State Farm Mutual Automobile Insurance Company et al v. Norcold, Inc. et al
Filing
16
OPINION AND ORDER: Def's motion for partial summary judgment 10 is granted in part and denied in part. As indicated, Thetford Corporation is dismissed as a Def. Signed by Judge William O. Bertelsman on 3/4/3015.(ECO)cc: COR
TO BE PUBLISHED IN FEDERAL SUPPLEMENT THIRD
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON
CIVIL ACTION NO. 2:14-CV-132 (WOB-JGW)
STATE FARM MUTUAL AUTOMOBILE
INSURANCE CO., ET AL.
PLAINTIFFS
VS.
NORCOLD, INC., ET AL.
DEFENDANTS
OPINION AND ORDER
BERTELSMAN, District Judge.
I. INTRODUCTION
This case presents the Court with an issue of first impression:
would the Kentucky Supreme Court apply the economic-loss doctrine to
consumer transactions?
For purposes of this motion, the Court must
assume that a used recreational vehicle (“RV”) was destroyed by fire
when a refrigerator included with the RV at the time of its original
purchase ignited, destroying itself, the RV, and the RV’s contents.
Plaintiff State Farm insured the RV and is subrogated to the
rights of the insured owner, Plaintiff Larry Swerdloff.
Plaintiffs
brought suit in Pendleton Circuit Court against Defendant Norcold and
its parent company, Thetford, on June 11, 2014.
Norcold removed the
action to this Court on July 15, 2014, and subsequently filed a motion
for partial summary judgment on October 9, 2014.
II. FACTS
The parties conveniently have filed a joint stipulation of facts
for the purposes of this motion.
Defendants reserve the right to
contest these facts if the Court denies the motion.
The following facts are stipulated as true:
1.
A model year 2007 Tiffin Phaeton [RV] owned by
Larry Swerdloff and insured by State Farm was destroyed by
fire on September 20, 2013 in Pendleton County, Kentucky.
Plaintiffs allege that the fire was caused by a defective
condition in the RV’s refrigerator.
2.
The refrigerator in question was a model 1210IM
Norcold gas absorption refrigerator.
It was manufactured
by Norcold on or about March 1, 2007.
It was installed
into the RV by Tiffin, the RV manufacturer.
The RV was
bought by the original purchaser on or about June 20, 2007.
The refrigerator originally came with a three-year written
express limited warranty. . . .
3.
Mr. Swerdloff bought the RV used in 2012.
The
refrigerator came with the RV when Mr. Swerdloff purchased
the RV.
The original three year [sic] warranty on the
refrigerator expired by its terms prior to Mr. Swerdloff’s
purchase of the RV.
Mr. Swerdloff had no contact with
Norcold when he bought the RV in 2012.
4.
The refrigerator was subject to one Norcold
recall, NHTSA recall 10E-049 announced in October of 2010.
. . . The recall repairs were performed at a facility in
Florida on or about February 14, 2011. . . .
The RV was
owned by the original purchaser at the time . . . .
5.
Plaintiffs allege
that the design of the
refrigerator was defective and unreasonably dangerous at
the time the refrigerator was initially sold, in that the
design of the refrigerator presented an unreasonable risk
of fire.
Plaintiffs also allege that Norcold’s recall
activities were negligently conducted, in that its recall
campaign did not fully or adequately address the allegedly
defective and unreasonably dangerous condition in the
refrigerator and did not prevent the fire in question.
6.
As a result of the fire, the RV and its contents
were a total loss.
The fire did not cause any personal
injuries.
There is no claim for damage to other property
outside of the RV. The damages claimed in this action are
$145,193.20 in payments made by State Farm, including Mr.
2
Swerdloff’s
$250.00
deductible.
Additionally,
Mr.
Swerdloff seeks recovery for damage to other personal
property owned by him in the RV at the time of the fire,
and consequential damages claimed by Mr. Swerdloff.
7.
The substantive law of Kentucky applies . . . .
(Doc. 11, Stipulation, at 2-3).
III. ANALYSIS
The
Erie
doctrine
requires
federal
courts
to
follow
substantive law of the forum state in substantive matters.
R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).
the
See Erie
If the law of the state
is not clear, federal courts must determine to the best of their
ability what the state’s appellate courts would hold if confronted
with the same issue.
17A James Wm. Moore et al., Moore’s Federal
Practice ¶ 124.22[3] (3d ed. 2014).
While such analyses can be fairly
straightforward, the issue in the instant case is somewhat complex.
