In re Harvard Industries, Inc.
| Decision Date | 28 February 2005 |
| Docket Number | No. 02-50586.,02-50586. |
| Citation | 324 B.R. 238 |
| Parties | In re HARVARD INDUSTRIES, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Adam G. Brief, Wollmuth Maher & Deutsch LLP, Trenton, NJ, for debtors.
Laurence P. Blaskopf, Department of Justice, Washington, DC, for I.R.S.
On February 22, 2005, the court heard oral argument on motions for summary judgment by the Internal Revenue Service and Harvard Secured Creditors Liquidation Trust. The court denied summary judgment on the issue of the workers' compensation payments pending additional discovery by the parties, and reserved decision on the remaining issues.
This matter has a long history. In June 2003, the Debtors filed a motion styled "Motion Requesting a Determination as to Debtors' Rights to a Tax Refund Pursuant to 11 U.S.C. § 505" ("tax refund motion"). In September 2003, the Debtors amended the tax refund motion to clarify certain statements made in the original motion. Prior to the resolution of the tax refund motion, the Debtors confirmed their Chapter 11 plan. Pursuant to the Plan, certain assets and causes of action were assigned to various trusts that were to established under the Plan. As a result, the Harvard Secured Creditors Liquidation Trust ("Trust") is now the party in interest on this motion.
At a hearing on September 3, 2003, this court determined that the most prudent course of action was to treat this motion as a contested matter under Fed. R. Bankr.Pro. 9014 and to set it down for a pre-trial. After numerous adjournments by the parties, a pre-trial was held on January 4, 2005, and an order was entered that required all motions to be filed by February 2, 2005. These two summary judgment motions ensued. The parties also filed opposition to each other's summary judgment motions.
The Supreme Court has established that summary judgment is appropriate only when there is no genuine issue of material fact and when the moving party is entitled to judgment as a matter of law. Fed. R. Civ. Pro. 56(c). The party moving for summary judgment has the burden of establishing the nonexistence of any "genuine issues of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). When as is the case here, the court is presented with cross-motions for summary judgment, the court is to draw all reasonable inferences in favor of the party opposing the particular motion. Buttitta v. City of Chicago, 803 F.Supp. 213 (N.D.Ill.1992), aff'd, 9 F.3d 1198 (7th Cir.1993).
The court agrees with the Trust that the IRS's motion for summary judgment is procedurally defective because it did not contain a Rule 56 statement and was not supported by admissible evidence. Hoch v. Phelan, 796 F.Supp. 130, 131 (D.N.J.1992) (); Celotex, 477 U.S. at 323, 106 S.Ct. 2548 () However, since the court finds that it can rule in favor of the Trust on its motion for summary judgment, those deficiencies are immaterial.
The issues presented by these summary judgment motions are whether three different categories of payments by Harvard constitute specified liability losses under 26 U.S.C. § 172(f). The payments are: 1) amounts Harvard expended in 1996 to settle claims relating to aircraft parts manufactured by its ESNA division; 2) amounts Harvard contributed to its pension plans as part of a settlement with the PBGC; and 3) certain workers' compensation payments. The court denied summary judgment as to the workers' compensation payments at the conclusion of oral argument.
Products liability claim
The starting point for analyzing any statute has to be the language itself. United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) If that language is clear there is no need for further inquiry. Id. at 241, 109 S.Ct. 1026. Section 172(f)(4) provides that "product liability" means, among other things, "liability of the taxpayer for damages on account of ... loss of the use of property." It is that part of the statute that the IRS appears to ignore. The IRS focuses on the fact that no injury to persons or property resulted from the use of the parts. That limited focus is misplaced given that the plain language of the statute clearly provides that product liability also includes damages from loss of the use of property. Since the term "property" is not defined in the statute, the court must accord it its ordinary meaning. In re Fegeley, 118 F.3d 979 (3d Cir.1997). Under its ordinary meaning "property" would include the Lock-Nuts at issue here. Had the statute been intended to be limited to property other than the defective property at issue, the drafters could have easily done that by inserting the word "other" before property. They did not do so, thus, the court must interpret the statute as written and conclude that "loss of the use of property" includes the property that was defective.
Loss of the use of the defective property is precisely what occurred here. Harvard's customers were distributors who were unable to use the Lock-Nuts manufactured by ESNA because of a defect known as hydrogen embrittlement. Here again, the court gives the term "use" its plain meaning which would include intended use as an item to resell. As a result of the customers loss of use of the defective Lock-Nuts, ESNA entered into settlements with the customers to forgive their accounts receivables. In addition, ESNA made a payment of $820,000 to its largest customer, Harco, on account of a lawsuit brought regarding the defective parts. That payment and the forgiveness of the accounts receivables all amount to damages as a result of loss of the use of property, therefore, they fit within § 172(f)(4)'s definition of product liability. The IRS's strained reasoning that ESNA's customers could not have lost the use of the property because they never had the use of the property because it was defective in its manufacture is unpersuasive and does not fit with a common sense reading of the statute.
To bolster its argument that these payments do not qualify as product liability losses, the IRS turns to Treasury Regulation § 1.172-13(b)(2)(ii), which states that "[t]he term product liability does not include liabilities arising under warranty theories relating to repair or replacement of the property that are essentially contract liabilities." That regulation is an imperfect fit because the payments at issue here were not for repair or replacement. Regardless, reliance on that regulation is complicated because of the inherent tension between tort law and contract law in the product liability area. See, e.g., Marshall S. Shapiro, In Search of the Law of Products Liability: The ALI Restatement Project, 48 Vand. L.Rev. 631 (1995). At oral argument, the IRS cited the court to Aloe Coal Co. v. Clark Equipment Co., 816 F.2d 110 (3d Cir.1987) for the proposition that the Third Circuit has cited the East River case approvingly. In East River the Supreme Court set forth what is commonly referred to as the economic loss rule. East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986). The fact that the Third Circuit may have espoused the economic loss rule in certain instances is not dispositive of the issue before this court. This court is unaware of any Third Circuit Court of Appeals case that addresses the meaning of the phrase "loss of the use of property" in § 172(f)(4). That is significant because the line between strict product liability in tort and warranty liability under the UCC is continuing to evolve. See, Thomas C. Galligan, Contortions Along the Boundary Between Contracts and Torts, 69 Tul. L.Rev. 457 (1994). Accordingly, the court is...
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In re Harvard Industries, Inc.
...summary judgment motion with respect to two of the three categories of specified liability loss expenses at issue. In re Harvard Indus., Inc., 324 B.R. 238 (Bankr.D.N.J.2005). The court ruled that the lock-nut related payments were product liability losses as they were a "liability of the t......