Flagstaff Affordable Housing Limited Partnership v. Design Alliance Inc.

• Decision Date: 24 March 2009
• Docket Number: No. 1 CA-CV 07-0743.,1 CA-CV 07-0743.
• Citation: 221 Ariz. 433,212 P.3d 125
• Parties: FLAGSTAFF AFFORDABLE HOUSING LIMITED PARTNERSHIP, an Iowa limited partnership, Plaintiff/Appellant, v. DESIGN ALLIANCE INC., an Iowa corporation, Defendant/Appellee.
• Court: Arizona Court of Appeals

212 P.3d 125

221 Ariz. 433

FLAGSTAFF AFFORDABLE HOUSING LIMITED PARTNERSHIP, an Iowa limited partnership, Plaintiff/Appellant, v. DESIGN ALLIANCE INC., an Iowa corporation, Defendant/Appellee.

No. 1 CA-CV 07-0743.

Court of Appeals of Arizona, Division 1, Department E.

March 24, 2009.

As Amended April 20, 2009.

Tiffany & Bosco, PA By Robert A. Royal, Chad A. Hester, Elizabeth A. Corasiniti, Phoenix, Attorneys for Plaintiff/Appellant.

Renaud Cook Drury & Mesaros, PA By Denise J. Wachholz, Phoenix, Attorneys for Defendant/Appellee.

OPINION

GEMMILL, Judge.

¶ 1 In this appeal by plaintiff-appellant Flagstaff Affordable Housing Limited Partnership ("Owner"), we are asked to decide whether a lawsuit filed by a property owner against an architect, alleging professional negligence and seeking purely economic damages, is barred by the economic loss doctrine. For the reasons that follow, we conclude that this action is not barred by the economic loss doctrine. Because the trial court reached the opposite conclusion, we reverse its dismissal of the action and remand for additional proceedings.

FACTS AND PROCEDURAL HISTORY

¶ 2 On September 8, 1995, Owner entered into a contract with Design Alliance, Inc. ("Architect") for the design of the Mountainside Village Apartments (the "Apartments") in Flagstaff, Arizona. As an architectural firm licensed to perform professional architectural services, Architect designed the Apartments and provided Owner with plans, specifications, and drawings. Construction on the Apartments began in 1995 and was completed in 1996. Owner acknowledges that the Apartments were constructed in accordance with the architectural plans and specifications.

¶ 3 On August 26, 2004, the U.S. Department of Housing and Urban Development filed a complaint against Owner for housing discrimination, claiming that the design and construction of the Apartments violated the Fair Housing Design Construction requirements of 24 C.F.R. 100.205, which were in effect at the time of construction. Owner was forced to incur substantial expense to remedy the design deficiencies.

¶ 4 On April 7, 2006, Owner filed a complaint against Architect alleging breach of contract and professional negligence.¹ No personal injury or property damage had occurred, and Owner sought economic losses as compensatory damages. Architect filed a motion to dismiss the complaint pursuant to Rule 12(b)(6), Arizona Rules of Civil Procedure, arguing that the statute of repose² barred the breach of contract claim and the economic loss doctrine precluded the professional negligence claim. In its response, Owner agreed to withdraw its breach of contract claim because of the statute of repose, but argued that the economic loss doctrine did not apply to professional negligence claims.

¶ 5 The trial court granted Architect's motion to dismiss, explaining in part as follows:

Plaintiff relies on Donnelly Construction Company v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 677 P.2d 1292 (1984) and Smith v. [Arthur] Anderson [Andersen] L.L.P., 175 F.Supp.2d 1180 (D.Ariz.2001) for its argument that professional negligence claims between contracting parties are not barred by the economic loss rule.... Here, the parties were both parties to the contract and, therefore, Donnelly's reasoning and allowance of a claim based in negligence does not apply.

Judge Rosenblatt's ... decision in Wojtunik v. Kealy, 394 F.Supp.2d 1149 (D.Ariz. 2005) is more persuasive, even though it is based on a claim of negligent misrepresentation, not professional negligence....

Plaintiff attempts to distinguish its professional negligence claim from a claim of negligent misrepresentation and relies on the "special relationship between the parties" to support its position that a professional negligence claim is an exception to the economic loss rule. The Court is not so persuaded and finds that plaintiff's claim is barred.

¶ 6 Owner timely appeals, and we have jurisdiction in accordance with A.R.S. § 12-2101 (2003).

ANALYSIS

¶ 7 "In reviewing motions to dismiss for failure to state a claim, we assume that the allegations in the complaint are true and determine if the plaintiff is entitled to relief under any theory of law." Sensing v. Harris, 217 Ariz. 261, 262, ¶ 2, 172 P.3d 856, 857 (App.2007). Whether a claim of professional negligence against a design professional is barred by the economic loss doctrine is a question of law that we review de novo. See Carstens v. City of Phoenix, 206 Ariz. 123, 125, ¶ 8, 75 P.3d 1081, 1083 (App.2003).

