Wyman v. Ayer Properties, LLC

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SJC-11474
BRYAN WYMAN & others, 1 trustees, 2 vs. AYER PROPERTIES, LLC.
Middlesex. March 4, 2014. - July 10, 2014.
Present: Ireland, C.J., Spina, Cordy, Botsford, Gants, Duffly,
& Lenk, JJ.
Real Property, Condominium. Condominiums, Common area.
Negligence, Construction work, Economic loss. Damages,
Replacement or reconstruction of building, Repairs.
Civil action commenced in the Superior Court Department on
December 8, 2005.
The case was heard by Paul A. Chernoff, J.
After review by the Appeals Court, the Supreme Judicial
Court granted leave to obtain further appellate review.
Thomas O. Moriarty (David M. Rogers with him) for the
plaintiffs.
Thomas H. Hayman (Patrick T. Uiterwyk with him) for the
defendant.
Henry A. Goodman, for Community Associations Institute,
amicus curiae, submitted a brief.
1
Frank Thoms and Vincent Cascio.
2
Of the Market Gallery Condominium Trust.
2
CORDY, J. On December 8, 2005, Brian Wyman, Frank Thoms,
and Vincent Cascio, as trustees of the Market Gallery
Condominium Trust (trustees), filed a civil action against Ayer
Properties, LLC (Ayer), seeking damages stemming from the
negligent construction of elements of a condominium building by
Ayer. The trustees alleged that Ayer -- which had purchased and
converted the building in question into condominiums -- had
negligently constructed the window frames, the exterior brick
masonry, and the roof of the building, resulting in damage to
both the common areas of the building and individual residential
units. 3
After a jury-waived trial, a Superior Court judge found
that Ayer was negligent in its construction of the window
frames, masonry, and roof. He awarded damages for Ayer's
negligence as to the window frames and the roof, because their
improper installation had resulted in damage to both the common
areas and several individual units. However, because he found
that the damage resulting from the defective masonry work was
limited to the masonry itself and did not cause or include
damage to any individual units, the judge concluded that the
3
The trustees of the Market Gallery Condominium Trust
(trustee) sought damages only for the damage to the common areas
and facilities of the building.
3
economic loss rule precluded the trustees from recovering for
Ayer's negligence as to that portion of the building. 4
In determining the appropriate measure of damages, the
judge first calculated the cost to repair and replace the
damaged portions of the building, 5 and then reduced that amount
by twenty per cent to reflect what the costs would have been at
the time of the negligent construction rather than at the time
of the actual expenditures for repair and replacement. As a
result, the judge awarded compensatory damages of $140,000 to
the trustees. To this amount, the judge noted, would be added
simple annual interest of twelve per cent, in accordance with
G. L. c. 231, § 6B. 6 The parties filed cross appeals. In its
appeal, Ayer claimed, among other things, that the condominium
structure constituted an integrated product, and that where no
4
The "economic loss rule" is also referred to as the
"economic loss doctrine."
5
These costs included costs actually incurred to replace
the roof, and those estimated to be necessary for the removal
and replacement of the windows and frames.
6
General Laws c. 231, § 6B, provides:
"In any action in which a verdict is rendered or a
finding made or an order for judgment made for pecuniary
damages for personal injuries to the plaintiff or for
consequential damages, or for damage to property, there
shall be added by the clerk of court to the amount of
damages interest thereon at the rate of twelve per cent per
annum from the date of commencement of the action even
though such interest brings the amount of the verdict or
finding beyond the maximum liability imposed by law."
4
damage extended beyond that product, the economic loss rule
precluded any damages.
The Appeals Court affirmed the judgment in favor of the
trustees on the claims for compensatory damages for harm to the
common area window frames and to the roof areas, determining
that application of the economic loss rule was not appropriate
in this context. Wyman v. Ayer Props., LLC, 83 Mass. App. Ct.
21, 29, 31 (2012). It went on to note that the "closest dicta"
of this court "lean against the unqualified application of the
rule to defectively designed or constructed condominium common
areas," id. at 27, citing Aldrich v. ADD Inc., 437 Mass. 213,
222-223 (2002). Based on this reasoning, the Appeals Court
reversed the order of dismissal of the trustees' claim for
damages for harm to the masonry, and awarded damages totaling
$64,000 plus interest pursuant to G. L. c. 231, § 6B. Wyman,
supra at 31. 7 It also determined that the judge's decision to
reduce the damages by twenty per cent to reflect the earlier
replacement costs "fell well within the range of reasonable
alternative calculations." Id.
