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Liberty Mutual Insurance Co. v. Equipment Corporation of America

August 18, 2009

LIBERTY MUTUAL INSURANCE CO., AS SUBROGEE OF SCHNABEL FOUNDATION CO., INC., PLAINTIFF,
v.
EQUIPMENT CORPORATION OF AMERICA, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge

MEMORANDUM OPINION

Invoking this Court's diversity jurisdiction, Liberty Mutual Insurance Company ("Liberty Mutual") as subrogee of Schnabel Foundation Company, Inc. ("Schnabel") brings this action against defendants Equipment Corporation of America ("ECA"), Bauer Maschinen GmbH ("Bauer"), and Pileco, Inc. for property damages sustained to a 18H rotary drill rig ("Drill Rig") manufactured by Bauer and leased and sold by ECA under theories of strict products liability sounding in tort and breach of warranty sounding in contract. Before the Court is ECA's and Bauer's motion for summary judgment [#49] on both the strict products liability claim and breach of warranty claim asserted by Liberty Mutual. Upon consideration of the motion, the opposition thereto, and the record of this case, the Court concludes that the motion for summary judgment should be granted in part and denied in part.

I. BACKGROUND

Bauer is a German company that manufactures certain equipment, including the Drill Rig. In January 2004, Bauer authorized ECA to market, sell, and rent certain products manufactured by Bauer, including the Drill Rig. In April 2005, Schnabel leased the Drill Rig from ECA. The Lease Agreement ("Lease Agreement") disclaimed all warranties, express and implied, including any implied warranty of merchantability. An additional writing to the Lease Agreement ("Purchase Option") provided that the renter has an option to purchase the Drill Rig at any time during the rental period.*fn1 Schnabel exercised the Purchase Option in December 2005. Unlike the Lease Agreement, neither the Purchase Option nor the invoice for the sale of the Drill Rig ("Invoice") contained a similar warranty disclaimer. Defendants Bauer and ECA maintain that the Purchase Option was one term of the Lease-Purchase Agreement ("Lease-Purchase Agreement"), while Liberty Mutual argues that the Purchase Option is a separate agreement from the Lease Agreement. Thus, the parties disagree as to whether the terms of the Lease Agreement apply only to the rental of the Drill Rig, or if they also apply to the sale of the Drill Rig.

In December 2006, Schnabel was using the Drill Rig in Washington, D.C. At the end of the day on December 11, 2006, the work crew "turned off the engine and locked the cab of the Drill Rig." (Pl.'s Am. Compl. ¶ 12.) The Drill Rig was not used the following day, but at 3 a.m. on December 13, 2006, the Drill Rig was on fire. Liberty Mutual contends that the Drill Rig was damaged beyond repair. Further, Liberty Mutual asserts that the fire caused fuel and/or hydraulic fluid to spill that was subsequently cleaned up by Schnabel, and which required the disposal of contaminated material that was paid for by Liberty Mutual. As subrogee of Schnabel, Liberty Mutual seeks $745,000 in damages sustained to the Drill Rig, as well as consequential damages associated with the clean up under theories of strict products liability and breach of warranty.

II. ANALYSIS

ECA and Bauer move for summary judgment on both Liberty Mutual's strict products liability claim and breach of warranty claim alleging that: (1) strict liability and breach of the implied warranty of merchantability are considered a single tort, (2) recovery under this single tort claim is precluded by the economic loss rule, and (3) even if the two claims are not considered a single tort, the Lease-Purchase Agreement disclaimed any express or implied warranties.*fn2 This memorandum opinion will address each of the defendants' arguments in turn.

As a preliminary matter, the parties disagree as to which state's law should apply to this case.Bauer and ECA assert that District of Columbia law should apply because the injury-causing conduct, the fire, occurred in the District of Columbia. Liberty Mutual contends that Pennsylvania law should apply because the parties' relationship centered in Pennsylvania.

