Crescent Univ. City Venture, LLC v. Trussway Mfg., Inc.

Opinions

Opinion

IN THE SUPREME COURT OF NORTH CAROLINA

No. 407A19

Filed 18 December 2020

CRESCENT UNIVERSITY CITY VENTURE, LLC

v.

TRUSSWAY MANUFACTURING, INC. and TRUSSWAY MANUFACTURING, LLC

Appeal pursuant to N.C.G.S. § 7A-27(a)(2) from an order and opinion granting

summary judgment in favor of defendants entered on 14 August 2019 by Judge Louis

A. Bledsoe III, Chief Business Court Judge, in Superior Court, Mecklenburg County,

after the case was designated a mandatory complex business case by the Chief Justice

pursuant to N.C.G.S. § 7A-45.4(a). Heard in the Supreme Court on 16 June 2020.

Kiran H. Mehta and William J. Farley III for plaintiff-appellant.

Fox Rothschild LLP, by Elizabeth Brooks Scherer and Jeffrey P. MacHarg; and Martyn B. Hill and Michael A. Harris for defendant-appellees.

MORGAN, Justice.

In this case we must determine whether, under North Carolina law, a

commercial property owner who contracts for the construction of a building, and

thereby possesses a bargained-for means of recovery against a general contractor,

may nevertheless seek to recover in tort for its economic loss from a subcontracted

manufacturer of building materials with whom the property owner does not have

contractual privity. The Business Court determined that North Carolina’s economic

Opinion of the Court

loss rule requires negligence claims to be based upon the violation of an extra-

contractual duty imposed by operation of law, simultaneously recognizing that

parties generally do not owe each other a duty of care to prevent economic loss. We

agree with the Business Court and therefore affirm the Business Court’s order

granting summary judgment in favor of defendants.

Factual and Procedural Background

Plaintiff Crescent University City Venture, LLC (Crescent) was the owner and

developer of an initiative to build and lease several student apartment buildings near

the campus of the University of North Carolina at Charlotte (the project). In 2012,

Crescent entered into a contract with AP Atlantic, Inc. d/b/a Adolfson & Peterson

Construction (AP Atlantic), a general contractor, whereby AP Atlantic agreed to

construct a multi-building apartment complex on Crescent’s property. As a matter of

course, AP Atlantic entered into agreements with several subcontractors to facilitate

the construction of the project, including a subcontract with Madison Construction

Group, Inc. (Madison) for the provision and installation of wood framing for the

buildings. The AP Atlantic-Madison subcontract required Madison to procure the

floor and roof trusses at issue in the present controversy. The trusses in this context

were structures of wood members held together by metal plates bristling with teeth,

which were pressed into the pieces of wood at points where they connected at angles,

creating a cross-supporting web of triangles. The trusses were delivered

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premanufactured to the project site and were each installed as a single piece to make

up the floor and roof portions of each apartment building. In order to procure trusses

for the project, Madison executed a signed purchase order with Trussway

Manufacturing, Inc. (Trussway). The purchase order included the specifications of

the trusses required by the project and set forth further terms applicable to the sale

of the trusses including an express warranty.

Students of the University of North Carolina at Charlotte began occupying the

apartments for the 2014–2015 academic year. Following a party attended by 80–100

people hosted in one of the units of Building C—one of the student apartment

buildings erected during the project—on 30 January 2015, the occupants of the unit

below reported that their living room ceiling had cracked and was sagging. Crescent

relocated the residents of both units in Building C, after which the residents of a unit

in Building E reported similar problems on 1 May 2015. Initial inspections revealed

that the floor trusses between the apartments in Buildings C and E were defective.

Crescent hired an engineering firm, Simpson Gumpertz & Heger, Inc. (SGH), to

conduct an investigation into both the identified failures as well as a random

sampling of the remaining apartments to determine if the structural defects were

isolated or systemic. After examining the apartments with noticeable defects and a

wider sample of other apartments, SGH informed Crescent that it believed the floor-

truss defects were systemic and pervasive throughout the project. The investigation

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revealed that 13.6% of the metal plates connecting the wood members of each truss

that SGH inspected had failed or presented an unsafe defect, and reports produced

by SGH detailed the repairs necessary to bring the project back to an acceptable

standard. While having initially consulted AP Atlantic to conduct the necessary

repairs, the parties to this action disagreed about the reasonableness of the proposed

timeframe and repair plan Crescent developed with SGH. Crescent instead enlisted

the assistance of a third party, Summit Contracting Group, Inc. to complete the

planned repairs.

