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Volume XXIII, No. 17, July 18, 2011

From the Law Offices of Garan Lucow Miller, P.C.

 

From the Co-Editors

James L. Borin & Simeon R. Orlowski

 

MICHIGAN SUPREME COURT DISCUSSES WHEN A PLAINTIFF CAN SUE IN TORT FOR INJURIES ARISING FROM ACTIONS OF A DEFENDANT WHILE PERFORMING CONTRACT OBLIGATIONS

CONTRIBUTOR – DAVID M. SHAFER

In the recent opinion of Loweke v Ann Arbor Ceiling & Partition Co, LLC, __ Mich __ (6-6-2011), the Michigan Supreme Court discusses the test for determining when a plaintiff can bring a claim of negligence in tort law against a defendant who negligently performed duties under a contract with another party.

Although the Supreme Court states many times in its new Loweke opinion that its intent is to “clarify ” an ambiguity in the law, depending on your outlook, this new opinion either clarifies an ambiguity or makes things a bit more complex.

The first element of any negligence claim in tort law is that the defendant owed a “duty” to the plaintiff.  (The other elements of a negligence claim, by the way, are breach of the duty owed, damages suffered by the plaintiff, and that the breach was a proximate cause of the damages.)

Duties can arise in various ways. There is “the common law” as a source of a duty. The common law is whatever a judge says it is. Judges “recognize” (i.e., they create) common-law duties when such recognition (creation) is deemed merited in light of the facts in a case. When a plaintiff alleges that he or she was owed a duty by a defendant under the common law, judges are supposed to consider several factors to determine whether such a duty is, or should be, “recognized.” Those factors include such things as the relationship of the parties, the foreseeability of harm, the degree of certainty of injury, the closeness of connection between the conduct and the injury, the moral blame attached to the conduct, the policy of preventing future harm, the burdens of imposing a duty, and the public interest in the matter.

Underlying common-law duties recognized by judges is the precept that a person must use due care in undertakings, so that if a person does something, he or she is obligated to do it in a reasonable fashion and so as not to create a risk of undue harm to others.

There are times when the common law has not necessarily recognized a duty to exist on a person to act in a certain way or when the existence of a duty is questionable. In these circumstances, lawyers will get creative and try to find another source for a duty. Sometimes they will look to a statute or a “special relationship” between the parties or the fact that the defendant “voluntarily undertook” an obligation.

The circumstance that was recently addressed by the Supreme Court in its new Loweke opinion concerns a plaintiff’s attempt to sue in tort for injuries arising from actions of a defendant while performing contract obligations with a third party. In essence, the argument is that the plaintiff is owed a duty by the defendant based on the defendant’s failure to do what the defendant was contractually obligated to do or on the defendant’s inadequate performance of what the defendant was contractually obligated to do.

In 2004, the Michigan Supreme Court issued an opinion in a negligence case in which the plaintiff alleged that the defendant, a snow removal service, owed him a duty. The plaintiff had slipped on ice and had fallen in a parking lot in which the defendant was obligated by a contract with the parking lot’s owner to remove ice and snow. That case was Fultz v Union-Commerce Associates, 470 Mich 460 (2004). In Fultz, the plaintiff alleged that the defendant snow removal service owed her a common-law duty to perform its contractual duties in a non-negligent manner. Thus, the Supreme Court was asked to clarify when a contractual duty that is owed by one party to a contract to another party to the contract can also give rise to a common-law duty owed by one party to the contract to a non-party to the contract.

Before the Supreme Court’s 2004 Fultz opinion, courts usually applied a misfeasance-nonfeasance test to determine whether a contracting party could be held liable in tort to a non-contracting party. In essence, that test provided that if a contracting party performed an obligation under a contract in a negligent manner (misfeasance), then that party could be held liable for tort damages for the plaintiff’s injuries; but if the contracting party agreed in its contract to perform an act but simply failed to act at all (nonfeasance), then that party could not be held liable in tort.

