Gattis v. McNutt (In re Gattis)
| Decision Date | 07 November 2013 |
| Docket Number | Court of Appeals No. 12CA1269,Court of Appeals No. 13CA0116 |
| Parties | In re the Estate of Carol S. Gattis, deceased. Scott M. Gattis, Linda L. Spreitzer, and Amy G. Goeden, as Personal Representatives, Appellees, v. John E. McNutt; Timothy A. McNutt; and Christopher L. Boortz, Defendants-Appellants. |
| Court | Colorado Court of Appeals |
Larimer County District Court No. 10CV993
JUDGMENTS AFFIRMED AND CASE
REMANDED WITH DIRECTIONS
Opinion by JUDGE WEBB
¶ 1 Whether the economic loss rule bars a nondisclosure tort claim against the seller of a home built on expansive soils, which caused damage to the home after the sale, is a question of first impression in Colorado. In case number 12CA1269, defendants, John E. McNutt, Timothy A. McNutt, and Christopher L. Boortz (collectively, Sellers), appeal the judgment entered following a bench trial in favor of Carol S. Gattis (Gattis) on her nondisclosure claim. They seek reversal on the basis that the economic loss rule precludes Gattis's tort claim because the standard-form purchase and sale agreement included a "Seller's Property Disclosure" form (SPD), which addressed expansive soils, but Gattis did not assert a breach of contract claim.
¶ 2 We decline to apply the economic loss rule in this case for two reasons. First, apart from any contractual obligation, home sellers owe home buyers an independent duty to disclose latent defects of which they are aware. Second, disclosure provisions in the standard-form residential real estate contract at issue do not so subsume this independent duty as to trigger the economic loss rule. Therefore, we affirm the trial court's judgment.
¶ 3 An entity controlled by Sellers purchased the residence for purposes of repair and resale. Before the purchase, this entity obtained engineering reports that included extensive discussion of structural problems in the residence resulting from expansive soils and of ways to remedy those problems. Advance Structural Repair, another entity that Sellers controlled, oversaw the repair work. When the repairs were completed, Sellers obtained title to the residence and listed it for sale.
¶ 4 Sellers had no direct contact with Gattis and her husband, both now deceased, who purchased the residence from them. The parties entered into a standard-form real estate contract, approved by the Colorado Real Estate Commission: Contract to Buy and Sell Real Estate (Residential) (New Loan) (CBS1-10-11), to which they made no changes (the Form Contract).
¶ 5 As relevant here, the SPD asked, "To Seller's current actual knowledge, do any of the following conditions now exist or have they ever existed: sliding, settling, upheaval, movement or instability of earth or expansive soils on the Property?" Across this entire page, one of the Sellers wrote, "Seller has no personal knowledge of property / Seller has never lived at property." The SPD also asked, "To Seller's current actual knowledge, do any of the following conditions now exist or have they ever existed: structural problems?" Although one of the Sellers wrote the same statement across this page, the "Yes" box was checked in response to this question, followed by, "Repaired by Advanced Structural Repair - Engineered by Bob Hessick" (sic).
¶ 6 Several years after having taken title to the residence, Gattis commenced this action. She pleaded several tort claims alleging only economic losses based on damage to the residence resulting from expansive soils.
¶ 7 The trial court denied Sellers' pretrial motion for summary judgment based on the economic loss rule. Sellers raised the economic loss rule through an oral motion to dismiss at the end of Gattis's case-in-chief. Again, the court denied Sellers' motion.
¶ 8 Sellers do not dispute the trial court's findings that before the sale closed:
No reference was made to "‘expansive soil' in any manner, in any discussion or disclosure to the Gattises or any of their representatives." "No person or entity ever informed the Gattises or any of their representatives that the individual Sellers were the principals of Advanced Structural Repair." "Neither the Gattises nor their representatives were made aware of the various Engineering Reports . . . that had been reviewed by the Sellers when they were debating whether to purchase the residence."
¶ 9 As relevant here, the trial court held Sellers liable for nondisclosure of material facts. Citing Colorado Jury Instructions (CJI)-Civil 19:2 (2009), the court explained:
$$Defendants falsely represented in the [SPD] that they had no personal knowledge of the property, when in fact they were thoroughly familiar with it. They also failed to disclose that they were the principals of Advance Structural Repair. Finally, and most importantly, they failed to disclose that expansive soil underlies the Residence and had already caused serious structural damage to the Residence. Indeed, the [SPD] actively concealed the existence of the expansive soil because it stated . . . that to Seller's current actual knowledge, expansive soil had never existed, and did not now exist, on the property.
¶ 10 "Whether the economic loss rule precludes a particular claim raises a legal issue subject to de novo appellate review." Makoto USA, Inc. v. Russell, 250 P.3d 625, 627 (Colo. App. 2009). "The existence and scope of a tort duty is a question of law to be determined by the court." A.C. Excavating v. Yacht Club II Homeowners Ass'n, Inc., 114 P.3d 862, 866 (Colo. 2005).
¶ 11 Under the economic loss rule, "a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law." Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000). In adopting the rule, the supreme court recognized three policy considerations:
$$(1) to maintain a distinction between contract and tort law; (2) to enforce expectancy interests of the parties so that they can reliably allocate risks and costs during their bargaining; and (3) to encourage the parties to build the cost considerations into the contract because they will not be able to recover economic damages in tort. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo. 2004).
¶ 12 The source of the underlying duty determines whether the economic loss rule applies. Town of Alma, 10 P.3d at 1262. While contractual obligations are based on bargained-for exchanges, tort law imposes general duties "to protect citizens from risk of physical harm or damage to their personal property," in addition to duties arising from any agreement or contract. BRW, Inc., 99 P.3d at 72 (quoting Town of Alma, 10 P.3d at 1262).
¶ 13 For a claim to escape the economic loss rule, the duty must arise independently of any contractual obligation. Town of Alma, 10 P.3d at 1263 (); see also United Int'l Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1227 (10th Cir. 2000) () (applying Colorado law).
¶ 14 The economic loss rule does not bar negligence claims brought by homeowners against builders for latent construction defects, because the "builder has an independent duty to act without negligence in the construction of a home." Town of Alma, 10 P.3d at 1265-66.1 In so holding, the court "[r]el[ied] heavily on policy concerns about protecting home buyers." Id. at 1266. Despite more recently having applied the economic loss rule in commercial construction cases, the supreme court has declined to extend it to negligence claims for latent defects in residential construction. Compare BRW, Inc., 99 P.3d at 74, with A.C. Excavating, 114 P.3d at 866.
¶ 15 In Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc., 2013 COA 119, a negligent construction case involving a residence, the division identified several policy considerations that favor recognizing an independent duty to protect homeowners:
Preventing "overreaching" by a builder, which is "comparatively more knowledgeable" and "is in a far better position to determine the structural condition of a house than most buyers," [Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983)
(quotations omitted)];
An "ordinary purchaser of a home is not qualified to determine when or where a defect exists," id.
(quotations omitted);
A purchaser of a home "rarely has access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features," id. (quotations omitted); The magnitude of the investment made when purchasing a home, id.; The foreseeability that a house will be sold to someone who is not the original owner, id.; The foreseeability that a construction professional's work on a house "is, ultimately, for the benefit of homeowners and that harm to homeowners from negligent construction is foreseeable," Yacht Club II Homeowners Ass'n v. A.C. Excavating, 94 P.3d 1177, 1181 (Colo....
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