Hack v. Lone Oak Development, Inc., No. 2007-CA-001431-MR (Ky. App. 6/13/2008)

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Nathan HACK and Kristie HACK, Appellants v. LONE OAK DEVELOPMENT, INC. and Central Paving Company of Paducah, Appellees.

No. 2007-CA-001431-MR.

Court of Appeals of Kentucky.

June 13, 2008.

Appeal from McCracken Circuit Court, Honorable Craig Z. Clymer, Judge, Action No. 05-CI-00125.

James A. Harris, Jr. Paducah, Kentucky, Briefs and Oral Argument.

Max S. Hartz, Owensboro, Kentucky, Brief and Oral Argument for Appellee Lone Oak Development, Inc.

Burke B. Terrell, Paducah, Kentucky, Brief and Oral Argument for Appellee Central Paving Company of Paducah, Kentucky.

Before: COMBS, Chief Judge; ACREE and THOMPSON, Judges.

OPINION

THOMPSON, JUDGE.

This is a claim for negligence filed by homeowners Nathan Hack and Kristie Hack against a subdivision developer and the contractor who installed a drain pipe. The McCracken Circuit Court granted summary judgment to the developer and installer. We conclude that the homeowners presented a material issue of fact that precluded summary judgment and, therefore, reverse.

As alleged in the complaint, the facts are as follows: On April 29, 2002, Nathan and Kristie Hack purchased a subdivision lot from Jimmy and Candy Varble. The Varbles had purchased the lot from Lone Oak Development, Inc. (Lone Oak), the developer of the Coleman Place Subdivision where it is located. Prior to the purchase of the property by the Hacks, Lone Oak contracted with Central Paving Company of Paducah (Central Paving) for the installation of a drainage pipe on the property.

After the Hacks constructed a residence on the property, in February 2004, the driveway and a portion of the yard collapsed. When the area was excavated, the Hacks discovered that the drainage pipe had collapsed because a variety of fill materials, including tree stumps and other vegetation, had been placed there by Central Paving, and the underground drainage pipe was placed directly on top of the tree stumps. The cost to repair the sinkholes, driveway, and yard was in excess of $50,000. The Hacks maintain that Lone Oak and Central Paving negligently installed the drainage pipe and were further negligent when the area surrounding the pipe was filled with vegetation.

The issue presented is whether absent privity of contract, the Hacks can pursue a negligence action against Lone Oak and Central Paving for the damage caused by their negligence.

The standard of review applicable to summary judgment is whether the trial court properly found that there was no genuine issue as to any material fact and that Lone Oak and Central Paving were entitled to judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779 (Ky.App. 1996). We review the case de novo giving no deference to the conclusions of the trial court. Baker v. Coombs, 219 S.W.3d 204 (Ky.App. 2007).

The Hacks admit that there was no privity of contract among them, Lone Oak, and Central Paving. They assert their claims in negligence.

Unlike actions based on contract, negligence does not require privity between the parties. Tabler v. Wallace, 704 S.W.2d 179, 186 (Ky. 1985). In Saylor v. Hall, 497 S.W.2d 218 (Ky. 1973), the Court recognized that a builder had a legal obligation to respond for personal injuries caused by its negligent construction despite the fact that there was no privity between it and the injured plaintiffs. When the damage is limited to property, however, the legal remedy is not as easily discernible.

When the damage is exclusive to property, the plaintiffs seeking to recover under a theory of negligent construction have encountered a legal quagmire.

Although privity is no longer required to maintain a tort action, "one who is not a party to the contract or in privity thereto may not maintain an action for negligence which consists merely in the breach of the contract."

Presnell Const. Managers, Inc. v. EH Const., LLC, 134 S.W.3d 575, 579 (Ky. 2004) (citations omitted). In the case of negligent homebuilders, the resulting damage is most often damage caused by the builders' failure to fulfill its contractual obligations to the original owner of the property. In such cases, there is a trend to deny a subsequent purchaser compensation for losses caused by the negligent construction under the theory of what is commonly referred to as the "economic loss rule."

