Whitesell Corporation v. Whirlpool Corporation et al

Filing 601

OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)

UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

W H I T E S E L L CORPORATION, P l a in tif f , C a se No. 1:05-CV-679 v. H O N . ROBERT HOLMES BELL W H I R L P O O L CORPORATION, W H IR L P O O L MEXICO S.A. de C.V., a n d JOSEPH SHARKEY, D e f e n d a n ts , and W H I R L P O O L CORPORATION, C o u n te r- P l a in tif f , v. W H I T E S E L L CORPORATION, C o u n ter -D e f e n d a n t. / O P IN IO N T h is matter comes before the Court on Defendant and Counter-Plaintiff Whirlpool's m o t io n for partial summary judgment on Plaintiff and Counter-Defendant Whitesell's: (1) c la im s arising under the parties' 1995 strategic alliance agreement; (2) request for rescission o f the parties' mutual release; and (3) claim for fraud. (Dkt. No. 423.) On February 19, 2009, th e parties agreed to a stipulation and order dismissing: (1) Plaintiff's claims arising under

th e parties' 1995 strategic alliance agreement; and (2) Plaintiff's request for rescission of the p a rtie s' mutual release. (Dkt. No. 461.) Thus, Defendant's original motion for partial su m m a ry judgment has been reduced to a motion for partial summary judgment exclusively o n Plaintiff's claim for fraud. For the reasons that follow, Defendant's motion will be g r a n te d . I . Factual Background O n March 15, 2002, the parties jointly executed a "Strategic Alliance Agreement" ("2 0 0 2 SAA"). The 2002 SAA required Defendant to purchase all of Defendant's

re q u ire m e n ts for certain categories of "fasteners" (screws, nails, nuts, bolts, etc.) from P la in tif f over the term of the 2002 SAA. The 2002 SAA contained a choice-of-law provision providing that "[t]his Agreement s h a ll be governed in all respects, including validity, interpretation and effect, by and c o n s tru e d in accordance with the internal laws of the State of Michigan." (2002 SAA § 16.8.) The 2002 SAA contained a merger clause providing that "the parties acknowledge and agree t h a t . . . there are no oral agreements or understanding [sic] between them affecting the s u b je c t matter of this Agreement." (2002 SAA § 16.2.) The 2002 SAA also contained a nore lian c e clause providing that: Each party acknowledges that it has had full opportunity to c o n su lt with such legal and financial advisors as it has deemed n e c e ss a ry or advisable in connection with its decision knowingly to enter into this Agreement. Neither party has executed this A g re e m e n t in reliance on any representations, warranties, or s ta te m e n t s made by the other party hereto other than those e x p re s s ly set forth herein. 2

(20 0 2 SAA § 16.10.) According to Plaintiff, and not currently disputed by Defendant, Defendant made five a lle g e d ly fraudulent representations to Plaintiff prior to or contemporaneous with the e x e cu tio n of the 2002 SAA:1 (1) that Defendant could not purchase the cold-headed and th re a d ed fasteners listed on Exhibit B-2 from Plaintiff because Defendant was already co n trac tually obligated to purchase those parts from other suppliers (Dkt. No. 444, Pl.'s R e sp . 2, 7-8); (2) that Defendant would provide Plaintiff with a minimum of $5-6 million of n ew business in addition to the obligations under the contract each year (Id. at 2, 7); (3) that D e f e n d a n t intended to transfer $75 million in revenue to Plaintiff by virtue of the 2002 SAA (D k t. No. 14, Am. Compl. ¶ 122; Dkt. No. 444, Pl.'s Resp. 7); (4) that Defendant intended to use Plaintiff as its primary supplier of fasteners through 2007 (Dkt. No. 14, Am. Compl. ¶ 122; Dkt. No. 444, Pl.'s Resp. 7); and (5) that Defendant intended to work in good faith w ith Plaintiff during the course of the 2002 SAA (Dkt. No. 14, Am. Compl. ¶ 122). D e f e n d a n t has moved for summary judgment on Plaintiff's fraud claims brought pursuant to all five of these alleged misrepresentations.

