Horizons, Inc. v. Avco Corp.

• Decision Date: 23 August 1983
• Docket Number: Nos. 82-2270 and 82-2309,s. 82-2270 and 82-2309
• Citation: 714 F.2d 862
• Parties: 36 UCC Rep.Serv. 1207 HORIZONS, INC., Appellee/Cross-Appellant, v. AVCO CORPORATION, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 862

714 F.2d 862

36 UCC Rep.Serv. 1207

HORIZONS, INC., Appellee/Cross-Appellant, v. AVCO CORPORATION, Appellant/Cross-Appellee.

Nos. 82-2270 and 82-2309.

United States Court of Appeals,

Eighth Circuit.

Submitted May 16, 1983.

Decided Aug. 23, 1983.

John M. Kilroy, Sr., Dennis D. Palmer, William E. Quirk, of Shughart, Thomson & Kilroy, Kansas City, Mo., for Avco Corp.

Wayne F. Gilbert, of Gunderson, Farrar, Aldrich & DeMersseman, Rapid City, S.D., for Horizons, Inc.

Before ROSS and ARNOLD, Circuit Judges, and SCHATZ, ^* District judge.

ROSS, Circuit Judge.

This diversity action was instituted by Horizons, Inc. alleging a breach of express and implied warranties of fitness for an ordinary purpose and fitness for a particular purpose in connection with the purchase by Horizons of an airplane engine which was remanufactured by Avco Corporation. Horizons claimed that it suffered ordinary, incidental and consequential damages as a result of backfiring which occurred in the engine shortly after installation. Following a bench trial, the district court, 551 F.Supp. 771, ¹ found that Avco had breached an implied warranty of merchantability and awarded Horizons $9,974.37 in general damages, $619.84 in incidental damages, and $56,265.00 in consequential damages. Horizons cross-appeals alleging that the failure to award damages for the cost of "cover" was error.

Horizons is a South Dakota corporation in the business of providing aerial photographic and photogrammetric services, including topographic surveying and mapping. Avco does not sell its remanufactured engines directly to the public, but does so only through its authorized domestic distributors. Aviation Sales, Inc. of Denver, Colorado, is an authorized distributor of Avco engines. James Spell, president of Horizons, contacted Aviation Sales and discussed the possibility of purchasing an Avco remanufactured engine for one of its company airplanes. Aviation Sales advised Spell that Horizons would be better off to order the engine through an Avco "fixed base operator," such as Casper Air Service, a dealer located in Casper, Wyoming. In December of 1977, Horizons ordered an Avco engine from Casper Air Service for a price of $12,767.00.

Robert Collett, Horizons' pilot, installed the engine in a Cessna 310 aircraft owned by Horizons about mid-June of 1978. After the engine was installed and ground-tested, Horizons' personnel attempted to operate the aircraft. A series of mechanical failures and breakdowns occurred primarily because of backfiring in the engine. Horizons notified Avco, in writing, of the engine malfunctions. In order to correct the backfiring problems, Horizons incurred numerous expenses and ultimately had to overhaul the engine. The district court found that expert testimony established that there was a defect in the valve train which existed at the time the engine was remanufactured and was not caused by normal engine wear.

The district court held that an award of consequential damages was proper because Aviation Sales was the ostensible agent of Avco who had "reason to know" of the requirements of Horizons' business and the knowledge of an agent is imputed to the principal under South Dakota law. The district court found that in 1977 and 1978, Horizons had sufficient contract work available to occupy the aircraft on every available flight day. Horizons lost eleven flight days (57.7 hours) in 1978 due to the defective condition of the Avco engine. The court found that consequently, Horizons was unable to complete its 1978 contracts and was forced to utilize flight days in late 1978, 1979 and 1980 to complete those contracts. The court held that the evidence at trial established, to a reasonable degree of certainty, that had Horizons been able to complete flights on those days it would have received net earnings of $56,265.00, which was then awarded as consequential damages for the "down time" experienced by the aircraft during repair of the defective valve train.

On appeal, Avco contends that the district court erred in its award of consequential damages and also in its computation of the proper amount of consequential damages. ² 2] Horizons, as cross-appellant, contends that the district court erred in failing to award damages for the cost of "cover." We find that the district court correctly awarded consequential damages but failed to award the proper amount of such damages. We also find that the district court correctly denied an award of damages for the cost of "cover." We accordingly affirm in part and reverse in part.

The district court based its determination that an award of consequential damages was proper in this case upon S.D. Codified Laws Ann. § 57A-2-715(2)(a), ³ providing as follows:

(2) Consequential damages resulting from the seller's breach include

(a) Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and

Avco alleges that the district court erred when it found that Avco had "reason to know" of Horizons' requirements. Avco traced the reasoning of the district court as finding: (1) that Horizons communicated its requirements to Aviation Sales; (2) Aviation Sales was the ostensible agent ⁴ of Avco; and (3) that knowledge of Horizons' requirements are imputed to Avco, the principal, under South Dakota law, thereby giving Avco "reason to know" as required under the statute. Avco argues that each of the three steps in the district court's reasoning is flawed and allowed an erroneous award of consequential damages. We disagree.

Avco contends that the first step of the court's analysis is erroneous because Horizons never put on evidence that it actually communicated its requirements to anyone at Aviation Sales. Avco alleges that the district court should not have relied on the fact that Horizons' president, James Spell, habitually explained the nature of Horizons' business to people that he spoke to on the telephone. Avco argues that such testimony does not establish that Spell actually told Aviation Sales of its business requirements. We conclude that the district court's finding that Avco had knowledge of Horizons' requirements is not clearly erroneous under Fed.R.Civ.P. 52(a). The record in this case fully supports the court's finding and demonstrates that, at every level of the transaction, knowledge of Horizons' business use of its airplane engines was either communicated to or previously known by Avco. We find three instances of communication to Avco of Horizons' requirements. First, Avco sent mailings to Horizons' business address which identified Horizons as an aerial photographer. Second, it is doubtful that James Spell departed from his habit of identifying himself and his company's line of work when he talked to Aviation Sales about purchasing the engine. Third, Casper Air Service, the Avco dealer which sold the engine to Horizons, had previously modified Horizons' plane for aerial photography. Thus, it is clear that Avco knew, both directly from its own mailing list and indirectly through its distributors, of Horizons' business requirements.

In Lewis v. Mobil Oil Corporation, 438 F.2d 500, 510-11 (8th Cir.1971) we held that

[w]here a seller provides goods to a manufacturing enterprise with knowledge that they are to be used in the manufacturing process, it is reasonable to assume that he should know that defective goods will cause a disruption of production, and loss of...