Coghlan v. Wellcraft Marine Corp.

Revised February 16, 2001
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 99-41443
_______________________
FRANK E. COGHLAN, III, on behalf of themselves and all other
similarly situated persons; JOANNA L. COGHLAN, on behalf of
themselves and all other similarly situated persons,
Plaintiffs-Appellants,
versus
WELLCRAFT MARINE CORPORATION; GENMAR INDUSTRIES,
INC.; GENMAR HOLDINGS, INC.; AQUASPORT MARINE CORPORATION,
Defendants-Appellees.
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas
_________________________________________________________________
January 26, 2001
Before JOLLY, JONES, and SMITH, Circuit Judges.
EDITH H. JONES, Circuit Judge:
The Coghlans, dissatisfied boat purchasers, appeal from
the district court’s sua sponte dismissal of their case for failure
to state a claim. Because they have stated several legally
cognizable claims upon which relief might be granted, we reverse
and remand in part, and affirm in part.
BACKGROUND
In May 1998, the Coghlans, residents of Texas, purchased
an Aquasport 205, a type of recreational fishing boat manufactured
by Wellcraft Marine Corporation. Wellcraft is a Delaware
corporation with its principal place of business in Florida. The
boat cost about $28,000. The Coghlans’ purchase was motivated, at
least in part, by Wellcraft’s marketing campaign for this line of
boats, which emphasized the advantages of all-fiberglass
construction. In addition to rot-resistance and durability, it is
generally believed among mariners that all-fiberglass boats tend to
hold their value better than their wood-fiberglass hybrid
counterparts.
The Coghlans assert that they relied on Wellcraft’s
representations that the Aquasport 205 was made entirely of
fiberglass. A few months after the purchase, they discovered that
the deck of the Aquasport 205 is actually composed of 1.5 inches of
plywood encased entirely within fiberglass. Disappointed by this
revelation, the Coghlans filed suit against Wellcraft, seeking
class certification on behalf of all similarly situated Aquasport
owners.
The Coghlans’ suit alleged a claim against Wellcraft
under the Magnuson-Moss Warranty Act (MMWA), 15 U.S.C. §§ 2301-
2312, for breach of the implied statutory warranty of fitness for
a particular purpose. They also pled state law claims for fraud,
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negligent misrepresentation, breach of contract, deceptive trade
practices, unjust enrichment and civil conspiracy. In response to
this laundry list of accusations, Wellcraft filed a limited motion
to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),
seeking dismissal on the pleadings of the MMWA and civil conspiracy
claims.
The district court independently analyzed the pleadings
and concluded that the Coghlans had failed to allege any real
damages, a required element for each of their causes of action.
The court went well beyond the scope of the 12(b)(6) motion before
it and sua sponte ordered all the Coghlans’ claims dismissed,
pending a satisfactory attempt to re-plead.
The Coghlans attempted in an amended pleading to cure the
deficiencies identified by the district court, but the court again
concluded that the Coghlans had failed to assert the requisite
“palpable injury.” The court denied leave to file the amended
complaint and reiterated its order dismissing all claims. The
Coghlans timely appealed.
DISCUSSION
The question whether the Coghlans alleged facts stating
a justiciable controversy is a matter of law, reviewed de novo.
See Southwest Livestock and Trucking Co. v. Ramon, 169 F.3d 317
(5th Cir. 1999); Treaty Pines Invs. v. Commissioner of Internal
3
Revenue, 967 F.2d 206, 210 (5th Cir. 1992).1 While the trial
court’s denial of the motion to amend is reviewed for abuse of
discretion by this court, the discretion of the district court is
limited by Fed. R. Civ. P. 15(a), which provides that “leave [to
amend] shall be freely given when justice so requires.”. Lowery v.
Texas A&M Univ. System, 117 F.3d 242, 245-46 (5th Cir. 1977). It
contravenes the liberal pleading presumption of Rule 15(a) and
constitutes an abuse of discretion for a district court to deny a
timely motion to amend where the underlying facts or circumstances
relied upon by a plaintiff may be a proper subject of relief. Id.
at 245. A court may not dismiss on the pleadings if the
allegations support relief on any possible theory. Cinel v.
