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Case: 13-35163 08/15/2013 ID: 8743644 DktEntry: 16 Page: 1 of 56




No. 13-35163



IN THE

United States Court of Appeals

For the Ninth Circuit

CHMM, LLC,

—against—



Plaintiff-Appellant,

FREEMAN MARINE EQUIPMENT, INC.,

Defendant-Appellee.



ON APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE DISTRICT OF OREGON

PLAINTIFF-APPELLANT’S OPENING BRIEF


ANTHONY J. PRUZINSKY
BRIAN P. R. EISENHOWER
HILL RIVKINS LLP
45 Broadway, Suite 1500
New York, New York 10006
(212) 669-0600
Attorneys for Plaintiff-Appellant
CHMM, LLC



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CORPORATE DISCLOSURE STATEMENT



Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, the

undersigned counsel of record for Plaintiff-Appellant CHMM, LLC certifies that

Plaintiff-Appellant has no corporate ownership.











s/ Anthony J. Pruzinsky
Anthony J. Pruzinsky
Attorney for Plaintiff-Appellant
CHMM, LLC
Dated: August 15, 2013










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TABLE OF CONTENTS

TABLE OF AUTHORITIES .................................................................... iii

PRELIMINARY STATEMENT .............................................................. 1

JURISDICTIONAL STATEMENT ........................................................ 3

STATEMENT OF ISSUES PRESENTED FOR REVIEW ................... 4

STATEMENT OF THE CASE ................................................................ 4

STATEMENT OF THE FACTS .............................................................. 6

SUMMARY OF THE ARGUMENT ...................................................... 9

STANDARD OF REVIEW ...................................................................... 11

ARGUMENT ............................................................................................. 11


POINT I: THE DISTRICT COURT ERRED IN
FAILING TO COMPLY WITH THE APPLICABLE
PROCEDURAL STANDARDS IN CONSIDERING
THE MOTION TO DISMISS. ...................................................... 11


A. The District Court Erred in Refusing to Accept
as True CHMM's Allegations of Material Fact and
to Construe those Allegations in the Light Most
Favorable to CHMM. ............................................................. 12

B. The District Court Engaged in Impermissible
Fact Finding based upon Materials Placed Before it
and Unsubstantiated Arguments, and Treated those
Findings as if they were Undisputed Facts. ........................... 18


POINT II: THE DISTRICT COURT ERRED IN
DISMISSING CHMM'S TORT CLAIMS AT THE
PLEADINGS STAGE, GIVEN THAT THERE IS NO
DECISION OF THE SUPREME COURT, NINTH
CIRCUIT, OR ANY OTHER COURT HOLDING
THAT TORT RECOVERY IS NOT AVAILABLE



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FOR PROPERTY PLACED ON BOARD A VESSEL
BY A PURCHASER BEFORE ITS DELIVERY DATE. ......... 22

A.

In Saratoga Fishing, the Supreme Court Confirmed
the Relevant Product is that which is Supplied
by the Manufacturer. .............................................................. 28


B. No Court has Held that Recovery is Unavailable

for Property Added by a Purchaser to a Vessel
Before its Delivery Date ......................................................... 33


C. Deciding What Constitutes the Relevant Product

Requires a Factual Determination Precluding Dismissal
at the Pleadings Stage ............................................................. 41


D. Dismissal was Inappropriate in View of Relevant Questions

Left Open by the Supreme Court. .......................................... 45



CONCLUSION .......................................................................................... 46

STATEMENT OF RELATED CASES ................................................... 48

CERTIFICATE OF COMPLIANCE ....................................................... 49

CERTIFICATE OF SERVICE ................................................................. 50





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TABLE OF AUTHORITIES

































Page

Cases

All Alaskan Seafoods, Inc. v. Raychem Corp.,
197 F.3d 992 (9th Cir. 1999)………………………………….. 29, 35, 45

Barker v. Riverside County Office of Educ.,
584 F.3d 821(9th Cir. 2009)…………………………………… 11

