American Eagle Insurance v. United Technologies Corp.

UNITED STATES COURT OF APPEALS
For the Fifth Circuit

No. 93-1841

AMERICAN EAGLE INSURANCE COMPANY and MARTINAIRE, INC.,

Plaintiffs-Appellants,

VERSUS

UNITED TECHNOLOGIES CORPORATION and PRATT & WHITNEY-CANADA, LTD.,
Etc.

Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Texas
(February 24, 1995)

Before WIENER, EMILIO M. GARZA, and BENAVIDES, CIRCUIT JUDGES.

BENAVIDES, CIRCUIT JUDGE:

This appeal involves the application of Texas law to

negligence, strict liability and breach of implied warranty claims

brought in a diversity suit against an aircraft engine manufacturer

and its parent organization. The district court granted summary

judgment against Plaintiffs. We AFFIRM IN PART and REVERSE AND

REMAND IN PART.

I. Undisputed Facts
 On February 28, 1985, Appellee Pratt & Whitney-Canada, Ltd. (a

subsidiary of United Technologies Corporation, also an Appellee),

manufactured and sold a PT-6 aircraft engine to the Cessna Aircraft

Company. On May 29, 1985, after installing the engine in a Cessna

Caravan Aircraft, Cessna sold the aircraft to the Federal Express

Corporation, the first purchaser. On August 7, 1987, the fifth and

last purchaser, Martinaire, Inc., acquired the aircraft.

On September 4, 1987, the airplane crashed. There were no

personal injuries. However, there was damage to the aircraft and

damage on the ground to property owned by a third party for which

the Appellants, Martinaire, Inc. and American Eagle Insurance

Company, became legally responsible. The aircraft was subsequently

destroyed and sold for salvage.

A service policy between Federal Express and Pratt & Whitney-

Canada, Ltd., disclaimed implied warranties, liability in tort and

contract, and limited remedies to repair or replacement. The

policy also contained an express warranty against defects in the

engine. By its own terms, the warranty expired on May 29, 1986.

II. Procedural History

On September 1, 1989, Plaintiffs/Appellants filed suit against

Defendants/Appellees alleging negligence; strict product liability;

breach of implied warranty under Chapter 2 of the Uniform

Commercial Code; and breach of implied warranty under the Texas

Deceptive Trade Practices Act, Tex. Bus. & Com. Code § 17.50(a)

(Vernon 1987) ("DTPA"). The district court granted Appellees'

Motion for Summary Judgment, dismissing all of Appellants' claims.
 Appellants primarily contest the following conclusions of the

district court: (1) there is no claim for negligence when the only

damages are economic; (2) there is no claim for strict product

liability when the only damage is to the product itself; and (3)

there is no claim for breach of warranty because the four-year

statute of limitations ran from the date of delivery to the

original purchaser. With the exception of Appellants' claim of

breach of implied warranty under the DTPA, we agree with the

district court's conclusions.

III. Negligence and Strict Product Liability

The first question is whether Texas recognizes a cause of

action for negligence when the only loss is economic. This Circuit

has already found that Texas does not recognize such a cause of

action. In Arkwright-Boston Mfgrs. Mut. v. Westinghouse Elec., 844

F.2d 1174 (5th Cir. 1988), this Court held that Texas does not

permit recovery under a negligence theory for economic loss

resulting from damage to a defective product. Consequently, the

district court properly granted summary judgment against Appellants

on their negligence claim.

A related issue is whether Texas recognizes a cause of action

for strict product liability when the damage is to the defective

product itself. In Mid-Continent Aircraft Corp. v. Curry City

Spraying Serv., Inc., 572 S.W.2d 308 (Tex. 1978), the Texas Supreme

Court held that in transactions between a commercial seller and a

commercial buyer, when no physical injury has occurred to persons

or "other property," injury to the defective product itself is an

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economic loss governed by the Uniform Commercial Code. In short,

strict tort liability would not be applied when economic loss alone

was asserted.

Given this situation, Appellants argue that damage to the hull

of the aircraft caused by the defective engine is damage to "other

property." In Mid-Continent, the defective component was a

crankshaft gear bolt in an airplane's engine which caused the pilot

to conduct an emergency landing, destroying the aircraft. While

not specifically addressed, the court's opinion was premised on the

idea that the entire aircraft was the defective product, rather

than "other property" damaged by a defective engine or component

part. This interpretation of Mid-Continent is supported by Shipco

2295, Inc. v. Avondale Shipyards, Inc., 825 F.2d 925 (5th Cir.

1987), cert. denied, 485 U.S. 1007 (1988). In Shipco, this Circuit

rejected an argument that a vessel's defective steering mechanism

caused damage to unrelated components in the same vessel or "other

property." The controlling inquiry in Shipco was whether the

parties bargained separately for individual components of the

vessel. If they had, then the individual defective components

making up the vessel could cause damage to the whole, allowing

recovery under a strict product liability theory.