Connick, 15 F.3d 1338, 1341 (5th Cir. 1994).
The district court did not consider whether Texas or
Florida law, the only two arguable candidates, governs the
Coghlans’ various state claims; it dismissed after reviewing
precedents borrowed from a variety of circuits and jurisdictions.
On appeal, the Coghlans rely on Florida law, neglecting to
demonstrate why it applies.2 But regardless whether Texas or
1
The Coghlans have not appealed the dismissal of their Magnuson-Moss
Warranty Act claim or their civil conspiracy claim. We do not consider these
claims. See United States v. Bigler, 817 F.2d 1139, 1140 (5th Cir. 1987);
Zuccarello v. Exxon Corp., 756 F.2d 402, 407-08 (5th Cir. 1985).
2
State law governs these claims. When deciding matters of state law,
a federal court must apply the choice-of-law rules of the state in which it sits.
See Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); De Aguilar v.
Boeing Co., 47 F.3d 1404, 1413 (5th Cir. 1995). Texas state courts use a choice-
4
Florida law is applied, the Appellants managed to plead several
legally cognizable claims which should not have been dismissed on
the pleadings alone.
The only damage sought by the Coghlans is the benefit of
their bargain with Wellcraft, or the difference in value between
what they were promised, an all fiberglass boat, and what they
received, a hybrid wood-fiberglass boat. Along with the “out of
pocket” damages formula, which measures the difference between what
the plaintiff paid in consideration and what he actually received,
“benefit of the bargain” is a standard method for measuring damages
in fraudulent representation and certain contract cases. The
benefit of the bargain measure of damages is neither novel nor
exotic.3 A simple example proffered by the Coghlans at oral
argument makes the common-sense nature of benefit of the bargain
damages clear: if a man buys what is represented to him as an 18k
gold ring, but later discovers that the ring is merely 10k gold, he
is entitled to the difference in value between the 18k ring that he
bargained for and the 10k ring that he received.
of-law formula borrowed from section 6 and 145 of the Restatement (Second) of
Conflict of Laws, and will apply the law of the state with the most significant
relationship to a particular substantive issue. See Duncan v. Cessna Aircraft
Co., 665 S.W.2d 414, 421 (Tex. 1984). Because the district court did not reach
this issue, we do not address it. Spence v. Glock, 227 F.3d 308, 311-12 (5th
Cir. 2000).
3
For a discussion of “benefit of the bargain damages” vis-a-vis “out
of pocket damage” see Comment Note--“Out of Pocket” or “Benefit of the Bargain”
as Proper Rule of Damages for Fraudulent Representation Inducing Contract for the
Transfer of Property, 13 A.L.R. 875 (1967).
5
Wellcraft and the district court misperceived the
Coghlans’ burden at the pleadings stage. Whether the Appellants
may ultimately succeed in proving benefit of the bargain damages is
a test that awaits discovery. If, however, such damages are
theoretically available for the causes of action they have pled,
dismissal on the pleadings was premature.
As the Coghlans contend, Texas and Florida permit
recovery of benefit of the bargain damages in certain contexts.
See Formosa Plastics Corp. v. Presidio Engineers and Contractors,
960 S.W.2d 41, 49-50 (Tex. 1997) (recognizing the “benefit of the
bargain” measure of damages as remedy for common law fraud in
Texas); Bankston Nissan v. Walters, 754 S.W.2d 127, 128 (Tex. 1988)
(successful Deceptive Trade Practices Act plaintiffs may elect to
receive either out-of-pocket damages or benefit of the bargain
damages); Leyendecker v. Wechter, 683 S.W.2d 369, 373 (Tex. 1985)
(Texas DTPA permits recovery of benefit of the bargain damages);
DuPuis v. 79th St. Hotel, 231 So. 2d 532, 536 (Fla. 3rd DCA 1970)
(Florida courts have adopted both the “out of pocket” and “benefit
of the bargain” rules in fraud cases and choose between them as
circumstances require to do substantial justice); Martin v. Brown,
566 So. 2d 890, 891 (Fla. 4th DCA 1990) (applying “benefit of the
bargain” formula in a fraudulent representation case); Ft.
