NM-Emerald, LLC v. Interstate Dev., LLC

488 P.3d 707

NM-EMERALD, LLC, Plaintiff-Appellant,

v.INTERSTATE DEVELOPMENT, LLC and Terry Corlis, Defendants-Appellees,andCentral Mutual Insurance Company, Defendant,

and

Interstate Development, LLC ; Terry Corlis; and BK Sales, Inc., Cross-Plaintiffs,

v.Interstate Development, LLC ; BFI Plumbing & Heating ; CJL Engineers, Inc. ; Fox Electric Ltd. Co.; Klee Architects and Engineers, Inc. ; and Smith & Sons Mechanical, LLC, Cross-Defendants,andCentral Mutual Insurance Company, Third-Party Plaintiff,

v.NM-Emerald, LLC ; Interstate Development, LLC ; John Klee; and Terry Corlis, Third-Party Defendants.

No. A-1-CA-37113

Court of Appeals of New Mexico.

Filing Date: February 11, 2021

Modrall, Sperling, Roehl, Harris & Sisk, P.A., R.E. Thompson, Emil J. Kiehne, Mia K. Lardy, Albuquerque, NM, Polsinelli Shughart PC, Jonathan G. Brinson, Phoenix, AZ for Appellant

Allen, Shepherd, Lewis & Syra, P.A., E.W. Shepherd, Tiffany A. Owens, Albuquerque, NM for Appellees

HANISEE, Chief Judge.

{1} Plaintiff NM-Emerald, LLC, appeals the district court's order granting summary judgment and dismissing its claim for negligence against Defendants Interstate Development, LLC, and Terry Corlis for defects to a property constructed by Defendants and purchased through foreclosure by Plaintiff, based on the economic loss rule. On appeal, Plaintiff contends that the economic loss rule does not apply to bar its claim because (1) based on the language in the contract between the parties, both parties agreed that tort remedies would be available to Plaintiff; and (2) tort remedies were available to Plaintiff as a subsequent purchaser of the property. Though we conclude the parties have failed to demonstrate that the economic loss rule is applicable in this case, we nevertheless affirm on the basis that Plaintiff does not qualify as a subsequent purchaser within the meaning contemplated in Steinberg v. Coda Roberson Construction Co. , 1968-NMSC-055, ¶ 6, 79 N.M. 123, 440 P.2d 798.

BACKGROUND

{2} IMH Secured Loan Fund, LLC, (IMH) and Interstate Development, LLC, (Interstate) entered into a construction loan agreement (the Construction Contract) whereby IMH loaned over $4 million to Interstate for construction of a three-story office building (the Property). Interstate, as both owner and general contractor for the project, and Terry Corlis, as a principal, engaged various subcontractors to perform work on the Property. The Construction Contract outlines the responsibilities and remedies available to both parties. In particular, Interstate had a duty to build the Property in a good and workmanlike manner and to correct any defects in the construction. IMH was allowed, but not required, to inspect the work done by Interstate at any time. Interstate's failure to abide by the provisions of the Construction Contract, including any failure to construct the Property in a good and workmanlike manner or fix any construction defects, constituted default under the Construction Contract. In the event of default, IMH had the option to "enter into possession of the Property" and "perform all work necessary to complete the construction." In such a circumstance, Interstate would be obligated to "pay to [IMH] on demand any amount expended by [IMH] in such performance or attempted performance, together with interest thereon." The Construction Contract also stated that IMH:

shall have all of the [r]ights granted in the [l]oan [d]ocuments or otherwise and all of those available at law or in equity , and these same [r]ights shall be cumulative and may be pursued separately, successively or concurrently against [Interstate], Guarantor or any property covered under the [l]oan [d]ocuments at the sole discretion of [IMH].

(Emphasis added.) In addition, Section 6.01 of the Construction Contract states "[s]hould a Default occur and be continuing, ... [IMH] may, at its election, do any one or more of the following: ... Exercise any and all [r]ights afforded by any of the [l]oan [d]ocuments, or by law or equity or otherwise , as [IMH] shall deem appropriate." (Emphasis added.) The parties further agreed that the Construction Contract was to be governed by New Mexico law.

