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NAPORANO IRON & METAL CO. v. AMERICAN CRANE CORP.

December 30, 1999

NAPORANO IRON & METAL CO. AND COMMERCIAL UNION INSURANCE CO. A/S/O NAPORANO IRON & METAL CO., ALBANY INSURANCE CO., A/S/O NAPORANO IRON & METAL CO., PLAINTIFFS,
V.
AMERICAN CRANE CORPORATION; FORMSPRAG COMPANY, WARNER ELECTRIC CO., DANA FORMSPRAG CORPORATION, DANA CORPORATION, INDIVIDUALLY AND AS SUCCESSOR TO FORMSPRAG CORPORATION., DANA FORMSPRAG CORPORATION, AND WARNER ELECTRIC CO.; MOODY BROTHERS OF JACKSONVILLE, INC., M.D. MOODY & SONS, INC., INDIVIDUALLY AND AS SUCCESSOR TO MOODY BROTHERS OF JACKSONVILLE, INC., MOBRO MARINE, INC., INDIVIDUALLY WEST PAGE 495 AND AS SUCCESSOR TO MOODY BROTHERS OF JACKSONVILLE, INC.; XYZ CORPORATIONS 1-10, REPRESENTING FICTITIOUS BUSINESS ENTITIES, AND JOHN DOES 1-10, REPRESENTING FICTITIOUS INDIVIDUALS, DEFENDANTS.



The opinion of the court was delivered by: Greenaway, District Judge.

OPINION

This matter comes before the Court on the motion of defendants Dana Corporation, Formsprag Company, Warner Electric Co., and Dana Formsprag Corporation, American Crane Corporation ("American Crane"), and M.D. Moody & Sons, Inc., Moody Brothers of Jacksonville, Inc., and Mobro Marine, Inc., (collectively, "defendants"), pursuant to Fed. R.Civ.P. 12(b)(6) and 9(b), to dismiss Counts I, III, and V of the complaint. Defendants also seek to strike the claims of plaintiff Naporano Iron & Metal Co. ("Naporano") for punitive damages.*fn1 For the reasons discussed below, defendants' motion is granted in part and denied in part, and Naporano's request for leave to amend its fraud allegations to comply with Fed.R.Civ.P. 9(b) is granted.*fn2

BACKGROUND

Naporano commenced this action seeking recovery of damages and attorneys fees and costs stemming from three collapses of a crane that defendants manufactured.*fn3 The relevant facts, taken from the complaint are as follows:

On or about February 14, 1992, Naporano, a New Jersey corporation, purchased an American 12220 Crane ("the Crane") manufactured by defendants.*fn4 The Crane was equipped with a Formsprag Overrunning Clutch (the "original Clutch") and Boom Hoist Brake (the "Brake"), which were designed, manufactured and/or distributed by defendants.

The first collapse occurred on or about September 9, 1993, while Naporano was using the Crane for its intended purpose on a customer's property. The Crane, the original Clutch, and the Brake all failed, causing the Crane's boom to collapse.*fn5 The Crane itself was damaged as a result, along with the property of the Naporano customer. No person or other property of Naporano was damaged in the collapse.

On or about October 2, 1994, the Crane, the Clutch, and the Brake failed again, causing the boom to collapse a second time. As with the first collapse, this second collapse injured only the Crane itself and the property of Naporano's customer. The boom collapsed for the third time on June 2, 1997, damaging the Crane and certain property of Naporano's customer. Once again, no person or other property of Naporano was injured.*fn6

At some point in time, unspecified in the complaint, Defendants determined that the Clutch was defective. Defendants recalled the Crane and promised to provide Naporano with a non-defective crane with a modified Formsprag Overruning Clutch (the "modified Clutch"). Defendants later determined that the modified Clutch was defective, and recalled it as well. Defendants advised Naporano to resume using the original Clutch and again promised a non-defective crane and Formsprag Overrunning Clutch. Subsequently, defendants advised Naporano not to use either the original Clutch or the modified Clutch and that it should cease "operations entirely." Defendants' directive compelled Naporano to "choose between shutting down its operations and using the defective product." When Naporano informed defendants of this Hobson's choice, defendants denied any wrongdoing and "blam[ed] each other." Although Naporano repeatedly requested a replacement non-defective clutch from defendants, one was never provided.

