Douglas County District Court Rejects Builder’s Argument That Economic Loss Rule Applies to Original Homeowners

In light of the Colorado Supreme Court’s “subsequent homeowner” analysis in S K Peightal v. Mid Valley, 342 P.3d 868 (Colo. 2015), questions remain as to how courts will interpret the term in deciding whether or not the independent tort duty to act non-negligently in the construction of a home is barred by the economic loss rule. Construction litigators must now define who is and who is not a “subsequent homeowner” in bringing and defending negligence claims for construction defects.

In S K Peightal, the court refused to extend the judicially recognized independent tort duty to act non-negligently in the construction of home to a third-party beneficiary of a commercial entity whose claims rested purely on economic damages under a negligence theory. Id. at 870-71. The “subsequent homeowner” analysis hinged on “whether a party who stands in the shoes of one of the parties to a Construction Loan Contract that financed the construction of the home in question can properly be considered a subsequent homeowner of the property.” Id. at 876. The court held the third-party beneficiary was not a “subsequent homeowner” and within the class of plaintiffs to whom the duty was owed because the third-party beneficiary was able to and did negotiate the construction contracts outlining the duties and liabilities during construction of the home. Id. at 876-77.

Despite the fact the court responded narrowly to the specific and unique facts of S K Peightal, construction professionals have started to argue an original purchaser’s negligence claims should be barred by the economic loss rule. Construction professionals have argued an original homeowner is analogous to the third-party beneficiary in S K Peightal because original purchasers are at “arm’s length” in negotiating construction contracts during construction of the home.

This argument falls short because it makes the assumption original purchasers of newly constructed homes are involved in negotiating the duties and liabilities in the contracts for construction of the home. Quite the contrary; homeowners are rarely involved in the negotiating the means and methods involved in constructing a new home. Homeowners rely on the builder’s expertise, which is why the court has judicially recognized a construction professional’s independent duty to act non-negligently in the construction of homes.

Vision Homes recently argued this in a case where Johnson Law and co-counsel represented eleven homeowners against it in Castle Rock Colorado. Douglas County District Court Judge Shaw Whitaker did not reach defendants’ “subsequent purchaser” arguments. Instead, Judge Whitaker relied on Colorado precedent in Town of Alma v. AZCO Constr. Inc., 10 P.3d 1256, 1259 (Colo. 2000) and held the economic loss rule did not apply because plaintiffs alleged more than purely economic loss. In citing to Hildebrand v. New Vista Homes II, LLC, 252 P.3d 1159, 1172 (Colo. App. 2010), Judge Whitaker held the “Construction Defect Action Reform Act allows claims for personal and bodily injury including noneconomic loss or injury such as pain and suffering, inconvenience, emotional stress, and impairment to the quality of life.” James Coates, et al. v. Vision Development Group, Inc., et al., No. 14 CV 30372 (Douglas County Dist. Ct. February 16, 2016). Therefore, Judge Whitaker denied the builder defendants argument the economic loss rule barred the homeowner plaintiffs’ negligence claims because plaintiffs plead non-economic damages and a jury could award such damages.

Construction professionals will likely attempt to use the dicta from S K Peightal as an opportunity to chip away consumer rights. Judge Whitaker’s ruling is correct, but the District Court’s ruling could be narrowly read to only protect individual homeowner purchasers, and not HOAs or other corporate entities that hold title to homes because such entities cannot suffer non-economic losses. Further clarification of S K Peightal is still required, including how the Homeowner Protection Act of 2007 would trump any application of the common law economic loss rule.

This issue is of greatest importance in Colorado’s booming housing market where rapid growth of new developments leads to high numbers of original purchasers contracting with builders for newly constructed homes. There is no good reason (legal, policy, or otherwise) that Courts should exclude original homeowners from the ability to hold builders liable for their negligence.

If you have any questions about the S K Peightal decision, or the Douglas County District Court ruling interpreting it, please contact construction defect lawyer Chad Johnson at Chad@chadjohnsonlaw.com or 303.586.4829.

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