On 5 August 2015, AP Atlantic filed suit against Crescent for outstanding

payments on the project, to which Crescent responded with a breach of contract

counterclaim on multiple grounds including the defective trusses. Crescent initiated

a separate action against AP Atlantic’s parent company to enforce a performance

guaranty while AP Atlantic maintained multiple derivative claims against the

subcontractors on the project, including Trussway. The matter was designated as a

complex business case and assigned to the North Carolina Business Court for

administration and resolution. The Business Court consolidated the actions on 10

October 2016. Following multiple rounds of pleadings, a lengthy discovery process,

and several settlement agreements and voluntary dismissals, the resulting

procedural posture led Crescent to move the Business Court to realign the parties,

with Crescent as plaintiff, AP Atlantic and its parent company as defendants, and

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the subcontractors as third-party and fourth-party defendants. All parties to the

consolidated proceedings agreed, and the Business Court granted Crescent’s motion

on 11 December 2017.

On 12 February 2018, the parties to the consolidated action filed motions for

summary judgment, while Crescent filed a complaint asserting a single negligence

claim against Trussway, along with a motion to consolidate the new claim with the

ongoing matters. Crescent’s new complaint alleged that Trussway’s negligence in

manufacturing the trusses resulted in almost eight million dollars in damages from

a combination of the project-wide repairs and stipends to residents for temporary

accommodations, transportation, and storage. After this new action was itself

designated as a complex business case on 7 March 2018, Trussway filed a motion to

dismiss Crescent’s new negligence complaint, arguing that the “prior action pending”

doctrine barred such a claim. The Business Court held a hearing on the summary

judgment motions, Trussway’s motion to dismiss the new Crescent action, deemed

the “Trussway Action” by the Business Court, and Crescent’s motion to consolidate

the Trussway Action with the remaining cases on 30 May 2018. In an order dated 16

July 2018, the Business Court denied Trussway’s motion to dismiss the Trussway

Action and granted Crescent’s motion to consolidate. Following this consolidation and

denial of its motion to dismiss, Trussway filed an answer to the Trussway Action

denying Crescent’s negligence allegation and lodging several defenses.

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After the conclusion of discovery in the Trussway Action, Trussway filed a

motion for summary judgment, arguing that because the duties Trussway allegedly

violated as stated in Crescent’s newest complaint arose under a contractual

relationship—and not by operation of law—Crescent’s claims were barred by, inter

alia, the economic loss rule. A hearing was held before the Business Court on 25 July

2019 during which Trussway specifically argued that Crescent had failed to present

sufficient evidence showing the breach of any duty other than the contractual duties

contained within the purchase order for the defective trusses with Madison. The

Business Court agreed, finding that “[b]ecause Crescent has not alleged or forecast

evidence showing the breach of any separate or distinct extra-contractual duty

imposed by law, . . . Crescent may not maintain a negligence claim against it.”

Applying the economic loss rule irrespective of the existence or lack of a contractual

relationship between Crescent and Trussway, the court dismissed Crescent’s

negligence claim with prejudice. We agree with the Business Court’s application of

the economic loss rule and therefore affirm its order granting summary judgment in

favor of Trussway.

