The Florida Bar
The Florida Bar Journal
March, 2012 Volume 86, No. 3
Ruminations on the Relationship Between the Economic Loss Rule and Claims for Breach of Fiduciary Duty

by Thomas Wade Young

Page 8

The court-created doctrine known as “the economic loss rule” arose from the idea that, because parties may allocate risks and remedies through contract negotiations, tort remedies should not be available simply because an unhappy contracting party deems negotiated contractual remedies insufficient. The doctrine began in the context of products liability cases, but rapidly expanded in Florida to bar tort claims in other contexts, to a point “beyond [the rule’s] principled origins.”1 So, through a decisional trilogy between 1999 and 2004, the Supreme Court of Florida systematically retracted the doctrine’s reach. In the seminal 2004 decision Indemnity Insurance Company of North America v. American Aviation, Inc., 891 So. 2d 532 (Fla. 2004), the court unanimously agreed “the economic loss rule should be expressly limited.”2 Yet, years later, decisions by the First, Second, Third, and Fifth district courts of appeal reflect uncertainty and incongruent outcomes, suggesting disagreement about whether the Supreme Court’s “express limitation” permits or precludes common law claims for breach of fiduciary duty when an underlying contract also embodies the parties’ relationship. Federal courts, too, note the conundrum.3

For more than 11 years the Third District has consistently held the economic loss rule does not bar claims for breach of fiduciary duty, even when the duty arises from an underlying oral or written contract.4 Last year, in an opinion rejecting a statute of frauds defense, the Second District inferentially aligned itself with the Third District by citing the latter’s precedent and holding that fiduciary duty claims stand on legal footing different from claims arising out of an underlying oral contract.5 In 2010, the First District hinted claims for breach of fiduciary duty may coexist with contract claims, but it also cautioned the Florida Supreme Court has neither approved nor disapproved decisions to that effect.6 Meanwhile, the Fifth District appears committed to its early decision in Detwiler v. Bank of Central Florida, 736 So. 2d 757 (Fla. 5th DCA 1999), which declared the economic loss rule bars claims for tortious breach of fiduciary duty when an underlying contract defines the parties’ relationship.7

The existing confusion traces back to July 1, 1999, when the Florida Supreme Court decided Moransais v. Heathman, 744 So. 2d 973 (Fla. 1999). The Fifth District released Detwiler the next day. The temporal proximity of the decisions, coupled with the absence of rehearing, prevented the Fifth District from considering what impact, if any, Moransais would have had on its conclusion.

The fiduciary relationship alleged in Detwiler originated in a contractual relationship, thus making the outcome explainable by the absence of breach.8 But the Fifth District’s opinion was not so limited; it continued past the absence of breach to broadly declare “a cause of action for breach of fiduciary duty will not lie where the claim of breach is dependent upon the existence of a contractual relationship between the parties.”9 Detwiler’s language seemingly contradicted the Supreme Court’s pronouncement the day before in Moransais that it “never intended to bar well-established common law causes of action” and that “the rule was primarily intended to limit actions in the product liability context” and “should generally be limited to those contexts or situations....”10 Although not involving a claim for breach of fiduciary duty, Moransais also involved parties whose relationship originated in contract and had no counterpart in common law.

Moransais arose from a homebuyer’s contract with an engineering firm for a pre-purchase home inspection. The issue was whether the homeowner could maintain a professional negligence claim against the engineers who performed the inspection.11 The Supreme Court answered affirmatively, holding claims for “professional” negligence represent an exception to the economic loss rule.12 To reach that outcome, the Moransais court “recognized the danger in an unprincipled extension of the rule,”13 emphasizing “[t]he rule, in any case, should not be invoked to bar well-established causes of actions in tort, such as professional malpractice.”14 Justice Wells, joined by Justice Pariente, concurred, stating he would expressly limit the economic loss rule “to cases involving a product which damages itself by reason of a defect in the product.”15

Within three months of Moransais, the Supreme Court curtailed the reach of the economic loss rule a second time. In Comptech International, Inc. v. Milam Commerce Park, Ltd., 753 So. 2d 1219 (Fla. 1999), the court considered whether a tenant’s lawsuit for damage to computers was barred by the existence of a lease agreement. Holding it was not, the court quoted extensively from Moransais. The economic loss rule did not apply, said the court, because the rule does not bar statutory causes of action.16 Justice Wells again concurred separately to declare that he “would expressly state that [the economic loss rule’s] application is limited to product claims....”17 Two justices joined Justice Wells’ concurrence this time. Hence, before the year 1999 ended, the Florida Supreme Court was just one vote shy of expressly limiting the economic loss rule to product liability claims in which the only damage is to the defective product itself.

