Opinion
Civil Action No. 3:99CV-345-S.
May 16, 2000.
MEMORANDUM OPINION
This matter is before the court on motion of the defendants, Sanden Machine, Limited, et al. (collectively "Sanden"), 1) for dismissal of all but one claim against Sanden Machine Limited and Sanden, and 2) for dismissal of all claims against QAM, Inc. d/b/a Sanden, U.S.A.
This action arose from a thwarted sale of a $1,686,000 printing press by Sanden to the plaintiff, Strathmore Web Graphics ("Strathmore"). Strathmore contends that it was fraudulently induced to enter into the contract for sale by certain representations made to it about the machine's capabilities which proved to be untrue. It further contends that the actions of Sanden violated the Kentucky Consumer Protection Act, and resulted in a breach of contract. Strathmore seeks consequential and punitive damages.
The complaint names three entities, Sanden Machine, Limited, a Canadian Corporation; Sanden, a division of Sanden Machine Limited; and QAM, Inc. d/b/a Sanden U.S.A. The defendants seek dismissal of all claims against QAM, Inc. They articulate the same bases for dismissal of the fraud and Consumer Protection Act claims as made on behalf of the other defendants. Our ruling with respect to those claims will apply to QAM, Inc. as well. The defendants also seek dismissal of the contract claim against QAM, Inc. on the ground that it was not a signatory to the contract. This argument is not supported by an affidavit. While "QAM, Inc." does not appear on the signature line of the contract, the court is disinclined to make assumptions about the corporate relationships between the parties without hard evidence in the record upon which to premise such a decision. To the extent that the defendants seeks dismissal of the contract claim against QAM, Inc., the motion will be denied at this time.
The press which Strathmore contracted to purchase was called the Quantum-1500, presumably because the machine was mechanically rated to achieve a top printing speed of 1500 feet per minute ("fpm"). The brochure supplied by Sanden to Strathmore and the contract for sale both stated that the press would operate at speeds up to 1500 fpm. The contract contained the bold-typed provision that "QUOTED PRODUCTION SPEEDS AND TOLERANCES DEPEND UPON SIZE OF CIRCUMFERENCE, QUALITY AND WEIGHT OF STOCK USED, AUXILIARY PARTS NOT MANUFACTURED BY SANDEN, AND DEPTH OF FOLD OR CUT." Sales Contract, pg. 16.
Sanden first contends that all negotiated terms and representations about the Quantum-1500 were merged into the sales contract. It then asserts that the statements relating to the capabilities of the press were not statements of present or pre-existing fact, but rather constituted future promises which are not actionable.
"The parol evidence rule is one of substantive law [citation omitted] . . . It defines the limits of a contract [citation omitted] . . . `Where the parties put their engagement in writing all prior negotiations and agreements are merged in the instrument, and each is bound by its terms unless his signature is obtained by fraud or the contract be reformed on the ground of fraud or mutual mistake, or the contract is illegal.'" Childers Venters, Inc. v. B.F. Sowards, 460 S.W.2d 343 345 (Ky. 1970), quoting, Hopkinsville Motor C. v. Massie, 228 Ky. 569, 15 S.W.2d 423, 424 (1929).
The rule concerning the character of misrepresentations which constitute actionable fraud is stated in Livermore v. Middlesborough Townlands Company, 106 Ky. 140, 50 S.W. 6, 13, 20 Ky. Law Rep. 1704, to be:
. . . it must appear that the misrepresentation was of a matter of material fact, as distinguished from opinion, at the time or previously existing, and not a mere promise for the future; must be relied upon by the person whose action is intended to be influenced; and must be made with knowledge of its falsity, or under circumstances which did not justify a belief in its truth.Church v. Eastham, 331 S.W.2d 718, 719 (Ky. 1960). Fraud must be pled with particularity. The plaintiff must allege "the time, place, and content of the alleged misrepresentation on which he or she relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud." St. Martin v. KFC Corp., 935 F. Supp. 989, 909 (W.D.Ky. 1996), quoting, Coffey v. Foamex L.P., 2 F.3d 157, 161-62 (6th Cir. 1993).
