United States District Court s35

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

H.C. SMITH INVESTMENTS, L.L.C., / Case No. 1:00-CV-128
Plaintiff, / HON. RICHARD ALAN ENSLEN
v. OUTBOARD MARINE CORPORATION,
RAYTHEON COMPANY,
RAYTHEON AIRCRAFT COMPANY,
and
RAYTHEON AIRCRAFT SERVICES, INC., / ORDER

Defendants.

______/

In accordance with the Court's Opinion of this date;

IT IS HEREBY ORDERED that Defendant Outboard Marine Corporation's Motion to Dismiss Counts I and II

(Dkt. No. 8) is GRANTED.

IT IS FURTHER ORDERED that both parties shall further brief whether Aero is an indispensable party as

follows:

Defendant, Outboard Marine Corporation, shall file its brief by Tuesday, November 28, 2000.

Plaintiff, H.C. Smith Investments, L.L.C., shall file a response by Tuesday, January 9, 2001.

Defendant, Outboard Marine Corporation, shall file its reply brief by Wednesday, January 24, 2001.

IT IS SO ORDERED.

DATED in Kalamazoo, MI: November 13, 2000

RICHARD ALAN ENSLEN

Chief Judge

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

Defendants.

______/

This matter comes before the Court on Defendant, Outboard Marine Corporation's ("Outboard") Motion to Dismiss Counts I and II of Plaintiff's Complaint and Motion to Dismiss Count III. Count I of Plaintiff's Complaint alleged fraudulent misrepresentation, and Count II alleged negligent misrepresentation. Count III alleged breach of express warranty. Outboard claims that Counts I and II must be dismissed pursuant to Michigan's economic loss doctrine. Outboard further claims that Count III should be dismissed because: (1) Plaintiff has not and cannot allege privity of contract with Outboard; (2) no legal basis exists for extending the alleged warranties to remote buyers; (3) the face of Plaintiff's Amended Complaint demonstrates no breach occurred; and (4) Plaintiff failed to join an indispensable party. The Court grants Outboard's Motion to Dismiss Counts I and II.

BACKGROUND

Plaintiff's claims against Outboard stem from the sale and resale of a 1969 Hawker-Siddeley ("Hawker") airplane that Outboard owned from September 1969 through December 1996. On

December 16, 1996, Outboard sold the Hawker "As Is, Where Is" to Aero Toy Store, Inc. ("Aero"). In July 1997, Plaintiff expressed an interest in purchasing the Hawker and directed the Raytheon Company ("Raytheon")1 to conduct a pre-purchase inspection of the Hawker. Raytheon inspected the Hawker, and in August 1997, Plaintiff purchased the Hawker from Aero "As Is, Where Is" for $2,200,000.

More than one year after purchasing the Hawker, Plaintiff hired AVMATS, an aircraft repair and inspection company, to inspect the plane. AVMATS found corrosion on various part of the Hawker. In October 1999, Plaintiff sold the Hawker to Cypress Corporation for $950,000.

Plaintiff alleges that the corrosion existed when Outboard owned the Hawker, and Outboard either discovered or should have discovered the corrosion during the 600-hour and 48-month radiographic (x-ray) inspection of the aircraft. The results of this inspection were recorded in the Hawker's logbook, which noted no problems and stated that the Hawker was "approved for return to service." The results of those x-rays reveal 22 points of corrosion. The logbook entries, however, do not indicate that Outboard discovered or repaired the corrosion.

The Federal Aviation Regulations ("FAR") require that a person approving an aircraft for return of service record (1) the type of inspection performed and a brief description of it, (2) the date of the inspection and the aircraft's total time in service, (3) the signature, certificate number, and kind of certificate held by the person approving the aircraft for return to service, and (4) a certifying statement approving the aircraft for return to service. FAR §§ 43.5, 43.11. All of this information appeared in the logbook entry approving the aircraft for return to service.

______

1Raytheon Company, Raytheon Aircraft Company, and Raytheon Aircraft Services, Inc. will be collectively referred to as "Raytheon."

Plaintiff also alleges that Outboard misrepresented the Hawker's condition when its mechanics failed to record the corrosion in the airplane's logbook. Plaintiff claims it relied on these misrepresentations in deciding to purchase the Hawker from Aero and has suffered "economic losses" in the amount of $2,450,000. The "economic losses" stem from Plaintiff's inability to continue leasing the Hawker, costs for repairing the corrosion, lost profits, and a subsequent sale of the Hawker.

Finally, Plaintiff alleges that Outboard breached an express warranty based on the Hawker's logbook and maintenance history while in Outboard's control. Specifically, Plaintiff alleges that the logbook entries constitute express warranties of the Hawker's condition and "airworthiness."