Plaintiff's complaint asserts one catch-all claim for fraud. (Dkt. No. 14, Am. Compl. ¶¶ 118-136.) However, Plaintiff identifies five allegedly fraudulent misstatements. Therefore, the Court will treat and refer to Plaintiff's claim for fraud collectively as Plaintiff's claims for fraud.

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II . Law and Analysis 1 . Applicable Law A federal district court sitting in diversity applies the substantive law, including the c h o ic e -o f -la w rules, of the state in which it sits. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 79 (1 9 3 8 ). If, however, a case is transferred from one federal district court to another pursuant t o 28 U.S.C. § 1404(a), the transferee court applies the law of the state in which the tra n s f e ro r state sits. Van Dusen v. Barrack, 376 U.S. 612, 639 (1964). The case at hand was tra n sf e rre d to this Court from the United States District Court for the Northern District of A la b a m a pursuant to § 1404(a). (Dkt. No. 48, Op. & Order 11-12.) Thus, this Court must a p p ly the substantive law of the state of Alabama, including the choice-of-law rules of that s ta te . A la b a m a choice-of-law rules allow parties to agree on the governing law by including a choice-of-law provision in a contract. Lifestar Response of Ala., Inc. v. Admiral Ins. Co., N o . 1060776, 2009 WL 280457, at *12 n.3 (Ala. Feb. 06, 2009). While a choice-of-law p ro v is io n always governs contractual claims related to the contract, under Alabama law a c h o ic e -o f -la w provision only encompasses tort claims related to the contract, including fraud c la im s , if the choice-of-law provision is written broadly enough to encompass such claims. In Williams v. Norwest Fin. Ala., Inc., 723 So. 2d 97 (Ala. Civ. App. 1998), the Alabama C o u rt of Appeals held that a choice-of-law provision in an agreement providing that "[the a g re e m e n t is] governed by the laws of Alabama" applied only to contractual disputes arising

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o u t of the agreement and was not broad enough to encompass the plaintiff's claim for f ra u d u le n t misrepresentation. Id. at 101. There is little additional Alabama law addressing th e adequacy of choice-of-law provisions to cover tort claims arising out of contractual a g re e m e n ts . State and federal courts alike, however, have found choice-of-law provisions to be broad enough to encompass tort claims when those provisions are written to cover, for ex am p le, "any claim or controversy of or relating to" the agreement, Turtur v. Rothschild, 2 6 F.3d 304, 309 (2d Cir. 1994), "all issues" concerning "enforcement of the rights and d u tie s of the parties," Capital Z v. Health Net, Inc., 43 A.D.3d 100, 103 (N.Y. 2007), or "all a sp e c ts of the legal relationship," Jiffy Lube Int'l, Inc. v. Jiffy Lube of Pa., Inc., 848 F. Supp. 5 6 9 , 576 (E.D. Pa. 1994). The choice-of-law provision in the 2002 SAA is written broadly. It provides that the 2 0 0 2 SAA "shall be governed in all respects, including validity, interpretation and effect" b y the laws of Michigan. The term "in all respects" and the inclusion of questions su rro u n d in g the "validity" of the 2002 SAA suggest that this provision is closer in kind to th o s e provisions held by most courts to cover fraud claims than to the provision in Williams. T h e Court holds that all of Plaintiff's claims, including Plaintiff's claims for fraud, are g o v e rn e d by Michigan law. 2 . The Merger Clause U n d e r Michigan law, a merger clause (sometimes called an "integration clause") can p re c lu d e a fraud claim in two related ways. First, by establishing that a written contract is

