PACIFIC NATIONAL INSURANCE CO v. GORMSEN APPLIANCE COMPANY

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Court of Appeal, Fourth District, Division 1, California.

PACIFIC NATIONAL INSURANCE CO., Plaintiff and Respondent, v. GORMSEN APPLIANCE COMPANY, Defendant and Appellant.

Nos. D010765, D010996.

Decided: August 05, 1991

Klinedinst & Fliehman and Donald R. McKillop, San Diego, for defendant and appellant. Hinchy, Witte, Wood, Anderson & Hodges, Cheryl L. Edwards and Joe B. Cordileone, San Diego, for plaintiff and respondent.

The issue we address in this case is the availability of the doctrine of strict liability in tort for defective products in an action against the commercial lessor of used refrigerators.   It appears this question has not previously been met squarely, either in this jurisdiction or, to the best of our research, elsewhere.   It is our conclusion that the used equipment lessor, who does not recondition or modify the equipment, is not strictly liable in tort to users who are injured as the result of a defect in the equipment.1

FACTUAL AND PROCEDURAL BACKGROUND

Homeowners rented their single-family residence, without benefit of a refrigerator, to college students.   The students shopped the local area for the purpose of leasing a refrigerator.   Their objective was the largest refrigerator they could get for the cheapest price.   They chose a 16-year-old Admiral 20-cubic-foot refrigerator, leased “as is” by Gormsen Appliance Company (Gormsen).   Gormsen was in the business of sales, service and rental of major appliances.   The Admiral refrigerator in question had been acquired by Gormsen as a trade-in as part of another sale.   The refrigerator had been inspected, cleaned and minor repairs had been made by an employee of Gormsen before its delivery to the students.   Gormsen did not, however, recondition, rebuild or modify the refrigerator.

A fire occurred at the residence, caused by a defect in the refrigerator.   Homeowners made claim upon their homeowners' insurance policy and were paid $79,491.49 by their carrier, Pacific National Insurance Co.   Pacific then sued Gormsen upon an express subrogation of homeowners' rights.   Since the jury rejected Pacific's claim of negligence, the judgment in favor of Pacific depends upon the viability of its cause of action based on strict products liability.   The question of the applicability of strict liability concepts to the lessor of used equipment was highlighted by the jury instructions requested and those given by the court.   Gormsen submitted an instruction which would have excluded a finding of strict liability because of its status as a lessor of used equipment.2  The court rejected this instruction, giving instead BAJI 9.00.3, which instructed the jury that “The lessor of a product is liable for injuries a legal cause of which was a defect in its manufacture which existed when it left possession of defendant, provided that the injury resulted from use of the product that was reasonably foreseeable by the defendant.”   This standard instruction makes no distinction between the lessor of new equipment and the lessor of used equipment.   The court thus effectively rejected Gormsen's argument based upon an assertedly lesser degree of exposure to tort liability for lessors of used equipment.

DISCUSSION

 The liability in tort of a manufacturer for product defects which cause injury to consumers, without the requirement of proof of negligence, was established in Greenman v. Yuba Power Products, Inc. (1963) 59 Cal.2d 57, 27 Cal.Rptr. 697, 377 P.2d 897.   Not only the manufacturer, but distributors and others involved in the marketing of the product to the public are subject to liability.  (Vandermark v. Ford Motor Co. (1964) 61 Cal.2d 256, 37 Cal.Rptr. 896, 391 P.2d 168.)   A commercial lessor of personal property can be an integral part of the process by which a product is marketed for public use.   The doctrine of strict liability for distribution of faulty products is therefore also applicable to lessors of personal property.   (Price v. Shell Oil Co. (1970) 2 Cal.3d 245, 85 Cal.Rptr. 178, 466 P.2d 722;  McClaflin v. Bayshore Equipment Rental Co. (1969) 274 Cal.App.2d 446, 79 Cal.Rptr. 337.)