LEGAL STANDARDS

Rule 12(b)(6)

When ruling on a motion to dismiss, a court must construe the complaint in the light most favorable to plaintiff, accept all well-pled allegations as true and determine whether the plaintiff can prove any set of facts to support its claims that would entitle it to relief. See Nelson v. Miller, 170 F.3d 641, 649 (6th Cir. 1999). Dismissal is appropriate if, accepting all allegations as true and giving the plaintiff the benefit of all reasonable inferences, the plaintiff cannot demonstrate it is entitled to relief. See Advocacy Org. for Patients v. Auto Club Ins. Ass'n, 176 F.3d 315, 319 (6th Cir. 1999).

ANALYSIS

A. Plaintiff's Amended Complaint

Plaintiff argues that Outboard cannot succeed on its Motion because Plaintiff has filed an Amended Complaint including a breach of warranty claim against Outboard. Although Plaintiff timely filed the Amended Complaint, the breach of express warranty claim is found in Count III.

The pending Motion is to dismiss Counts I and II and has no bearing on Count III. For this reason, this argument fails.

B. Economic Loss Doctrine

Michigan follows the economic loss doctrine, which "bars tort recovery and limits remedies to those available under the Uniform Commercial Code where a claim for damages arises out of the commercial sale of goods and losses incurred are purely economic." Neibarger v. Universal Corp, Inc., 486 N.W.2d 612, 613 (Mich. 1992)(farmers' tort claims against designers and sellers of allegedly defective milking system barred by economic loss doctrine where only damages alleged were injury to cows and decreased milk production). The economic loss doctrine further provides that `where a purchaser's expectations in a sale are frustrated ... his remedy is said to be in contract alone, for he has suffered only `economic losses."' Id. at 615. Courts apply this doctrine to tort claims that do not involve "unanticipated physical injury" because tort law is an "inapt tool" for solving commercial disputes. See Allmand Assoc., Inc. v. Hercules Inc., 960 F. Supp. 1216, 1227 (E.D. Mich. 1997)(manufacturer's fraud claim against a developer of an allegedly defective manufacturing process that could not be used for its intended purpose); see also Neibarger, 486 N.W.2d at 615-16.

When applying the economic loss doctrine, Michigan courts have held that a plaintiff has no cause of action for fraudulent or negligent misrepresentation in connection with the sale of an allegedly defective good where the only loss suffered is economic. See Citizens Ins. Co. v. Osmose Wood Preserving, Inc., 585 N.W.2d 314, 316 (Mich. Ct. App. 1998)(restaurant owner's fraud and negligence claims against builders who installed roof that later collapsed barred even though owner alleged damages to restaurant as well as to roof); McGhee v. GMC Truck, 296 N.W.2d 286 (Mich. Ct. App. 1992)(dismissing plaintiff's negligent misrepresentation claim against a seller of an

allegedly defective tractor where plaintiff sought damages for lost profits, diminished value, and cost of repair barred); Sullivan Indus., Inc. v. Double Seal Glass Co., Inc., 480 N. W.2d 623, 629 (Mich. Ct. App. 1991)(glass door manufacturer's negligence claim against suppliers of insulated glass and sealant barred even though plaintiff had no contractual relationship with sealant supplier).

In addition, the Court has applied the economic loss doctrine in a claim similar to the one at issue. In Valleyside Dairy Farms v. A.. O. Smith Corp., 944 F. Supp. 612 (W.D. Mich. 1995), dairy farmers contracted with a retail store to purchase Harvestore-brand silos to store feed for cattle. 944 F. Supp. at 613. Harvestore marketed its silos as "air-tight" even though it knew that oxygen could get into the silos. Id. at 613-14. After using the silos for several years, the farmers discovered that the feed stores in the silos had been damaged by oxygen, and this lowered dairy production. Id. at 615. The farmers sued Harvestore and its parent corporation for fraud, and the Court granted Harvestore's motion for summary judgment holding that the economic loss doctrine barred the farmer's claims even though the farmers and Harvestore were not in privity of contract. Id. at 615. The Court applied the economic loss doctrine because the claims arose in a commercial context, and the farmers' alleged injuries did not involve "accidental or personal injury." Id. at 617.

