UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
SP LIQUIDATING COMPANY, INC.
f/k/a The Sanymetal
Products Company, Inc.
DEBTOR CHAPTER 11
SP LIQUIDATING COMPANY, INC.
and CONTINENTAL METAL
SPECIALTY, INC. PLAINTIFFS
VS. ADV. NO. 93-1002
NORDSON CORPORATION DEFENDANT
G. LISSY & ASSOCIATES, INC. DEFENDANT and THIRD-PARTY
a Division of Allied Signal, Inc. THIRD-PARTY DEFENDANT
This matter is before the Court on Motions to Dismiss and for Partial Summary Judgment filed by defendant G. Lissy & Associates, Inc. ("GLA"), on a Motion for Summary Judgment filed by defendant Nordson Corporation ("Nordson"), and on a Motion for Summary Judgment filed by third-party defendant Baron-Blakeslee ("B-B"). These motions were heard by the Court on July 21, 1994. Subsequent to that hearing, this Court entered an Order overruling GLA's Motion to Dismiss for improper venue, sustaining GLA's Motion to Dismiss Count IV of the plaintiff's Complaint, and reserving ruling on GLA's Motion to Dismiss Count III of the plaintiff's Complaint, Motion for Partial Summary Judgment regarding plaintiff's claims for damages arising from components supplied by B-B and Unibilt, and Motion to Dismiss plaintiff's claims for consequential damages. Although an order has not yet been entered regarding the ruling, this Court also ruled that Nordson should have summary judgment as to the plaintiff's allegation of strict liability contained in Count VIII of the plaintiff's Complaint.
This matter was initiated by the filing of the plaintiffs' Complaint on April 12, 1993. Plaintiff SP Liquidating Company, Inc. ("SPL") is the debtor in this case, and plaintiff Continental Metal Specialty, Inc. ("CMS") is the liquidating agent for the debtor under the Plan of Liquidation confirmed January 7, 1993. Defendant Nordson Corporation filed its Answer on June 15, 1993, and a Motion to Withdraw the Reference on June 16, 1993. Defendant G. Lissy & Associates filed its Answer, Counterclaim and Third-Party Complaint on June 18, 1993, and a Motion to Withdraw the Reference on June 28, 1993.
GLA filed the above-referenced motions on April 29, 1994. Nordson and B-B filed their respective Motions for Summary Judgment on May 2, 1994. The plaintiff filed a Memorandum in Opposition to the motions of GLA and Nordson on June 13, 1994, and a Supplemental Memorandum on June 23, 1994. GLA filed a Memorandum in Response to B-B's Motion for Summary Judgment on June 13, 1994. GLA filed an Amended Answer and Third-Party Complaint on June 21, 1994. Nordson filed Replies on June 24 and June 27, 1994, respectively. B-B filed an Answer to Amended Third-Party Complaint on July 12, 1994. The plaintiff filed a further Supplemental Memorandum on August 4, 1994. GLA filed a Supplemental Memorandum on that date as well.
Pursuant to the above-referenced Plan of Liquidation, the only asset left to the debtor was the so-called Paint Line Claim ("the Claim"). It is defined in the Plan as "the Claim that the debtor holds against G. Lissy & Associates (aka GLA) and Nordson Corporation as the result of their defective manufacture and installation of the GLA Nordson Finishing System the debtor used in its manufacturing operation." The Complaint filed herein was intended to prosecute this Claim. The Third-Party Complaint seeks indemnification and contribution from the third-party defendants as suppliers of component parts of the industrial paint line finishing system.
The plaintiff's Complaint against GLA and Nordson alleges breach of contract, breach of warranty, negligence and strict liability. In sustaining GLA's Motion to Dismiss Count IV of the Complaint, this Court has already decided that the plaintiff may not recover on a theory of strict liability. The plaintiff raises the issue of negligence in Count III of the Complaint, alleging therein that GLA was negligent in the design, construction and installation of the paint finishing system. It further alleges that as a direct and proximate result of GLA's negligence, the plaintiff incurred expense for repair and replacement of damaged or defectively painted goods, for lost business and income, and other related damages.
