Hofmann v. Damarc Quality Inspection Servs., LLC (In re Mountain W. Indus., LLC)
| Decision Date | 26 September 2018 |
| Docket Number | Bankruptcy Number: 14-32190,Adversary Proceeding No. 15-02262 |
| Citation | 592 B.R. 871 |
| Parties | IN RE: MOUNTAIN WEST INDUSTRIES, LLC, Debtor. George B. Hofmann, in His Capacity as Chapter 7 Trustee of Mountain West Industries, LLC, Plaintiff, v. Damarc Quality Inspection Services, LLC, and Edward D. Mansell, Defendants. |
| Court | U.S. Bankruptcy Court — District of Utah |
William G. Garbina, George B. Hofmann, Cohne Kinghorn PC, Salt Lake City, UT, for Plaintiff.
Richard C. Terry, Terry Jessop & Bitner, David H. Leigh, Ray Quinney Nebeker P.C., Salt Lake City, UT, Michael A. Steel, Brennan Manna & Diamond, LLC, Akron, OH, for Defendants.
This case involves whether an exculpatory clause in a contract shields an inspector from over $1 million in liability arising from a failure to identify a flaw in the design and construction of high-pressure tanker trailers that resulted in a purely economic injury to the Debtor.
On December 15, 2015 George B. Hofmann (the "Trustee"), in his capacity as Chapter 7 Trustee of the Mountain West Industries, LLC bankruptcy case, filed this adversary proceeding against Damarc Quality Inspection Services, LLC ("Damarc") for breach of contract, professional negligence, recovery of fraudulent transfers, and disallowance of Damarc's claims against the bankruptcy estate.1
On December 21, 2017, Damarc filed a motion for summary judgment asserting all claims should be dismissed because: (1) Utah law applies to the contracts; (2) the Exculpatory Clause in the contracts at issue exempts Damarc from all liability; (3) Utah's economic loss rule precludes liability for a negligence claim; and (4) Damarc gave reasonably equivalent value for its services to Mountain West Industries, LLC.2
In a prior decision, the Court found that Utah law applies to the Trustee's causes of action for breach of contract and professional negligence.3 On July 31, 2018, the Court held a hearing on Damarc's motion for summary judgment that the exculpatory clause in the parties' contract requires dismissal of these causes of action. Richard C. Terry appeared on behalf of Damarc. William Garbina appeared on behalf of the Trustee.
After taking the matter under advisement, the Court is now prepared to rule.
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 1334(a) & (b) and 157(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(O) as it is a proceeding affecting the liquidation of the assets of the estate. Venue is appropriate in this District under 28 U.S.C. §§ 1408 and 1409, and notice of the hearing was proper.
1. The Debtor, Mountain West Industries, LLC ("Mountain West"), previously manufactured utility and cargo trailers. In 2013, Mountain West sought to expand its product line by constructing three, high-pressure tanker trailers to haul liquid petroleum and anhydrous ammonia on public roads (the "Tanker Trailers").
2. The Tanker Trailers are subject to design and construction standards established by the American Society of Mechanical Engineers ("ASME"), and specifically the "2010 ASME Boiler and Pressure Vessel Code, Part VIII, Division 1, Rules for Construction of Pressure Vessels" (the "ASME Code").4
3. The Tanker Trailers are also subject to regulations under 49 C.F.R. § 178.337, commonly referred to as "Specification MC-331," which expressly incorporates the ASME requirements, and 49 C.F.R. § 178.320, which, for purposes of the Department of Transportation, defines a "cargo tank" as one constructed and certified under the ASME Code.
4. The Debtor obtained the required ASME "U" and "R" stamps and an ASME-approved Quality Control Manual that qualified the Debtor to construct the Tanker Trailers.5
5. The ASME Code required the Debtor to contract with an Authorized Inspection Agency to perform certain inspection services in connection with the design and construction of the Tanker Trailers.6
6. Damarc is an Authorized Inspection Agency.7
7. The Debtor and Damarc signed essentially identical contracts in 2012 and 2013 titled "Agreement For AIA Third Party Inspection Services" (the "Contract").8
8. Damarc's responsibilities under the Contract are as follows:
9. The Contract states the following under the heading "Liability":
10. The Contract states the following under the heading "Indemnity": (the Liability and Indemnity provisions of the Contract are collectively referred to as the "Exculpatory Clause"):
11. The Contract provided that Damarc would be paid $95 an hour, and the Debtor paid Damarc a total of $18,573.80 for its inspection services.10
12. At the completion of the manufacturing process the Authorized Inspection Agency must sign a "Form U-1 Manufacturer's Data Report for Pressure Vessels" (the "ASME Compliance Certificate").11
13. The ASME Compliance Certificate is a form created by the ASME that must be signed by the Authorized Inspection Agency when the pressure vessel "to the best of his knowledge and belief, is in compliance with all provisions" of the ASME Code.12
14. Damarc signed the ASME Certificate of Compliance.13
15. The ASME Certificate of Compliance contains the following language, as required by the ASME Code:
I, the undersigned, holding a valid commission issued by the National Board of Boiler and Pressure Vessel Inspector ... have inspected the component described in this Manufacturer's Data Report ... and state that, to the best of my knowledge and belief, the Manufacturer has constructed this pressure vessel in accordance with ASME BOILER AND PRESSURE VESSEL CODE, Section VIII, Division 1. By signing this certificate neither the Inspector nor his/her employer makes any warranty, expressed or implied, concerning the pressure vessel described in this Manufacturer's Data Report. Furthermore, neither the Inspector nor his/her employer shall be liable in any manner for any personal injury or property damage or a loss of any kind arising from or connected with this inspection.
16. It was later determined that the materials and/or construction procedures used for some of the nozzles on the Tanker Trailers failed to comply with the ASME Code (the "Non-Compliant Nozzles").
17. Because of the Non-Compliant Nozzles, the Tanker Trailers could not be sold by the Debtor, making them essentially worthless.
The Trustee's Complaint seeks to recover damages of $1,155,248.80 based on Damarc's alleged breach of the Contract and professional negligence. There is no claim of fraud or gross negligence against Damarc.
In its motion for summary judgment, Damarc asserts that (1) Utah's economic loss rule restricts the Trustee's remedies to those provided for in the Contract; and (2) the Exculpatory Clause in the Contract shields Damarc from any liability arising from the installation of the Non-Compliant Nozzles on the Tanker Trailers.
In response, the Trustee argues (1) that the Exculpatory Clause is invalid either because its language is too ambiguous to be enforceable, or its enforcement would violate a public interest; or (2) even if the Exculpatory Clause is enforceable, the Trustee can still pursue the claim for professional negligence under the independent duty exception to the economic loss rule.
The Court agrees with Damarc and, for the following reasons, grants its motion for summary judgment.
In Utah, the "economic loss rule is a judicially created doctrine that marks the fundamental boundary between contract law, which protects expectancy interests created through agreement between the parties, and tort law, which protects individuals and their property from physical harm by imposing a duty of reasonable care."14 "[T]he economic loss rule originated as a way of ‘limiting damages in products liability cases where there is no physical injury’ or damage to ‘other property’ and where there are only ‘economic losses.’ "15 Further, it requires that "relief for defeated economic expectations ... was to come from the contract itself ...."16 Utah defines the type of losses covered by the economic loss rule as including:
Damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits – without any claim of personal injury or damage to other property ... as well as "the diminution in the value of the product because...
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