Linda EASTWOOD v. HORSE HARBOR Found. INC.
| Citation | 241 P.3d 1256 |
| Decision Date | 04 November 2010 |
| Docket Number | No. 81977-7.,81977-7. |
| Court | United States State Supreme Court of Washington |
| Parties | Linda EASTWOOD, dba Double KK Farm, Petitioner, v. HORSE HARBOR FOUNDATION, INC., a Washington corporation; Maurice Allen Warren, a single person; and Katherine Daling and Michael Daling, a husband and wife, and the marital community composed thereof, Respondents. |
241 P.3d 1256
Linda EASTWOOD, dba Double KK Farm, Petitioner,
v.
HORSE HARBOR FOUNDATION, INC., a Washington corporation; Maurice Allen Warren, a single person; and Katherine Daling and Michael Daling, a husband and wife, and the marital community composed thereof, Respondents.
No. 81977-7.
Supreme Court of Washington,En Banc.
Argued Sept. 24, 2009.
Decided Nov. 4, 2010.
COPYRIGHT MATERIAL OMITTED.
David P. Horton, Law Office of David P. Horton Inc. PS, Silverdale, WA, for Petitioner.
Leslie Clay Terry, III, Law Offices of Leslie Clay Terry, III, Bellevue, WA, for Respondents.
Harold T. Hartinger, Attorney at Law, Tacoma, WA, amicus counsel for Harold T. Hartinger.
FAIRHURST, J.
¶ 1 Since the 1800s, lessors of real property in Washington have been able to recover damages for the tort of waste. In this case, however, the Court of Appeals interpreted our jurisprudence on the economic loss rule and concluded that lessor Linda Eastwood was limited to contractual remedies for the damage done to her horse farm by lessee Horse Harbor Foundation, Inc. See Eastwood v. Horse Harbor Found., Inc., noted at 144 Wash.App. 1009, 2008 WL 1801332. The Court of Appeals also held that Horse Harbor's employee and board directors could not be individually liable for breach of contract. We reverse. The availability of a tort remedy depends on the existence of a tort duty arising independently of a contract's privately negotiated terms, not on whether an injury can be labeled an economic loss. Because the duty to not cause waste is a tort duty independent from a lease's covenants, Eastwood had a cause of action for waste, and the trial court properly concluded she may recover tort damages from Horse Harbor's employee and two of its board directors.
¶ 2 Eastwood owns the Double KK Farm horse farm in Poulsbo, Washington. Horse Harbor, a nonprofit organization incorporated in 1997 under the Washington Nonprofit Corporation Act, chapter 24.03 RCW, cares for abused and abandoned horses. Maurice Allen Warren is Horse Harbor's paid manager, and Katherine and Michael Daling were two of Horse Harbor's corporate directors.
¶ 3 Eastwood and Horse Harbor entered into a lease for a portion of the Double KK, with covenants obligating Horse Harbor to maintain the farm and to return it to Eastwood in good condition. Eastwood accepted a rental rate below fair market value in exchange for Horse Harbor's pledge to maintain the property. But “there was a broad, persistent, and systemic failure” to maintain the leasehold, according to the trial court. Clerk's Papers (CP) at 131. After moving 15 to 16 horses to the farm, Horse Harbor permitted manure and urine to accumulate, and the Kitsap County Health District cited Horse Harbor for unlawful burning of solid waste and improper management of horse manure. Horse Harbor also failed to keep the farm and its improvements properly drained, resulting in pools of standing water and accumulating mud. Other maintenance problems included broken fencing, a damaged riding arena floor, and the horses chewing wood surfaces.
¶ 4 Members of Horse Harbor's board of directors, including the Dalings, had the opportunity to observe the farm's condition. The board received written complaints and a video from Eastwood documenting maintenance issues. The Dalings visited the Double KK frequently. At one point, the board took a walking tour of the Double KK and then met to discuss the growing dispute and the legal ramifications. At the meeting, six people were present, including Warren and the Dalings. The board took no action.
¶ 5 Eastwood sued for breach of lease, the commission of waste, and negligent breach of a duty to not cause physical damage to the leasehold. She named Horse Harbor, Warren, and the Dalings as defendants. Following a bench trial, the trial court found Horse Harbor committed waste and breached the lease covenant to maintain the leasehold. The court found Warren and the Dalings were grossly negligent and therefore individually liable for the damage they proximately caused. At no point did the court or the parties raise the economic loss rule.
¶ 6 On appeal, Horse Harbor, Warren, and the Dalings argued that the trial court erred by finding that their conduct rose to the level of gross negligence. They retried the case, rehashing the trial testimony and exhibits. They also argued that Horse Harbor's corporate form protected Warren and the Dalings from being held individually liable. At no point did they cite the economic loss rule.
