The Indiana Supreme Court case involves Dutchmen Manufacturing, Inc. (Appellant) appealing a decision against them in favor of Chad and Don Reynolds (Appellees) regarding tort liability for injuries sustained due to scaffolding left on leased premises. The court ruled that a tenant's tort liability for a dangerous item does not end with the lease's expiration. Additionally, a provision stating that a successor tenant accepts the property "as is" does not automatically eliminate tort claims by non-contracting parties.
The background details that Dutchmen leased a facility from Chapman Realty, Inc. from 1992 to 1999, during which employees installed scaffolding without Chapman’s consent. Dutchmen's lease required removal of personal property, but it left the scaffolding behind after negotiations with Keystone RV, Inc., which expressed a desire to keep it. Following the lease expiration, Chad Reynolds, a Keystone employee, was injured by the scaffolding, which had a defective weld. Reynolds subsequently sued both Chapman and Dutchmen, claiming Dutchmen was liable for its role in the scaffolding's condition. Dutchmen's attempt to obtain summary judgment was based on the argument that it had no duty to Reynolds and that Keystone accepted the scaffolding with awareness of potential risks.
The trial court initially granted Dutchmen’s summary judgment on Reynolds’ negligence per se claim and all negligence theories, except for the section 388 claim. However, the Court of Appeals reversed this decision, directing the trial court to grant summary judgment for Dutchmen on all claims, including section 388. The Court of Appeals determined that the scaffolding had merged with the real estate at the end of Dutchmen's lease, preventing Reynolds from claiming that Dutchmen provided a defective chattel. Following this, the Indiana Supreme Court granted transfer to address the section 388 claim, the sole issue in the interlocutory appeal.
In reviewing the trial court's decision, the standard applied is whether there is a genuine issue of material fact that would prevent summary judgment and whether the moving party is entitled to judgment as a matter of law, with the evidence construed favorably to the non-moving party. Section 388 of the Restatement (Second) of Torts outlines the liability of a supplier for physical harm caused by a chattel they provide if they know or should know it is dangerous.
The parties agree that the scaffolding is a trade fixture, defined as personal property placed on premises by a tenant that can be removed without significant damage. Dutchmen contends that the scaffolding merged into the realty, transferring ownership to Chapman upon vacating the premises, thus rendering it realty and inapplicable under section 388. Conversely, Reynolds argues that Dutchmen did not abandon the scaffolding and that ownership was transferred to Keystone, with Chapman’s consent, before Dutchmen left, maintaining its status as a chattel at the time of the accident. The dispute centers around the ownership of the scaffolding following the lease's expiration.
A trade fixture installed by a tenant merges with the realty and becomes the landlord's property if left on the premises after the tenant vacates. In this case, Chapman viewed the scaffolding as a liability, demanding its removal and stating he would charge Dutchmen for removal costs if they did not comply. Chapman located a prospective tenant, Keystone, who wanted the scaffolding, suggesting he had no interest in owning it and intended to have Dutchmen remove it. No specific references to the scaffolding were made in the arrangement between Keystone and Chapman, but it is evident that Chapman disclaimed ownership and demanded its removal at Dutchmen's expense. A tenant can remove improvements under lease terms, but failure to do so usually causes title to merge with the real estate. A landlord can grant an implicit or explicit extension for removal without forfeiture, allowing the tenant to retain ownership of fixtures if the landlord consents to their remaining post-lease. The evidence suggests Chapman consented to Dutchmen leaving the scaffolding, meaning title did not vest in Chapman and was transferred directly to Keystone. Keystone’s chairman’s affidavit indicated they took "ownership" of the scaffolding upon occupying the building. If the scaffolding had passed to Chapman, Keystone would be a lessee, not an owner. Since Dutchmen left the scaffolding at Chapman’s request to avoid removal costs, no merger occurred. Furthermore, legal title to fixtures is not the main consideration for section 388 tort liability. Dutchmen, as a "supplier" of the scaffolding, retained liability regardless of the scaffolding's incorporation into the real estate, having provided it for Keystone’s use in exchange for consideration. The scaffolding was not simply abandoned at the lease's end, and thus Dutchmen maintained its status as a supplier.
Section 388 establishes liability for suppliers of chattels when their failure to exercise reasonable care results in physical harm. Incorporation of a chattel into real estate does not exempt the supplier from this liability. For instance, a supplier of defective electrical wiring or landing gear remains liable regardless of the item’s integration into another structure. In the case discussed, the intention among parties indicated that ownership of scaffolding would transfer to Keystone upon signing a lease, allowing Dutchmen extra time to remove it if necessary. Even if the scaffolding was considered part of the real estate, it was still classified as a chattel at the time of supply, which is relevant for a Section 388 claim.
The elements of a Section 388 claim include a supplier's duty to inform users about the chattel's condition, but they are not required to warn against obvious hazards or risks known to regular users. Notably, suppliers must also conduct proper inspections to identify defects. In this case, while Dutchmen argued they were unaware of a defect in the scaffolding’s weld, the plaintiff contended that Keystone could not have detected the defect due to its concealment. The trial court determined there was no evidence showing Dutchmen had actual knowledge of the alleged defect in the scaffolding’s weld.
Reynolds provided expert testimony indicating that the welding defect leading to the scaffolding's collapse should have been clearly visible to the welder during manufacturing. A negligence claim under section 388 requires proof that the supplier had actual or constructive knowledge of the product’s danger, as established in Bogard v. Mac’s Restaurant Inc., among other cases. Dutchmen contended that its duty was limited to warning Keystone about general dangers, asserting no breach occurred since it was unaware of any hidden dangers. However, the evidence allows for the inference that Dutchmen negligently performed the welding and failed to adequately inspect the scaffolding. This supports the denial of summary judgment regarding Dutchmen's lack of knowledge about the defect.
Dutchmen further argued that Keystone assumed the risks associated with the scaffolding by accepting the premises "as is," as stated in their lease with Chapman. However, since there was no direct contract between Keystone and Dutchmen, and given that the scaffolding did not constitute part of the premises defined in the lease, this argument does not support summary judgment. The "as is" clause serves primarily to disclaim implied warranties from Chapman to Keystone and does not exempt Dutchmen from liability for negligence. While contracting parties can allocate risks among themselves, they cannot transfer that risk to non-parties. Therefore, any agreement between Keystone and Chapman or Keystone and Dutchmen does not preclude Reynolds from pursuing a tort claim against Dutchmen, as Keystone cannot waive its employees' rights against Dutchmen.
An “as is” clause in a lease agreement does not prevent an employee from bringing tort claims against third parties, even if the employer indemnifies the third party. Case law, including Waters v. Puget Sound Power, Light Co., supports that an employer’s indemnity agreement is not enforceable against employee tort claims. Limited case law exists regarding the impact of “as is” clauses on tort liability. In Stapinski v. Walsh Construction Co., the court found no liability on the part of a former vehicle owner because the purchaser had assumed maintenance responsibilities and knowledge of the vehicle's history. The “as is” clause was one of several factors but did not solely absolve the seller of liability to third parties. Dutchmen’s reliance on landlord-tenant cases is inappropriate, as those cases involved tenants in full control of premises and did not address concealed defects. Furthermore, an affidavit from Keystone’s chairman, suggesting acceptance of scaffolding on an “as is” basis, does not provide a clear basis for summary judgment against Reynolds, as it is ambiguous and may represent a disclaimer of warranties or indemnity rather than a bar to claims. Consequently, the trial court’s decision to deny Dutchmen's summary judgment motion concerning Reynolds’ claim under section 388 of the Restatement (Second) of Torts is upheld, and the case is remanded for further proceedings.
