Bocre Leasing Corp. v. General Motors Corp. (Allison Gas Turbine Div.)

• Decision Date: 10 January 1995
• Citation: 645 N.E.2d 1195,84 N.Y.2d 685,621 N.Y.S.2d 497
• Parties: , 645 N.E.2d 1195, 63 USLW 2440, 25 UCC Rep.Serv.2d 321, Prod.Liab.Rep. (CCH) P 14,119 BOCRE LEASING CORPORATION, Plaintiff, v. GENERAL MOTORS CORPORATION (ALLISON GAS TURBINE DIVISION), Defendant.
• Court: New York Court of Appeals Court of Appeals

Page 497

621 N.Y.S.2d 497

84 N.Y.2d 685, 645 N.E.2d 1195, 63

USLW 2440,

25 UCC Rep.Serv.2d 321,

Prod.Liab.Rep. (CCH) P 14,119

BOCRE LEASING CORPORATION, Plaintiff, v. GENERAL MOTORS CORPORATION (ALLISON GAS TURBINE DIVISION), Defendant.

Court of Appeals of New York.

Jan. 10, 1995.

Gilman, Pangia & Balsamo (Michael J. Pangia and Barry C. Hansen, of District of Columbia Bar, admitted pro hac vice, of counsel) and Joseph W. Ryan, Jr., Uniondale, for plaintiff.

Katten Muchin & Zavis, New York City (John N. Romans, of counsel), for defendant.

OPINION OF THE COURT

BELLACOSA, Judge.

Plaintiff, a four-times-removed-downstream purchaser of a helicopter, may not recover from the original engine manufacturer under either strict products liability or negligence theories. Judge Wexler correctly applied governing New York law in dismissing the diversity action brought by plaintiff in the United States District Court for the Eastern District of New York. We conclude that the reasoning of East Riv. S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865, persuasively explains and points to the resolution of the policy determination underlying this dispute and point of law. Plaintiff thus has no cause of action in tort against the remote manufacturer for contractually based economic losses, including to the product itself, occasioned by the failure of the product which was the subject of plaintiff's arm's length, negotiated purchase from a subsequent owner.

I.

Defendant, in 1972, manufactured a jet engine and sold it to Bell Helicopter, Inc., which installed the engine in one of its helicopters. Several months later, Petroleum Helicopters Inc. acquired the helicopter and operated the aircraft for over 12,000 hours. After 14 years of ownership, in mid-1986, Petroleum Helicopters sold the helicopter to Edwards & Associates, a brokerage firm dealing in used aircraft. Plaintiff purchased the helicopter late in 1986 from Edwards & Associates.

Plaintiff and the seller, Edwards & Associates, negotiated the terms of their purchase agreement. The particularity of their transaction is evinced by several amendments made to the standard language of their agreement, which include provisions for: (1) risk of loss, under which the risk would be shifted to the purchaser after purchaser's acceptance of the aircraft; (2) warranties of title and against encumbrances; and (3) a condition precedent to purchaser's acceptance of the aircraft--namely, a satisfactory "test flight, functional test of all equipment, [and] a mechanical inspection." Additionally, the purchase agreement stated that plaintiff expressly agreed to accept the 14-year-old helicopter in "AS IS" condition, for a price of $214,000. Plaintiff insured the aircraft for $275,000.

Later, plaintiff, which was engaged in the aircraft leasing business, leased the subject helicopter to a number of entities. In May 1989 (almost three years after plaintiff's purchase and 17 years after the manufacture of the engine), the helicopter experienced a power loss, allegedly due to a failed engine compressor blade. Despite the loss of power and the resulting "auto rotation," the helicopter landed safely, sustaining only minor property damage to the helicopter itself, with no damage whatsoever to persons or other property.

To move the helicopter from the initial "accident" site to its hanger in Farmingdale, the aircraft was loaded by a truck driver onto a truck. En route to Farmingdale, the truck with helicopter atop struck a highway overpass. The helicopter sustained significant damage. Although the driver attempted to correct the loading problems, the efforts proved unsuccessful, and the helicopter smashed into a second overpass, resulting in more property damage to the helicopter.

Subsequent to these incidents, plaintiff received a total of $371,600--$275,000 from its insurer and $96,600 from the insurer of the truck. Plaintiff, either directly or for subrogation purposes, seeks recovery in tort against the manufacturer in the amount of $450,000 for losses, including the cost of repairs and lost profits.

The sound reasoning provided by the United States Supreme Court in East Riv. supports the bright line rule as compelling in this case, too (see, 476 U.S. 858, 870-875, 106 S.Ct. 2295, 2301-2304, supra ). Both generally and specifically under the facts of this case, cogent policy considerations militate against allowing tort recovery for contractually based economic losses in this kind of commercial dispute (id.).

