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SUNDSTRAND CORP. v. LAKE SHORE

January 11, 1994

SUNDSTRAND CORPORATION, a Delaware Corporation, Plaintiff,
v.
LAKE SHORE, INC., a Michigan Corporation, Defendant.



The opinion of the court was delivered by: PHILIP G. REINHARD

 INTRODUCTION

 Plaintiff, Sundstrand Corporation (Sundstrand), filed a five-count complaint against defendant, Lake Shore, Inc. (Lake Shore), seeking damages arising out of an explosion allegedly caused by a defective product designed, manufactured, installed, tested, assembled and inspected by Lake Shore. Jurisdiction is apparently based on 28 U.S.C. § 1332. *fn1" Venue is based on 28 U.S.C. § 1391 as the alleged occurrence took place in this district. Lake Shore moved to dismiss Counts III, IV and V of the complaint pursuant to Fed. R. Civ. P. 12(b)(6).

 FACTS

 The following facts are derived from the allegations contained in Sundstrand's complaint, are taken as true, and are viewed in a light most favorable to Sundstrand. See Perkins v. Silverstein, 939 F.2d 463, 466 (7th Cir. 1991). In 1989, Lake Shore designed, manufactured, installed, inspected, assembled and tested a boiler to be assembled in an unarmed torpedo that Sundstrand was testing at its Stillman Valley, Illinois facility. On or about September 9, 1989, the unarmed torpedo containing the boiler "exploded." Count I alleges that Lake Shore negligently manufactured, inspected or tested the boiler by allowing a crack to occur or develop in the boiler tubes or leaving the crack therein which left the boiler in an "inoperational, nonfunctional and dangerous condition." Lastly, Count I alleges that as a direct and proximate result of Lake Shore's negligence, Sundstrand suffered "real and personal property damage, business interruption losses, and extra expense loses [sic]."

 Count II realleges the factual allegations of Count I and adds allegations pertaining to its claim for strict liability. Additionally, Count II states that Lake Shore breached its duty in that the crack in the boiler tubes "could result in an explosion . . . suddenly and without warning." Count II also alleges that the explosion "caused damage" and "caused interruption of . . . business and loss of profits."

 Counts III, IV and V all reallege the factual allegations of Count I and seek recovery for breach of contract, breach of the implied warranty of fitness for a particular purpose, see 810 ILCS 5/2-315 (1993), and breach of the implied warranty of merchantability, see 810 ILCS 5/2-314 (1993), respectively. Count III further alleges that the explosion caused damage to real and personal property, business interruption losses and extra expenses. Counts IV and V claim that the explosion caused real and personal property damage as well as damage to "its business."

 CONTENTIONS

 Lake Shore contends that Counts III, IV and V should be dismissed because, under Seegers Grain Co. v. United States Steel Corp., 218 Ill. App. 3d 357, 577 N.E.2d 1364, 1371, 160 Ill. Dec. 793 (1st Dist. 1991), Sundstrand is limited to tort recoveries only for its noneconomic losses. Sundstrand responds that the Seegers decision: (1) misapplies the doctrine announced in Moorman Mfg. Co. v. National Tank Co., 91 Ill. 2d 69, 435 N.E.2d 443, 61 Ill. Dec. 746 (1982); (2) unconstitutionally usurps the legislature's power to create implied warranty claims; (3) impermissibly ignores the contractual rights of the parties; (4) denies Sundstrand its right under Illinois law to plead alternatively; and (5) is distinguishable from this case.

 DISCUSSION

 As noted earlier, in considering Lake Shore's motion to dismiss, this court must take all the well-pleaded facts as true and view them in the light most favorable to Sundstrand. See Perkins, 939 F.2d at 466. Dismissal is improper "unless it appears beyond doubt that [Sundstrand] can prove no set of facts in support of [its] claim which would entitle [it] to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).

 It is also important to note that in a diversity case this court has a duty to apply the state law that would be applied in this context by the Illinois Supreme Court. Kaplan v. Pavalon & Gifford, 12 F.3d 87, 1993 U.S. App. LEXIS 32265, slip op. at 4 (7th Cir. 1993). Of course, cases decided by the Illinois Supreme Court are the most persuasive evidence of how that court would resolve the legal issues presented here. Kaplan, slip op. at 4. Decisions of the appellate courts of Illinois, while not binding, are useful evidence of what the Illinois Supreme Court would do in a similar case. Kaplan, slip op. at 4.

 Lake Shore's basis for its motion to dismiss Counts III, IV and V is premised entirely upon the Illinois Appellate Court decision in Seegers Grain. There, the appellate court held that "where no personal injury is involved, actions to recover noneconomic loss in relation to a product must be had within the framework of tort law, and no contract or implied warranty action under the UCC will lie." Seegers Grain, 577 N.E.2d at 1372. Additionally, the court concluded that the issue of whether an action is one for economic or noneconomic loss is one of law to be decided by the court. Seegers Grain, 577 N.E.2d at 1372.

 While the Illinois Supreme Court has not directly decided the issue resolved by Seegers Grain, it has definitively answered the question of how to determine whether a loss is economic or noneconomic. The seminal case in that regard is Moorman Mfg. Co. v. National Tank Co., 91 Ill. 2d 69, 435 N.E.2d 443, 61 Ill. Dec. 746 (1982). In Moorman, the supreme court held that a party who seeks relief from damage caused by a defective product may not proceed in tort where the losses suffered are purely economic. In so holding, the supreme court painstakingly considered the difference between economic and noneconomic loss. Distillation of that analysis results in a complex but rather basic conclusion reached by the supreme court. "Where only the defective product is damaged, economic losses caused by qualitative defects falling under the ambit of a purchaser's disappointed expectations cannot be recovered ...


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