Daniels-Hall v. Nat’l Educ. Ass’n,
629 F.3d 992 (9th Cir. 2010)…………………………………… 13

East River Steamship Corp. v. Transamerica Delaval Inc.,
476 U.S. 858 (1986)…………………………………………… passim

Exxon Shipping Company v. Pacific Resources,
835 F.Supp. 1195 (D. Hawai’i 1993)………………………….. 39-40, 41

Giles v. General Motors,
494 F.3d 865 (9th Cir. 2007)…………………………………… 25

Manzarek v. St. Paul Fire & Marine Ins. Co.,
519 F.3d 1025 (9th Cir. 2008)…………………………………. 13

McKinstry Co. v. Sheet Metal Workers’ Intern. Ass’n,
Local Union No. 16, 859 F.2d 1382 (9th Cir. 1988)…………… 11

Petroleum Helicopters, Inc. v. Avco Corp.,
930 F.2d 389 (5th Cir. 1991)……………………………………. 38-39, 40

Roberts v. Corrothers, 812 F.2d 1173 (9th Cir. 1987)………….. 13





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Saratoga Fishing v. J.M. Martinac & Co.,
520 U.S. 875 (1997)………........................................................... passim

Sateriale v. R.J. Reynolds Tobacco Co.,
687 F3d 777 (9th Cir 2012)………………………………………12, 18, 19

Sea-Land Serv., Inc. v. Gen. Elec. Co.,
134 F.3d 149 (3rd Cir. 1998)……………………………………. 38, 39, 40

Shipco 2295, Inc. v. Avondale Shipyards, Inc.,
825 F.2d 925 (5th Cir. 1987)…………………………………….. 36-37

Stacy v. Rederiet Otto Danielsen, A.S.,
609 F.3d 1033 (9th Cir. 2010)…………………………………… 11

U.S. v. Bear, 439 F.3d 565 (9th Cir. 2006)……………………… 11

Warren v. Fox Family Worldwide Inc.,
328 F.3d 1136 (9th Cir. 2003)…………………………………… 13

Zadrozny v. Bank of New York Mellon,
--- F.3d ---, 2013 WL 3242528 (9th Cir. June 28, 2013)… ……… 11

Statutes and Rules

28 U.S.C. §1292(a)(3) …………………………………………….. 3

28 U.S.C. §1333…………………………………………………… 3

Fed. R. App. P. 4(a)…………………………………………….…. 3

Fed. R. Civ. P. 9(h)…………………………………………….…... 3

Fed. R. Civ. P. 12(b)(6)……………………………………………. passim





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PRELIMINARY STATEMENT

Plaintiff-Appellant, CHMM, LLC (“CHMM”), as owner of the motor yacht

Jamaica Bay (“Vessel”), submits its Opening Brief in this maritime interlocutory

appeal of the order of the United States District Court for the District of Oregon

issued February 7, 2013, (ER 1-3)1, adopting the Magistrate Judge’s Findings and

Recommendation (“F&R”) issued December 17, 2012, (ER 4-22), regarding the

motion to dismiss for failure to state claims upon which relief may be granted, (ER

299-300), over CHMM’s Objections, (ER 42-46). The court construed the motion

of Defendant-Appellee, Freeman Marine Equipment, Inc. (“Freeman”), as against

the subsequently-filed Amended Complaint, (ER 5, 283-298), and dismissed in

their entirety the First through Fifth Claims for negligence and products liability

with respect to “damage to property installed on and integrated into the Vessel

prior to its delivery by [non-party shipbuilder] Nobiskrug to Plaintiff”, (ER 1).

CHMM’s claims relate to a purportedly weathertight Freeman door (“Door”)

which suffered a catastrophic failure in an expectable marine environment,

allowing seawater to enter into the interior of the Vessel and causing severe

damage to the Interior Outfit and additional property contained within the Vessel.

