Abco Metals Corp. v. JW Imports Co., Inc.

• Decision Date: 13 September 1982
• Docket Number: No. 82 C 169.,82 C 169.
• Citation: 560 F. Supp. 125
• Parties: ABCO METALS CORPORATION, Plaintiff, v. J.W. IMPORTS COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

560 F. Supp. 125

ABCO METALS CORPORATION, Plaintiff, v. J.W. IMPORTS COMPANY, INC., et al., Defendants.

No. 82 C 169.

United States District Court, N.D. Illinois, E.D.

September 13, 1982.

C. Philip Curley, Burke & Smith Chartered, Chicago, Ill., for plaintiff.

John Powers Crowley, Cotsirilos & Crowley, Ltd., Laurie G. MacFarlane, Miriam J. Frank, Katten, Muchin, Zavis, Pearl & Galler, Gary W. Leydig, William G. Swindal, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

DECKER, District Judge.

Plaintiff, Abco Metals Corporation ("Abco"), has filed its amended complaint in this diversity action against three defendants, J.W. Imports Company, Inc. ("J.W. Imports"), E. Laursens Maskinfabrik ("Laursens"), and Equico Lessors, Inc. ("Equico"), alleging breach of express warranties, breach of implied warranties of merchantability, breach of implied warranties of fitness for a particular purpose, strict products liability, negligence, and breach of contract. All nine counts of the complaint involve the delivery and use of an allegedly defective wire chopper manufactured by defendant Laursens, a Denmark corporation. Each of the three defendants has filed a motion to dismiss at least some of the counts. Defendant Laursens has moved to dismiss all counts against it, including counts stating causes of action for breach of express warranties (Count I), breach of implied warranties (Counts III and V), strict liability in tort (Count VII), and negligence (Count VIII). Defendant J.W. Imports has filed an answer to the breach of warranties counts against it (Counts II, IV and VI), and has joined in Laursens' motion to dismiss the tort counts (Counts VII and VIII). Finally, Equico has moved to dismiss the only two counts naming it as a defendant, which allege strict liability (Count VII) and breach of contract (Count IX). After a short statement of the facts, each motion will be discussed in turn.

I. Factual Background.

The following facts have been alleged in plaintiff's amended complaint filed on May 14, 1982 ("complaint"), which, for the purpose of these motions, must be considered as true. In early 1980, Abco contacted J.W. Imports to inquire about buying a large capacity wire chopper and granulator for use in Abco's scrap metal processing business. A wire chopper is used in the recycling of insulated wire and cable. Among other things, it strips insulation from the metal conductor in the wire, usually copper, which is then sold to a refiner for reprocessing. Abco had had prior business dealings with J.W. Imports, and had previously purchased a smaller capacity wire chopper and granulator. Like the one involved here, the smaller wire chopper had been manufactured by Laursens, for whom J.W. Imports was the exclusive distributor in North America.

A meeting was arranged to discuss Abco's particular requirements and the details of the newly proposed sale. Those present at the meeting included Ray Ebinger, president of Abco; Jorgen Warrer, president of J.W. Imports, and Ole Christiansen, an engineer employed by Laursens. According to the complaint, Ebinger specifically told Warrer and Christiansen that Abco needed a wire chopper capable of processing mixed # 2 insulated wire at a rate of 10,000 pounds per hour. Warrer and Christiansen agreed that Laursens would build for Abco and J.W. Imports would sell to Abco the wire chopper. Allegedly, Warrer and Christiansen guaranteed that the wire chopper would meet the requirements outlined by Ebinger. The purchase price of the machine was $151,000.00.

The sale of the wire chopper was structured in the following manner. Laursens was to manufacture the wire chopper and sell it to J.W. Imports. It was agreed that J.W. Imports would then sell the wire chopper to Equico, an equipment leasing company, who would "lease" it to Abco. Pursuant to that arrangement, Abco forwarded a substantial security deposit to J.W. Imports, and a purchase order was exchanged between Equico and J.W. Imports, with a copy being sent to Abco.

Abco and Equico then executed an agreement stated in the terms of a lease. Under the agreement, Abco made an initial payment to Equico of $55,152.50, to be followed by sixty monthly payments of $2,459.00, in exchange for the wire chopper. Contemporaneously with that agreement, Abco and Equico also executed a purchase option, pursuant to which Abco could purchase the wire chopper from Equico at the expiration of the sixty-month period for $10,000. Plaintiff alleges that Laursens and J.W. Imports were informed that the arrangement with Equico was strictly for financing purposes, and that notwithstanding the "lease" characterization, the import of the entire arrangement was that Abco was purchasing the wire chopper from J.W. Imports and Laursens.

