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Breaking Legal Developments

05-21-2010

Published by:
Peter A. Lynch, Esq.
of Cozen O'Connor
palynch@cozen.com
http://www.cozen.com

 

EXECUTIVE SUMMARY:      This weekly newsletter covers:

  1. Fire Caused by negligence in installing Flues -Negligence finding imposed on non-appearing party


(1) FIRE CAUSED BY NEGLIGENCE IN INSTALLING FLUES -NEGLIGENCE FINDING IMPOSED ON NON-APPEARING PARTY

In Master Blaster, Inc. v. Damman, Court of Appeals Minnesota (April 12, 2010), A09-1617, the court reviewed the effect of a jury finding negligence against Master Blaster in contracting to install flues with a third party outside the jurisdiction. This was a common-law indemnity action involving the practice of vouching, appellant challenges summary judgment granted to respondent, binding it to a verdict in a South Dakota action from which the original flue installer was dismissed for lack of personal jurisdiction.

In October 1999, Supreme Pork, Inc., a South Dakota corporation that owns feed and hog operations in eastern South Dakota and western Minnesota, bought two commercial-grade pressure washers from respondent Master Blaster, Inc., a South Dakota corporation owned by Paul Miersma, to be installed at Supreme Pork's hog facility near Lake Benton, Minnesota. The pressure washers were manufactured by All American Pressure Washers. Master Blaster installed the pressure washers in the southeast corner of the pressure-washer room of the hog facility.

A pressure washer generates tremendous heat and requires a flue vent to release hot gases through the attic space above the ceiling and out of the roof of the building in which it is installed. Master Blaster hired appellant Pipestone Plumbing & Heating, Inc. (Pipestone), a Minnesota corporation owned by appellant Doug Dammann, to supply and install flue vents for the pressure washers installed by Master Blaster. On site, Pipestone fabricated some venting components necessary for installation of the flues. The contract between Master Blaster and Pipestone was oral.

About two years after the pressure washers were installed, one of the pressure washers froze. Master Blaster removed that pressure washer from the site, repaired it in Master Blaster's shop, and returned it to the hog facility, where it was reconnected by Supreme Pork. A few days later, a fire erupted in the pressure-washer room. The fire originated in the southeast corner of the room, in the attic space directly above the pressure washers. Supreme Pork notified Master Blaster, Pipestone, All American Pressure Washers, and LB White, the manufacturer of a space heater that was located in the pressure-washer room at the time of the fire, that Supreme Pork had retained an expert fire investigator, to investigate the cause of the fire and to schedule site inspections. Before the site inspections, Pipestone hired a fire investigator , All American hired another fire investigator , and LB White hired a different fire investigator.

On April 18, 2002, Dammann, Miersma, and all of the fire investigators except Cox convened at the hog facility to inspect the site. Cox inspected the site the next day. At the time of the April inspections, most of the hog facility's buildings had been removed from the site and the only room available for inspection was the pressure-washer room. Master Blaster later retained fire investigator Jeffrey Washinger, who inspected the site in August 2002. By the time Washinger inspected the site, the pressure-washer room had also been removed, but Washinger reviewed photographs and the physical evidence that had been retained. He discussed the fire with Rallis and reviewed Rallis's preliminary report.

In January 2004, Supreme Pork sued Master Blaster in South Dakota for its fire loss, alleging negligence and breach of implied warranty. Both claims specifically referenced the venting system as the cause of the fire. The recitation of facts in the complaint, reflecting the opinion of Supreme Pork's fire investigator, stated that investigation of the fire revealed that Master Blaster failed to properly install the vents in a manner so as to maintain proper separation between heat from the flue gases and the materials that formed in the building. The use of the washers allowed the expulsion of these gases in a manner and duration that lowered the ignition temperature of the building materials to a point where they became heated to a smoldering ignition state. This condition progressed to a free-burning fire during the early morning hours of March 21, 2002.

In May 2004, Master Blaster brought a third-party claim against Pipestone in the South Dakota action, seeking indemnity. In June 2005, Pipestone was dismissed from the South Dakota action for lack of personal jurisdiction. Master Blaster immediately tendered its defense of the action to Pipestone and Pipestone's insurer, asserting common-law indemnity against Pipestone in the event of a judgment against Master Blaster for Pipestone's acts. Pipestone refused this tender and two subsequent tenders. Pipestone also refused to allow Master Blaster to depose Pipestone's fire investigator, Terry Parks, in preparation for the South Dakota action.