Analysis

Applying the economic loss rule, North Carolina courts have long refused to

recognize claims for breach of contract disguised as the type of negligence claim that

Crescent asserted against Trussway in the case before us. See generally N.C. State

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Ports Auth. v. Lloyd A. Fry Roofing Co. (Ports Authority), 294 N.C. 73, 240 S.E.2d 345

(1978), rejected in part on other grounds by Trs. of Rowan Technical Coll. v. J. Hyatt

Hammond Assocs., Inc., 313 N.C. 230, 328 S.E.2d 274 (1985). Adopted by this Court

in Ports Authority, the economic loss rule bars recovery in tort by a plaintiff “against

a promisor for his simple failure to perform his contract, even though such failure

was due to negligence or lack of skill.” Id. at 83, 240 S.E.2d at 351. Ports Authority

involved parties which had a relationship posture which is similar to the relationship

between Crescent and Trussway in the instant case. In Ports Authority, the North

Carolina State Ports Authority contracted with a general contractor for the

construction of two storage buildings at a site owned and operated by the state

agency. Id. at 75, 240 S.E.2d at 347. In turn, the general contractor entered into a

subcontract with E.L. Scott Roofing Company (E.L. Scott) for the construction of the

roofs on both buildings. Id. Almost four years after the buildings were completed and

occupied by the State Ports Authority, leaks developed in both roofs that necessitated

the expensive removal of the equipment and goods stored inside the affected

buildings. Id. at 75–76, 240 S.E.2d at 347.

The State Ports Authority sued the general contractor in Ports Authority for

breach of contract based upon the contractor’s alleged failure to construct the roofs

“in accordance with the plans and specifications” of their agreement. The agency also

included in its complaint a second claim that E.L. Scott negligently installed portions

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of the roof substructure under the supervision of the general contractor, resulting in

the same damages as the general contractor’s breach of contract. Id. at 81, 240 S.E.2d

350. In addressing the State Ports Authority’s negligence claim against E.L. Scott,

while the Court noted the existence of appellate case precedent establishing that a

promisor to a contract can be held liable in tort for personal or property damage

caused by the promisor’s negligence, such cases fit into one of four categories, with

the common feature among them being the breach of an extra-contractual duty,

relationship, or bailment. Id. at 81–82, 240 S.E.2d at 350–51. However, this Court

recognized that it had never allowed a tort action against a party to a contract “for

[its] simple failure to perform [its] contract.” Id. at 83, 240 S.E.2d at 351. Since that

time, North Carolina courts have endeavored to apply the economic-loss-rule

instruction of Ports Authority. See Beaufort Builders, Inc. v. White Plains Church

Ministries, Inc. (Beaufort Builders), 246 N.C. App. 27, 32–38, 783 S.E.2d 35, 39–42

(2016) (applying the economic loss rule to bar a negligence claim where the denial of

a occupancy permit for the contract’s subject matter—a church building—constituted

the plaintiff’s alleged injury); Window Gang Ventures, Corp. v. Salinas (Window

Gang), 2019 NCBC LEXIS 24, at *23–33 (N.C. Super. Ct. Apr. 2, 2019) (analyzing

one of four Ports Authority exception categories in denying negligence cause of action

against defendant based on economic loss rule).

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An examination of the Supreme Court of the United States’ adoption of the

economic loss rule within admiralty law reveals the utility of the rule within its

original product-liability context. The Supreme Court of the United States

emphasized in East River S.S. Corp. v. Transamerica Delaval, Inc. (East River), 476

U.S. 858, 866 (1986), that the purpose of the economic loss rule is to prevent “contract

law [from] drown[ing] in a sea of tort.” Id. at 866. In East River, a group of tanker

ship operators sued the manufacturer of the turbines installed on ships that they had

chartered from a shipbuilder after the turbines suffered multiple malfunctions,

leading to costly delays in the ongoing businesses of the tanker ship operators. Id. at

859–61. In much the same relationship as exists between AP Atlantic and Madison

in the case at bar, the shipbuilder had contracted with the manufacturer for the

provision and installation of a single part of a larger design/build arrangement. Id.

The Supreme Court of the United States grappled with the question of

“whether a commercial product injuring itself is the kind of harm against which

public policy requires manufacturers to protect, independent of any contractual

obligation.” Id. at 866 (emphasis added). Applying what is now coined as the economic

loss rule in denying the tanker ship operators’ recovery from the turbine

manufacturer, the Supreme Court of the United States held in East River that “a

manufacturer in a commercial relationship has no duty under either a negligence or

strict products-liability theory to prevent a product from injuring itself.” Id. at 871.

