United States v. 2009-02-17 | 07-35696 | AFFILIATED FM INSURANCE CO. V. LTK CONSULTING | precedential…

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
 AFFILIATED FM INSURANCE No. 07-35696
COMPANY, a Rhode Island D.C. No.
corporation, CV-06-01750-JLR
Plaintiff-Appellant, ORDER
v.  CERTIFYING
LTK CONSULTING SERVICES INC, a QUESTION TO
Pennsylvania corporation, WASHINGTON
Defendant-Appellee. STATE SUPREME
COURT

Filed February 17, 2009
Before: Robert R. Beezer, Ronald M. Gould and
Consuelo M. Callahan, Circuit Judges.
COUNSEL
William E. Pierson, Jr., 1601 Fifth Avenue, Suite 2500, Seat-
tle, Washington, for the plaintiff-appellant Affiliated FM
Insurance Co.
Steven G.M. Stein and Brandon G. Hummel, Stein, Ray &
Harris LLP, 222 W. Adams, Suite 1800, Chicago, Illinois;
Beth Andrus, Skellenger Bender, P.S., 1301 Fifth Avenue,
Suite 1401, Seattle, Washington, for the defendant-appellee
LTK Consulting Services, Inc.
ORDER
We respectfully ask the Washington State Supreme Court
to answer the certified question presented below, pursuant to
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Revised Code of Washington § 2.60.020, because “it is neces-
sary to ascertain the local law of [Washington] state in order
to dispose of [this] proceeding and the local law has not been
clearly determined.” This case involves a tort claim under
Washington law for approximately $3 million in damages to
the Monorail System—the elevated train system located in
downtown Seattle—allegedly caused by negligent design
advice from LTK Consulting (“LTK”). LTK asserts that the
“economic loss rule” precludes this suit, and that the plaintiff,
Affiliated FM Insurance (“AFM”), lacks an adequate interest
in the Monorail System upon which to base a suit in tort.
I
We summarize the material facts: This suit is brought by
AFM, based on the rights of its insured, Seattle Monorail Ser-
vices Joint Venture (“SMS”). The Monorail System is owned
by the City of Seattle (“the City”). In 1994, the City entered
into a “Monorail Concession Agreement” (“the Agreement”)
with SMS. The Agreement granted to SMS the right to oper-
ate the Monorail System, but retained for the City the right to
enter the property and to adjust operation of the Monorail
System as necessary. As part of the Agreement, SMS agreed
to maintain insurance on the Monorail System, with the City
as loss payee, and SMS procured this insurance with AFM.
In 1999, under a separate contract, the City hired LTK to
identify and repair problems with the Monorail’s trains. Nei-
ther SMS nor AFM was a party to the City’s contract with
LTK. LTK completed its work in 2002. On May 31, 2004, the
Monorail Blue Train caught fire, damaging both the Blue and
Red Trains, and interrupting Monorail service. AFM alleges
that the fire was a result of LTK’s negligent design. LTK dis-
agrees, but concedes for the sake of argument in its summary
judgment motion that its negligent design caused the fire. Pur-
suant to SMS’s policy with AFM—and after settlement of a
coverage dispute—AFM paid $3,267,861 for damages to the
Monorail System resulting from the fire. On November 7,
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2006 AFM filed this tort action against LTK as subrogee to
the rights of SMS, and LTK removed the case to federal dis-
trict court based on diversity of citizenship under 28 U.S.C.
§ 1332. The district court, sitting with jurisdiction based on
diversity of citizenship of the parties, granted summary judg-
ment to LTK on the ground that AFM is barred under Wash-
ington law by the economic loss rule from suing LTK in tort.
II
We next identify the issue that is the basis for our certifica-
tion order: whether a party with a right to operate commer-
cially and extensively on another’s property may bring a suit
in tort against a third party for damage to that property.
Defendant relies primarily on the Washington State Supreme
Court’s economic loss rule as explained in Berschauer/
Phillips Construction Co. v. Seattle School Dist. No. 1, 881
P.2d 986, 992 (Wash. 1994), to argue that a suit in tort is not
allowed in such a case.
In Berschauer, a general contractor sued an architect, a
structural engineer, and a project inspector because they alleg-
edly caused construction delays. Berschauer, 881 P.2d at 988.
None of the defendants were in privity of contract with the
general contractor, so the general contractor relied on a tort
theory. Id. The Washington State Supreme Court held that the
economic loss rule barred the tort claim. Id. at 992-93. Justice
Guy, writing for the Court, explained: “A brightline distinc-
tion between the remedies offered in contract and tort with
respect to economic damages . . . encourages parties to nego-
tiate toward the risk distribution that is desired or customary.”
Id. at 992. Thus, “[i]n cases involving construction disputes,
the contracts entered into among the various parties shall gov-
ern their economic expectations.” Id. at 993.
As we understand this doctrine of Washington law, the eco-
nomic loss rule has two primary features. First, it precludes
tort suits for purely commercial losses, as opposed to losses
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“from personal injury or injury to other property.” Alejandre
v. Bull, 153 P.3d 864, 869 (Wash. 2007). Second, the primary
goals of the rule are to distinguish between contract and tort
remedies and to encourage parties to allocate risk through
contract. Id. at 870-71.
