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 CRESCENT UNIV. CITY VENTURE, LLC V. TRUSSWAY MFG., INC.
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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