The Third District Court of Appeal decided Invo Florida, Inc. v. Somerset Venturer, Inc., 751 So. 2d 1263 (Fla. 3d DCA 2000), the following year. Invo addressed a fiduciary duty arising from a settlement agreement, so, like Detwiler, it involved a fiduciary duty established through contract. Unlike the Detwiler court, however, the Invo court had full benefit of both Moransais and Comptech, and it pointed to Moransais as the catalyst for its decision: “We believe that Moransais makes it clear that the economic loss rule has not abolished the cause of action for breach of fiduciary duty, even if there is an underlying oral or written contract.”18

Although Invo’s holding did not square with Detwiler, the Third District’s opinion neither discussed nor referenced Detwiler. A plausible explanation for the absent reference is that the Invo court did not perceive actual conflict. Three circumstances point to that conclusion. First, because no breach of contract occurred in Detwiler, it was factually distinguishable. Second, the absence of breach in Detwiler rendered the opinion’s statements regarding dependent fiduciary duty claims obiter dictum. And, third, Moransais and Comptech cast substantial doubt on the validity of the Fifth District’s opinion, the face of which conspicuously reflected its ill-timed sequence in economic loss rule jurisprudence. Whatever the reason, the Third District announced an exception for breach of fiduciary duty claims without the slightest inkling of doubt or conflict.

For its part, the Fifth District has never cited Invo or addressed the issue of conflict. In 2002, however, it embraced an exception to the economic loss rule for tort claims arising from intentional acts beyond mere failure to perform a contractual obligation.19 In so doing, the court appeared to be moving in the Third District’s direction, for breach of fiduciary duty claims often have purposeful actions at their root.

Then came the Florida Supreme Court’s pronouncement in American Aviation.20 Authored by then-Chief Justice Pariente, one of the three justices who had previously called for express limitation of the economic loss rule, American Aviation declared unanimous consensus: “We now agree that the economic loss rule should be expressly limited.”21 The court identified just two circumstances in which the economic loss rule finds application in Florida: 1) when the parties have negotiated remedies pursuant to a contract; and 2) when a defect in a product causes damage to the product, but causes no personal injury or damage to other property.22 Significantly, the court took care to emphasize that developed exceptions may still render the economic loss rule inapplicable even in the two limited circumstances identified.23

American Aviation did not, however, expressly approve the Third District’s Invo opinion. It instead simply “noted” “that some courts have extended the exception to the application of the economic loss rule created in Moransais to causes of action for breach of fiduciary duty, even if there was an underlying oral or written contract.”24 Despite the absence of express approval, the court’s juxtaposition of its limited holding in Moransais with the Third District’s extension of Moransais suggests approval,25 particularly since American Aviation also emphasized that while “the economic loss rule may have some genuine, but limited, value in our damages law, we never intended to bar well-established common law causes of action....”26

Consistent with that interpretation, the Supreme Court reiterated in Curd v. Mosaic Fertilizer, LLC, 39 So. 3d 1216 (Fla. 2010), that the economic loss rule in Florida is applicable in only two situations and, even then, is subject to exceptions for intentional torts and torts requiring proof of intent.27 Thus, with the exception of the Fifth District’s outlier decision in Detwiler, which the Fifth District had never since cited in a decision considering the economic loss doctrine, Florida case law appeared to be congealing around an exception to the economic loss rule for breach of fiduciary duty claims. Then the Fifth District decided Lindon v. Dalton Hotel Corporation, 49 So. 3d 299 (Fla. 5th DCA 2010), rev. denied, Dalton Hotel Corp. v. Lindon, 69 So. 3d 277 (Fla. 2011).

Lindon arose from a shareholder dispute over the meaning of buy-back provisions in the parties’ stockholders’ agreement. The minority shareholder sued the corporation and the majority shareholder, asserting contract and tort claims, including a claim for breach of fiduciary duty.28 The trial court dismissed the tort claims at summary judgment but submitted the contract claim to a jury, which returned a verdict for the minority shareholder after determining the contract’s involuntary redemption provision did not apply.29 Consequently, Lindon presented facts absent in Detwiler — a jury’s finding of an actual breach of contract and, under Tillis v. United Parts, Inc., 395 So. 2d 618 (Fla. 5th DCA 1985),30 a discrete fiduciary relationship between the majority and minority shareholders. Those circumstances, in turn, presented an opportunity for the Fifth District to limit Detwiler to its facts and, thereby, align its case law with Invo and other Third District decisions.31

But, rather than distinguishing or limiting Detwiler, the Lindon court summarily affirmed Detwiler’s continuing validity, citing it as authority for affirming summary judgment on the minority shareholder’s tort claims.32 Beyond that, the Fifth District directed its opinion to reversing the trial court’s post-trial order granting judgment notwithstanding the verdict and discussing the remedies the trial court should have permitted the jury to consider.