Lauderdale Lincoln Mercury v. Corgnati, 715 So. 2d 311, 314
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(awarding benefit of the bargain-type damages for diminished value
under the Florida Deceptive and Unfair Trade Practices Act); Gregg
v. U.S. Industries, 887 F.2d 1462, 1466 (11th Cir. 1989) (reviewing
the use of benefit of the bargain damages in Florida fraud
actions). Our task is to evaluate each of the Coghlans’ state law
claims for the availability of benefit of the bargain relief.
1) Fraud-- Texas and Florida both follow the “flexibility
theory” in fraud actions, which permits a trial court to instruct
the jury under either the out-of-pocket rule or the benefit of the
bargain rule, whichever will more fully compensate the defrauded
party. Martha A. Gottfried, Inc. v. Amster, 511 So. 2d 595, 599
(Fla. 4th DCA 1985); Formosa, 960 S.W.2d at 48; Arthur Andersen &
Co. v. Perry Equip. Corp., 945 S.W.2d 812, 817 (Tex. 1997).
Therefore, regardless whether Texas or Florida law is applied, it
was improper to dismiss the Coghlans’ fraud claim on the pleadings;
a fraud claim seeking benefit of the bargain damages is legally
cognizable in both Texas and Florida.
2) Deceptive Trade Practices--The Coghlans also seek the
benefit of their bargain under the consumer protection statutes of
Texas or Florida. A successful Texas Deceptive Trade Practices Act
(DTPA) plaintiff may recover under either the out-of-pocket rule or
the benefit of the bargain rule. Leyendecker v. Wechter, 683
S.W.2d 369,373 (Tex. 1985); Blackstone v. Dudley, 12 S.W.3d 131,
7
135 (Tex. App. 1999). The rule will be applied that affords a
victorious Texas DTPA plaintiff the larger sum. Leyendecker, 683
S.W.2d at 373.
Similarly, Florida’s Deceptive and Unfair Trade Practices
Act (DUPTA) has been interpreted to allow victims of deceptive acts
to recover the diminished value of their purchases. Ft. Lauderdale
Lincoln Mercury, 715 So. 2d at 313; Urling v. Helms Exterminators,
468 So. 2d 451, 453 (Fla. 4th DCA 1985). The measure of damages in
Florida DUTPA cases has been determined to be “the difference in
the market value of the product or service in the condition in
which it was delivered and its market value in the condition in
which it should have been delivered according to the contract of
the parties.” Rollins, Inc. v. Heller, 454 So. 2d 580, 585 (Fla.
3rd DCA 1984) (quoting from a Texas case, Raye v. Fred Oakley
Motors, Inc., 646 S.W.2d 288, 290 (Tex. App. 1983)). While the
Florida DUTPA cases do not use the phrase “benefit of the bargain”
in describing this damages formula, the two are clearly synonymous:
the value of the product as promised minus the value of the product
delivered. Thus Texas’s DTPA and Florida’s DUTPA both recognize
the legal cognizability of benefit of the bargain damages.
3) Breach of Contract-- Benefit of the bargain damages
are the very essence of a breach of contract action and are
recoverable under both Texas and Florida contract law. An award of
8
damages for breach of contract is supposed to place the injured
party as nearly as possible in the position that he would have
occupied had the defaulting party performed the contract. Stewart
v. Bassey, 245 S.W.2d 484, 486 (Tex. 1952); Rector v. Larson’s
Marine, Inc., 479 So. 2d 783, 785 (Fla. 2nd DCA 1985). The Coghlans
assert that they were contractually entitled to an all-fiberglass
boat but Wellcraft breached by delivering a wood-fiberglass hybrid.
