Rinehart v. Morton Buildings, Inc.

• Decision Date: 26 July 2013
• Docket Number: No. 101,940.,101,940.
• Citation: 305 P.3d 622,297 Kan. 926
• Parties: Kenneth RINEHART and Beverly Rinehart, Individuals, and Midwest Slitting, LLC, Appellees, v. MORTON BUILDINGS, INC., Appellant.
• Court: Kansas Supreme Court

297 Kan. 926

305 P.3d 622

Kenneth RINEHART and Beverly Rinehart, Individuals, and Midwest Slitting, LLC, Appellees,

v.MORTON BUILDINGS, INC., Appellant.

No. 101,940.

Supreme Court of Kansas.

July 26, 2013.

Syllabus by the Court

1. The economic loss doctrine is judicially created. It originated with product liability lawsuits to bar tort claims for economic recovery when the only alleged injury resulted from damage to the product. Over time, the doctrine was extended in some jurisdictions based on judicial views about the appropriateness of its application to other circumstances.

2. Determining whether the economic loss doctrine applies in a case is an issue of law subject to unlimited review.

3. The tort of negligent misrepresentation as set forth in Restatement (Second) of Torts § 552 (1976) arises when a person in the course of that person's business, profession, employment, or in any other transaction in which that person has a pecuniary interest: (a) supplies false information to guide others in their business transactions; (b) the person supplying the false information fails to exercise reasonable care or competence in obtaining or communicating that information; (c) the party receiving the false information reasonably relies on it; (d) the person relying on the false information is a person or one of a group of persons for whose benefit and guidance the information is supplied or a person or one of a group of persons to whom the person supplying the information knew the information would be communicated by another; and (e) the party receiving the information suffered damages.

4. Negligent misrepresentation claims are not subject to the economic loss doctrine because the duty underlying such claims arises by operation of law and the doctrine's purposes would not be furthered by extending it to such claims.

5. Interpretation of a Supreme Court rule is a question of law subject to unlimited review.

6. Supreme Court Rule 7.07(b) ([297 Kan. 927]2012 Kan. Ct. R. Annot. 66) authorizes an appellate court to award attorney fees for services on appeal in cases in which the district court had authority to award such fees. The rule does not provide any greater authority to award attorney fees than K.S.A. 50–634(e), which specifically permits the prevailing party to be awarded reasonable attorney fees, including those on appeal, for certain violations of K.S.A. 50–626 under the Kansas Consumer Protection Act.

Greg L. Musil, of Polsinelli Shughart PC, of Overland Park, argued the cause, and G. Edgar James and Heber O. Gonzalez, of the same firm, of Kansas City, Missouri, were with him on the briefs for appellant.

Michael L. Entz, of Entz, Entz & Laskowski, LLC, of Topeka, argued the cause and was on the briefs for appellees.

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

Morton Buildings, Inc. challenges a Court of Appeals decision affirming an adverse jury verdict in a negligent misrepresentation case and assessing attorney fees for the appeal. Morton contends the economic loss doctrine, which originated with product liability litigation to prohibit tort claims when the only damages were to the product itself, should extend to bar the negligent misrepresentation claim in this case. Morton also objects to the attorney fee award, arguing it included time and expenses not reimbursable under the applicable statute. We affirm in part and reverse in part the Court of Appeals, and remand to the Court of Appeals for further proceedings.

We hold the economic loss doctrine does not bar negligent misrepresentation claims because the duty at issue arises by operation of law and the doctrine's purposes would not be furthered by extending it to such claims. We reverse and remand the attorney fee award for reconsideration by the Court of Appeals because we cannot determine from the record whether the panel limited the time and expenses to just the consumer protection issue as required by K.S.A. 50–643(e) and Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66). For the same reasons, we deny on present showing the application for attorney fees for the work performed before this court.

Factual and Procedural Background

Kenneth and Beverly Rinehart contracted with Morton for a preengineered building to serve as their personal residence and business location for their cellophane slitting company, Midwest Slitting, LLC. The Rineharts and the sales agent discussed the building's dual purpose during negotiations. The written contract is not in the appellate record, but it is agreed Midwest Slitting, as a corporate entity, was not a party to it.

Disputes arose during construction over the structure's quality. These clashes matured into litigation when the Rineharts refused payment because of dissatisfaction with Morton's attempts at repair, which caused Morton to file a mechanic's lien. The Rineharts and Midwest Slitting sued first, advancing various legal theories. Morton counterclaimed against the Rineharts to foreclose its mechanic's lien and recover the remaining balance on the contract. A jury returned a verdict for the Rineharts on their breach of contract and warranty claims, awarding them $108,017.13 in damages.