According to the Supreme Court in Fultz, “the ‘slippery distinction’ between misfeasance and nonfeasance” had created too many problems in Michigan law, and so the Fultz Court presented a new approach for use by Michigan courts in analyzing a tort action based on a contract. According to this new approach, a tort plaintiff has to show that the defendant owed a duty to the plaintiff that is “separate and distinct” from the defendant’s contractual obligations. And if no such independent duty exists, no action in tort is permitted.

In the wake of Fultz, numerous panels of the Michigan Court of Appeals and also some U.S. district courts and the U.S. Sixth Circuit Court of Appeals broadly applied this new “separate and distinct duty” rule, such that if a plaintiff’s injury was even remotely connected to the defendant’s contractual obligations, the defendant was found not to owe any duty to the plaintiff that was “separate and distinct” from the contract. Therefore, a defendant who was sued by a plaintiff who was injured by something that the defendant did or did not do but that related to the defendant’s contractual obligations often enjoyed a type of “tort immunity.” This broad application of the Fultz “separate and distinct duty” rule seems to have especially picked up steam from two post-Fultz peremptory orders of the Michigan Supreme Court itself. The two orders were issued in the cases of Mierzejewski v Torre & Bruglio, Inc, 477 Mich 1087 (2007), and Banaszak v Northwest Airlines, Inc, 477 Mich 895 (2006).

In September 2010, one panel of the Michigan Court of Appeals issued a published opinion in which it strained to limit this broad application of the Fultz “separate and distinct duty” rule. See Boylan v Fifty-Eight Limited Liability Co, 289 Mich App 709 (2010).

Then, just last month, on June 6, 2011, the Michigan Supreme Court itself issued an opinion with the stated purpose of “clarifying” the scope of its earlier Fultz rule. The Supreme Court’s new opinion specifically repudiates the broad application of the Fultz rule, which, according to the Court, has resulted in the barring of tort claims that were “even remotely connected to a contractual relationship.”

The new Supreme Court opinion is Loweke v Ann Arbor Ceiling & Partition Co, LLC, ___ Mich ___ (6-6-2011). In Loweke, the Supreme Court states in part as follows: “[w]e take this opportunity to clarify Fultz’s ‘separate and distinct’ mode of analysis . . . and hold that a contracting party’s assumption of contractual obligations does not extinguish or limit separately existing common-law or statutory tort duties owed to noncontracting third parties in the performance of the contract.” In Loweke, the Supreme Court emphasizes that under the common law, a defendant already has a duty to exercise reasonable care and to avoid harm to others whenever he or she acts–and that is true whether or not the defendant is otherwise a party to a contract. Moreover, in Loweke, the Supreme Court specifically states in a footnote that, “[w]hile this Court’s orders in Banaszak and Mierzejewski  understandably caused confusion. . . . [they] have been misconstrued to support an overly expansive reading of Fultz, [and] we note that such an interpretation is incorrect and reject it as inconsistent with Fultz.”

Without going through all the facts and the pages of analysis in the Loweke opinion, the bottom line seems to be the ending of a broad application of the Fultz “separate and distinct duty” rule and the functional return in Michigan law of the rule formerly known as the misfeasance-nonfeasance test. That is, if a defendant has contract obligations but simply does not perform them, which results in an injury to the plaintiff, it’s likely (in the ordinary negligence case) that the defendant cannot be held liable in tort; but if the defendant has contract obligations and goes on to negligently perform them, the defendant can be held liable in tort. And so, for the most part, plaintiffs will like this new Loweke opinion more than defendants will.

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INDIANA COURT OF APPEALS UPHOLDS EXTRA-CONTRACTUAL AWARD IN NON-BAD FAITH CASE

CO-CONTRIBUTORS – GREGORY BAKOTA and DAVID A. WILSON

The Indiana Court of Appeals upheld an award of pre-judgment interest against an insurance carrier, which exceeded the limits of applicable coverage, reversing the trial court. In Inman v State Farm, an insured obtained a jury verdict for $100,000. Following the verdict, the insured filed a motion for pre-judgment interest. The trial court denied the motion. As a matter first impression, the Court of Appeals held that a claim against an insurer for UIM benefits was a civil action arising out of tortious conduct, within the meaning of Tort Prejudgment Interest Statute (TPIS). The Court held that an insurer could be required to pay prejudgment interest in excess of the underinsured motorist limits.

