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,
ORDER
RAYTHEON COMPANY,
RAYTHEON AIRCRAFT COMPANY,
and
RAYTHEON AIRCRAFT SERVICES, INC.,
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
H.C. SMITH INVESTMENTS, L.L.C.,
Case No. 1:00-CV-128
Plaintiff,
HON. RICHARD ALAN ENSLEN
v. OUTBOARD MARINE CORPORATION,
OPINION
RAYTHEON COMPANY,
RAYTHEON AIRCRAFT COMPANY,
and
RAYTHEON AIRCRAFT SERVICES, INC.,
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.
___________________
1
Raytheon Company, Raytheon Aircraft Company, and Raytheon Aircraft Services, Inc. will be
collectively referred to as "Raytheon."
2
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.
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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
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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
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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
__________________________
2
Plaintiff 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.
6
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)
7
(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.
The Court initially notes that Plaintiff failed to allege fraud in the inducement or any facts
indicating that Outboard intended Plaintiff to rely on its logbook entries when they were made.
Neither does Plaintiff allege that it did not have access to the x-ray reports, which were
referenced in the logbook entries. In addition, Outboard and Plaintiff are not parties to a contract,
and nothing indicates that Outboard tried to "trick" Plaintiff into entering a contract with Aero. In
fact, Plaintiff does not allege that Outboard knew or should have known that Plaintiff would
enter a contract with Aero. Moreover, the alleged misrepresentations concern the Hawker's
quality, and the fraud in the inducement exception does not apply. See Allmand, 960 F. Supp. at
1227-28. Plaintiff is also unable to show a duty owed to it by Outboard.
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D. Count III - Breach of Express Warranties
Plaintiff claims Outboard's logbook entries are express warranties that Outboard subsequently
breached. Outboard argues, inter alia, that Plaintiff failed to join Aero, an indispensable party.
Whether Aero is an indispensable party is a threshold question relating to Count III.
The parties have briefly addressed this issue in their Motions and Responses. The Court,
however, requires further briefing from the parties regarding this issue.
CONCLUSION
For the foregoing reasons, Outboard's Motion to Dismiss Counts I and II is granted, and the
parties are ordered to further brief whether Aero is an indispensable party.
DATED in Kalamazoo, MI: November 13, 2000
RICHARD ALAN ENSLEN
Chief Judge
9