S Dev. Co. v. Pima Capital Mgmt. Co.

• Decision Date: 30 August 2001
• Docket Number: No. 1 CA-CV-00-0347.,1 CA-CV-00-0347.
• Citation: 201 Ariz. 10,31 P.3d 123
• Parties: The S DEVELOPMENT COMPANY, an Arizona corporation; and Presidio North Limited Partnership, an Arizona limited partnership, Plaintiffs-Appellees, v. PIMA CAPITAL MANAGEMENT CO., an Arizona corporation; and Lincoln Life & Casualty, a Nebraska corporation, Defendants-Appellants.
• Court: Arizona Court of Appeals

31 P.3d 123

201 Ariz. 10

The S DEVELOPMENT COMPANY, an Arizona corporation; and Presidio North Limited Partnership, an Arizona limited partnership, Plaintiffs-Appellees, v. PIMA CAPITAL MANAGEMENT CO., an Arizona corporation; and Lincoln Life & Casualty, a Nebraska corporation, Defendants-Appellants.

No. 1 CA-CV-00-0347.

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

August 30, 2001.

Dalton Gotto Samson & Kilgard, P.L.C. by Ron Kilgard and Mark A. Fuller, Phoenix, Attorneys for Plaintiffs-Appellees.

Osborn Maledon, P.A., by David G. Campbell and Thomas L. Hudson, Phoenix, Attorneys for Defendants-Appellants.

OPINION

GARBARINO, Presiding Judge.

¶ 1 We are called upon to determine the effect, if any, that a disclaimer of warranties, or an "as is" provision, in a purchase contract for, commercial property has on a vendor's duty to disclose defects in the physical condition of a property being sold. We hold that latent defects in a property sold "as is" that are known to the vendor must be disclosed to the purchaser. We also hold that a vendor may be held liable for negligent nondisclosure of facts basic to the transaction when the purchaser is precluded by the vendor from discovering those facts.

¶ 2 The appellants, Pima Capital Management Company and Lincoln Life & Casualty, appeal a jury verdict awarding $3,690,000 in damages to the appellees, The S Development Company and Presidio North Limited Partnership, for the appellants' negligent nondisclosure of facts basic to the parties' transaction. For the following reasons, we affirm.

FACTUAL AND PROCEDURAL HISTORY

¶ 3 Because this is an appeal from a jury verdict, we view the evidence in the light most favorable to upholding the jury verdict. Warrington v. Tempe Elementary Sch. Dist. No. 3, 197 Ariz. 68, 69, ¶ 4, 3 P.3d 988, 989 (App.1999). The appellees purchased two Phoenix apartment complexes, Presidio North and Bell Tower, from the appellants in July 1993. Both purchase contracts contained substantially similar provisions, which stated:

Disclaimer of Warranties. Buyer acknowledges that except as expressly set forth in this Agreement, Seller makes and has made no representations or warranties of any kind whatsoever, including but not limited to warranties concerning the condition of title, physical condition, encroachments, access, zoning, value, future value, income potential, any survey, environmental report or other information prepared by third parties, loan assumability,[¹] or the presence on or absence from the Property of any hazardous materials or underground storage tanks. Buyer is purchasing the Property as a result of its own examination thereof in its "AS IS" condition, and upon the exercise of its own judgment and investigation.

(Emphasis added.) Both contracts also contained provisions granting the appellees the right to inspect the property:

Buyer's Inspection. During the Review Period described ... below, Buyer and Buyer's agents, servants, employees and independent contractors shall have reasonable access to the Property for the purpose of investigating the condition of the same, and for any other reasonable purpose which relates to the potential use, occupancy, operation and maintenance of the Property; provided, however, that in conducting such investigations ... (ii) Buyer shall not injure or damage the Property....

(Emphasis added.)

¶ 4 Prior to the close of escrows, the appellees retained two engineering firms to inspect each of the buildings to be purchased. The inspections did not reveal any substantial problems with the plumbing in the buildings. Approximately two years after closing, however, the appellees learned that polybutylene pipe (PB pipe) had been used in both Presidio North's and Bell Tower's plumbing. PB pipe is a defective type of flexible tubing that will fail and leak when it is used to transport warm water under normal water pressures.² The appellants claim that they were not aware that PB pipe had been used in the buildings when they sold the buildings to the appellees and, therefore, they could not and did not disclose that condition to the appellees prior to the sale.

