Hofmann v. Damarc Quality Inspection Servs., LLC (In re Mountain W. Indus., LLC)
| Decision Date | 30 March 2018 |
| Docket Number | Adversary Proceeding No. 15–02262,Bankruptcy Number: 14–32190 |
| Citation | 583 B.R. 514 |
| 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.
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 a denial 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. The Trustee responded, asserting that the contracts between the parties contain a Minnesota choice-of-law provision, and that under Minnesota law, Damarc is liable for damages on the claims for breach of contract and professional negligence.
Based on the impact of the choice of law on a final determination of this dispute, the Court limits its initial ruling to whether Utah or Minnesota law applies. The Court held a hearing on the motion for summary judgment on February 23, 2018. Richard C. Terry appeared on behalf of Damarc. William Garbina appeared on behalf of the Trustee.
The Debtor, Mountain West Industries, LLC ("Mountain West"), was a manufacturer of utility and cargo trailers, operating out of Tooele, Utah. In 2013, Mountain West endeavored to expand its product line to include the manufacture of tanker trailers suitable for over-the-road transportation of compressed, liquid gases. Tanker trailers hauling compressed gas on public roads are subject to extensive regulation, inspection, and certification requirements regarding their design and construction. The regulations are referred to as "MC–331," and such trailers are known as "MC–331 Tanker Trailers." MC–331 designs require inspection by an ASME2 -authorized inspector. To perform this service, Mountain West hired Damarc, an entity incorporated in Minnesota but with its principal place of business in Wisconsin. The parties signed two contracts—one in 2012 and one in 2013—that are identical in most respects, with each containing a choice-of-law provision stating that they "shall be interpreted and enforced in accordance with the laws of the State of Minnesota" (the "Contracts").3 The Contracts also contain exculpatory clauses that Damarc argues exempts it from any liability arising under the Contracts (the "Exculpatory Clause").
Mountain West proceeded with the construction of three MC–331 Tanker Trailers, but it was subsequently discovered they could not be sold because their nozzles did not comply with the MC–331 design specifications (the "Non–Compliant Nozzles"). Mountain West asserts that because Damarc failed to properly perform its contracted-for services, the three MC–331 Tanker Trailers are now essentially worthless. This situation contributed to Mountain West filing a chapter 7 bankruptcy petition on November 18, 2014, and George B. Hofmann was appointed as the Chapter 7 Trustee.
1. Damarc is incorporated in Minnesota.4 Damarc is headquartered and has its place of business in Wisconsin.5 The Contracts state that Damarc is a Wisconsin corporation.6
2. Mountain West is domiciled in Utah with its principal place of business in Utah. Mountain West manufactured the MC–331 Tanker Trailers in Utah, and Damarc physically inspected the MC–331 Tanker Trailers in Utah. The alleged injury occurred in Utah with the supposedly injurious conduct occurring both in Utah and Wisconsin.7
3. Mountain West and Damarc entered into the Contracts in 2012 and 2013. The Contracts are titled "Agreement For AIA8 Third Party Inspection Services. "9 Mountain West and Damarc negotiated and executed the Contracts from their respective headquarters in Utah and Wisconsin.10
4. The Contracts contain the following choice-of-law provision: "This Agreement shall be interpreted and enforced in accordance with the laws of the State of Minnesota."
5. The Contracts also contain the following Exculpatory Clause:
The Trustee asserts that the choice-of-law provisions in the Contracts control, and thus this Court should apply Minnesota law to the "interpretation and enforcement" of the Contracts. Damarc argues that other than its incorporation in Minnesota, that state has no other contacts to the parties or the transaction; thus, Minnesota has little to no interest in the outcome of the case. Therefore, under applicable Utah law, the Court should apply the Restatement (Second) of Conflict of Laws, § 187(2), and determine if two or more states have an interest in the litigation. If so, the Court should consider which state has the more substantial relationship to the parties or the transaction, which, it argues, is Utah. Ostensibly, Utah law favors Damarc and Minnesota law favors the Trustee which underlies the basis for the choice-of-law dispute between the parties.12
A federal court exercising supplemental jurisdiction over state-law claims "applies the substantive law, including choice of law rules, of the forum state."13 The adversary proceeding is filed in the Utah Bankruptcy Court. "Since Utah is the forum state, Utah's choice of law rules determine the outcome of the conflict."14
The choice-of-law dispute under these facts has challenged the interpretive powers of all parties (including the Court) as to how a Utah court would rule. For purposes of analysis, the Court will visit in chronological order both federal and state cases that constitute Utah's choice-of-law jurisprudence.
The first case is Unibase Sys. v. Professional Key Punch ("Unibase") decided in 1987.15 Unibase, a Utah corporation, and Professional Key Punch, a Texas and California corporation, entered into a contract with a Utah choice-of-law provision.16 Professional Key Punch argued that even if the Utah choice-of-law provision controlled as to the contract claims, its fraud claims against Unibase should be governed by a "most significant contacts" analysis, which would point to Texas.17 The District Court commented that, at the time, Utah law provided little guidance as to the particular fact situation, so it looked to the Restatement of Conflict of Laws:
It is acknowledged in the Restatement § 187 and by the caselaw generally that where the parties have made an effective choice of law covering their contractual rights and duties the law of the chosen jurisdiction will be applied . It is only when the parties have failed to make a valid choice of law that courts apply traditional conflict of laws rules or apply the "most significant contacts" analysis of the Restatement § 188.18
Unibase thus applied the Utah choice-of-law provision to both the contract and the fraud claims.
Therefore, Unibase holds that if the parties have made an "effective" choice-of-law selection in their contract, the choice-of-law provision should control.19 However, the Court recognized in a footnote that a choice-of-law provision may not be honored if its application would be contrary to the fundamental policy of the state with a greater interest in the litigation:
However, the Restatement § 187(2)(b) provides that the parties choice of law may not be honored if "application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties."20
The next contractual choice-of-law case arose six years later in the Utah Supreme Court. In Prows v. Pinpoint Retail Sys., Inc. ("Prows") ,21 a Canadian software company sold its products throughout the United States. Consequently, its contracts contained a New York choice-of-law and forum selection clause.22 Prows, a Utah individual, entered into a contract with Pinpoint to provide software that Prows would then sell to a Utah corporation.23 Pinpoint eventually cut Prows out as the middleman and dealt directly with the Utah company. Prows sued Pinpoint in a Utah state court for breach of contract.24 The lower court denied Pinpoint's motion to...
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