 Sellers of used property, however, have generally been found not to be subject to strict products liability claims.   The initial case, Tauber–Arons Auctioneers Co. v. Superior Court (1980) 101 Cal.App.3d 268, 161 Cal.Rptr. 789, involved an auctioneer of machinery which turned out to be injuriously defective.   The case might have been resolved on the ground that the auction company served merely as agent for the seller, never taking title to the used equipment.   The court did not rest its decision there, however, but viewed the case more broadly as a question of liability, generally, of sellers of used personal property.   The court analyzed the differences in the trade in used property as distinguished from the business of dealing in new property.   Citing and relying on Tillman v. Vance Equipment Co. (1979) 286 Or. 747, 596 P.2d 1299, the court concluded that a purchaser of used machinery or equipment does not reasonably expect defect-free merchandise;  and the seller of used equipment should not be required to undertake the burden of assuring perfect equipment.

In contemplating the problems that would result from imposing strict liability on the sellers of used equipment, the Tauber–Arons court stated that such a rule would “make every dealer in secondhand goods strictly liable for defects created by innumerable manufacturers of the class or classes of products with which he may deal.”  (Tauber–Arons, supra, 101 Cal.App.3d at p. 274, 161 Cal.Rptr. 789.)   The imposition of such liability on used equipment dealers, the court concluded, would be unjustified, imposing undue and unwise burdens on the commerce in used equipment.

Tauber-Arons was followed by LaRosa v. Superior Court (1981) 122 Cal.App.3d 741, 176 Cal.Rptr. 224, which held that the commercial seller of a used punch press could not be held strictly liable for its defects.   In a lengthy opinion examining the policy reasons for imposition of strict liability on the sellers of new products, the court concluded that the same did not apply with equal force to the used equipment business.

The third opinion rejecting strict liability for dealers in used property is Wilkinson v. Hicks (1981) 126 Cal.App.3d 515, 179 Cal.Rptr. 5.   Here again the seller of a used punch press was held not strictly liable for damages resulting from its defects.   To impose such liability, the court said, would as a practical matter require dealers to dismantle, inspect and repair all their inventory, which would effect a radical change in the nature of the used product market, depriving it of its flexibility.  (Id. at p. 521, 179 Cal.Rptr. 5.)

These cases emphasize that the freedom from strict liability depends upon the used property dealer's sale of the equipment in the condition in which he acquires it, without reconditioning or modification.   When the secondhand seller reconditions or makes extensive modifications to the item, he becomes “tantamount to a manufacturer insofar as liability ․ is concerned.”   (Green v. City of Los Angeles (1974) 40 Cal.App.3d 819, 838, 115 Cal.Rptr. 685.)

Thus, we have precedent establishing liability of the lessor of new products as commensurate with the liability of the manufacturer or others engaged in the distribution of new products.   We also have precedent denying strict liability as to the seller of used products.   There is no case specifically addressing, however, the question of strict products liability for the lessor of used equipment, as distinguished from the lessor of new equipment.

We recognize that both Price v. Shell Oil Co., supra, 2 Cal.3d 245, 85 Cal.Rptr. 178, 466 P.2d 722 and McClaflin v. Bayshore Equipment Rental Co., supra, 274 Cal.App.2d 446, 79 Cal.Rptr. 337 approved the application of strict liability to a lessor of equipment, which, in each case, undeniably was used equipment.   It could therefore be contended that they established precedent for the applicability of strict liability in tort for the leasing of defective used equipment.   We do not accept this contention.   In each of these cases, as well as the landmark New Jersey Supreme Court case which they cite (Cintrone v. Hertz Truck Leasing, Etc. (1965) 45 N.J. 434, 212 A.2d 769), the issue was whether concepts of strict liability in tort for the distribution of defective products could be applied to a lessor of property.   Each case labored with the history of strict liability, evolving as it did from warranty theories grounded in contract law to tort concepts.   The thrust of both Price and McClaflin was to extend liability concepts already established for manufacturers, to bailors and lessors of equipment.   The focus of each case was the thesis that all parties involved in the distribution of products could be embraced within the scope of products liability.   A central theme of the cases, set forth in McClaflin and quoted in Price, is that “Lessors of personal property, like the manufacturers or retailers thereof, ‘are engaged in the business of distributing goods to the public.   They are an integral part of the overall ․ marketing enterprise that should bear the cost of injuries resulting from defective products.’ ”  (Price v. Shell Oil Co., supra, 2 Cal.3d at p. 252, 85 Cal.Rptr. 178, 466 P.2d 722, quoting McClaflin v. Bayshore, supra, 274 Cal.App.2d at p. 452, 79 Cal.Rptr. 337.)

