Justices: South Bend condo HOA can move forward with faulty construction lawsuit

A homeowners association made up of condominium owners in a South Bend condo complex can move forward with its claims of faulty construction work against two of the four defendants named in its original lawsuit after a reversal by the Indiana Supreme Court.

The case of The Residences at Ivy Quad Unit Owners Association, Inc. v. Ivy Quad Development, LLC, et al., 21S-PL-294, involves the Ivy Quad condos, a 60-plus-unit residential condo complex in South Bend.

In the fall of 2017, residents noticed issues at the complex, such as “crumbling and cracking concrete and water infiltration.”

The Residences at Ivy Quad Unit Owners Association Inc. hired an engineering firm to investigate the concerns. The firm inspected the complex multiple times and ultimately issued five reports that identified a wide range of construction and design defects.

As a result, the HOA, on the unit owners’ behalf, sued several parties involved in the development, design, construction or sale of Ivy Quad, including Matthews LLC, DMTM Inc., David Matthews and Velvet Canada. The complaint included claims for breach of the implied warranty of habitability and for negligence.

The defendants responded with a motion to dismiss under Indiana Trial Rule 12(B)(6), arguing that they were not subject to the implied warranty of habitability because they were not builder-vendors, and that the negligence claim was barred by the economic loss doctrine.

Following a hearing, the St. Joseph Superior Court granted the motion and dismissed the case.

On a subsequent appeal, the Court of Appeals of Indiana reversed and remanded for further proceedings.

The Supreme Court granted transfer, then ruled in a Tuesday opinion that the HOA alleged facts supporting a “builder-vendor” status for two of the defendants — David Matthews and Velvet Canada — so those alleged facts were capable of supporting relief on its implied warranty of habitability claim.

“The complaint includes sufficient facts to support a showing that David Matthews and Velvet Canada are ‘builder-vendors’ because the HOA alleged that both took part in ‘the design, construction, development and sale of Ivy Quad,’” Indiana Chief Justice Loretta Rush opined for the high court. “In other words, each defendant was purportedly involved in both building and selling residences at Ivy Quad for profit.

“However, the same is not true for the other two Matthews Defendants,” Rush continued. “Though the HOA alleged that DMTM, Inc. and Matthews, LLC were involved in the ‘design’ and ‘construction’ of Ivy Quad, it did not assert that either was involved in selling the residences. As a result, the face of the complaint reveals no set of circumstances under which DMTM, Inc. or Matthews, LLC could qualify as a builder-vendor, and thus neither can be held liable for breach of the implied warranty of habitability.”

As for the negligence claim, the Supreme Court found that though the economic loss doctrine may preclude recovery as the facts mature, dismissal at this stage is premature.

“First, at this juncture, the HOA’s alleged damages do not trigger application of the economic loss doctrine,” Rush wrote. “The complaint seeks recovery not only for ‘expense incurred in hiring experts, redesigning of Ivy Quad to correct the deficiencies, and reconstructing, repairing, and restoring Ivy Quad’ — which would, indeed, be ‘purely economic’— but also for ‘damage to other property, including property inside individual units and property other than the building itself.’  Because the complaint contains allegations of ‘other property’ damage — namely, damage to something other than Ivy Quad itself — the economic loss doctrine does not bar recovery.

“… Second, even if the HOA alleged only purely economic damages, dismissal of the negligence claim is premature for an additional reason,” Rush continued. “As noted above, the economic loss doctrine precludes tort recovery when participants in a construction project are connected through a chain of contracts. But here, the HOA’s complaint includes nothing about if, or to what extent, the parties were connected contractually.

“Accordingly, we cannot conclude that the parties ever had the opportunity to ‘allocate their respective risks, duties, and remedies.’ … And without a factual basis demonstrating any contractual relationship between the HOA and the Matthews Defendants, it would be unjust to foreclose a tort theory of relief based on the economic loss doctrine.”

All justices concurred. The case was remanded for further proceedings.