The complaint alleges at paragraphs 4, 5, and 6 that certain specific representations were made about the press which were known by Sanden to be false, and which were made to induce and did induce Strathmore into signing the contract for sale on July 1, 1998. The complaint delineates specific statements upon which Strathmore claims to have relied. The court finds that the complaint places Sanden on "sufficient notice of the misrepresentations" allowing Sanden to "answer, addressing in an informed way the plaintiff's claim of fraud." St. Martin, 935 F. Supp. at 909. Strathmore has pled fraud with sufficient particularity to withstand the motion seeking dismissal of the claim on that basis.
Having found fraud particularly pled, the court must next consider whether the representations were such that they constitute actionable fraud. Strathmore has claimed to have been fraudulently induced into entering into the contract to purchase the press. Therefore, the exception to the parol evidence rule applies to allow the court to look beyond the four corners of the contract, and to consider the purported misrepresentations made during the negotiation process. Further, the extrinsic evidence offered does not appear to vary or contradict the terms of the contract, and thus may be considered alongside the contract provisions.
The defendants contend that on a motion to dismiss, the court should look only to the pleadings in determining the sufficiency of the claims. We need not convert this motion into one for summary judgment in order to consider the contract and correspondence from the negotiations. The court may consider these documents as they are the source of the purported misrepresentations itemized in the complaint, and are central to Strathmore's claim. Helwig v. Vencor, Inc., 2000 WL 432432 (6th Cir.), decided April 24, 2000.
The contract states that the press will print at speeds up to 1,500 fpm; not 1,000, not 1,400, not 1,600. Strathmore has submitted various written communications from Sanden representatives which suggest that the Quantum-1500 specifications as to mechanical running, rewinding, folding and sheeting speeds constitute the present capabilities of the machine, rather than "puffing" or "opinion" as to the machine's possible future performance. Unlike the speculation concerning the prospects of recovery from an oil well, the representations made by Sanden about its machine constitute statements about its present capabilities. The Quantum-1500 was promoted as a distinctive high-speed press which exceeded the capabilities of the other presses on the market. It was not billed simply as a "better" or "faster" press. The March 9, 1998 letter from Douglas M. Justus to Steve Siegwald, for example, contained a long discussion about printing speed, specifically comparing the capabilities of machines from various manufacturers to the Quantum-1500. The letter stated "And Sanden's most recent introduction of the Quantum-1500 came as a result of customer demand for cold web printing speeds of up to 1,500 fpm, and realistic UV printing speeds of up to 1,300 fpm." The letter suggested that the Quantum-1500 performed at speeds which the 1,000 to 1,200 fpm presses could not. The letter also discussed the failures of other companies to successfully manufacture and sell a 1,500 fpm press. We read the contract terms as representations of the actual capabilities of the machine, not hopeful musings. Additionally, John Calardo sent an April 6, 1998 E-Mail to Steve Siegwald in which he compares the revenue potential of the Quantum-1500 to a 1,000 fpm press based solely upon the difference in the speed of the machines, stating "A press that doesn't even break a sweat at 1,200 f.p.m. vs. a press that hyperventilates at 1,000 f.p.m." This is not a puffing up of a product image, but rather a representation that the machine can actually function at speeds above 1,200 fpm. While a precise printing speed is not promised on any given job, and the variables which may affect speed and print quality appear in the contract terms, Sanden did make representations about the press' capabilities. The precise parameters or the representations and the matter of whether the performance of Sanden's press fell within those parameters remain to be developed during the course of the litigation. It is sufficient for our purposes, however, to conclude that the contract and accompanying written materials contain representations of material fact, existing at the time they were made and critical to Strathmore's decision to enter into the contract.
Terrill v. Carpenter, 143 F. Supp. 747 (E.D.Ky. 1956); Krumholz v. Goff, 315 F.2d 575 (6th Cir. 1963); Sparks v. Ward, 322 S.W.2d 461 (Ky. 1959) all involved speculation in oil or gas production and thus are dissimilar to the facts before us.