7
In his findings, the Superior Court judge presciently
computed the value of the damage to the masonry to avoid the
necessity of a retrial "in the event that an appellate authority
subsequently ruled that the [e]conomic [l]oss [d]octrine does
not preclude an assessment of damages to the masonry." He
assessed the cost to repair and replace the damaged masonry as
$80,000, which, after a twenty per cent reduction, amounts to
$64,000.
5
On further appellate review in this court, the trustees
contend that the Appeals Court was correct and that the Superior
Court judge misapplied the economic loss rule so as to exclude
damages resulting from the defective masonry. They also argue
that the judge erred in reducing the measure of the established
damages by twenty per cent. Ayer, on cross appeal, continues to
contend that the economic loss rule should preclude all claimed
damages.
We are largely in agreement with the Appeals Court, and
conclude that the economic loss rule is not applicable to the
damage caused to the common areas of a condominium building as a
result of the builder's negligence, and that recovery for
damages resulting from the defective masonry should have been
awarded to the trustees. Consequently, we affirm the judge's
decision as to the window frames and roof, and remand to the
Superior Court for entry of an order awarding additional damages
for the negligently constructed masonry. We also reverse the
judge's decision to reduce the repair and replacement damages by
twenty per cent, and remand the case to the Superior Court for
entry of judgment in the full amount of the damages established
at trial.
6
1. Background. a. The construction. In 2002, Ayer 8
purchased a 150 year old vacant, four-story mill building
located on Market Street in Lowell. Ayer intended to serve as a
general contractor for the renovation of the building, during
which Ayer would convert the building into five commercial units
and twenty-two luxury condominiums. To that end, Ayer, as
trustee, established the Market Gallery Condominium on December
16, 2003, and recorded the master deed on December 17, 2003,
simultaneously with the sale of the first unit.
The renovation began in January, 2003, and the sale and
occupancy of the twenty-two residential units proceeded as each
unit was completed during the three-year construction period.
On August 2, 2004, Ayer ceded control as trustee to the newly
appointed board of trustees. 9 The sale and occupancy of the
residential units was completed in 2005. 10
Shortly after the transfer of control, the trustees became
concerned with the condition of the building, specifically the
8
Ayer Properties, LLC (Ayer), is a single-purpose entity
existing solely to acquire buildings, convert them into
condominiums, and convey finished units. It is a limited
liability company managed by John J. DeAngelis.
9
At the time of the judge's decision, the board of trustees
consisted of Philippe Jeanjean, Stephen Greene, Alyssa Faulkner,
Clint Baptiste, and Phillip Thompson.
10
The residential units are located on the second, third,
and fourth floors of the building. The first level contains
five commercial units, all of which are owned by Ayer.
7
windows, exterior masonry, and roof. Out of that concern, they
hired a professional engineer to perform a condition survey.
The survey revealed damage to the window frames, exterior
masonry, and roof. 11 As a result of the damage, the trustees
brought suit against Ayer in December, 2005, alleging, in
relevant part, negligent design and construction of the common
areas of the building. 12
b. The trial judge's findings and decision. The judge
first found that Ayer's negligent design and construction of the
common-area window frames was responsible for severe weather-
related deterioration to twenty-two frames, which in turn caused
damage to both the common areas and several individual units.
He calculated the cost to "remove a storm window, remove and
replace the frame elements, remove and replace a window, and
11
The initial survey was performed by Timothy Little, a
professional engineer, who found damage to the windows and
masonry but did not inspect the roof. Little returned to the
site for a more detailed inspection in 2008, which is presumably
when he discovered the damage to the roof, although the record
is not clear on this point.
12
The trustees initially alleged five causes of action:
(1) negligent design and construction of common areas; (2)
breach of fiduciary duty by Ayer to deliver a common area free
of defects; (3) breach of an implied warranty to deliver
competent workmanship and material; (4) breach of fiduciary duty
by Ayer to exercise good faith, loyalty, and due diligence; and
(5) unfair or deceptive conduct in violation of G. L. c. 93A,
§ 2, for failing to comply with statutes and regulations
intended to protect public health, safety, or welfare. At the
conclusion of trial, the judge ruled for Ayer on counts two,
three, and five, and dismissed count four on the request of the
trustees. The trustees do not appeal those decisions.
8
dispose of the refuse at $1,500 per window," and the cost to
replace the sills, a process which includes the "removal of
storm windows and disposal of refuse," at $500 per window,
amounting to a total cost of repair of $44,000. He opted to
reduce the costs by twenty per cent, "to reflect costs at the
time the damage was incurred." He added that the "[twenty per
cent] reduction in replacement costs seems especially
appropriate where the [twelve per cent] interest on the judgment
will amount to approximately [sixty per cent]." Thus, the
assessable damages awarded for the windows were set at $34,000.