State Farm argued that an award of prejudgment interest in excess of the $100,000 policy limit paid out would improperly exceed the limits. Following a Texas case, the Indiana Court of Appeals agreed with the Texas court that the primary objective of an award of damages in civil actions is to compensate the insured/plaintiff, and following that reasoning, a law that denies the recovery of prejudgment interest frustrates that goal. The Court further reasoned that if a judgment provides plaintiffs only the amount of damages sustained at the time of the accident, plaintiffs arguably are not fully compensated because they will have been denied the opportunity to invest and earn interest in the amount of damages between the time of the accident and the time of the judgment. The Indiana Court of Appeals also followed the Supreme Court of Michigan in Denham v. Bedford, 287 N.W.2d 168 (Mich. 1979), which had reached the same conclusion.

The stated purpose of the Indiana Prejudgment Interest Statute is “to encourage settlement and to compensate the plaintiff for lost time and value of money.” The Inman court stated that if a defendant has the option to terminate a dispute and chooses not to do so, that defendant, and not the plaintiff, should bear the cost of the time value of money in the intervening period if the ultimate result is within the parameter set by the legislature.

It is worth noting that the Tort Prejudgment Interest Statute is not invoked merely by a prayer for relief seeking “pre-judgment” interest. Rather, the plaintiff must make a settlement offer within one year after the claim was filed in court. The plaintiff must also include a provision for payment of the offer within 60 days after the offer is accepted. Additionally, the amount of the offer must not exceed 1 1/3 of the amount of the judgment awarded. This statute limits the rate of prejudgment interest that a trial court may award to a minimum of 6% and a maximum of 10% per year. (We have, in the past, successfully argued that with prevailing market conditions and Treasury rates, that awards are more appropriately set closer to 6%.). The court is further limited to awarding interest for a maximum period of 48 months.

It is also worth observing that following Inman, the Qualified Settlement Offer statute should now be held applicable to uninsured and underinsured motorist cases. Indiana Code 34-50-1-1 provides that Qualified Settlement Offers were only applicable in tort cases. Enforcement of Qualified Settlement Offers have in the past been opposed by plaintiffs’ attorneys in UM/UIM cases on the basis that such cases were based on contract. Following the premise in Inman that such cases sound in tort and not contract, Inman should provide for application of the Qualified Settlement Offer statute to uninsured and underserved motorist cases.

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SAVE THE DATE

The 4th Annual Cherry-Roubaix bicycle race, sponsored by Garan Lucow Miller, P.C., will be held from August 12th through the 14th, 2011, on the streets of Traverse City, Michigan and neighboring Leelanau County, and will feature the 2011 State Road Race Championships. There will also be a charity fun ride out Old Mission Peninsula. Please see the event website

at www.cherry-roubaix.com for more details.

Please mark your calendars to join us at this exciting event. Garan Lucow Miller will be hosting special

VIP viewing areas at each race, please advise Peter Worden, in our Traverse City office at (231) 941-1611 or

pworden@garanlucow.com, if you will be available to join in the festivities.

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GLM ANNUAL GOLF OUTING CLIENT INVITATIONAL

EVENT: Garan Lucow Miller’s Annual Golf Outing

DATE: Tuesday, August 23, 2011

VENUE: Forest Akers West Golf course on the campus of MSU

Banquet dinner to be on campus at the University Club

RSVP to Eileen Carty at ecarty@garanlucow.com by August 4, 2011.

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UPCOMING SEMINARS

The Troy Breakfast Seminar will be held on Thursday October 27, 2011 at the Troy Marriott.

Please watch Law Fax for further information.