At trial, Supreme Pork argued that Master Blaster was vicariously liable for Pipestone's negligence and breach of implied warranty. Supreme Pork did not assert any claims that Master Blaster was directly responsible for the fire. Supreme Pork's expert, Chris Rallis, testified that, in his opinion, there was only one source of heat capable of generating the ignition for this fire: the vent stacks for the pressure washers. Rallis blamed the fire solely on improper installation of the flue vents too close to cellulose insulation, due to Pipestone's failure to secure its "flimsy," "field-constructed" attic shields. Master Blaster extensively cross-examined Rallis in an attempt to undermine his qualifications and his opinions. Supreme Pork also called Dr. Schroeder, who had initially been retained by LB White. Dr. Schroeder agreed with Rallis that the fire was caused by the heat in the flue igniting the cellulose insulation, which he described as "nothing more than ground-up newspapers." He opined that the Pipestone-fabricated attic shields were not approved, designed, or manufactured for the intended purpose of preventing the hot flue from coming into contact with the combustible cellulose insulation. Dr. Schroeder testified that Pipestone's shields were substantially inferior to shields made by the manufacturer of the flues that Pipestone installed. Master Blaster extensively cross-examined Dr. Schroeder about his opinion, mistakes in his initial report, and the possible causes of the fire that he had not explored.

Master Blaster called two experts: Terry Kern and Richard Cox, who both testified that based on the available evidence, the cause of the fire could not be determined. Kern disagreed with Dr. Schroeder's characterization of Pipestone's shields as "flimsy," testifying that the 28-gauge steel used should be sufficient to prevent the insulation from coming into contact with the hot pipes. Kern testified that other potential fire causes were not satisfactorily eliminated. Cox also testified that the shields were "perfectly adequate for the job," and that there was no evidence of improper installation. Both Kern and Cox testified that there was a good possibility that the fire had an electrical cause-- an opinion shared by the chief of the fire department that responded to the fire. Master Blaster did not call Washinger, who stated in his deposition that he had no basis on which to disagree with Rallis and Dr. Schroeder, because all of the hog-facility buildings, including the pressure-washer room, had been removed by the time he visited the site. But Supreme Pork read Washinger's deposition testimony into the record.

The jury was instructed that Pipestone was the agent of Master Blaster for the purpose of installing flue vents at the hog facility, that both had a duty to use reasonable care under the circumstances to install the flue vents so that Supreme Pork's property would not be damaged, and that an implied warranty of fitness for a particular purpose was breached if the flue vents were not fit for the particular purpose specified by Supreme Pork at the time of sale. The jury found that Pipestone was negligent and had breached an implied warranty of fitness for a particular purpose. The jury found that Pipestone's conduct caused 95% of Supreme Pork's damages, for which judgment was entered against Master Blaster. Master Blaster appealed to the South Dakota Supreme Court.

Master Blaster then sued Pipestone in Minnesota for indemnity, including the costs of defense. The district court granted Master Blaster's motion for summary judgment based on the common-law practice of "vouching." But the issue of damages remained open until the South Dakota Supreme Court affirmed the South Dakota district court judgment. The district court then awarded Master Blaster damages that included indemnification for the South Dakota judgment, plus interest and the costs of defense and appeal in that action. This appeal by Pipestone followed, challenging the district court's holding that Pipestone is bound by the South Dakota judgment on liability.

The label "vouching" comes from the ancient practice of bringing a warrantor into an action by "writ of voucher." State Bank of New Prague v. Am. Sur. Co. of N.Y., 206 Minn. 137, 145, 288 N.W. 7, 11 (1939). Tender of defense has long since replaced the writ of voucher. See id. at 146, 288 N.W. at 11 (stating that"[p]arties responsible over are no longer vouched in as parties of record. Instead they are notified to defend, which long ago superseded the technical voucher . . . ."). Under this practice, [i]f the person sued gives due notice of the pendency of the suit to the one who is responsible [by operation of law or by contract] and requests him to assume the defense, all the cases agree that the latter will be concluded by the judgment rendered if sued upon his obligation by the former.Id. (citation omitted). The term "vouching," however, is still used to describe the process.

"Vouching helps to avoid duplicative litigation and the risk of inconsistent results in adjudicating indemnification claims." Universal Am. Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1138 (5th Cir. 1991). "An alleged indemnitor who is vouched into a court proceeding may be subject to having the prior determination used against the vouchee in the subsequent indemnification action even if the vouchee does not appear and defend in the first action." Id. at 1139.

Generally, once the alleged indemnitor is vouched in, the vouchee must choose either to appear and defend or to decline the tender, though the vouchee must make this choice without the benefit of an authoritative determination of the primary defendant's right of indemnification. If the vouchee declines, the vouchee loses certain prerogatives in any subsequent indemnification action brought by the primary defendant, and results of the primary lawsuit may be binding in the subsequent action. For example, the alleged indemnitor may not contest the validity of the primary defendant's liability to the injured party. He may contest only whether notice was sufficient, whether he has a duty to indemnify, and whether the prior judgment was obtained by fraud or collusion.Id.