In this case, Plaintiff, a commercial business, purchased the Hawker for commercial purposes from Aero, a commercial airplane refurbisher. Further, Plaintiff does not argue that the claims do not arise out of the commercial sale of an airplane. In addition, Plaintiff asserts tort claims against Outboard and alleges that it suffered damages resulting from repair expenditures, lost profits, and the Hawker's diminished value. It even characterized these losses as "economic losses." It appears that the economic loss doctrine would therefore bar Counts I and II of Plaintiff's Amended Complaint. Plaintiff, however, argues that the economic loss doctrine does not bar Counts I and II because these claims are based on Outboard's "extra-contractual obligations to make accurate and

complete disclosures in the Hawker's logbook." Plaintiff attempts to create a duty based on a FAR that requires an accurate logbook. Plaintiff argues that a FAR has the force and effect of law, and violations of a FAR can constitute negligence per se. See Knight v. United States, 948 F. Supp. 316, 323 (E.D. Mich. 1980). The Federal Aviation Act ("Act"), however, "does not provide for a private right of action for violations of (the Act)." Wright v. Bond-Air, Ltd., 930 F. Supp. 300, 305 (E.D. Mich. 1996); Margolis v. United Airlines, Inc., 811 F. Supp. 318, 324 (E.D. Mich. 1993).

In addition, the FARs do not provide a duty owed by Outboard to Plaintiff that would allow Plaintiff to recover purely economic losses. A legal duty may arise from a regulation only where: (1) the regulation's purpose is to prevent the type of injury and harm actually suffered; and (2) the plaintiff is a member of the class of person the regulation was designed to protect. See Cipri v. Bellingham Foods, Inc., 596 N.W.2d 620, 628 (Mich. Ct. App. 1999).2 Congress enacted the Act to promote safety in aviation. See Brown v. Byard, 600 F. Supp. 396, 397 (S.D. Ohio 1984) (enacted to protect lives of persons on board aircraft and no private right of action created). Congress did not enact the Act to protect an aircraft purchaser's economic expectations. See Erickson Air-Crane Co. v. United Tech. Corp., 743 P.2d 747, 749 (Or. App. 1987). Here, Plaintiff has not and seemingly cannot allege that its injury was the type Congress meant to prevent. Plaintiffs economic loss has nothing to with safety.

Furthermore, Plaintiff's "extra-contractual obligation" argument holds no merit because Neibarger mandated that a products liability action may be premised on extra-contractual duties

______

2Plaintiff attempts to rely on Cipri for the proposition that statutes can create separate legal duties. Although statutes can create separate legal duties, Cipri is inapposite to the case at bar. The environmental contamination statute at issue in Cipri explicitly provided a private cause of action. 596 N.W.2d at 623.

where a consumer or bystander suffers a personal injury. 486 N.W.2d at 615. This is not a products liability case, nor has Plaintiff alleged a personal injury.

C. Fraud in the Inducement

Plaintiff also argues that its misrepresentation claim falls under the fraud in the inducement exception to the economic loss doctrine because the claims concern pre-contractual conduct that "tricked" Plaintiff into purchasing the Hawker and because the claims are "viable apart from and are extraneous to any contract claims."

The fraud in the inducement exception is found in Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 532 N. W.2d 541 (Mich. Ct. App. 1995). The Huron court held that "[f]raud in the inducement presents a special situation where parties to a contract appear to negotiate freely ... but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior." 532 N. W.2d at 545. The Huron court further stated that fraud in the inducement occurs when one party is `tricked" into signing a contract. 532 N.W.2d at 544. The dispositive factor as to whether the exception applies is whether the alleged fraud is extraneous to the contract. See Dinsmore Instrument Co. v. Bombardier, Inc., 999 F. Supp. 968, 972 (E.D. Mich. 1998).

In addition, under Michigan law, fraud in the inducement does not occur where the alleged misrepresentations concern the quality or character of the goods that are the subject of a contractual agreement. See Allmand, 960 F. Supp. at 1227-28 (fraud in the inducement exception inapplicable where the alleged misrepresentations concerned the quality and characteristics of the goods sold). Furthermore, a plaintiff alleging fraud must prove that the defendant made representations to the plaintiff with the intention that the representations be relied and acted upon by the plaintiff. See Associated Mut. Hosp. Serv. v. Health Care Serv. Corp., 71 F. Supp. 2d 750, 752 (W.D. Mich. 1999)

(dismissing fraud claim where plaintiff failed to allege that defendant intended plaintiff to rely on its statements).

Plaintiff contends that the alleged misrepresentations are extraneous to and independent of a contract. First, Plaintiff specifically points to its allegations referencing inspections and corresponding logbook disclosure made pursuant to the FAR as opposed to in connection with any contract or sales negotiation. Second, Plaintiff points to the fact that the documents supporting these allegations are the logbook entries and relevant FARs. Plaintiff argues this is because contracts are not needed to establish its misrepresentation claim. Third, Plaintiff claims that although it referenced a sale in Paragraphs 40 and 41 of is fraudulent misrepresentation claims, these Paragraphs are not necessary and only further establish that Outboard intentionally made false representations of material facts. Fourth, Plaintiff states that the logbook representations do not concern the quality or character of the goods at the point of sale.