The summary judgment evidence shows that Appellants' claim was

for the loss of the aircraft, not for physical injuries. There is

no summary judgment evidence indicating Appellants bargained

separately for the engine. It is likewise undisputed that the

engine was installed in the aircraft prior to Appellants' purchase.

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Once Appellees properly show the absence of evidence to support the

Appellants' case, the burden shifts to the Appellants to

demonstrate the existence of a genuine issue of material fact. See

Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Here, the

evidence shows that Pratt & Whitney-Canada, Ltd. manufactured and

sold the engine to Cessna. The engine was subsequently installed

into the aircraft by Cessna. The aircraft was then sold to Federal

Express. The record also shows the aircraft's chain of title and

history of ownership, with the ultimate purchase of the entire

aircraft by Appellants. There is simply no evidence that the

parties bargained separately for individual components of the

aircraft. Consequently, the aircraft hull does not qualify as

"other property" damaged by the defective engine component.

Appellants further argue that damage to the ground where the

aircraft crashed constitutes "other property," allowing recovery

under a strict product liability theory. Section 402A allows

recovery for damages sustained as a result of an unreasonably

dangerous product. See Restatement (Second) of Torts § 402A

(1965).

Appellees correctly counter that the damage at the crash site

must be damage to Appellants' "other property." Here, the ground

damage occurred to a third-party's property for which the

Appellants subsequently became legally responsible. In Signal Oil

& Gas Co. v. Universal Oil Prods., 572 S.W.2d 320 (Tex. 1978), the

Texas Supreme Court emphasized that the damage to "other property"

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must be to the plaintiff's property to state a claim for strict

product liability:

One who sells any product in a defective condition
unreasonably dangerous to the user or consumer or to his
property is subject to liability for physical harm
thereby caused to the ultimate user or consumer, or to
his property. . . .

Signal Oil & Gas, 572 S.W.2d at 325 (emphasis in original).

Appellants admitted that it owned no property, other than the

aircraft, that was damaged as a result of the crash. Thus, the

district court properly granted summary judgment on Appellants'

strict product liability claim.

IV. Breach of Warranty

The district court concluded that Appellants' claims for

breach of express and implied warranty brought under the Uniform

Commercial Code were barred by the four-year statute of

limitations. Appellants do not contest that these claims were time

barred. Rather, Appellants argue that the district court erred by

dismissing their claim for breach of implied warranty brought under

the Texas Deceptive Trade Practices Act, Tex. Bus. & Com. Code §

17.50(a) (Vernon 1987) ("DTPA").

While the summary judgment dismissed all of Appellants'

claims, it failed to address, specifically, the claim for breach of

implied warranty under the DTPA. Consequently, the first question

is whether this Court should proceed to rule on the viability of

this claim or remand to the district court for its determination of

the issue.

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 As a matter of judicial economy, this Court may address an

issue for the first time on appeal if additional factual

development in the district court would not be necessary. The

pertinent aspects of Appellees' summary judgment motion challenging

Appellants' DTPA implied warranty claim include: (1) an application

of the appropriate statute of limitations; and (2) an evaluation of

the effectiveness of Appellees' written disclaimer of implied

warranties.

The parties agree that the defective condition of the engine

was discovered by Appellants on the date of the crash or September

4, 1987. A claim under the DTPA for breach of an implied warranty

is governed by the discovery rule and a two-year limitations

period. McAdams v. Capitol Prods. Corp., 810 S.W.2d 290 (Tex.

App.--Fort Worth 1991, writ denied). Thus, under the DTPA, the

limitations period begins to run when the breach is discovered.

Here, the breach was discovered on September 4, 1987, and the suit

was filed on September 1, 1989. The claim was brought within two

years and is not time barred.

Regarding the second question, Appellees' disclaimer was

contained in the original contract of sale.1 A disclaimer that

satisfies the "conspicuous" requirement of chapter 2 of the Uniform

Commercial Code is likewise sufficient to disclaim any implied

1
The portion of the original contract of sale containing the
disclaimer is set out in an Appendix to this opinion. While it
appears that this page does not constitute the entire written
portion of the contract, it is the only page contained in the
record.

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warranties under the DTPA. See Singleton v. La Coure, 712 S.W.2d

757 (Tex. App.--Houston [14th Dist.] 1986, writ ref'd n.r.e.).