The judge also found that the common-area roof was badly
damaged as a result of the incomplete attachment of a protective
subsurface membrane. As a result of the damage, the roof
allowed water to leak into common areas, as well as several
residential units, during heavy rainstorms, causing stains on
several walls and ceilings. The judge noted that, in September,
2009, the trustees contracted with L.E. Morgan Construction
Company to completely replace the building's roof for $132,240.
Finding that cost attributable to Ayer, the judge again reduced
those damages by approximately twenty per cent, and awarded
$106,000 to the trustees for damage to the roof.
Regarding the exterior masonry, the judge found that the
brick facade to the common area had significantly deteriorated
due a lack of diligence that was "chargeable to Ayer." He
9
assessed the cost to repair at $80,000. However, the judge held
that where the defects to the exterior masonry did not cause any
harm beyond the masonry itself, the economic loss rule barred
the trustees' recovery in negligence, and he thus awarded no
damages for the negligently constructed masonry. 13
2. Discussion. a. Economic loss rule. This court has
long stood with the majority of jurisdictions in embracing the
economic loss rule. See, e.g., Bay-State Spray & Provincetown
S.S., Inc. v. Caterpillar Tractor Co., 404 Mass. 103, 107 (1989)
(Bay-State Spray). The rule establishes limitations on damages
a plaintiff may plead and recover in a negligence action. It
ensures that, "[i]n the absence of personal injury or physical
damage to property [beyond the defective product itself], the
negligent supplier of a defective product is not ordinarily
liable in tort for simple economic loss." Berish v. Bornstein,
437 Mass. 252, 267 (2002). See FMR Corp. v. Boston Edison Co.,
415 Mass. 393, 395 (1993) ("purely economic losses are
unrecoverable in tort and strict liability actions in the
absence of personal injury or property damage"). "Economic loss
13
Ayer did not plead the economic loss rule as an
affirmative defense, and instead raised the issue in a motion
for directed verdict at the close of evidence, after which the
judge reopened the evidence to take evidence on the
applicability of the rule. While the trustees argued in their
initial appeal that Ayer waived its argument that the economic
loss rule should apply, the Appeals Court rejected its
contention, and the trustees do not argue waiver here. See
Wyman v. Ayer Props., LLC, 83 Mass. App. Ct. 21, 24-25 (2012).
10
includes 'damages for inadequate value, costs of repair and
replacement of the defective product or consequent loss of
profits without any claim of personal injury or damage to other
property.'" Berish, supra, quoting Marcil v. John Deere Indus.
Equip. Co., 9 Mass. App. Ct. 625, 630 n.3 (1980). Essentially,
where the negligent design or construction of a product leads to
damage only to the product itself, the recovery for economic
loss is in contract, and the economic loss rule bars recovery in
tort.
We have said that "[t]he economic loss doctrine applies not
only to the purchase and sale of products but also to claims of
negligent design and installation in a newly constructed home."
Berish, 437 Mass. at 267. See McDonough v. Whalen, 365 Mass.
506, 514 (1974) (doctrine did not apply where negligently
designed septic system overflowed causing damage to other
property). We have not, however, had occasion to consider
whether the economic loss rule applies to damage caused by
negligent design and construction of the common areas of a
condominium building, whether or not such negligence caused
damage to other property. As the issue is now squarely before
us, we hold that the economic loss rule does not ordinarily
apply in such circumstances.
An examination of the purpose of the economic loss rule
guides our decision. The rule was developed in part to prevent
11
the progression of tort concepts from undermining contract
expectations. See East River S.S. Corp. v. Transamerica
Delaval, Inc., 476 U.S. 858, 866 (1986). The rationale for
excluding tort recovery for economic loss is that, "[w]hen a
product injures only itself," a party should be left to its
contractual remedies. Bay-State Spray, 404 Mass. at 109,
quoting East River S.S. Corp., supra at 871. "The commercial
user can protect himself by seeking express contractual
assurances concerning the product (and thereby perhaps paying
more for the product) or by obtaining insurance against losses."
Bay-State Spray, supra at 109-110. See Sebago, Inc. v. Beazer
E., Inc., 18 F. Supp. 2d 70, 89 (D. Mass. 1998), quoting East
River S.S. Corp., supra at 872 ("The rationale underlying the
economic loss doctrine is that damage to a product itself 'means
simply that the product has not met the customer's expectations,
or, in other words, that the customer has received 'insufficient
product value.' The maintenance of product value and quality is
precisely the purpose of express and implied warranties"). As a
result, "[w]hen a product injures only itself the reasons for
imposing a tort duty are weak and those for leaving the party to
its contractual remedies are strong." Bay-State Spray, supra at
109, quoting East River S.S. Corp., supra at 871.