The Coghlans’ alleged expectancy or benefit of the bargain is thus
the difference in value between the boat which they claim they
contracted for and the boat that was actually delivered to them.
In Florida, the non-breaching party to a contract is
entitled to “insist upon the benefit of his bargain, and seek the
damages that would place him in the position he would have been in
had the contract been completely performed.” McCray v. Murray, 423
So. 2d 559, 561 (Fla. 2nd DCA 1982); see also National Education
Centers v. Kirkland, 635 So. 2d 33, 33 (Fla. 4th DCA 1994).
Similarly, under Texas contract law “[e]xpectancy
damages, similar to benefit-of-the-bargain recoveries, award
damages for the reasonably expected value of the contract.” Hart
v. Moore, 952 S.W.2d 90, 97 (Tex. App. 1997). Benefit of the
bargain-type damages place the injured party in as nearly as
possible the position that he would have occupied if the contract
9
had been properly performed. Cook v. Rowhanian,774 S.W.2d 679, 686
(Tex. App. 1989).
4) Unjust Enrichment-- The district court properly
dismissed the Coghlans’ unjust enrichment claim. In Texas, unjust
enrichment is based on quasi-contract and is unavailable when a
valid, express contract governing the subject matter of the dispute
exists. Woodard v. Southwest States, Inc., 384 S.W.2d 674, 675
(Tex. 1964); Burlington Northern Railroad Co. v. Southwestern
Electric Power Co., 925 S.W.2d 92, 97 (Tex. App. 1996). Unjust
enrichment is an equitable remedy in Florida as well, used to strip
ill-begotten, non-contractual benefits from a defendant. N.G.I.
Travel Associates v. Celebrity Cruises, Inc.,764 So.2d 672, 675
(Fla. 3rd DCA 2000); People’s Nat’l Bank of Commerce v. First Union
Nat’l Bank of Florida, 667 So. 2d 876 (Fla. 3rd DCA 1996). An
express contract governed the Coghlans’ purchase of their boat, and
no implied or quasi-contract will be found where an express
contract exists.
5) Negligent Misrepresentation-- Texas courts have held
that benefit of the bargain damages are not recoverable in a claim
for negligent misrepresentation. D.S.A., Inc. v. Hillsboro Indep.
Sch. Dist., 973 S.W.2d 662, 663 (Tex. 1998). In Texas negligent
misrepresentation actions the plaintiff can recover only the amount
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necessary to compensate for direct pecuniary loss. Metropolitan
Life Insurance Co. v. Haney, 987 S.W.2d 236, 246 (Tex. App. 1999).
Florida has been less explicit in its treatment of this
issue. However, it appears that Florida courts do allow the
recovery of benefit of the bargain damages in negligent
misrepresentation actions. See PK Ventures, Inc. v. Raymond James
& Associates, Inc., 690 So. 2d 1296 (Fla. 1997)(holding that “fraud
in the inducement is an independent tort not barred by the economic
loss rule); Wassal v. Payne, 682 So. 2d 678 (Fla. 1st DCA
1996)(economic loss rule does not bar tort action based on
fraudulent or negligent misrepresentations).
Because the district court did not reach the choice of
law issue and because it appears that the Coghlans’ negligent
misrepresentation claim is legally cognizable in Florida, we must
reverse the district court’s dismissal of this claim and remand it
as well.
In summary, we affirm the district court’s dismissal of
the Coghlans’ unjust enrichment claim on the pleadings, but reverse
and remand on the dismissal of the claims for breach of contract,
fraudulent misrepresentation, negligent misrepresentation and
deceptive trade practices (DTPA/DUTPA). While we share the
district court’s implicit concern over the rise of “no-injury”
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product liability law suits4, the district court acted prematurely
in dismissing this case sua sponte on the pleadings: the
determination that there has been no injury in this case must be an
evidentiary one, since the relevant state jurisdictions recognize
benefit of the bargain damages for the claims that the Coghlans
allege.
