Alloway v. General Marine Industries, L.P.

• Decision Date: 30 June 1997
• Citation: 149 N.J. 620,695 A.2d 264
• Parties: , 32 UCC Rep.Serv.2d 1040, Prod.Liab.Rep. (CCH) P 15,007 Samuel P. ALLOWAY, III, and New Hampshire Insurance Co., Plaintiffs-Respondents, v. GENERAL MARINE INDUSTRIES, L.P., Defendant-Appellant, and Mullica River Boat Basin, Defendant.
• Court: New Jersey Supreme Court

Page 620

149 N.J. 620

695 A.2d 264, 32 UCC Rep.Serv.2d 1040,

Prod.Liab.Rep. (CCH) P 15,007

Samuel P. ALLOWAY, III, and New Hampshire Insurance Co. Plaintiffs-Respondents, v. GENERAL MARINE INDUSTRIES, L.P., Defendant-Appellant and Mullica River Boat Basin, Defendant.

Supreme Court of New Jersey.

Argued Nov. 18, 1996.

Decided June 30, 1997.

John C. Penberthy, III, for defendant-appellant (Mesirov Gelman Jaffe Cramer & Jamieson, attorneys; Mr. Penberthy and Matthew O. Dickstein, Philadelphia, PA, on the brief).

Sanford F. Schmidt, Medford, and Edward A. Penberthy, Moorestown, for plaintiffs-respondents (Brandt Haughey Penberthy Lewis & Hyland, Moorestown, attorneys, for Samuel P. Alloway, III, and Mr. Schmidt, Medford, attorney, for New Hampshire Insurance Co.; Suzanne E. Bragg, Medford, on the brief).

The opinion of the Court was delivered by

POLLOCK, J.

The primary issue is whether New Hampshire Insurance Co. ("New Hampshire") and its insured, Samuel P. Alloway III ("Alloway") (jointly described as "plaintiffs") may recover from General Marine Industries, Inc. ("GMI") in negligence and strict liability for economic loss caused by a defect in a power boat purchased by Alloway and insured by New Hampshire. Alloway purchased the boat from Mullica River Boat Basin ("Mullica"), a retail boat dealer, and insured it with New Hampshire under a comprehensive general insurance policy. Mullica had purchased the boat from Century Boats ("Century"), an unincorporated division of Glasstream Boats, Inc. ("Glasstream"), the manufacturer. Subsequently, Glasstream went bankrupt, and GMI, formerly known as GAC Partners, P.L. ("GAC"), purchased Glasstream's assets.

Allegedly because of a defective seam in the swimming platform, water seeped into the boat, which sank while docked. New Hampshire paid Alloway under the policy. Alloway then subrogated New Hampshire to his rights, subject to Alloway's claim for the deductible portion of his loss.

Plaintiffs instituted this action to recover for their respective economic losses. The Law Division granted GMI's motion to dismiss, holding that plaintiffs could not recover for economic loss resulting from damage to the boat itself. It held that plaintiffs' only claim was for breach-of-warranty under the Uniform Commercial Code ("U.C.C."), a claim barred by 11 U.S.C.A. § 363 ("s 363") of the Bankruptcy Code. The Appellate Division reversed, holding that plaintiffs could recover in tort for the economic loss and that the Bankruptcy Code did not bar recovery. 288 N.J.Super. 479, 672 A.2d 1177 (1996). We granted certification, 145 N.J. 372, 678 A.2d 713 (1996). We reverse the judgment of the Appellate Division and reinstate that of the Law Division.

I.

From the limited record, the following facts emerge. In October 1989, Glasstream filed a voluntary petition in bankruptcy. Five months later, the Bankruptcy Court directed Glasstream to sell substantially all of its assets to GMI "free and clear of any interest in such property." At some unspecified time, Glasstream made the boat and sold it to Mullica.

On July 14, 1990, Alloway purchased the boat, a new thirty-three foot Century Grande XL ("Grande") boat from Mullica. The purchase price was $61,070. Century expressly warranted for twelve months from the date of purchase that the boat was "free from defects in material and workmanship under normal use and when operated according to instructions." Alloway obtained from New Hampshire a comprehensive general insurance policy on the boat.

Three months later, while docked at the Bayview Marina in Manahawkin, New Jersey, the Grande sank. No other property was damaged, and no one sustained personal injuries.

Alloway filed a claim with New Hampshire, which spent $40,106.63 to repair the boat. Alloway, who had a $2,500 deductible under the policy, paid $2,490 towards the repairs. After completion of the repairs, he received a trade-in credit of $38,770 for the Grande on the purchase of a new boat.

Thereafter, Alloway filed a three-count complaint against Mullica and GMI, seeking recovery for his economic loss. In count one, Alloway sought to recover for Mullica's breach of "the manufacturer's warranty" for "repair or replacement of any part found to be defective." Count two alleged a strict-liability claim asserting that Century had manufactured a defective boat for which GMI was liable as Century's successor. Count three alleged that Glasstream, "negligently manufactured and inspected the boat," that GMI was liable to Century's successor, and that Mullica had failed to discover the defect.