GLA contends that the plaintiff may not recover under a theory of negligence because Ohio law, which controls in this matter, does not provide a cause of action in tort for purely commercial loss. It cites in support of its contention Chemtrol Adhesives, Inc. v. American Manufacturers Mutual Ins. Co., 42 Ohio St.3d 40, 537 N.E.2d 624, 635 (1989). The plaintiff, however, maintains that Chemtrol supports its position as well. The Chemtrol court discusses the various types of injury that a defective product can cause. Property damage and economic loss, both direct and indirect, are under consideration here. As defined by the court
'Property damage' generally connotes either damage to the defective product itself or damage to other property. .... 'Direct' economic loss includes the loss attributable to the decreased value of the product itself. .... 'Indirect' economic loss includes the consequential losses sustained by the purchaser of the defective product, which may include the value of production time lost and the resulting lost profits.
Chemtrol, at page 629. The court goes on to explain that the mere application of labels does not resolve the issue of tort recovery for a defective product's self-inflicted damage. The court stated:
[T]he better practice is to analyze such damage within the context of the transaction, considering the relationship of the parties, the nature of the product's defect, and the manner in which the damages were sustained.
Id., at page 630.
Allegations of negligence in the design, manufacture, and installation of an item of industrial equipment were made in the Chemtrol case, as they have been in this matter. The court, quoting from an Iowa case, stated:
'[t]he well-established rule is that a plaintiff who has suffered only economic loss due to another's negligence has not been injured in a manner which is legally cognizable or compensable.' (Cite omitted.)
The court identifies the denial of recovery for purely economic loss as the majority view, and states that the law of Ohio has been in accord with this view.
The court's analysis continues as it discusses the reason for denying recovery in negligence for purely economic loss: "the key factor is the extent, and more important, the source, of the duty owed by the manufacturer to the consumer." At page 630. This duty is one of reasonable care that protects the consumer from injury, either to person or property. However, the court points out that
the law of negligence does not extend the manufacturer's duty so far as to protect the consumer's economic expectations, for such protection would arise not under the law but rather solely by agreement between the parties.
At pages 630-631.
The duty to provide a piece of equipment that worked properly arose under the contract between the parties, and not under the law of negligence. Therefore, the court reasoned, it is the law of contracts, and not the law of negligence, to which Chemtrol must look for a remedy.
For an ordinary consumer, i.e., one not in privity of contract with the seller or manufacturer against whom recovery is sought, an action in negligence may be an appropriate remedy to protect the consumer's property interests. However, where the buyer and seller are in privity of contract, and they have negotiated that contract from relatively equal bargaining positions, the parties are able to allocate the risk of all loss, including the loss of the subject product itself, between themselves. Therefore, any protection against the product's self-inflicted damage in the latter context is better viewed as arising under the contract and not under the law of negligence.
At page 631. This Court believes that all of the foregoing analysis leads to the conclusion that the within matter must be resolved under the terms of the contract, and not by the application of the law of negligence. The only property damage claimed by the plaintiff is the unusable metal panels which were allegedly not properly painted by the paint line. This Court does not believe that the defective work produced by the product purchased from defendants is the type of property damage which gives rise to a negligence claim. Count III of the Complaint should be dismissed for failure to state a claim.
The Court next considers GLA's Motion for Partial Summary Judgment on Counts I and II of the Complaint. GLA maintains that the Court should hold that it is not liable for any damages arising from the operation of or defects in the power-and-free conveyer or the vapor degreaser. It bases this contention on the fact that its contract with the debtor disclaimed any warranties on non-manufactured components. The warranty section of the contract does indeed contain language which excludes any warranty on components not manufactured by GLA.
As GLA points out, the Uniform Commercial Code permits limitation or negation of warranties. UCC'2-316(1); Ohio Revised Code '1302.29(1). Subsection (1) deals with express warranties and provides:
Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; .... negation or limitation is inoperative to the extent that such construction is unreasonable.
The language of the warranty section expressly covers components manufactured by GLA and expressly excludes components that are not. The plaintiff argues that GLA breached its express warranty because it "expressly warranted the design of the entire paint line system and its production capacities."
