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South Dakota Wheat Growers Association v. Chief Industries, Inc.

United States District Court, D. South Dakota, Northern Division

August 28, 2018





         On April 7, 2014, plaintiff South Dakota Wheat Growers Association ("SDWG") filed suit in state court against Chief Industries, Inc. ("Chief) and Gateway Building Systems, Inc. ("Gateway") to recover damages incurred by SDWG as a result of the failure of a Chief Industries Big Bin at SDWG's Mellette, South Dakota, facility on January 5-6, 2013. Chief properly removed the claim to this court on May 6, 2014. On November 16, 2015, SDWG moved to add claims against Heyer Engineering, P.C. ("Heyer") to its complaint, which this court granted on January 7, 2016. Following the completion of discovery on August 1, 2017, defendants moved for summary judgment and SDWG moved for sanctions against Heyer.

         SDWG's claims arise out of a series of events that occurred following the erection of the Chief Big Bin at its Mellette, South Dakota, site. Chief manufactured the Big Bin, which Gateway, as a Chief distributor, erected. Gateway was also responsible for installing the foundation for the Big Bin, which Heyer designed. Shortly after the substantial completion of construction of the Big Bin in January of 2000, cracks were discovered in the stem wall of the bin at the interface with the south loader door frame. Large plates were designed by Heyer and installed by Gateway to address the cracks. The wall above the loader door then tilted inwards, wrinkling, in May of 2000. In November of 2000 and April of 2001 the Big Bin's roof partially collapsed and was repaired. In December of 2001, a tear occurred on the east side of the loader door on the inside of the door frame, followed by a tear on the west side of the loader door on the outside of the door frame in April of 2002. In April of 2003, a tear again appeared on the east side of the loader door on the outside of the door frame. Each tear was repaired. However, SDWG states that another tear occurred at the east door jamb on January 5-6, 2013, resulting in the ultimate collapse of the bin. SDWG claims damages resulting from the tear and other defects which damages are $3, 598, 789.95.

         SDWG alleges that Chief made representations that the Big Bin would have a snow-wind load of 30-90 pounds per square foot ("PSF") and that the Big Bin could be built on 3000 pounds per square inch ("PSI") soil without concern for differential settlement. SDWG also alleges that Gateway and Heyer did not correctly install rebar in the concrete foundation of the Big Bin and that repairs were improperly made. The parties do not dispute that the conditions of sale include a provision that "the equipment is sold by the dealer only with the standard warranty of the manufacturer, if any... [t]here are no other warranties expressed, implied, or statutory, upon which said equipment is sold or erected." Chiefs Standard Limited Grain Bin Warranty states "that the components manufactured by Chief Industries, Inc., were, on the date of delivery to you, free from defects in the composition of material, Chief workmanship, and design." The warranty "is applicable under normal use and service to defects which become evident within a period of five (5) years from the date of delivery of [the] Chief Grain Bin."

         SDWG brought claims against Chief for negligence in designing the Big Bin; for willful, wanton and gross negligence in its representations of the Big Bin's snow and wind loads and required soil rating, as well as for inadequate design and execution of repairs; for fraudulently misrepresenting that the Big Bin was structurally sufficient for the Mellette, South Dakota, site; for statutory deceit, negligent misrepresentation and deceptive trade practices for the same alleged misrepresentations; strict products liability for the design and manufacture of the Big Bin; post-sale duty to warn; breach of contract for design and repair deficiencies; breach of express warranty; and equitable estoppel in light of SDWG's alleged agreement not to sue following promises purportedly made regarding the repairs to the Big Bin.

         SDWG brought claims against Gateway for negligence and willful, wanton, and gross negligence in constructing and repairing the Big Bin; for fraudulent misrepresentation, fraudulent concealment, statutory deceit, and negligent misrepresentation in connection with the Big Bin's snow and wind loads and the failure to install rebar under the loader door; deceptive trade practices for Gateway's failure to inform SDWG of the Big Bin's actual snow and wind load capacity; strict products liability with respect to Gateway's construction of the concrete stem wall, foundation, footings, pilings and stem wall plates for the Big Bin; breach of contract for failure to properly design and repair the concrete and rebar; breach of express warranty and implied warranties of merchantability and fitness for a particular purpose; and equitable estoppel.