Plaintiff
State
Farm
argues
that
the
proper
Erie
analysis
requires the Court to overrule Norcold’s motion for partial summary
judgment
because
economic-loss
applied
the
the
doctrine
doctrine
Kentucky
to
to
Supreme
Court
would
consumer
transactions,
commercial
transactions.
not
apply
although
See
it
the
has
Giddings
&
Lewis, Inc. v. Indus. Risk Insurers, 348 S.W.3d 729, 733 (Ky. 2011).
The Court notes that Frumer, Friedman, and Sklaren’s Products
Liability
contains
an
excellent,
general
approaches to the economic-loss doctrine.
discussion
of
different
Louis R. Frumer, Melvin I.
Freeman, & Cary S. Sklaren, 2-13 Products Liability § 13.07 (2014).
Jurisdictions are divided as to the application of the doctrine to
consumer transactions, such as that in the instant case:
3
The majority of courts apply the economic loss doctrine to
consumer purchases as well as business purchases, reasoning
that the separate and distinct functions served by tort and
contract law apply equally to consumer and business
purchasers of defective products.
Several courts have
found support in § 21 of the Restatement (Third) of Torts:
Products Liability, for their decision to apply the
economic loss rule to all plaintiffs, including nonbusiness
consumers.
Other courts focus on the availability of
insurance.
Courts holding the economic loss doctrine does not apply to
consumers are in the minority.
Id. § 13.07[4] (footnotes omitted).
As the parties’ highly informative briefs indicate, resolution of
the consumer-application issue requires an historical analysis of the
most significant Kentucky and federal cases.
The Court therefore will
discuss those cases in chronological order.
A.
Historical Overview
A foundational case is East River Steamship Corp. v. Transamerica
Delaval, Inc., 476 U.S. 858 (1986).
In that admiralty case, certain
turbine engines malfunctioned, causing damage only to the turbines
themselves.
doctrine
Id. at 860-61.
generally
only
Although at that time the economic-loss
applied
to
land-based-product
East River Court applied it also to admiralty actions.
actions,
the
Id. at 868-71.
The Court held “that a manufacturer in a commercial relationship has
no duty under either a negligence or strict products-liability theory
to prevent a product from injuring itself.”
Id. at 871 (emphasis
added).
The Court further observed: “[W]hen a product injures itself, the
commercial user stands to lose the value of the product, risks the
displeasure of its customers . . . , or, as in this case, experiences
4
costs in performing a service.
Id. (emphasis added).
Losses like these can be insured.”
As the above quotations indicate, the East
River Court had no occasion to consider whether the economic-loss
doctrine should apply to consumer transactions.
Next, and closer to home, is the decision of the Kentucky Court
of Appeals in Falcon Coal Co. v. Clark Equipment Co., 802 S.W.2d 947
(Ky.
Ct.
App.
1991).
In
that
case,
a
allegedly caught fire and destroyed itself.
large,
front-end
Id. at 947.
loader
The Falcon
Coal court denied recovery on the following basis:
Section 402A of the Restatement (Second) of Torts
provides in relevant part that “[o]ne who sells any product
in a defective condition unreasonably dangerous to the user
or consumer or to his property is subject to liability for
physical harm thereby caused to the ultimate user or
consumer, or to his property . . . .”
(Emphasis added.)
Our reading of this section, as well as the official
comment to it, convinces us that Section 402A is aimed at
imposing
liability
for
physical
harm
caused
by
an
unreasonably dangerous product to the user or his other
property, but not for harm caused only to the product
itself. The term “his property” simply does not appear to
be intended to embrace within its meaning the term “any
product” as those terms are used in Section 402A. Inasmuch
as this section now has been adopted by our highest court
as the standard for recovery in strict liability tort
cases, and from our reading of this section, it would not
permit such recovery in a case like this, we are left to
conclude that as it now stands the common law in this
jurisdiction does not support the appellant’s position
[that it could recover in tort where the product damaged
only itself].
Id. at 948.
Falcon Coal of course involved a commercial transaction,
but Section 402A of the Restatement also applies by its terms to
consumer transactions.
The next case in the Court’s chronological survey comes from the
United States Court of Appeals for the Sixth Circuit.
In a 1992 case
arising out of a commercial transaction, the Sixth Circuit predicted
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“that the Kentucky Supreme Court would not allow recovery for purely
economic losses in a product liability action based on negligence.”
Miller’s Bottled Gas, Inc. v. Borg-Warner Corp., 955 F.2d 1043, 1050
(6th Cir. 1992).
Another Kentucky case is next.
Franz,
885
S.W.2d
921
(Ky.
