Pulte Home Corp. v. Parex, Inc.

WILNER, J. This action began as a product liability case involving a defective building material intended for use in residential construction. The product was a synthetic exterior stucco finish known as the Exterior Insulation and Finish System (EIFS). Between 1994 and 1998, petitioner, Pulte Home Corporation, built 77 homes using that system. When the system failed to prevent water penetration, as it was allegedly designed and warranted to do, and some of the home buyers made claims, Pulte corrected the problem and took an assignment of the home buyers’ rights.

Pulte claimed that the'77 homes had to be completely “reclad” at an average cost of $50,000 per home. The appeal now before us arises from Pulte’s effort to recover its losses, which, together with interest and various charges, it calculated to be in excess of $5.2 million. As the result of settlements with three of the defendants, certain rulings by the Circuit Court for Montgomery County, and ³⁷¹ additional rulings by the Court of Special Appeals, Pulte ended up with only $1,450,000, of which half came from its settlements, and it contends that it is entitled to substantially more. We shall affirm the judgment of the Court of Special Appeals.

BACKGROUND In 2001, Pulte, in part on its own behalf and in part as assignee of the home buyers, filed suit in the Circuit Court for Montgomery County against four categories of defendants. One defendant was respondent Parex, Inc., which designed, manufactured, and, through distributors, sold the EIFS product. The second category consisted of two alleged distributors of the product—American EIFS Stone & Stucco, Inc. (American EIFS) and American Stucco and Stone, L.L.C. (American Stucco).

American EIFS, which later traded as American Stucco, obtained the product from Parex and supplied it either to Pulte or to the third set of defendants—Coronado Corporation (Coronado) and CSS, L.L.C. (CSS). Those companies, acting as subcontractors of Pulte, installed the product in the Pulte-built homes. Finally, Pulte sued Bernard and Benjamin Franks, the alleged owners, officers, directors, or controlling parties of American EIFS, American Stucco, Coronado, and CSS.

They were sued, essentially, as the alter ego of their companies, who exercised sufficient control over them to justify “piercing the corporate veil.” Pulte’s case proceeded to the point of trial on its Third Amended Complaint, which contained the following 15 counts: (1) Count 1 alleged negligence against all defendants except Parex. Coronado, CSS, and the Franks—the installers—were charged with improper installation of the EIFS product; the complaint against American EIFS and American Stucco—the distributors—was their failure to obtain a written warranty that was offered by Parex. (2) Count 2 charged Coronado, CSS, and the Franks with various breaches of the subcontracts entered into with Pulte, including the obligation to perform in a workmanlike manner ³⁷² and to require that suppliers indemnify Pulte from losses arising from their materials. (3) Count 3 charged all parties except Parex with breach of express warranties.

The distributors allegedly warranted the EIFS products they sold, and the installers warranted that the products would be free from defects and would be properly installed. (4) Count 4 charged all defendants with breaches of an implied warranties of merchantability and that the EIFS product was fit for the particular purpose of residential construction. (5) There is no Count 5 in the Third Amended Complaint. Count 6 charged Parex with negligence and strict liability in the design of the EIFS product—failure to design the product to be free from defects that prevented the product from properly performing and strict liability because the product was inherently defective in permitting water intrusion that caused damage to other property.

(6) Count 7 alleged negligence and strict liability against all defendants for failure to warn of the defects in the EIFS product. (7) Count 8 alleged actual fraud against Parex—false representations and concealments on which Pulte relied in using the product. (8) Count 9 charged all defendants with negligent misrepresentation concerning the ability of the EIFS product to prevent water intrusion, the nature of the product, and its life expectancy and maintenance. (9) Count 10 alleged constructive fraud against all defendants, based on the alternative supposition that the misrepresentations made by them were made “negligently or innocently” but with the intent that Pulte rely on those misrepresentations.

(10) Count 11 charged Coronado, CSS, and the Franks with actual fraud concerning Coronado’s financial problems and the relationship between Coronado and CSS, as a result of which, ³⁷³ both companies were left with insufficient assets to honor their indemnity obligations. (11) Count 12, captioned “Negligent Misrepresentation,” charged Coronado, CSS, and the Franks with knowingly and intentionally making material misrepresentations regarding Coronado’s financial problems and the relationship between Coronado and CSS. (12) Count 13 charged Coronado, CSS, and the Franks with constructive fraud, on the basis that the misrepresentations regarding Coronado and CSS may have been made negligently or innocently. (13) Count 14 charged Parex, American EIFS, American Stucco, and the Franks with false advertising in violation of a Virginia statute.