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a n integrated agreement, a merger clause brings into play the parol evidence rule, which p ro h ib its evidence of oral promises made prior to or contemporaneous with the execution of a written agreement. UAW-GM Human Res. Ctr. v. KSL Recreation Corp., 579 N.W.2d 411, 4 1 4 (Mich. Ct. App. 1998). Second, since a merger clause nullifies a promise not included in the written agreement, it also makes reliance on that promise unreasonable. UAW-GM, 5 7 9 N.W.2d at 419; Diamond Computer Sys. v. SBC Commc'n, Inc., 424 F. Supp. 2d 970, 9 8 5 (E.D. Mich. 2006). Reasonable reliance is one element of a fraud claim under Michigan la w . Novak v. Nationwide Mut. Ins. Co., 599 N.W.2d 546, 553 (Mich. Ct. App. 1999). Even if a written agreement is integrated by virtue of a merger clause, however, parol e v id e n c e may be introduced to show that the agreement itself was procured by fraud. Plate v . Detroit Fid. & Sur. Co., 201 N.W. 457, 458 (Mich. 1924). But to qualify for this exception to the parol evidence rule, the alleged misrepresentation must be so severe that it "invalidates th e entire contract." UAW-GM, 579 N.W.2d at 509. Misrepresentations that relate to " d is c re te " terms of the contract are not sufficient to "invalidate[] the entire contract." D ia m o n d , 424 F. Supp. 2d at 985. On the other hand, "representations of fact made by one p a rty to another to induce that party to enter into a contract" are considered fraud that " in v a lid a te s the entire contract." LIAC, Inc. v. Founders Ins. Co., 222 F. App'x 488, 493

(6 th Cir. 2007) (quoting Star Ins. Co. v. United Commercial Ins. Agency, Inc., 392 F. Supp. 2 d 927, 928-29 (E.D. Mich. 2005)); see also Custom Data Solutions v. Preferred Capital, In c ., 733 N.W.2d 102 (Mich. Ct. App. 2006). Since a merger clause makes reliance on

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s ta te m e n ts unreasonable because it makes evidence of those statements inadmissible under th e parol evidence rule, it follows that when a statement is not inadmissible in light of a m e rg e r clause, reliance on that statement is also not unreasonable. See Diamond, 424 F. S u p p . 2d at 984-85; Custom Data, 733 N.W.2d at 104-06. Plaintiff does not dispute that the 2002 SAA was an integrated version of the parties' a g re e m e n t. Plaintiff, however, argues that Defendant used fraudulent misrepresentations to in d u c e Plaintiff into signing the agreement. (Dkt. No. 444, Pl.'s Resp. 21.) According to P lain tiff , these misrepresentations, if proven, constitute fraud that would invalidate the entire 2 0 0 2 SAA because Plaintiff would not have entered into the contract had it known the truth. (Id .; Dkt. No. 440, Pl.'s Resp. 16 ("Plaintiff never would have entered into the 2002 SAA h a d it known the truth about the Exhibit B-2 list.").) All of the alleged misrepresentations, su c h as Defendant's representation that it intended to transfer $75 million in revenue to P lain tiff by virtue of the 2002 SAA, do not relate to any "discrete" terms of the agreement, b u t are substantial misrepresentations that could have induced Plaintiff to enter into the entire 2 0 0 2 SAA. For this reason, Defendant's alleged misrepresentations "invalidate[] the entire c o n tra c t." The merger clause does not bar evidence of these misrepresentation or make P la in tif f 's reliance on these misrepresentations unreasonable. 3 . The No-Reliance Clause L i k e a merger clause, a no-reliance clause can abrogate the reliance element of a p la in tif f 's fraud claim. However, while a merger clause purports to make reliance on

