Strict Liability and Used Car Dealers After the Chrysler and General Motors Bankruptcies
Shane C. Mecham
Allmayer & Associates, P.C.
For generations the bankruptcy of either Chrysler or General Motors (GM) was unimaginable. The recent bankruptcies of both corporations have sent shockwaves across the economic, political, and legal landscapes. One of those tremors is being felt in Missouri product liability law.
The two American automotive icons’ bankruptcies have robbed Missouri used car dealers of an effective statutory defense in many products liability cases. Section 537.762(1), RSMo 2000, provides that a party whose only liability is “as a seller in the stream of commerce may be dismissed from a products liability claim.” This statute only applies, however, when “another defendant, [usually] the manufacturer, is … before the court and” able to totally satisfy the plaintiff’s damages.2 Chrysler’s bankruptcy effectively insulated the corporation from products liability for its approximately 10 million vehicles on the road.3 Even though the “new” General Motors will be responsible for post-bankruptcy products liability claims, its bankruptcy rendered worthless the approximately 300 lawsuits that were ongoing when it filed under Chapter 11.4 Since the traditional “deep pockets” are now judgment-proof, numerous Missouri plaintiffs will turn their attention to used car dealers, and those dealers cannot rely on a § 537.762 defense because the manufacturers are not able to totally satisfy the judgment.
As Missouri used car dealers scramble for additional defenses to an impending tidal wave of products liability claims, they should first consider whether strict liability applies to them at all. Missouri state courts have not answered this question,5 and other states are divided on the issue.6 However, the U.S. District Court for the Western District of Missouri, in Harber v. Altec Industries, Inc., held that strict liability does not apply to used goods dealers.7 The 8th U.S. Circuit Court of Appeals affirmed Chief Judge Stevens’ opinion in Harber v. Altec Industries, Inc.8 In Engel v. Corrigan Company-Mechanical Contractors, Inc., the Missouri Court of Appeals - Eastern District characterized the decision as a “thoughtful and comprehensive analysis.”9 Even so, Missouri state courts have not yet specifically adopted Harber.10 The Chrysler and GM bankruptcies will force the bench and the bar to address the application of strict liability to used goods dealers. Ultimately, based on the public policy reasons for initially adopting the doctrine, Missouri state courts should agree with the U.S. District Court for the Western District and decline to extend strict liability to used goods dealers.
I. Statutory Scheme
In 1969, the Supreme Court of Missouri adopted the doctrine of strict liability in Keener v. Dayton Electrical Manufacturing Co.11 It specifically adopted Restatement (Second) of Torts § 402A.12 In 1987, the Missouri legislature passed a set of products liability statutes.13 These statutes define a products liability defendant as a party “situated in the chain of commerce.”14 Where in the chain of commerce the products defendant is situated affects its liability, as evidenced by the fact that § 537.762 allows the court to dismiss a claim against a party lower in the chain – the seller – in favor of holding liable a party higher in the chain – the manufacturer. Moreover, whether a product was “state of the art” is determined at the time it is “placed into the stream of commerce.”15 Given the statutory focus on the “stream [or chain] of commerce,” it is important to consider whether dealers in used goods are in that stream.