¶ 7 The Court of Appeals did not address Eastwood's claim for waste or cite the waste statute, RCW 64.12.020, which gives a lessor a right of action for damages if the lessee
commits waste. See Eastwood, 2008 WL 1801332. On its own motion and without argument, the court cited Alejandre v. Bull, 159 Wash.2d 674, 153 P.3d 864 (2007), our most recent case discussing the economic loss rule, a doctrine that has attempted to describe the dividing line between the law of torts and the law of contracts.
¶ 8 The Court of Appeals characterized Eastwood's claims as economic losses because they “result[ed] from [Horse Harbor's] actions that led to damages and breach of the lease agreement.” Eastwood, 2008 WL 1801332, at *2. Based on these circumstances, the court held the economic loss rule applied and limited Eastwood to recovery only for breach of lease, and Warren and the Dalings could not be individually liable for the damages. Id. at *2-*3. The Court of Appeals denied Eastwood's motion for reconsideration.
¶ 9 We granted Eastwood's petition for review. Eastwood v. Horse Harbor Found., Inc., 165 Wash.2d 1016, 199 P.3d 411 (2009). 1
A. When a lessee breaches a lease covenant requiring the lessee to repair and maintain the leased property, is the lessor limited to contract remedies, or may the lessor also recover for the tort of waste?
B. Are employees of a lessee liable for the waste they cause?
C. Does RCW 4.24.264 insulate the directors of a lessee nonprofit corporation from liability for permitting waste that rises to the level of gross negligence?
D. Is Eastwood entitled to attorney fees?
[1] [2] ¶ 10 “Waste is a tort.” William Woodfall, The Law of Landlord and Tenant 469 (6th ed. 1822). Arising in the context of a lease for real property, waste is a breach of the lessee's duty to avoid “an unreasonable and improper use” of the leasehold and “to treat the premises in such a manner that no harm be done to them, and that the estate may revert to those having the reversionary interest, without material deterioration.” Moore v. Twin City Ice & Cold Storage Co., 92 Wash. 608, 611, 159 P. 779 (1916). Only damage rising to the level of “substantial injury” is considered waste. Id. A lessor thus has a right to the reversionary interest in the property remaining free from substantial material injury. Rights and remedies go together, and a statutory remedy for waste has been available to lessors in Washington since the first territorial assembly enacted one in 1854. See Laws of 1854, XLIV, § 403. The current landlord-tenant waste statute, RCW 64.12.020, provides, “If a guardian, tenant in severalty or in common, for life or for years, or by sufferance, or at will, or a subtenant, of real property commit waste thereon, any person injured thereby may maintain an action at law for damages.”
[3] ¶ 11 A lease is a contract as well as a conveyance of a property interest, and the tort law duty to not cause waste is usually supplemented by a lease covenant allocating responsibility for repairs between the lessor and the lessee. See 17 William B. Stoebuck & John W. Weaver, Washington Practice: Real Estate: Property Law § 6.39, at 367 (2d ed. 2004) (“A well drafted lease will make provision for repairs, creating a contractual duty for either the landlord or tenant to make repairs or apportioning repair duties between the parties.”). When a lessee breaches such lease provisions and consequently harms the property, the issue is whether the lessor's injury is only an economic loss remediable under the law of contracts or whether it is also the tort of “waste” within the meaning of RCW 64.12.020. Stated another way, can a breach of lease simultaneously be a breach of a tort duty that arises independently of the lease's terms? We hold it can because an independent tort
duty can overlap with a contractual obligation.
1. The “ economic loss rule ”
¶ 12 In reaching the opposite conclusion, the Court of Appeals picked several statements from Alejandre to support its analysis. Alejandre defined an economic loss as an injury in a contractual relationship “where the parties could or should have allocated the risk of loss, or had the opportunity to do so.” 159 Wash.2d at 687, 153 P.3d 864. The lease between Eastwood and Horse Harbor actually allocated the risk of the property falling into disrepair, as the lease assigned most responsibilities for maintenance to Horse Harbor. The Court of Appeals thought the breach of this contractual arrangement was therefore an economic loss under Alejandre. The court also noted the statements from Alejandre that “the purpose of the economic loss rule is to bar recovery for alleged breach of tort duties where a contractual relationship exists and the losses are economic losses,” and “[i]f the economic loss rule applies, the party will be held to contract remedies, regardless of how the plaintiff characterizes the claims.” Id. at 683, 153 P.3d 864. Seeing both a contractual relationship and an economic loss, the Court of Appeals believed that Alejandre therefore compelled a holding that Eastwood's only remedy was a recovery for breach...
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