¶ 5 The appellees sued the appellants alleging fraud and nondisclosure for failing to disclose the defective plumbing prior to the close of escrows. The appellants moved for summary judgment arguing that the "as is" provisions in the purchase contracts relieved them of any duty to disclose the defective plumbing, even if they had actual knowledge of the condition. The trial court denied the appellants' summary judgment motion and the case proceeded to trial. The trial court granted the appellants' motion for judgment as a matter of law on the appellees' punitive damages claim after the case-in-chief, but denied the appellants' motions for judgment as a matter of law on the other causes of action after the close of all of the evidence, and after the jury rendered its verdict. The trial court also denied the appellants' motion for a new trial and motion to alter or amend the judgment. The jury returned a verdict in favor of the appellants on the fraud claim, but awarded the appellees $3,690,000 in damages on the nondisclosure claim. The appellants timely appealed. We have jurisdiction pursuant to Arizona Revised Statutes (A.R.S.) § 12-2101(B) and (F)(1) (1994).

ISSUES

¶ 6 The appellants raise the following issues on appeal:

1. Whether the trial court erred by denying the appellants' motion for judgment as a matter of law in light of the purchase contracts' "as is" clauses;

2. Whether the trial court erred by refusing to give an instruction on the legal effect of an "as is" clause;

3. Whether the trial court erred by instructing the jury that the appellants could have imputed knowledge of the defective plumbing;

4. Whether the trial court erred by precluding evidence of repairs made to the defective plumbing paid for by settlement proceeds from the plumbing manufacturer;

5. Whether the trial court erred by precluding evidence of the appellants' offer to rescind the purchase contracts;

6. Whether the trial court erred by refusing to give the jury an avoidable consequences instruction; and

7. Whether sufficient evidence supported the jury's consequential damages award.

DISCUSSION

I. The "As Is" Provisions and the Appellants' Motion for Judgment as a Matter of Law

¶ 7 The appellees' claim for nondisclosure is predicated on the Restatement (Second) of Torts § 551 (1977). The appellees devote much of their brief to refute the appellants' argument that the "as is" clauses in the purchase contracts relieve them of tort liability for nondisclosure. The appellants are not, however, arguing that the insertion of the "as is" clauses in the purchase contracts relieves them, as a matter of law, of all tort liability for nondisclosure. Rather, they argue that the "as is" clauses pertain only to one element of the tort of nondisclosure-the duty element.

¶ 8 Section 551 of the Restatement (Second) of Torts places the burden on a plaintiff who claims that a defendant negligently failed to disclose facts basic³ to the transaction:

(1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.

Restatement (Second) of Torts § 551(1) (emphasis added). The appellants do not dispute that the appellees argued, and the jury was instructed, that the appellants' duty to disclose arose under § 551(2)(e) of the Restatement (Second) of Torts, which provides as follows:

(2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated,

....

(e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.

Restatement (Second) of Torts § 551(2)(e). Essentially, the appellants argue that they were under no duty to disclose the defective plumbing to the appellees by operation of the "as is" clauses; that the "as is" clauses effectively shifted the burden of discovering the defect to the appellees and, therefore, the appellants are not liable for the appellees' failure to discover the defect, and they should have been granted judgment as a matter of law.

¶ 9 First, we find merit in the appellees' argument that the existence of an "as is" provision in a purchase contract generally operates only as a waiver of breach of warranty claims, not tort claims. See, e.g., Salt River Project Agric. Improvement & Power Dist. v. Westinghouse Elec. Corp., 143 Ariz. 368, 384, 694 P.2d 198, 214 (1984) (stating that "[w]hile parties to a contract may `disclaim responsibility for any potential [tort] liability ... they must expressly spell out their intention' " (emphasis added) (quoting Penn. Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165, 1175 (3d Cir.1981))); Mardan Corp. v. C.G.C. Music, Ltd., 600 F.Supp. 1049, 1055 (D.Ariz.1984) ("[T]he warranty disclaimer is effective to preclude only causes of action which are based upon breach of warranty theory."), aff'd, 804 F.2d 1454 (9th Cir.1986); Southland Corp. v. Ashland Oil, Inc., 696 F.Supp. 994, 1001 (D.N.J.1988) ("[A]n `as is' provision is merely a warranty disclaimer and as such precludes only claims based on breach of warranty."); Prudential Ins. Co. of Am. v. Jefferson Assocs., 896 S.W.2d 156, 162 (Tex.1995) ("A buyer is not bound by an agreement to purchase something `as is' that he is induced to make because of a fraudulent representation or concealment of...