(14) Count 15 sought recovery against Coronado, CSS, and the Franks for contractual indemnification under the subcontracts with Pulte. (15) Finally, Count 16 claimed subrogation against all defendants, based on Pulte’s having repaired the homes in which the defective product was installed and thus being subrogated to the rights that the home buyers had. The intermediary defendants—American EIFS, American Stucco, Coronado, CSS, and the Franks—each filed cross-claims against Parex and, to some extent, against each other. The amended cross-claims of Coronado and CSS were similar in nature.

They alleged, in pertinent part: (1) As subcontractors of Pulte, Coronado and CSS purchased the EIFS product from American EIFS and American Stucco, which purchased it from Parex; (2) At the time American EIFS, American Stucco, and Parex sold the product, they expressly and impliedly warranted that the product was free from defects, fit for the purpose of residential construction, and merchantable, and should it be determined that the product was defective, the cross-claimants would be entitled to indemnification from American EIFS, ³⁷⁴ American Stucco, and Parex based on their breach of warranties; and (3) Should Pulte succeed on a theory of negligence, the cross-claimants’ negligence was passive while that of American EIFS, American Stucco, and Parex was active, thereby entitling the cross-claimants to (i) indemnity, and (ii) contribution as a joint tortfeasor. In its cross-claim against Parex, American EIFS averred that it was a distributor of EIFS product used in the homes constructed by Pulte and that it purchased that product from Parex. It alleged that, at the time Parex sold the product, it expressly and impliedly warranted that the product was free from defects, that it was fit for residential construction, and that it was merchantable. As did Coronado and CSS, American EIFS claimed that, to the extent Pulte was entitled to recover from it based on the product being defective or on the ground of negligence, American EIFS was entitled to indemnification and contribution from Parex and to judgment against Parex for breach of contract.

American Stucco’s cross-claim, which was against Parex and CSS, sought (1) indemnification from them with respect to any portion of Pulte’s damages under the doctrines of strict liability, breach of express or implied warranty as to fitness or merchantability, active/passive negligence, and equitable indemnification/subrogation, and (2) contribution as joint tortfeasors. As the result of rulings on motions to dismiss and for summary judgment, all of Pulte’s claims against Parex, except the false advertising claim in Count XIV, were dismissed prior to trial, many of them because of a lack of privity between Pulte and Parex. In addition, all of Pulte’s claims against American Stucco were dismissed on the ground that American Stucco was not a properly formed entity when the product was installed in the various homes, and a number of claims against Coronado, CSS, and American EIFS were also dismissed. The correctness of those rulings is not challenged in this appeal.

What remained open for trial were: (1) As to Parex, only Count XIV (false advertising); ³⁷⁵ (2) As to Coronado, Counts I, II, III, IX, X, XII, XIII, and XV; (3) As to CSS and the Franks, the same counts as against Coronado except Count III; and (4) As to American EIFS, Counts I, III, IX, and X. On the first morning of trial, Pulte entered into settlement agreements with American EIFS, Coronado, and CSS, and their respective insurers. Those agreements provided, in pertinent part, that: (1) CSS and Coronado admitted Pulte’s allegations in the remaining counts against them, which embraced Count I (negligence). Those defendants agreed to the entry of judgment in the amount of $4,079,772 plus $611,966 for “overhead allowance,” and $975,762 in pre-judgment interest, for a subtotal of $5,667,500, plus costs and reasonable attorneys’ fees. (2) American EIFS admitted the allegations in the remaining counts against it and agreed to the entry of judgment in the amount of $3,751,905, plus $562,786 for “overhead allowance,” and pre-judgment interest of $914,609, for a subtotal of $5,229,300, plus costs and reasonable attorneys’ fees.

(3) CSS and American EIFS agreed to a consent judgment in favor of CSS on its cross-claim against American EIFS in the amount of $5,229,300, plus costs and attorney’s fees. (4) Pulte dismissed all of its claims against Bernard and Benjamin Franks. (5) Pulte dismissed with prejudice Counts XI (fraud), XII (negligent misrepresentation), and XIII (constructive fraud) against Coronado and CSS. (6) Pulte agreed not to execute on the judgments against American EIFS, Coronado, and CSS or on the CSS cross-claim judgment against American EIFS.

