Griffith v. Centex Real Estate Corp.

Citation: 969 P.2d 486Docket: 40541-1-I

Court: Court of Appeals of Washington; December 13, 1998; Washington; State Appellate Court

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Mark Griffith, Renee Griggs, Eugene Zielke, Julia Metcalf, and 162 other individuals filed a class action against Centex Real Estate Corporation after experiencing issues with peeling paint on their cedar-sided homes. They alleged breach of express warranty, negligent misrepresentation, and violations of the Consumer Protection Act (CPA). The trial court certified their class action but later granted summary judgment dismissing the breach of warranty and negligent misrepresentation claims, citing that the warranty had expired and that the economic loss rule barred the misrepresentation claim. However, the court found a genuine issue of material fact regarding the CPA claims, prompting a remand for further proceedings.

The facts reveal that Centex marketed its homes to first-time buyers, assuring quality and customer satisfaction through model homes and brochures. The contracts included a one-year Builder Limited Warranty, which the class members acknowledged, and specified that no additional warranties existed. A waiver of claims for repairs not covered by this warranty was also included. A Disclosure Addendum informed buyers of the real estate agent's duty to disclose material facts. During the preclosing inspection, a Centex manager reviewed the warranty and provided a Homeowner's Manual, which noted that cedar siding requires maintenance and that moisture control is challenging, emphasizing the need for periodic repainting.

Cedar siding used by Centex in home construction presents several limitations, such as leaching tannic acids that stain paint, a rough surface requiring penetrating paint to minimize chipping, and specific environmental constraints for application. Centex applied one coat of heavy-bodied, oil-based opaque stain, conducted by subcontractors who reportedly backrolled the stain to ensure even application and penetration. While Centex and two manufacturers claimed this process was suitable for Northwest weather and met industry standards, the Class's expert argued that an additional primer coat was necessary and contended that the stain had not been backrolled. The Class alleged that Centex's improper preparation and application led to premature deterioration of the siding, evidenced by complaints of cracking, discoloration, and mold within three years of purchase. Centex denied repair requests after the one-year warranty expired and sent a letter in August 1996 denying liability but offering a paint coupon, as the stain did not last as promised. The Class filed a lawsuit against Centex for damages of approximately $2,500 per home, citing breach of express warranty, negligent misrepresentation, and violation of the Consumer Protection Act (CPA). The trial court granted summary judgment in favor of Centex, ruling that it complied with express warranties and disclosure duties, and that negligence claims were barred by existing case law. The Class is appealing this decision, which will be reviewed under a standard that favors the nonmoving party and requires no genuine issue of material fact for summary judgment. The Class argues that the warranty disclaimers in the Real Estate Contract do not apply to its claims, asserting that express warranties were created by Centex's promises, including a commitment to prime the cedar siding.

Time limitations on warranties in real estate contracts are recognized as valid by Washington courts, as demonstrated in the Southcenter View case, where a condominium association's claims against the owner/developers, builder, and selling agent for breach of express and implied warranties were dismissed due to a one-year warranty limitation in the contract. The court affirmed that such limitations are enforceable and distinguished them from total exclusions of warranties, rejecting claims that they unfairly burden naive home buyers. 

In the current case, the Class attempted to argue that the warranty limitation from Centex pertained only to defective materials and workmanship, but the court found this argument unpersuasive, stating that using materials for unsuitable purposes constitutes defective workmanship. Even if an express warranty existed from sales materials, it was still subject to the one-year limitation and waiver provisions of the Real Estate Contract, leading to the correct dismissal of the claim.

Regarding the Class's negligent misrepresentation claim, the trial court's dismissal was upheld based on the economic loss rule, which bars such claims when liability is allocated by contract. Washington's precedent, as seen in cases like Stuart and Atherton, indicates that claims for negligent construction are not recognized for individual homeowners, emphasizing that economic losses from construction defects must be remedied through contract terms. The court reiterated its commitment to maintaining the separation of tort and contract law, thereby ensuring risk allocation and liability determinations are based on contractual agreements, which is particularly vital in the construction industry to promote certainty and predictability.

The Class contends that the economic loss rule from Berschauer/Phillips should not apply to negligent misrepresentation claims, referencing cases from other jurisdictions that support this position. However, the Berschauer/Phillips court established a clear distinction between contract and tort remedies for economic damages, emphasizing that parties should negotiate their risk distribution. While Washington recognizes negligent misrepresentation claims under the Restatement (Second) of Torts § 552, the court ruled that when a contract addresses potential economic liability, contract principles prevail, barring recovery for purely economic damages. The Class seeks to differentiate its case by arguing that it involves private homebuyers, but this argument was not persuasive in the precedent set by Stuart. The Class also claims that its case involves harm to property beyond mere economic loss due to defects in materials, citing expert opinions regarding damage to siding. Nonetheless, the court found that the alleged damage was limited to the siding itself, thus constituting economic loss and falling under the economic loss rule.

