Nevada Non-Mutual Claim Preclusion Case Effect on Permissive Cross-Claims

In construction defect litigation, including matters where the contractors are covered by owner controlled insurance policies (“OCIP”) or design professionals are not sued by plaintiff, a question often arises as to whether or not the co-defendants should file cross-claims for indemnity or contribution regarding plaintiff’s defect and damage claims? Notwithstanding the permissive status of such potential cross-claims, the prudent course in Nevada construction defect cases — without a good reason to justify a second lawsuit — is to file cross-claims or third-party complaints regardless of OCIP potential coverage to avoid claim or non-mutual claim preclusion.

Procedurally, parties with permissive cross-claims in the past could wait before proceeding against co-defendants under statute and case law. In Nevada, the applicable rule on cross-claims against co-parties is NRCP 13(g). A pleading may state as a cross-claim any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein or relating to any property that is the subject of the original action. Such cross-claim may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.

A frequently cited case interpreting the permissive cross-claim rule is Executive Mgmt. v. Ticor Title Ins. Co., 114 Nev. 823, 963 P.2d 465 (1998). Noting that NRCP 13 (g) language is “clearly permissive” regarding the option to pursue, the Nevada Supreme Court held that where a party to an action has a permissive cross-claim, that party has the option to pursue that claim in an independent action, and if such a claim is neither asserted nor litigated, the parties cannot be barred from asserting it in a later action by principles of res judicata, waiver or estoppel. 963 P.2d at 474. Moreover, the Supreme Court stated it would “not allow the doctrine of claim preclusion to convert the permissive character of NRCP 13(g) into a compulsory mandate.” Id. at 475.

However, the Nevada Supreme Court’s relatively recent decision in Weddell v. Sharp 131 Nev. Adv. Op. No. 28, 350 P.3d 80 (May 28, 2015), has limited that procedural option for co-defendants. Even as to parties without contractual privity, the Nevada Supreme Court held that non-mutual claim preclusion applies in Nevada. The purpose of claim preclusion and non-mutual claim preclusion is to obtain finality of litigation by preventing a party from filing another suit based upon the same set of facts present in the initial suit. This includes promoting judicial economy in situations where the rules of civil procedure governing noncompulsory joinder, permissive counterclaims, and permissive crossclaims “fall short.” 350 P.3d at 84.

In the Weddell case, the Supreme Court decision modified the privity requirement established in Five Star Capital Corp. V. Ruby, 124 Nev.1048 (2008), with application of “the doctrine of nonmutual claim preclusion.” In short, the Nevada Supreme Court Weddell decision makes it clear that the main inquiry focuses on whether appellant has shown a good reason to justify this second lawsuit. Weddell 350 P.3d at 85.

Now, notwithstanding the optional direction for permissive cross-claims or counter claims under NRCP (13), the Nevada Supreme Court found that defendants in a second lawsuit may validly use a claim preclusion defense based upon where (1) there has been a valid final judgment in a previous action; (2) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first action: and (3) privity exists between the new defendant and the previous defendant or the defendant can demonstrate that he or she should have been included as a defendant in the earlier suit and the plaintiff cannot provide a “good reason” for failing to include the new defendant in the previous action. 85-86.

Arizona Court of Appeals Addresses Subsequent Homeowner Negligence Claims (Sullivan II)

The Arizona Court of Appeals addressed the question whether a subsequent (i.e., non-original) homeowner may maintain a negligence cause of action against a homebuilder for economic losses arising from latent construction defects unaccompanied by physical injury to persons or other property.

The Court of Appeals in Sullivan v. Pulte Home Corporation, 354 P.3d 424 (July 28, 2015) upheld the dismissal of negligence based claims finding a lack of duty to a subsequent purchaser of a home. This opinion, which is now on appeal to the Arizona Supreme Court, if upheld, will benefit homebuilders, design professionals and contractors in limiting the claims of subsequent purchasers of homes.

History of the Claim

Defendant/Appellee Pulte Home Corporation built homes in a Phoenix hillside community. In 2000, Pulte sold the home at issue in these proceedings to the original homeowners, who, in 2003, sold the property to Plaintiffs/Appellants John and Susan Sullivan. In 2009, the Sullivans discovered problems with the home’s hillside retaining wall. An engineering firm they retained concluded that Pulte had constructed the retaining wall and prepared the home site without proper structural and safety components, including footings, rebar, and adequate drainage and grading. Pulte declined the Sullivans’ request to make repairs.

The Sullivans sued Pulte, alleging eleven separate counts, including several negligence-based claims. Pulte moved to dismiss all counts of the complaint pursuant to Arizona Rule of Civil Procedure 12(b)(6), arguing that the implied warranty claim was barred by the 8 year statute of repose and that the tort claims were impermissible under the economic loss doctrine. The superior court granted Pulte’s motion, and the Sullivans appealed.

