Great Dane Trailer Sales, Inc. v. Malvern Pulpwood, Inc.

Citations: 785 S.W.2d 13; 301 Ark. 436; 11 U.C.C. Rep. Serv. 2d (West) 875; 1990 Ark. LEXIS 112Docket: 89-179

Court: Supreme Court of Arkansas; February 26, 1990; Arkansas; State Supreme Court

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Malvern Pulpwood, Inc. (appellee) filed a lawsuit against Great Dane Trailer Sales, Inc. (appellant) for breach of warranties related to two defective pulpwood trailers purchased from Great Dane. The warranties issued by Great Dane limited remedies to repair or replacement of defective parts and excluded consequential and incidental damages. Malvern Pulpwood's claim arose after the trailers exhibited serious defects, including those of their replacements. Great Dane defended itself by arguing that Malvern Pulpwood failed to list its warranty claim in its Chapter 11 bankruptcy proceedings, thereby barring the current suit under the Bankruptcy Code.

The trial court denied Great Dane's motion for summary judgment, leading to a jury verdict in favor of Malvern Pulpwood for $40,000. On appeal, Great Dane raised four points for reversal, primarily asserting that it should be protected by the bankruptcy proceedings since it was not listed as a creditor. However, the court found that Great Dane was not a party or privy to the bankruptcy case, thus res judicata did not apply. The court reiterated that for res judicata to be valid, the parties must be the same, and since Great Dane was not included in the bankruptcy proceedings, it could not use that context to bar Malvern Pulpwood's lawsuit. The court also noted that Great Dane's cited federal cases were not controlling in this matter.

The cases of In re Emmer Bros. Co. and Stein v. United Artists Corp. are pivotal to the legal analysis. In Emmer, a creditor bank sought to rescind a settlement with a Chapter 11 debtor after discovering the debtor had not disclosed an interest in an antitrust lawsuit. The bankruptcy court initially ruled the bank's claims were barred, but the federal district court reversed this, allowing the bank's action since the undisclosed antitrust claim was not considered "property dealt with by the plan" under 11 U.S.C. § 1141(c). The court further stated that res judicata and collateral estoppel would not apply if the alleged fraud could not have been raised in the bankruptcy proceedings, and the claims had not been adjudicated.

Contrastingly, Great Dane lacks allegations of fraud against Malvern Pulpwood and does not challenge the validity of the bankruptcy court's confirmation order, which weakens its position compared to the Emmer case. In Stein, the court ruled that a Chapter 11 debtor could not pursue an unlisted antitrust claim post-confirmation order; however, this case did not address res judicata or standing, making it less relevant here.

Additionally, Great Dane contends that the trial court incorrectly denied its motions for summary judgment and directed verdict based on a contractual exclusion of remedies. Malvern Pulpwood counters that the express warranty's failure allows it to seek general remedies under Article 2 of the Arkansas Code. Under Ark.Code Ann. § 4-2-719, parties can limit remedies unless such limitations fail in their essential purpose. Case law supports that if substantial evidence suggests a product cannot be repaired or replaced to meet standards, a jury's verdict affirming the limitation's failure should be upheld.

A limited warranty by Great Dane Trailers, Inc. offered to repair or replace defective parts of two drop-deck trailers sold to Malvern Pulpwood, stipulating that the warranty was valid for five years from delivery and that repairs would occur at designated facilities, with transportation costs borne by the purchaser. This warranty explicitly excluded any implied warranties of merchantability. However, evidence suggested that the limitation failed its essential purpose, as both trailers broke in the same location within a year of purchase. Testimony indicated that the repairs were inadequate, potentially making the trailers unsafe. Great Dane ultimately replaced the trailers with straight-deck models, which also exhibited the same defects.

Malvern Pulpwood successfully demonstrated that Great Dane failed to remedy the defects in a reasonable timeframe. Great Dane contested claims of an implied warranty of fitness for a particular purpose, arguing it only understood the trailers' general use for hauling pulpwood. However, the necessary elements for such a warranty were established, including that damages were incurred and that Great Dane was expected to understand the specific purpose behind the purchase. The circumstances indicated that the trailers were intended specifically for pulpwood hauling, not merely for general use.

The implied warranty of fitness for a particular purpose merges with the implied warranty of merchantability when the intended use aligns with the goods' general functional use, as established in Beech Aircraft Corp. v. Flexible Tubing Corp. This principle is consistent with Arkansas law, which mandates that warranties be construed as consistent and cumulative. Great Dane contends that no implied warranty exists since Malvern Pulpwood relied on its president, Joe Gage, rather than Great Dane's expertise. However, evidence suggests Malvern justifiably relied on Great Dane's judgment, supporting the jury's verdict of breach of implied warranty regarding the trailers' fitness for purpose. Gage sought drop-deck trailers with specific requirements and obtained necessary specifications and images from Great Dane before purchase. Despite Gage's previous experience with trailers, he lacked familiarity with Great Dane's offerings. The trailers ultimately failed to meet the required capacity and exhibited a design defect, which Great Dane could not rectify.

Great Dane argues that even if Malvern prevails, it cannot recover consequential damages as per Arkansas statutes. However, Arkansas case law indicates that consequential damages may be recoverable when a limited remedy fails to fulfill its essential purpose. The case of Kohlenberger supports this view, emphasizing that a warranty's limitations are tied to its obligations, and a failure to adhere to the warranty negates the benefits of its limitations. Thus, upon the failure of Great Dane's limited remedy, Malvern is entitled to pursue all remedies under the Code, including consequential damages.

Great Dane contends that Malvern Pulpwood's proof of damages was insufficient and speculative, but this argument is deemed meritless. The jury received an unobjected damage instruction, which allowed for recovery of lost profits as foreseeable damages from the warranty breach. The jury was instructed to measure damages by comparing the accepted value of the trailers to their warranted value. Malvern Pulpwood presented adequate valuation testimony supporting claims exceeding $44,000, leading to a jury award of $40,000, which is justified by the evidence. The court finds no error, upholding the jury's verdict. Additionally, Malvern Pulpwood's modification request to include the claim against Great Dane in its bankruptcy plan was granted, but this was not properly included in the case record. Great Dane asserted that Malvern Pulpwood's claim was barred by res judicata, estoppel, and laches due to the failure to schedule the claim, but the trial court's reasons for rejecting this motion are not reflected in the abstract.