Kennedy v. Columbia Lumber and Mfg. Co., Inc.

• Decision Date: 03 May 1988
• Docket Number: No. 22824,22824
• Court: South Carolina Supreme Court
• Parties: John Lamar KENNEDY, Appellant, v. COLUMBIA LUMBER AND MANUFACTURING COMPANY, INC., Respondent. . Reheard

Page 730

384 S.E.2d 730

299 S.C. 335

John Lamar KENNEDY, Appellant, v. COLUMBIA LUMBER AND MANUFACTURING COMPANY, INC., Respondent.

No. 22824.

Supreme Court of South Carolina.

Reheard May 3, 1988.

Decided Sept. 25, 1989.

[299 S.C. 337] Thomas J. Hummel, Robert J. Thomas and A.L. Blackstone, III, Columbia, for appellant.

William C. Boyd, III and Phyllis B. Burkhard, Columbia, for respondent.

ON REHEARING

On Rehearing, Opinion No. 22824, filed January 25, 1988, is withdrawn and the following Opinion is substituted as the Opinion of the Court.

TOAL, Justice:

Kennedy brought this action for breach of implied warranty of habitability or fitness against Columbia Lumber arising from the sale of a new home. The trial judge directed a verdict for Columbia Lumber. We affirm. ¹

In 1976 Columbia Lumber sold building materials on credit to Charles Crumpton, d/b/a Rainbow Construction Company, for the construction of a house in Lexington County, South Carolina. Columbia Lumber did not participate in any way in the construction of the house, and was by appearance and in fact nothing more than a materials supplier.

After Crumpton had substantially completed the house, he encountered financial difficulties and could not pay his creditors, including Columbia Lumber. Crumpton then deeded the property to his mother, Cleo Crumpton, who assumed the mortgages. On October 11, 1976, Columbia Lumber filed a mechanic's lien on the property for its outstanding debt of $3,392.62. Instead of foreclosing on its lien, Columbia Lumber took title by deed, and paid off the lot and construction mortgages on the property.

Columbia Lumber then sold the house to Kennedy on July 21, 1977. The net proceeds from the sale were not enough to satisfy the debt owed by Crumpton to Columbia Lumber.

About six years after purchasing the house, Kennedy noticed a crack in the brick veneer at the rear of the house. Nearly two years after noticing the crack, Kennedy employed an engineer to estimate the cost of repairing it. The engineer opined that the crack was caused by a defective foundation. On September 27, 1985, Kennedy brought suit against Columbia Lumber on implied warranty of habitability and negligence theories. Kennedy's complaint was later amended to delete his cause of action for negligence.

I. LENDER LIABILITY

The facts of this case fall between those involved in Lane v. Trenholm Bldg. Co., 267 S.C. 497, 229 S.E.2d 728 (1976) and those involved in Roundtree Villas Ass'n, Inc. v. 4701 Kings Corp., 282 S.C. 415, 321 S.E.2d 46 (1984). We hold that Roundtree Villas should be applied here to absolve the lender of liability under an implied warranty of habitability theory.

In Lane, the developer of a subdivision sold an undeveloped lot to a builder. The developer gained a second mortgage on a house subsequently built on the lot. The builder, experiencing financial problems, deeded the house to the developer in satisfaction of its mortgage. The developer paid off the first mortgage on the house, and then sold it to Lane. Lane complained shortly thereafter about septic tank problems, and the developer endeavored to remedy them by ultimately installing a new septic tank. The repairs failed, and Lane brought suit, asserting the implied warranty of habitability.

We ruled in Lane that the developer was liable, citing our long held maxim of caveat venditor, and noting that one of the primary objectives of the law of contracts "is to carry out the reasonable expectations of the parties." Lane, 267 S.C. at 503, 229 S.E.2d at 730. While Lane is pertinent to the facts here, it is not fully controlling.

Lane differs from the instant case in that there the lender was also the developer of the subdivision. The developer's status as a lender was at most of secondary importance in the transaction. To have held against the buyer there would have been to frustrate his reasonable expectations when he entered the transaction.

