Mt. Lebanon Personal Care v. Hoover Universal

• Decision Date: 01 August 2001
• Docket Number: No. 00-5696,PLAINTIFF-APPELLANT,DEFENDANTS-APPELLEES,00-5696
• Citation: 276 F.3d 845
• Parties: (6th Cir. 2002) MT. LEBANON PERSONAL CARE HOME, INC.,, v. HOOVER UNIVERSAL, INC.; JOHNSON CONTROLS, INC., Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 845

276 F.3d 845 (6th Cir. 2002)

MT. LEBANON PERSONAL CARE HOME, INC., PLAINTIFF-APPELLANT, v. HOOVER UNIVERSAL, INC.; JOHNSON CONTROLS, INC., DEFENDANTS-APPELLEES.

No. 00-5696

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: August 1, 2001

Decided and Filed January 11, 2002

Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 99-00372--Edward H. Johnstone, Senior District Judge. [Copyrighted Material Omitted] F. Larkin Fore (argued and briefed), Joseph C. Spalding (briefed) Fore, Miller & Schwartz, Louisville, Kentucky, for Appellant.

Richard K. Wray (argued and briefed), Michael D. Richman, Sachnoff & Weaver, Ltd., Chicago, Illinois, David T. Schaefer (briefed), Woodward, Hobson & Fulton, Louisville, Kentucky, for Appellees.

Before: Clay, Gilman, and Wallace, Circuit Judges.^*

OPINION

Wallace, Senior Circuit Judge.

Mt. Lebanon Personal Care Home, Inc. (Mt. Lebanon) appeals from the district court's summary judgment for Hoover Universal, Inc. (Hoover) on Mt. Lebanon's tort/product-liability claims. The district court held that the economic loss doctrine bars Mt. Lebanon's tort claims. The district court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. We AFFIRM.

I.

Mt. Lebanon is a non-profit corporation owned by the New Zion Baptist Church. In 1981 and 1982 it hired a contractor and an engineer to build a nursing home facility which can serve approximately 122 residents. These residents are primarily Medicare and Medicaid patients. In July 1998, a structural failure occurred in the nursing home's cafeteria, causing Mt. Lebanon to abandon the cafeteria. A year later a second failure occurred, and upon the recommendation of its structural engineer, Mt. Lebanon evacuated the facility. It has been unoccupied since the evacuation.

According to Mt. Lebanon, the structural failures were caused by fire retardant chemicals used to treat the lumber in the building's trusses. Hoover manufactured the chemicals, and although the record is not clear, may also have been responsible for the lumber used in the trusses in the Mt. Lebanon facility.

In May 1999, Mt. Lebanon filed this diversity action against Hoover alleging 1) strict liability; 2) violation of express warranties; 3) violation of implied warranties; 4) negligent misrepresentation; 5) negligence 6) gross negligence; and 7) malice. In April 2000, the district court granted Hoover's motion for summary judgment. It dismissed Mt. Lebanon's tort claims (claims 1 and 4-7) as being foreclosed by the economic loss doctrine. It dismissed Mt. Lebanon's warranty claims (claims 2 and 3) both because there was no privity between Mt. Lebanon and Hoover and because the Kentucky statute of limitations had long since run.

We review a district court's summary judgment de novo. Little Caesar Enters v. OPPCO, LLC, 219 F.3d 547, 550 (6th Cir. 2000). We will uphold the district court if "there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions" of the record showing an absence of a genuine issue of fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once that burden is satisfied, the non-moving party must come forward with "specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e).

In this diversity action we apply the substantive law of Kentucky "in accordance with the then-controlling decision of [Kentucky's highest court]." Pedigo v. Unum Life Ins. Co. of Am., 145 F.3d 804, 808 (6th Cir. 1998) (internal quotation marks omitted).

II.

The economic loss rule bars recovery in tort for economic loss. Economic loss is both loss in the value of a product caused by a defect in that product (direct economic loss) and consequential loss flowing from the defect, such as lost profits (consequential economic loss). Louis R. Frumer & Melvin I. Friedman, Products Liability, § 13.11[1] (2000) (hereafter, Frumer & Friedman). The economic loss rule marks the border between tort and contract law. Where tort law, primarily out of a concern for safety, fixes the responsibility for a defective product directly on the parties responsible for placing the product into the stream of commerce, contract law gives the parties to a venture the freedom to allocate risk as they see fit. Were there no economic loss rule, "contract law [might] drown in a sea of tort." East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986).

