Unpublished Disposition, 872 F.2d 430 (9th Cir. 1983)

MEMORANDUM^* 

Cessna appeals from a judgment on jury verdicts against it for breach of warranty and fraud in connection with the sale of an airplane. Long cross-appeals the district court's decision to eliminate the damage award for fraud.

1. Submission to the Jury of an Issue Not Raised in the Pleadings

Cessna contends that the court erred when it submitted to the jury the issue of breach of the written warranty that the plane would be free from defects in material and workmanship. We disagree.

Long's complaint did not include a claim for breach of the express warranty, although it did refer to breach of an express warranty as to maintenance costs, and breach of implied warranties including merchantability in that the plane had "numerous defects in material and workmanship which rendered it unfit for flying."

The court granted partial summary judgment to Cessna eliminating the implied warranty claims. On the morning of trial the court granted Cessna's motion in limine to exclude evidence of representations extrinsic to the purchase contract except to show fraud in the inducement. The claim based on the express warranty of maintenance costs appeared to be eliminated by that order.

Long's counsel then informed the court that Long would rely on the warranty in the purchase contract that the plane would be free from defects in material and workmanship. Cessna did not object.

At the end of the trial, Cessna objected to Long's proposed jury instruction 33. The instruction said that if Long was to recover for breach of warranty, Long had to prove that the aircraft did not conform to Cessna's affirmations of fact or promises. Long's counsel proposed that the instruction be modified to tell the jury that the warranty at issue was the warranty that the airplane would be free of defects in material and workmanship. Cessna objected on the basis that this was not the warranty referred to in the complaint. Long's counsel directed the court's attention to the pretrial order, which referred generally to the breach of warranty issues to be tried, and whether the limited remedy of repair or replacement of defective parts failed of its essential purpose. That limited remedy was relevant only if there were an issue of breach of a warranty that the airplane was free of defects in material or workmanship. The court agreed to give the proposed instruction as modified.

Cessna contends that the court should not have submitted to the jury the issue of whether this warranty was breached. Cessna claims that "it was clearly prejudicial to Cessna to be forced to defend a different warranty that had never been at issue in the case and as to which different discovery would have been directed prior to trial."

This question is governed by Rule 15(b) of the Federal Rules of Civil Procedure, relating to amendment of the pleadings to conform to evidence at trial. Where an amendment should have been made, the court will presume it was made. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1522 (9th Cir. 1985). A district court may amend the pleadings merely by entering findings on the unpleaded issues. Galindo v. Stoody Co., 793 F.2d 1502, 1513 n. 8 (9th Cir. 1986).

Rule 15(b) provides, in part:

(b) Amendments to Conform to the Evidence.

When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues.

Fed. R. Civ. P. 15(b).

The rule is to be construed liberally to promote the objective of deciding cases on their merits rather than on the basis of the relative pleading skills of counsel. 6 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1491, at 454 (1971). A district court's decision to amend the pleadings is reviewed for an abuse of discretion. Galindo, 793 F.2d at 1512. Such an amendment is proper unless it results in prejudice to one of the parties. Id. at 1513. Here, in effect, the trial court treated the pleadings as amended by submitting the issue to the jury.

Cessna had notice from the time the complaint was filed that it was required to defend against a claim that the plane had "numerous defects in material and workmanship" under the claim for breach of the implied warranty of merchantability. It could have conducted discovery accordingly. In Cessna's Memorandum of Contentions of Fact and Law filed more than a year before trial, Cessna stated that the crucial issue in the case was "whether there was a defect in Mr. Long's aircraft" (emphasis in original). The pretrial order listed as an issue to be tried whether the limited remedy of repair and replacement "failed of its essential purpose." Before the trial, when Long's counsel informed the court he would rely on the warranty against defects in material and workmanship, Cessna did not object. If it had, the court could have granted a continuance if necessary to avoid prejudice. See Fed. R. Civ. P. 15(b). Finally, Cessna has not shown that it would have defended this claim differently if given more notice: Cessna's defense theory was that the problems with Long's plane were caused by pilot abuse rather than defects in the plane.