1994),
Real Estate Marketing, Inc. v.
was
a
consumer
case
involving
subsequent purchasers of a house who sued its builder for structural
defects.
The Kentucky Supreme Court declined to apply the economic-
loss doctrine.
Id. at 923.
Addressing the applicability of the
Falcon Coal case discussed previously, the Franz court observed:
We do not go so far as the Court of Appeals’ opinion in
Falcon . . . limiting recovery under a products liability
theory to damage or destruction of property “other” than
the product itself. But we do recognize that to recover in
tort one cannot prove only that a defect exists; one must
further prove a damaging event.
Id. at 926.
Of course, the consumer here can point to a damaging
event on the instant set of facts -- the sudden fire that destroyed
his RV.
The Sixth Circuit had occasion to address the economic-loss issue
again in Mt. Lebanon Personal Care Home, Inc. v. Hoover Universal,
Inc., 276 F.3d 845 (6th Cir. 2002).
In Mt. Lebanon, a nursing home
operator sued the manufacturer of chemicals used to treat the lumber
used in the trusses of a nursing home structure.
The Sixth Circuit
ultimately held that “there [was] no reason . . . not to follow [its]
earlier decision in Miller’s Bottled Gas” that the Kentucky Supreme
Court
would
transactions.
apply
the
economic-loss
Id. at 849.
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doctrine
to
commercial
Before the Mt. Lebanon court reached that conclusion, however, it
discussed the Franz decision and the applicability of the economicloss doctrine to consumer transactions:
While the Kentucky Supreme Court agreed with the trial
court that the Franzes could not sustain a negligence
claim, it did so because there was no “damaging event,” not
because their claim was barred by the economic loss
doctrine.
Id. at 926.
Indeed, in its decision, the
Kentucky Supreme Court expressly refused to extend Franz to
a Kentucky Court of Appeals decision which had adopted the
economic loss doctrine. Id.
Thus, Franz forces us to reconsider our earlier ruling
in Miller's Bottled Gas.
In Franz, the Kentucky Supreme
Court declined to extend the economic loss rule to an endconsumer's second-hand purchase of a house.
We think,
then, that Franz probably answers in the negative the
question of whether the economic loss doctrine applies to
consumer purchases in Kentucky.
276 F.3d at 848-49 (emphasis added).
The Sixth Circuit thus has also
interpreted the Franz decision as a consumer case where the Kentucky
Supreme Court declined to apply the economic-loss doctrine.
Finally, the Court arrives at the most recent case:
Giddings &
Lewis, Inc. v. Indus. Risk Insurers, 348 S.W.3d 729, 733 (Ky. 2011).
Although
Giddings
involved
a
commercial
transaction,
the
Kentucky
Supreme Court made the following observation about Franz and Falcon
Coal:
While the manner in which the Franz Court would restrict
the holding in Falcon Coal Co. is not altogether clear,
given the immediately succeeding discussion, perhaps the
Court intended to suggest that the ban on recovery of
economic loss in a product liability action would not apply
in the event of a damaging event.
Alternatively, the
rather cryptic statement has been read to suggest that
Kentucky would not apply the economic loss rule to consumer
transactions.
Id. at 737 (emphasis added).
The Giddings & Lewis court then made an
additional statement about consumer transactions in dicta:
7
The case sub judice does not require us to consider the
effect of the economic loss rule on consumer transactions
but, notably, the Restatement (Third) of Torts: Products
Liability makes no distinction between products produced
for commercial customers and those produced for consumers.
See Restatement (Third) of Tort § 19(a) (1998) defining
“product” in relevant part as “tangible personal property
distributed commercially for use or consumption.”
Id. at 737 n.5.
The court went on to hold that the economic-loss
doctrine does apply in Kentucky to commercial transactions, even where
the loss occurs from defects in a component part of a product sold as
an integrated whole.
Id. at 739-43.
In summary, the economic-loss doctrine finds its roots in cases
involving commercial transactions.
But there exists authority from
the Sixth Circuit stating in dicta that the Kentucky Supreme Court
would not apply the economic-loss doctrine in the context of consumer
transactions, as well as dicta from the Kentucky Supreme Court noting
that
the
Restatement
does
not
distinguish
between
consumer
and
commercial transactions when it comes to recovery for economic loss.
The authorities are thus in relative equipoise on this question.
B.
Application
Making an “Erie guess” as to whether the Kentucky Supreme Court
would
apply
requires
because
the
economic-loss
consideration
the
Court
has
of
not
the
doctrine
to
policies
underlying
located
--
and
consumer
the
transactions
the
parties
doctrine,
have
not
identified for the Court -- any decision of the Kentucky Supreme Court
or the Kentucky Court of Appeals addressing this precise issue.