The economic loss rule is relatively new in American jurisprudence and its genesis is found in Seely v. White Motor Co., 63 Cal.2d 9, 403 P.2d 145 (1965). In this Commonwealth, little has been written concerning the rule, and although references have been made that it is applicable to negligence actions against homebuilders and sellers, it has never been explicitly adopted by our courts. However, in Real Estate Marketing, Inc. v. Franz, 885 S.W.2d 921 (Ky. 1994), the Kentucky Supreme Court's implicit adoption of the economic loss rule is found in the following passage:

In Saylor v. Hall, Ky., 497 S.W.2d 218 (1973), we recognize a legal obligation to respond in damages for negligent construction despite the absence of privity. The case involved two children of tenants, one injured and one killed, crushed by a fireplace and mantle that collapsed due to defective construction. The argument made in the present case, as recited in the Court of Appeals' Opinion, is that "it seems capricious to deny recovery to a vigilant property owner who discovers a latent defect, which `only' diminishes the value of his property, and allow recovery if he had `waited' for a member of his family to be injured as a result of the defect." Nevertheless, this Court recognizes that tort recovery is contingent upon damage from a destructive occurrence as contrasted with economic loss related solely to diminution in value, even though, as to property damage, both may be measured by the cost of repair. See Dealers Transport Company, Inc. v. Battery Distributing Company, Ky., 402 S.W.2d 441 (1966), adopting Section 402A of the Restatement (Second) of Torts in defective products cases.

Id. at 926. The Court concluded the homeowner could not recover in tort against the home's builder after water leaked into the home's foyer, the floor warped, and mold and mildew accumulated. The loss suffered, the Court reasoned, was solely diminution in value.

Other than the passage quoted, there was no historical basis for the rule given nor was it explained how the rule was to be applied in future cases. The most informative explanation of the rule is found in Justice Keller's concurring opinion in Presnell Const. Managers, Inc., 134 S.W.3d at 583. As noted in that opinion, the economic loss rule evolved as part of American product liability jurisprudence. Id. at 585. Its purpose is essentially to draw a line of demarcation between contract and tort law, limiting consumers of products to damages other than those sustained merely because the product failed to meet economic expectations. Id. Supported by a thorough citation to authorities from other jurisdictions, Justice Keller summarized the rule as follows:

The "economic loss rule" is a judicially created doctrine that "marks the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others. The crux of the doctrine is not privity but the premise that economic interests are protected, if at all, by contract principles, rather than tort principles. Although originally rooted primarily in product liability cases to protect manufacturers from tort liability for damage that is limited to the product itself, the economic loss rule has evolved into a modern, general prohibition against tort recovery for economic loss. In its broadest formulation, the economic loss rule prohibits tort recovery in negligence or products liability absent physical injury to a proprietary interest. Under this sweeping rule, recovery of economic loss is foreclosed when a product or service falls short of an expected level of quality yet causes no personal injury or property damage. (internal quotations and citations omitted).

Id. at 583-584.

Justice Keller observed that although the rule has been adopted by the majority of jurisdictions, its parameters remain unclear. Id. at 584. One jurist has analogized it to the "all-consuming alien life form portrayed in the 1958 B-movie classic The Blob," and observed that the economic loss doctrine "seems to be a swelling globule on the legal landscape . . . ." Grams v. Milk Products, Inc., 283 Wis.2d. 511, 539, 699 N.W.2d 167, 180 (2005), Justice Abrahamson, Chief Justice, dissenting. Most recently, the Oregon Supreme Court expressed its displeasure with the potential expansion of the economic loss rule into the traditional legal concept of compensation for damages caused by the negligence of others.

Every physical injury to property can be characterized as a species of "economic loss" for the property owner, because every injury diminishes the financial value of the property owner's assets. Damage to a car reduces the value of the car-one of the owner's assets. A tree falling on a person's residence is damage to property, but also can be characterized as a financial loss because it reduces the value of the residence, which the owner may properly view as an asset or financial investment as well as a residence. Yet the law ordinarily allows the owner of the damaged car or residence to recover in negligence from the person who caused the damage.

Harris v. Suniga, 344 Or. 301, 310, 180 P.3d 12, 16 (2008).

We concur with the Oregon court's observance that left without exception, the economic loss rule could be interpreted to abolish a massive wedge of traditional tort law on the premise of a doctrine rooted in contract law. Applied originally to product liability cases, it has spread into the realm of building construction cases which, unlike the manufacturing of a product destined to...