The nature of condominium unit ownership supports our
conclusion that claims such as those raised here do not fit into
12
the rubric of claims intended to be covered by the rule.
"Ownership of a condominium unit is a hybrid form of interest in
real estate, entitling the owner to both 'exclusive ownership
and possession of his unit, G. L. c. 183A, § 4, and . . . an
undivided interest . . . in the common areas." Berish, 437
Mass. at 262, quoting Noble v. Murphy, 34 Mass. App. Ct. 452,
455-456 (1993). As part of the statutory structure of
condominium ownership, "condominium unit owners cede the
management and control of the common areas to the organization
of unit owners, which is the only party that may bring
litigation relating to the common areas of the condominium
development on their behalf." Berish, supra at 263, citing
G. L. c. 183A, § 10 (b) (4). See Cigal v. Leader Dev. Corp.,
408 Mass. 212, 217 (1990) (G. L. c. 183A, § 10, "plainly
contemplates that the association is to act as the exclusive
representative of the unit owners in litigation for negligent
construction").
The problem arises where the party exclusively responsible
for bringing litigation on behalf of the unit owners for the
negligent construction of the common areas (here, the trustees)
has no contract with the builder under which it can recover its
costs of repair and replacement, that is, its economic losses
caused by defective construction. We agree with the Appeals
Court that "the rule does not require a court to leave a wronged
13
claimant with no remedy," Wyman v. Ayer Props., LLC, 83 Mass.
App. Ct. at 28, and that "[t]he fundamental purpose of the rule
is to confine the indeterminacy of damages, not to nullify a
right and remedy for a demonstrated wrong and its harm." 14 Id.
The rationale for applying the rule is made even weaker
where the trustees seek damages that are finite and foreseeable.
The rule is intended to preclude recovery for intangible and
unknown damages for lost contract or economic opportunity. See
FMR Corp., 415 Mass. at 394-395 (economic loss doctrine
precluded recovery for lost income and increased costs of doing
14
While the trustees do not have a contract with Ayer, the
individual unit owners who purchased their units from Ayer do,
and, as such, depending on the terms of each contract, they
might each bring an action for breach of contract against Ayer
for damage to their units and to their interest in the common
areas stemming from negligent construction. See Cigal v. Leader
Dev. Corp., 408 Mass. 212, 215 (1990) ("Nothing in G. L. c. 183A
divests the purchaser of a condominium of the right to sue in
breach of contract"). See also Gordon v. State Bldg. Code
Appeals Bd., 70 Mass. App. Ct. 12, 20 (2007) (although
association has exclusive right to protect owners' common
rights, individual owners may assert claims "relating to their
individual rights even though such claims may arise from
something that takes place in a common area"). Were we to
determine that the economic loss rule precluded the trustees'
suit, we would force each individual unit owner to sue Ayer for
breach of contract, even though the harm complained of stemmed
from common structural problems. Such a result is precisely the
sort of "[p]iecemeal litigation by individual unit owners [that]
would frustrate the statutory scheme, in which the association
acts as the representative of all owners in common." Cigal,
supra at 218. Simply put, where contractual remedies for the
individual unit owners are not easily enforceable, and actions
brought by such individuals would be inconsistent with judicial
economy and with the role delegated to the condominium
association by statute with regard to common areas, the
rationale for applying the economic loss rule is weak.
14
business due to three-day power outage resulting from
defendant's negligence). See also Garweth Corp. v. Boston
Edison Co., 415 Mass. 303, 304-305 (1993) (plaintiff's claim
"thwarted by the economic damage rule" where malfunctioning
measuring device installed by defendant resulted in oil spill at
plaintiff's station, and alleged damages resulted in part from
157-day delay in plaintiff's ability to complete contracted work
with third party); Marcil, 9 Mass. App. Ct. at 630 (plaintiff
suffered unrecoverable economic losses where he alleged that
defendant's negligently manufactured tractor caused him "severe
losses in his business and good will"). Here, there is no such
danger. An eleven-day trial established Ayer's fault, the harm
suffered by the trustees as representative of the unit owners'
rights in the common areas, and the exact amount of the damages.