The court's decision to submit the issue to the jury was not an abuse of discretion.

2. The "Substantial Factor" Jury Instruction

Cessna objected in the district court and argues on appeal that instruction 38 was an incorrect statement of law in that it allowed the jury to find Cessna liable for all of the loss even if Cessna fully performed its obligations under the warranty and the loss was caused by someone else. We reject this argument.

We review the jury instructions as a whole to determine "whether ... the court gave adequate instructions on each element of the case to ensure that the jury fully understood the issues" and "whether the instruction is misleading or states the law incorrectly to the prejudice of the objecting party." Kisor v. Johns-Manville Corp., 783 F.2d 1337, 1340 (9th Cir. 1986). Whether the instruction correctly stated the law is a question of state law reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984) (en banc).

We can review objections to instructions in a civil case, however, only to the extent that the objections were presented to the district court. See Hargrave v. Wellman, 276 F.2d 948, 950 (9th Cir. 1960). Rule 51 of the Federal Rules of Civil Procedure provides that " [n]o party may assign as error the giving or the failure to give an instruction unless that party objects thereto before the jury retires to consider its verdict, stating distinctly the matter objected to and the grounds of the objection." The objection " 'must be sufficiently specific to bring into focus the precise nature of the alleged error.' " Investment Service Co. v. Allied Equities Corp., 519 F.2d 508, 510 (9th Cir. 1975) (quoting Palmer v. Hoffman, 318 U.S. 109, 119 (1943)).

The text of the instruction refutes Cessna's contention that it allowed the jury to find Cessna liable for Long's harm even if Cessna fully performed its obligations under the warranty and the loss was caused by someone else:

CONCURRENT CAUSES

In law, more than one act, omission, or event may be considered to be a cause of loss or harm. The fact that an independent cause that was operating at the same time caused or would have caused a loss or harm claimed by Robert W. Long does not necessarily mean that a breach of warranty cannot also be considered to be a cause of that loss or harm.

If a breach of warranty by Cessna actually caused some loss or harm to Robert W. Long, or if it would have caused that loss or harm if the independent cause was not operating, the breach of warranty is considered in law to be a cause of that loss or harm as long as it was or would have been a substantial factor in bringing it about. This is so even if the independent cause would have produced the loss or harm suffered by Long if the warranty had been fully performed.

This instruction attempted to state California law. See John B. Gunn Law Corp. v. Maynard, 189 Cal. App. 3d 1565, 1571-73, 235 Cal. Rptr. 180, 183-84 (1987) (approving BAJI No. 3.78). BAJI No. 3.78 provides:

Where two causes combine to bring about an injury and either one of them operating alone would have been sufficient to cause the injury, either cause is considered to be a [proximate] [legal] cause of the injury if it is a material element and a substantial factor in bringing it about, even though the result would have occurred without it.

California BAJI No. 3.78 (West 1986).

The instruction given does not precisely mirror the BAJI instruction. We need not pass on the correctness of the particular instruction, however, since taken as a whole the jury instructions were not subject to the objection made by Cessna. Instruction 38 on its face required that the jury find that Cessna breached the warranty. The final sentence of the instruction, which Cessna emphasized in its brief, simply informed the jury that it could still find that Cessna's breach caused the harm even if the harm would have occurred absent a breach. This is a correct statement of California law. See John B. Gunn, 189 Cal. App. 3d at 1571-73.

Other instructions made it clear that the breach must have caused Long's harm. For example, the jury was instructed that: "Long must prove that the aircraft did not conform to Cessna's affirmations of fact and promise [and] that Cessna failed to repair or replace the aircraft so as to put the aircraft in the condition it was warranted to be; and, further, it must be proved that Long's damage was caused by the breach"; "Mr. Long is entitled to recover damages only for loss or harm on his claim of breach of warranty for damages that were caused by a breach of warranty"; and "Long is not entitled to recover damages for a particular loss or type of harm unless he proved that it is reasonably certain that he has suffered or will suffer such a loss or type of loss as a result of a breach by Cessna."

