Corvias Military Living, LLC v. Ventamatic, Ltd.

• Citation: 450 P.3d 797
• Decision Date: 25 October 2019
• Docket Number: No. 116,307,116,307
• Parties: CORVIAS MILITARY LIVING, LLC, and Corvias Military Construction, LLC, Appellants, v. VENTAMATIC, LTD., and Jakel, Inc., Appellees.
• Court: United States State Supreme Court of Kansas

450 P.3d 797

CORVIAS MILITARY LIVING, LLC, and Corvias Military Construction, LLC, Appellants,

v.VENTAMATIC, LTD., and Jakel, Inc., Appellees.

No. 116,307

Supreme Court of Kansas.

Opinion filed October 25, 2019.

Charles L. Philbrick, pro hac vice, of Rathje & Woodward, LLC, of Wheaton, Illinois, argued the cause, and William J. Bahr, of Arthur-Green, LLP, of Manhattan, was with him on the briefs for appellants.

Seth A. Lowry, of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, argued the cause, and James P. Nordstrom, of the same firm, was with him on the briefs for appellee Ventamatic, Ltd.

David E. Rogers, of Foulston Siefkin LLP, of Wichita, argued the cause, and Daniel J. Buller, of the same firm, was with him on the briefs for appellee Jakel Motors, Inc.

The opinion of the court was delivered by Stegall, J.:

The plaintiffs in this lawsuit—Corvias Military Living, LLC, and Corvias Military Construction, LLC—collectively form a construction firm specializing in building military housing. Corvias built thousands of homes near Fort Riley in Geary County. In these homes, Corvias installed bathroom ceiling fans constructed by the defendants—Ventamatic, Ltd., and Jakel Motors, Inc. After installation, several of the ceiling fans caught fire and damaged several homes. Corvias then sought to mitigate further damage by removing and replacing the remaining fans. This lawsuit followed.

The district court entered summary judgment against Corvias, holding that the economic loss doctrine barred Corvias from recovery. Corvias appealed, and the Court of Appeals reversed. The panel reasoned that the economic loss doctrine did not bar Corvias from asserting a product liability claim because the property damage to the homes was not economic loss. We granted review.

FACTUAL AND PROCEDURAL BACKGROUND

Corvias is a military housing developer that built and now manages privatized family housing at Fort Riley, Kansas. During the construction phase, Corvias, through its subcontractors, purchased and installed approximately 3,785 "NuVent" bathroom ceiling fans into the Fort Riley homes. Ventamatic manufactures the NuVent model bathroom exhaust fans, and some of these fans were built with electric motors manufactured by Jakel.

On June 12, 2012, a fire occurred in one of the homes. A defective electrical motor in a NuVent bathroom exhaust fan allegedly caused the fire. Corvias claims the fire caused $656.26 in damage. Then, another fire occurred in a different housing unit constructed by Corvias. Again, a defective electrical motor in a NuVent bathroom exhaust fan allegedly caused the fire. This fire caused extensive damage to the home including walls, ceiling, rafters, artwork, and personal property of the tenants. Additionally, the fire caused damage to the adjoining townhome. In total, this fire caused $88,994 in damages.

But the fires were not the only problem Corvias had with the NuVent fans. Before the fires, Corvias allegedly experienced over 100 failed NuVent fans. So, following the second fire, Corvias removed the remaining 3,783 NuVent fans from its housing units and replaced them with a new brand of bathroom fans. This removal and replacement of the fans cost an estimated $459,027.

Corvias filed suit in Geary County District Court against Ventamatic, Jakel, and four other defendants. In Corvias' amended petition, Corvias asserted: (1) a product liability claim under the Kansas Product Liability Act; (2) claims for breaches of express and implied warranties of merchantability; (3) an unjust enrichment claim; (4) a claim under the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq. ; and (5) breach of contract. Corvias sought $459,027.26 in damages for the removal and replacement of the 3,783 NuVent fans and $50,000 for property damage associated with the two fires—the amount of its insurance deductible.

Corvias voluntarily dismissed its claims against the four other defendants—including all its breach of contract claims—with prejudice. Ventamatic and Jakel filed motions for summary judgment arguing the economic loss doctrine barred Corvias' product liability claims because the damages incurred were purely economic. Ventamatic also argued Corvias' warranty claims were barred because the express one-year warranty had lapsed and the parties lacked privity.

The district court granted summary judgment to both Ventamatic and Jakel. The district court began by noting that the Kansas Product Liability Act (KPLA) governs all product liability claims in Kansas. The district court determined, therefore, that "the only claim plaintiffs brought against Ventamatic in this lawsuit is a product liability claim—regardless of how plaintiffs may have previously denominated their causes of action."

