Date: 01-11-2002

Case Style: Mt. Lebanon Personal Care Home, Inc. v. Hoover Universal, Inc.; Johnson Controls, Inc.

Case Number: 00-5696

Judge: Unknown

Court: United States Court of Appeals for the Sixth Circuit

Plaintiff's Attorney: F. Larkin Fore of Fore, Miller & Schwartz, Louisville, Kentucky, for Appellant.

Defendant's Attorney: Richard K. Wray of Sachnoff & Weaver, Ltd., Chicago, Illinois, for Appellees.

Description: Mt. Lebanon Personal Care Home, Inc. (Mt. Lebanon) appeals from the district court's summary judgment for Hoover Universal, Inc. (Hoover) on Mt. Lebanon's tort/product-liability claims. The district court held that the economic loss doctrine bars Mt. Lebanon's tort claims. The district court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. We AFFIRM.

I.

Mt. Lebanon is a non-profit corporation owned by the New Zion Baptist Church. In 1981 and 1982 it hired a contractor and an engineer to build a nursing home facility which can serve approximately 122 residents. These residents are primarily Medicare and Medicaid patients. In July 1998, a structural failure occurred in the nursing home's cafeteria, causing Mt. Lebanon to abandon the cafeteria. A year later a second failure occurred, and upon the recommendation of its structural engineer, Mt. Lebanon evacuated the facility. It has been unoccupied since the evacuation.

According to Mt. Lebanon, the structural failures were caused by fire retardant chemicals used to treat the lumber in the building's trusses. Hoover manufactured the chemicals, and although the record is not clear, may also have been responsible for the lumber used in the trusses in the Mt. Lebanon facility.

In May 1999, Mt. Lebanon filed this diversity action against Hoover alleging 1) strict liability; 2) violation of express warranties; 3) violation of implied warranties; 4) negligent misrepresentation; 5) negligence; 6) gross negligence; and 7) malice. In April 2000, the district court granted Hoover's motion for summary judgment. It dismissed Mt. Lebanon's tort claims (claims 1 and 4-7) as being foreclosed by the economic loss doctrine. It dismissed Mt. Lebanon's warranty claims (claims 2 and 3) both because there was no privity between Mt. Lebanon and Hoover and because the Kentucky statute of limitations had long since run.

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In this diversity action we apply the substantive law of Kentucky "in accordance with the then-controlling decision of [Kentucky's highest court]." Pedigo v. Unum Life Ins. Co. of Am., 145 F.3d 804, 808 (6th Cir. 1998) (internal quotation marks omitted).

II.

The economic loss rule bars recovery in tort for economic loss. Economic loss is both loss in the value of a product caused by a defect in that product (direct economic loss) and consequential loss flowing from the defect, such as lost profits (consequential economic loss). Louis R. Frumer & Melvin I. Friedman, Products Liability, § 13.11[1] (2000) (hereafter, Frumer & Friedman). The economic loss rule marks the border between tort and contract law. Where tort law, primarily out of a concern for safety, fixes the responsibility for a defective product directly on the parties responsible for placing the product into the stream of commerce, contract law gives the parties to a venture the freedom to allocate risk as they see fit. Were there no economic loss rule, "contract law [might] drown in a sea of tort." East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986).

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A large majority of jurisdictions in this country have adopted the economic loss rule. Id. at § 13.11[1] n.1.4-1.5. While a small minority of these jurisdictions have limited the rule to business purchases, most apply it to both business and consumer purchases. Id. at § 13.11[3]. In Miller's Bottled Gas, Inc. v. Borg-Warner Corp., 955 F.2d 1043, 1050 (6th Cir. 1992), we anticipated that the Kentucky Supreme Court would adopt the economic loss rule "in a product liability action based upon negligence."

Two years later, the Kentucky Supreme Court decided Real Estate Marketing, Inc. v. Franz, 885 S.W.2d 921 (Ky. 1994). In Franz, subsequent purchasers of a home sued the builder for structural defects under warranty, negligence, and statutory theories. Id. The trial court granted the builder's motion to dismiss and the case was appealed to the Kentucky Supreme Court. Id. It reversed, reasoning that the Franzes should be able to assert their statutory theory. 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.