We also note that the broad inclusion of lessors within the scope of liability applicable to manufacturers and distributors, as illustrated by Price and McClaflin, came several years before the analysis of Tauber–Arons, LaRosa and Wilkinson, set forth above, which first distinguished and limited the applicability of strict liability concepts to dealers in used property.

 We therefore do not believe that Price and McClaflin constitute precedent for a rule which would impose strict products liability exposure on lessors of used property.   Such a rule would be inconsistent with the now-established authority which excludes dealers in used property from such liability, and would in fact be contrary to a central theme of Price:  that liability rules for sellers and lessors should be parallel.   No distinction in our present law is made between sellers and lessors of new equipment—they are treated alike in terms of imposition of strict products liability.   We believe the rule appropriate for sellers of used property should be the same as that applicable to lessors of new property.

The reasoning developed in Tauber–Arons, LaRosa and Wilkinson, which led to a rejection of strict liability concepts for sellers of used property, is equally applicable, we believe, to the lessor of used property.

The consumer of used property, whether a purchaser or lessee, seeks economy and practical utility.   That consumer does not expect products free from defect.   If he wanted a perfect product, he would purchase a new one.   In a sense, the purchaser or lessee of used equipment is one who “assumes the risk” of the existence of product defects.3

There is great utility in the preservation and encouragement of a used property market, whether it be in sales or leases.   The existence of the market permits people of modest means to share in the use of equipment which otherwise would be beyond their financial ability.   The students in this case, for instance, obtained the use of a large refrigerator for $39 per month (or less than $8 per month per student).   The viability of the used market depends upon its freedom from some of the restraints and restrictions which we reasonably impose upon the market for new goods.   As stated in Wilkinson v. Hicks, supra, 126 Cal.App.3d at page 521, 179 Cal.Rptr. 5, were we to require fault-free used products we would impose inspection and repair (and no doubt insurance) requirements upon the market which would “deprive it of its valuable flexibility.”

We therefore conclude that the ordinary lessor of used equipment, i.e., one who simply passes along trade-ins or other used items without major reconditioning or remodeling, should not be subject to claims based upon strict products liability theories.4

DISPOSITION

The judgment is reversed.   Appellant is entitled to costs on appeal.

I respectfully dissent.   The question of whether strict liability in tort applies to lessors of used products has been resolved by our Supreme Court in a legally indistinguishable context, and “met squarely” by other jurisdictions whose views have been endorsed by that court.   The correct rule is contrary to that reached by the majority herein.

In not recognizing this precedent, the majority reads Price v. Shell Oil Co. (1970) 2 Cal.3d 245, 85 Cal.Rptr. 178, 466 P.2d 722 as imposing strict liability on lessors of new products, but not lessors of used products.   The majority admits no such limitation was expressed or implied in Price or the authorities relied upon therein (Cintrone v. Hertz Truck Leasing, Etc. (1965) 45 N.J. 434, 212 A.2d 769 and McClaflin v. Bayshore Equipment Rental Co. (1969) 274 Cal.App.2d 446, 79 Cal.Rptr. 337), but nonetheless proceed to treat several Court of Appeal cases involving sellers, rather than lessors, as limiting a Supreme Court decision.   I believe such a crabbed reading of Price is incorrect.   Accordingly, I would affirm the judgment in its entirety.

First, had our Supreme Court intended to limit strict liability to lessors of new products only they would have so stated.  Price and McClaflin, as the majority admits, applied the doctrine to personalty “which, in each case, undeniably was used equipment.”  (Maj. opn. at p. 81, emphasis in original.)   The majority now suggests both Price and McClaflin were wrongly decided because they did not have the benefit of later decisions concerning sellers of used equipment.   With all due respect, I believe appellate cases arising in very different factual settings should not be used to limit the effect of a square holding of the Supreme Court resolving the issue before us.