The district court then held that the economic loss doctrine barred Corvias from recovering its removal and replacement costs. The district court noted that under Northwest Arkansas Masonry, Inc. v. Summit Specialty Products, Inc. , 29 Kan. App. 2d 735, 31 P.3d 982 (2001), removal and replacement costs fell under the economic loss doctrine. And because Corvias did not dispute that these costs were economic losses, the court held that the economic loss doctrine barred Corvias from recovering.

The district court also held that the economic loss doctrine barred Corvias from recovering for any loss caused by the fires. The district court relied on the "integrated systems" rule to find the fire damage was likewise an economic loss not recoverable in a products liability claim. The integrated systems rule was adopted by the Kansas Court of Appeals in Northwest Arkansas Masonry, Inc ., and posits that " ‘[d]amage by a defective component of an integrated system to either the system as a whole or other system components is not damage to "other property" which precludes the application of the economic loss doctrine.’ " 29 Kan. App. 2d at 744, 31 P.3d 982 (quoting Wausau Tile, Inc. v. County Concrete Corp. , 226 Wis. 2d 235, 249, 593 N.W.2d 445 [(1999)] ).

Applying this rule, the lower court reasoned that the fire damage to the homes was actually damage to the product itself and must therefore be considered a nonrecoverable economic loss. The district court considered the NuVent fans "integrated" component parts of the home—the home itself being the integrated system. Because the district court viewed the lawsuit as exclusively sounding in product liability, and because the court further found all purported damages to be economic losses, the court granted summary judgment in favor of Ventamatic and Jakel. Corvias appealed.

On appeal, the Court of Appeals ably summarized the common-law development of the economic loss doctrine in Kansas:

"Economic loss is defined as ‘loss of use of the defective product, cost of replacing the product, loss of profits to plaintiff's business, or damage to plaintiff's business reputation from use of the product.’ Elite Professionals, Inc. v. Carrier Corp. , 16 Kan. App. 2d 625, 633, 827 P.2d 1195 (1992). Economic loss includes the ‘loss of the bargain, repair, and replacement cost, loss of profits, and/or goodwill, including diminution in value.’ In other words, economic loss is those damages that arise as a ‘result of the failure of the product to perform to the level expected by the buyer, which is the core concern of traditional contract law.’ Northwest Arkansas Masonry, Inc. v. Summit Specialty Products, Inc. , 29 Kan. App. 2d 735, 742, 31 P.3d 982 (2001)." Corvias Military Living, LLC v. Ventamatic, Ltd. , 54 Kan. App. 2d 169, 173, 397 P.3d 441 (2017).

The panel went on to discuss how the development of the economic loss doctrine was primarily driven by a concern to prevent contract law from " ‘drown[ing] in a sea of tort.’ " 54 Kan. App. 2d at 174, 397 P.3d 441 (quoting East River S.S. Corp. v. Transamerica Delaval , 476 U.S. 858, 866, 106 S. Ct. 2295, 90 L. Ed. 2d 865 [1986] ). In other words, at common law, economic loss damages are contract damages, not tort damages. This is because "a manufacturer in a commercial relationship has no duty under either a negligence or strict products-liability theory to prevent a product from injuring itself." East River S.S. Corp., 476 U.S. at 871, 106 S.Ct. 2295. Because as a matter of law there is no duty to prevent a product from injuring itself, there can be no recovery for such damages under any tort theory, including a common-law product liability claim.

Our Court of Appeals had previously explained that the economic loss doctrine is a "rule that is straightforward and predictable and that establishes a logical demarcation between cases properly pursued as tort actions and those which are warranty claims." Koss Construction v. Caterpillar, Inc. , 25 Kan. App. 2d 200, 205, 960 P.2d 255 (1998). The panel below then noted that this court has refused to apply the economic loss doctrine in the context of a tort claim when a duty actually exists as a matter of law. Corvias Military Living, LLC , 54 Kan. App. 2d at 176, 397 P.3d 441 (discussing Rinehart v. Morton Buildings, Inc. , 297 Kan. 926, 305 P.3d 622 [(2013)], and David v. Hett , 293 Kan. 679, 270 P.3d 1102 [(2011)] ).

With this as background, the Court of Appeals panel then turned to the question of the scope of the "product" itself. If Ventamatic and Jakel did not have a legal duty to prevent the bathroom fan from damaging itself, did Ventamatic and Jakel have a legal duty to prevent the fan from damaging the house? The answer to this question turns on the application of the integrated system rule and depends, essentially, on whether the "product" is the house as a whole, or only the discrete part of the house manufactured and sold by the defendants.

On this score, the Court of Appeals disagreed with the district court's conclusion that the fans were an integrated part of the homes—that the homes themselves were the products and that Ventamatic and Jakel had no legal duty to prevent damage to the "product." Corvias Military Living, LLC , ...