Three policies support applying the economic loss doctrine to commercial transactions: (1) it maintains the historical distinction between tort and contract law; (2) it protects parties' freedom to allocate economic risk by contract; and (3) it encourages the party best situated to assess the risk of economic loss, usually the purchaser, to assume, allocate, or insure against that risk.

Frumer & Friedman § 13.11[1].

A large majority of jurisdictions in this country have adopted the economic loss rule. Id. at § 13.11[1] n.1.4-1.5. While a small minority of these jurisdictions have limited the rule to business purchases, most apply it to both business and consumer purchases. Id. at § 13.11[3]. In Miller's Bottled Gas, Inc. v. Borg-Warner Corp., 955 F.2d 1043, 1050 (6th Cir. 1992), we anticipated that the Kentucky Supreme Court would adopt the economic loss rule "in a product liability action based upon negligence."

Two years later, the Kentucky Supreme Court decided Real Estate Marketing, Inc. v. Franz, 885 S.W.2d 921 (Ky. 1994). In Franz, subsequent purchasers of a home sued the builder for structural defects under warranty, negligence, and statutory theories. Id. The trial court granted the builder's motion to dismiss and the case was appealed to the Kentucky Supreme Court. Id. It reversed, reasoning that the Franzes should be able to assert their statutory theory. While the Kentucky Supreme Court agreed with the trial court that the Franzes could not sustain a negligence claim, it did so because there was no "damaging event," not because their claim was barred by the economic loss doctrine. Id. at 926. Indeed, in its decision, the Kentucky Supreme Court expressly refused to extend Franz to a Kentucky Court of Appeals decision which had adopted the economic loss doctrine. Id.

Thus, Franz forces us to reconsider our earlier ruling in Miller's Bottled Glass. In Franz, the Kentucky Supreme Court declined to extend the economic loss rule to an end-consumer's second-hand purchase of a house. We think, then, that Franz probably answers in the negative the question of whether the economic loss doctrine applies to consumer purchases in Kentucky. Yet, as we have stated, some courts decline to extend the economic loss rule to consumer purchases, but apply it to business purchases. Cova v. Harley Davidson Motor Co., 182 N.W.2d 800, 804 (Mich. Ct. App. 1970), Frumer & Friedman, § 13.11[3] n. 6-9 and accompanying text. Franz, then, does not tell us whether the Kentucky Supreme Court would apply the economic loss doctrine to tort claims like the one before us stemming from a business purchase.

With no decision on point from the Kentucky Supreme Court, there is no reason for us not to follow our earlier decision in Miller's Bottled Gas and predict that the Kentucky Supreme Court will apply the economic loss rule to bar a tort claim in a case that involves a business purchase. We recognize that the language used in Miller's Bottled Gas makes no distinction between business and consumer purchases. Yet Miller's Bottled Gas, if confined to its facts-i.e., a business purchase-is wholly consistent with Franz. Any suggestion in Miller's Bottled Gas that its holding extends to consumer purchases is dicta that has since been eclipsed by Franz.

Further, our prediction that the Kentucky Supreme Court would apply the economic loss doctrine to business purchases is supported by all the available "relevant data." Cf. Bailey v. V & O Press Co., Inc., 770 F.2d 601, 604 (6th Cir. 1985) (stating that federal courts should look to "all relevant data" when predicting a state supreme court's decision including state appeals court rulings, restatements of the law, academic publications, and the majority rule). A majority of jurisdictions in this country have applied the economic loss doctrine to business purchases, Frumer & Friedman, § 13.11[1-3], as has the Kentucky Court of Appeals. Falcon Coal Co. v. Clark Equip. Co., 802 S.W.2d 947, 948 (Ky. Ct. App. 1991). In addition, the weight of the academic commentary favors this approach. Frumer & Friedman at § 13.14.

III.

Having determined that the Kentucky Supreme Court would apply the economic loss rule to business purchases, we now turn to the question of whether the economic loss rule bars Mt. Lebanon's claims. The answer to this question turns on how we define the product because, as we have stated, the economic loss rule permits recovery for damages to property other than the product purchased but denies recovery for damages to the product itself. If the product is the treated wood in the trusses, as Mt. Lebanon urges, then Mt. Lebanon may recover for damage to property other than the wood in the trusses, including, for example, damage to the ceiling or the roof of the nursing home. If the product is the nursing home as a whole, as Hoover argues, then Mt. Lebanon's tort claims are barred because the product-the nursing home-was the only thing damaged.

Courts are divided over whether the component parts of a building or the building itself is the product for purposes of the economic loss doctrine. Frumer & Friedman at § 13.13. In most cases, a home-buyer is suing either the builder or the manufacturer of materials used by the builder for defects in a particular...