When deciding state law claims in federal court where jurisdiction is based on diversity, the court will "apply the choice-of-law rules of the jurisdiction in which" it sits. Nnadili v. Chevron USA, Inc., 435 F. Supp. 2d 93, 97 (D.D.C. 2006) (quoting Ideal Elec. Sec. Co. v. Int'l Fid. Ins. Co., 129 F.3d 143, 148 (D.C. Cir. 1997)). The court is not bound to decide all the issues presented in a claim under the law of a single state, but instead must examine the various interests of the states with regard to each distinct issue in the litigation. Hercules & Co., Ltd. v. Shama Rest. Corp., 566 A.2d 31, 40 (D.C. 1989). Before applying the District's choice of law principles, however, "the court must first determine if there is a conflict between the laws of the relevant jurisdictions." Young Women's Christian Ass'n v. Allstate Ins. Co., 275 F.3d 1145, 1150 (D.C. Cir. 2002). "Only if such a conflict exists must the court then determine, pursuant to the District of Columbia choice of law rules, which jurisdiction has the 'more substantial interest' in the resolution of the issues." Id. As explained below, the Court concludes that no conflict of law exists between Pennsylvania and the District of Columbia on the relevant issues, and therefore need not analyze which jurisdiction has a more substantial outcome in the litigation.

A. Liberty Mutual May Bring its Strict Liability and Breach of Implied Warranty Claims Separately Against ECA, but May Bring Such Claims Only as a Single Tort Claim Against Bauer

ECA and Bauer contend that strict products liability and the breach of implied warranty of merchantability are considered one tort under District of Columbia law and, therefore, Liberty Mutual cannot bring any contract claims against ECA and Bauer. Liberty Mutual rejoins that under Pennsylvania law, products liability claims and implied warranty claims are independent. The parties are each partially correct.

ECA and Bauer are correct that the District of Columbia construes an action for strict products liability and breach of the implied warranties of merchantability as a single tort. See, e.g., Wainwright v. Washington Metro. Area Transit Auth., 903 F. Supp. 133, 140 (D.D.C. 1995) ("Breach of implied warranty and strict liability in tort are expressions of a single basic public policy as to liability for defective products."); Bowler v. Stewart-Warner Corp., 563 A.2d 344, 347 (D.C. 1989) (granting new trial where the trial judge instructed the jury in both strict liability and implied warranty of merchantability because the two claims represent one tort); Payne v. Soft Sheen Prods., Inc., 486 A.2d 712, 720 (D.C. 1985) ("[W]here there are no issues unique to warranty, a claim of strict liability in tort is effectively made out in a complaint for breach of warranty.").

ECA and Bauer, however, misconstrue this standard and apply it to parties in privity of contract. Under District of Columbia law, the court will apply this rule only to cases in which a third party is bringing an action against a manufacturer of a product and thus there is no privity of contract. For example, in Potomac Plaza Terraces, Inc. v. QSC Prods., Inc., 868 F. Supp. 346, 350, 354 (D.D.C. 1994), the court permitted a breach of implied warranty claim to go forward because the plaintiff and the defendant had a contractual relationship.

Pennsylvania law similarly distinguishes between strict products liability and breach of implied warranties based on the position of the plaintiff in the case. Where the plaintiff is not in privity with the defendant, Pennsylvania courts construe an action for breach of implied warranties as one in tort. See Hahn v. Atlantic Richfield Co., 625 F.2d 1095, 1104 (3d Cir. 1980) ("[T]he Supreme Court of Pennsylvania has been moving in the direction of viewing non-purchaser actions filed under the UCC as strict liability actions in tort, rather than as contract actions."). Yet where the plaintiff and defendant are in privity, Pennsylvania law permits the plaintiff to pursue strict liability claims and implied warranties claims separately. See, e.g., Aloe Coal Co. v. Clark Equip. Co., 816 F.2d 110, 117-18 (3d Cir. 1987) (applying Pennsylvania law and concluding that plaintiffs who are in privity with defendant may bring a contract action for breach of implied warranties); Hammermill Paper Co. v. C.T. ...


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