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Are There Limits to the Economic Loss Doctrine?; The Residences of Ivy Quad Unit Owners Association, Inc. v. Ivy Quad Development, LLC

The economic loss doctrine prevents a party who suffers only economic damages from recovering those damages in tort. But this case shows that the Court of Appeals may be open to limiting its application in appropriate cases.

Ivy Quad is a condominium complex in South Bend. Its developer was Ivy Quad Development, LLC, a now insolvent company that was owned by David Matthews. The general contractor, Matthews, LLC, and designer, DMTM, Inc., are also owned and managed by David. His wife, Velvet, was also involved in the design, construction, development, and sale of Ivy Quad units. The Court referred to these collectively as the “Matthews Defendants.”

In the fall of 2017, Ivy Quad’s unit owners began noticing problems and hired an engineer to inspect the property. Over the next few months, the engineer issued four reports that identified many issues with the design and construction of the condominiums.

The condo’s HOA filed a complaint for breach of warranty and negligence, eventually naming the Matthews Defendants in an amended complaint. The Matthews Defendants moved to dismiss for failure to state a claim. They claimed that they were not the condos’ “builder-vendor”—that was Ivy Quad Development. And they argued that they could not be liable for negligence because of the economic loss rule. The trial court granted the motion, and the HOA was granted an interlocutory appeal.

Apparently, the HOA’s motion to certify the interlocutory appeal only identified the dismissal of the negligence claim as an issue that the HOA wanted to appeal. And the motions panel for the Court of Appeals specifically said that the appeal would be limited to that issue. But the writing panel disagreed.

It is well established that any issues that were properly raised in the trial court in ruling on its order are available on interlocutory appeal. Indeed, our supreme court has emphasized that interlocutory appeals are taken from orders, not issues. In Harbour, the court held that Indiana Appellate Rule 14 “does not require or even permit certification of particular issues. Rather it requires certification of an interlocutory order.” Accordingly, in addition to the negligence claim, we will also review the HOA’s assertion that the trial court erred in dismissing the implied warranty claims.

And when the Court dealt with the warranty claims, it found that it was too early to dismiss them. The Court acknowledged that warranties of habitability can normally be enforced against only a builder-vendor of a home, and that Ivy Quad Development was the builder-vendor of the property. But the Court saw no reason to think that it was the only builder-vendor of the property.

The HOA sufficiently alleged in its Third Amended Complaint that, in addition to Ivy Quad Development, each of the Matthews Defendants is in the business of and/or had some hand in building and selling the Ivy Quad condominium units. Whether there is evidence that each or any of those individual defendants actually assumed the responsibilities of a buildervendor is a question that might be ripe for disposition in an eventual motion for summary judgment, but is not appropriate for resolution in the context of the current 12(B)(6) motion to dismiss.

The Court then turned to the negligence issue. The Matthews Defendants argued that the HOA’s negligence claim was precluded by the economic loss rule. But the Court thought that the Matthews Defendants were applying this rule “too broadly.”

It noted that the economic loss rule was based on the policy “that the law should permit the parties to a transaction to allocate the risk that an item sold or a service performed does not live up to expectations.” And it had problems applying this rule to this kind of situation. First, it questioned whether there was a reason to apply this doctrine to these defendants, as there “are no facts or allegations suggesting that a contract or ‘a network or chain of contracts’ connects the HOA members with the Matthews Defendants.” And it thought that applying the doctrine here would be unjust.

Although our supreme court extended the economic loss doctrine beyond its customary scope in Indianapolis–Marion County Public Library to bar a negligence claim in a case where there was technically no privity of contract, the court specifically cautioned that “there are situations where it would be unjust” not to allow a plaintiff to proceed in tort “for purely economic loss where no contract exists nor could exist between the parties.” We think the current situation may be one in which it would be “unjust” not to allow the plaintiff members to proceed in tort against the various construction professionals for their economic losses. Unlike in the sophisticated world of commercial construction, in the residential construction context all participants are generally not in privity of contract and thus have not defined for themselves their respective risks, duties, and remedies through a “network or chain of contracts” governing the project. Other than a largely nonnegotiable purchase contract with a property developer, the unsophisticated individual homebuyer is wholly frozen out of any legitimate risk allocation process. Indeed, we must seriously question whether the economic loss doctrine, which originally focused on the ability of parties involved in commercial transactions to allocate potential risks through contracts and warranties, should extend to tort claims brought by homebuyers against certain residential construction professionals and contractors for negligence. We think that the rationales upholding the economic loss doctrine do not necessarily support its application to these types of disputes.

Thus, the economic loss rule would only apply when there is no privity of contract when the parties are “sophisticated parties involved” in complex situations. “The economic loss doctrine was never meant to operate as a sword to be used by defendants to attack a plaintiff’s tort claim that falls wholly outside of contract law.”

Given these conclusions, the Court found that the case should go forward, and the facts more fully developed.

Lessons:

1. “Trial Rule 12(b)(6) is improper unless it appears to a certainty that the plaintiff would not be entitled to relief under any set of facts.” (Emphasis in original).
2. Indiana Appellate Rule 14 does not permit certification of particular issues but requires certification of an interlocutory order, so all issues addressed in the order are subject to interlocutory review.
3. More than one entity may qualify as a “home builder-vendor” and be liable to a homebuyer under the implied warranty of habitability.
4. The language in the Restatement (Third) of Torts on the economic loss doctrine was substantially narrowed in its final version by comparison to what was said in a working draft on which the Indiana Supreme Court relied in Indianapolis-Marion County Public Library—limiting the bar to negligence claims for economic loss to parties who have contracts.
5. The Indiana Court of Appeals will limit the application of the “sweeping holding” in Indianapolis-Marion County Public Library to large commercial construction projects and will not extend it to the typical residential construction context.

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