The opinion of the court was delivered by: Ralph R. Erickson, Chief Judge United States District Court
ORDER ON DEFENDANTS BRUCE OTTO, SUSAN OTTO, AND CRYSTAL SEED POTATO COMPANY'S MOTION TO DISMISS AND FOR SUMMARY JUDGMENT
Before the Court is Defendants Bruce and Susan Otto's motion to dismiss them as individual defendants in this action and Crystal Seed Potato Company, Inc.'s (hereafter "Crystal Seed") motion for summary judgment and/or to limit damages (Docs. #86, 93). Susan Otto asserts she has no ownership interest in Crystal Seed and no involvement in the production of seed potatoes and, therefore, she is entitled to be dismissed from this action. Bruce Otto claims that, as a part-owner of Crystal Seed, he is protected as a matter of law by the corporate veil and should be dismissed from this action. Crystal Seed asserts that it is entitled to summary judgment because North Dakota law precludes the warranty claims, it made no false statements during the sale of the seed potatoes, and recovery under a strict liability theory is limited by application of the economic loss doctrine.
Plaintiffs Everkrisp Vegetables Inc. and Bickman Farms (hereafter collectively referred to as "Everkrisp") have filed a brief in opposition to the motions (Doc. #109). Everkrisp concedes that Susan Otto should be dismissed from this action, but asserts that Bruce Otto should remain personally liable for failure to keep the warehouse clean and sanitary. Everkrisp also contends the seed potatoes contained a latent defect in violation of an express warranty and its claim for consequential damages is allowed under the Uniform Commercial Code. As to its strict liability claim, Everkrisp maintains that there is a material fact regarding whether the seed potatoes had something "inherent in it, which caused it to harm itself" which renders summary judgment improper. The Court, having considered the evidence and arguments of the parties, now issues this memorandum opinion and order.
Applying the "foreseeability approach" established in Dakota Gasification Co. v. Pascoe Bldg. Sys., 91 F.3d 1094, 1099 (8th Cir. 1996), the alleged damages caused by bacterial ring rot, a known disease in seed potatoes, was something that was clearly forseeable when Everkrisp purchased the seed potatoes. Thus, the economic loss doctrine applies to Everkrisp's tort claims. Crystal Seed's motion for summary judgment on the tort claims is granted.
The Court finds the warranty disclaimer on the invoices sent to Everkrisp was conspicuous and complied with North Dakota's Uniform Commercial Code provisions relating to exclusion or modification of warranties, N.D. Cent. Code §41-02-33. The Court further finds that there is insufficient evidence in the record to raise a fact question on whether there was unequal bargaining power between the parties. Likewise, there is insufficient evidence in the record to establish whether or not Everkrisp was free to bargain for a more comprehensive remedy if it deemed the limitation on damages to the purchase price inadequate. Because there is no procedural or substantive unconscionability in enforcing the limitations of remedies provision. Crystal Seed's motion for summary judgment to limit damages is granted.
Everkrisp concedes Susan Otto had no control or ownership interest in Crystal Seed and, therefore, should be dismissed as a defendant in this action. Susan Otto's motion to dismiss is granted. The North Dakota Supreme Court has set forth several factors to be considered when determining whether the corporate veil should be pierced, including, for example, insufficient capitalization for the purposes of the corporate undertaking, failure to observe corporate formalities, insolvency of the debtor corporation at the time of the transaction in question, and the existence of the corporation as merely a facade for individual dealings. Hilzendager v. Skwarok, 335 N.W.2d 768, 774 (N.D. 1983). Everkrisp has failed to meet its burden of establishing any of the Hilzendager factors and thus Bruce Otto's motion to dismiss is granted.
On May 5, 2011, this Court granted Tobiason Potato Company's motion to dismiss under N.D. Cent. Code § 28-01.3-04 (liability of a nonmanufacturing seller) (Doc. #73). In doing so, the Court determined North Dakota law applied in this diversity action. Judgment dismissing all claims against Tobiason was entered on this same day (Doc. #74).
Everkrisp alleges the following claims against Crystal Seed and Bruce and/or Susan Otto: Breach of Express Warranty (Count II); Breach of Implied Warranty (Count IV); Negligent Misrepresentation (County VI); and Strict Liability (Count VIII) (Doc. #1). Everkrisp seeks damages resulting from the loss of its 2009 potato crop and contamination of its soils and lands.
The Court previously set forth the factual background giving rise to the claims in this case in its Order dismissing Tobiason as a defendant in this action. Because the parties are familiar with the facts and they have been previously recited by the Court, the Court will refer to the facts in this Order only as necessary to decide the pending issues.
Crystal Seed is a grower of potato seed buds (Doc. #52, Answer at ¶ 5). Bruce Otto owns 49.9 percent of the corporation, Robert Otto owns 49.9 percent of the corporation, and John Otto owns .2 percent of the corporation (Doc. #106, Dep. Bruce Otto pp. 10-11). Bruce Otto handles almost all of the operations of the corporation. Id. at 13.