(7) The insurers of those defendants agreed to pay, and did pay, Pulte $725,000. There was no breakdown as to how much was paid on behalf of any defendant or with respect to any claim; it was an aggregate sum on behalf of all three. ³⁷⁶ (8) The settling defendants assigned to Pulte all claims, rights, and actions they had against Parex or any third parties that arose from the facts related in the lawsuit, including all contractual, breach of warranty, and other claims against Parex, and they agreed to cooperate with Pulte in Pulte’s pursuit of those claims by making the Franks and other expert witnesses available to Pulte. The case proceeded to trial on Pulte’s claim against Parex under Count XIV and on the remaining cross-claims by American EIFS, American Stucco, Coronado, or CSS against Parex that had been assigned to Pulte pursuant to the settlement agreements. At the end of the plaintiffs case, Parex moved for judgment on all of the claims against it.

As to Count XIV, Parex noted that, in order for liability to exist under the Virginia statute, Pulte was required to show that either it or the home buyers had relied on written advertising by Parex, and there was no evidence of any such reliance. The court agreed and dismissed that count for that reason. Pulte does not complain about that ruling. Parex regarded the assigned cross-claims as being for contribution as a joint tortfeasor and for indemnification.

It noted that, to be liable for contribution, Parex must be shown to be a joint tortfeasor, but that, by dismissing all tort claims made against it by Pulte, either directly or as assignee of the home buyers, the court had concluded that it had no tort liability to them and therefore could not be a joint tortfeasor with the distributors or installers. With respect to the claims for indemnification, Parex averred that, because, in their settlement agreements, Coronado and American EIFS had admitted liability to Pulte for their own negligence, they were not free of fault, and, not being free of fault, they had no indemnity claim against Parex. Alternatively, Parex argued that, even if indemnity claims survived, they would be limited to what the intermediaries actually paid. Parex urged that, because there was no privity between it and the installers (Coronádo and CSS), their only claim for indemnity would be against American EIFS, from ³⁷⁷ whom they obtained the product, and there was no evidence of what, if anything, American EIFS had paid to them.

Accordingly, none of them had an indemnity claim against Parex. The court’s ruling on the assigned cross-claims was announced ex temporaneously from the bench. The court did not mention the claims for contribution at all. It viewed the assigned cross-claims as resting on two theories—indemnification and implied warranty.

With respect to indemnification, the court appeared to accept Parex’s argument that the only indemnification claim was that which Coronado or CSS, the installers, had against American EIFS, the distributor, based on a defect in the product, and which American EIFS, to the extent of any payment to Coronado or CSS based on such a defect, would then have against Parex. The court concluded, however, that the evidence was lacking as to any such loss. The court assigned two reasons for that conclusion, the first being that Coronado was sued for negligence in the application of the product and that Pulte had failed to demonstrate how much of any loss sustained by Coronado was due to its own negligence in installation rather than by reason of any defect in the product. The second reason dealt with the lack of clarity in who Pulte or Coronado actually dealt with—whether it was CSS or American Stucco.

The court reached a different result with respect to what it regarded as the implied warranty theory of the cross-claims, as to which it held that privity of contract was not necessary and that the proof of damages was different. Pulte was suing as a consumer of the product, either in its own right or under the assignments from the home buyers, and the court was satisfied that it had sufficiently identified its damages to warrant submitting that theory to the jury. Although Pulte claims otherwise, there can be little doubt that the court dismissed all aspects of the assigned cross-claims based on an indemnity theory. It announced that “the claim fails.” It said that “the only remaining claim that exists is a claim by Coronado or CSS for breach of implied warranty of fitness for purpose and use, and the Court will allow the ³⁷⁸ case to proceed forward on that basis.” It said that “[t]he cross-claim of American EIFS is for indemnification ... and is out of the case.” When asked later to vacate that ruling, it announced: “The Court carefully considered the arguments ... [a]nd it is my view that my original ruling on the dismissal of the indemnity claims was correct.