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s ta te m e n ts unreasonable indirectly by first making them inadmissible under the parol e v id e n c e rule, a no-reliance clause directly and explicitly makes reliance on statements u n re a so n a b le . For this reason, no-reliance clauses have an altogether different effect than m e rg e r clauses on the reasonableness of reliance, and they therefore require a different a n a lysis . Deluxe Media Servs. v. Direct Disc Network, Inc., No. 06 C 1666, 2007 WL 7 0 7 5 4 4 , at *6-7 (N.D. Ill. Mar. 2, 2007) (holding that while merger clauses may not preclude f ra u d claims, no-reliance clauses may); FMC Techs., Inc. v. Edwards, No. C05-946C, 2007 W L 1725098, at *4 (W.D. Wash. June 12, 2007) ("It is undisputed that there is a significant d if f e re n c e between integration clauses and no-reliance clauses in contracts."). Very few Michigan cases address the validity of no-reliance clauses.2 A survey of p e rs u a siv e authority reveals that courts generally look for three factors to determine if a nore lian c e clause will successfully abrogate the reliance element of a fraud claim. First, courts a re more willing to enforce a no-reliance clause if the provision disclaiming reliance is its o w n separate clause rather than a provision embedded within another clause of the a g re e m e n t, such as a merger clause or an exculpatory clause. See Vigortone AG Prod., Inc. v . PM AG Prods., Inc., 316 F.3d 641, 644 (7th Cir. 2002); Rissman v. Rissman, 213 F.3d 381, 3 8 5 (7th Cir. 2000); Tirapelli v. Advanced Equities, Inc., 813 N.E.2d 1138, 1145 (Ill. App. C t. 2004); CFJ Assocs. of N. Y. Inc. v. Hanson Ind., 274 A.D.2d 892, 894 (N.Y. App. Div.
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The most relevant Michigan case is Federated Capital Services v. Dextours, Inc., No. 228208, 2002 WL 868273 (Mich. Ct. App. Apr. 26, 2002), in which the Michigan Court of Appeals upheld a no-reliance provision to preclude the plaintiff's fraud claims. Id. at *1. Dextours, however, is an unpublished opinion. 8

2 0 0 0 ). Second, courts are more willing to enforce a no-reliance clause if it expressly m e n tio n s and disclaims "reliance." See Rissman, 213 F.3d at 385; Deluxe Media Servs. v. D ir e c t Disc Network, Inc., No. 06 C 1666, 2007 WL 707544, at *6-8 (N.D. Ill. Mar. 2, 2007). T h ird , courts are more willing to enforce a no-reliance clause if the contracting parties are s o p h is tic a te d . Insitu, Inc. v. Kent, No. CV-08-3067-EFS, 2009 WL 2160690, at *3-4 (E.D. W a sh . July 17, 2009); Tirapelli, 813 N.E.2d at 1144; Vigortone AG, 316 F.3d at 645. T h e no-reliance clause contained in the 2002 SAA is separate and independent from th e merger clause. It expressly mentions reliance. Plaintiff and Defendant, together with th e ir attorneys, are both sophisticated commercial parties. Every court that has addressed the is s u e would enforce the no-reliance clause under the circumstances presented here. The nore lia n c e clause is thus enforceable as a matter of law. Plaintiff cannot establish its fraud c la im s for alleged misstatements made outside of the terms of the 2002 SAA. By its express terms, the no-reliance clause does not abrogate reliance on m is s ta te m e n ts that are expressly included in the 2002 SAA. (2002 SAA § 16.10.) Two of the five alleged misrepresentations that form the basis of Plaintiff's fraud claims are e m b o d ied , at least to some extent, in the 2002 SAA.3 Defendant's representation that it

Plaintiff also argues that Defendant's alleged misrepresentation that it would use Plaintiff as its primary parts supplier through 2007 also appears in the 2002 SAA since Section 3.4 of the 2002 SAA made the intended scope of the agreement between the two parties certain commodity codes. (Dkt. No. 444, Pl.'s Resp. 24) However, the 2002 SAA says nothing of Defendant's intention to make Plaintiff its "primary parts supplier," only Defendant's intention to purchase certain enumerated items from Defendant. It would be a stretch for the Court to extend Defendant's explicit purchase obligations under the 2002 SAA to a promise by Defendant to make Plaintiff its "primary parts supplier." 9