Judge Stevens suggested that “the stream of commerce begins with the manufacture and ends with the sale to the first end-user. This ‘chain’ of commerce very well may be broken when the product is first sold to the consumer. Subsequent sales in the second-hand market may be outside of this chain.”16 Thus, Judge Stevens concluded that the Missouri products liability statutes neither “expressly include[d] dealers in used goods” nor expressed the intent to do so.17
II. Cases From Other Jurisdictions
Since neither the Missouri courts nor the Missouri legislature have answered this question, it is appropriate to consider persuasive authority from other jurisdictions. Nationwide, courts disagree as to whether the doctrine of strict liability should be applied to cases involving the sale of used goods.18
A. States That Do Not Impose Strict Liability on Dealers of Used Goods
Several states refuse to apply strict liability to dealers of used goods. In an often-cited case, the Oregon Supreme Court refused to apply strict liability to a seller of a used crane.19 It held that the policies that justified strict liability – risk reduction, consumer expectations, and compensating injured parties – did not make sense in the secondhand market.20 The U. S. District Court for the District of Kansas agreed that the purposes of strict liability were not advanced by its application to sellers of used goods.21 Similarly, California law does not hold dealers in used goods strictly liable for the products they sell.22 Florida courts have held that strict liability does not apply to dealers in used goods because they are not the ones who profit from making products safer.23
In addition to those four, the following states do not impose strict liability on dealers in used goods: Alaska,24 Idaho,25 Maryland,26 Minnesota,27 and New Hampshire.28 Even where there is a general rule against applying strict liability, however, dealers in used goods may sometimes be found strictly liable if they repaired or modified the product – causing the defect – or made some representation regarding the product’s quality.29 Recently, California, Alaska, and South Dakota have taken the position that, while strict liability normally does not make sense in second-hand markets, a used goods dealer may subject itself to strict liability by rebuilding or reconditioning a product.30
B. States That Do Not Impose Strict Liability on Dealers of Used Goods for Defects That Arise After the Product’s Original Manufacture
Some states take a middle ground and do not impose strict liability on dealers in used goods only when the alleged defect arose after the product’s original manufacture. Illinois first considered the application of strict liability to dealers in used goods in 1975.1 The court refused to impose strict liability on a used car dealer for a defect that was not present when the car left the manufacturer.32 To do so would force dealers to become an insurer for defects that arise when the vehicle is under the control of others.33 As a corollary, a Wisconsin court held that a used firearm dealer was strictly liable for a defective shotgun that it sold because the defect arose out of the original manufacturing process.34
C. States That Do Impose Strict Liability on Dealers of Used Goods
Other states have imposed strict liability on dealers of used goods. Arizona courts have noted that Restatement (Second) of Torts § 402A applies to a seller, and does not require it to be the first in the chain of sellers.35 South Dakota concurs.36 Both Arizona and New Jersey, however, allow jurors to consider the fact that the defendant was a seller of used goods in determining whether the product was “unreasonably dangerous.”37 In other words, the fact that a product is used informs “whether an ordinary purchaser of the … product, considering its age and condition, would regard it as unreasonably dangerous when sold.”38 For instance, an ordinary purchaser of a 50-year-old airplane could not reasonably expect that it would be immediately ready for flight.
In addition to those three, the following states have all held that the policy reasons behind strict liability are furthered by applying the doctrine to dealers in used goods: Connecticut,39 Massachusetts,41 New York,41 Pennsylvania,42 Texas,43 and Washington.44
III. Public Policy
Finding no clear guidance from Missouri statutes or common law and finding no general rule nationwide, Judge Stevens analyzed the public policy justifications for strict liability to determine if it should apply to dealers in used goods. He identified six public policies justifying the doctrine:
A. Spreading the Risk
One rationale behind strict liability is that those in the distribution chain can most efficiently shift the costs of injuries by spreading them among all consumers equally through increased prices.45 This rationale is most applicable to manufacturers because they set “the original cost of the product,” and they can spread “the extra cost of insuring the product against defects … among all [of] the units [that are] manufactured.”46 Distributors and original retailers share in this efficiency through their relationship with manufacturers.47 They have the ability to “negotiate costs with manufacturers based on the increased risk they might bear.”48 “And since they sell a number of a product, they can spread the cost of risk-protection among all their sales.”49
Dealers in used goods, by contrast, cannot rely on the stream of commerce to spread the risk of liability. Rather, they are often left to defend suits alone.50 “Lawsuits that go after this type of seller usually come about because the other parties either have no money or can’t be found.”51 “Due to the passage of time before a product enters the secondhand market,” it is often difficult to identify the manufacturer or other sellers.52 Additionally, the defect “may arise after the product [left] the initial stream of [commerce], also leaving the dealer in used goods alone in the suit.”53 This position is precisely the one Missouri used car dealers find themselves in following the Chrysler and GM bankruptcies.