The instructions were adequate to enable the jury to fully understand the issues.

3. Sufficiency of Evidence of Breach of Warranty

Cessna contends that the evidence did not support the verdict because most of the evidence related to engine problems and Cessna was not responsible for engine problems under its warranty. Even though there was evidence that engine problems caused much of Long's damage, the verdict must stand because it is supported by substantial evidence. See Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1013-14 (9th Cir. 1985), cert. denied, 474 U.S. 1059 (1986). "Substantial evidence means 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.' " Id. at 1013-14 (citations omitted) (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)).

There was substantial evidence of defects unrelated to the engines. Richard Saterlee, for example, testified that there was excessive tire wear, electrical failure, problems with the avionics, and oil leaks. Douglas Reagan testified that there were other problems besides the engine problems that impaired the availability of the plane. A reasonable mind could accept this evidence as adequate to support the damage award.

Cessna claims that the undisputed facts demonstrated that Long's fraud claim was barred by the three year statute of limitations in California Code of Civil Procedure section 338, and that the court therefore erred when it denied Cessna's motion for a directed verdict on the fraud claim. We agree.

In determining whether a verdict should have been directed the appellate court applies the same standard as does the trial court originally: "whether the evidence is such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable men could have reached." Yeaman v. United States, 584 F.2d 322, 326 (9th Cir. 1978) (quoting Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir. 1970)).

Section 338 provides that the limitations period does not begin to run until the aggrieved party discovers the facts constituting the fraud or mistake. Cal.Civ.P.Code Sec. 338 (West 1982). Discovery does not mean actual knowledge:

"The statute commences to run ... after one has knowledge of facts sufficient to make a reasonably prudent person suspicious of fraud, thus putting him on inquiry. Section 19 of the Civil Code provides: 'Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact."

People v. Zamora, 18 Cal. 3d 538, 562, 557 P.2d 75, 91, 134 Cal. Rptr. 784, 800 (1976) (quoting Hobart v. Hobart Estate Co., 26 Cal. 2d 412, 437, 159 P.2d 958 (1945)) (emphases in original).

Because the provision tolling the statute of limitations is an exception, if an action is commenced more than three years after the fraud is committed the plaintiff must plead and prove the following:

(1) when and how the facts concerning the fraud became known to him; (2) lack of knowledge prior to that time; (3) that he had no means of knowledge or notice which followed by inquiry would have shown at an earlier date the circumstances upon which the cause of action is founded.

Id.

The acquisition of additional information which merely confirms a belief that a fraud was committed or is evidence helpful in establishing the plaintiff's case does not establish the time of discovery of the fraud. See Teitelbaum v. Borders, 206 Cal. App. 2d 634, 640-41, 23 Cal. Rptr. 868, 872 (1962). In other words, the statute of limitations does not remain tolled until the plaintiff has collected enough evidence to establish an airtight case. The running of the statute commences when the plaintiff is on inquiry notice.

The alleged fraud was committed in 1978 when Long purchased the plane. The second amended cross-complaint which brought Cessna into the litigation for the first time was filed February 15, 1983. Long's cross-complaint against Cessna was timely only if the statute of limitations was tolled until February 15, 1980. Thus, Long had the burden of pleading and proving that prior to February 15, 1980 the facts concerning the fraud were not known to him; how the facts were made known to him subsequent to February 15, 1980; and that he had no notice of facts which would have led a reasonable person to conduct an inquiry which might have shown, at an earlier date, the circumstances of the fraud.

Mr. Weinstock, who served as Mr. Long's attorney during the litigation between Tigerair and Long, testified at trial that in early 1982 his firm had prepared a memorandum considering claims against Cessna, but that they didn't have any hard facts, so they decided not to sue Cessna. He claimed that it was not until "around the end of 1982" that they [Long and his lawyers] knew "that Cessna had any connection to those representations or statements" about the cost estimates. He testified that it was not until the Summer of 1982 when he received exhibit 19, the "Estimated Cost of Use" document, and deposed Art Warren, the Cessna employee who testified that it was not possible to maintain the 421C for $20.00 per hour that " [they] realized that there were some hard facts to tie Cessna into Doug Reagan's cost estimates to Mr. Long."