         SDWG also brought claims against Heyer for negligence and professional negligence for the design of the Big Bin foundation, aeration tunnels, and failure to properly calculate the hoop tension in the stem wall of the Big Bin for purposes of the plate repair; for breach of contract for Heyer's failure to properly design the Big Bin foundation; and for fraudulent concealment by aiding and abetting for failing to inform SDWG and Chief that the rebar was not constructed under the loader door. SDWG also brought a claim against Heyer seeking sanctions in light of Heyer's alleged spoliation of documents related to this dispute, Chief moved for summary judgment, arguing that SDWG's claims are barred by the statute of repose and various statutes of limitations; that tort claims are barred by the economic loss doctrine; and that the express warranty claim is barred by the Statute of Frauds. Gateway similarly moved for summary judgment, arguing that SDWG's breach of contract and implied warranty claims are barred by the statute of limitations; that SDWG's tort claims are barred by the economic loss doctrine; that SDWG's negligence, strict products liability, breach of implied warranty, breach of contract, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, statutory deceit, deceptive trade practices, and willful, wanton, and gross negligence claims are barred under the statute of repose; and that the negligent misrepresentation, equitable estoppel and breach of express warranty claims fail as a matter of law. Heyer also moved for summary judgment, stating that plaintiffs claims are time-barred by the statute of repose and that SDWG's claims for fraudulent concealment by aiding and abetting fail as a matter of law.

         This court will first address whether plaintiffs claims are barred by the economic loss doctrine, the statute of repose, or statute of limitations before determining whether sanctions for spoliation are appropriate.


         I. Standard of Review

         The purpose of summary judgment is to determine whether there is a "genuine issue for trial" with regard to a claim or defense or "part of each claim or defense." Matsushita Elec. Indus. Co.. Ltd. v. Zenith Radio Corp.: 475 U.S. 574, 587 (1986); Fed.R.Civ.P. 56(a). Summary judgment should be granted only where there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). If facts are disputed, "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby. Inc.. 477 U.S. 242, 248 (1986). The moving party bears the burden of showing that the material facts in the case are undisputed and "inferences to be drawn from the underlying facts . . . must be viewed in the light most favorable to the party opposing the motion." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam). However, a nonmoving party "may not rest on mere allegations or denials" and "must do more than show that there is some metaphysical doubt as to the material facts." Anderson at 256; and Matsushita at 587. In sum, an issue of fact is genuine if, based upon the evidence in the record, a reasonable jury could return a verdict for the nonmoving party. Anderson at 248.

         II. South Dakota Law Governs Substantive Issues

         Neither the warranty provided by Chief nor the purchase orders provided by Gateway identify the applicable law governing those instruments. The current dispute is before this court on the basis of diversity of citizenship. With the exception of venue transfers, "[a] federal court sitting in diversity ordinarily must follow the choice-of-law rules of the State in which it sits." See, e.g., Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas. 134 S.Ct. 568, 582 (2013) (internal citations omitted). SDCL § 53-1-4 provides that "[a] contract is to be . interpreted according to the law and usage of the place where it is to be performed or, if it does not indicate a place of performance, according to the law and usage of the place where it is made." South Dakota has also adopted the most significant relationship approach for torts. Chambers v. Dakotah Charter, Inc., 488 N.W.2d 63, 68 (S.D. 1992). The parties do not dispute that the Big Bin was erected at SDWG's Mellette, South Dakota, site and this site is the place where the relationship between the parties is centered. The place of performance, and of the most significant relationship, then, is South Dakota, and South Dakota law therefore governs the substantive issues in this case.