Alloway then assigned his claims to New Hampshire, but retained a claim for the loss in value of the boat. He sought the $2,490 he had paid towards the repair of the boat, "[t]he difference in value between the price paid for the boat and the market value of the boat in its defective condition," attorneys' fees, and costs. Thereafter, plaintiffs filed an amended complaint asserting, in addition to Alloway's original claims, New Hampshire's claim for the cost of repairs.

On October 3, 1991, GMI, as successor to Glasstream, removed the action to the United States District Court for the District of New Jersey, which referred the matter to the Bankruptcy Court. Alloway and New Hampshire filed a proof of claim as unsecured creditors. The Bankruptcy Court then remanded the matter to the Law Division.

The Law Division granted GMI's motion to dismiss for failure to state a cause of action. It relied on Spring Motors Distribs. v. Ford Motor Co., 98 N.J. 555, 489 A.2d 660 (1985), which held that a purchaser could not maintain an action in strict liability for economic loss. It also relied on D'Angelo v. Miller Yacht Sales, 261 N.J.Super. 683, 619 A.2d 689 (1993), in which the Appellate Division held that a consumer who had purchased a yacht that was not as represented could sue the manufacturer under the U.C.C. for breach of warranty, but not in strict liability. According to the D'Angelo court, the U.C.C. provides a consumer with the exclusive remedy for economic loss resulting from the breach of express or implied warranties. Id. at 688, 619 A.2d 689. The Law Division reasoned that because plaintiffs sought to recover for economic loss to the boat itself, GMI was not liable as Glasstream's successor.

Because Mullica's insurer was insolvent, New Hampshire dismissed its subrogation claim against Mullica. See N.J.S.A. 17:30A-5, -8 (denying subrogation claims against insured of insolvent insurer). Alloway then settled his claim against Mullica, thereby extinguishing plaintiffs' claims for breach of warranty. Thus, Alloway has already received payment from New Hampshire for the cost of repairs, less the $2,500 deductible under his policy, and an undisclosed sum in settlement of his claim against Mullica.

The Appellate Division reversed, relying on Santor v. A & M Karagheusian, Inc., 44 N.J. 52, 207 A.2d 305 (1965), which recognized that a consumer could maintain a strict-liability claim against a manufacturer for loss of value of a defective carpet. According to the Appellate Division, Spring Motors precluded a commercial purchaser, but not a consumer, from recovering in strict liability. 288 N.J.Super. at 486-87, 672 A.2d 1177. Observing that Spring Motors declined to reconsider Santor, the Appellate Division concluded that "[s]ince Santor has not been overruled, we must follow it." Id. at 488, 672 A.2d 1177. In so holding, the court rejected the Appellate Division's holding in D'Angelo, supra, 261 N.J.Super. 683, 619 A.2d 689.

The Appellate Division also concluded that plaintiffs could recover against GMI as the successor to Glasstream. The court relied on Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 431 A.2d 811 (1981), which permitted a worker who was injured by a defective power press to maintain a strict-liability action against a defendant that had purchased the assets of the manufacturer of the press. According to the Appellate Division, the right to recover in strict liability against a successor owner should not depend on whether the recovery was for personal injuries or economic loss. 288 N.J.Super. at 490-91, 672 A.2d 1177. In addition, the court reasoned that the Bankruptcy Court's sale of the boat "free and clear of any interest in [the boat]" did not extend to lawsuits and, therefore, did not bar the instant action. Id. at 493, 672 A.2d 1177. Finally, the court held that a suit against GMI as the purchaser of Century's assets in the bankruptcy sale did not constitute a claim against Century. Consequently, plaintiffs' suit against GMI did not offend the Bankruptcy Code's scheme for the priority of claimants. Ibid. Essentially, the Appellate Division held that GMI, as the successor to Glasstream, was liable to plaintiffs in negligence and strict liability for economic loss caused by the sinking of the boat.

II.

The threshold issue is whether plaintiffs may rely on theories of strict liability and negligence to recover damages for economic loss resulting from a defect that caused injury only to the boat itself. Plaintiffs seek damages for the cost of repair and for the boat's lost value on trade-in. They do not allege that other property was damaged or that anyone sustained personal injuries. The question reduces to whether plaintiffs may use tort theories to recover the lost benefit of their bargain from the purchaser of the manufacturer's assets, GMI.

Preliminarily, economic loss encompasses actions for the recovery of damages for costs of repair, replacement of defective goods, inadequate value, and consequential loss of profits. See James J. White & Robert S. Summers, Uniform Commercial Code 534-44 (3d ed.1988); Note, Economic Loss in Products Liability Jurisprudence, 66 Colum.L.Rev. 917, 918 (1966). Economic loss further includes "the diminution in value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured...