Opinion
No. 1:01CV00424
March 20, 2003
MEMORANDUM OPINION AND ORDER
I. Facts
The basic, undisputed facts in the case are as follows. Plaintiffs are the owners of a house located in Bahama, North Carolina. This house was custom built by plaintiffs with Mr. Higginbotham serving as the general contractor and hiring various subcontractors to perform the actual construction. Although Mr. Higginbotham has no formal training in construction or general contracting, he decided to act as the general contractor on the project in order cut construction costs.
In choosing an exterior finish for their home, plaintiffs decided that they wanted a stucco exterior due to its appearance. Because they knew nothing about using or applying stucco, Mr. Higginbotham sought advice from Penny Taylor, an employee at The Contractor's Yard, an establishment where he was buying materials. Ms. Taylor recommended third-party defendant Southern Synthetic and Plastic, Inc. (Southern Synthetic).
Although listed in the case caption, as far as the record indicates, the third-party complaint has never actually been served on Southern Synthetic. Therefore, the Higginbothams and Dryvit are the only true parties to the case.
Based on Ms. Taylor's recommendation, Mr. Higginbotham contacted Southern Synthetics. After talking with Southern Synthetics' personnel and viewing examples of their work, Mr. Higginbotham hired the company to apply the stucco to his and his wife's house. It was agreed that Southern Synthetic would use a "Fastrak 4000" stucco system which is manufactured by defendant.
Plaintiffs state that, during installation, Mr. Higginbotham and one of the owners of Southern Synthetic discussed whether or not expansion joints were needed in the stucco. Mr. Higginbotham claims that he was told that the joints were not needed, and so decided not to have them installed. Southern Synthetics also did not caulk around windows and doors as part of its work. Mr. Higginbotham did this himself as instructed by Southern Synthetics.
Plaintiffs' house was completed in June of 1996. In March or April of 1997, plaintiffs noticed a blister in the stucco on one side of their house. Several weeks later, another blister appeared. Plaintiffs contacted defendant, who sent an employee to inspect their home. According to plaintiffs, defendant offered to provide new product to fix the house, but negotiations stalled over the issue of how to pay for the labor. While those negotiations were ongoing, plaintiffs heard of a class action lawsuit filed in North Carolina involving owners of synthetic stucco houses. Plaintiffs state that they were initially told by the North Carolina Attorney General's office that they were eligible to join the class action and that they filed an appropriate claim form on June 28, 2000. However, on September 14, 2000, they were informed that they were not eligible to be in the class action because the stucco applied to their home was a different type than was involved in the class action suit. They then contacted the Attorney General's office, which, after investigation, confirmed that plaintiffs were not eligible to join the class action. Plaintiffs then sought redress alone in the state courts. The action was removed to this Court by defendant.
II. Plaintiff's Claims
In their complaint, plaintiffs raise several possible claims for relief against defendant. Plaintiffs' theory is that defendant negligently and/or knowingly designed, manufactured, tested, and labeled a defective product, i.e. its Fastrak System 4000. They also claim that defendant knew the product was defective, made incorrect or false representations about the product's effectiveness, and failed to tell potential users of problems with the product. Based on these allegations, plaintiffs raise state law claims of negligence, gross negligence, negligent misrepresentation, fraud, and unfair or deceptive trade practices. Defendant has now moved for summary judgment on all of those claims.
III. Legal Standards
Summary judgment should be granted only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The Court must view the evidence in a light most favorable to the non-moving party. Pachaly v. City of Lynchburg, 897 F.2d 723, 725 (4th Cir. 1990). When opposing a properly supported motion for summary judgment, the party cannot rest on conclusory statements, but must provide specific facts, particularly when that party has the burden of proof on an issue. Id. "The summary judgment inquiry thus scrutinizes the plaintiff's case to determine whether the plaintiff has proffered sufficient proof, in the form of admissible evidence, that could carry the burden of proof of his claim at trial."Mitchell v. Data General Corp., 12 F.3d 1310, 1316 (4th Cir. 1993) (emphasis added). A mere scintilla of evidence will not suffice. Rather, there must be enough evidence for a jury to render a verdict in favor of the party making a claim. A few isolated facts are not sufficient. Sibley v. Lutheran Hosp. of Maryland, Inc., 871 F.2d 479 (4th Cir. 1989). The mere fact that both parties request summary judgment does not necessarily mean that the material facts are undisputed. World-Wide Rights Ltd. Partnership v. Combe Inc., 955 F.2d 242, 244 (4th Cir. 1992).
