JMB Mfg., Inc. v. Child Craft, LLC

• Decision Date: 24 August 2015
• Docket Number: Nos. 14–3306,14–3315.,s. 14–3306
• Citation: 799 F.3d 780
• Parties: JMB MANUFACTURING, INC., d/b/a Summit Forest Products Company, Plaintiff/Counterclaim–Defendant–Appellant/Cross–Appellee, v. CHILD CRAFT, LLC, et al., Defendants–Appellees, and Harrison Manufacturing, LLC, f/k/a Child Craft, LLC, Defendant/Counterclaim–Plaintiff–Appellee/Cross–Appellant, v. Ron Bienias, Counterclaim–Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

799 F.3d 780

JMB MANUFACTURING, INC., d/b/a Summit Forest Products Company, Plaintiff/Counterclaim–Defendant–Appellant/Cross–Appellee

v.CHILD CRAFT, LLC, et al., Defendants–AppelleesandHarrison Manufacturing, LLC, f/k/a Child Craft, LLC, Defendant/Counterclaim–Plaintiff–Appellee/Cross–Appellant

v.Ron Bienias, Counterclaim–Defendant–Appellant/Cross–Appellee.

Nos. 14–3306

14–3315.

United States Court of Appeals, Seventh Circuit.

Argued April 22, 2015.

Decided Aug. 24, 2015.

Michael P. Tomlinson, Michael Munley, Attorney, Tomlinson Law Office, Chicago, IL, for Plaintiff/Counterclaim–Defendant–Appellant/Cross–Appellee.

S. Chad Meredith, Attorney, Ransdell & Roach, PLLC, Lexington, KY, for Defendant/Counterclaim–Plaintiff–Appellee/Cross–Appellant.

Before FLAUM, MANION, and HAMILTON, Circuit Judges.

Opinion

HAMILTON, Circuit Judge.

This case presents a merchant's creative effort to avoid the limited remedies that contract law provides for a seller's delivery of non-conforming goods. After the seller delivered about $90,000 worth of non-conforming wood products, the buyer sought recovery from both the seller and its president personally for tort damages on a tort theory, that they negligently misrepresented the quality of the delivered goods.

The district court ruled in favor of the buyer and awarded damages of more than $2.7 million on the theory that the non-conforming goods caused the complete destruction of the buyer's business. This damages theory echoed the proverb of Poor Richard's Almanack (“A little neglect may breed mischief; for want of a nail, the shoe was lost; for want of a shoe the horse was lost; for want of a horse the rider was lost; for want a rider the battle was lost.”), and Shakespeare's story of Richard III, where the loss of a horse led in turn to the loss of a battle, the death of a king, and the loss of a kingdom. Cf. Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854) (damages for breach of contract limited to consequences reasonably contemplated by both parties when they made contract).

We reverse the award of damages against the seller and the seller's president, but for reasons that do not depend on the flawed “want of a nail” theory. Under Indiana law, a buyer who has received non-conforming goods cannot sue a seller for negligent misrepresentation to avoid the economic loss doctrine, which limits the buyer to contract remedies for purely economic losses. See Indianapolis–Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind.2010). Second, there is no basis for transforming the buyer's breach of contract claim into a tort claim for negligent misrepresentation to hold the seller's president personally liable. See Greg Allen Construction Co., Inc. v. Estelle, 798 N.E.2d 171 (Ind.2003). In all other respects, we affirm the judgment of the district court.

I. Factual and Procedural Background

A. The Parties and Their Contracts

Child Craft Industries, an Indiana business run by the Suvak family since 1911, manufactured furniture for young children and infants. At the height of its success in the 1990s, it employed approximately 1,200 workers. After changes in the industry and a devastating flood in 2008, Child Craft Industries was acquired by defendant and counterclaim-plaintiff Child Craft, LLC, which is now known as Harrison Manufacturing, LLC. (Like the district court, we call this new entity “Child Craft.”) Counterclaim-defendant Ron Bienias is the owner and president of plaintiff and counterclaim-defendant JMB Manufacturing, Inc., which does business as Summit Forest Products Company. (Like the district court, we call the company “Summit.”)

Before 2008, Child Craft Industries and Bienias had a long-standing business relationship. After Child Craft assumed control of Child Craft Industries, Child Craft contracted with Summit to supply raw wood components for Child Craft's new planned line of high-end baby furniture called the “Vogue Line.” Child Craft made clear that it had specific quality requirements and an inflexible timeline.

Summit did not actually manufacture the wood components itself. Instead, it sourced the goods from an Indonesian manufacturer named P.T. Cita. Beginning in August 2008, Child Craft contracted with Summit through a series of purchase orders to buy raw wood components for cribs and “case goods” (such as bureaus and night stands). Child Craft and Summit understood that Summit would buy the components from P.T. Cita and re-sell them to Child Craft. Child Craft would then finish and assemble the components into furniture and sell the finished products to retailers.