Our inquiry does not end there, however. The Economic Loss Doctrine bars Strathmore's claim for fraud. The allegedly fraudulent representations relate solely to the quality or character of the press. These representations appear as terms in the contract and cannot be distinguished from them. As was held in Imaging Financial Services, Inc. d/b/a EKCC v. Lettergraphics/Detroit, Inc., 178 F.3d 1294 (6th Cir. 1999), unpubl. 1999 WL 115473, where there are no fraudulent representations alleged that are distinct from the breach of contract or warranty claims, but rather reference the quality or character of the goods sold, the fraud claim "falls squarely within the ambit of the economic loss doctrine." As explained in Gooch v. E.I. Du Pont de Nemours Company, 40 F. Supp.2d 863, 876-77 (W.D.Ky. 1999), "the doctrine applies "where a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only `economic' losses. . . . As the Sixth Circuit held, a plaintiff who seeks to recover damages resulting from a failed commercial expectation which caused only economic losses cannot state a viable claim under tort law . . . Such recovery is better left to the warranty law of contracts and other provisions of the U.C.C." Strathmore's claim for fraud in the inducement must be dismissed as barred by the Economic Loss Doctrine.
Strathmore argues that the Imaging Financial case is inapplicable as it is based upon Michigan law, and that the Kentucky courts would not find a fraud claim barred by the Economic Loss Rule. We find that the rationale underlying the Imaging Financial case is sound, and Neibarger v. Universal Cooperatives, Inc., 486 N.W.2d 612 (Mich. 1992), upon which the analysis was based, has been quoted at length in this district for the principle underlying the economic loss doctrine. See, Gooch v. E.I. Du Pont de Nemours Company, 40 F. Supp.2d 863 (W.D.Ky. 1999).
The claim for violation of the Kentucky Consumer Protection Act ("The Act") must be dismissed, as Strathmore has no standing to bring the claim. The Act, KRS Chapter 367, provides a private right of action for unfair, false or misleading acts in the purchase or lease of goods or services obtained primarily for personal, family or household purposes. The Quantum-1500 was not purchased for personal, family or household purposes. See, Hunt Enterprises, Inc. v. John Deere Industrial Equipment Company, 18 F. Supp.2d 697 (W.D.Ky.), affm'd, 162 F.3d 1161 (6th Cir. 1998).
Sanden contends that the contract provision precluding the recovery of consequential damages should be enforced, and Strathmore's claim for such damages should be dismissed. The U.C.C. states that "consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable." KRS 355.2-719(3). This court agrees with the analysis in Janus Group, Inc. v. Independent Container, Inc., unpubl. 1999 WL 294846 (S.D.N.Y.) that the Kentucky courts would, under appropriate circumstances, bar the enforcement of a damages limitation clause, although the clause itself may not be unconscionable, where there is a showing of bad faith in the performance of the contract. Janus, at p. *3 (quoting the U.C.C., KRS 355.1-203 which provides that "[e]very contract or duty within this chapter imposes an obligation of good faith in its performance or enforcement." We do not find this case to be analogous to Janus, as the allegation of bad faith relates to the negotiations surrounding rather than the performance of the contract. Strathmore has alleged that Sanden knew that its Quantum-1500 was not capable of performing as represented, yet sought to sell it the press anyway. Apparently, the press was never delivered to Strathmore because Strathmore was dissatisfied with the demonstration of the machine and refused to go forward with the sale. We will grant the motion to dismiss the claim for consequential damages, inasmuch as the complaint fails to allege bad faith by Sanden in its performance under the contract.
The information regarding the testing of the machine does not appear in allegations of the complaint or in the documents presently before the court, however the parties make reference to the testing in their briefs.
Sanden has moved for dismissal of the claim for punitive damages. Strathmore has not argued to the contrary. As no tort claims remain, the claim for punitive damages will be dismissed, See, KRS 411.184(4) and Tractor Farm Supply, Inc. v. Ford New Holland, Inc., 898 F. Supp. 1198, 1208 (W.D.Ky. 1995).
A separate order will be entered this date in accordance with this opinion.