Because all of plaintiffs' claims arise under state law, special rules apply. When state law is unclear, the federal court must rule in such a manner as it appears the highest state court would rule if presented with the issue. Where the state's highest court has not decided the particular issue, the federal court should examine the rulings of the lower state courts. Rulings of the lower courts may be considered as persuasive evidence of state law, but they are not binding on the federal court should it be convinced the highest court would rule to the contrary.Sanderson v. Rice, 777 F.2d 902, 903 (4th Cir. 1985), cert. denied, 475 U.S. 1027, 106 S.Ct. 1226, 89 L.Ed.2d 336 (1986). Furthermore, the federal court must rule on state law as it exists, as opposed to surmising or suggesting an expansion of state law. Burris Chemical, Inc. v. USX Corp., 10 F.3d 243 (4th Cir. 1993).
IV. Discussion A. Negligent Misrepresentation, Fraud, and Unfair or Deceptive Trade Practices
As a preliminary matter, plaintiffs' claims for negligent misrepresentation, fraud, and unfair or deceptive trade practices are no longer being pursued. Plaintiffs stipulate and consent to the dismissal of these claims, of course, defendant has not opposed this request. Therefore, these three claims are dismissed and only plaintiffs' claims for negligence and gross negligence remain for a decision.
B. Negligence and Gross Negligence
Plaintiffs' two remaining claims, negligence and gross negligence, can be considered together because all of defendant's arguments in favor of summary judgment apply equally to both claims. Further, although defendant has raised several arguments, only one, its argument based on the economic loss rule, appears to be completely meritorious. Because that will dispose of this action entirely, the Court will only address it.
The economic loss rule, as adopted in North Carolina, limits the types of damages that a purchaser of a product may recover against the seller or manufacturer of the product through a negligence action. Wilson v. Dryvit Systems, Inc., 206 F. Supp.2d 749, 753 (E.D.N.C. 2002); Moore v. Coachmen Industries, Inc., 129 N.C. App. 389, 401, 499 S.E.2d 772, 780 (1998). The purchaser cannot use claims of negligence to recover "purely economic losses" caused by the product's failure to meet expectations. Instead, the purchaser must use contract law, including the Uniform Commercial Code (UCC). Reece v. Homette Corp., 110 N.C. App. 462, 466-467, 429 S.E.2d 768, 770 (1993). Defendant contends the economic loss rule bars plaintiffs' negligence based claims in the present action.
Plaintiffs claim that the economic loss doctrine does not bar their claims. Plaintiffs first contend that the losses they seek are not "economic losses" under North Carolina's economic loss rule. "Economic losses" are defined under North Carolina law as "damage to the product itself." Moore at 401, 499 S.E.2d at 780, citing North Carolina State Ports Authority v. Lloyd A. Fry Roofing Co., 294 N.C. 73, 240 S.E.2d 345 (1978) and Reece. Other types of damages are barred by the economic loss rule. On the other hand, a plaintiff may maintain a negligence action for personal injury or for damage sustained by property other than the allegedly defective product. Id.; Reese at 466, 429 S.E.2d at 770. Plaintiffs assert that their claims do not fall under the economic loss rule because the product involved, defendant's Fastrak 4000, damaged not only itself, but also their house. Moreover, if plaintiffs can sue in negligence, they need not show that they have a connection to defendant through privity in contract, which is usually required in contract actions.
Unfortunately for plaintiffs, this exact argument has already been dealt with and rejected by another court. Wilson involved plaintiffs who hired a third party to apply Dryvit's Fastrak 4000 stucco to their home. When alleged defects in the system damaged the house through water intrusion and rotting, the plaintiffs sued Dryvit based on the same claims as are advanced by plaintiffs in the case at bar.
Wilson is factually indistinguishable from the instant case, except that in Wilson, the plaintiffs hired a general contractor, whereas the plaintiff husband took on that role in the instant case. As will be seen, this distinction is not a material one in the application of the economic loss rule.
