Whispering Creek, L.L.C. Rosauer filed an amended petition
on September 19, 2012, adding “W.C. Development, Inc. a/k/a Morningside Investors,
L.C.” as defendants. On November 26, 2012, Rosauer filed a dismissal without
prejudice of Sapp Development, L.L.C. and Whispering Creek, L.L.C. In this opinion, we
will refer to the defendants collectively as Sapp.
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summary judgment for Sapp, reasoning an implied warranty did not attach to
Sapp’s actions because “no physical structure was actually built on the land.”
The court concluded: “Without a dwelling, the doctrine of caveat emptor
extinguishes Rosauer’s claims of negligent workmanlike construction.” Rosauer
challenges the grant of summary judgment on appeal.
II. Scope and Standard of Review
We review a district court’s grant of summary judgment for correction of
legal error. Mueller v. Wellmark, Inc., 818 N.W.2d 244, 253 (Iowa 2012). The
legal question concerning the existence of an implied warranty may be properly
resolved by summary judgment. See Knapp v. Simmons, 345 N.W.2d 118, 121
(Iowa 1984). Summary judgment is appropriate if the record reveals no genuine
issues of material fact and the moving party is entitled to judgment as a matter of
law. See Emp’rs Mut. Cas. Co. v. Van Haaften, 815 N.W.2d 17, 22 (Iowa 2012).
We view the record in the light most favorable to the nonmoving party, here
Rosauer Corporation. See Minor v. State, 819 N.W.2d 383, 393 (Iowa 2012).
III. Analysis
Rosauer acknowledges Iowa has yet to recognize an implied warranty for
building lots, even for property like Lot 13 that has been excavated and
backfilled. Rosauer argued in the district court: “The Iowa Supreme Court has
never rejected a claim for breach of implied warranty on the sale of a residential
building lot. The court has simply not addressed the issue.”
In granting Sapp’s motion for summary judgment, the district court
predicted “if the question here to be decided were presented to the Supreme
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Court of Iowa, the rule of caveat emptor[2] in the sale of land would be recognized
and an implied warranty of workmanlike construction would not be available to a
purchaser of a land parcel with no dwelling on it.”3 The district court decided the
analysis in Kirk v. Ridgway, 373 N.W.2d 491, 496 (Iowa 1985) and Speight, 744
N.W.2d at 114, only applied to home construction.
Sapp advances two different arguments in support of the district court’s
ruling: first, agreeing there is no implied warranty under Iowa law for land in the
absence of a constructed building and second, asserting the extension of the
implied warranty to subsequent home purchasers in Speight does not apply to a
commercial investor-builder like Rosauer.
2
This phrase is Latin for “let the buyer beware” and describes a legal doctrine “holding
that purchasers buy at their own risk.” See Black’s Law Dictionary 252 (9th ed. 2009)
(explaining modern cases have “greatly limited the importance of this doctrine”). Iowa
case law trends toward implied warranties. See, e.g., Speight, 744 N.W.2d at 114(allowing subsequent purchaser to recover against builder-vendor for breach of implied
warranty of workmanlike construction); Kirk, 373 N.W.2d at 496 (applying doctrine of
implied warranty of workmanlike construction to sale of home by builder-vendor to first
owner); Semler v. Knowling, 325 N.W.2d 395, 398 (Iowa 1982) (finding implied warranty
of fitness for particular purpose applied to installation of sewer); Farm Bureau Mut. Ins.
Co. v. Sandbulte, 302 N.W.2d 104, 110 (Iowa 1981) (acknowledging implied warranty
that insurance policy later delivered would be reasonably fit for its intended purpose);
Mease v. Fox, 200 N.W.2d 791, 796 (Iowa 1972) (recognizing implied warranty of
habitability as available defense to tenants with residential lease); Drager v. Carlson
Hybrid Corn Co., 56 N.W.2d 18 (Iowa 1952) (allowing defense of implied warranty on
personalty, specifically seed corn); Boddy v. Henry, 101 N.W. 447, 452 (Iowa 1904)
(finding maxim caveat emptor did not bar relief to land purchaser claiming false
representations as to number of acres); Arthur v. Brick, 565 N.W.2d 623, 625 (Iowa Ct.
App. 1997) (describing trend as “dislodging antiquated concept of caveat emptor in most
business transactions”).
3
The district court relied on a series of Alabama cases in deciding the Iowa Supreme
Court would not recognize an implied warranty to land with no dwelling. See, e.g., Clay
Kilgore Const., Inc. v. Buchalter/Grant L.L.C., 949 So.2d 893 (Ala. 2006) (defining
“unimproved” property as land with no dwelling and applying rule of caveat emptor to
such property); DeAravjo v. Walker, 589 So.2d 1292 (Ala. 1991) (same); Morris v.
Strickling, 579 So.2d 609 (Ala. 1991) (same).