Because they are left to pay judgments alone, applying strict liability would drive dealers in used goods out of the business and destroy the secondhand market. “Dealers in used goods tend to be much smaller operations than others in the chain of distribution and the large amounts awarded for an injury would bankrupt these smaller businesses if they are forced to pay a judgment alone.”54 The only way for dealers in used goods to survive would be to pass the cost along to consumers by charging higher prices and/or to individual sellers by paying less for their secondhand items. Either option risks destroying the secondhand market. “Increasing the cost for consumers may drive the cost of used goods too close to the cost of new goods and drive the second-hand market out of business.”55 Paying less for secondhand items might make the enterprise not worthwhile for individuals who may decide to donate the items to a charity, sell the items themselves through a garage sale or a website such as Craigslist, or simply discard the items. “An exodus of goods from the used goods market would also shut businesses down.”56
Thus, applying strict liability to dealers in used goods does not fulfill the public policy of efficiently spreading risk. To the contrary, dealers in used goods are left to defend suits and/or pay judgments on their own. The result is the demise of those dealers and, ultimately, of the secondhand market as a whole.
B. Risk Reduction Through Increased Inspection
A second public policy justification for strict liability is that it increases safety because manufacturers and sellers “will use increased care in inspecting and servicing goods.”57 This justification applies to latent defects because consumers have remedies under negligence for discoverable defects.58 A latent defect is one “that is not discoverable by reasonable inspection.”59
This rationale does not make sense in secondhand markets because even “if a dealer in used goods were to inspect its products, latent defects would not be found and injuries would not be prevented.”60 Dealers in used goods could only discover latent defects by dismantling, inspecting, and reassembling each of their products. “Every dealer in used goods would be forced to become a reconditioner of products.”61 Imposing this burden, and the high costs associated with it, would render the secondhand market unable “to meet the needs of low-cost seeking consumers.”62
C. Risk Reduction Market Pressure
“Another policy rationale is that the seller of goods can exert pressure on the manufacturer to correct defective products and discourage their marketing.”63 In the normal chain of commerce, distributors and sellers have regular communication with manufacturers that can be used to share concerns about product safety.64 An original seller can send a strong message to a manufacturer by ceasing to purchase the manufacturer’s goods,65 but this relationship is limited to new-product sellers:
This kind of influence is possible precisely because the normal seller of new goods deals with a product on a regular basis and has the opportunity to observe its sales and communicate with its buyer. The normal seller has adequate means to receive information on a product and relay it to the manufacturer, and the dealer has the economic influence to effect change.66
Dealers in used goods, on the other hand, rarely have influence over, or communication with, manufacturers.67 Secondhand dealers receive their goods through “resales or trade-ins,” not from manufacturers.68 Dealers in used goods may not be able to identify the manufacturer, much less contact it. In fact, many of their goods may no longer be manufactured. “Meaningful communication with the manufacturer is unlikely if not impossible.”69 Even if the used goods dealer could communicate with the manufacturer, its voice would not be influential. Manufacturers do not make money from the resale of used goods.70 Rather, those cheaper substitute goods compete with the sale of new goods.71
D. Consumer Expectations
“Another rationale underlying strict liability is that consumers’ reasonable expectations should be satisfied.”72
“[T]he public has a right to and does expect . . . that reputable sellers will stand behind their goods.”73 There are, however, different expectations in buying new goods versus used goods. “When a person buys a new product, it is reasonable to expect that it will serve its purpose satisfactorily: the product is sold direct from the factory and usually comes with warranties and guarantees.”74 Strict liability for new products ensures that consumers get what they are promised.
Conversely, the secondhand market usually operates without guarantees, and often there is an affirmative disclaimer of warranties.75 Caveat emptor is the rule and buyers are willing to take their chances in exchange for cheaper prices.76 “[A] purchaser of used goods is on notice that the used good was sold because it no longer met the seller’s needs.”77 Secondhand “[c]onsumers … pay less because [the] product may not last as long [or work as well] as a new one.”78 “With these considerations in mind, the purchaser of used goods must have lower expectations of quality than a buyer of new goods.”79 Strict liability is not necessary to protect these lower expectations.
E. Preventing Waste
There is another public policy unique to secondhand markets. They serve the important function of preventing economic and resource waste.80 When a consumer is done using a product, she has three choices: sell it directly to another consumer, “sell [it] to a dealer in used goods,” or discard it.81 “By selling to a dealer in used goods, the party can save time and energy and maybe get a better price.”82 As previously discussed, however, the imposition of strict liability threatens the continued existence of secondhand markets because dealers may not want to risk the tremendous and unpredictable expense.83 The result is a less efficient allocation of resources.
