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Dean v. Barrett Homes

November 15, 2010

ROBERT R. DEAN, JENNIFER P. DEAN AND MARY SUE DEAN, PLAINTIFFS-APPELLANTS,
v.
BARRETT HOMES, INC., LINCOLN WOOD PRODUCTS, INC., STO OF NEW JERSEY, INC., STO EASTERN, INC., ARCHITECTURAL EXTERIOR FINISHES, INC., AND HOUSEMASTER, INC., DEFENDANTS, AND STO CORP., DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 406 N.J. Super. 453 (2009).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

In this appeal, the Court considers the application of the economic loss rule and the integrated product doctrine to a claim arising out of the purchase of a residence, from its original owners, which was constructed with an allegedly defective exterior finishing system; and whether and those purchasers should be permitted to pursue a tort remedy against the manufacturer of the allegedly defective product pursuant to the Products Liability Act, N.J.S.A. 2A:58C-1 to -11.

In 2002, plaintiffs purchased a home from its original owners. In 1995, Barrett Homes built the home with an Exterior Insulation and Finish System (EIFS) manufactured by defendant Sto Corporation. EIFS, sometimes called synthetic stucco, operates as a combined insulation and wall finish system. Although plaintiffs' home inspector raised concerns about the EIFS, they proceeded with the purchase without further investigation of the EIFS. They claim that one year later, they noticed black lines on the exterior; and they hired an industrial hygienist, who found toxic mold. They eventually had all the EIFS removed and replaced. According to plaintiffs, EIFS is defective because it does not allow for the drainage of moisture that penetrates it, causing the underlying structure to rot or develop mold. They filed suit against many defendants, alleging negligence, breach of warranty, Consumer Fraud Act violations, and strict products liability claims. They resolved their claims against all defendants except Sto, which moved for summary judgment. The trial court granted Sto's motion, rejecting plaintiffs' products liability claim because they sought damages for purely economic losses. Because plaintiffs did not sustain any injuries related to the product's claimed defect, the court concluded that there was no basis to support any tort theory of recovery.

The Appellate Division affirmed. Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (2009). The panel concluded that the economic loss rule precluded recovery because the damages claim was focused on the cost of replacing the product itself. The court also found that the integrated product doctrine precluded a tort-based theory of recovery for damages to other parts of the building's structure. In a concurring opinion, two members of the panel argued that the integrated product doctrine should be rejected so that truly innocent purchasers could recover in tort from the manufacturer of a defective component product for damages to the home other than to the product itself; but that here, plaintiffs could not qualify as innocent purchasers because the home inspection report gave them sufficient opportunity to protect themselves from the risk of loss. The Court granted plaintiffs' petition for certification. 200 N.J. 207 (2009).

HELD: The economic loss rule embodied in the Products Liability Act precludes recovery of damages for harm that the EIFS caused to itself. The purpose of the Act to provide a remedy for harm that a defective product causes to people or property. There is no room to expand it to create a new remedy for the cost of replacing the product based on assertions that it failed to perform as expected. However, because the EIFS was not fully integrated into the structure, plaintiffs retain a cause of action against the product's manufacturer to the extent that the product caused damage to the house or its immediate surroundings.

1. The Products Liability Act provides that a manufacturer of a product is liable if the product causing the harm was not reasonably fit or safe for its intended purpose. The statute limits compensable harm to "physical damage to the property, other than to the product itself," and certain personal injuries. That definition is a codification of the common law economic loss rule, which bars tort remedies when the only claim is for damage to the product itself. That rule evolved to establish the boundary line between tort and contract remedies. In Spring Motors Distributors v. Ford Motor Co., the Court adopted the economic loss rule in the context of commercial transactions for which the Uniform Commercial Code (U.C.C.) operates as a comprehensive system for determining the rights and duties of buyers and sellers with respect to contracts for the sale of goods. The Court ruled that if the essence of a claim was that there was something wrong with the product itself, the buyer's remedies were found in the U.C.C. because the claim was fundamentally based on the contract principles embodied there. In Alloway v. General Marine Industries, the Court extended the economic loss rule to transactions involving individual consumers because the U.C.C. protects all buyers from economic loss arising out of the purchase of a defective product. The Court also noted that other statutory contractual remedies, such as the Consumer Fraud Act, protect consumers against economic loss. (pp. 11-15)