The question is not one reasonably subject to dispute, in my view of the cases.  Price and McClaflin both relied upon Cintrone v. Hertz Truck Leasing, Etc., supra, 45 N.J. 434, 212 A.2d 769 which held:  “From the standpoint of service to the customer ․ the law cannot justly accept any distinction between the obligation assumed by a [lessor] company whether the vehicle is new or old when rented.   The nature of the business is such that the customer is expected to, and in fact must, rely ordinarily on the express or implied representation of fitness for immediate use.”  (Id. 212 A.2d at p. 777, emphasis added.)   A lessee's reliance on “fitness for immediate use” of a new or used product (Cintrone ) and the absence of other responsible parties with respect to used leased products (McClaflin ) are the two central issues, and I believe our Supreme Court so understood Cintrone and McClaflin when citing them with approval in a case involving a used, leased product.

Applied to the case before us, Gormsen's customers, whether leasing new or used equipment,1 were entitled to rely upon the product's “fitness for immediate use,” which does not include an expectation the product is likely to catch fire and destroy the premises in which it is employed.2

In support of the result reached the majority relies on three cases (Tauber–Arons Auctioneers Company v. Superior Court (1980) 101 Cal.App.3d 268, 161 Cal.Rptr. 789;  LaRosa v. Superior Court (1981) 122 Cal.App.3d 741, 176 Cal.Rptr. 224;  and Wilkinson v. Hicks (1981) 126 Cal.App.3d 515, 179 Cal.Rptr. 5) which concern sellers, rather than lessors, of used products.   None of the sellers in those cases played an active role in the marketing enterprise of the used products, and none of them placed the products in the stream of commerce or created a reasonable expectation in the minds of users that the used products were safe for their intended use.   It is this distinction, rather than any distinction between “new” and “used” personalty, which compels a differing result.

This distinction does not apply to Gormsen.   Gormsen is indisputably engaged in the business of distributing and redistributing new and used goods to the public, and thus is subject to the same liability imposed on the lessors in Price, Cintrone and McClaflin.   In sum, whatever rule is applied to sellers of used products, strict liability applies to lessors of products, whether new or used, whose customers “rely ordinarily on the express or implied representation of fitness for immediate use.”   I believe that consumers have as much right to reasonably expect a used refrigerator they lease to be safe as do those who buy or lease a new one.   If it is not safe it should not be leased to those who, relying on the lessor, will not have it inspected for safety defects.   Accordingly, I would affirm the jury's award finding Gormsen liable.

FOOTNOTES

1.   The case comes to us after judgment based on a jury verdict finding damages on the theory of strict liability.   The defendant-appellant asserts various trial court errors in addition to the submission of the case to the jury on the theory of strict liability.   We do not deal with these because they become moot when we conclude that the court was in error in its determination of the applicability of strict liability to the plaintiff's claim.   The plaintiff also appeals, asserting error in the court's permitting the jury to reduce damages based upon comparative fault, and also in the court's rulings respecting pre-judgment interest.   Since we reverse the judgment, these contentions by the plaintiff also are mooted.

2.   The full text of Gormsen's proposed instruction, which as will be seen, infra, we apprehend to state the appropriate principle of law, was:  “The ordinary used products dealer will not be strictly liable for defects created by the manufacturer.   The lessor of a used product who makes no representation about the quality of the product and does not rebuild or modify the product extensively may not be found to generate the kind of expectations of safety that are justifiably created by the introduction of a new product into the stream of commerce and therefore the lessor of that used product will not be held strictly liable for leasing a defective product.”

3.   Since the user of secondhand equipment in the typical case has no knowledge of any specific defect, dangerous or otherwise, there presumably can be no implied assumption of the risk of injury.  (See 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 1106, pp. 518–519.)   An argument could be made, however, that where the sales or leasing contract provides that the equipment is accepted in “as is” condition, as was the fact in this case, an express contractual assumption of the risk of defects is achieved.  (Cf. Anderson v. Owens–Corning Fiberglas Corp. (1991) 53 Cal.3d 987, 1001, 281 Cal.Rptr. 528, 810 P.2d 549.)   This contention was not raised in this case, however, either at trial or on appeal, and we therefore do not address the matter substantively.

