Allstate Insurance Company and Granit Mutual Insurance Company v. Hamilton Beach/Proctor Silex Company

Allstate Insurance Company and Granite Mutual Insurance Company (collectively
"Plaintiffs") brought this subrogation action against Hamilton Beach/Proctor Silex, Inc.
("Hamilton Beach" or "Defendant") seeking to recover approximately $97,000 paid to their
respective insureds, Joseph Malboeuf and Michael and Gail Leggett, for covered losses sustained
in a residential fire in St. Albans, Vermont. Plaintiffs alleged that a defective coffee maker
manufactured by Hamilton Beach caused the fire and asserted claims for products liability and
breach of express and implied warranties.1 Hamilton Beach moved for summary judgment
arguing that Plaintiffs could not establish a defective condition in the coffee maker, an essential
element of both claims.

Plaintiffs argued that they had produced sufficient circumstantial evidence to show the coffee
maker was defective to preclude summary judgment as to both claims. With respect to their strict
products liability claim, Plaintiffs urged the District Court to adopt the Restatement (Third) of Torts:
Products Liability § 3 (1998) ("Restatement § 3"), which under certain conditions permits recovery
on a strict liability claim where there is only circumstantial evidence of a defect. With respect to
their breach of warranty claim, Plaintiffs argued that Vermont law allows recovery where
circumstantial evidence establishes that a defect in a product is the most likely cause of injury.
Plaintiffs asserted, therefore, that summary judgment on their breach of warranty claim would be
inappropriate regardless of whether the District Court adopted the malfunction theory.

In his Report and Recommendation, Magistrate Judge Niedermeier determined Plaintiffs'
circumstantial evidence was not sufficient to show that a defect in the coffee maker was the more
probable cause of the fire when compared to all other possible causes. Magistrate Judge
Niedermeier declined, therefore, to consider whether the Supreme Court of Vermont would adopt
the malfunction theory and recommended granting Hamilton Beach's motion for summary
judgment in its entirety. The United States District Court for the District of Vermont (Murtha,
J.) adopted the Report and Recommendation without modification and dismissed the complaint.
Plaintiffs appeal.

BACKGROUND

In May 2002, Malboeuf purchased from Ames Department store a coffee maker
manufactured by Hamilton Beach, brought it home and placed it, still packaged, on his kitchen
floor. The coffee maker remained there until the night of June 13, 2002, when Malboeuf
removed it from its packaging and set it up. The following morning, Malboeuf used the coffee
maker for the first time. Before leaving for work, he turned it off, but did not unplug it. Less
than three hours later, a neighbor saw flames coming from Malboeuf's home and called the St.
Albans fire department. Although the fire department arrived just two minutes later and
promptly brought the fire under control, it had caused substantial damage to both Malboeuf's
property and that of his tenants, the Leggetts.

Gary Palmer, St. Albans's fire chief, conducted an initial investigation into the cause of
the fire. Based on that investigation, he determined that the fire started to the right of the stove,
where Malboeuf claims the coffee maker was located prior to the fire. Palmer ruled out the possibility that the fire was the result of arson or careless smoking. He did not, however, offer
any theory of how or why the coffee maker started the fire.

On June 17, 2002, David Eliassen, a cause and origin investigator retained by Allstate,
visited the scene to undertake his own investigation. Eliassen noted that the coffee maker had
been reduced to very small pieces and there was a very heavy char pattern on the splash board
behind the coffee maker. According to Eliassen, this char pattern - shaped like a "V" with the
lowest point of heavy char directly behind the coffee maker - indicated that the fire originated in
that area. While Eliassen testified in his deposition that there were three other potential electrical
sources of ignition in the area - the electric range, the range hood, and the electric receptacle
behind the coffee maker - he did not believe that the burn patterns were consistent with a fire in
either the electric range or the range hood. Nonetheless, Eliassen recommended that Allstate
retain an electrical engineer to examine each of these alternate sources of ignition so that they
could be definitively ruled out.

On June 28, 2002, Eliassen returned to the scene to continue his investigation. He was
accompanied by Eric Chaine, the electrical engineer retained by Allstate on Eliassen's
recommendation, and Charles King, a fire investigator representing Hamilton Beach. King
inspected the scene and spoke with Malboeuf. According to Eliassen, when he explained to King
that one of the purposes for the visit was to examine closely the electric range and range hood,
King stated that he could see that those items did not cause the fire and did not stay for that
examination. Based on that interaction, Eliassen concluded that Hamilton Beach had "no interest
in preserving the range or the range hood." Chaine, however, went forward with the examination
on site and also took the remnants of the coffee maker back to his laboratory for further study.

Eliassen and Chaine both submitted reports detailing the results of their respective
investigations. Eliassen concluded that the "fire had a single point of origin at the . . .
coffeemaker," but deferred to Chaine to identify a specific failure mode within the coffee maker.
Eliassen based his conclusion on the lack of any evidence of arson or accidental ignition, as well
as his professional opinion that "all ignition sources, except for the . . . coffeemaker ha[d] been
considered and ruled out." Chaine's report also ruled out the range, the range hood, and the
receptacle as potential causes of the fire. The report noted that the plastic housing of the coffee
maker had been consumed completely by the fire, leaving only "the bottom base plate, the
heating element assembly (including the warmer plate), some remnants of the carafe, and pieces
of stranded wires." Despite this destruction, Chaine was able to identify the basic components of
the coffee maker which were "still in a fair condition, with no signs of failure." Chaine also
observed that the wire strands probably came from the power cord and indicated multiple points
of electrical arcing. This arcing, he concluded, was likely the result of a cord failure and the most
probable cause of the fire.