In this case, the loss suffered is “economic” or “commer-
cial” in that SMS suffered harm to its contractually-created
economic interest in operating the Monorail. However, AFM
argues that SMS’s right to operate the Monorail exclusively
is more like a “property interest” and that the economic loss
rule should therefore not apply because SMS’s interest is not
purely “economic.” No Washington State Supreme Court pre-
cedent explains the degree of interest one must have in prop-
erty to bring a suit in tort for damage to that property.
It is also unclear how the contract-tort distinction that is
central to the economic loss rule applies here. That is, SMS
was not in privity of contract with LTK; SMS contracted with
the City, which in turn contracted independently with LTK. If
the core of the economic loss rule is the allocation of risk
through contract, it is unclear how the parties here should
have allocated that risk. It is possible that SMS could have
contracted with the City for the right to sue third parties on
contracts that the City entered with those third parties. How-
ever, the desirability of particular risk allocation is an issue of
Washington State policy that the Washington State Supreme
Court is in a better position than our court to decide, and we
hesitate to declare Washington law on an issue that has not
been definitively resolved by the Washington State Supreme
Court.
This case provides the Washington State Supreme Court an
opportunity to explain more fully how, if at all, the economic
loss rule applies to parties who have not contracted with each
other. In Berschauer, the plaintiff-general contractor was not
in privity of contract with the defendants, but the District,
which was in privity of contract with two of the defendants,
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had assigned its contract claims to the plaintiff. Berschauer,
881 P.2d at 988-89. Thus, the plaintiff was able to pursue the
District’s contract claims vicariously against the defendants
and the Washington State Supreme Court limited plaintiff to
those contract claims. Id. Justice Chambers also noted in his
concurrence in Alejandre—where the parties were in privity
of contract—that the economic loss rule has been applied in
cases, like Berschauer, where privity of contract did not exist.
See Alejandre, 153 P.3d at 874 n.8. However, neither Bersch-
auer nor Alejandre elaborated on how the economic loss rule
should apply generally to parties not in privity of contract,
where the plaintiff has not received an assignment of claims
from a party in privity of contract.
Because we have concluded that this important question of
Washington tort law is not entirely settled and involves mat-
ters of policy best left to state resolution, we have concluded
that certification of a question to the Washington State
Supreme Court is the most appropriate course of action. If the
Washington State Supreme Court concludes that a party with
a contractual right to operate commercially and extensively on
another’s property may bring a suit in tort against a third party
for damage to that property, we will reverse the district
court’s order granting summary judgment to LTK. If, how-
ever, the Washington State Supreme Court decides that the
economic loss rule, or some other legal rule, bars such a suit
in tort, we will affirm the district court’s grant of summary
judgment in favor of LTK.
ORDER
In light of our foregoing discussion, and because the
answer to this question is “necessary to ascertain the local law
of this state in order to dispose” of this appeal, RCW
§ 2.60.020, we respectfully certify to the Washington State
Supreme Court the following question:
May party A (here, SMS, whose rights are asserted
in subrogation by AFM), who has a contractual right
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to operate commercially and extensively on property
owned by non-party B (here, the City of Seattle), sue
party C (here, LTK) in tort for damage to that prop-
erty, when A (SMS) and C (LTK) are not in privity
of contract?
We do not intend our framing of this question to restrict the
Washington State Supreme Court’s consideration of any
issues that it determines are relevant. If the Washington State
Supreme Court decides to consider the certified question, it
may in its discretion reformulate the question. Broad v. Man-
nesmann Anlagenbau AG, 196 F.3d 1075, 1076 (9th Cir.
1999).
If the Washington State Supreme Court accepts review of
the certified question, we designate appellant Affiliated FM
Insurance as the party to file the first brief pursuant to Wash-
ington Rule of Appellate Procedure (“WRAP”) 16.16(e)(1).
The clerk of our court is hereby ordered to transmit forth-
with to the Washington State Supreme Court, under official
seal of the United States Court of Appeals for the Ninth Cir-
cuit, a copy of this order and all relevant briefs and excerpts
of record pursuant to Revised Code of Washington
§§ 2.60.010, 2.60.030 and WRAP 16.16.
Further proceedings in our court on the certified question
are stayed pending the Washington State Supreme Court’s
decision whether it will accept review, and if so, receipt of the
answer to the certified question. This case is withdrawn from
submission until further order from this court. The panel will
resume control and jurisdiction on the certified question upon
receiving an answer to the certified question or upon the
Washington State Supreme Court’s decision to decline to
answer the certified question. When the Washington State
Supreme Court decides whether or not to accept the certified
question, the parties shall file a joint report informing this
court of the decision. If the Washington State Supreme Court
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accepts the certified question, the parties shall file a joint sta-
tus report every six months after the date of the acceptance,
or more frequently if circumstances warrant.
It is so ORDERED.
_________________________________
RONALD M. GOULD
Circuit Judge, United States Court of
Appeals for the Ninth Circuit
Presiding Judge of the Certifying Panel
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