Section 6.20 of the Restatement (Third) of Property: Servitudes (2000), lists a series of duties that a condominium developer owes to a condo association and its members.
According to Section 6.20:
“Until the developer relinquishes control of the association to the members, the developer owes the following duties to the association and its members:
“(1) to use reasonable care and prudence in managing and maintaining the common property;
“(2) to establish a sound fiscal basis for the association by imposing and collecting assessments and establishing reserves for the maintenance and replacement of common property;
“(3) to disclose the amount by which the developer is providing or subsidizing services that the association is or will be obligated to provide;
“(4) to maintain records and to account for the financial affairs of the association from its inception;
“(5) to comply with and enforce the terms of the governing documents, including design controls, land-use restrictions, and the payment of assessments;
“(6) to disclose all material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and
“(7) to disclose all material facts and circumstances affecting the financial condition of the association, including the interest of the developer and the developer's affiliates in any contract, lease, or other agreement entered into by the association.”
In a case where a condo association pursued tort claims against a developer for water seepage and building subsidence – and the developer argued the claims were barred by the economic loss doctrine – the Utah Supreme Court adopted Section 6.20’s “limited fiduciary duty” as the source of an independent duty that was “outside the scope of the economic loss rule.” Davencourt at Pilgrims Landing Homeowners Ass’n v. Davencourt at Pilgrims Landing, LC, 2009 WL 3151197 (Utah) (October 2, 2009).
Davencourt at Pilgrims Landing, LC – the developer of a planned unit development in Utah – was managed by its member, LeGrand Woolstenhulme.
The developer, acting through Woolstenhulme, initially controlled the Davencourt at Pilgrim’s Landing Townhome Owners’ Association.
Several years after the association was turned over to the purchasers, water began seeping into the buildings.
According to the association, the developer had been warned, before construction, that the project was on collapsible subsurface soils that would subside if not properly prepared.
Post-construction subsidence allegedly caused sever damage to the structures, and the association sued the developer and Woolstenhulme, among others.
The claims against the developer and Woolstenhulme included negligence, negligent misrepresentation, misrepresentation and nondisclosure, and breach of fiduciary duties.
Invoking the economic loss rule, the trial judge dismissed these claims – but the Utah Supreme Court reversed. Here are highlights of the Supreme Court’s analysis (with omissions not noted in the text):
The economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care.
Absent physical property damage (i.e., damage to other property) or bodily injury, this doctrine prohibits recovery of economic losses. Economic losses are defined as:
Damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits – without any claim of personal injury or damage to other property – as well as the diminution in the value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold.
Where the economic loss rule is at issue, the initial inquiry becomes whether a duty exists independent of any contractual obligations between the parties.
If we find that an independent duty exists under the law, the economic loss rule does not bar a tort claim because the claim is based on a recognized independent duty of care and thus does not fall within the scope of the rule.
The question of whether a duty exists is a question of law and involves the examination of the legal relationships between the parties, an analysis of the duties created by these relationships, and policy judgments applied to relationships.
The Limited Fiduciary Duty Owed by a Developer in Control of a Homeowner’s Association Falls Outside the Scope of the Economic Loss Rule
The Association argues that the district court erred where it ruled that the Developer and Woolstenhulme owed no duty or that “any duty the developer had to the homeowners association would essentially be to itself.”
The Association emphasizes that because the Developer and Woolstenhulme established and initially operated the Association, they owed the Association a fiduciary duty that lies outside the economic loss rule.
We agree to an extent with the Association.
We have yet to consider what, if any, duty a developer owes where it establishes and initially controls a homeowners association.
The Association urges us to impose a broad fiduciary duty under the Utah Revised Nonprofit Corporation Act. The Act requires directors and officers of a nonprofit corporation to discharge their duties in good faith, with the care of an ordinarily prudent person in a like position under similar circumstances and according to the best interests of the corporation.
While the Act may serve as a basis for imposing a broad fiduciary duty in a nonprofit setting, the inherent conflict that a developer faces in promoting and marketing property for a profit, while simultaneously ensuring the interests of a homeowners association and its members, causes us to look elsewhere.
