DMC Mach. Am. Corp. v. Heartland Mach. & Eng'g, LLC

DMC MACHINERY AMERICA CORP., Plaintiff, v. HEARTLAND MACHINE & ENGINEERING, LLC, ILRIM NANO TEC CO., LTD., Defendants.

HEARTLAND MACHINE & ENGINEERING, LLC,HEARTLAND MACHINE & ENGINEERING, LLC, Counter Claimants, v. DMC MACHINERY AMERICA CORP.,DMC MACHINERY AMERICA CORP., Counter Defendants.

No. 1:17-cv-00369-SEB-MPB

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION

January 11, 2019

ORDER ON PLAINTIFF-COUNTERDEFENDANT'S MOTION TO DISMISS COUNTERCLAIMS (DKT. 125)

Plaintiff-Counterdefendant DMC Machinery America ("DMCA"), a Michigan corporation, sued among others Defendant-Counterclaimant Heartland Machine and Engineering ("Heartland"), an Indiana limited liability company. Dkt. 104. Heartland answered and counterclaimed. Dkt. 124. Now before the Court is DMCA's motion to dismiss Heartland's counterclaim in part for failure to state a claim on which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). Dkt. 125. For the reasons explained below, the motion is granted in part and denied in part.

Background

The facts are recited as they appear in Heartland's counterclaim. Cozzi Iron & Metal, Inc. v. U.S. Office Equip., Inc., 250 F.3d 570, 574 (7th Cir. 2001). Heartland is a vendor of machine tools. For several years, it purchased its inventory from "DMC," a South Korean manufacturer, through DMC's American importer and affiliate, DMCA. In 2013, DMC and DMCA began using substandard parts in their machine tools, unbeknownst to Heartland, as a cost-savings measure instituted in response to serious financial difficulties the companies were then facing. As a result, the machine tools delivered to Heartland did not perform as specified or warranted.

As DMC and DMCA's financial situation worsened, deliveries of new machine tools to Heartland were delayed and repairs to the defective machine tools already delivered could not be made for want of replacement parts. By mid-2014, DMC had declared bankruptcy and sold its machine-tool business to "FFG," a subsidiary of a Taiwanese company. But because DMCA was already in default on several financial obligations to FFG, FFG would not do business with DMCA. Accordingly, Heartland was forced to buy new DMC machine tools from FFG's American distributor, "Hanhwa," a South Korean company, and to purchase replacement parts from FFG directly.

DMCA brought this action in the Northern District of Illinois on January 8, 2016. Dkt. 1. It was transferred to this Court on February 9, 2017. Dkt. 76. The now operative Amended Complaint was filed on September 7, 2017, Dkt. 104, to which Heartland filedits Amended Answer on June 4, 2018. Dkt. 124. The answer contains Heartland's counterclaims for negligent misrepresentation (Count 1), fraudulent misrepresentation (Count 2), and breach of contract (Counts 3 and 4).

Count 1 alleges DCMA's duty "to act with reasonable care in the information and products provided to Heartland" and its breach of that duty "by misrepresenting its products as well as its ability to obtain replacement parts." Countercl. ¶¶ 26, 30. Count 2 alleges DCMA's fraud in knowingly misrepresenting to Heartland "that the products it sold to Heartland were in good and working condition . . . with the intent for Heartland to continue making sales . . . ." Id. ¶ 33. Count 3 alleges DCMA's breach of an "agreement" to "provide DMC manufactured tools in a good, new, and working condition, and according to manufacturer specifications[,]" id. ¶ 36, and to "provide replacement parts for DMC manufactured machine tools as needed . . . ." Id. ¶ 37. Count 4 alleges DMCA's breach of an "agreement" providing that, "if Heartland would make new warehouse space available for DCMA, DCMA would move inventory to Heartland's campus and pay Heartland rent . . . ." Id. ¶ 41.

On June 22, 2018, DMCA moved under Rule 12(b)(6) to dismiss the misrepresentation claims in Counts 1 and 2 as barred by the economic-loss rule and the fraudulent misrepresentation claim in Count 2 as insufficiently pleaded under Rule 9(b).

Standard of Decision

A motion under Rule 12(b)(6) tests the legal sufficiency of a pleading. Szabo v. Bridgeport Machs., Inc., 249 F.3d 672, 675 (7th Cir. 2001). In determining a pleading's sufficiency, we accept as true all factual allegations and draw every nonspeculativeinference in the pleader's favor. Vesely v. Armslist LLC, 762 F.3d 661, 664-65 (7th Cir. 2014). Generally, a pleading is legally sufficient when it contains a short and plain statement plausibly showing the pleader is entitled to relief. Fed. R. Civ. P. 8(a); Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Claims of fraud, however, must be pleaded with particularity. Fed. R. Civ. P. 9(b).