{3} Interstate stopped payment and defaulted on the loan associated with the Construction Contract approximately a year and a half after the loan's inception and, as a result, IMH filed a foreclosure lawsuit. IMH did not complete the foreclosure, and instead, gave Interstate time to cure its default. IMH eventually assigned its interest in the Construction Contract to Plaintiff, a single-asset entity specifically created by IMH to permit the Property to be held by Plaintiff. Thereafter, the foreclosure was completed, and Plaintiff purchased the Property at the foreclosure sale. Plaintiff did not inspect the Property until after it was purchased through foreclosure. After inspecting the Property, Plaintiff discovered numerous, significant construction defects. Plaintiff alleges it incurred over $615,000 in repair costs to repair the defects and lost approximately $913,132 in lost rents. Plaintiff filed suit against Defendants in negligence for the construction defects, alleging that Defendants breached their duty to Plaintiff by "(1) negligently choosing a subcontractor that caused structural and other defects to the Property; (2) failing to properly supervise its subcontractor's work on the Property; and/or (3) failing to properly inspect construction of the Property."

{4} Defendants filed a motion for summary judgment seeking dismissal of Plaintiff's negligence claims, arguing that (1) the construction defects alleged by Plaintiff were patent defects, and a subsequent purchaser's remedies against a contractor for negligence exist only for latent defects; and (2) Plaintiff's tort claims were barred by the economic loss rule, which in circumstances applicable precludes recovery of economic loss damages in tort, rather than contract, causes of action. In response, Plaintiff argued that (1) Defendants’ latent-defect argument fails because New Mexico does not limit recovery to latent defects; (2) the economic loss rule does not apply because Defendants owed Plaintiff an independent duty of care as a subsequent purchaser, and the rule was not meant to apply to construction damages suffered by subsequent purchasers.

{5} The district court held a hearing and heard argument from the parties on the motion for summary judgment. During the hearing, the district court judge rejected Defendants’ latent defect argument, but stated that "recovery could be barred ... based on the [e]conomic [l]oss [r]ule" and sought argument on the rule's applicability. After the hearing, the district court entered an order granting Defendants’ motion for summary judgment, dismissing all of Plaintiff's claims against Defendants based on the economic loss rule.

{6} Plaintiff moved to reconsider, arguing that the economic loss rule did not apply because the parties stated in the Construction Contract that Plaintiff was not limited to contractual remedies, alternatively seeking certification of the order granting summary judgment for immediate appeal. In denying Plaintiff's motion to reconsider, the district court stated that "[t]he economic loss rule is not a matter of waiving or preserving tort remedies. Rather, it is a doctrine of law that prohibits plaintiffs from recovering in tort economic losses to which their entitlement flows only from contract." The district court then entered an order directing entry of final judgment against Plaintiff, concluding that the order granting summary judgment was final and that there was no just reason for delay under Rule 1-054(B) NMRA.

DISCUSSION

{7} On appeal, Plaintiff contends that Defendants’ motion for summary judgment was improperly granted because (1) the parties agreed in the Construction Contract that tort remedies would be available to the lender; (2) the economic loss rule does not bar Plaintiff's negligence claims as Defendants owed Plaintiff a separate duty of care as a subsequent purchaser; and (3) Defendants’ argument that the construction defects were patent defects provides no alternative basis for affirmance.¹

I. Standard of Review

{8} "Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law." Bank of N.Y. Mellon v. Lopes , 2014-NMCA-097, ¶ 6, 336 P.3d 443 (internal quotation marks and citation omitted). "We review issues of law de novo." Id. Plaintiff is not contending a genuine issue of material fact exists. Accordingly, "if no material issues of fact are in dispute and an appeal presents only a question of law, we apply de novo review and are not required to view the appeal in the light most favorable to the party opposing summary judgment." City of Albuquerque v. BPLW Architects & Eng'rs, Inc. , 2009-NMCA-081, ¶ 7, 146 N.M. 717, 213 P.3d 1146.

II. Economic Loss Rule

{9} New Mexico adopted the economic loss rule in 1989 in Utah International, Inc. v. Caterpillar Tractor Co. , 1989-NMCA-010, ¶ 7, 108 N.M. 539, 775 P.2d 741, a case where a purchaser of a coal-hauler sued the manufacturer after the hauler caught fire during normal use and destroyed itself. There, we held, "in commercial transactions, when there is no great disparity in bargaining power of the parties, economic losses from injury of a product to itself are not recoverable in tort actions; damages for such economic losses in commercial settings in New Mexico may only be recovered in contract actions." Id. ¶ 17 (emphasis added) (citation omitted). In the three decades since, application of the rule by New Mexico courts has occurred only in the context of strict products liability cases. See, e.g. , Spectron Dev. Lab. v. Am. Hollow Boring Co. , 1997-NMCA-025, ¶ 20, 123 N.M. 170, 936 P.2d 852 (reaffirming Utah International and holding that the plaintiffs could not recover in strict products liability for any injury of the product to itself, or any...