Subsequent Homebuyers’ Negligence Claims Now Invalid as to Builders: Appellate Court Ruling Huge Victory for Builders in Arizona
WHY THIS CASE IS IMPORTANT
This case is important to builders in the State of Arizona because it effectively eliminates any claim that a subsequent homeowner may bring for negligence. Before this case, subsequent homeowners arguably had more rights than original homeowners for construction defects because the economic loss doctrine prevents original homeowners from suing for construction defects sounding in negligence absent personal injury or property damage, and the Statute of Repose is not applicable to tort causes of action. This case, coupled with the recent changes to Arizona’s Purchaser Dwelling Act, underscore a trend of making it more difficult for the plaintiff bar to successfully prosecute a claim for construction defect against the homebuilder.
On July 28, 2015, the Arizona Court of Appeals issued its decision in Sullivan v. Pulte Home Corporation, 2015 WL 4549188, ___ P.3d ___. The key issue in this opinion was whether subsequent (non-original) homeowners could maintain a negligence cause of action against a homebuilder for economic losses arising from latent construction defects. The Court of Appeals held that the subsequent homeowners could not maintain their negligence-based claims against the homebuilder.
SUMMARY OF RELEVANT FACTS
Pulte Home Corporation (“Pulte”) developed and built homes in a Phoenix hillside community. In 2000, Pulte sold the home to the original homeowners who, three years later, sold the property to the Sullivans. In 2009, the Sullivans discovered problems with the home’s hillside retaining wall. An engineering firm they retained concluded that Pulte had constructed the retaining wall and prepared the home site without proper structural and safety components, including footings, rebar, and adequate drainage and grading. Pulte declined the Sullivans’ request to make repairs.
The Sullivans sued Pulte, alleging several negligence-based claims. The Sullivans sought to recover out-of-pocket costs associated with identifying and remediating the alleged defects, as well as damages for diminution in the property’s value. Pulte moved to dismiss all counts of the complaint, arguing that the implied warranty claim was barred by the statute of repose and that the tort claims were impermissible under the economic loss doctrine (“ELD”). The superior court granted Pulte’s motion, and the Sullivans appealed.
At the Court of Appeals, the dismissal of the breach of implied warranty claim was upheld, but the Court overturned the trial court’s ruling on the ELD, holding that a subsequent homeowner does not have a contract with a homebuilder and their negligence claims were therefore not barred by the ELD. The case then went to the Supreme Court which vacated the Court of Appeals’ decision in part but affirmed that the negligence claims were not barred by the ELD. Importantly, the Supreme Court pointed out that it was not endorsing the fact that the negligence claims were valid, only that they were not barred by the ELD. The Supreme Court then hinted that a homebuilder may not even have a duty in tort to a subsequent homeowner at all.
The case went back to the trial court where Pulte filed a motion to dismiss, arguing “a homebuilder such as Pulte does not owe a duty of care to a subsequent homeowner (such as plaintiffs) to prevent them from economic harm.” The trial court granted Pulte’s motion.
The case finally made it back to the Court of Appeals and, on July 28, 2015, it entered its ruling, holding that homebuilders do not owe a duty in tort to subsequent homeowners.
The Sullivans acknowledged that Pulte did not owe any duty based on common law principles of negligence. Instead, they premised their duty argument on the municipal building code and on Arizona statutes and regulations governing residential contractors.
With respect to the municipal building code, the court reasoned that no duty existed when a regulatory scheme “expressly eschews any intent to protect or benefit a class or group of persons.” Specifically, the City of Phoenix Code provided that it was not intended to create or otherwise establish or designate any particular class or group of persons who will or should be especially protected or benefited by the terms of the code.
Nor was the Court persuaded by the argument that statutes enacted to protect the public from unscrupulous contractors supported a public policy-based tort duty. The Court reasoned that the provisions regulating contractors did not support imposing public policy-based tort duties in favor of subsequent property owners asserting only economic loss. It continued by pointing out that if the legislature so chose, it could include such intent to create a duty within the statutes and/or regulations but, at this point, it has not done so.
Unpersuaded by the Sullivans arguments, the Court held in favor of Pulte and found that no duty in tort existed as to the Sullivans.
ADDITIONAL IMPLICATIONS OF THE RULING
In Arizona, both original and subsequent homeowners can assert any claim based in contract (i.e., breach of implied warranty) for up to eight (8) years from substantial completion of the home. However, prior to the ruling in this case, a negligence claim could potentially be asserted into perpetuity because a subsequent homeowner could claim that they did not discover a latent defect until year 15, 20, 25, etc., and they would then have two (2) years from the date of discovery of the latent defect to assert their claim. This ability to assert a negligence claim theoretically into perpetuity would give subsequent homeowners even more rights than an original homeowner, who is limited by the ELD.
Now, unless there is physical injury to persons or other property, neither original nor subsequent homeowners can bring a claim for negligence against their homebuilder in Arizona. Original homeowners are limited by the ELD to their contractual remedies absent such other injury, and subsequent homeowners cannot bring a negligence claim at all.
Prior to this ruling, homebuilders could potentially be liable in negligence well beyond the eight (8) year statute of repose. Now, assuming the defect was not discovered until the eighth year, homebuilders can only be liable for latent defects for up to eight (8) years from substantial completion of the home.