West v. Inter-Financial, Inc.

• Decision Date: 02 June 2006
• Docket Number: No. 20050195-CA.,20050195-CA.
• Citation: 2006 UT App 222,139 P.3d 1059
• Parties: Steven WEST and Suzanne West, Plaintiffs and Appellants, v. INTER-FINANCIAL, INC.; and Badi Mahmood, Defendants and Appellees.
• Court: Utah Court of Appeals

139 P.3d 1059

2006 UT App 222

Steven WEST and Suzanne West, Plaintiffs and Appellants, v. INTER-FINANCIAL, INC.; and Badi Mahmood, Defendants and Appellees.

No. 20050195-CA.

Court of Appeals of Utah.

June 2, 2006.

David B. Hansen and Kevin A. Howard, Howard Phillips & Andersen, Salt Lake City, for Appellants.

M. David Eckersley, Prince Yeates & Geldzahler, Salt Lake City, for Appellees.

Before Judges BENCH, GREENWOOD, and BILLINGS.

OPINION

GREENWOOD, Associate Presiding Judge:

¶ 1 Plaintiffs Steven and Suzanne West (the Wests) appeal the trial court's grant of Defendants' Motion for Judgment on the Pleadings. We reverse in part and affirm in part.

BACKGROUND

¶ 2 Dave Szumigala and Ellen Daley (the Sellers) hired Defendant Inter-Financial, Inc. to appraise their Salt Lake City property. Andrew Schofield, an appraiser at Inter-Financial, appraised the property at $240,000. Schofield's supervisor at Inter-Financial, Defendant Badi Mahmood, approved the appraisal report. Schofield certified in his appraisal report that he performed the appraisal "in conformity with the Uniform Standards of Professional Appraisal Practice, adopted and promulgated by the Appraisal Standards Board of the Appraisal Foundation." See Utah Code Ann. § 61-2b-27 (Supp.2005). The Sellers accepted the Wests' offer to purchase the property for $220,000. The Sellers then authorized Schofield and Inter-Financial "to transfer the appraisal" to the Wests and the Wests' lending institution. At closing, the lending institution charged the Wests $150 for the appraisal report.

¶ 3 Thereafter, the Wests allegedly discovered that an error in the appraisal report overstated the property's square footage by 560 square feet, constituting approximately eighteen percent of the total size. The Wests subsequently brought an action against Inter-Financial and Mahmood for negligence, negligent misrepresentation, and breach of contract. They demanded $40,000 in damages, which represented the difference in the value of the property at its purportedly true square footage, based on comparable sales in the neighborhood. After hearing arguments, the trial court granted Defendants' motion for judgment on the pleadings. This appeal followed.

ISSUE¹ AND STANDARD OF REVIEW

¶ 4 The Wests argue that the trial court erroneously barred their claims for negligence and negligent misrepresentation under the economic loss rule. "The grant of a motion for judgment on the pleadings is reviewed under the same standard as the grant of a motion to dismiss, i.e., we affirm the grant of such a motion only if, as a matter of law, the plaintiff could not recover under the facts alleged." Golding v. Ashley Cent. Irrigation Co., 793 P.2d 897, 898 (Utah 1990). "[W]e take [the factual allegations in the complaint] as true and consider them and all reasonable inferences drawn therefrom in a light most favorable to the plaintiff." Id. And, "because our review concerns only questions of law, we review for correctness." Straley v. Halliday, 2000 UT App 38, ¶ 8, 997 P.2d 338.

ANALYSIS

I. Economic Loss Rule

¶ 5 The trial court held that under the economic loss rule, the Wests have no cause of action for purported negligence and negligent misrepresentation because they were not a party to the contract between the Sellers and Inter-Financial, and they suffered neither physical nor property damage. "The economic loss rule prevents a party from claiming economic damages `in negligence absent physical property damage or bodily injury.'"² Fennell v. Green, 2003 UT App 291, ¶ 13, 77 P.3d 339 (quoting SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assocs., Inc., 2001 UT 54, ¶ 32, 28 P.3d 669 (additional quotations and citation omitted)).

¶ 6 Outside of a products liability context, Utah first applied the economic loss rule in American Towers Owners Ass'n v. CCI Mechanical, Inc., 930 P.2d 1182 (Utah 1996), to bar an owners association's tort claim against an architect for negligent design and construction. See id. at 1188, 1192. Similarly, in SME Industries, 2001 UT 54, 28 P.3d 669, the supreme court extended the scope of the economic loss rule to bar a steel subcontractor's negligence and negligent misrepresentation claims against design professionals. See id. at ¶¶ 38, 44. More recently, in Fennell, 2003 UT App 291, 77 P.3d 339, this court applied the holdings of American Towers and SME Industries to bar a property owner's negligent misrepresentation claims against real estate owners and developers under the economic loss rule. See id. at ¶ 13.

