Compressed Gas Corp., Inc. v. U.S. Steel Corp.

• Decision Date: 21 September 1988
• Docket Number: 87-5608,Nos. 87-5535,s. 87-5535
• Citation: 857 F.2d 346
• Parties: COMPRESSED GAS CORPORATION, INC., Plaintiff-Appellee, Cross-Appellant, v. UNITED STATES STEEL CORPORATION and Jack B. Kelley, Inc., Defendants- Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 346

857 F.2d 346

COMPRESSED GAS CORPORATION, INC., Plaintiff-Appellee, Cross-Appellant, v. UNITED STATES STEEL CORPORATION and Jack B. Kelley, Inc. Defendants- Appellants, Cross-Appellees.

Nos. 87-5535, 87-5608.

United States Court of Appeals Sixth Circuit.

Argued Aug. 2, 1988.

Decided Sept. 21, 1988.

John R. McCall (argued), Brown, Todd and Heyburn, Louisville, Ky., Robert Y. Gwin, Wayne Emery, USX Corp., Law Dept., Pittsburgh, Pa., for defendants-appellants, cross-appellees.

Grover Cox (argued), Louisville, Ky., for plaintiff-appellee, cross-appellant.

Before KEITH, KENNEDY and NELSON, Circuit Judges.

KEITH, Circuit Judge.

I.

Defendants United States Steel Corporation ("USS") and Jack Kelley appeal, and plaintiff Compressed Gas Corporation ("CGC") cross-appeals, the jury verdict for plaintiff in this diversity action resulting from the explosion of a steel cylinder. The "3T" cylinder, manufactured by defendant USS and leased by defendant Jack B. Kelley, Inc., ("Kelley") ruptured while being filled with natural gas apparently containing certain contaminants. The explosion killed two persons, injured four others, and caused property damage. The personal injury and wrongful death claims were adjudicated in a separate lawsuit. At trial in this action, CGC claimed that it had been defrauded by the misrepresentations of USS and Kelley that the cylinders were safe for transporting natural gas and approved for that purpose by the United States Department of Transportation ("DOT"). CGC also made a products liability claim for a defective cylinder and failure to warn. This appeal focuses on the property damage resulting to plaintiff CGC from the rupture of the cylinder.

For the reasons set forth below, we believe the jury was improperly permitted to find against USS and Kelley on a theory of fraudulent misrepresentation, and was also improperly permitted to include CGC's alleged "lost profits" in the damages award. Because the jury reached a damages verdict that apparently was calculated upon a theory of fraudulent misrepresentation, and which also incorporated CGC's alleged lost profits, the verdict against the defendants must be vacated. We must therefore reverse on those issues and remand the entire case to the district court for a new trial. Further, we believe that an incorrect rate of interest was applied to the judgment below. We affirm on all of the remaining issues.

This case was tried as a summary jury trial on February 13, 1985, which resulted in a verdict of $200,000 against defendants USS and Kelley. The case was then reassigned to the Honorable Ronald Meredith of the Western District of Kentucky, who allowed additional discovery. A full trial on the merits took place on October 21, 1986. On December 11, 1986, the jury returned a verdict, apportioning fault at 70% against USS and 30% against Kelley, and awarding $1,766,271.20 in damages to CGC. The district court set the post-judgment interest rate at 12% to be compounded annually. The district court denied USS's and Kelley's motions for judgment notwithstanding the verdict and new trial.

Defendants USS and Kelley present a host of issues on appeal. They urge: 1) that the absence of proof of fraudulent misrepresentation entitled them to a directed verdict on the question of whether they fraudulently induced CGC to lease their steel cylinders; 2) that the jury instructions impermissibly allowed a solitary instruction on damages for two separate theories of liability; 3) that there was insufficient evidence to support a jury instruction on lost profits; 4) that Kentucky law requires the application of contributory rather than comparative negligence to products liability cases; 5) that the trial court abused its discretion in allowing CGC to conduct additional discovery following the summary jury trial; 6) that the trial court erred in applying the 12% post-judgment interest rate; and 7) that CGC's agreement to indemnify Kelley from all liability arising from the use of leased cylinder trailers entitled Kelley to a directed verdict on claims against him. On cross-appeal, CGC argues that punitive damages should have been submitted to the jury.

II. FACTS

Gobel Mattingly, the retired owner of a highway construction company, incorporated CGC for the purpose of hauling natural gas from wells to commercial pipelines. A five-paragraph trade journal article describing the successful gas transportation operation of Texas Gas Transport ("Texas Gas") inspired Mattingly to enter the gas transportation business in August, 1976. When he incorporated CGC, Mattingly had no training or experience in gas transportation or compression. Joint Appendix at 927.