The wire chopper was delivered to Abco in June 1980. After accepting the machine, Abco learned that the chopper was not capable of operating at a 10,000 pounds per hour capacity, and that it could not process mixed # 2 insulated wire. Shortly after Abco discovered that the wire chopper did not meet the expected specifications, it notified both Laursens and J.W. Imports of the problem. Laursens and J.W. Imports both assured Abco that the problems would be cured. Abco alleges that in fact the problems were not solved, and that the wire chopper has never operated satisfactorily. As a consequence, Abco claims that it has suffered damages from the purchase of the wire chopper itself, from its purchase of additional equipment to be integrated with the wire chopper, the maintenance and installation of the wire chopper, the destruction of wire that was processed in the chopper, and lost profits.

II. Laursens' Motion to Dismiss Warranty Counts.

In Counts I, III, and V, Abco alleges that the failure of the wire chopper to work as expected constituted a breach by Laursens of each of the three types of warranties created by the Uniform Commercial Code. In Count I, Abco claims that the statements from Laursens' representatives to the effect that the wire chopper would process 10,000 pounds of mixed # 2 insulated wire were affirmations of fact and promises constituting express warranties which were subsequently breached when the chopper did not work. Abco alleges in Count III that the wire chopper, as delivered, was not fit for the ordinary purposes for which wire choppers are used, and, therefore, Laursens breached its implied warranty of merchantability. Finally, Count V alleges that, at the time Laursens manufactured the wire chopper for Abco, Laursens was aware of the particular purposes and needs of Abco, and the failure of the wire chopper to meet those purposes constituted a breach of the implied warranty of fitness for a particular purpose. See Uniform Commercial Code, §§ 2-313, 2-314, and 2-315, Ill.Rev.Stat. ch. 26, §§ 2-313, 2-314, and 2-315.

Laursens attacks all three of the warranty counts on essentially the same grounds. Relying on the structure of the deal between the various parties, Laursens claims that there was no contract between it and Abco. Rather, Laursens notes that the wire chopper was first sold to J.W. Imports, then sold to Equico, who finally leased it to Abco. Therefore, Laursens argues that it is not in privity of contract with Abco. According to Laursens, without privity of contract between Laursens and Abco, the breach of warranty claims do not state causes of action.

Initially, the court notes that the parties apparently assume that Illinois law should govern this diversity action. Without any suggestion to the contrary, the court agrees with the parties' assumption. Turning to Laursens' specific arguments, Illinois law does not always require privity of contract between the user and the manufacturer of the product, at least insofar as the enforceability of implied warranties of merchantability and fitness for a particular purpose are concerned.

"Generally privity only extends to the parties to the sale and implied warranties are not applicable between the buyer and a remote manufacturer.... This is not true, however, where there is a direct relationship between the manufacturer and the seller ..., or where, as here, the manufacturer knew the identity, purpose and requirements of the dealer's customer and manufactured or delivered the goods specifically to meet those requirements."

Franks' Maintenance & Engineering, Inc. v. C.A. Roberts Co., 86 Ill.App.3d 980, 992-93, 42 Ill.Dec. 25, 408 N.E.2d 403 (1st Dist.1980) (citations omitted). See Rhodes Pharmacal Co. v. Continental Can Co., 72 Ill.App.2d 362, 372-73, 219 N.E.2d 726 (1st Dist.1966).

From the allegations of plaintiff's complaint, it is apparent that both conditions for avoiding the privity requirement may exist in this case. Abco has alleged facts indicating that there was a direct relationship between it and Laursens involving the wire chopper. Laursens' employee was present at the meeting where the purchase of the wire chopper was discussed, and he promised the machine would meet Abco's requirements. Abco notified Laursens when the wire chopper did not operate as expected. After the notification, Laursens assured Abco that the chopper would be fixed, and evidently took some steps to do so, though the attempted repairs failed. Those allegations, if true, establish the requisite direct relationship between Abco and Laursens. Likewise, the same allegations show that Laursens was well aware that Abco was J.W. Imports' customer, and that Laursens was informed of Abco's purpose in buying the wire chopper and of Abco's particular requirements. Given plaintiff's allegations, privity of contract between Abco and Laursens was not necessary for the implied warranties to arise.

This leaves only Laursens' arguments concerning the express warranty. Apparently, the Illinois courts have not directly considered whether the privity requirement for express warranties will be eased under the same...