         III. The Uniform Commercial Code Applies

         The UCC applies to transactions for the sale of goods, where goods "means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale." SDCL § 57A-2-105. Where a contract provides for both goods and services, South Dakota has adopted the predominate purpose test to determine whether the UCC applies. See, e.g., Jandreau v. Sheesley Plumbing & Heating Co.. Inc.. 324 N.W.2d 266, 268 (S.D. 1982). The operative question is whether a contract is "for the rendition of a service with goods incidentally involved or... a transaction of sale with labor incidentally involved?" City of Lennox v. Mitek Industries. Inc.. 519 N.W.2d 330, 332 (S.D. 1994). In the current case, it is clear that this contract would not have been executed were it not for the purpose of purchasing the Big Bin. It is also clear that the services provided by Gateway and Heyer in designing and installing the Big Bin's foundation are incidental to the purchase of the bin itself. The UCC therefore governs the purchase orders and warranty at issue in this dispute.

         IV. The Economic Loss Doctrine

         Having determined that the UCC governs this dispute, the next inquiry is whether the economic loss doctrine bars any available tort causes of action. "The general rule is that economic losses are not recoverable under tort theories; rather, they are limited to the commercial theories found in the UCC." City of Lennox at 333. The Supreme Court of South Dakota has articulated the rational for the economic loss doctrine in the following statement:

The prohibition against tort actions to recover solely economic damages for those in contractual privity is designed to prevent parties to a contract from circumventing the allocation of losses set forth in the contract by bringing an action for economic loss in tort. The doctrine draws a legal line between contract and tort liability that forbids tort compensation for certain types of foreseeable, negligently caused, financial injury. The economic loss doctrine, therefore, sets forth that regardless of whether a tort duty may exist between contracting parties, the actual duty one party owes to another for purely economic loss should be based exclusively on the contract to which they agreed and assigned their various risks.

Kreisers Inc. v. First Dakota Title Ltd. Partnership. 852 N.W.2d 413, 421 (S.D. 2014) (internal citations omitted). Privity of contract is not a requirement for invoking the economic loss rule where, as in the instance case, a manufacturer provides a warranty for a product it sells through a distributor. Corsica Co-op. Ass'n v. Behlen Mfg. Co.. Inc.. 967 F.Supp. 382, 387 (D.S.D. 1997). South Dakota recognizes two exceptions to the economic loss doctrine: (1) where the damage is to "other property" and (2) where personal injury is involved. Kreisers at 421. No. personal injury is alleged here. Damage to other property is defined as "damage to property collateral to the product itself." Agristor Leasing v. Spindler, 656 F.Supp. 653, 657 (S.D. 1987). Examples of "other property" include a defective heater that exploded and destroyed a major portion of a refiner and defective brakes that caused a truck to run into a home. Id. Damages that constitute consequential damages do not satisfy the "other property" exception to the economic loss doctrine. Diamond Surface. Inc. v. State Cement Plant Com'n. 583 N.W.2d 155, 162 (S.D. 1998) (quoting City of Lennox at 333-34). Consequential damages "do not flow directly and immediately from an injurious act" but "result indirectly from the act." Damages, BLACK'S LAW DICTIONARY (10th Ed. 2014).

         While some courts have recognized exceptions to the economic loss doctrine for fraud, fraud in the inducement, negligent misrepresentation, negligent provision of services by licensed professionals, and for violation of building codes or other statutory duties, damages for foreseeable, negligently caused losses arising under a contract are limited to the terms of the contract. See 6 Bruner & O'Connor Construction Law § 19:10 (2018) (collecting cases). SDWG claims that Chief acted with willful, wanton and gross negligence in allowing welds to be performed and gussets installed by contractors who did not have the proper qualifications to perform such repairs and in inadequately selling and designing the Big Bin for the weather conditions in Mellette, South Dakota. SDWG also asserts claims of strict products liability against Chief for its manufacture and design of the Big Bin as well as for post-sale duty to warn regarding such defects. SDWG further claims that Gateway, in failing to properly install rebar or the stem wall plate fix, acted with a conscious realization that injury would be probable, and that Gateway was strictly liable for failure to warn of the Big Bin's faulty design. SDWG states claims against Chief and Gateway for negligent misrepresentation with regard to the design of the Big Bin and repairs made in 2002. Finally, SDWG asserts claims of negligence and professional negligence against Heyer for its design of the foundation and aeration tunnels and the plate repair fix. SDWG's damages include not only the damages to the grain bin, but also damages for grain stored in the bin. Damages for grain stored in the bin are consequential damages that would not fall under the "other property" exception to the economic loss doctrine. The economic loss doctrine would therefore bar SDWG's negligence, strict products liability, and post-sale duty to warn claims. However, it is possible that claims associated with Chiefs failure to design the Big Bin in accordance with the building codes for snow and wind loads applicable to Mellette, South Dakota, negligent misrepresentation claims against Chief and SDWG, and Heyer's alleged professional negligence would survive application of the economic loss doctrine.