Mattingly visited Jack Kelley's Texas facilities to lease the special trailers that hauled the USS steel cylinders used in transporting natural gas. Kelley was one of four or five principal purchasers of USS seamless steel cylinders. He would purchase the cylinders from USS and fabricate trailers for them. Each trailer could transport twelve cylinders. As well as using the trailers to transport a variety of compressed gases, Kelley sold or leased the cylinder trailers to others. Mattingly executed a trailer lease with Kelley in February, 1977.

On October 27, 1977, CGC's compressor station was damaged when a 3T seamless steel cylinder manufactured by USS ruptured while being filled with natural gas apparently tainted by the contaminants hydrogen sulfide and water. CGC repaired its property damage for $45,307.54.

The experts who testified at trial generally agreed that the explosion of the steel cylinder would not have occurred if hydrogen sulfide and water had not combined with natural gas in the cylinder. Natural gas is odorless and flammable, and is composed principally of methane. Sometimes natural gas, when extracted from the ground, contains contaminants such as hydrogen sulfide. Gas that does not contain significant hydrogen sulfide contamination is labeled "sweet" gas, while contaminated gas is called "sour" gas. In the gas industry, contaminated gas is considered dangerous because hydrogen sulfide in the presence of water will embrittle high-strength steel, causing it to fail under stress within hours. This is known in the industry as "sulfide stress cracking," and is recognized and understood. For sulfide stress cracking to occur, three factors must be present: hydrogen sulfide, water and susceptible metal. At the time of the accident, CGC had neither installed a dehydrator nor any sulfide removal equipment at its gas wells, unlike most other gas well operations in the United States.

When Mattingly and Kelley met to arrange the lease of the 3T cylinders and trailers, Kelley testified that he told Mattingly that Mattingly's "gas can't have any moisture in it or no hydrogen sulfide." Joint Appendix at 800. Kelley testified that he repeated this warning to Mattingly during Mattingly's second visit to his offices. Mattingly testified that "someone" had advised him that the gas had to be dry to be hauled safely in the 3T tubes, but he was not sure that that person was Kelley. Id. at 919. Mattingly saw a Kelley brochure which promoted the cylinder trailers, but never read the DOT regulations that were on the front of the brochure. In September, 1977, at CGC's request, Kelley sent Mattingly a copy of the DOT regulations setting forth the gases suitable for transport in 3T cylinders. Mattingly testified that again he did not read the regulations sent to him. Id. at 924.

Mattingly said that he showed Kelley an analysis of a gas well that indicated the gas was sweet. He did not, however, have the wells tested for hydrogen sulfide or moisture. Id. at 731. The test that he had showed Kelley was over a year old, and contained no moisture reading. Tests conducted on the wells following the accident revealed high concentrations of hydrogen sulfide and moisture. Id. at 615-16, 1043-45.

Aside from his three visits with Kelley, Mattingly's contacts with USS itself were scant. In September, 1976, while visiting the Kelley offices, Mattingly saw but did not read a USS brochure, and instead only "looked at the pictures." Id. at 924. In June of 1977, Mattingly saw an advertisement in the Wall Street Journal promoting USS cylinders for use in natural gas transportation. The advertisement gave no specific cylinder identification or detailed technical information, but gave a telephone number and invited inquiries from persons interested in further information. CGC never called the number in response to the advertisement.

Prior to the accident, neither USS nor Kelley ever had any complaints that, or knowledge that, any high pressure jumbo cylinder had ruptured in service. Id. at 983. As of the date of the accident, USS had produced over 15,000 jumbo steel cylinders. The 3T cylinder had transported approximately 48,000 loads of natural gas without difficulty. According to testimony at trial, never in USS's history had one of its cylinders ruptured in any kind of service until the explosion at issue here. Id.

III. ANALYSIS

A. The Fraud Claims

CGC claims that USS and Kelley fraudulently induced CGC to use the 3T cylinders by "misrepresenting" the cylinders as safe containers for natural gas transportation, and by misrepresenting that the DOT regulations authorized natural gas transportation in 3T cylinders.

Under Kentucky law, which governs this diversity action, the plaintiff must establish six elements to sustain a fraud claim. There must be: 1) a material misrepresentation, 2) which is false, 3) which was known to be false, or made recklessly, 4) made with inducement to be acted upon, 5) which is acted upon in reliance thereon, and 6) causes injury. Wahba v. Don Corlett Motors, Inc., 573 S.W.2d 357, 359 (Ky.Ct.App.1978). Kentucky law also recognizes a presumption of innocence and honesty against fraud claims. Terrill v. Carpenter, 143 F.Supp. 747, 753-54 (E.D.Ky.1956), aff'd, 249 F.2d 142 (6th Cir.1957); ...