Negligent misrepresentation, economic loss rule, consumer protection. Certifying engineer not liable for failed septic system.

Glassford v. Dufresne & Associates, P.C., 2015 VT 77 (12-Jun-2015)

DOOLEY, J. Plaintiffs appeal a decision denying summary judgment to plaintiffs and granting summary judgment to defendant Dufresne & Associates, P.C. on plaintiffs’ claims of negligent misrepresentation and violation of the Vermont Consumer Protection Act (CPA). The superior court held that plaintiffs’ negligent misrepresentation claim failed because plaintiffs did not see defendant’s certification until the proceedings in this case and therefore did not rely on the alleged misrepresentation. With respect to the CPA claim, the court held that the claim failed because the parties did not contract for a sale of goods or services as required under the CPA. Plaintiffs appealed. We affirm.

Plaintiffs claim only economic losses, which usually are precluded in a tort action. Plaintiffs argued below that their case fits into an exception to the economic loss rule where a special relationship exists between the parties, particularly in the context of professional malpractice. According to plaintiffs, that special relationship was created by defendant’s statutory duty to file a certificate with the Agency. The superior court found the proper framework for plaintiffs’ claim under the common law tort of negligent misrepresentation, as defined in Restatement (Second) of Torts § 552 (1977), which provides a cause of action for “information negligently supplied for the guidance of others.” We previously have adopted this section of the Restatement for claims of negligent misrepresentation, and do so here. We conclude Restatement § 552 governs the claims of negligent misrepresentation and that plaintiffs do not have a valid claim under § 552. The superior court properly granted summary judgment for defendant and properly denied summary judgment for plaintiffs.

Liability for negligent representation under § 552 (2) attaches “only to those persons for whose benefit and guidance it is supplied.” Restatement § 552 cmt. h. Plaintiffs are homeowners who purchased their home direct from the builder. The builder hired defendant to certify that the on-site mound sewage disposal system constructed for the home satisfied state permitting requirements. Plaintiffs were not the intended recipient of the certificate. The certificate was provided to the Agency for determining compliance with the permitted design and was not intended for use by homebuyers in deciding whether or not to affect a purchase. That homebuyers, like plaintiffs, may at some point obtain the information is merely incidental and does not create a cause of action under subsection (2).

Liability for negligent representation under § 552 (3) attaches to “one who is under a public duty to give the information” and extends to loss suffered by any of the class of persons for whose benefit the duty is created.” Plaintiffs’ claim fails under subsection (3), because plaintiffs demonstrated no actual, or direct, reliance on the certificate.

A negligent misrepresentation claim requires a plaintiff to rely directly on the defendant’s misrepresentations and not on a third party’s reliance on such information. Plaintiffs never saw the certificate until after the sewage disposal system failed. The broadened liability under the public duty exception does not eliminate this need for direct reliance.

It is true the plaintiffs’ attorney viewed the certificate and prepared the title report, and plaintiffs relied on the marketability of the title in their decision to close on the transfer of title to their home. But the closing attorney’s interest in defendant’s certificate was based entirely on his opinion that the existence of defendant’s certificate was a requirement of good title under Bianchi v. Lorenz. If the attorney’s reliance on the certificate could be imputed to plaintiffs, it would only be reliance that plaintiffs obtained good title, not reliance sufficient to satisfy § 552. Actual reliance, as required under § 552, is a subjective state of mind, focusing on what a plaintiff “considered to be important in deciding to enter into the transaction in which the misrepresentation occurred,”

Under the CPA a plaintiff may recover damages only from the “seller, solicitor, or other violator.” § 2461(b). Relying on State v. Stedman, 149 Vt. 594, 547 A.2d 1333 (1988), as well as decisions from other jurisdictions, we have held that a person cannot be liable as an “other violator” unless he or she directly was involved in the transaction that gave rise to liability. Knutsen v. Dion, 2013 VT 106, ¶¶ 19-20 195 Vt. 512, 90 A.3d 866,. In Knutsen, we rejected plaintiffs contention that the Vermont Association of Realtors was an “other violator” because it placed a form which contained unfair provisions on its website.

Here there is no allegation that defendant had any interaction with plaintiffs. Defendant did not supply the permit to plaintiffs or any other prospective purchaser. The law required that the certificate be sent only to the government agency that issued the permit. There is no allegation that the seller used the certificate as part of its sales pitch, and no allegation that defendant had any part in the sales. The certificate was unrelated to the sale. The Knutsen standard for CPA liability requires that a person be directly involved in the transaction that gives rise to the claimed liability. That standard is not met.