And, as a result, the Court declines the motion to vacate and they will remain out of the case. On the other hand, the Court is not in accord with the defendants at this point and denies the motion for judgment on the warranty claims.” In conformance with those rulings, the court, at the conclusion of the case, instructed the jury, as to the cross-claims, only on a breach of implied warranty theory. It gave no instructions on indemnification. Indeed, the court rejected an instruction proposed by Pulte that characterized the cross-claims as a pass through of the cross-claimants’ liability to Pulte “under an indemnification theory of breach of implied warranty.” The instruction given was: “The plaintiff bears the burden of proof by a preponderance of the evidence that its alleged damages arose from a breach of implied warranty.

In other words, the plaintiff must demonstrate by a preponderance of the evidence that the damages it seeks were caused by an alleged defect in Parex’s product.” Consistent with that instruction, the special verdict sheet given to the jury dealt only with the elements of breach of implied warranty and damages flowing therefrom; it too made no mention of indemnity. One collateral issue submitted to the jury arose from a statute of limitations defense raised by Parex. As noted, the homes containing the EIFS system were built by Pulte commencing in 1994. The lawsuit was filed on June 14, 2001.

Parex asserted that Pulte’s claims were subject to the four-year statute of limitations set forth in Maryland Code, § 2-725 of the Commercial Law Article, Maryland’s version of the Uniform Commercial Code (UCC), which would bar implied ³⁷⁹ warranty claims with respect to homes sold prior to June 14, 1997. Pulte contended that the applicable period of limitations was three years, as prescribed in § 5-101 of the Cts. & Jud. Proc. Article, but that the period did not begin to run until the consent judgments were entered against the settling defendants.

Under that theory, none of the warranty claims would be barred. The court agreed with Parex and, in both a special instruction and on the special verdict sheet, directed the jury, if it found liability for breach of implied warranty, to identify, by number from an exhibit, each home incorporating a Parex product upon which there was delivery after June 14, 1997 and, as to each such house, to determine the damage suffered by CSS or Coronado. In response to these instructions and the issues enumerated on the verdict sheet, the jury found, in pertinent part, that (1) the EIFS system was unfit for the particular purpose for which it was intended and was defective, (2) the defective product was delivered to 23 homes after June 14, 1997, (3) the damages sustained by CSS or Coronado amounted to $50,000 per home, or a total of $1,150,000, and (4) Pulte was entitled to pre-trial interest. Upon that verdict, the court entered judgment for Pulte in the amount of $1,150,000 plus $279,380 in pre-trial interest, for a total of $1,429,380.

Neither side was happy with that result, so cross-appeals were filed. Pulte complained that the Circuit Court erred (1) in applying the UCC statute of limitations, and (2) in dismissing its assigned American EIFS and American Stucco indemnity claims and Pulte’s direct actions against Parex for breach of express warranty claim, breach of implied warranty, negligence, and legal subrogation. Parex raised nine issues, including the assertion that Pulte’s recovery under the cross-claims of CSS and Coronado must be limited to the $725,000 paid by them under the settlement agreement, and that the allowance of prejudgment interest was in error. In a reported opinion, the Court of Special Appeals rejected all complaints except two.

It concluded that the Circuit Court had erred in entering summary judgment in favor of Parex on ³⁸⁰ the implied warranty claims brought by Pulte as assignee of American EIFS, but it also held that Pulte was not entitled, in pursuing the assigned cross-claims, to recover more than the $725,000 paid by American EIFS, CSS, and Coronado. In light of that latter conclusion, the court determined that there was no need for further proceedings on the American EIFS claim because it could not produce any greater recovery. The court remanded the case with instructions to enter judgment in favor of Pulte in the amount of $725,000. See Pulte v. Parex, 174 Md.App. 681 , 923 A.2d 971 (2007).

We granted certiorari to consider three questions raised by Pulte: (1) whether the Court of Special Appeals erred in applying the “payment rule,” rather than the “judgment rule,” thereby limiting Pulte’s damages to $725,000; (2) whether the Circuit Court erred in applying the UCC statute of limitations, which ran from the date of sale of the homes, rather than the general statute of limitations which, in Pulte’s view, would run from the date of the consent judgments; and (3) whether the Court of Special Appeals erred in reversing the award of prejudgment interest. Any issue not fairly included within those questions is not before us. We find no error in the intermediate appellate court’s decision on the three issues noted, and we shall therefore affirm the judgment of that court. DISCUSSION The foundation of all three arguments made by Pulte is that the assigned cross-claims by