II.

A purchaser enjoys the contractual control and choice to protect itself with insurance and UCC warranties (see, 10A Couch, Insurance2d §§ 42:385-42:401, 42:414-42:417, at 496-508, 520-524 [rev. ed. 1982]; East Riv. S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 872-873, 106 S.Ct. 2295, 2302-2303, supra). The particular seller and purchaser are in the best position to allocate risk at the time of their sale and purchase, and this risk allocation is usually manifested in the selling price (id., at 873, 106 S.Ct. at 2303). Allowing the purchaser to recover in tort for what is, in sum and substance, a commercial contract claim, as is the case here, would grant the purchaser more than the "benefit of [the] bargain" to which the purchaser agreed (see, id., at 873, 106 S.Ct. at 2303 [stating that "expectation damages available in warranty for purely economic loss give a plaintiff the full benefit of its bargain by compensating for foregone business opportunities"]; see also, Rocky Mtn. Helicopter v. Bell Helicopter Textron, 24 F.3d 125, 129, 130 [10th Cir.] [applying Texas law]. This serves no cognizable tort public policy purpose (see, Scandinavian Airlines Sys. v. United Aircraft Corp., 601 F.2d 425, 429).

Having foregone protecting itself with UCC warranties, plaintiff should not be permitted to "fall back on tort when it has failed to preserve its * * * remedies" (Rocky Mtn. Helicopter v. Bell Helicopter Textron, 24 F.3d 125, 130, supra; see also, East Riv. S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 871-872, 874, 106 S.Ct. 2295, 2302-2303, 2304 supra [stating that "(d)amage to a product itself is most naturally understood as a warranty claim" and that "both the nature of (such an) injury and the resulting damages indicate it is more natural to think of injury to a product itself in terms of warranty"; also stating that injury to a product itself is a loss that can be insured].

In purchasing a 14-year-old helicopter, plaintiff could have negotiated a UCC-seller's warranty (see, id., at 872-873, 106 S.Ct. at 2302-2303). Instead, plaintiff chose to purchase the helicopter in "AS IS" condition. Plaintiff eschewed the very protections which are specifically designed to shelter a purchaser from the particular type of losses at issue in this Federal diversity lawsuit (see, generally, 1 White and Summers, Uniform Commercial Code, at 501-526 [Practitioner's 3d ed. 1988] [suggesting that UCC warranties are designed to protect buyer from the cost of a bad bargain and to provide the buyer with the value of the goods as warranted]. Undoubtedly, the lack of a seller's or manufacturer's warranty was reflected in the purchase price (see, East Riv. S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 873, 106 S.Ct. 2295, 2303, supra ). Notably, plaintiff insured the helicopter in the amount of $275,000, $61,000 greater than the purchase price, further suggesting that plaintiff's failure to demand a seller's warranty was proportionately reflected in the selling price.

Because the allocation of risk was fixed by the parties at the time of purchase, plaintiff should be deemed to have assumed that risk of loss. Courts should not later modify plaintiff's commercial contractual risks by interposing a belated tort benefit or potentiality (see, Hininger v. Case Corp., 23 F.3d 124, 127 [stating that, in a commercial context, the purchaser should not be allowed " 'to reach back up the production and distribution chain, thereby disrupting the risk allocations that have been worked out in the transactions comprising that chain' "].

Public policy considerations do not mandate a different result and realistically and cogently support the view we propound. Holding manufacturers of dangerous products liable in tort to downstream purchasers who are personally injured by those products is precedentially sound and unassailable. MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 marks a jurisprudential breakthrough and common-law development at its best, by extending a manufacturer's duty of care beyond immediate purchasers. The instant case, however, does not qualify for such treatment, because to recognize tort responsibility in these circumstances would create more problems than it would solve.

Public policy objectives reflected in tort principles are not advanced by allowing downstream purchasers recovery in a case such as this (see, East Riv. S.S. Corp. v. Transamerica Delaval, 476 U.S. 858, 871, 106 S.Ct. 2295, 2302, supra ). The approach urged by plaintiff would unjustifiably crisscross the appropriately discrete lines of tort and contract by allowing a strict products liability claim for all contractually based economic losses in settings involving only unduly dangerous products. Asserting public policy, the partial dissent would allow tort recovery in this case, but only for those damages to the property itself and not for the consequential economic losses. Under either approach, the tendered justification is simply a generalized hope that permitting tort recovery would serve as an incentive for manufacturers to use the safest possible practices. In East Riv., the United States Supreme Court refutes that idealized expectation:

"When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.

"The tort concern with safety is reduced when an injury is only to...