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Recognizing that “a commercial situation generally does not involve large disparities

in bargaining power,” the nation’s high court saw “no reason to intrude into the

parties’ allocation of risk” in reinforcing the operation of the economic loss rule in

contractual disputes. Id. at 873. Instead, the Supreme Court pointed the tanker ship

operators to remedies in warranty, where a plaintiff could enjoy the “full benefit of

its bargain” by seeking compensation for expectation damages and “foregone business

opportunities,” similar to the damages Crescent now attempts to recover from

Trussway. Id. The economic loss rule has since gained near universal acceptance, and

nearly all other state and federal jurisdictions that have applied the rule to

commercial transactions—like the transaction involved in the case sub judice—agree

that purely economic losses are not recoverable under tort law. See, e.g., Chicopee,

Inc. v. Sims Metal Works, Inc., 98 N.C. App. 423, 432, 391 S.E.2d 211, 217 (1990)

(citing 2000 Watermark Ass’n, Inc. v. Celotex Corp., 784 F.2d 1183, 1185 (4th Cir.

1986)); see also Kelly v. Georgia-Pacific LLC, 671 F. Supp. 2d 785, 791 (E.D.N.C.

2009).

Crescent’s argument, in construing the Court of Appeals decision in Lord v.

Customized Consulting Specialty, Inc., 182 N.C. App. 635, 643 S.E.2d 28 (2007), to

represent that the application of the economic loss rule hinges on the existence of a

contract between the plaintiff and defendant, is at odds with our holding in Ports

Authority which is specific to the commercial-development context. To the extent that

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such cases as Lord spawn an argument against the application of the economic loss

rule in commercial cases where a sophisticated commercial developer attempts to

recover in tort against a subcontractor when the injury complained of concerns solely

the subject matter of a valid contract between the developer and the general

contractor, as is the case here, such an argument is unpersuasive. The lack of privity

in the commercial context between a developer and a subcontractor, supplier,

consultant, or other third party—the potential existence of which is readily known

and assimilated in sophisticated construction contracts—is immaterial to the

application of the economic loss rule. To this end, Ports Authority represents that a

lack of contractual privity between 1) a plaintiff who engages in commercial

development with a general contractor and 2) a subcontractor, supplier, or other

third-party whose relevance to the plaintiff springs from the original contract

between the plaintiff and the general contractor does not bar the application of the

economic loss rule.

We are well aware of how the intersection between contract law and tort law

in North Carolina has developed since Ports Authority, as illustrated by Crescent’s

reliance on Lord and this Court’s discussion of negligence as a cause of action against

residential homebuilders in Oates v. JAG, Inc., 314 N.C. 276, 333 S.E.2d 222 (1985).

In Oates, this Court addressed the trial court’s allowance of a defendant-

homebuilder’s motion to dismiss for failure to state a claim after the plaintiffs in the

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case, who were residential homebuyers who had purchased the subject home from a

seller several degrees removed from the defendant builder, had discovered latent

defects in the construction of the home. Id. at 277–78, 333 S.E.2d at 224. The trial

court in Oates had granted the defendant-homebuilder’s motion to dismiss on the sole

ground that plaintiffs could not establish contractual privity with the defendant. Id.

at 278, 333 S.E.2d at 224. The Court of Appeals affirmed the trial court’s order,

opining that because the implied warranty of fitness in the construction of homes in

North Carolina protected only the initial purchaser in privity of contract with the

homebuilder and since the plaintiff was a subsequent purchaser well-removed from

contractual privity with the homebuilder, the traditional doctrine of caveat emptor

applied to bar a cause of action against a homebuilder by a once-removed purchaser.

Id. at 278–79, 333 S.E.2d at 224.

This Court in Oates reversed the decision of the Court of Appeals, determining

instead that a subsequent home purchaser in the consumer context could recover

against the builder of the home in negligence, even if the purchaser maintained no

contractual privity with the builder. Id. at 281, 333 S.E.2d at 226. In so holding, this

Court adopted the public policy considerations of two Florida intermediate appellate

court decisions which both addressed the plight of residential homebuyers who had

alleged that their residences suffered from negligent construction on the part of the

defendant homebuilders. Id. at 279–81, 333 S.E.2d at 225–26 (first quoting Navajo

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Circle, Inc. v. Development Concepts Corp., 373 So. 2d 689, 691 (Fla. Dist. Ct. App.