Notwithstanding the Fifth District’s silence regarding the significant case law developments over the years following Detwiler, Lindon holds significance for its resurrection of Detwiler’s broad rule barring claims for breach of fiduciary duties attendant to an underlying contract, even when the fiduciary relationship has a basis in common law apart from the contract. While not an express pronouncement on the subject, Lindon signals disagreement with the Third District’s conclusion “that the economic loss rule has not abolished the cause of action for breach of fiduciary duty, even if there is an underlying oral or written contract.”33 And within that seeming disagreement are rumblings of express and direct conflict only the Florida Supreme Court can quell.q

1 Moransais v. Heathman, 744 So. 2d 973, 980 (Fla. 1999).

2 Indemnity, 891 So. 2d at 542.

3 Gardner v. Construct Corps, LLC, No. 8:09-cv-1743-T-23TBM, 2010 WL 427742 at *1 (M.D. Fla. Feb. 1, 2010) (comparing inconsistent Third and Fifth district case law).

4 Invo Fla., Inc. v. Somerset Venturer, Inc., 751 So. 2d 1263 (Fla. 3d D.C.A. 2000); Susan Fixel, Inc. v. Rosenthal & Rosenthal, Inc., 842 So. 2d 204 (Fla. 3d D.C.A. 2003).

5 B&C Investors, Inc. v. Vojak, 36 Fla. L. Weekly D1740a (Fla. 2d D.C.A. Aug. 10, 2011).

6 Testa v. Southern Escrow and Title, LLC, 36 So. 3d 713 (Fla. 1st D.C.A. 2010) (observing the Florida Supreme Court has neither approved nor disapproved decisions refusing to apply the economic loss rule to bar recovery on a claim for breach of fiduciary duty).

7 Lindon v. Dalton Hotel Corp., 49 So. 3d 299 (Fla. 5th D.C.A. 2010) (citing Detwiler). The author was appellate counsel in this

8 Detwiler, 736 So. 2d at 758.

9 Id. at 759.

10 Moransais, 744 So. 2d at 983.

11 Id. at 974-975.

12 Id. at 983-984.

13 Id. at 982.

14 Id. at 983.

15 Id. at 984.

16 Comptech, 753 So. 2d at 1222-1223.

17 Id. at 1227.

18 Invo, 751 So. 2d at 1266; see also Susan Fixel, Inc., 842 So. 2d 204.

19 Duncan v. Kasim, Inc., 810 So. 2d 968, 970-71 (Fla. 5th D.C.A. 2002); see also Burke v. Napieracz, 674 So. 2d 756, 758 (Fla. 1st D.C.A. 1996).

20 American Aviation, 891 So. 2d at 532.

21 Id. at 542.

22 Id. at 542-43.

23 Id. at 543.

24 Id. (citing Invo, 751 So. 2d 1263, and Performance Paint Yacht Refinishing, Inc. v. Haines, 190 F.R.D. 699, 701 (S.D. Fla. 1999)).

25 See id. at 542.

26 Id.

27 Curd, 39 So. 3d at 1223; Id. at n.4.

28 Lindon, 49 So. 3d at 302.

29 Id. at 302-303.

30 Tillis, 395 So. 2d at 619 (“Corporate officers, controlling the corporation through ownership of a majority of the stock, have a fiduciary relation to minority stockholders.”).

31 See, e.g., Hallock v. Holiday Isle Resort & Marina, Inc., 4 So. 3d 17, 21 (Fla. 3d D.C.A. 2009) (holding activities permitted under a contract “cannot form the basis for a breach of fiduciary duty claim”).

32 Lindon, 49 So. 3d at 303.

33 Invo, 751 So. 2d at 1267; see also Mitchell Co., Inc. v. Campus, 672 F. Supp. 2d 1217 (S.D. Ala. 2009) (applying Florida law and concluding the economic loss rule does not preclude tort claims for breach of common law fiduciary duties).

Thomas Wade Young is a Florida Bar board certified appellate specialist and sole practitioner in Orlando. He graduated from the Texas Tech University School of Law, Order of the Coif, in 1990. He is licensed to practice in Florida, Kansas, and New Mexico and is also admitted to practice in the U.S. District Court for the Middle District of Florida, the U.S. Courts of Appeals for the 10th and 11th circuits, and the U.S. Supreme Court.

[Revised: 02-28-2012]