This Court affirmed the dismissal of all counts of the Sullivans’ complaint except the negligence claims. Sullivan v. Pulte Home Corp., 231 Ariz. 53, 60 (App. 2012), vacated in part, 232 Ariz. 344, 306 P.3d 1 (2013). The Court held that because the Sullivans were not in privity with Pulte and had no contract with the homebuilder, the economic loss doctrine did not bar their negligence claims. The Arizona Supreme Court vacated the portion of the Court of Appeals opinion discussing the economic loss doctrine, but nevertheless agreed that it did not bar the Sullivans’ negligence claims. Sullivan v. Pulte Home Corp., 232 Ariz. 344, 345-47, ¶¶ 7, 11, 15, 306 P.3d 1, 2-4 (2013) (“Sullivan I”). Sullivan I held that the economic loss doctrine “protects the expectations of contracting parties, but, in the absence of a contract, it does not pose a barrier to tort claims that are otherwise permitted by substantive law.” Id. at 346, ¶ 11, 306 P.3d at 3. Instead, courts must “consider the applicable substantive law to determine if non-contracting parties may recover economic losses in tort.” Id. at 347, ¶ 14, 306 P.3d at 4.

On remand to the superior court, Pulte moved to dismiss the negligence claims pursuant to Rule 12(b)(6), arguing “a homebuilder such as Pulte does not owe a duty of care to a subsequent purchaser (such as plaintiffs) to prevent them from economic harm.” The superior court granted Pulte’s motion, and the Sullivans again timely appealed.

Sullivan II

The Court of Appeals accepted jurisdiction to determine whether a subsequent homeowner could maintain a negligence action against a homebuilder for latent construction defects resulting in purely economic losses.

On appeal, the Sullivans argued that Pulte’s duty arose out of public policy principles based in the municipalities’ building codes, Arizona statutes and the Arizona Administrative Code governing contractors. In determining that neither the Building Code, nor Arizona’s statutory or administrative schemes supported the imposition of a public policy-based duty for purely economic loss, the Court of Appeal found that the codes and statutes did not provide a sufficient basis for holding that homebuilders owe public policy-based tort duties to subsequent homeowners for economic loss. The statutes and codes do not delineate a specific class of persons they seek to protect distinguishable from the public. The Court stated that the governance of licensed contractors has a broad, general purpose: “to protect the public health, safety and welfare by licensing, bonding and regulating contractors engaged in construction,” but because the Sullivans had no contract with Pulte, the regulatory provisions did not support imposing a public policy-based tort duty in favor of subsequent property owners asserting only economic loss. As the Sullivans’ claims did not arise out of personal injury or damage to other property, the Court of Appeals found that there was no duty on the part of Pulte to repair a subsequent purchaser’s retaining wall.

Significance of the Ruling

Although Sullivan II is now on appeal to the Supreme Court of Arizona, the Court of Appeals ruling is certainly a positive step toward limiting the liability of homebuilders, contractors, subcontractors and design professionals for claims by subsequent homeowners. The ruling in Sullivan II, if upheld, will limit the bases that plaintiffs can rely on to create a duty.  The hope is that Arizona courts will continue to be active in limiting the liability of homebuilders, design professionals and contractors.

California Supreme Court to Address Design Professionals and Duty of Care to Third-Party Purchasers

On May 7, the California Supreme Court heard oral arguments in Beacon Residential Community Assn. v. Skidmore, Owings, & Merrill LLP, a case that will have a huge impact on design professional liability in California when third-party purchasers sue a designer alleging defective designs.

The Beacon is a mixed-use project consisting of 595 condominium units and some commercial and office space.  Plaintiff Beacon Residential Community Association (the HOA) sued the initial developer, a subsequent developer, the architects, the general contractor and subcontractors asserting SB 800 and common-law causes of action.  The architects demurred to the HOA’s Third Amended Complaint asserting they owed no duty of care to the HOA.

The trial court sustained the demurrer, reasoning that the architects had not asserted direct “control” over construction decisions, and thus, under the Biakanja ((1958) 49 Cal. 2nd647), Bily ((1992) 3 Cal. 4th 370) and Weseloh ((2004) 125 Cal. App. 4th, 152) line of decisions, ruled the architects owed no duty to the HOA.

The HOA appealed and in December 2012, the California Court of Appeal, First Appellate District, reversed the trial court ruling in Beacon (2012) 211 Cal.App.4th 1301. The Court of Appeal reasoned that in analyzing the various factors elucidated in Biakanja and Bily, and distinguishing those and the Weseloh facts from those in Beacon, design professionals do owe a duty of care to eventual third-party purchasers.  The architects appealed to the California Supreme Court asserting that the rulings in Weseloh and Beacon are inapposite.

During the Supreme Court oral arguments, the justices focused on: 1)  the foreseeability of harm to the plaintiff; 2) the closeness of connection between the defendant’s conduct and the injury suffered; and 3) the potential imposition of liability out of proportion to fault.  The court distinguished Beacon from the former line of cases in that: 1) it was imminently foreseeable that a defective design of residential units would affect eventual purchasers of the units; 2) the architects were directly responsible for the alleged design defects given their “intimate involvement” with construction value-engineering decisions and project observation (i.e., they did not simply draw plans, hand them over, then leave the project); and 3) unlike Weseloh, where the retaining-wall designers provided only $2,000 in services relative to a $6 million claim, Beacon architects provided $5 million worth of services in a $45 million claim.

The Supreme Court has 90 days from May 7 to issue an opinion.  Given the Supreme Court’s comments and analysis at oral argument, it looks like it may agree with the Court of Appeal and rule that in the context of residential-unit design, design professionals do owe a duty of care to eventual third-party purchasers regardless of lack of privity.