Here, Columbia Lumber is merely a materials supplier, and sold in its capacity only as a lender attempting to recoup its losses, which it never fully accomplished. Columbia Lumber became a seller only by virtue of the fact that it took a deed in lieu of foreclosure, and we find that Lane does not direct the disposition of the case at bar. ²

In Roundtree Villas, a construction lender monitored a construction project to protect its loan investment to the builder. The builder sold several units of the project, but then faced insurmountable financial problems. The builder deeded the remaining units in the project, to prevent foreclosure, to a selling corporation created at the instigation of the lender. This selling corporation assumed the obligations owed by the builder to the lender. The lender undertook to repair defects in the remaining units in order to facilitate further sales by the seller corporation. Purchasers of these units brought suit upon discovering construction defects, asserting that the lender was liable under negligence and implied warranty of habitability theories.

We held in Roundtree Villas that the lender could not be held liable in tort for construction defects caused by the builder's work. The monitoring by the lender was not enough to impose a legal duty on it to prevent construction defects. We agreed, however, that a duty on the lender to use due care did arise regarding the repair work it undertook. We further held that the lender was not a party to any sales of the units sufficient to incur liability under an implied warranty of habitability.

In Roundtree Villas, this Court did not address the warranty liability of a mere lender who sells a house, since there we found that the lender was not sufficiently a party to the sale. We now hold that a mere lender, even if a party to the sale, is ordinarily not liable under an implied warranty of habitability theory.

The public policy reasons for refusing to impose warranty liability on a mere lender are myriad. To require every lender to foreclose in order to shield itself from liability instead of taking a deed in lieu would be unduly burdensome on the state's judicial and administrative machinery. The imposition of warranty liability on all lenders/sellers would discourage lending, and thus, economic growth. Further, it is unduly punitive to impose potential warranty liability on a lender that is searching for some way to recover the losses it has suffered due to the default of the debtor.

This is not to say that a lender will never incur implied warranty liability when it makes a sale after default. Obviously, a lender can be held liable if it is also a developer. See discussion of Lane, supra. Roundtree Villas establishes liability on lenders for defects in those portions of the house(s) which they complete. A lender will also incur liability for the performance of express representations made to a buyer. A lender should be held responsible if it is aware of defects but conceals them from an unwitting buyer. Liability may also attach when the lender becomes highly involved with construction in a manner that is not normal commercial practice for a lender. In such a situation, the lender might be said to be a joint venturer. See generally Central Bank v. Baldwin, 94 Nev. 581, 583 P.2d 1087 (1978). The lender may be liable if it is so amalgamated with the developer or builder so as to blur its legal distinction. See generally Kincaid v. Landing Dev. Corp., 289 S.C. 89, 344 S.E.2d 869 (Ct.App.1986). A lender may also be liable where it forecloses on a developer in the midst of construction, takes title, has substantial involvement in completing the construction and sells homes. See Ferguson, Lender's Liability for Construction Defects, 11 Real Est. L.J. 310 (1983).

None of these possibilities for liability apply to Columbia Lumber. It therefore cannot be found responsible in the instant case and the trial court must be affirmed.

II. BUILDER AND SELLER LIABILITY

Because this is the latest in a series of cases we have decided concerning theories of liability in new, residential housing, we take this opportunity to address the Court of Appeals' recent decision in Carolina Winds Owners' Association, Inc. v. Joe Harden Builder, Inc., 297 S.C. 74, 374 S.E.2d 897 (Ct.App.1988). To the degree herein indicated, we express our disapproval and rejection of that opinion.

There, a builder who was not also the seller of a condominium building was sued by a regime representing the purchasers. The regime, alleging cracking in the exterior facial brick walls of the building, pursued a negligence theory and an implied warranty of habitability theory against the builder.

The Court of Appeals held that the source of the implied warranty of habitability was the sale of a house, and since the builder was not a seller, he was not liable in warranty. Further, the Court of Appeals held that the "economic loss" rule served to prevent the imposition of tort liability on the builder. The "economic loss rule" simply states that there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself. In other words, tort liability only lies where the damage done is to other property or is personal injury.

While the Court of Appeals' reasoning in Carolina Winds appears to be a seamless web of proper legal analysis, the opinion reaches a result which is repugnant to the South Carolina policy of protecting the new home buyer. The result is that a builder who constructs defective housing escapes liability while a group of innocent new home purchasers are denied relief because of the imposition of traditional and technical legal distinctions.

The law involving the purchase of new housing has been in a state of flux since the early nineteenth century. It has necessarily evolved to keep pace with the changing mechanics of an ordinary new home purchase.

In the early 1800's, the doctrine caveat emptor was developed by courts which...