Tobiason is a wholesale potato dealer licensed under North Dakota law to purchase and sell certified seed potatoes. Tobiason and Everkrisp have had a business relationship for over 35 years (Doc. #51, Answer ¶ 7). On September 30, 2008, Everkrisp purchased "Blue Tag" certified seed potatoes from Tobiason (Doc. #51, Answer ¶ 7; Doc. #1, Complaint at ¶ 7; Doc. #106, Dep. Etchart p. 22). The terms of the contract between the parties were contained in the invoices (Doc. #106, Dep. Etchart p. 24). There were no oral terms outside of the terms on the invoices. Id. The invoices contained the following liability disclaimer:
Buyer and seller recite that they are both merchants and have negotiated the terms of this sale. The grade of the seed potatoes sold herein has been or will be determined by a federal/state inspection service. Seller makes no warranty as to the accuracy of such inspection. SELLER MAKES NO WARRANTY EXPRESSED OR IMPLIED OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THE EXCLUSIVE REMEDY FOR DAMAGES arising out of this transaction whether for breach of contract, warranty, negligence or any other reason, shall be limited to the purchase price of the seed lot involved in the claim. Seller is not responsible for consequential commercial damages arising from disease, loss of crop yield quality, crop production or any other factor affecting the crop produced by this seed. This sale is subject to the provisions of § 4-10-04 N.D.C.C. and N.D.S.P.C. § Reg. 74-04-01-03. (Doc. #1-6) (emphasis in original).
Between November 28, 2008, and January 21, 2009, twenty-eight semi-truckloads of seed potatoes from Crystal Seed were shipped directly to Everkrisp after the seed potatoes had been inspected by the North Dakota State Seed Department (Doc. #51, Answer ¶¶ 8-11; Doc. #109, p. 13 of 32). Everkrisp received approximately 1,546,260 pounds of seed potatoes, which were packed in plastic totes inside the truck.*fn1 (Doc. #1, Complaint, ¶ 13). Upon receipt, Everkrisp unloaded the totes and either stored the seed potatoes in a shed or cut them for immediate planting (Doc. #106, Dep. Houge p. 27).
When Everkrisp began harvesting the potatoes in April 2009, it discovered an inordinate amount of rotten potatoes. Id. at pp. 34, 54. This was the first time Everkrisp discovered the potatoes were diseased. Id. at p. 56. After testing by a North Dakota seed potato inspector, Everkrisp and Crystal Seed learned that the potatoes were infected with bacterial ring rot.
The North Dakota State Seed Department conducted an investigation in an effort to determine the origin of the infection. Crystal Seed had purchased the seed potatoes from a farmer in Cando, North Dakota in 2007. The seed potatoes were reproduced and multiplied in 2007 by Crystal Seed and then grown in a commercial crop in 2008. Crystal Seed believes the ring rot originated in the seed purchased from the farmer in 2007 (Doc. #106, Dep. Otto p. 135). Everkrisp alleges its more likely that the origin of the infection occurred in Crystal Seed's warehousing bins before shipment. Nobody, including the State Seed Department, has been able to determine exactly when or how the seed potatoes were infected with ring rot (Doc. #106, Dep. Otto p. 135). It is indisputable, however, that after Everkrisp discovered the bacterial ring rot in its crop, inspectors from the State of North Dakota obtained samples from Crystal Seed's warehousing bins. Some of these potatoes tested positive for bacterial ring rot and were dumped for feed (Doc. #106, Dep. Otto pp. 97-99, 109).
Everkrisp always purchased Blue Tag certified seed potatoes from Tobiason. According to the North Dakota State Seed Department, a Blue Tag grade is "given to seed lots having the higher standards for physical defects, condition and size that approximate U.S. No. 1."*fn2 (Doc. #106, Dep. Otto Exh. 7). The State Seed Department's disease detection process is based on visible symptoms noted in the potato plants with the exception of potentially latent potato viruses which are detected using serological methods. Id. Although there is a "zero tolerance" for bacterial ring rot, the certification process does not guarantee that the lot is free from the disease - it means that none of the disease was found during inspection. Id. When the seed department determines the potatoes meet the "Blue Tag" standards, a tag is affixed to the container. The tag contains the following disclaimer:
Since the use, crop, yields or quality of certified seed potatoes is beyond the control of the producer, the seller, the inspector or the North Dakota State Seed Department, no warranty of any kind, expressed or implied as to the quantity or quality of the crop produced from certified seed or as to certified seed quality beyond the express representation that the seed potatoes were produced graded, sacked and inspected under the seed certification rules and regulations of the North Dakota State Seed Department (available from the State Seed Department, University Station, Fargo, North Dakota 58105). The Seed Department and inspection service function and serve only in an official regulatory manner. (Doc. #97-4).
North Dakota law exempts the state seed department and certified seed potato producers from liability based on the quantity or quality of the crop produced from the seed potatoes:
The state seed commission, state seed department, commissioner and the commissioner's employees, certified seed potato producers, and wholesale potato dealers licensed under [N.D. Cent. Code] chapter 4.1-57 make no expressed or implied warranty of any kind as to the quantity or quality of the crop produced from the seed potatoes or through other produce inspected and certified, including merchantability, fitness for a particular purpose, or absence of disease. The only representation is that the potatoes or other produce were inspected under the rules of the state seed department or United States department of agriculture. The commissioner and the commissioner's employees function and serve only in an official regulatory manner.
N.D. Cent. Code § 4-10-12.1. This statute was approved by the Committee of Agriculture on March 11, 1981 (Doc. #114-1, p. 3 of 13). It was introduced because of lawsuits involving the State Seed Commissioner and State Seed Department in Washington (Doc. #114-1, p. 6 of 13 Comments of Virgil Anderson). The provision was not intended to relieve any party from all potential liability such as that arising out of negligent acts, but was intended to protect both the grower and the State Seed Department from expansive liability (Doc. #114-1, p. 11 of 13 Comments of Ken ...