Mid Valley Real Estate Solutions V, LLC v. Hepworth-Pawlak Geotechnical, Inc.

• Decision Date: 01 August 2013
• Docket Number: Court of Appeals No. 13CA0519
• Citation: 2013 COA 119,343 P.3d 987
• Parties: MID VALLEY REAL ESTATE SOLUTIONS V, LLC, a Colorado limited liability company, Plaintiff–Appellee, v. HEPWORTH–PAWLAK GEOTECHNICAL, INC., a Colorado corporation; Steve Pawlak; Daniel Hardin ; and S K Peightal Engineers, Ltd., a Colorado corporation, Defendants–Appellants.
• Court: Colorado Court of Appeals

343 P.3d 987

2013 COA 119

MID VALLEY REAL ESTATE SOLUTIONS V, LLC, a Colorado limited liability company, Plaintiff–Appellee

v.HEPWORTH–PAWLAK GEOTECHNICAL, INC., a Colorado corporation; Steve Pawlak; Daniel Hardin ; and S K Peightal Engineers, Ltd., a Colorado corporation, Defendants–Appellants.

Court of Appeals No. 13CA0519

Colorado Court of Appeals, Div. A.

Announced August 1, 2013

Garfield and Hecht, P.C., David L. Lenyo, Chad J. Schmidt, Avery A. Simpson, Aspen, Colorado, for Plaintiff–Appellee

Cardi, Schulte & Ford, LLC, Andrew S. Ford, Daniel V. Woodward, Greenwood Village, Colorado, for Defendants–Appellants Hepworth–Pawlak Geotechnical, Inc., Steve Pawlak, and Daniel Hardin

Montgomery Little & Soran, P.C., Echo D. Ryan, Shawn A. Eady, John R. Riley, Greenwood Village, Colorado, for Defendant–Appellant S K Peightal Engineers, Ltd.

Hogan Lovells U.S. LLP, Craig A. Umbaugh, David A. DeMarco, Denver, Colorado, for Amicus Curiae Colorado Bankers Association

Bieging Shapiro & Barber LLP, John E. Burrus, Tracy A. Davis, Denver, Colorado, for Amicus Curiae Independent Bankers of Colorado

Cardi, Schulte & Ford, LLC, Phillip B. Cardi, Greenwood Village, Colorado, for Amici Curiae American Council of Engineering Companies of Colorado, American Institute of Architects of Colorado, Structural Association of Colorado, and The Colorado Association of Geotechnical Engineers

Opinion

Opinion by JUDGE WEBB

¶ 1 A construction professional has an independent duty “to act without negligence in the construction of a home,” and a “home owner” may sue in negligence for breach of this duty. Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1042–43 (Colo.1983). This interlocutory appeal under C.A.R. 4.2 presents a legal question unresolved in Colorado: whether “home owner” includes a wholly-owned subsidiary of the construction lender on the project, which holds title to the home solely for purposes of resale? We conclude that it does.¹

¶ 2 Defendants, Hepworth–Pawlak Geotechnical, Inc., Steve Pawlak, and Daniel E. Hardin (collectively H–P), the project soils engineer; and S K Peightal Engineers, LTD (SKPE), the project structural engineer, challenge an order denying their motion for summary judgment on the negligence claim of plaintiff, Mid Valley Real Estate Solutions V, LLC (Mid Valley), a wholly-owned subsidiary of Alpine Bank (bank), the construction lender. Defendants contend that summary judgment should have been entered because the economic loss rule precludes this negligence claim, which was based on extensive damage to the house caused by soil expansion.

¶ 3 We conclude that the independent duty announced in Cosmopolitan Homes and reaffirmed in A.C. Excavating v. Yacht Club II Homeowners Ass'n , 114 P.3d 862 (Colo.2005), applies to defendants as residential construction professionals, and that Mid Valley's relationship to the construction lender does not take it outside the scope of this duty. Therefore, we affirm the trial court's denial of summary judgment because the existence of this duty renders the economic loss rule inapplicable, and we remand for further proceedings.

I. Facts

¶ 4 The relevant facts are undisputed for purposes of this appeal. A developer entered into a written contract with H–P to analyze the soil on which houses would be built for resale. As required under the contract, H–P produced a report, which recommended a particular type of foundation. The developer's general contractor entered into an oral contract with SKPE to provide structural engineering services, including foundation design. The general contractor built the house at issue according to H–P's recommendations and SKPE's designs.

¶ 5 After completing the house, the developer was unable to sell it and eventually defaulted on the construction loan agreement with the bank. To avoid foreclosure, the developer and the bank entered into a deed-in-lieu agreement. Under this agreement, the bank received $355,000, and title to the house was transferred to Mid Valley, which had been created to hold the house, its sole asset, for resale. In return, the bank forgave the remaining balance on the construction loan.