         Courts in other jurisdictions have determined that the economic loss rule does not bar negligence claims based on the violation of a building code. See, e.g., Brian and Christie, Inc. v. Leishrnan Elec Inc.. 150 Idaho 22, 25-27 (2010); Association of Apartment Owners of Newtown Meadows ex rel. its Bd. of Directors v. Venture 15, Inc., 115 Haw. 232, 295 (2007); and Stallings v. Kennedy Elec, Inc., 710 So.2d 195, 195-97 (Fla. 5th DCA 1998). At least one other court, though, has declined to waive the economic loss doctrine for violation of a building code where the court found no public policy-based tort duty arose from the municipal building code. Sullivan v. Pulte Home Corp., 237 Ariz. 547 (Ct. App. Div. 1 2015). Since it is possible that South Dakota would recognize such an exception, and since there is a dispute as to whether Chief indeed violated the applicable building codes for snow and wind loads in designing the Big Bin, this court should not rule that, as a matter of law, that summary judgment on SDWG's claims against Chief for negligent design is proper.

         It appears that the Supreme Court of South Dakota has never directly addressed whether the economic loss rule bars recovery for negligent misrepresentation. The District Court for the District of South Dakota has allowed claims for fraud to go forward after finding that the economic loss rule applied to bar certain claims. Brookings Mun. Utilities, Inc. v. Amoco Chemical Co., 103 F.Supp.2d 1169, 1178 (D.S.D. 2000). The District Court has also held that "[o]n balance, the South Dakota Supreme Court seems more likely to hold that the economic loss doctrine does not bar fraud claims . . . ." Northwestern Public Service v. Union Carbide Corp., 115 F.Supp.2d 1164, 1170 (D.S.D. 2000). Including negligent misrepresentation as a species of fraud, I also hold that such misrepresentation claims should not be barred by the economic loss rule. Indeed, "[p]rior to the adoption of the economic loss rule, courts routinely awarded purely economic damages when a defendant's misrepresentation induced a transaction." Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation, 41 Wm. & Mary L. Rev. 1789, 1802 (2000). While SDWG's claims against Chief and Gateway for negligent misrepresentation with regard to the design of the Big Bin could ultimately be barred by the statute of repose, as discussed in Part V, the negligent misrepresentations allegedly made with regard to repairs executed in 2002-2003 would not be so barred, and are addressed in Part X.

         In South Dakota a cause of action also exists for "economic damage for professional negligence beyond the strictures of privity of contract." Wells Fargo Bank, N.A. v. Fonder, 868 N.W.2d 409, 416 (S.D. 2015) (internal citations omitted). South Dakota recognizes that engineering firms may be held to a higher standard of care such that they would be subject to claims for professional negligence. See, e.g., Mid-Western Elec, Inc. v. DeWild Grant Reckert &Associates Co..500 N.W.2d 250, 254 (1993). To deny such claims "would, in effect, be condoning a professional's right to do his or her job negligently with impunity as far as innocent parties who suffer economic loss." Id. South Dakota specifically recognizes that tort claims against at least some professionals may be exempt from the economic loss doctrine. Kreisers at 422. Since there is a genuine issue of material fact as to whether ...

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