2. In enacting the Products Liability Act and codifying the economic loss rule within the definition of "harm" found in N.J.S.A. 2A:58C-1b(2), the Legislature agreed with the designation of the line that divides tort and contract remedies. The economic loss rule is an established limitation on recovery through tort-based theories. (pp. 15-16)

3. In recent years, federal courts, including those applying New Jersey law, have used the integrated product doctrine to extend the economic loss rule to preclude tort-based recovery when a defective product is incorporated into another product which the defective product then damages. Those courts have concluded that "harm to the product itself" means harm to whatever else the defective product became integrated into. (pp. 16-17)

4. In Marrone v. Greer & Polman Construction, Inc., the Appellate Division applied the integrated product doctrine to bar a homeowner's Products Liability Act claim for consequential damages involved in replacing an EIFS exterior, which had damaged portions of the home. That panel reasoned that "the house is the 'product,' and it cannot be subdivided into its component parts" to support a Products Liability Act claim. The court concluded that EIFS was not separate from the house, but was integrated into it, therefore making the EIFS and the house one "product" for purposes of the Act's definition of harm; thus, any damage the EIFS caused to the structure of the house was damage to the "product" itself, and plaintiff was barred from recovery by the economic loss rule. (pp. 18-20)

5. Whether or not the Legislature considered a home to be a product when it excluded the sellers of real estate from the definition of product sellers, plaintiffs purchased the home from its prior owners, not a product seller or manufacturer. Thus, the issue is not whether a home is a product, but whether a product like EIFS, which causes damage to a house, was sufficiently integrated into the home to become a part of it for purposes of broadly applying the economic loss rule. (pp. 20-22)

6. A product that is merely attached to a structure is not necessarily an integrated part. For example, California courts have declined to apply the integrated product doctrine to products used in building houses, such as windows, holding that the economic loss rule does not necessarily bar recovery in tort for damage that a defective product causes to other portions of the home. Here, the Court likewise concludes that the EIFS, which was affixed to the exterior walls to create a moisture barrier, was not an integral part of the house. However, the economic loss rule precludes recovery under the Products Liability Act for damage to the EIFS itself. Plaintiffs' recovery is limited to damages the EIFS caused to the house's structure or its surroundings. (pp. 22-24)

7. Plaintiffs argue that because they are non-commercial purchasers with no contract remedy, the Court should find a tort-based cause of action within the Products Liability Act that would permit them to recover the costs of removing the EIFS. The essential focus of the Products Liability Act is providing a remedy for the harm that a defective product causes to people or property. It was not enacted to create an expansive tort remedy that would become available if a plaintiff had no contract remedy. In light of the purposes of the Products Liability Act, there is no room to expand it to create a new remedy for plaintiffs' assertions that the product, EIFS, failed to perform as expected. (pp. 25-27)

8. The economic loss rule, as embodied in the Act's definition of harm, precludes plaintiffs from recovering any damages for harm that the EIFS caused to itself. However, because the EIFS was not fully integrated into the structure of the house, to the extent that it caused damage to the house or its immediate surroundings, plaintiffs retain a cause of action against the product's manufacturer. (p. 28)

The judgment of the Appellate Division is REVERSED to the extent that it concluded that plaintiffs were precluded from pursuing any remedy under the Products Liability Act. The matter is REMANDED for further proceedings consistent with the Court's opinion.

JUSTICE RIVERA-SOTO, CONCURRING IN PART AND DISSENTING IN PART, agrees with the majority to the extent it concludes that the economic loss doctrine bars recovery in this case, but he cannot join in the unexplained conclusion that an exterior finish system that is permanently applied to a home's exterior is not "integrated" into the structure.

CHIEF JUSTICE RABNER and JUSTICES LONG, LaVECCHIA, ALBIN, and WALLACE join in JUSTICE HOENS's opinion. JUSTICE RIVERA-SOTO has filed a separate opinion, concurring in part and dissenting in part.

The opinion of the court was delivered by: Justice Hoens

Argued January 5, 2010

The Products Liability Act, N.J.S.A. 2A:58C-1 to -11, established a unified theory of recovery for harm caused by products. In enacting that statute, our Legislature carefully defined the kinds of harm needed to support a recovery, specifically embracing a long standing common law theory known as the economic loss rule. N.J.S.A. 2A:58C-1b(2). In this appeal, we consider the continuing viability of the economic loss rule and its application to a claim arising out of the purchase of a residence, from its original owners, which had been constructed with an allegedly defective exterior finishing system. That context sets this case apart from our existing jurisprudence, in which we considered the remedies available to direct purchasers of products. This dispute, by distinguishing secondary purchasers from those with clearly available contract remedies against the manufacturer of the allegedly defective product, thus presents the question of whether, and in what circumstances, those remote purchasers should be permitted to pursue a tort remedy against that manufacturer.