¶ 6 Soon after Mid Valley took title to the house, significant structural damage began to appear, starting with cracks in the foundation. As relevant here, Mid Valley sued defendants for negligence in failing to identify expansive soils and specify an appropriate foundation. Mid Valley sought damages for costs of repair.

II. Law

¶ 7 Tort and contract law are distinct, each imposing different obligations: while tort duties are imposed by law to protect against “physical harm or damage to ... personal property,” among other injuries, contractual duties arise solely from voluntary promises between parties. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo.2004) ; see City of Westminster v. Centric–Jones Constructors, 100 P.3d 472, 483 (Colo.App.2003) (“Tort duties are imposed by law without regard to any agreement.”). To maintain this distinction, the Colorado Supreme Court adopted the economic loss rule in Town of Alma v. AZCO Construction, Inc., 10 P.3d 1256, 1264 (Colo.2000) ( “[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.”).

¶ 8 Whether the economic loss rule applies in a particular case turns on the source of the duty at issue. Id. at 1262 ; Hamon Contractors, Inc. v. Carter & Burgess, Inc., 229 P.3d 282, 291 (Colo.App.2009). Generally, if either the duty was created by contract or the applicable tort duty would duplicate “a duty also imposed by the contract,” then the duty is not “independent” and the economic loss rule applies. Makoto USA, Inc. v. Russell, 250 P.3d 625, 627 (Colo.App.2009) ; accord Grynberg v. Agri Tech, Inc., 10 P.3d 1267, 1269–70 (Colo.2000).

¶ 9 This source of duty inquiry is illustrated by BRW, which turned on a series of contracts involving multiple parties on a commercial construction project. The supreme court held that the economic loss rule precluded a subcontractor's negligence suit against an engineer and the project supervisor because “the duties allegedly breached were contained in the network of interrelated contracts.” BRW, 99 P.3d at 74. The court compared the defendants' contractual duties and remedies to those in negligence and concluded that “[t]he interrelated contracts ... contain[ed the defendants'] duty of care, and [plaintiff's] remedies exist[ed] in contract.” Id. Thus, the economic loss rule applied and precluded the subcontractor's claims. Id.

¶ 10 But less than a year later, in A.C. Excavating, 114 P.3d at 866, the supreme court reiterated that “the economic loss rule ha[s] no application” when the applicable duty is necessarily “independent of any contractual obligations that may have existed.” The case arose from construction defects in a townhome project. Without mentioning the test announced in BRW —whether the parties' contracts provided a standard of care, and if so, whether that standard duplicated the applicable negligence duty—the court noted that “Cosmopolitan Homes specifically held that builders have an independent duty of care to act without negligence in the construction of homes” and allowed a negligence action to proceed against subcontractors. Id. at 867.

¶ 11 This independent duty was first recognized in Cosmopolitan Homes, 663 P.2d at 1042, which involved a negligence action by a home owner against a builder. The supreme court noted that the contract and negligence claims were distinguishable “and therefore they should be treated differently.” Id. at 1045. The court held that “[a]n obligation to act without negligence in the construction of a home is independent of contractual obligations.” Id . at 1042.

¶ 12 Although Cosmopolitan Homes predates the supreme court's adoption of the economic loss rule, “Town of Alma firmly establish[ed] that the economic loss rule does not apply to negligent construction claims against homebuilders because homebuilders have an independent duty of care to act without negligence in the construction of homes.” A.C. Excavating, 114 P.3d at 867. And rather than limiting this duty, the supreme court expanded it beyond “builders” to include residential subcontractors. Id. at 868.

¶ 13 Colorado appellate courts have predicated this independent duty on the following policy considerations:

• 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, 663 P.2d at 1045 (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 home[ ]owners and that harm to home [ ]owners from negligent construction is foreseeable,” Yacht Club II Homeowners Ass'n v. A.C. Excavating, 94 P.3d 1177, 1181 (Colo.App.2003), aff'd , 114 P.3d 862 (Colo.2005) ; and

• An independent duty “discourage[s] misconduct and provide[s] an incentive for avoiding preventable harm,” id.

¶ 14 In sum, “the issue of duty in the context of the economic[ ]loss rule differs depending upon whether one is evaluating the standard of care owed by commercial contractors or residential contractors.” 7 Colo. Prac., Personal Injury Torts And Insurance § 10:40 (3d ed.). Thus, while application of the economic loss rule in commercial construction cases hinges on the “contractual context among and between the...