¶ 7 The Wests assert that the trial court erroneously applied the economic loss rule in light of Hermansen v. Tasulis, 2002 UT 52, 48 P.3d 235. In Hermansen, the supreme court recognized that "[w]hen an independent duty exists, the economic loss rule does not bar a tort claim `because the claim is based on a recognized independent duty of care and thus does not fall within the scope of the rule.'" Id. at ¶ 17 (quoting Town of Alma v. Azco Constr., Inc., 10 P.3d 1256, 1263 (Colo.2000)). To understand the significance of the supreme court's adoption of the independent duty of care outside the parameter of the economic loss rule, we must first examine the context and rationale underlying the economic loss rule.

¶ 8 Until Hermansen, the Utah Supreme Court's interpretation of the economic loss rule developed in the context of either products liability or construction and design. See American Towers, 930 P.2d at 1189-90; SME Indus., 2001 UT 54 at ¶ 34, 28 P.3d 669. The supreme court noted that the economic loss rule is "particularly applicable" to construction and design situations because parties "can avoid economic loss" with contracts and are thus "free to adjust their respective obligations to satisfy their mutual expectations." American Towers, 930 P.2d at 1190. Therefore, "relief for defeated economic expectations ... was to come from the contract itself, not from third parties." SME Indus., 2001 UT 54 at ¶ 35, 28 P.3d 669.

¶ 9 In American Towers, the supreme court rejected the owners association's breach of contract claim as intended third party beneficiaries to the construction contracts. See 930 P.2d at 1187-88. The court explained that "[t]o allow the claim would be to impose the [association's] economic expectations upon parties whom the [association] did not know and with whom they did not deal and upon contracts to which they were not a party." Id. at 1192.

¶ 10 Regardless of whether it was an owners association, as in American Towers, or subcontractors, as in SME Industries, who brought the negligence claim against architects,³ the supreme court recognized that both "are akin to the types of commercial situations to which the economic loss rule was meant to apply." SME Indus., 2001 UT 54 at ¶ 36, 28 P.3d 669. Indeed, "`the economic loss rule was developed [for such situations,] to prevent disproportionate liability and allow parties to allocate risk by contract.'" Id. (quoting Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 990 (1994) (en banc)).

¶ 11 For the same reasons, the supreme court refused to apply Restatement section 552 to a negligent misrepresentation action against a construction or design professional for solely economic damages. See id. at ¶ 44, 881 P.2d 986 ("[T]o maintain the fundamental boundary between tort and contract law, we hold that when parties have contracted, as in the construction industry, to protect against economic liability, contract principles override the tort principles enunciated in section 552 of the Restatement (Second) of Torts and, thus, economic losses are not recoverable."); see also Restatement (Second) of Torts § 552 (1977).⁴

II. Adoption of Independent Duty in Hermansen

¶ 12 In SME Industries, the supreme court expressly limited the economic loss rule to bar tort actions against construction and design professionals, but left the door open for actions against other professionals. See 2001 UT 54 at ¶ 38 n. 9, 28 P.3d 669 (noting "that other courts dealing with this issue have concluded that professionals, such as attorneys, accountants, and health care providers, are distinguishable from architects, and that cases applying the economic loss rule in the construction setting do not signal in general the end of malpractice recovery in tort" (additional quotations and citations omitted)).

¶ 13 The supreme court further acknowledged, "that [it] has under certain circumstances recognized that economic losses [in other contexts] are recoverable in tort under section 552 [of the Restatement (Second) of Torts]." Id. at ¶ 41; see also Restatement (Second) of Torts § 552. For example, in Price-Orem Investment Co. v. Rollins, Brown & Gunnell, Inc., 713 P.2d 55 (Utah 1986), the supreme court held that the plaintiff was not barred from pursuing its negligent misrepresentation action against a defendant surveyor even though the party was not in privity of contract. See id. at 59 ("Utah long ago acknowledged the tort of negligent misrepresentation, which provides that a party injured by reasonable reliance upon a second party's careless or negligent misrepresentation of a material fact may recover damages resulting from that injury when the second party had a pecuniary interest in the transaction, was in a superior position to know the material facts, and should have reasonably foreseen that the injured party was likely to rely upon the fact."). Similarly, in Milliner v. Elmer Fox & Co., 529 P.2d 806 (Utah 1974), the supreme court held that a third party has an action in negligence against an accountant where the third party relied on the accountant's report, even though they were not in privity, where the accountant knew that the party would rely on the report for a particular purpose. See id. at 808 (stating that "lack of privity is not a defense where an accountant who is aware of the fact that his work will be relied on by a party or parties who may...