F. Victim Compensation
The overriding “purpose of ‘products liability law, essentially, is to socialize the losses caused by defective products.’”84 The reason to socialize losses is to ensure that innocent victims are compensated, especially in cases “where traditional common-law claims in warranty and negligence would not work.”85 This purpose is the only justification served by imposing strict liability on dealers in used goods. “Since dealers in used goods are often defendants of last resort, removing them from strict liability may prevent many innocent victims from recovering.”86
While protecting innocent victims is important, it is not the only goal of our tort system.87 The tort system is based on the “fundamental ‘principal of fairness.’”88 Weighing the six public policies considered above, Judge Stevens concluded that fairness “is not served by imposing strict liability here.”89
Harber landed in federal court based on diversity jurisdiction.90 Of course, Missouri state courts have the final word on the state law question of whether strict liability applies to dealers in used goods.91 Judge Stevens’ conclusion was correct, and Missouri state courts should explicitly adopt it. The Chrysler and GM bankruptcies have left used car dealers as defendants of last resort in numerous product liability cases. Applying strict liability to these dealers would foist all of the liability on parties who had nothing to do with the design or manufacture of the allegedly defective vehicle. That scheme would not serve the fundamental principle of fairness.
1 Shane Mecham is an attorney with Allmayer & Associates, P.C. He received his J.D. with honors from the University of Texas School of Law, where he was an editor of the Texas Law Review, and his B.S. magna cum laude from Truman State University.
2 Section 537.762(2), RSMo. 2000.
3 Randolph Heaster, “Liability Provisions of GM Reorganization Are Little Solace to Some,” Kansas City Star, A14 (July 24, 2009).
5 See Engel v. Corrigan Co.-Mech. Contractors, Inc., 148 S.W.3d 28, 30 (Mo. App. E.D. 2004) (finding that defendant was occasional seller, not dealer in used goods); Heaviside v. Rental Serv. Corp., No. 4:05CV2343 CDP, 2007 WL 2156302, at *2 (E.D. Mo. July 24, 2007) (determining that defendant was “commercial lessor, not a dealer in used goods.”).
6 Tracy A. Bateman, Annotation, Products Liability: Application of Strict Liability Doctrine to Seller of Used Product, 9 A.L.R. Fed. 5th 1 (1993); Arriaga v. CitiCapital Comm. Corp., 167 Cal.App.4th 1527, 1540 (2008).
7 Harber v. Altec Indus., Inc., 812 F. Supp. 954, 965 (W.D. Mo. 1993).
8 5 F.3d 339, 340 (8th Cir. 1993).
9 Engel, 148 S.W.3d at 30, fn.2.
10 Williams v. Nuckolls, 644 S.W.2d 670, 674 fn. 5 (Mo. App. E.D. 1982).
11 445 S.W.2d 362, 366 (Mo. 1969).
12 Id. at 365.
13 Sections 537.760-65, RSMo. 2000.
14 Section 537.760, RSMo. 2000.
15 Section 537.764, RSMo. 2000.
16 Harber, 812 F. Supp. at 958 (citing Welkener v. Kirkwood Drug Store Co., 734 S.W.2d 233, 241 (Mo. App. E.D. 1987)).
18 Bateman, note 6; Arriaga, 167 Cal. App. 4th at 1540.
19 Tillman v. Vance Equip. Co., 596 P.2d 1299 (Or. 1979).
21 Sell v. Bertsch & Co., 577 F. Supp. 1393 (D. Kan. 1984).
22 Wilkinson v. Hicks, 126 Cal. App. 3d 515, 517 (1981) (denying that used machinery dealer was strictly liable for punch press that it sold “as is”).
23 Cataldo v. Lazy Days R.V. Ctr., Inc., 920 So.2d 174, 179 (Fla. Dist. App. 2006); Masker v. Smith, 405 So.2d 432, 434 (Fla. Dist. Ct. App. 1981); Fuquay v. Revels Motors, Inc., 389 So.2d 1238, 1240 (Fla. Dist. Ct. App. 1980).