This appeal also calls upon the Court to consider whether we will adopt the integrated product doctrine, devised in the federal courts, as a corollary to the economic loss rule. Were we to do so, and were we to conclude that the exterior finishing system is indeed integrated into the home itself, the effect would be to preclude these plaintiffs, and any other similarly situated home purchaser, from pursuing products liability relief against the manufacturer of an allegedly defective product affixed or adhered to the outside of the home for damage done by the product to the home.

Our consideration of these questions, and of the policies expressed by our Legislature in the governing statute, compels us to conclude that the integrated product doctrine does not apply to the facts before this Court, but that the economic loss rule limits plaintiffs' recovery to damage to the structure other than that sustained by the exterior finishing system itself. We therefore reverse and remand this matter to the Law Division for further proceedings.

I.

Many of the facts relevant to this appeal are contained in the Appellate Division's published majority and concurring opinions, see Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), as a result of which we will set forth only those facts necessary to explain our decision. Plaintiffs Robert, Jennifer, and Mary Sue Dean purchased a home in 2002 from its original owners. Id. at 455. The home had been built in 1995 by defendant Barrett Homes, Inc., with an Exterior Insulation and Finish System (EIFS), which was designed and manufactured by defendant Sto Corporation (Sto). Ibid. Traditional EIFS, the kind featured on the Deans' home, is sometimes called synthetic stucco. It consists of an adhesive, an expanded polystyrene board, a ground coating with reinforcing fiberglass fabric, a primer, and a synthetic plaster finish coating. Id. at 457. When it is affixed to the exterior of a building, EIFS operates as a combined insulation and wall finish system.

Prior to the closing, plaintiffs hired defendant HouseMaster, Inc. to perform a home inspection. Id. at 456. The inspection report raised questions concerning the EIFS and recommended that plaintiffs follow up with an expert or the product's manufacturer before proceeding with their purchase. Id. at 456-57. Plaintiffs, however, did not read the report prepared by HouseMaster and did not make the inquiries that report suggested. Ibid. At about the same time, plaintiffs learned that their insurer would not transfer their existing homeowner's policy to the new property, purportedly because the insurer would not cover a stucco exterior. Id. at 456. Undeterred, and without any further investigation of the EIFS, plaintiffs obtained insurance from another carrier, proceeded with the purchase, and moved into the home in May 2002. Id. at 457.

Plaintiffs assert that approximately one year after moving in, they first noticed black lines on the exterior of their home and thought that there might be a problem with the home's finishing system. Ibid. Plaintiffs assert that they then began to investigate and learned that if moisture penetrates through the EIFS, it has no means of escape. Id. at 457-58. Moisture penetrating the EIFS therefore becomes trapped behind it and eventually causes the underlying structure to rot or to develop mold. Id. at 458. They further assert that they hired an industrial hygienist, who inspected their home and found toxic mold that he blamed on leaks in the EIFS. Ibid. Although plaintiffs have never claimed that they sustained any personal injuries caused by the mold, they eventually had all of the EIFS removed and replaced. Ibid.

Plaintiffs believe that EIFS is defective because it lacks a "secondary weather protection behind the cladding to protect the underlying moisture sensitive substrate" and has "no means of drainage of water which may penetrate the wall assembly." Ibid. Moreover, they assert that it is virtually inevitable that water will penetrate the EIFS because moisture can enter through any break in the EIFS, including window cracks, holes created during cable installation, or failed sealing joints.

In May 2004, plaintiffs filed their complaint, in which they asserted claims against several defendants sounding in negligence, breach of express and implied warranties, breach of contract, Consumer Fraud Act violations, common law fraud, and strict products liability. Id. at 459. Eventually, plaintiffs resolved their claims against all of the defendants except Sto.

Following discovery, defendant Sto moved for summary judgment. Ibid. In granting that motion, the motion court rejected plaintiffs' products liability claim against defendant Sto, because plaintiffs were seeking damages for purely economic losses. Ibid. That is, the motion court reasoned that although plaintiffs claimed that the EIFS was defective, they sought to recover the cost of replacing it, resulting in a claim that was statutorily barred. Ibid. Because neither plaintiffs nor anyone else had sustained an injury ...


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