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We must now try to predict the approach the Kentucky Supreme Court would adopt. Mt. Lebanon refers us to Saratoga Fishing Co. v. J.M. Martinac & Co., 520 U.S. 875 (1997), and argues that the product is the "item placed in the stream of commerce." Hoover, on the other hand, relies on East River when it argues that the product is the item purchased by the initial user. While these two cases would likely be persuasive to the Kentucky Supreme Court, neither adopts the rule offered by each party. Rather, it appears that product scope determinations are fact-sensitive. In Saratoga, for example, the Court held that the product was the ship initially sold to the user but not items added to the ship after the initial purchase. 520 U.S. at 879. In East River, on the other hand, the Court held that the ship's turbine was the product and not the entire ship. 476 U.S. at 867. Thus, neither case provides conclusive guidance in our quest to determine whether the Kentucky Supreme Court would hold that a component part of a larger product is a product for purposes of the economic loss rule. Indeed, it seems that Saratoga supports Hoover as much as it does Mt. Lebanon because it suggests that the product is the ship (or nursing home) and not a component part. And East River supports Mt. Lebanon as much as it does Hoover because it suggests that a component part of the final product-a ship's turbine-is the product. Thus, we must look elsewhere for guidance.

Mt. Lebanon argues that the treated wood is the product. This theory has serious problems. If the product is to be defined as the item placed in the stream of commerce, then any component part of a product is a product itself because all component parts are placed into the stream of commerce at some point. Id. As the Supreme Court stated in East River, such a finding would obliterate "the distinction between warranty and strict products liability." Id. With the understanding that there must be some limit to the degree to which a unit may be broken down into multiple parts when attempting to define what constitutes a product for purposes of the economic loss rule, we predict that the Supreme Court of Kentucky would hold that the wood used in the trusses in this case is not the product. While the wood used in the nursing home is not irreducible-it consists of wood and fire retardant-it is so rudimentary that, if we were to hold that it is the product for economic loss rule purposes, nearly any component part would be a product and we would, as a result, effectively eviscerate the distinction between contract and tort law.

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Courts are divided over whether the economic loss rule immunizes potential defendants who are not in privity with a plaintiff. Frumer & Friedman § 13.14[5]. The Kentucky Supreme Court has not addressed this question. Moreover, Mt. Lebanon's authority for this point does not support the argument it advances. It cites Bowling Green Municipal Utilities v. Thomason Lumber Co., 902 F. Supp. 134 (W.D. Ky. 1995). However, nowhere does Bowling Green hold that Kentucky's economic loss rule only applies to parties that are in privity. Mt Lebanon also cites Detroit Edison Co. v. NABCO, Inc., 35 F.3d 236 (6th Cir. 1994). This case is of no help to Mt. Lebanon either, however, because it anticipates Michigan law not Kentucky law. What is more, while some portions of the Detroit Edison opinion assume that parties to a suit involving economic loss will be in privity, nowhere does the court hold that privity is a requirement. Indeed, since the parties were in privity in Detroit Edison, the court had no occasion to address the privity issue raised here. Consequently, we will look elsewhere for guidance.

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Mt. Lebanon further argues that the Kentucky Supreme Court would adopt an exception to the economic loss doctrine where the injury to the product created a serious risk of injury to a person or property. While courts are divided over this exception, Frumer & Friedman § 13.14[2], those that have adopted it are in the minority. Id. § 13.14[2]. Moreover, "all relevant evidence" suggests that the Kentucky Supreme Court would not adopt this exception. Bailey, 770 F.2d at 604. The Supreme Court in East River rejected it, 476 U.S. at 870, as have the authors of the Restatement (Third) of Torts: Products Liability in section 21 comment d. We therefore predict that the Kentucky Supreme Court would reject a serious risk of injury exception to the economic loss rule.

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Click the case caption above for the full text of the Court's opinion.

Outcome: Affirmed

Plaintiff's Experts: Unknown

Defendant's Experts: Unknown

Comments: E-mail suggested corrections, comments and/or corrections to: Kent Morlan

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