Regarding the Class's Consumer Protection Act (CPA) claim, the court dismissed it, asserting that the Class failed to establish a prima facie case. The CPA aims to prevent unfair or deceptive acts in trade and requires proof of five elements for a claim. The only disputed element is whether Centex engaged in an unfair or deceptive act. The Class need only demonstrate that the act could deceive a substantial portion of the public, without needing to show intent to deceive.

Review of whether a party committed an act is based on substantial evidence, while the determination of whether that act constitutes a violation of the Consumer Protection Act (CPA) is a legal question. The Class alleges that Centex engaged in unfair and deceptive practices by not disclosing known defects in the exterior finish and failing to adhere to industry standards. It is acknowledged that Centex did not disclose these defects; however, compliance with industry standards remains contested.

Case law establishes that a seller has a duty to disclose material facts known to them but not easily discoverable by buyers. For instance, in Testo v. Russ Dunmire Oldsmobile, Inc., an automobile dealer’s failure to disclose modifications that increased maintenance costs was deemed deceptive under the CPA. Similarly, in McRae v. Bolstad, sellers were held accountable for not disclosing sewer and drainage issues, satisfying the public interest element of the CPA due to their failure to disclose material facts.

Furthermore, the Disclosure Addendum in the Real Estate Contract imposed a contractual duty on Centex to disclose all material facts adversely affecting the property that were known to one party but not reasonably ascertainable by the other. The evidence suggests that Centex was aware that its buyers expected high-quality finishes and that there were significant complaints regarding premature deterioration of the exterior finishes. This knowledge indicates a material fact affecting the property that buyers would likely not discover on their own.

Although the trial court did not specifically address the CPA, it concluded that Centex met its disclosure obligations under Atherton, which outlines a builder-vendor's duty to disclose concealed defects that are dangerous and known to the seller but unknown to the buyer, constituting fraud if not disclosed.

The Atherton court established that a defect must significantly impact the property's value or undermine the transaction's purpose to be actionable. However, the nondisclosure in this case does not meet the Atherton criteria, as there are other duties to disclose beyond those specified by Atherton. The Consumer Protection Act (CPA) differentiates between CPA violations and fraud, applying a broader standard that encompasses deceptive acts affecting a substantial portion of the public, not limited to life-threatening defects. The CPA aims to safeguard the public from unfair practices in commerce, which would not be fulfilled if only life-threatening deceptions were actionable. The CPA has been applied in various home purchase contexts, indicating its relevance to this case. Additionally, the Atherton test is inapplicable because Centex accepted a different standard in its disclosure addendum. A genuine issue of material fact exists regarding whether Centex committed an unfair or deceptive act, leading to an error in the trial court's summary judgment on the CPA claim. Centex's motion to strike parts of the Class' reply brief, alleging improper arguments and misrepresentation, was denied; the court found it to be an inappropriate response. The court affirms the dismissal of the breach of warranty and negligent misrepresentation claims but reverses the dismissal of the CPA claim, remanding for further proceedings.

AGID, A.C.J. and WEBSTER, J. concur. Centex provided an extended warranty covering major items like electrical and plumbing systems but excluded exterior paint. A later warranty version mentioning "stain blocking primers" was added post-purchase and is irrelevant to claims. A waiver in Paragraph 32, titled "Waiver of Future Claims," states that purchasers relinquish claims against Centex for damages arising post-contract, except for specific coverage under the Builder Limited Warranty. This waiver binds purchasers and their successors, allowing Centex to use it as a defense in any claims. References to "paint" or "stain" were noted, and the document cites previous cases discussing sellers' disclosure duties. The court rejected the Class's negligent misrepresentation claim based on the economic loss rule, indicating that the Atherton analysis on disclosure duty was not necessary for decision-making. The Class argued that non-compliance with industry standards violated the Consumer Protection Act (CPA), which the court rejected, emphasizing that mere failure to meet standards does not constitute deceptive practices. For the CPA to apply, there must be unfair or deceptive acts influencing consumer actions. The court referred to a precedent where a contractor's failure to meet promised completion dates was deemed deceptive. However, it acknowledged factual questions regarding whether industry standards necessitated a primer coat or backrolling of the stain.