The court in Wilson explicitly considered whether the water damage and rot caused to the rest of the house was damage to "other property" so that the economic loss rule did not apply. The court concluded that under North Carolina law "when a component part of a product or a system injures the rest of the product or the system, only economic loss has occurred." Id. at 753. This holding was supported by several North Carolina cases, as well as cases from other states. See Moore (all fire damage to vehicle caused by a component part was economic loss); Gregory v. Atrium Door and Window Co., 106 N.C. App. 142, 415 S.E.2d 574 (1992) (water damage to flooring caused by allegedly defective doors was economic loss); Calloway v. City of Reno, 116 Nev. 250, 993 P.2d 1259 (2000) (damage to other parts of a building caused by defective framing is economic loss); Casa Clara Condominium Association, Inc. v. Charley Toppino and Sons, Inc., 620 So.2d 1244 (Fla. 1993) (defective concrete was part of house and so house was not "other property"). Accordingly, the court in Wilson determined that once the Fastrak 4000 system was applied, it was integrated into the house so that other portions of the house were not "other property." It held that the economic loss rule did bar the plaintiffs' claims. Wilson at 753-754.
Plaintiffs try to convince this Court not to follow the rule in Wilson by arguing that houses should be treated differently because they are not assembled by one manufacturer as other products are, the UCC does not apply to houses as a whole, and the UCC does still apply to the individual parts of houses even after the parts are integrated. They also claim that homeowners should not have negligence claims against material manufacturers barred because those same manufacturers can perfect liens against real estate even in the absence of a contract with the owner. Finally, they assert that because a homeowner can sue for the negligent performance of a subcontractor with whom there is no contractual privity, the homeowner should also be able to sue manufacturers with whom they do not have privity. Based on all of these things, plaintiffs conclude that the economic loss rule should not apply to residential homes.
Accepting, without deciding, that all of plaintiffs' characterizations of the law's treatment of homes are correct, the Court cannot conclude that residential homes are exempt from the economic loss rule under North Carolina law. First and foremost, although not dealing with the issue explicitly, at least one North Carolina case has applied the economic loss rule where, if plaintiffs' rule were the law of North Carolina, the rule would not have been applied. See Gregory (economic loss rule applied to damage to residential home caused by component parts). Second, plaintiffs have cited no case law from any jurisdiction, much less North Carolina, which espouses the rule they propose. Several jurisdictions have actually rejected proposed exceptions to the economic loss rule for residential homeowners. See Casa Clara at 1247 (rejecting proposed exception and collecting cases). In view of Gregory, Casa Clara, and plaintiffs' lack of citation to any supporting case law, this Court concludes that, plaintiffs' policy arguments notwithstanding, North Carolina courts have and would continue to apply the economic loss rule to residential homes.
Were the Court to accept plaintiff's interpretation of the economic loss rule, it would have to alter, or at least create, North Carolina law. As mentioned previously, a federal court sitting under its diversity jurisdiction may not do this.
Turning to plaintiffs' specific arguments, they all depend on an extension or creation of North Carolina law. They assert a number of policy arguments. The main thrust of these arguments is that the economic loss rule should not apply to their claims because the rationale underlying the rule does not cover their particular situation.
The economic loss rule is based on the idea that "`the sale of goods is accomplished by contract and the parties are free to include, or exclude, provisions as to the parties' respective rights and remedies, should the product prove to be defective.'" Wilson at 753, quoting Moore at 401-402, 499 S.E.2d at 780. Allowing parties to pursue a tort claim based on a sale defined by contract would let parties ignore the rights and remedies set out in the contract. Moore at 402, 499 S.E.2d at 780.
Plaintiffs contend that the economic loss rule should not apply to them due to the fact that Mr. Higginbotham acted as their general contractor in building the house. As a result, he did not buy the house as a whole in the way that a typical buyer would, but purchased it piece by piece through a series of contracts with various entities like Southern Synthetic. This has left plaintiffs without an express warranty or implied warranty of habitability as to the entire house; warranties which buyers purchasing from a builder or vender would have. Plaintiffs also have no privity of contract with defendant and, they claim, no recourse against defendant through any warranties. Finally, plaintiffs state that they would have recourse against Southern Synthetic based only on any improper installation, but not based on any defect in the product itself. Because plaintiffs allegedly lack many of the typical contract and UCC remedies available to home buyers and purchasers of consumer goods, they claim that the underlying rationale of the economic loss rule does not cover their case.
