Dutchmen Mfg., Inc. v. Reynolds

• Decision Date: 22 June 2006
• Docket Number: No. 20S05-0506-CV-292.,20S05-0506-CV-292.
• Citation: 849 N.E.2d 516
• Parties: DUTCHMEN MANUFACTURING, INC., Appellant (Defendant below), v. Chad REYNOLDS and Don Reynolds, Appellees (Plaintiffs below).
• Court: Indiana Supreme Court

Page 516

849 N.E.2d 516

DUTCHMEN MANUFACTURING, INC., Appellant (Defendant below), v. Chad REYNOLDS and Don Reynolds, Appellees (Plaintiffs below).

No. 20S05-0506-CV-292.

Supreme Court of Indiana.

June 22, 2006.

COPYRIGHT MATERIAL OMITTED

Tracy D. Knox, D. Michael Anderson, South Bend, IN, Attorneys for Appellant.

Patrick F. O'Leary, Goshen, IN, Attorney for Appellees.

On Petition To Transfer from the Indiana Court of Appeals, No. 20A05-0404-CV-202

BOEHM, Justice.

We hold that tort liability of a tenant who leaves a dangerous item on the leased premises at the expiration of a lease is not extinguished by reason of the expiration of the lease. We also hold that a provision in a lease to a successor tenant that the item is acquired "as is" does not of itself bar a tort claim asserted by a non-contracting party.

Facts and Procedural History

Dutchmen Manufacturing, Inc., is a manufacturer of recreational vehicle travel trailers and fifth wheels. From April 1992 until February 1999 Dutchmen leased a facility in Goshen, Indiana, from Chapman Realty, Inc. At some point during its tenancy, Dutchmen employees installed scaffolding which was affixed to the ceiling beams without Chapman's knowledge or consent. The identities of the employees who performed the assembly and the time it was done are not known according to Dutchmen.

Dutchmen's lease required that it remove all personal property and trade fixtures before vacating the premises. Any property not removed would become the property of Chapman, and the lease also gave Chapman the right to require removal at Dutchmen's expense.

Chapman had initially told Dutchmen to remove the scaffolding or pay for its removal, which was estimated to cost $4,200. Shortly before the lease expired, Chapman began negotiating to lease the premises to Keystone RV, Inc., a manufacturer of travel trailers and Keystone expressed a desire that the scaffolding be left in the building. Dutchmen first offered to sell the scaffolding to Keystone, and when that proposal was rejected offered to give the scaffolding to Keystone if Chapman would not charge Dutchmen for its removal.

Dutchmen vacated the premises on February 28, 1999 leaving the scaffolding in place. Two weeks later, Keystone signed a lease with Chapman and took possession of the premises on May 3. Under its lease, Keystone accepted the premises from Chapman "AS IS." Keystone's chairman supplied an affidavit that it was his understanding that Keystone "accepted and took possession of the scaffolding . . . at its own risk, regardless of whether the scaffolding contained defects or deficiencies."

In December 1999, Chad Reynolds, a Keystone employee, was installing electric wiring in a trailer under assembly. Scaffolding broke loose from its mounting and struck Reynolds rendering him paralyzed below the neck. According to Keystone's employee injury report, a weld in the scaffolding had failed. Keystone's engineers determined that an inner steel tube had fractured due to lack of lubricant and "improper welding procedure." The inner tube was concealed from view by an outer tube and an end cap when the unit was assembled.

In November 2000, Reynolds¹ filed a complaint against Chapman and Dutchmen alleging, among other things, that Dutchmen was liable for the injuries because it had constructed and installed defective scaffolding in the building that it had formerly leased from Chapman. Dutchmen moved for summary judgment, arguing that it did not owe Reynolds any duty and was not negligent per se. At the hearing on that motion, Reynolds filed a supplemental memorandum of law, alleging for the first time that Dutchmen was liable as a supplier of a defective chattel under section 388 of the Restatement (Second) of Torts. Dutchmen responded that the scaffolding was not a chattel, and that Keystone was aware of the dangers of the scaffolding and had accepted the premises and scaffolding "as is." The trial court granted Dutchmen's motion for summary judgment with respect to Reynolds' negligence per se claim and all theories of negligence except for the section 388 claim. On interlocutory appeal, the Court of Appeals reversed and remanded to the trial court with direction to enter summary judgment for Dutchmen on all theories, including the section 388 claim. Dutchmen Mfg., Inc. v. Reynolds, 819 N.E.2d 529, 533 (Ind.Ct.App. 2004). The Court of Appeals held that the scaffolding had merged into the real estate at the expiration of Dutchmen's lease, and Reynolds therefore could not recover on the theory that Dutchmen had supplied a defective chattel. Id. at 532. We granted transfer. Dutchmen Mfg., Inc. v. Reynolds, 831 N.E.2d 750 (Ind. 2005).