At some point prior to June 2, 1997 (again unspecified in the complaint) "it became apparent" that the Brake was also defective. American Crane promised to provide Naporano with the first redesigned "unit," made with a non-defective brake. American Crane, however, gave the first redesigned brake unit to another customer. The third collapse occurred with the defective brake.

DISCUSSION

In considering defendants' motion to dismiss for failure to state a claim, the Court must accept as true all the allegations set forth in the complaint and draw all reasonable inferences in favor of Naporano. See Ford v. Schering-Plough Corp., 145 F.3d 601, 604 (3d Cir. 1998). A motion to dismiss, pursuant to Rule 12(b)(6), will only be granted if it appears that Naporano could not prove any set of facts in support of its claims entitling it to relief See Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996); see also Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

I. Naporano's Tort Claims

A. The Economic Loss Doctrine

In Count I, Naporano asserts a products liability claim against defendants under New Jersey's Products Liability Act, N.J.S.A. § 2A:58C-1 to -11 (West 1987 and Supp. 1999) (the "PLA").*fn7 Naporano charges defendants with defective design and manufacture of the Crane and its component parts, as well as the failure to provide adequate warnings. In Count V, Naporano asserts a negligence claim, charging defendants with breaching their duties of care to Naporano in the assembly, monitoring, and repairing of the Crane. Defendants contend that the PLA is the exclusive source of products liability and bars Naporano's tort claims, as it limits tort remedies to harm caused by a product defect resulting in "physical damage to property, other than to the product itself." N.J.S.A. § 2A:58C-1(b)(2). Defendants maintain that because Naporano alleges only damage to the Crane itself and to the property of a third-party, Naporano's claims are excluded from the PLA and, therefore, not actionable in tort. The PLA, they argue, embodies the "economic loss" doctrine, which limits Naporano's recovery to its contractual remedies.

Under the economic loss doctrine, a plaintiff seeking relief for damages sustained from the purchase of a defective product is limited to contractual remedies under the Uniform Commercial Code.*fn8 Where the defective product fails — and harms only the product itself — the purchaser has lost only the benefit of bargain. This harm is deemed "economic loss," for which contract damages are considered sufficient. See Alloway v. General Marine Indus., L.P, 149 N.J. 620, 627-28, 695 A.2d 264 (1997). Economic loss encompasses suits to recover damages for repair costs, replacement of defective goods, inadequate value, consequential loss of profits, and "the diminution in value of the product because it is inferior in quality and does not work for the general purposes for which it was manufactured and sold." Alloway, 149 N.J. at 627, 695 A.2d 264 (citation omitted).

The New Jersey Supreme Court first approved the economic loss doctrine in Spring Motors Distribs., Inc. v. Ford Motor Co., 98 N.J. 555, 489 A.2d 660 (1985), and recently reaffirmed its commitment to the theory in Alloway. The New Jersey Legislature embraced the economic loss doctrine in enacting the PLA in 1987, "to establish clear rules with respect to certain matters relating to actions for damages for harm caused by products." N.J.S.A. § 2A:58C-1(a). Insofar as it is relevant to this case, "harm" under the PLA encompasses "physical damage to property, other than to the product itself." N.J.S.A. § 2A:58C-1(b)(2)(a).

In Spring Motors, the court limited a commercial purchaser's damages from a defective product to contractual remedies under the U.C.C. "The considerations that give rise to strict liability do not obtain between commercial parties with comparable bargaining power." Spring Motors, 98 N.J. at 576, 489 A.2d 660. This rationale extended to the plaintiffs negligence claim as well. See id. at 581-82, 489 A.2d 660. The court reasoned that in enacting the U.C.C., the New Jersey Legislature "adopted a carefully conceived system of rights and remedies to govern commercial transactions." Id. at 577, 489 A.2d 660. The duties imposed and remedies established under the U.C.C. reflect "a policy choice that economic losses inflicted by a seller of goods are better resolved under principles of contract law." Id. at 579, 489 A.2d 660. Permitting a commercial purchaser to supplement contractual claims with tort remedies would allow it to "obtain a better bargain than it made." Id. at 576, 489 A.2d 660.