ROBINSON, J., dissenting. Because I believe that the majority draws an artificial distinction between the significance of the certifications for marketable title and their significance in verifying that the wastewater system has been inspected and was constructed as designed, and because I do not believe the majority has afforded plaintiffs the benefit of favorable inferences from this summary-judgment record, I respectfully dissent.

If the lawyer had known the statements were inaccurate, and for purposes of this summary-judgment motion we assume that they were, a factfinder could most certainly infer that the lawyer would not have advised the plaintiffs to proceed without taking further steps to ensure that the wastewater system was properly constructed. By inferring as a matter of law that the truth of the statements in the certificate was of no consequence to plaintiffs’ lawyer—who had a fiduciary duty to them in connection with this transaction—the majority has failed to draw reasonable inferences in favor of the nonmoving party.

---

A Note on recovery for economic loss based on fraudulent or negligent misrepresentation.

Section 552 of the Restatement permits recovery for “pecuniary loss” caused by justifiable reliance upon false information negligently supplied for the guidance of others in their business transactions by one acting in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest.

On its face the Restatement allows recovery against both professsionals and non-professionals for certain negligently caused economic loss. Fraud is another tort that permits recovery for economic loss, without physical injury.

Some have argued that the economic loss rule trumps both Section 552 and fraud cases generally. R.C. Anzivino, The Fraud in the Inducement Exception to the Economic Loss Doctrine, 90 Marq. L. Rev. 921, 931-34 (2007).

Without controlling Vermont precedent the local federal court has allowed fraud in the inducement and constructive fraud claims to proceed. Sherman v. Ben & Jerry's Franchising, Inc., No. 1: 08-CV-207 (D. Vt. Aug. 10, 2009); Mount Snow, Ltd. v. Alli, No. 2: 12-cv-022-wks (D. Vt. May 30, 2012).
The local federal court, in contrast, on three occasions has applied the economic loss doctrine to bar negligent misrepresentation claims involving only economic loss, Hunt Constr. Group, 2008 U.S. Dist. LEXIS 93754, at *15-16; Vt. Country Foods, Inc. v. So-Pak-Co, Inc., No.1 :02-CV-83 (D. Vt. Jul. 28, 2004) (unpublished order), aff’d, Vt. Country Foods, Inc. v. So-Pak-Co., No. 05-3429, 170 Fed. Appx. 756 (2d Cir. 2006) (summary order); City of Burlington v. Zurn Indus., 135 F. Supp. 2d 454,461-62 (D. Vt. 2001).

The Second Circuit certified this issue to the Vermont Supreme Court but the case settled without a ruling. Hunt Construction Group, Inc., v. Brennan Beer Gorman / Architects, P.C..  607 F.3d 10 (2d Cir 2010) ( certifying the question, "Does the economic loss doctrine apply to claims of negligent misrepresentation?")  

Today, the Glassford Court implicitly holds the economic loss rule does not preclude a negligent misrepresentation claim. 

The Court mentions the economic loss rule and its professional services exception, and then analyzes and strictly confines the potential liability of the defendant engineer to the bounds of the Restatement § 552. It refuses to examine the potentially broader tort liability for breach of professional duty (malpractice). 

This is a consistent pattern. The Court has never expressly applied the "professional services" exception to the economic loss rule to allow recovery in tort for economic loss. See Hunt Const. v. Brennan Beer Gorman/Architects, 607 F.3d 10 ( 2nd Cir 2010)(“we know of no case in which the Vermont Supreme Court has actually found the exception to apply”); see, e.g., Walsh v. Cluba, 2015 Vt 2, ¶ 30 (refusing to apply exception to allow owner to recover from occupant where no professional relationship such as as doctor-patient or attorney-client exists); EBWS, LLC v. Britly Corp., 2007 VT 37, ¶¶ 31–32, 181 Vt. 513, 524–25, 928 A.2d 497, 508 (design build contractor not liable for economic loss due to negligent design because it did not provide specialized professional services); Long Trail House Condo. Ass’n v. Engelberth Constr., Inc., 2012 VT 80, ¶ 22, 192 Vt. 322, 59 A.3d 752 (general contractor not liable in tort for economic loss because it was hired to perform the services of a contractor, not that of an engineer, architect or other professional); Wentworth v. Crawford & Co., 174 Vt. 118, 127 (2002) (provider of vocational rehabilitation services hired by employer not within exception because plaintiff failed to "identify any professional standards to which entities like [the defendant] must adhere"); Springfield Hydroelectric Co. v. Copp, 172 Vt. 311, 316, 779 A.2d 67, 71 (2001 ) (employees of the power exchange "did not hold themselves out as providers of any licensed professional servic.").