King died before filing a report or being deposed in connection with this action. To
replace King, Hamilton Beach retained Scott Barnhill. Based on his investigation, Barnhill
stated that he was "comfortable ruling out the range, the receptacle, [and] the hood . . . ." In an
apparent reference to Plaintiffs' disposal of several component parts of these alternate sources
following King's site visit, however, Barnhill suggested that his conclusion might have been
different had he had an opportunity to examine additional evidence. Barnhill also eliminated the
coffee maker as a potential cause of the fire. Disputing Chaine's conclusion, he asserted that any electrical arcing on the coffee maker's power cord would not have been strong enough to ignite
the coffee maker's housing.

Hamilton Beach moved to preclude Chaine's testimony regarding the coffee maker's
alleged mode of failure. Plaintiffs agreed to limit Chaine's testimony "to his examination of the
range, range hood and receptacle, and his elimination of these items as potential causes of the
fire." Thereafter, Hamilton Beach moved for summary judgment, arguing that Plaintiffs could
not establish that the coffee maker was defective.

Plaintiffs conceded that they could not identify a specific defect in the coffee maker.
Relying on expert reports and testimony eliminating the other possible causes of the fire,
however, they argued they had produced sufficient circumstantial evidence that the coffee maker
was defective to withstand summary judgment on both claims.

With respect to their strict liability claim, Plaintiffs' argument assumed that the District
Court would apply Restatement § 3, often referred to as the "malfunction theory." The Vermont
Supreme Court has not yet issued an opinion that adopts the malfunction theory, which allows a
plaintiff to use circumstantial evidence to demonstrate that a product was defective where the
incident that harmed the plaintiff: "(a) was of the kind that ordinarily occurs as a result of a
product defect; and (b) was not, in the particular case, solely the result of causes other than
product defect." Restatement § 3. The malfunction theory relieves plaintiffs of the heavier
burden of establishing a specific defect in a product.

With respect to its breach of warranty claim, Plaintiffs asserted they had at least created a
material issue of fact because existing Vermont law permits a plaintiff to use circumstantial
evidence to prove that a defect in a product is the most likely cause of the injury. Thus, Plaintiffs argued that summary judgment was inappropriate even if the District Court declined to adopt the
malfunction theory.

In his Report and Recommendation, Magistrate Judge Niedermeier recommended
granting Hamilton Beach's motion for summary judgment. The recommendation was supported
by two central determinations. First, Magistrate Judge Niedermeier refused to allow Plaintiffs to
make use of their evidence that ruled out all sources of ignition aside from the coffee maker,
reasoning that due to Plaintiffs' failure to preserve several components of the potential alternate
sources of ignition for examination by Hamilton Beach, it would be inequitable for Plaintiffs to
make use of such circumstantial evidence or avoid the burden of proving a specific defect in the
coffee maker. Second, he found that Plaintiffs had not presented any evidence that the coffee
maker could not have been damaged in transit from the store after Malboeuf purchased it, or
while it sat on Malboeuf's floor before he used it. On the basis of those findings, Magistrate
Judge Niedermeier concluded it was not necessary to consider whether the Vermont Supreme
Court would adopt the malfunction theory, because Plaintiffs' evidence could not satisfy it.
Therefore, he recommended dismissing Plaintiffs' strict products liability claim.

With respect to the breach of warranty claim, Magistrate Judge Niedermeier noted that
Vermont law permits a plaintiff to establish the existence of a defect through circumstantial
evidence by demonstrating that a defect is the more probable cause of the injury when compared
to other possible causes. Referring to his earlier finding that Plaintiffs had not produced any
evidence that the coffee maker was not damaged after it was purchased by Malboeuf, he
concluded that no such showing could be made in this case and recommended the dismissal of
the breach of warranty claim as well. Plaintiffs filed timely objections to the Report and Recommendation, and Hamilton Beach filed a timely response. On November 4, 2004, the
District Court (Murtha, J.) adopted the Report and Recommendation without modification.

On appeal, Plaintiffs challenge the two determinations underlying the District Court's
judgment. Plaintiffs argue here that the District Court erred in finding that they did not provide
Hamilton Beach an opportunity to examine the other potential ignition sources and that
dismissing their strict products liability claim on that basis constituted an inappropriate spoliation
sanction. In addition, Plaintiffs claim that the District Court erroneously drew a factual inference
in favor of Hamilton Beach when it held that the coffee maker may have been damaged in transit
or while it sat on Malboeuf's floor.

According to Plaintiffs, the record contains circumstantial evidence sufficient to allow a
jury reasonably to conclude that an unspecified defect in the coffee maker was the more probable
cause of the fire and that the coffee maker was defective while in the possession and control of
Hamilton Beach. Plaintiffs argue that the District Court erred by refusing to consider whether the
Vermont Supreme Court will adopt some form of the malfunction theory, which would support a
recovery on their strict products liability claim. In addition, Plaintiffs argue that Vermont law on
breach of warranty requires that those claims be decided by a jury.

We agree that both determinations underlying the District Court's entry of summary
judgment were in error. Construing the record in the light most favorable to Plaintiffs, as we
must, we find there is circumstantial evidence sufficient to allow a jury reasonably to find: (1)
that a defect in the coffee maker was the more probable cause of the fire; and (2) that the coffee
maker was in substantially the same condition as it was when last in Defendant's possession and
control. We, therefore, hold the District Court erred in dismissing Plaintiffs' breach of warranty claim. For the same reasons, and in light of Travelers Ins. Cos. v. Demarle, Inc., 178 Vt. 570,
574, 878 A.2d 267, 272 (Vt. 2005), where the Vermont Supreme Court suggested that under
Vermont law a plaintiff may rely on circumstantial evidence to establish causation in strict
products liability actions in the same manner as he or she may in breach of warranty actions,2 we
hold that the District Court also erred in dismissing Plaintiffs' strict products liability claim.

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