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w o u ld provide Plaintiff with a minimum of $5-6 million of new business in addition to the o b lig a tio n s under the contract each year appears at the bottom of Exhibit B-1 of the 2002 S A A .4 (2002 SAA Ex. B-1.) Additionally, Defendant's representation that it will work in g o o d faith with Plaintiff appears in Sections 10 5 and 11 6 of the 2002 SAA. (2002 SAA §§ 1 0 , 11.) Therefore, though the no-reliance clause abrogates the reliance element of

P lain tiff 's fraud claims brought pursuant to alleged misstatements not expressly included in th e 2002 SAA, it does not abrogate the reliance element of Plaintiff's fraud claims brought p u rs u a n t to the alleged misrepresentations contained in Sections 10 and 11 of the 2002 SAA a n d Exhibit B-1 of the 2002 SAA. 4 . The Economic Loss Doctrine M ic h ig a n has adopted the economic loss doctrine. Neibarger v. Universal Coops., In c ., 486 N.W.2d 612 (Mich. 1992). The economic loss doctrine "bars tort recovery and l im its remedies to those available under the Uniform Commercial Code where a claim for d a m a g e s arises out of the commercial sale of goods and losses incurred are purely e c o n o m ic ." Id. at 613. In a broad sense, the economic loss doctrine is intended to provide

Exhibit B-1 of the 2002 SAA obligates Defendant to provide Whitesell with a "potential business growth opportunity between $5 to $6 million" each year to supplement Defendant's other purchase obligations under the 2002 SAA. Section 10 of the 2002 SAA requires the parties to "use good faith business efforts to work towards and [sic] acceptable arrangement" if compliance with the agreement for some reason caused economic hardship to one of the parties. Section 11 requires the parties to "use their best efforts to attempt to resolve any disputes" arising out of the agreement. 10
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c o m m e rc ial contracting parties with the certainty that claims arising out of the contract will b e governed exclusively by the UCC, and allow those parties to negotiate accordingly. Id. a t 616; see also Williams Elec. Co. Inc. v. Honeywell, Inc., 772 F. Supp. 1225, 1237 (N.D. F la . 1991) ("There is a danger that tort remedies could simply engulf the contractual re m e d ies and thereby undermine the reliability of commercial transactions.") As noted in N e ib a r g e r, the economic loss doctrine prevents contract law from "drown[ing] in a sea of tort la w ." Neibarger, 486 N.W.2d at 618 (quoting East River Steamship Corp. v. Transamerica D e la v a l Inc., 476 U.S. 858, 866 (1986)). Under the economic loss doctrine, a plaintiff may n o t maintain a fraud claim for a defendant's failure to fulfill a promise that is "interwoven w ith the breach of contract." Huron Tool & Eng'g Co. v. Precision Consulting Servs., Inc., 5 3 2 N.W.2d 541, 545 (Mich. App. 1995). In such a case, breach of contract is the plaintiff's o n ly cause of action. The parties dispute whether the economic loss doctrine bars fraud claims brought by s e lle rs of goods as well as claims brought by purchasers of goods. Defendant relies on D in s m o r e Instrument Co. v. Bombarider, Inc., 999 F. Supp. 968 (E.D. Mich. 1998), which e x p lic itly held that the economic loss doctrine applies to claims brought by sellers of goods. (D k t. No. 596, Ex. A at 2-3.) Plaintiff relies on Michigan Dessert Corp. v. Baldwin R ic h a rd s o n Foods, Inc., No. 06-15726, 2007 U.S. Dist. LEXIS 24305 (E.D. Mich. March 15, 2 0 0 7 ) (unpublished opinion), which explicitly held that the economic loss doctrine does not a p p ly to claims brought by sellers of goods. (Dkt. No. 593, Ex A at 3.) Dinsmore and

