Hughes Custom Building, L.L.C. v. James Davey and Associates (CA2 5/7/09)

Having very recently addressed the economic loss rule, Division Two does so again here and manages to muddy the waters pretty completely.

Davey (“JDS”) did soil engineering for a subdivision in Globe. Hughes built some houses there. The houses had serious problems due, allegedly, to bad soil. As a result, Hughes dealt with lawsuits from homeowners, problems with the Registrar of Contractors, its own (unsuccessful) suit against the City of Globe, and substantial legal fees. It then sued JDS for negligence. JDS moved for summary judgment, which the trial court – a Graham County judge visiting Gila – granted. (For some reason, the trial judge then instructed JDS to prepare findings and conclusions; in a footnote, this opinion gently points out that they’re not appropriate on summary judgment and that the Court of Appeals would ignore them.) Hughes appealed.

JDS’s argument was that under the economic loss rule Hughes couldn’t sue for negligence. The economic loss rule, traditionally stated, is that a claim for economic loss that does not involve personal injury or damage to property other than that which was the subject of a contract lies only in tort, not in contract. For example, if you buy a widget that turns out to be broken then your claim is in contract unless the broken widget hurts you or causes damage to some other, “secondary” property.

What property is “secondary” can involve the sort of how-many-angels-fit-on-the-head-of-a-pin metaphysics that has not – as this opinion demonstrates – entirely passed out of the law. When Hughes built houses on the land JDS worked on, did they become part of the land – and therefore subject to the economic-loss doctrine – or were they still separate, and therefore “secondary,” property?

In March Division Two seemed to have simplified the problem in  Valley Forge Insurance v. Sam’s Plumbing, L.L.C. (CA2 3/19/09) (which we referred to briefly here). Under that case, the question turns not on whether the property is “other property” but instead on analysis of three factors: “the nature of the defect, how the loss occurred, and the type of loss for which the plaintiff seeks redress.” Under that analysis, there needn’t even be any “other property” to support a tort claim.

Hughes started with the last factor – the type of loss.  If the loss is economic, the remedy is in contract. But if personal injury or damage to other property is involved, tort liability is appropriate. Therefore, the court said, the question is whether the houses became part of the land or were “other property.”

Wait a minute. Haven’t we just circled back to the traditional economic loss rule? And how does that square with the indication in Valley Forge that the question is not whether there is other property?

In any event, after a page or two of studying metaphysics from other jurisdictions, the court concluded that the houses were separate from the lots. (At this point the opinion mentions that JDS had conceded that at oral argument; one wonders whether the court wanted to bolster its argument with the litigant’s admission or to justify the admission with its argument.) So, factor three justifies a tort claim.

The first factor – the nature of the defect – concerns whether there is an unreasonable danger to person or property or merely a construction defect. The court concluded that bad soil is a danger both to the houses and to their occupants. Factor two justifies a tort claim.

The second factor – how the loss occurred – has to do with whether it occurred suddenly or gradually. This factor, the court explained, might favor a contract claim but was outvoted here by the first two factors.

Therefore, Hughes was entitled to sue JDS for negligence. The court reversed and remanded on that issue. (It upheld the trial court on a couple of issues JDS argued below but didn’t discuss in its brief.)

Where this leaves the economic loss rule is anybody’s guess. The old rule has, apparently, been folded into one of the three Valley Forge factors, which are themselves so clearly and artfully drawn that they have to be addressed backwards, or at least sideways.

(Hughes also argued a “standing” issue but the argument was factually silly and so we won’t waste time on it.)