¶ 8 Owner argues the trial court erred by relying on the economic loss doctrine to dismiss its professional negligence claim. Architect argues that this case is similar to a construction defect case and that the economic loss doctrine bars Owner's recovery in tort.

¶ 9 The economic loss doctrine precludes an aggrieved party from recovering economic damages in tort unless accompanied by physical harm — either in the form of personal injury or property damage. Carstens, 206 Ariz, at 125-26, ¶ 10, 75 P.3d at 1083-84. The doctrine is a creature of judicial origin, its purpose grounded in the judicial hallmarks of distinction and clarity. "The purpose of the `economic loss rule' is to maintain the distinction between those claims properly brought under contract theory and those which fall within tort principles." Rissler & McMurry Co. v. Sheridan Area Water Supply Joint Powers Bd., 929 P.2d 1228, 1235 (Wyo.1996). "The economic loss rule thus `serves to distinguish between tort, or duty-based recovery, and contract, or promise-based recovery, and clarifies that economic losses cannot be recovered under a tort theory.'" Carstens, 206 Ariz, at 126, ¶ 10, 75 P.3d at 1084 (citation omitted).

¶ 10 In Arizona, the economic loss doctrine has been applied in two categories of disputes: construction defects and products liability. See, e.g., Salt River Project v. Westinghouse Elec. Corp., 143 Ariz. 368, 694 P.2d 198 (1984) (barring strict liability action in products liability context when only economic loss occurs), abrogated on other grounds by Phelps v. Firebird Raceway, Inc., 210 Ariz. 403, 111 P.3d 1003 (2005); Woodward v. Chirco Const. Co., Inc., 141 Ariz. 514, 687 P.2d 1269 (1984) (barring negligence claim for pure economic losses in construction defect context); Carstens, 206 Ariz. 123, 75 P.3d 1081 (same); Colberg v. Rellinger, 160 Ariz. 42, 43, 770 P.2d 346, 347 (App.1988) (same); Nastri v. Wood Bros. Homes, Inc., 142 Ariz. 439, 445, 690 P.2d 158, 164 (App. 1984) (same).³

¶ 11 In the above Arizona cases, the alleged deficiencies constituted actual defects in the physical construction of the home or building, such as cracks in the foundation, flooring, and walls; improper and hazardous electrical wiring; and inadequate beam support. In contrast, this dispute is a professional negligence action arising from the alleged negligent design of the Apartments. This is neither a construction defect case nor a products liability case. The Apartments were constructed in complete conformity with the architectural plans and specifications. The alleged error is in the design embodied within the architectural plans and specifications. Prior Arizona appellate opinions applying the economic loss doctrine have not decided whether the doctrine should be applied in this context. Nor has our legislature undertaken to prescribe whether the economic loss doctrine can be applied to bar a claim for professional negligence. Therefore, we must resolve this issue of first impression in Arizona.

¶ 12 For the reasons that follow, we hold that the economic loss doctrine does not apply to this claim for professional negligence against a design professional.

¶ 13 Owner's claim against Architect for professional negligence is based in tort, not contract.⁴ In relationships between professionals and their clients, "the law imposes special duties to all within the foreseeable range of harm as a matter of public policy, regardless of whether there is a contract, express or implied, and generally regardless of what its covenants may be." Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 522, 747 P.2d 1218, 1221 (1987). The relationship between Architect and Owner is one between a professional and client. Because of its status as a professional, the law imposes special duties upon Architect in its relationship with Owner.

As a matter of public policy, attorneys, accountants, and other professionals owe special duties to their clients, and breaches of those duties are generally recognized as torts. The essential nature of actions to recover for the breach of such duties is not one "arising out of contract," but rather one arising out of tort — breach of legal duties imposed by law.

Barmat, 155 Ariz, at 523, 747 P.2d at 1222.

¶ 14 Here, Owner alleges Architect negligently fell below the standard of care for architects by failing to design the apartments in accordance with the Fair Housing Act. If proven, this would amount to a tort claim for breach of duties imposed by law upon Architect: namely, to act with the ordinary skill, care, and diligence of other design professionals in the architectural field. See Barmat, 155 Ariz, at 521-23, 747 P.2d at 1220-22. Because Architect's professional duties arise independently of any contract, the purpose of the economic loss doctrine — maintaining a distinction between tort and contract actions — is not implicated.⁵

¶ 15 Our supreme court has also explained that "[d]esign professionals have a duty to use ordinary skill, care, and diligence in rendering their professional services. When they are called upon to provide plans and specifications for a particular job, they must use their skill and care to provide plans and specifications which are sufficient and adequate." Donnelly Constr. Company v. Oberg/Hunt/Gilleland, 139 Ariz. 184, 187, 677 P.2d 1292, 1295 (1984) (citation omitted) (allowing negligence claim against architect by...