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.