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As to Sapp’s first argument for affirming the grant of summary judgment,
we take no position on the question whether the lack of a dwelling on a
residential lot would require reliance on the rule of caveat emptor. We note other
state appellate courts have recognized implied warranties on the sale of land by
a developer. See Rusch v. Lincoln-Devore Testing Laboratory, Inc., 698 P.2d
832, 835 (Colo. App. 1984) (holding where “a commercial developer improves
and sells land for the express purpose of residential construction, an implied
representation to a purchaser arises that the property is suitable for the
residential purpose for which it is sold”); Overton v. Kingsbrooke Dev., Inc., 788
N.E.2d 1212, 1218 (Ill. App. Ct. 2003) (holding buyer has a cause of action for a
breach of an implied warranty of habitability against a developer/seller for latent
defects in improved land); Jordan v. Talaga, 532 N.E.2d 1174, 1185–86 (Ind. Ct.
App. 1989) (rejecting application of the rule of caveat emptor to sale of graded
lots developed for homebuilding); Hinson v. Jefferson, 215 S.E.2d 102, 111 (N.C.
1975) (holding developer breached an implied warranty of habitability arising out
of restrictive covenants because the land was valueless for the only purpose
allowed—homebuilding). Moreover, Iowa cases do not rule out the possibility
that subsurface contract work, rather than above-ground construction, could give
rise to an implied warranty. See, e.g., Midwest Dredging Co. v. McAninch Corp.,
424 N.W.2d 216, 222 (Iowa 1988) (holding acts of state department of
transportation in providing test boring results to highway construction
subcontractor and requiring material in question be hydraulically dredged and
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piped to construction site gave rise to implied warranty); Semler, 325 N.W.2d at
398 (recognizing availability of implied warranty relief for digging sewer).
But even if we believed a contract for excavation work could spawn an
implied warranty that the developed lot was fit for a particular purpose, the
circumstances here do not support extending such an implied warranty to
Rosauer under existing Iowa law.
In Kirk, our supreme court allowed purchasers of a new home who
discovered latent defects to recover from a builder-vendor under the implied
warranty of workmanlike construction. 373 N.W.2d at 494. In Speight, the
supreme court extended the implied warranty of workmanlike construction to
subsequent purchasers. 744 N.W.2d at 115. Speight explained an implied
warranty was a judicially-created doctrine having roots in the execution of a
contract, but also “exists independently of the contract by its very nature.” Id. at
110, 113. The court recognized the warranty did not arise from contractual
language binding a builder-vendor and the original purchaser. Id. at 114. On
that basis, it expanded the implied warranty of workmanlike construction to allow
subsequent purchasers who were not in contractual privity to recover from the
builder-vendor. Id.Recognizing the limitations in the existing case law, Rosauer asked the
supreme court to retain this case to extend the principles in Speight to
subsequent purchasers of residential lots. Nevertheless, the supreme court
transferred the appeal to our court.
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On several occasions, our court has declined to extend the implied
warranty of workmanlike construction to parties not previously recognized by the
supreme court as warrantors or warrantees of that home-building doctrine. See,
e.g., Luana Sav. Bank v. Pro-Build Holdings, Inc., 2014 WL 69515, at *2 (Iowa
Ct. App. 2014) (declining invitation to extend Speight’s implied warranty to
consumer lender providing funds to build a multi-unit dwelling); Village at White
Birch Town Homeowners Ass’n v. Goodman Assocs., Inc., No. 11-1842, 2012
WL 5356045, at *4 (Iowa Ct. App. 2012) (opining that “to hold a subcontractor
responsible under the implied warranty of workmanlike construction would
overstep our current case law”), aff’d, 2014 WL 1351058 (Iowa Apr. 4, 2014);
Speight v. Walters Dev. Co., Ltd., 2007 WL 465572, at *1 (Iowa Ct. App. 2007)
(“We leave it to the legislature or our supreme court to extend the law in this
area.”), vacated by Speight, 744 N.W.2d at 110.
We opt to follow that same path here. To allow a remote purchaser and
commercial investor like Rosauer to benefit from an implied warranty of
workmanlike performance by the excavation company, which contracted with the
developer, would outpace our existing precedents. As Sapp asserts, Rosauer is
not the kind of naïve purchaser the implied warranty normally works to protect.
As a commercial investor, Rosauer would have more skills than the average
consumer to determine if the lot was suitable for building. See Speight, 744
N.W.2d at 111 (noting “home buyers are ill-equipped to discover defects in
homes, which are increasingly complex, and therefore must rely on the skill and
judgment of the vendor”). Moreover, it is unclear under existing law that
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developer Sapp would have the same status as a builder-vendor under the Kirk-
Speight regime. See Kirk, 373 N.W.2d at 496 (defining builder as a general
contractor who “has ultimate responsibility for the completion of the whole
contract and for putting the structure into permanent form”). In addition, the
intervening purchase of Lot 13 by realtor Beaulieu could impede the flow of the
implied warranty to Rosauer. See Speight, 744 N.W.2d at 114 (suggesting it is
the doctrine of assignment that would allow transfer of the original purchaser’s
right to sue for breach of an implied warranty to the subsequent purchaser).
We decline to apply the doctrine of implied warranty under these
circumstances, leaving any extension of the principles discussed in Speight to
the discretion of our supreme court. Accordingly, we affirm the grant of summary
judgment to Sapp.
AFFIRMED.