However, the plaintiff cites neither language nor case authority in support of this argument. It does seem to be saying that because GLA sold equipment that it had not manufactured to the plaintiff as part of the paint line system, GLA was giving a warranty on this equipment. This reasoning is not justified. GLA did not attempt to exclude from warranty coverage something it had included in its warranty. Inclusionary and exclusionary language may reasonably be construed as consistent in this instance. GLA should have Partial Summary Judgment on Counts I and II of the Complaint as to such non-GLA components.
GLA's final motion under consideration is its Motion for Partial Summary Judgment dismissing plaintiff's claims for consequential damages including lost profits. Both GLA and the plaintiff state that courts are divided as to the resolution of this question. In Chemtrol, supra, the court explained that
Pursuant to R.C. 1302.29(D) and 1302.93(A)(1), the seller may also limit the buyer's remedies for breach of warranty to the repair or replacement of the defective product. In addition, liability for consequential damages may be limited or excluded 'unless the limitation or exclusion is unconscionable.' R.C. 1302.93(A)(1). As the Editor's Analysis following R.D. 1302.93 in Page's Revised Code notes, there is not requirement that an exclusion of consequential damages be 'conspicuous.' .... Here the limitation of remedy for breach of warranty was set forth in a separate provision under a bold-faced heading titled 'Liability Limitation,' and was not in small print or otherwise obscured in any way. Therefore, since the limitation of liability in this case was clear and conspicuous, we need not address the question of whether an inconspicuous limitation would be enforceable.
At page 639. Clearly, then, liability for consequential damages may be excluded if the exclusion is not unconscionable. That consideration aside, this Court believes that it may dispose of the question of whether the exclusion was clear and conspicuous as the Chemtrol court did.
The issue of conscionability is generally not pertinent in a commercial setting. The Chemtrol court states that:
R.C. 1302.93(C) provides in part: '...Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.' .... Numerous cases have held that in a situation such as the instant case, where there is no great disparity of bargaining power between the parties, a contractual provision which excludes liability for consequential damages and limits the buyer's remedy to repair or replacement of the defective product is not unconscionable.
At page 639. GLA's exclusion of liability for consequential damages is not unconscionable. The plaintiff argues, however, that it is entitled to recover consequential damages because the repair-or-replacement remedies failed, and therefore it did not receive the benefit of its bargain with GLA.
The plaintiff goes on to argue that where a limited remedy fails of its essential purpose, Ohio law provides that all other remedies under the Uniform Commercial Code are available. Ohio Revised Code 1302.93(B). The Chemtrol court noted that
Such limited remedies generally fail only where the seller is unable or unwilling to make repairs within a reasonable time. .... [T]he determination of whether a warranty has failed to fulfill its essential purpose is ordinarily a question of fact for the jury.
At pp. 639-640. Whether GLA was unable or unwilling to repair or replace within a reasonable time remains a question of fact, especially in light of GLA's contention that it was not allowed enough time to "de-bug" the paint line system when it was first installed. GLA's Motion for Partial Summary Judgment dismissing the plaintiff's claims for consequential damages should therefore be overruled.
The Court next considers Nordson's Motion that it have summary judgment on all claims brought by the plaintiff, on the grounds that damages which may be proven at trial are limited by the contract to the purchase price for the equipment provided by Nordson. Nordson further moves for summary judgment that potential damages be limited to those arising before December 18, 1991, because, it contends, the debtor admitted that any problems with its equipment were resolved by that date.
Nordson's Memorandum in Support of its Motion for Summary Judgment contains many of the same arguments concerning the application of the law of negligence, breach of express warranties, and entitlement to consequential damages as were made by GLA. This Court's reasoning and opinion on those issues apply to Nordson as well. The plaintiff's claim against Nordson also raises the issue, however, of breach of implied warranty of fitness for a particular purpose.
Nordson argues that its contract contains a disclaimer of all warranties not contained therein, including implied warranties. Paragraph 3(h) of Nordson's proposal does specifically exclude implied warranties, including warranties of merchantability and fitness for a particular purpose. Pursuant to Ohio Revised Code 1302.29, such an exclusion is valid and enforceable.
That provision states in pertinent part:
(B) Subject to division (C) of this section .... to exclude or modify any warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that 'There are no warranties which extend beyond the description on the face hereof.'