Long argues that these facts show that he did not know the estimate was false until the Summer of 1982, less than a year before he sued Cessna, and that there was at best a triable issue of fact about when Long discovered that the source of the estimate was Cessna. Since Cessna did not request a jury instruction on the statute of limitations issue, Long argues Cessna has waived the defense.

Long, however, did not meet his burden of proof under Zamora of showing that he could not reasonably have discovered the fraud prior to February, 1980. Thus the district court's denial of a directed verdict on the fraud issue was erroneous.

In June, 1978, before Long purchased the airplane, Tigerair provided Long with the analysis it made, which was based in part on Cessna's "Estimated Cost of Use" statement. In a deposition which was read at trial Long admitted "deep down in my recollections I'll swear [Tigerair] showed me a piece of pertinent material with Cessna's name on it that gave us that thought of $20 an hour, but I sure can't remember what it might have been." Douglas Reagan, the Tigerair salesman, testified that it was his practice to provide the customer with a copy of the cost estimates provided by Cessna. Thus, the plaintiff's own admission and the testimony of the salesman tended to establish that 4 1/2 years before Cessna was brought into this action Long was aware that Cessna had provided the cost of use figures on which Long's fraud claim is based.

In May, 1980, two years and nine months before Cessna was brought in, Long sent Cessna a letter which said:

I feel there have been certain misrepresentations in direct cost of operation. These misrepresentations relate to maintenance costs per hour to operate my aircraft. Over the past two years and 626 hours of operation, these costs ($39,194.00 or $62.00 per hour) have far exceeded those projected by Cessna.

This letter establishes that as of May, 1980 Long actually suspected that Cessna was guilty of the misrepresentation which later became the basis of this claim.

In March, 1981 Tigerair sued Long. Long claimed an affirmative defense, and also cross-complained, on the basis that Tigerair had fraudulently misrepresented the estimated cost of use of the plane. This strengthens the conclusion that as of this time Long suspected the estimate was fraudulent.

In his letter of May, 1980, Long indicated that he believed Cessna had misrepresented the projected cost of use of the airplane. There is no evidence that between February and May of 1980 Long acquired new evidence of the fraud. On the contrary, the evidence supports a conclusion that Long knew from the time he purchased the plane that Cessna had provided the estimates. When Long cross-claimed against Tigerair in May of 1981 on the basis of fraudulent misrepresentation he clearly suspected the estimate was fraudulent. He has not shown that he acquired that knowledge after February, 1980. Long knew every fact necessary to commence the statute of limitations on his claim against Cessna by this time. Long has failed to show that he acquired the necessary knowledge between February of 1980 and May of 1981. His attorney's testimony to the contrary is belied by Long's own admissions.

Long has not produced evidence of any attempted inquiry of Cessna prior to February 15, 1980, nor has he attempted to prove that an inquiry prior to that date would have been fruitless. Thus, Long has not shown that he could not reasonably have discovered the fraud prior to February, 1980.

While Long's case was strengthened when he received from Tigerair the "Estimated Cost of Use" statement, and when he deposed the Cessna employee, that evidence merely confirmed the belief that he expressed in the letter of May, 1980 that Cessna was guilty of misrepresentation.

We conclude that a directed verdict on the fraud claim should have been granted.

Under California law, the award of punitive damages of $120,000 depended on the fraud verdict. See Roam v. Koop, 41 Cal. App. 3d 1035, 1040, 116 Cal. Rptr. 539, 543 (1974). Because the fraud claim was barred by the statute of limitations, the punitive damages award must be reversed.

CONCLUSION

We affirm the award of damages for breach of warranty. We reverse the judgment on the fraud claim and the award of punitive damages.