In State Bank, the supreme court stated that "[t]he practice of concluding a person responsible over by notice to defend, which has persisted as the law of the land for well nigh five centuries, if not longer, is not lacking in due process." 206 Minn. at 146, 288 N.W. at 11. The indemnitor is bound in such a case not by the contract of indemnity, except where it expressly so provides, nor by the judgment as a determination of the issue against him, but by estoppel in pais . . . . The estoppel to claim a right to be heard on the original issues between [indemnitor and indemnitee] results from the refusal of [the indemnitor] to accept the tender of [the right to defend] when it was offered him and it was his duty to accept.Id. at 143-44, 288 N.W. at 10-11 (citations omitted).

But if a party does not properly vouch-in another, that party cannot utilize the judgment in the underlying case as conclusive evidence against the putative vouchee. See, e.g., United N.Y. Sandy Hook Pilots Ass'n v. Rodermond Indus., Inc., 394 F.2d 65, 72-73 (3d Cir. 1968) (holding, in an indemnity action, that indemnitors were not bound by findings in a prior action by third party against indemnitee, where indemnitors had not been timely vouched-in to the prior action); see also Int'l Fid. Ins. Co. v. Goltra Corp., 149 N.J. Super. 574, 374 A.2d 481, 483 (N.J. Sup. Ct. App. Div. 1977) (stating that, where the vouching procedure is deficient, the voucher "will be required to introduce evidence anew which will demonstrate that the indebtedness was rightfully due to the [plaintiff in the underlying action]"); see also Ill. Cent. Rr. v. Blaha, 3 Wis. 2d 638, 89 N.W.2d 197, 201 (Wis. 1958) ("The omission to give notice to the indemnitor . . . does not affect the [indemnitee's] right of action against him, but simply changes the burden of proof and imposes on the indemnitee the necessity of again litigating and establishing all of the actionable facts." (quotation omitted)).

The common-law process of vouching has been, for the most part, supplanted by modern third-party pleading practice under the applicable federal and state rules of civil procedure. 3 Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner & O'Connor on Construction Law, 10.95 at 956 (West Group 2002). But vouching continues to be employed, primarily in situations, such as here, where the vouchee is not subject to personal jurisdiction in the underlying action. See Humble Oil & Ref. Co. v. Philadelphia, 444 F.2d 727, 735 n.15 (3d Cir. 1971) (noting that because impleader is the most expeditious procedure, at least one legal scholar would restrict the use of vouching to cases in which process on the indemnitor cannot be obtained).

Pipestone argued that it cannot be bound by the South Dakota judgment because, (1) due to an inherent conflict of interest with Master Blaster, Pipestone was precluded from accepting the tender of defense; (2) Master Blaster failed to adequately represent Pipestone's interests in the South Dakota action; (3) due process prevents Pipestone from being bound by a judgment from a court that lacked personal jurisdiction over Pipestone; and (4) Pipestone was procedurally disadvantaged due to South Dakota's spoliation rules.

Subdivision (2) provides:

If there is a conflict of interest between the indemnitee and the indemnitor regarding the injured person's claim against the indemnitee, so that the indemnitor could not properly have assumed the defense of the indemnitee, a judgment for the injured person precludes the indemnitor only with respect to issues determined in that action as to which:

(a) there was no conflict of interest between the indemnitee and the indemnitor; and

(b) the indemnitee conducted a defense with due diligence and reasonable prudence.Restatement (Second) of Judgments 57(2). "A 'conflict of interest' for purposes of this Section exists when the injured person's claim against the indemnitee is such that it could be sustained on different grounds, one of which is within the scope of the indemnitor's obligation to indemnify and another of which is not." Restatement (Second) of Judgments 57(3). We conclude that the principles set out in the Restatement (Second) of Judgments 57 should guide this court in the application of indemnification actions involving vouching.

Supreme Pork sued Master Blaster in South Dakota on a theory of vicarious liability for the acts of Pipestone. Supreme Pork's claim could not have been sustained on a different ground--one that would be outside the scope of Pipestone's obligation to indemnify Master Blaster--because Supreme Pork never asserted any independent claim of negligence or breach of contract or warranty against Master Blaster. Pipestone was a party to the lawsuit for approximately one year, and Master Blaster knew that Supreme Pork's claims against Master Blaster were based solely on vicarious liability for Pipestone's acts. And Master Blaster's three tender-of-defense letters expressly reminded Pipestone that the claims against Master Blaster were based on vicarious liability for the acts of Pipestone.

In response to Master Blaster's summary judgment motion, Pipestone did not offer or allege the existence of any evidence from which a jury could have determined that Master Blaster's own negligence or breach of an implied warranty of fitness caused the fire. The court concluded that the undisputed facts of this case demonstrate no inherent conflict between Pipestone and Master Blaster that would permit Pipestone to relitigate the facts already litigated in South Dakota.