1979); then quoting Simmons v. Owens, 363 So. 2d 142, 143 (Fla. Dist. Ct. App. 1978)).

Crescent cites only this Court’s discussion of Florida’s Navajo Circle case, in arguing

that our holding in Oates remained consistent with Ports Authority in allowing

“claims of negligence for those who suffer economic losses or damages from improper

construction but who, because not in privity with the builder, have no basis for

recovery in contract.” See Warfield v. Hicks, 91 N.C. App. 1, 10, 370 S.E.2d 689, 694

(1988). We are not inclined to assign such an expansive reading to Oates as Crescent

urges, especially in light of this Court’s further discussion of the Simmons case from

Florida in Oates which reveals the public policy consideration which undergirds the

ability of residential homeowners to pursue recovery for deficient construction of their

homes on the ground of negligence.

Our holding in Oates is a fact-specific response to a problem eloquently

recognized by the Florida First District Court of Appeal in Simmons.

We must be realistic. The ordinary purchaser of a home is not qualified to determine when or where a defect exists. Yet, the purchaser makes the biggest and most important investment in his or her life and, more times than not, on a limited budget. The purchaser can ill afford to suddenly find a latent defect in his or her home that completely destroys the family’s budget and have no remedy for recourse. This happens too often. The careless work of contractors, who in the past have been insulated from liability, must cease or they must accept financial responsibility for their negligence.

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Oates, 314 N.C. at 280–81, 333 S.E.2d at 225–26 (quoting Simmons, 363 So. 2d at

143). In recognizing the propriety of the Florida court’s considerations in Simmons,

this Court allowed a negligence cause of action in favor of residential homeowners

against the distant homebuilders of their homes when the pleadings reflect that the

homebuilder’s negligent construction of the home constituted the proximate cause of

the homeowner’s damages. Whether characterized by the Court of Appeals as a

refinement of our holdings in Ports Authority and Lord or as a public policy exception

to the economic loss rule for the layperson homeowner, this Court’s holding in Oates

should not be read to disturb the applicability of the economic loss rule to commercial

real-estate development transactions.

When a plaintiff asserts that the subject matter of a contract has, in its

operation or mere existence, caused injury to itself or failed to perform as bargained

for, the damages are merely economic, and a purchaser has no right to assert a claim

for negligence against the seller or the product’s manufacturer for those economic

losses under the economic loss rule. See East River, 476 U.S. at 871 (concluding that

the economic loss rule imposes no duty upon manufacturers “under either a

negligence or strict products-liability theory to prevent a product from injuring

itself”); see also Moore v. Coachmen Indus., Inc., 129 N.C. App. 389, 401, 499 S.E.2d

772, 780 (1998). The plaintiff must instead look toward the breach of its contractual

relationship with its supplier or general contractor to recover these purely economic

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losses. Here, Trussway occupies a position much more akin to the component-parts

suppliers in East River and Moore and the roofing subcontractor in Ports Authority

as compared to the residential homebuilders in Oates. Crescent negotiated with AP

Atlantic for the construction of a number of student apartment buildings with the full

knowledge of and power to control the acquisition and engagement of subcontractors

for the various roles within the greater construction scheme. We are constrained by

the well-established origins and ongoing application of the economic loss rule in North

Carolina from affording Crescent, a sophisticated, commercial developer, the same

extra-contractual remedies afforded residential homeowners by reason of public

policy.

Conclusion

North Carolina’s state courts have consistently applied the economic loss rule

to hold that purely economic losses are not recoverable under tort law, particularly

in the context of commercial transactions. The Business Court was correct in its

interpretation and application of this Court’s decision in Ports Authority. Therefore,

we affirm the Business Court’s allowance of defendant’s motion for summary

judgment.

AFFIRMED.

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