Tuesday, September 10, 2013

Sixth Circuit Addresses Claims of Fraudulent Misrepresentation with Respect to Warranties

Sixth Circuit Addresses Claims of Fraudulent
Misrepresentation with Respect to Warranties

      A recent decision from the Sixth Circuit Court of Appeals considered and rejected claims by a purchaser that a manufacturer should be liable under various misrepresentations theories for the ultimate failure of warranties provided by a third-party parts supplier.  Morris Aviation, LLC v. Diamond Aircraft Industries, Inc., ___ Fed. Appx. ___, 2013 WL 4564740 (6th Cir. Aug. 29, 2013). 
      Dr. John Morris organized Morris Aviation, LLC for the purpose of starting an air taxi business.  In connection therewith, and working with his associate, Dr. Todd House, numerous discussions were held with Diamond Aircraft Industries, Inc. regarding the purchase of a number of Diamond aircraft.  Those aircraft incorporated a relatively new power plant, a turbo diesel, manufactured by a German company, TAE.  Those TAE engines, when incorporated into a Diamond aircraft, were covered by a TAE, and not a Diamond, warranty.  One effect of this warranty was to protect Morris from higher than otherwise expected maintenance costs with respect to the relatively new power plant design.  However, shortly after Morris took the delivery of the first aircraft including a TAE-manufactured engine, TAE filed for bankruptcy protection under German law, and pursuant therewith, voided all of its warranty obligations. 

       With TAE now unavailable, Morris brought suit against Diamond on the basis that Diamond had misled Morris as to the viability of the warranty.  Ultimately all of those claims would be dismissed.
      Based upon the facts recited in this decision, it does not appear that Morris had any direct contact with TAE.  Rather, Diamond passed on TAE prepared information as to the warranty and spoke favorably of its terms.  Essentially:
[Morris] claims that Diamond misrepresented the terms of the warranty, including its length. Diamond stated that the warranty was good for 2,400 flight-hours; as it turned out it was good for zero….
Second, Morris claims that describing TAE and its warranty as “quality” and “reliable” misrepresented TAE’s status as financially troubled and potentially bankrupt.
      All of these assertions were rejected, each on a variety of grounds.  With respect to the quantitative aspects of the TAE warranty, it had not been shown that Diamond’s statements were inaccurate.  In effect, the warranty provided for certain things and Diamond’s description thereof was accurate.  The fact that TAE was ultimately unable due to its bankruptcy to perform upon the warranty did not retroactively render Diamond’s descriptions thereof as misleading or fraudulent.  With respect to statements as to reliability and quality, they went to the functioning of the engines themselves and did not extend to TAE’s financial stability.  Further, the fact that TAE was in financial distress was publicly available, and Morris had just as much ability to access and consider that information as did Diamond.  Further, Diamond had not made a partial disclosure of information with respect to TAE’s finances intending to create an impression of full disclosure, and they were not in a position where they had both superior knowledge and an obligation to disclose same.
      Clearly where risk is allocated by contract in the form of a warranty, the principle caveat emptor continues to apply – the buyer needs to investigate and understand the limits of what it is that is being purchased.  When they fail to do so, it is an assumed risk.

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