There is no allegation of consequential damages, but simply a
reliably proven amount needed to repair or replace the
negligently constructed window frames, masonry, and roof. Thus,
the purposes of the economic loss rule have little applicability
in these circumstances.
b. Damages calculation. The trustees argue that the judge
incorrectly reduced the damages by twenty per cent in an attempt
to reflect the costs of repair and replacement at the time of
the negligent construction. They contend that the proper award
of damages is the actual and projected repair and replacement
15
costs as found by the trial judge, without any reductions. We
agree.
A basic premise of tort law is that "[t]he plaintiff is
entitled to that sum of money which will place him in the
position in which he was immediately before the defendant's
negligent act or omission." J.R. Nolan & L.J. Sartorio, Tort
Law § 13.1 (3d ed. 2005). The general rule for determining
property damage is diminution in market value. See Hopkins v.
American Pneumatic Serv. Co., 194 Mass. 582, 583 (1907).
However, "[r]eplacement or restoration costs have also been
allowed as a measure of damages in other contexts where
diminution in market value is unavailable or unsatisfactory as a
measure of damages." Trinity Church in the City of Boston v.
John Hancock Mut. Life Ins. Co., 399 Mass. 43, 49 (1987).
"Where expenditures to restore or to replace to predamage
condition are used as the measure of damages, a test of
reasonableness is imposed." Id. at 50. Both the cost of repair
or replacement and the repair or replacement itself must be
reasonably necessary in light of the damage inflicted by Ayer's
negligence. Id. "[A]n award of damages must stand unless to
make it or permit it to stand was an abuse of discretion on the
part of the court below, amounting to an error of law."
Mirageas v. Massachusetts Bay Transp. Auth., 391 Mass. 815, 822
(1984), quoting Bartley v. Phillips, 317 Mass. 35, 43 (1944).
16
While we have held that repair and replacement costs are an
appropriate measure of damages, we have not explicitly addressed
whether or when it is proper for those damages to be reduced to
account for the lower costs of repair and replacement that would
have been incurred had they been done closer in time to the
negligent construction. The cases cited by the Appeals Court in
affirming the trial judge's reduced award stand only for the
proposition that repair and replacement damages are appropriate.
See, e.g., Commonwealth v. Johnson Insulation, 425 Mass. 650,
665-666 (1997); Belkus v. Brockton, 282 Mass. 285, 288 (1933).
We need not now decide whether such a reduction is ever
appropriate, where the judge's decision to reduce the damages by
twenty per cent here was not reasonable.
It is not clear from the record why the judge concluded
that the actual costs of repair and replacement that he found
had already been incurred or were likely to be incurred were an
unreasonable remedy. At the time the damages were awarded, the
trustees had already contracted for the roof repair at a cost of
$132,240. Absent any finding that this cost was excessive, we
discern no basis to conclude that the trustees should not be
entitled to the costs they had already incurred. Similarly,
while work apparently remains to be done on the window frames
and masonry, there is no finding that the costs of their repair
and replacement, as determined by the judge, were unreasonable.
17
While the judge was in the best position to determine the
proper amount of actual damages, and wrote a meticulously
detailed, fifty-five page memorandum of decision in which he
carefully explained his method of determining damages, his
subsequent twenty per cent reduction is largely unexplained and
unsupported by any evidence.
The only explanation of the reduction is alluded to in the
judge's statements that the reduction with regard to the windows
seemed "especially appropriate" given the addition of interest,
and that the reduction with regard to the roof was reasonable
"based on the evidence and the fact that damages will be
enhanced by interest on the near [sixty per cent] interest on
the judgment." Thus, it appears that the judge's decision to
reduce the amount of damages was motivated, in significant part,
by a desire to prevent the trustees from receiving the full
benefit of the statutorily mandated interest. We agree with the
trustees that the awarding of interest "is not within the
purview of the fact finder," and conclude that reducing damages
for the purpose of preventing aggrieved plaintiffs from
receiving interest that the Legislature intended they receive is
unreasonable (citation omitted). Lawrence Sav. Bank v.
Levenson, 59 Mass. App. Ct. 699, 711 (2003) ("Prejudgment
interest, awarded pursuant to G. L. c. 231, § 6B, is designed to
18
compensate a damaged party for the loss of use or the unlawful
detention of money" [citation omitted]).
3. Conclusion. We affirm the trial judge's decision
awarding damages for negligent construction of the roof and
window frames, and reverse his decision with regard to the
damaged masonry. We also vacate the award of damages and remand
to the Superior Court for entry of an award of the full amount
of damages found by the trial judge, amounting to $256,240, plus
interest pursuant to G. L. c. 231, § 6B.
So ordered.