In Alloway, the court expanded the reach of the economic loss doctrine in New Jersey. There, unlike Spring Motors, the plaintiff was not a commercial purchaser, but an individual who sued in contract and tort to recover his economic loss from the manufacturer of his yacht after the boat sank. The Alloway court held that an individual plaintiff also was limited to remedies under the U.C.C. when seeking to recover for purely economic loss. See Alloway, 149 N.J. at 642-43, 695 A.2d 264.*fn9 The Alloway court engaged in an extensive discussion of the policies embodied in tort and contract law and the reasoning behind limiting recovery for purely economic loss solely to contractual remedies. As in Spring Motors, the court in Alloway recognized that the adoption of the U.C.C. reflected the state legislature's "attempt to strike the proper balance in the allocation of the risk of loss between manufacturers and purchasers for economic loss arising from injury to a defective product." Alloway, 149 N.J. at 629, 695 A.2d 264. Because the court found nothing to indicate that the parties' relative bargaining power was greatly disproportionate, it held that the parties contractual allocation of risk would govern recovery for economic loss. See id. at 628, 695 A.2d 264.

Here, Naporano seeks to recover in contract and in tort for damage sustained by the Crane itself and by Naporano's customer when the Crane's boom collapsed. Defendants assert that the PLA expressly excludes these tort claims for economic loss. The PLA, however, was "not intended to codify all issues relating to product liability . . . ." N.J.S.A. § 2A:58C-1(a). The Alloway court expressly recognized the continuing presence of other remedies: "Although the [PLA] excludes physical damage to the product itself from the [statutory] definition of harm, the Legislature did not intend to codify in the [PLA] all common-law remedies." Alloway, 149 N.J. at 640, 695 A.2d 264.

Thus, Naporano's claims for damages to the allegedly defective product itself are not automatically precluded by their exclusion from the PLA. Alloway, however, did not answer the question of when such a tort cause of action may be pursued. See id. at 638, 695 A.2d 264 (leaving unresolved whether U.C.C. or tort law controls "when a defective product poses a serious risk to other property or persons, but has caused only economic loss to the product itself"). Naporano puts forth two theories for why its claims should withstand defendants' motion to dismiss. Naporano first argues that because the Crane failed in a "sudden and calamitous manner," tort law — with its underlying policy of deterrence — should control. Naporano then argues that because other property was, in fact, damaged during the Crane collapses, "harm" occurred within the statutory definition.

B. "Sudden and Calamitous" Exception

In extending the economic loss doctrine to consumer transactions in Alloway, the New Jersey Supreme Court did not need to address the question of whether a sudden and calamitous accident that ultimately injured solely the defective product — but posed a serious risk to other property or persons — may be rectified in tort.*fn10 In the absence of an authoritative decision of the New Jersey Supreme Court on this issue, in accordance with Erie R.R, Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), this Court must determine how that court would resolve the issue upon the facts here. See Scotts African Union Methodist Protestant Church v. Conference of African Union First Colored Methodist Protestant Church, 98 F.3d 78, 92 (3d Cir. 1996) (stating that where applicable state law is unclear, federal court sitting in diversity must predict how state's highest court would rule).

To aid the Court in this endeavor, defendants point to the recent decision of the New Jersey Appellate Division in Goldson v. Carver Boat Corp, 309 N.J. Super. 384, 707 A.2d 193 (App. Div. 199 8), addressing this precise issue. There, the plaintiff had purchased a forty-foot powerboat "as is" at a public auction. Over a year later, plaintiff and his son docked the boat following a "long hard run," and "noticed a spark emanating from the engine compartment." Id. at 386-87, 707 A.2d 193. They soon discovered that the entire engine compartment was enveloped in smoke. Although the fire was eventually controlled, the boat suffered major damage, and plaintiff ultimately sold it for scrap. Id. at 387, 707 A.2d 193. Plaintiff brought tort claims against the bankrupt boat manufacturer's successor-in-interest, as well as against the company that had converted the engine to maritime use.

The Goldson defendants moved for summary judgment, arguing that plaintiffs tort claims to recover economic loss were barred. The Goldson court answered the question left unresolved in Alloway, and held that irrespective of the way the damage occurs, where damage is confined to the allegedly defective product itself, remedies are confined to contract law.

  Where, as here, there is no substantial
  disparity in bargaining power, and the
  only damage caused by the defective
  product is to the product itself, contract
  law, and the law of warranty in particular,
  is best suited to set the metes and bounds
  of appropriate remedies. Damage to a product
  itself is most naturally understood as a
  warranty claim because the cause of action
  rests on the premise that the product has
  not met the customer's expectation.

Goldson, 309 N.J.Super. at 397, 707 A.2d 193. There is no suggestion that Naporano and defendants possessed unequal bargaining power. Applying Goldson here, Naporano's claim for damage to ...


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