A final word is in order about federal court
jurisdiction. On remand, the district court may refuse to exercise
supplemental jurisdiction over the Coghlans’ state law claims. See
28 U.S.C. § 1367(c). The only federal claim over which the
district court had original jurisdiction, the MMWA action for
breach of warranty, was dismissed. A district court may decline to
exercise supplemental jurisdiction over state law claims in such
circumstances. Because the Coghlans’ boat cost only $28,000, it
4
The key distinction between this case and a “no-injury” product
liability suit is that the Coghlans’ claims are rooted in basic contract law
rather than the law of product liability: the Coghlans assert they were promised
one thing but were given a different, less valuable thing. The core allegation
in a no-injury product liability class action is essentially the same as in a
traditional products liability case: the defendant produced or sold a defective
product and/or failed to warn of the product’s dangers. The wrongful act in a
no-injury products suit is thus the placing of a dangerous/defective product in
the stream of commerce. In contrast, the wrongful act alleged by the Coghlans
is Wellcraft’s failure to uphold its end of their bargain and to deliver what was
promised. The striking feature of a typical no-injury class is that the
plaintiffs have either not yet experienced a malfunction because of the alleged
defect or have experienced a malfunction but not been harmed by it. Therefore,
the plaintiffs in a no-injury products liability case have not suffered any
physical harm or out-of-pocket economic loss. Here, the damages sought by the
Coghlans are not rooted in the alleged defect of the product as such, but in the
fact that they did not receive the benefit of their bargain. It is worth noting
that the no-injury approach to product litigation has been rejected in several
recent decisions. See, e.g. Briehl v. General Motors Corp. 172 F.3d 623 (8th
Cir. 1999); Ford Motor Co. v. Rice, 726 So. 2d 626 (Ala. 1998).
12
seems unlikely that the diversity jurisdiction threshold of $75,000
can be met. The fact that the Coghlans’ suit is an as-yet
uncertified class action does not alter diversity analysis, since
at least one member of the plaintiff class must assert a claim in
excess of the amount in controversy requirement.5 See Snyder v.
Harris, 394 U.S. 332 (1969). See also 7A Charles Alan Wright &
Arthur R. Miller, Federal Practice and Proceedure § 1756 (2d ed.
1986).
Because the district court acted prematurely in
dismissing the Coghlans’ breach of contract, fraudulent
misrepresentation, negligent misrepresentation, and deceptive trade
practices claims on the pleadings, we reverse and remand on those
claims. We affirm the district court’s dismissal of the unjust
enrichment claim.
AFFIRMED in part, REVERSED in part.
5
This court’s decision in In re Abbott Laboratories, 51 F.3d 524 (5th
Cir. 1995), holding that an award of attorney’s fees in a class action was
attributable to the named plaintiffs, rather than to the class as a whole, thus
allowing the combination of the class attorney’s fees and the claims of named
plaintiffs to satisfy the amount in controversy requirement, is peculiar to a
Louisiana statute and has no application here. The standard approach to awards
of attorney’s fees in a class action context is to distribute them pro rata to
all class members, both named and unnamed. Goldberg v. CPC International, Inc.,
678 F.2d 1365 (9th Cir. 1982). Under Texas law, attorney’s fees should not be
attributed to the named class representative for jurisdictional purposes.
Gooding v. Allstate Insurance Co., 2000 WL 626856 (N.D. Tex. 2000); Johnson v.
Direct TV, 63 F. Supp. 2d 768, 770 (S.D. Tex. 1999); Quebe v. Ford Motor Co., 908
F. Supp. 446, 449-50 (W.D. Tex. 1995). Similiarly, Florida law demands that
punitive damages and attorneys’ fees be divided equally among all class memebers,
rather than aggregrated to allow a single named plaintiff to reach the amount in
controversy threshold. Morrison v. Allstate Indemnity Co., 228 F.3d 1255 (11th
Cir. 2000); Cohen v. Office Depot Inc., 204 F.3d 1069 (11th Cir. 2000).
13