The Restatement (Third) of Property offers guidance. It recognizes that a developer owes certain limited duties to an association and its members. Section 6.20 of the Restatement provides:
“Until the developer relinquishes control of the association to the members, the developer owes the following duties to the association and its members:
“(1) to use reasonable care and prudence in managing and maintaining the common property;
“(2) to establish a sound fiscal basis for the association by imposing and collecting assessments and establishing reserves for the maintenance and replacement of common property;
“(3) to disclose the amount by which the developer is providing or subsidizing services that the association is or will be obligated to provide;
“(4) to maintain records and to account for the financial affairs of the association from its inception;
“(5) to comply with and enforce the terms of the governing documents, including design controls, land-use restrictions, and the payment of assessments;
“(6) to disclose all material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and
“(7) to disclose all material facts and circumstances affecting the financial condition of the association, including the interest of the developer and the developer’s affiliates in any contract, lease, or other agreement entered into by the association.” Restatement (Third) of Property: Servitudes § 6.20 (2000).
We agree with this articulation of the duties owed in such a relationship and adopt this section of the Restatement.
We also embrace the Restatement’s concept of the fine line drawn between a typical fiduciary duty and this limited fiduciary duty.
This concept arises from the nature of the developer’s relationship with the association and its members. The Restatement expounds that “treating the developer and its appointees to the board as trustees overstates the fiduciary component of the relationship.” Id. cmt. a.
Given the developer’s self-interest, “the developer cannot be expected to act solely in the interests for the association and the homeowners. Conflicts of interest are inherent in the developer’s role while it retains control of the association.” Id.
While the developer thus should not be a fiduciary in the broadest sense, we are nonetheless convinced that the developer’s control in this nonprofit association requires certain interests of the members and the association be protected. This is achieved by the limited fiduciary duty.
In adopting this limited fiduciary duty, we recognize that it constitutes a newly-recognized independent duty of care in Utah. This recognition comports with our past treatment of independent duties. For example, we have imposed an independent duty on real estate agents, who, though not occupying a fiduciary relationship, are expected to be honest, ethical, and competent and have a direct relationship with purchasers.
The limited fiduciary duty between a developer and an association or its members also constitutes a type of special relationship that gives rise to an independent duty. See, e.g., Grynberg v. Agri Tech, Inc., 10 P.3d 1267, 1271 (Colo.2000) (citing to cases wherein fiduciary relationships, such as attorney-client relationship, physician-patient relationship, or insurer-insured relationship, “automatically triggered independent duties of care”).
And despite the recovery of what would otherwise be considered economic loss damages, claims arising under a fiduciary duty, similar to fraud claims, lie outside the scope of the economic loss rule.
Therefore, because a limited fiduciary duty constitutes an independent duty of care, tort claims brought under this duty fall outside the scope of the economic loss rule.
This limited fiduciary duty does not permit any and all tort claims to be brought. Instead, only those tort claims that stem from this independent, limited fiduciary duty are permitted.
Recovery by the Association is therefore restricted to the common areas.
The Association may only bring its claims for negligence and negligent misrepresentation in relation to the Developer’s and Woolstenhulme’s failures to use reasonable care and prudence in managing and maintaining the common property, to establish a sound fiscal basis for the Association by imposing and collecting assessments and establishing reserves for the maintenance and replacement of common property, and to disclose all material facts and circumstances affecting the condition of the property that the Association is responsible for maintaining.
Consequently, the claims of negligence per se and nuisance, which the Association predicated respectively on noncompliance with the building code and the intrusion of water, do not arise from the fiduciary duty and are thus precluded by the economic loss rule.
Accordingly, we hold that the Developer and Woolstenhulme owed an independent duty to the Association, and we reverse the district court on this point.
The Association may bring its claims for negligence and negligent misrepresentation against the Developer and Woolstenhulme insofar as the claims stem from the limited fiduciary duty owed.
On remand, certain factual questions regarding the scope of the fiduciary duty should be resolved, including when the Developer and Woolstenhulme relinquished control of the Association, an act that would mark the termination of the duty owed.
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