24 Kodiak Elec. Ass’n v. Delaval Turbine, Inc., 694 P.2d 150, 154 (Alaska 1984).
25 Peterson v. Idaho First Nat’l Bank, 791 P.2d 1303, 1306 (Idaho 1990).
26 Harrison v. Bill Cairns Pontiac, 549 A.2d 385, 588 (Md. Ct. Spec. App. 1988).
27 Gorath v. Rockwell Int’l, Inc., 441 N.W.2d 128, 131 (Minn. Ct. App. 1989).
28 Brigham v. Hudson Motors, Inc., 392 A.2d 130, 135 (N.H. 1978).
29 See, e.g., Kodiak Elec. Ass’n, 694 P.2d at 154.
30 Arriaga, 167 Cal. App. 4th at 1540; Kodiak Elec. Ass’n, 694 P.2d at 154; Crandell v. Larkin & Jones Appliance Co., 334 N.W.2d 31 (S.D. 1983).
31 Peterson v. Lou Bachrodt Chevrolet Co., 329 N.E.2d 785 (Ill. 1975).
34 Nelson v. Nelson Hardware, Inc., 467 N.W.2d 518 (Wis. 1991).
35 Jordan v. Sunnyslope Appliance Propane & Plumbing Supplies Co., 660 P.2d 1236, 1238 (Ariz. Ct. App. 1983).
36 Crandell, 334 N.W.2d at 34.
37 Jordan v. Sunnyslope Appliance Propane & Plumbing Supplies Co., 660 P.2d 1236, 1238 (Ariz. Ct. App. 1983); Turner v. Int’l Harvester Co., 336 A.2d 62, 63 (N.J. Super. Ct. Law Div. 1975); see also Ortiz v. Farrell Co., 407 A.2d 1290, 1293 (N.J. Super. Ct. Law Div. 1979).
38 Bateman, § 2[b].
39 Stanton v. Carlson Sales, Inc., 728 A.2d 534, 536 (Conn. Super. Ct. 1998).
40 Ferragamo v. Massachusetts Bay Transp. Auth., 481 N.E.2d 477, 483 (Mass. 1985).
41 Stiles v. Batavia Atomic Horseshoes, Inc., 579 NYS2d 790, 792 (N.Y. App. Div. 1992).
42 Mixter v. Mack Trucks, Inc., 308 A.2d 139, 142 (Pa. Super. Ct. 1973).
43 Hovenden v. Tenbush, 529 S.W.2d 302, 307 (Tex. App. 1975).
44 Thompson v. Rockford Machine Tool Co., 744 P.2d 357, 360 (Wash. Ct. App. 1987).
45 See Restatement (Second) of Torts
§ 402A cmt. c; W. Page Keeton et al., Prosser and Keeton on Torts, § 98, at 692-93 (5th ed. 1984).
46 Harber, 812 F. Supp. at 961.
48 Id. at 961-62.
49 Id. at 962.
57 Haber at 926. See n. 4 (citing Jordan v. Sunnyslope Appliance Propane & Plumbing Supplies Co., 660 P.2d 1236, 1240 (Ariz. Ct. App. 1983)).
58 Harber, 812 F. Supp. at 963.
59 Black’s Law Dictionary 450 (8th ed. 2004).
60 Harber, 812 F. Supp. at 962.
61 Id. at 963.
62 Id. (citing Wilkinson v. Hicks, 179 Cal. Rptr. 5, 8 (1981)).
63 Id. at 963.
66 Harber, 812 F. Supp. at 963.
67 Id. (citing Fuquay, 389 So.2d at 1240; Tillman, 596 P.2d at 1303).
68 Id. (citing Fuquay, 389 So.2d at 1240; Tillman, 596 P.2d at 1303).
73 Id. (citing Restatement (Second) of Torts § 402A cmt. c.).
75 Harber, 812 F. Supp. at 964.
80 Id. at 965.
81 Id. (citing Fuquay, 389 So.2d at 1240; Tillman, 596 P.2d at 1303).
82 Harber, 812 F. Supp. at 965.
84 Welkener v. Kirkwood Drug Store Co., 734 S.W.2d 233, 241 (Mo. App. E.D. 1987) (quoting Lippard v. Houdaille Indus., Inc., 715 S.W.2d 491, 491 (Mo. banc 1986)).
85 Harber, 812 F. Supp. at 965.
87 See Keener v. Dayton Elec. Mfg. Co., 445 S.W.2d 362, 364 (Mo. 1969).
88 Welkener, 734 S.W.2d at 240.
89 Harber, 812 F. Supp. at 965.
90 Id. at 955.
91 Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938).