4.   We acknowledge that it is quite possible that alternative theories of liability for lessors of used property could be proposed, based upon the varying reasonable expectations of the users of the property.   A persuasive argument can be made that the person who rents an automobile for a day (a la the plaintiff in Cintrone v. Hertz Truck Leasing, Etc., supra, 45 N.J. 434, 212 A.2d 769) or even a piece of equipment like a ladder (as in Price and McClaflin ) reasonably expects a sound and defect-free item, and does not care whether it is new, slightly used or highly used.   Such cases can possibly be distinguished from that of the farmer who leases a used tractor or the tenant who leases a used refrigerator, each intending to use the item more or less permanently without expecting servicing, repair or prior inspection by the lessor.   It would seem that if concepts of strict liability are to be applied in the case of the short-term lessee, they might better be based upon theories of warranty.   In our effort over the last several decades to expand usage of tort theories of strict liability, we have downgraded causes of action based on express or implied warranty to the point of current practical nonutilization of same.  (In this case, for instance, no effort was made to assert any sort of warranty claim.)   See, for instance, the statement in Greenman v. Yuba Power Products, Inc., supra, 59 Cal.2d 57, 63, 27 Cal.Rptr. 697, 377 P.2d 897:  “Although ․ strict liability has usually been based on the theory of an express or implied warranty running from the manufacturer to the plaintiff, the abandonment of the requirement of a contract between them, the recognition that the liability is not assumed by agreement but imposed by law [citations], and the refusal to permit the manufacturer to define the scope of its own responsibility for defective products [citations] make clear that the liability is not one governed by the law of contract warranties but by the law of strict liability in tort.”  (See also Prosser & Keeton on Torts (5th ed. 1984) Products Liability, §§ 97, 98, pp. 690–694.)   Where the reasonable expectations of the lessee may be so variable (i.e., expecting a defect-free vehicle when one rents from the airport Rent–A–Car agency but having much lower expectations when renting used appliances for college dormitory use) it may not be unreasonable to depend more heavily upon the express or implied terms of the contract between the parties.   To impose by law terms which will be overly burdensome on the lessor may simply raise the cost of the lease to an extent which destroys its utility from the point of view of the lessee.

1.   The distinction drawn by the majority between a lease of “new” or “used” equipment is, in most instances, meaningless.   At what point in its life-cycle does a product, whether a car or a refrigerator, become transmuted from one to the other?   It is clear that an automobile may be “new” when first leased, but is it still “new” when it is leased for the tenth or the hundredth time?   Is Hertz strictly liable for a dangerous defect in a 1991 model car, but not so liable for a 1990 model leased to a customer?   The point is that the nature of leasing is such that a leased product will very seldom be “new” in the same sense as a purchased product, and liability allocations should not thus be determined.  (See fn. 2, infra.)

2.   The rationale for imposition of strict liability in tort on those in the business of leasing products, whether new or used, is clear.   Where, as here, a lessee suffers damage because of a defective product “ ‘the lessor “may be the only member of that enterprise reasonably available to the injured plaintiff” [citation], and the imposition of strict liability upon him serves, as in the case of the retailer, as an incentive to safety.  [Citation.]  This will afford maximum protection to the injured plaintiff while working no injustice upon the lessor:  the latter can recover the cost of the protection by charging for it in his business.  [Citation.]’  [Citation.]”  (Price v. Shell Oil Co., supra, 2 Cal.3d. at p. 252, 85 Cal.Rptr. 178, 466 P.2d 722, quoting McClaflin v. Bayshore Equipment Rental Co., supra, 274 Cal.App.2d at p. 452, 79 Cal.Rptr. 337, which in turn quotes Vandermark v. Ford Motor Co. ((1964) 61 Cal.2d 256, 262, 37 Cal.Rptr. 896, 391 P.2d 168.)   This rationale, relied upon in McClaflin and Price, is peculiarly applicable to lessors of used products.   While lessees of new products might have rights against the manufacturer as well, in the case of used products the lessor is the only person in the product distribution chain “reasonably available to the injured plaintiff”.   The majority here thus denies recourse precisely to those injured parties with no other practical remedy.

FROEHLICH, Associate Justice.

HUFFMAN, Acting P.J., concurs.

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