“Sealed Container” Defense does not Apply to UCC Breach of Warranty Claims

July 29, 2009

Alabama appellate courts have long held that the “sealed container” defense applies to retailers and distributors sued on products liability claims under the Alabama Extended Manufacturer’s Liability Doctrine (AEMLD).  Pursuant to Atkins v. American Motor Corp., 335 So.2d 134 (Ala. 1976), a retailer or distributor may avoid liability under the AEMLD if it shows:

…that he is in the business of either distributing or processing for distribution finished products; he received a product already in a defective condition; he did not contribute to this defective condition; he had neither knowledge of the defective condition, nor an opportunity to inspect the product which was superior to the knowledge or opportunity of the consumer.

Plaintiffs, in two separate actions, sued defendants, alleging claims under the AEMLD and for breach of the Uniform Commercial Code (UCC) implied warranties of merchantability and fitness for a particular purpose, in an action involving injuries from their ingestion of diatary suppliments.  Defendants removed the cases to federal court, contending that the retailer, the only Alabama defendant, was fraudulently joined.

The federal court certified a question to the Alabama Supreme Court, inquiring whether the sealed container defense applied to the UCC warranty claims.  The Court provided a lengthy response, and in a 5-4 opinion, held that is was inapplicable to the UCC claims.  Sparks v. Total Body Essential Nutrition, Inc., No. 1071708.

The Court discussed the history of the UCC and its predecessor, the Uniform Sales Act.  In Bradford v. Moore Bros. Feed & Grocery, 268 Ala. 217, 105 So.2d 825 (1958), the Supreme Court held that the sealed container defense was applicable to claims brought under the Uniform Sales Act.  However, the Court recognized that that when the UCC was enacted, it did not specifically include any reference to the defense.  In holding that the defense did not apply to the UCC claims, the Court stated “we view this silence as an abrogation of the common-law defense, rather that permission to carry it forward,” and that the question was “a policy matter best left to the wisdom of the legislature.”

This opinion is troublesome for product liability defendants.  Often, claims under the AEMLD are joined with UCC warranty claims. Although the sealed container defense remains applicable to the AEMLD claim, the Sparks opinion clearly holds that it does not apply to the warranty claims, thus preventing summary judgment on those claims.  Moreover, the facts presents in Sparks are quite common. Frequently, the retailer will be the only local defendant, and its inclusion in the suit will destroy diversity, rendering the action nonremovable to federal court. Hopefully, the Alabama legislature will accept the invitation of the Court, and make the sealed container defense applicable to warranty claims under the UCC.


Alabama Federal District Court Holds Insurer Has No Bad Faith Liability to Third Party Beneficiary

July 26, 2009

Recently, the U.S. District Court for the Southern District of Alabama held, in a case of first impression in the state, that an insurer’s liability for bad faith did not extend to a third party beneficiary to an insurance contract.  In Jones v. General Ins. Co. of America, the plaintiff was a homeowner who had failed to obtain insurance coverage for her home, in violation of her mortgage agreement.  After giving notice, the lender purchased “force placed” coverage from General.

Th policy named the lender as the sole named insured, and the plaintiff was named as the “borrower.”  It further stated that any covered amounts in excess of the lender’s interest would be paid to the borrower.

Her Mobile, Alabama area home was damaged as a result of Hurricane Katrina.  General paid a portion the claim, but denied another portion, in which she asserted damage to its foundation.  Jones sued General, alleging bad faith, and General moved for summary judgment.

The Court specifically found that the plaintiff was a third party beneficiary of the contract, pursuant to the policy’s language. However, recognizing that “the Alabama Supreme Court has explained in no uncertain terms that ‘a party cannot bring an action against an insurance company for bad-faith failure to pay an insurance claim if the party does not have a direct contractual relationship with the insurance company,'” Williams v. State Farm, 886 So.2d 72 (Ala. 2003), the Court held that the policy’s clear language identified the “insured” as the lender, and not the plaintiff.  The Court further cited Peninsular Life Ins. Co. v. Blackmon, 476 So.2d 87 (Ala. 1985):

The tort of bad faith refusal to pay a claim has heretofore been applied only in those situations where a typical insurer/insured relationship existed; that is, where the insured or his employer entered into a written contract of insurance with an insurer and premiums were paid into a central fund out of which claims were to be paid.  We are very hesitant to expand the tort beyond these narrow circumstances.

Based upon the above precedent, the Court held that as a third party beneficiary, the plaintiff lacked standing to sue for bad faith, and granted summary judgment in favor of the insurer.

Smith, Spires & Peddy Summer Newsletter

July 17, 2009

Our firm’s Summer Newsletter is out.  There’s some informative stuff in there, including a great article on the new Medicare reporting requirements,  one on insurer liability for hospital liens, and one on venue in Alabama, plus a breakdown on recent decisions by yours truly.  Enjoy!

Victims of Apartment Arson Allowed to Pursue Claims Against Builder, Owner

July 8, 2009

The Alabama Supreme Court recently considered a suit in which a fire at an apartment building, caused by arson, resulted in the death of one resident, and injuries to six others.  The residents sued the owner and builder of the complex, which had been constructed 22 years before the fire, alleging claims of negligence and wantonness.

The trial court entered summary judgment in favor of the owner and builder, holding that they had no duty to protect the residents from injuries caused by the criminal acts of a third party, and that the residents’ claims were barred by the 20-year rule of repose.

The Court, in Collins v Scenic Homes, Inc. __ S0.2d __ (Ala. June 30, 2009), reversed the entry of summary judgment.  Recognizing that in general, “absent special relationships or circumstances, a person has no duty to protect another from criminal acts of a third person,” Moye v. AG Gaston Motels, Inc., 499 So.2d 368 (Ala. 1986), the Court held that the general rule was inapplicable because the residents alleged that the defendants had a duty to construct and operate:

… a reasonably safe apartment building, equipped with appropriate exits and fire suppression safeguards designed to reduce the risk of injury as a result of fire, regardless of the origin of the fire. … Indeed, it is a forseeable risk that a fire at an apartment complex, however started, will cause harm to the inhabitants of the complex if the premises owner fails to provide adequate fire suppression safeguards and an adequate means of escape from the fire.

The Court distinguished the residents’ claims from previous cases decided under the general rule because in each of the previous cases, the plaintiff “alleged that the premises owner had a duty to prevent the intervening criminal act from occurring.”

The Court also held that the plaintiffs claims were not barred by the 20-year rule of repose, atating that a cause of action accrues “on the date the first legal injury occurs, but not necessarily from the date of the act causing the injury.”  Smith v. Medtronic, Inc.,  607 So.2d 156 (Ala. 1992).  In Collins, “the residents did not have a viable and cognizable claim against Scenic Homes until the fire occurred and the residents suffered injuries as a result.”