The Court finds none of plaintiffs' arguments to be persuasive. As with their previous argument, they have cited no supporting case law. Also,Gregory again cuts against at least some of their argument. In Gregory, the North Carolina Court of Appeals noted that the facts of the case left the plaintiffs with no recourse against a manufacturer with which they were apparently not in privity. Although musing that applying the economic loss rule in these circumstances was perhaps poor policy given that it left the plaintiffs with a remedy which they needed to pursue liability against a manufacturer, the court stated that it felt compelled by North Carolina law to do so. Gregory at 144, 415 S.E.2d at 575. Similarly, the same court in Moore applied the economic loss rule even though it left the plaintiffs without a remedy and ended their case.Moore at 401-402, 499 S.E.2d. at 780. This case law clearly defeats plaintiffs lack of remedy argument.
Plaintiffs argue that because individual products incorporated into a home retain their status as consumer goods, these same components should not then be deemed incorporated into the house for purposes of the economic loss rule. However, the case plaintiffs cite for the first part of the proposition, Gregory, in fact, disallowed recovery. Also, the fact that suppliers may have rights as lien holders against the property, even when there is no privity with the owner, does not mean that the economic loss rule must be abandoned. The law does not require all comparisons to be equal, even if that were possible. Moreover, plaintiffs' proposition is, in effect, a request to change or alter North Carolina law.
Further, the fact that plaintiffs warranty and contract remedies may be limited because Mr. Higginbotham acted as the general contractor in building their house does not negate the rationale behind the economic loss rule. In choosing to take on the role of general contractor, Mr. Higginbotham necessarily chose to limit plaintiffs' remedies. In essence, plaintiffs chose the money saved by having Mr. Higginbotham act as general contractor in lieu of certain warranties. The same is true for decisions he made when he negotiated with various subcontractors. If plaintiffs do not have more extensive contractual remedies against Southern Synthetic or defendant, it is because Mr. Higginbotham did not negotiate for them. If plaintiffs did not get one, it is apparently because Mr. Higginbotham did not ask. It is the protection of this freedom to trade away rights and remedies in order to accomplish a project at a certain price or in a certain time frame that is the heart of contract law and the economic loss rule.
One of the owners of Southern Synthetics testified in his deposition that he was able to supply warranties from defendant when general contractors asked him to do so. (McKean Dep. at 186-187, Ex. 13)
Finally, as to plaintiffs' argument that the economic loss rule should not apply in the situation where there is an absence of privity, the factual setting in Gregory strongly suggests that this is not the law of North Carolina. Moreover, the law of other jurisdictions shows that they would not allow the exception to the rule sought by plaintiffs based on a lack of privity with the manufacturer. Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir. 1990) (citing cases from several jurisdictions for proposition that privity is not an element of economic loss rule); Michigan Mutual Ins. Co. v. Osram Sylvania, Inc. 897 F. Supp. 992, 993 (W.D. Mich. 1995), aff'd, 111 F.3d 131 (6th Cir.),cert. denied, 522 U.S. 995, 118 S.Ct. 558, 139 L.Ed.2d 399 (1997) (under Michigan law, economic loss rule can be applied even where privity is lacking); Daanen Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 573 N.W.2d 842 (Wis. 1998) (no privity is needed in order for economic loss rule to apply in a commercial setting); Excess Risk Underwriters, Inc. v. Lafayette Life Insurance Co., 208 F. Supp.2d 1310, 1314 (S.D. Fla. 2002) (under Florida law, privity is not necessary to apply economic loss rule as long as plaintiff has a contractual remedy against some other party). These cases represent the current law on the subject. There is no indication the North Carolina Supreme Court has adopted a contrary position. This fact, in addition to the weight of Gregory, defeats plaintiffs' contention that a lack of privity prevents the economic loss rule from being applied. Because the rule does apply, plaintiffs' claims are barred and must be dismissed.
IT IS THEREFORE ORDERED that plaintiffs' claims for negligent misrepresentation, fraud, and unfair or deceptive trade practices are dismissed at their request and that defendant's motion for summary judgment (docket no. 17) be, and the same hereby is, granted as to plaintiffs' remaining claims.