(C) Notwithstanding division (B) of this section:
(1) Unless the circumstances indicate otherwise all implied warranties are excluded by expressions like 'as is,' 'with all faults,' or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty;
The language of paragraph 3(h) appears to comply with the requirements of the statute. The plaintiff has not responded to Nordson's argument concerning implied warranties, and it is the opinion of this Court that Nordson should have partial summary judgment that there was no breach of an implied warranty of fitness for a particular purpose.
Nordson's contention that any problems with its equipment were satisfactorily repaired by December 18, 1991, is unsupported by evidence that the plaintiff admitted that such was the case. In addition, the plaintiff contends that it continued to have problems with Nordson's equipment into the spring of 1992. This remains a question of fact to be determined at trial.
Finally, the Court considers B-B's Motion for Summary Judgment as to GLA's Third-Party Complaint. B-B's Motion makes three main contentions: that GLA has contractually waived its third-party complaint allegations against B-B; that GLA has no action against B-B for breach of warranty; and that GLA's action for indemnification and/or contribution has been eliminated under Kentucky's law of apportionment. The second and third contentions are most easily resolved.
This Court has already ruled in its Order of December 15, 1993, dismissing third-party defendant Unibilt, that Kentucky's law of apportionment does not apply in this matter. Unibilt's contract with GLA had a choice of law provision that specified Michigan law. B-B's contract with GLA specifies that the purchase order is to be construed according to the laws of the state of Ohio, and the same result is required.
B-B's arguments concerning whether GLA may recover on a theory of breach of warranty are based on its assertion that it has no contractual privity with the plaintiff, and therefore GLA may not recover from B-B for any breaches of warranty by B-B to the plaintiff. GLA agrees with this proposition, but responds that GLA may pursue a claim for indemnity based on B-B's breach of warranties in its contract with GLA. This Court agrees. B-B not having addressed this issue, it remains to be determined.
Whether or not GLA contractually waived its third-party complaint allegations against B-B is actually the same question raised by GLA and Nordstrom concerning limitation of damages to those provided for in express warranties. GLA also raises the issue of implied warranties. These issues are complicated, however, by the fact that B-B and GLA do not agree on what constitutes their contract for purchase of equipment. B-B contends that GLA accepted its Sales Acknowledgement as a binding contract, and included in the "Terms and Conditions" set out on the back of the Sales Acknowledgement is a "Warranties" section which contains the limiting language.
GLA argues that it did not accept the Sales Acknowledgement as part of the contract because it did not sign the document. There do not appear to be any Ohio cases on point, but B-B has cited a Kentucky case, Middletown Engineering Co. v. Climate Conditioning Co., Inc., Ky. App., 810 S.W.2d 57 (1991), in which Judge Wilhoit held that where there was no place for the purchaser to sign such a document, the offer of sale could be accepted without a signature. This Court agrees with this position, and finds that the "Terms and Conditions" set out in the Sales Acknowledgement were part of the contract between GLA and B-B.
In consideration of all the foregoing, it is therefore the opinion of this Court that GLA's Motion to Dismiss Count III of the plaintiff's Complaint for failure to state a claim should be sustained. GLA's Motion for Partial Summary Judgment on Counts I and II of the Complaint on grounds that it disclaimed all warranties on system components not manufactured by it should be sustained. GLA's Motion for Partial Summary Judgment dismissing plaintiff's claims for consequential damages should be overruled.
It is further the opinion of this Court that Nordson's Motion for Summary Judgment should be sustained as to Counts VI and VII of the plaintiff's Complaint which allege breach of express warranties and negligence respectively. Nordson's Motion for Summary Judgment that potential damages should be limited to those occurring before December 18, 1991, should be overruled. B-B's Motion for Summary Judgment on GLA's Third-Party Complaint should be sustained on the issue of whether GLA may only recover damages pursuant to the warranties provided for in its contract with B-B, and overruled on the issues of whether GLA may maintain an action for indemnity and/or contribution, and whether it may maintain an action for breach of warranty.
An order in conformity with this opinion will be entered separately.
By the Court -
Frank F. Chuppe, Esq.
Mark L. Moseley, Esq.
Robert L. Treadway, Esq.
Robert F. Duncan, Esq.