Under Rule 9(b), a [pleader] must allege "the first paragraph of any newspaper story": "the who, what, when, where, and how" of the alleged fraud. United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009) (quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990)). While it is "erroneous[ ]" to "take an overly rigid view of th[is] formulation," Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 442 (7th Cir. 2011), the application of which "may vary on the facts of a given case[,]" id., Rule 9(b) must require "some . . . means of injecting precision and some measure of substantiation . . . [,]" id. (quoting 2 James W. Moore, Moore's Federal Practice § 9.03 (3d ed. 2010)), if it is to serve its important functions of "forc[ing] the plaintiff to conduct a careful pretrial investigation" and "protect[ing] defendants from [the] 'privileged libel'" of fraud charges. Id. at 441 (quoting Fid. Nat'l Title Ins. Co. of N.Y. v. Intercounty Nat'l Title Ins. Co., 412 F.3d 745, 749 (7th Cir. 2005); Kennedy v. Venrock Assocs., 348 F.3d 584, 594 (7th Cir. 2003)). "It is enough to show, in detail, the nature of the charge, so that vague and unsubstantiated accusations of fraud do not lead to costly discovery and public obloquy." Lusby, 570 F.3d at 854-55.

United States ex rel. Kietzman v. Bethany Circle of King's Daughters of Madison, Ind., Inc., 305 F. Supp. 3d 964, 974 (S.D. Ind. 2018) (Barker, J.).

Analysis

I. Choice of Law

We next address choice of law as a preliminary matter. DMCA's motion assumesthe applicability of Indiana law to Heartland's tort claims. Heartland says it "does not concede the application of Indiana law here, but for purposes of this Motion, there is no conflict of law[,]" Br. Opp. 6 n.1, and its brief goes on to apply Indiana law. It is true that federal courts "do not worry about conflict of laws unless the parties disagree on which state's law applies." Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991). Still, it is puzzling that a claimant would not know from the outset of its case which jurisdiction's law creates its cause of action, not least because because it is strictly bound to raise only claims which "are warranted by existing law." Fed. R. Civ. P. 11(b)(2). It would risk prejudice to DCMA and general upheaval to decide DCMA's Rule 12(b)(6) motion under one state's law while leaving open the possibility of applying a different state's law at summary judgment or trial.

"Ours is an adversary system," Wood v. Mid-Valley Inc., 942 F.2d at 426-27; the time for Heartland to assert its choice-of-law arguments, if it has any, is now, when the choice must be made. Heartland asserts there is no conflict of law—but we are left wondering which states' law Heartland has consulted in reaching that conclusion. Heartland points to no other jurisdiction besides Indiana whose law is even arguably applicable. Accordingly, we take Heartland's "nonconcession" as a concession. And, in any event, Heartland is located in Indiana; its injuries if any were suffered in Indiana; Indiana courts generally apply the law of the place of injury to tort claims, Hubbard Mfg. Co., Inc. v. Greeson, 515 N.E.2d 1071, 1073-74 (Ind. 1987); and in this respect we must do as Indiana courts would. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). We thus declare that Indiana law governs Heartland's tort claims.

II. Economic-Loss Rule

We address the economic-loss rule as raised in DMCA's Rule 12(b)(6) motion attacking Heartland's counterclaim because Indiana courts treat application of the rule as negating the plaintiff's cause of action in tort, not as the defendant's affirmative defense. Fed. R. Civ. P. 12(b) ("Every defense . . . must be asserted in the responsive pleading . . . [,]" with seven exceptions.); Brownmark Films, LLC v. Comedy Partners, 682 F.3d 687, 690 (7th Cir. 2012) (affirmative defenses improper bases for grant of Rule 12(b)(6) motions); Richards v. Mitcheff, 696 F.3d 635, 637-38 (7th Cir. 2012) (same); Indianapolis-Marion Cty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 728-29 (Ind. 2010) (characterizing applicability of economic-loss rule as turning on existence of defendant's tort duty); U.S. Bank, N.A. v. Integrity Land Title Corp., 929 N.E.2d 742, 746, 748-50 (Ind. 2010) (same); Gunkel v. Renovations, Inc., 822 N.E.2d 150, 152-55 (Ind. 2005) (same); Magic Circle Corp. v. Crowe Horwath, LLP, 72 N.E.3d 919, 923-25 (Ind. Ct. App. 2017) (considering whether plaintiff failed to state claim by operation of economic-loss rule). Accord Robinson Helicopter Co. v. Dana Corp., 102 P.3d 268, 272 (Cal. 2004) (plaintiff must demonstrate injury beyond); Nelson v. Todd's Ltd., 426 N.W.2d 120, 123 (Iowa 1988) (no compensable injury when suffered); Wyman v. Ayer Props., LLC, 979 N.E.2d 782, 787 (Mass. App. Ct. 2012) (defendant need not plead), aff'd in part and rev'd in part on other grounds, 11 N.E.3d 1074 (Mass. 2014); Woods v. RE Inv., Inc., No. 338139, 2018 WL 4036539, at *3 (Mich. Ct. App. Aug. 23, 2018) (same); Crowder v. Vandendeale, 564 S.W.2d 879, 882-84 (Mo. 1978) (en banc) (no duty to prevent); Equistar Chems., L.P. v. Dresser-Rand Co., 240 S.W.3d 864, 867-68 (Tex. 2007) (defendant need not plead). Contra...