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M ic h ig a n Dessert are both decisions of the United States District Court for the Eastern D is tric t of Michigan in which that court was asked to apply Michigan law. It is the duty of th i s Court to ascertain Michigan law by examining the decisions of Michigan state courts, a n d although Dinsmore and Michigan Dessert provide persuasive authority, the Court is not o b lig a te d to follow either decision. See Allstate Ins. Co. v. Thrifty Rent-A-Car Systems, Inc., 2 4 9 F.3d 450, 454 (6th Cir. 2001). P lain tiff also cites several decision by Michigan state courts that Plaintiff argues limit t h e application of the economic loss doctrine to claims brought by purchasers, such as N e ib a r g e r, Huron Tool, and MASB-SEG Prop./Cas. Pool, Inc. v. Metalux, 586 N.W.2d 549 (M ich. Ct. App. 1998). (Dkt. No. 593, Ex A at 3-4.) Although Plaintiff is correct to assert th a t these cases do apply the economic loss doctrine to claims brought by purchasers, the C o u rt does not agree that these cases clearly exclude claims brought by sellers from the scope o f the doctrine. The Court relies on General Motors Corp. v. Alumi-Bunk, Inc., 757 N.W.2d 859 (M ic h . 2008), to hold that, under Michigan law, the economic loss doctrine bars fraud claims th a t are interwoven with a contract brought by sellers as well as buyers of goods. In General M o t o r s, the plaintiff agreed to sell hundreds of Chevrolet Silverado trucks to the defendant. G e n . Motors Corp. v. Alumi-Bunk, Inc., No. 270430, 2007 WL 2118796, at *1 (Mich. Ct. A p p . July 24, 2007), rev'd, 757 N.W.2d 859 (Mich. 2008). As part of the sale agreement, th e defendant promised to "upfit," or modify, the vehicles before reselling them so not to

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co m p ete with the sale of non-modified vehicles by the plaintiff. Id. When the defendant f a ile d to upfit the vehicles before reselling them, the plaintiff brought suit for breach of c o n tra c t and fraud. Adopting the dissenting opinion of the Court of Appeals, the Michigan S u p re m e Court held that the economic loss doctrine barred the plaintiff's fraud claim. Gen. M o t o r s, 757 N.W.2d at 859. In all relevant respects, the factual background of General Motors is identical to that o f the case at hand. In both cases, the allegedly fraudulent statement was a promise of future p e rf o rm a n c e , it was interwoven with the contract of sale itself rather than "extraneous" to th e contract, and it was made by the purchaser rather than the seller. Consistent with the h o ld in g in General Motors, the Court holds that the economic loss doctrine bars Plaintiff's c la im s for fraud based on Defendant's alleged misrepresentations that it would work in good f a ith with Plaintiff as provided in Sections 10 and 11 of the 2002 SAA, and that it would p ro v id e Plaintiff with a minimum of $5-6 million of new business in addition to the o b lig a t io n s under the contract each year as provided in Exhibit B-1 of the 2002 SAA. These p ro m is e s are interwoven with the 2002 SAA, and Plaintiff is limited to the breach of contract re m e d ie s provided under the UCC for Defendant's alleged failure to honor them. III. Conclusion P la in tif f 's claims for fraud based on Defendant's alleged misrepresentations (1) th a t Defendant could not purchase the cold-headed and threaded fasteners listed on E x h ib it B-2 from Plaintiff because Defendant was already contractually obligated to

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p u rc h a se those parts from other suppliers; (2) that Defendant intended to transfer $75 m illio n in revenue to Plaintiff by virtue of the 2002 SAA; and, (3) that Defendant in te n d e d to use Plaintiff as its primary supplier of fasteners through 2007, are barred by th e no-reliance clause of the 2002 SAA. Plaintiff's claims for fraud based on D e f e n d a n t's alleged misrepresentation (1) that Defendant would work in good faith with P la in tif f as provided in Sections 10 and 11 of the 2002 SAA; and (2) that Defendant w o u ld provide Plaintiff with a minimum of $5-6 million of new business in addition to th e obligations under the contract each year as provided in Exhibit B-1 of the 2002 SAA are barred by the economic loss doctrine. Defendant is therefore entitled to summary ju d g m e n t on all of Plaintiff's five claims for fraud. A n order consistent with this opinion will be entered.

Dated: October 5, 2009

/s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

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