In Giddings & Lewis, the Kentucky Supreme Court identified three
relevant policies that militate in favor of precluding recovery for
economic losses in commercial transactions:
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“(1) maintain[ing] the
distinction between tort and contract law; (2) . . . protect[ing]
parties’ freedom to allocate economic risk by contract; and (3) . . .
encourag[ing] the party best situated to assess the risk of economic
loss, usually the purchaser, to assume, allocate, or insure against
that risk.”
348 S.W.3d at 739 (quoting Hoover Universal, 276 F.3d
at 848) (internal quotation marks omitted).
This Court does not believe, however, that the Kentucky Supreme
Court would apply to economic-loss doctrine to consumer transactions.
Although the Court recognizes that the manufacturer provides an
express warranty to purchasers of its refrigerators, that warranty is
limited in both scope and duration.
the
refrigerators
consumers
well
in
beyond
question
the
It is reasonably foreseeable that
could
duration
cause
of
the
serious
express
problems
warranty.
for
The
foreseeable nature of this harm is confirmed by the fact that the
manufacturer conducted a recall of the refrigerators after the express
warranty had expired by its terms.
The Kentucky courts have a strong interest in protecting Kentucky
citizens from this kind of foreseeable harm through tort law.
The
Court thus concludes that the Kentucky Supreme Court would hold that
the
first
commercial
policy
for
application
transactions
weighs
the
against
economic-loss
doctrine
to
applying
doctrine
to
the
consumer transactions.
This Court also believes that the Kentucky Supreme Court would
hold that allowing a consumer to sue on a products-liability theory
for economic loss does not impinge freedom of contract.
overwhelming
majority
of
consumer
9
transactions,
even
the
As in the
original
purchaser of Swerdloff’s RV likely had little or no chance to allocate
economic risk by contract.
Norcold decided how much economic risk it
was willing to undertake to increase sales of its refrigerator before
placing that product into the stream of commerce -- in this case parts
and labor for repairs to the refrigerator for at most three years -and then disclaimed all other express or implied warranties.
Finally, this Court does not believe that the Kentucky Supreme
Court would hold that a consumer is in the best position to allocate
risk of economic loss.
At the time of purchase, a consumer has far
less information about a product than its manufacturer.
Here, Norcold
was best positioned to identify potential problems with its products
and cure any defects before placing those products into the stream of
commerce.
Given this difference, the Kentucky Supreme Court likely
would not impose on consumers a blanket requirement to insure every
product that they purchase to protect against the possibility that the
product might destroy itself.
The Court accordingly holds that the Kentucky Supreme Court would
not
apply
the
economic-loss
doctrine
to
consumer
transactions.
Decisions of the Kentucky Supreme Court, Franz, 885 S.W.2d at 926, and
the Sixth Circuit, Hoover Universal, 276 F.3d at 848-49, bolster this
conclusion.1
1
The Court notes that other District Judges applying Kentucky law have
relied on the Sixth Circuit’s statement in Hoover Universal that the
economic-loss doctrine does not apply to consumer transactions in Kentucky,
and at least one Judge did so following the Kentucky Supreme Court’s decision
in Giddings & Lewis. See, e.g., Rodrock v. Gumz, No. 4:11-cv-00141-JHM, 2012
WL 1424501, at *2-4 (W.D. Ky. Apr. 24, 2012); Highland Stud Int’l v. Baffert,
No. 00-261-JMH, 2002 WL 34403141, at *2-4 (E.D. Ky. May 16, 2002).
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C.
Defendant Thetford Corporation
Defendant Thetford Corporation moved for summary judgment on the
basis that it did not manufacture or distribute Plaintiffs’ RV or
refrigerator.
Counsel for Plaintiffs represented to the Court at oral
argument that he sued Thetford only out of an “abundance of caution.”
Because
Plaintiffs
do
not
oppose
Thetford’s
dismissal
from
this
action, the Court grants Defendants’ motion to the extent that it
seeks Thetford’s dismissal as a party.
III. CONCLUSION
For the foregoing reasons, the Court grants in part and denies in
part Defendants’ motion for partial summary judgment.
Therefore, the Court being advised,
IT IS ORDERED THAT:
Defendants’ motion for partial summary judgment (Doc. 10) be, and
is hereby, granted in part and denied in part.
As indicated above,
Thetford Corporation is hereby dismissed as a defendant.
This 4th day of March, 2015.
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