At Bienias's request, Child Craft agreed not to have direct contact with P.T. Cita.

Keeping its promise, Child Craft did not communicate with P.T. Cita, except on one occasion in September 2008, when Bienias and two Child Craft managers traveled to Indonesia together to inspect P.T. Cita's manufacturing facilities and to explain Child Craft's quality specifications.

In late 2008 and early 2009 Child Craft issued several purchase orders to Summit calling for a variety of case goods and baby crib components worth about $90,000 in total. Each purchase order included a detailed list of specifications. For purposes of the lawsuit, the most relevant item was that the moisture content of the wood products needed to be between 6% and 8%. (Furniture made with moist wood is prone to warp and split.)

A detailed rundown of the back and forth between Summit and Child Craft is not necessary for these appeals. Suffice it to say that the goods shipped to Child Craft never conformed to its specifications, in spite of Bienias's assurances that they would. Among other problems, many of the wood products had a moisture content well above the desired range of 6% to 8%. Child Craft identified the goods as defective upon receipt and refused to pay Summit for the shipments. It also spent considerable time trying to re-work the products before eventually giving up.

By the end of their relationship in the spring of 2009, Child Craft had not received any usable cribs from Summit. As a result, Child Craft was forced to cancel orders it had received for its products and was never able to sell any furniture in the Vogue Line. Child Craft burned through its remaining capital and ceased operations in June 2009.

B. Procedural History

Ironically, in light of the district court's final judgment, this suit was filed initially by Summit, invoking the district court's diversity jurisdiction under 28 U.S.C. § 1332, against both Child Craft and its owners for breach of contract and the tort of conversion based on Child Craft's refusal to pay for the wood products shipped pursuant to the 2008–2009 purchase orders. Summit even sought to pierce the corporate veil to hold Child Craft's owners personally liable for the alleged wrongs.

Child Craft counterclaimed for breach of contract against Summit and also for the tort of negligent misrepresentation against both Summit and Bienias. In its breach of contract counterclaim, Child Craft sought to recover its labor costs for re-working the defective products and for lost sales. In its negligent misrepresentation counterclaim, Child Craft alleged that it detrimentally relied on Bienias's representations that the delivered goods would and did conform to specifications. Child Craft sought to recover over $5 million in compensatory damages—a figure representing the total loss of its business—plus punitive damages of over $5 million.

For procedural reasons we address below in Part III, the only claim that went to trial was Child Craft's counterclaim for negligent misrepresentation against Bienias personally. The claim was tried to the court. The judge's findings of fact and conclusions of law favored Child Craft, awarding initially over $4 million in compensatory damages, which the judge later reduced to just over $2.7 million, against both Bienias and Summit. Bienias and Summit have appealed the judgment against them. Child Craft has cross-appealed the reduction of compensatory damages and the judge's decision not to award punitive damages.

II. Child Craft's Negligent Misrepresentation Counterclaim Against Bienias

Child Craft's negligent misrepresentation counterclaim against Bienias fails as a matter of law because it is barred by Indiana's economic loss doctrine.

A. Standard of Review

We review the district court's factual findings for clear error and the court's legal conclusions de novo. See Tax Track Systems Corp. v. New Investor World, Inc., 478 F.3d 783, 789 (7th Cir.2007) ; Mayer v. Gary Partners & Co., 29 F.3d 330, 334 (7th Cir.1994) (“When federal judges act as triers of fact in diversity cases, all questions concerning the standard of appellate review are governed by federal law.”). The decisive issue here is a legal one.

B. Indiana's Economic Loss Doctrine

Indiana substantive law governs this case. Under Indiana's economic loss doctrine, and subject to certain exceptions we discuss below, “there is no liability in tort for pure economic loss caused unintentionally.” Indianapolis–Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 736 (Ind.2010) (“Indianapolis Library ”). The rule reflects the general principle that contract law is better suited than tort law to address the problem of commercial losses caused by mere negligence. See Miller v. U.S. Steel Corp., 902 F.2d 573, 574 (7th Cir.1990) ; accord, Indianapolis Library, 929 N.E.2d at 729 (favorably citing Miller and discussing its rationale).

Merchants negotiating a contract can allocate between themselves the risk of commercial losses flowing from possible breaches. The economic loss doctrine recognizes this reality and prevents a commercial party from recovering in tort for commercial losses it could have protected itself against through contractual terms such as warranties, indemnification, or provisions for remedies. For the classic discussion of the justification for the economic loss rule, see Seely...