Pipestone asserted that Master Blaster failed to address the other possible causes of the fire that Pipestone would have asserted in the South Dakota action and that Master Blaster's experts failed to perform any forensic tests in an effort to disprove Supreme Pork's theories of liability. See Universal, 946 F.2d at 1140 ("Adequate representation makes sure that the issues of shared concern to the indemnitee and indemnitor alike are actually and fully litigated."); see also Restatement (Second) of Judgments 57(1)(b) (stating that "[t]he indemnitor is precluded from relitigating issues determined in the action against the indemnitee if . . . the indemnitee defended the action with due diligence and reasonable prudence" (emphasis added)). But Pipestone failed to demonstrate that any actual evidence exists or could be discovered regarding other possible causes of the fire. Pipestone thwarted Master Blaster's attempt to discover the opinion of Pipestone's expert fire investigator on the origin of the fire. And, in response to Master Blaster's summary judgment motion, Pipestone has not produced any evidence beyond that presented by Master Blaster in the South Dakota action: that Supreme Pork failed to adequately investigate some other possible causes of the fire and that two experts concluded that the cause of the fire remained undetermined. The trial transcript reflects that Master Blaster's counsel vigorously cross-examined Supreme Pork's experts, who opined that the sole cause of the fire was faulty installation of the flue vent.

Pipestone had the opportunity to participate in the South Dakota litigation as a party or by accepting Master Blaster's tender of defense and, in this indemnity action, has failed to demonstrate that Master Blaster neglected to present existing evidence that would have been favorable to Pipestone. The court concluded that poking hypothetical holes in Master Blaster's defense, based on mere speculation, is not sufficient to demonstrate that Master Blaster failed to defend with due diligence and reasonable prudence. See Bob Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 328 (Minn. 1993) (stating that "[m]ere speculation, without some concrete evidence, is not enough to avoid summary judgment").

But the district court found that Pipestone did not present any evidence that removal of all but the pressure-washer room, where the fire originated, constituted spoliation under Minnesota law that would have warranted the exclusion of Supreme Pork's expert testimony. Pipestone did not challenge that finding on appeal. Rather, Pipestone merely asserted, as it did before the district court, that before its "expert, [Parks,] was allowed to conduct his cause and origin investigation, Supreme Pork significantly altered the scene from its post-fire condition by removing and/or destroying relevant evidence," and that in Minnesota, "the district court judge likely would have excluded Supreme Pork's expert's opinion, resulting in a dismissal of the entire case for spoliation, [regardless of] the plaintiff's specific intent or bad faith." See Patton v. Newmar Corp., 538 N.W.2d 116, 119 (Minn. 1995) (affirming the district court's exercise of discretion to exclude plaintiff's expert's report, where an allegedly defective motor home was destroyed after plaintiff's expert's investigation and plaintiff's expert lost components that he had retained from the inspection).

Here, Supreme Pork's expert witness did not examine evidence that was destroyed before Pipestone's expert witness could examine it. All but one of the retained fire investigators examined the same evidence at virtually the same time and there is no evidence that any portion of the facility that was removed before the expert inspection was relevant to a determination of the cause of the fire. The district court correctly concluded that Pipestone had not made a colorable claim of prejudice based on procedural differences between the treatment of spoliation in Minnesota and South Dakota.

Master Blaster properly vouched Pipestone into to the underlying action by tendering defense of the claims asserted against Master Blaster in South Dakota for its vicarious liability for the acts of Pipestone. The claims asserted against Master Blaster in the South Dakota action were all within the scope of Pipestone's duty to indemnify Master Blaster. There was no conflict of interest between Master Blaster and Pipestone with regard to the claims asserted in the South Dakota action, Master Blaster defended Pipestone's interests in the South Dakota action with due diligence and reasonable prudence, and Pipestone was not prejudiced by procedural differences between South Dakota and Minnesota. Therefore, Pipestone is bound by the jury's findings in the South Dakota case, and the district court did not err in granting summary judgment to Master Blaster on its indemnity claim against Pipestone. Furthermore, applying the doctrine of vouching to bind Pipestone to the South Dakota judgment does not violate Pipestone's constitutional right to due process because Pipestone had notice and a full opportunity to participate in the South Dakota action through Master Blaster's tender of defense. The Court of Appeals affirmed the judgment.

Mr. Lynch can be reached at Cozen and O'Connor, 501 West Broadway, Suite 1610, San Diego, California 92101, 800-782-3366 (voice), 619-234-7831 (fax), palynch@cozen.com (e-mail), http://www.cozen.com. Follow us on Twitter at @firesandrain.

Please direct comments, suggestions, stories, and other items to the author by e-mail at palynch@cozen.com

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