The jury also found for the Rineharts on their deceptive acts and practices claim under the Kansas Consumer Protection Act (KCPA), K.S.A. 50–623 et seq. It determined Morton willfully misrepresented that the building complied with the plans and specifications and would include anchor bolts, roof fasteners, fire stops, a vapor barrier, and truss repairs. Based on that verdict, the district court held Morton committed unconscionable acts in violation of the KCPA. See K.S.A. 50–627(b) (“unconscionability of an act or practice is a question for the court”). This finding authorized the district court to award attorney fees to the Rineharts as the prevailing party on the KCPA claim. See K.S.A. 50–634(e) (court may award reasonable attorney fees to prevailing party on KCPA claim, including fees for appeal; award limited to fees for work reasonably performed). The district court awarded the Rineharts $45,000 in attorney fees after deducting approximately $6,500 of legal work the court attributed to Midwest Slitting's claims, which did not involve KCPA violations.

As for Midwest Slitting's negligent misrepresentation claims, it alleged Morton misrepresented that the building would be completed in a timely manner, accommodate Midwest Slitting's need to relocate its operations, and meet or exceed all industry standards. Midwest Slitting sought $218,349.65 in economic damages for shop rent at an alternate facility, lost production, relocation costs, and interest expenses on its line of credit. The jury found for Midwest Slitting and awarded $149,824.65. The verdict form did not require the jury to itemize how it calculated the award.

Finally, the jury rejected Morton's counterclaim against the Rineharts for mechanic's lien foreclosure and recovery of the remaining contract balance.

Morton timely appealed to the Court of Appeals, arguing: (1) the economic loss doctrine barred Midwest Slitting's negligent misrepresentation claims; (2) the alleged misrepresentations were not actionable; (3) the jury instructions for computing damages were improper; (4) the admission of certain photographs Morton contended were not provided during discovery was error; and (5) the holding that Morton committed unconscionable acts under the KCPA was error.

Relevant to this appeal, Morton argued the economic loss doctrine should apply to negligent misrepresentation claims involving construction projects on a “case-by-case basis,” depending on the contract's nature and whether the doctrine's goals would be furthered. Morton then argued the doctrine should apply here because Midwest Slitting had an opportunity to bargain for contractual protections but did not. It also asserted that many of the doctrine's policy goals would be promoted by its application to Midwest Slitting's claims.

The Court of Appeals disagreed with Morton. It held the economic loss doctrine did not bar Midwest Slitting's claims because the company did not have a contract with Morton, i.e., there was no contractual privity. Rinehart v. Morton Buildings, Inc., No. 101,940, ––– Kan.App.2d ––––, 2010 WL 4320353, at *4 (Kan.App.2010) (unpublished opinion). The panel found unpersuasive Morton's argument that Midwest Slitting had an opportunity to bargain for contractual protections, noting Morton had the same opportunity to contractually limit its liability and did not pursue it. 2010 WL 4320353, at *4. The panel then rejected Morton's remaining arguments. 2010 WL 4320353, at *5–10.

With their continued success with the KCPA claim, the Rineharts were allowed to seek attorney fees for that portion of their attorney's appellate work related to that issue. See K.S.A. 50–634(e). They applied to the panel for $15,593.94 in fees, citing the KCPA and Kansas Supreme Court Rule 7.07(b) (2012 Kan. Ct. R. Annot. 66), which allows an appellate court to award fees “in any case in which the trial court had authority to award fees.” Morton argued the entire request should be denied because the motion's supporting affidavit itemized time spent on all claims, rather than just work on the KCPA and intertwined claims. In a two-sentence order, the panel granted the entire fee request, citing Supreme Court Rule 7.07(b). The order did not mention the KCPA.

Unsatisfied, Morton petitioned this court for review of two questions: (1) whether the economic loss doctrine bars Midwest Slitting's negligent misrepresentation claims; and (2) whether the panel erred by granting the Rineharts appellate attorney fees. We granted review on both issues under K.S.A. 20–3018(b) (review of Court of Appeals decision) and obtained jurisdiction under K.S.A. 60–2101(b). After oral argument with this court, the Rineharts submitted another motion seeking attorney fees for work performed for this appeal. Morton...