The issue whether a disclaimer is conspicuous is a question of

law, which we review de novo. See Cate v. Dover Corp., 790 S.W.2d

559, 560 (Tex. 1990); Allied Fin. Co. v. Rodriguez, 869 S.W.2d 567,

570 (Tex. App.--Corpus Christi 1993, n.w.h.); Ellmer v. Delaware

Mini-Computer, 665 S.W.2d 158, 159-60 (Tex. App.--Dallas 1983, no

writ). The Texas Business and Commerce Code S 1.201 states:

[a] term or clause is conspicuous when it is so written
that a reasonable person against whom it is to operate
ought to have noticed it. A printed heading in capitals
. . . is conspicuous. Language in the body of a form is
"conspicuous" if it is in larger or other contrasting
type or color. But in a telegram any stated term is
"conspicuous." Whether a term or clause is "conspicuous"
or not is for decision by the court.

Comment 10 following this section states that this provision was

intended to indicate some of the methods of making a term

"attention-calling," but that the test is "whether attention can

reasonably be expected to be called to it."

The Texas Supreme Court has interpreted section 1.201 and

comment 10, declaring:

Admittedly, an ambiguity is created by the requirement
that disclaimer language be conspicuous to "a reasonable
person against whom it is to operate." Comment 10,
however, clearly contemplated an objective standard,
stating the test as "whether attention can reasonably be
expected to be called to it."

Cate, 790 S.W.2d at 560. The Texas Supreme Court then applied an

objective standard of conspicuousness to the written warranty and

went even further, disapproving other cases, such as Ellmer, that

could be read as imposing a subjective standard. Id. at 560-61.

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Under an objective standard, the circumstances surrounding the

transaction are not relevant to the issue of conspicuousness. Id.

at 561. However, once a court determines that a disclaimer is not

conspicuous under an objective standard, it may still give effect

to the disclaimer if it is shown that the buyer had actual

knowledge of the disclaimer. Id. In other words, actual knowledge

of the disclaimer overrides the question of conspicuousness. Id.

In Texas, the courts examine the entire document when making

their determination of whether a disclaimer is conspicuous. See,

e.g., Cate, 790 S.W.2d at 560-61; Allied Fin., 869 S.W.2d at 570-

71; Ellmer, 665 S.W.2d at 159. Appellees did not include the

entire contract in their summary judgment evidence.

While it is true that the disclaimer paragraph is in boldface,

Appellees go further and claim that "the boldface language is in

contrasting 'type.'" This is not so. The disclaimer is in the

identical type as that contained on the rest of the page.2

Nonetheless, because the question of the disclaimer's

conspicuousness is gauged by a review of the entire contract and we

do not have the entire contract before us, we are not in a position

to evaluate whether the disclaimer is conspicuous as a matter of

2
In making this statement, Appellees attempt to characterize
their disclaimer in terms addressed (in a non-exclusive listing) by
this Court in Stevenson v. Trw, Inc., 987 F.2d 288, 296 (5th Cir.
1993). In Stevenson, we suggested that a disclaimer of this nature
may satisfy the conspicuousness requirement if it is printed in all
capital letters, in larger type than the terms around it, or in
larger and boldface type. Our Stevenson opinion does not imply
that these examples constitute an exclusive list.

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law. Certain factors, such as the length of the document, whether

the disclaimer was on the front or back of the document, the extent

to which other portions of the document were in boldface, and

whether other portions of the document were in larger or

contrasting type, could conceivably have a bearing on the

conspicuousness issue.

The summary judgment evidence was not developed sufficiently

to allow either this court or the district court to make a decision

on the merits of Appellees' disclaimer contention. Consequently,

the district court erred in granting summary judgment against

Appellants on their claim of breach of implied warranty under the

DTPA. This ruling, of course, does not preclude the district

court's future consideration of this issue if properly presented.

Finally, Appellants argue that the district court erred in

dismissing, on a separate ground, their claims against United

Technologies Corporation. Appellees provided summary judgment

evidence showing that United Technologies Corporation did not

design, manufacture, warrant, sell or otherwise place in the stream

of commerce the PT-6 aircraft engine. To hold United Technologies

Corporation liable, Appellants rely solely on a logo on the engine

service policy that contains, in part, the designation "United

Technologies." However, the document does not mention United

Technologies Corporation, referring only to Pratt & Whitney-Canada,

Ltd.

Generally, there is no vicarious liability under Texas law if

the parent and the subsidiary corporations are entirely separate

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legal entities and there is no showing of fraud. See Lucas v.

Texas Indus., Inc., 696 S.W.2d 372, 374 (Tex. 1984). Here, the

existence of only a logo on the service policy does not create a

material fact issue necessary for United Technologies Corporation

to be held liable. Under these circumstances, the district court

did not err by dismissing United Technologies Corporation.

We AFFIRM the summary judgment as it pertains to Appellants'

claims based on negligence and strict product liability, and as it

pertains to all claims against Appellee United Technologies

Corporation. We REVERSE and REMAND the summary judgment in part,

as it relates to Appellants' claim for breach of implied warranty

under the DTPA against Appellee Pratt & Whitney-Canada, Ltd.

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