Standard of Review

Reynolds' section 388 claim is the only issue in this interlocutory appeal. Dutchmen argues that the trial court erred in denying its motion for summary judgment and the Court of Appeals agreed. On review of a trial court's decision to grant or deny summary judgment, we apply the same standard as the trial court: we must decide whether there is a genuine issue of material fact that precludes summary judgment and whether the moving party is entitled to judgment as a matter of law. Carie v. PSI Energy, Inc., 715 N.E.2d 853, 855 (Ind. 1999). We will construe the designated evidence in a light most favorable to the non-moving party. Id.

I. Restatement (Second) Torts Section 388

Section 388 of the Restatement (Second) of Torts provides:

One who supplies directly or through a third person a chattel for another to use is subject to liability to those whom the supplier should expect to use the chattel with the consent of the other or to be endangered by its probable use, for physical harm caused by the use of the chattel in the manner for which and by a person for whose use it is supplied, if the supplier

(a) knows or has reason to know that the chattel is or is likely to be dangerous for the use for which it is supplied, and

(b) has no reason to believe that those for whose use the chattel is supplied will realize its dangerous condition, and

(c) fails to exercise reasonable care to inform them of its dangerous condition or of the facts which make it likely to be dangerous.

A. Merger of the Scaffolding into the Real Estate

A "chattel" is "movable or transferable property; personal property."

Black's Law Dictionary 251 (8th ed. 2004). The parties agree that the scaffolding is a trade fixture. A "trade fixture" is "personal property put on the premises by a tenant which can be removed without substantial or permanent damage to the premises." 14 Ind. Law Encyclopedia, Fixtures § 14 at 137 (West 2004). Thus, the scaffolding was a chattel at the time of Dutchmen's occupancy.

Dutchmen argues, however, that the scaffolding merged into the realty and title to the scaffolding vested in Chapman when Dutchmen vacated the premises and Keystone had not yet signed its lease with Chapman. Therefore, Dutchmen reasons, the scaffolding was realty and not a "chattel" at the time of the accident and section 388 is inapplicable. Reynolds responds that Dutchmen did not abandon the scaffolding, so it remained a chattel at the expiration of Dutchmen's lease. Reynolds argues, that Dutchmen transferred ownership of the scaffolding to Keystone with the consent of Chapman in order to avoid incurring the expense of its removal, and this arrangement was consummated before Dutchmen vacated the premises.

The parties discuss this issue in terms of ownership of the asset, citing cases dealing with title to fixtures and similar property where the landlord and the tenant dispute ownership after expiration of a lease. It is true, as the Court of Appeals held in this case, that a trade fixture installed by a tenant merges with the realty and thereby becomes the property of the landlord if it is left on the premises after the tenant leaves the premises. The cases cited by the parties typically deal with a situation where the tenant has enhanced the real estate and the landlord claims title by "merger" to structures or improvements that the tenant had not removed. Chapman apparently viewed the scaffolding as a liability, not an asset, because it demanded removal and claimed a right to charge Dutchmen with the cost of removal if Dutchmen did not remove it at the expiration of the lease. Chapman then located a prospective tenant that affirmatively wanted the scaffolding. At least one inference is that Chapman had no interest in obtaining title to the scaffolding and intended to demand removal when Dutchmen vacated the premises, but then arranged for Dutchmen to transfer the scaffolding to Keystone to avoid the cost of removal.

The documents before us make no specific reference to the scaffolding in the arrangement between Keystone and Chapman, and in particular do not specifically address interest in the scaffolding. It is clear, however, that Chapman disclaimed ownership of the scaffolding and demanded its removal which, if not done, would be performed at the tenant's expense.

A tenant may remove buildings or improvements pursuant to the terms of its lease, but failure to do so ordinarily causes title to the improvements to merge into the real estate. Merrell v. Garver, 54 Ind.App. 514, 525, 101 N.E. 152, 156 (1913). See also William M. Howard, Time Within Which Tenant's Right to Remove Trade Fixtures Must Be Exercised, 109 A.L.R. 5th 421, 2003 WL 21026910 (West 2003). However, a landlord may expressly or implicitly allow a tenant an extension of time beyond the term expressed in contract for the removal of improvements without forfeiture. Merrell, 54 Ind.App. at 525, 101 N.E. at 156. A landlord's consent that trade fixtures may remain on the premises after the expiration of the lease causes ownership of them to remain preserved in the tenant, and the tenant has the right to remove the fixtures from the leased premises within a reasonable time after termination of the tenancy.² This is an application of the...