Arizona Court of Appeals Issues Decision Related to the Application of the Statute of Repose and Economic Loss Doctrine for Subsequent Home Purchasers

On December 4, 2012, the Arizona Court of Appeals issued a decision in Sullivan v. Pulte Home Corporation that will have significant implications in the construction industry. The case revolved around a home built by Pulte in 2000. The original purchasers sold the home to the Sullivans in 2003, who discovered the defects in 2009. The Sullivans alerted Pulte to the defects in March 2009, and then ultimately sued Pulte in February 2010, asserting claims for breach of the implied warranties of habitability and workmanship, negligence, consumer fraud and common law fraud. The trial court granted Pulte’s Motion to dismiss, holding that all of the claims were barred by Arizona’s statute of repose, A.R.S. § 12-552 (the SOR). The Sullivans appealed.

Specifically, the Court ruled that:

(1) the SOR applies to the breach of warranty claims and equitable tolling does not apply to the SOR;

(2) tort claims by construction defect plaintiffs are not barred by the economic loss doctrine (ELD) if the plaintiffs were not in privity of contract with the builder;

(3) subsequent purchasers do not have a private cause of action for concealment of construction defects under the Arizona Consumer Fraud Act (the ACFA); and

(4) warranty claims are “implied-in-law” and, thus, not “arising out of contract,” meaning that a party defending such a claim is not entitled to attorneys’ fees under Arizona law.

Statute of Repose Applies to Breach of Warranty Claims. The SOR creates an eight-year statute of limitations[1] within which a party can bring a claim for breach of contract or breach of warranty against developers and builders. The Sullivans argued that the SOR was: (1) not applicable to breach of warranty claims; (2) that the SOR creates an unconstitutional abrogation of claims as applied to the Sullivans; and, (3) the SOR should be tolled as applied to them.

The Court rejected all three arguments. First, the Court noted that A.R.S. § 12-552(C) expressly says that the limitations period applies to warranty claims. Second, the Court noted that breach of warranty claims are contractual in nature and, as a result, the anti-abrogation provision of the Arizona Constitution does not apply to them. Third, the Court held that the SOR cannot be equitably tolled, noting that the clear purpose of the SOR was to “provide an outer limit – a cut-off date – beyond which no actions may be brought for breach of contract and implied warranty,” and that equitable tolling would allow a judge-made doctrine to trump the Legislature improperly.

The ELD Does Not Bar Warranty Claims for Parties Not in Privity with the Contractor. Despite having already ruled that the claims were dismissed under the SOR, the Court went on to discuss the application of the ELD to warranty claims by homeowners who are not in privity with the original contractor. The Court held that it does not. Citing the Flagstaff Affordable Housing case, the Court noted that the reason why the ELD applied to bar tort claims between contracting parties that involved breaches of the contract and solely economic damages was that the contracting parties had an opportunity to negotiate their contract terms and allocate the risks of future losses or latent defects during the contract negotiations. Since that did not apply to the Sullivans, the Court was “persuaded that parties like the Sullivans, who were not in privity with the builder, do not lose their tort claims merely because they have (or had) an implied warranty claim.” Thus, the ELD claim does not apply in instances where a subsequent homeowner has tort-related claims against a builder, and may not apply in instances in which a party is not in privity with the original actor.

There Is No Private Cause of Action for Concealment Under the ACFA or Common Law. The Sullivans also brought claims for both consumer fraud and common law fraud, alleging that Pulte had improperly concealed the alleged construction defects related to the house and that the Sullivans could assert that claim as subsequent purchasers. Pulte argued that, even if Pulte had made a fraudulent statement or fraudulently concealed the defects, the only party that those statements were made to, and that relied upon them, were the original purchasers of the home, and that Pulte had no interaction with the Sullivans until 2009—well after any alleged statements regarding the construction were made. The Court agreed with Pulte, finding that since Pulte made no representations to the Sullivans and, since they had no interaction until well after the Sullivans purchased their home, that the Sullivans were not placed in an unfair bargaining position vis-à-vis Pulte; and that Pulte had not made any misrepresentations or statements to the Sullivans “‘in connection with the sale or advertisement’ of the home.” Thus, the Sullivans had no ACFA claim against Pulte.

No Attorneys’ Fees to Pulte Under A.R.S. § 12-341.01(A), as the Claims Arise Out of an “Implied-in-Law” Contract. After prevailing on its Motion to Dismiss, Pulte sought attorneys’ fees pursuant to A.R.S. § 12-341.01(A), arguing that the breach of warranty claims made by the Sullivans arose out of contract, and the trial court agreed. The Court of Appeals reversed, finding that A.R.S. § 12-341.01(A) allowed recovery of fees in actions arising out of express contracts and implied-in-fact contracts, but not implied-in-law contracts. Since implied warranty claims are implied-in-law, the Sullivan Court reversed the fee award and denied Pulte’s fee request.

[1] There is an exception in that if a claim is discovered in the eighth year, a party can file suit in year nine and still be timely.