August 24, 2019

Colorado Court of Appeals: Home Sellers Had Independent Duty to Disclose Home’s Defects So Economic Loss Rule Inapplicable

The Colorado Court of Appeals issued its opinion in In re Estate of Gattis on Thursday, November 7, 2013.

Residential Sales Contract—Nondisclosure—Economic Loss Rule.

Defendants (collectively, sellers) appealed the judgment entered following a bench trial in favor of Carol S. Gattis on her nondisclosure claim. The Court of Appeals affirmed the judgment.

An entity controlled by sellers purchased the residence for purposes of repair and resale. Before the purchase, the entity obtained engineering reports that included extensive discussion of structural problems resulting from expansive soils and ways to remedy those problems. Advance Structural Repair, another entity that sellers controlled, oversaw the repair work. When the repairs were completed, sellers obtained title to the residence and sold it to Gattis using a standard-form real estate contract to which they made no changes (contract). The contract included a “Seller’s Property Disclosure” (SPD) wherein sellers denied any knowledge of structural problems or issues with expansive soils.

Sellers argued that the trial court erred when it denied their defense based on the economic loss rule. Specifically, sellers argued that the economic loss rule bars a nondisclosure tort claim against the seller of a home built on expansive soils that caused damage to the home after the sale. Under the economic loss rule, “a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”

The Court declined to apply the economic loss rule in this case for two reasons. First, apart from any contractual obligation, home sellers owe home buyers an independent duty to disclose latent defects of which they are aware. Second, disclosure provisions in the Form Contract at issue do not subsume the independent duty so as to trigger the economic loss rule. Although sellers were not required by the SPD to disclose their involvement with the entity that had performed repairs, they do not dispute, as the trial court found, that this fact was material and should have been disclosed. Gattis could have prevailed on this nondisclosure without relying on the SPD.

Summary and full case available here.

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