(Am. Compl. ¶¶ 7-10, 19-20, ER 285, 287.) Importantly, the Interior Outfit and

additional property were added to the Vessel by CHMM, whereas the shipyard sold


1 “ER” refers to the Excerpts of Record.

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only a “bare ship” to CHMM. (Am. Compl. ¶¶ 7-10, ER 285; F&R 4, ER 7.) In

other words, the shipbuilder agreed to provide CHMM with a yacht less the

Interior Outfit, which was the subject of independent contracts between CHMM

and third parties. (Am. Compl. ¶¶ 7-10, ER 285; F&R 4, ER 7; Pruzinsky Decl. ¶¶

7-9, ER 122; Pruzinsky Decl. Ex. E, F, G, ER 187-279.) The Amended Complaint

sets forth an estimated cost of $18,000,000.00 to repair, replace, and otherwise

restore to pre-incident condition the property added to the Vessel by CHMM,

which included, among other things, artwork, furniture, and other non-permanent

personal property, as well as wood paneling, carpeting, audio visual equipment,

and the like. (Am. Compl. ¶ 10, 20, 29, ER 285, 287, 288.) CHMM contends that

the property it added to the Vessel is “other property” within the meaning of East

River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 859 (1986), as

later explained in Saratoga Fishing v. J.M. Martinac & Co., 520 U.S. 875 (1997),

such that tort recovery is available, and the district court erred in dismissing

CHMM’s claims. It is submitted that the district court failed to accept as true

CHMM’s allegations of material fact as required under the standard for

consideration of a Fed. R. Civ. P. 12(b)(6) motion to dismiss for failure to state a

claim upon which relief can be granted, instead engaging in impermissible fact

finding. Further, the dismissal of CHMM’s claims at the pleadings stage was

unwarranted as there is no decision in the Supreme Court, Ninth Circuit, or any



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other court holding that tort recovery is not available for property added by a

purchaser to a vessel before the date of its final delivery from the shipyard, and

indeed, the district court acknowledged that none of the cases cited below stand for

that proposition. (Mot. to Dismiss Hr’g Tr. 21, Nov. 29, 2012, ER 67.)

JURISDICTIONAL STATEMENT




The statutory basis for subject matter jurisdiction of the district court is 28

U.S.C. § 1333 as this is a case of admiralty and maritime jurisdiction pursuant to

Fed. R. Civ. P. 9(h). (Am. Compl. ¶ 1, ER 284; F&R 2, ER 5.)



This Court has jurisdiction pursuant to 28 U.S.C. §1292(a)(3) as this appeal

is properly made as of right from an interlocutory order that decided rights and

liabilities of the parties to a maritime action. This appeal seeks review of the

interlocutory order issued February 7, 2013, (ER 1-3), adopting the Magistrate

Judge’s Findings and Recommendation issued December 17, 2012, (ER 4-22),

regarding the motion to dismiss for failure to state claims upon which relief may be

granted, (ER 299-300), over CHMM’s Objections, (ER 42-46).

CHMM timely filed its notice of appeal on March 5, 2013, (ER 23), within

the time period allowed under Rule 4(a) of the Federal Rules of Appellate

Procedure. The parties previously submitted briefing on the issue of maritime

interlocutory appellate jurisdiction, (docket entries 7-8), in response to which this



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Court discharged its sua sponte order to show cause why this appeal should not be

dismissed for lack of jurisdiction, (docket entries 5, 9).

STATEMENT OF ISSUES PRESENTED FOR REVIEW

1.

Did the district court err in failing to accept as true CHMM’s allegations of

material fact and to construe those allegations in the light most favorable to

CHMM in considering the motion to dismiss?

2.

Did the district court engage in impermissible fact finding based upon

materials placed before it and treat those findings as if they were undisputed

facts in considering the motion to dismiss?

3.

Did the district court err in dismissing CHMM's tort claims at the pleadings

stage, given that there is no decision of the Supreme Court, Ninth Circuit, or

any other court holding that tort recovery is not available for property placed

on board a vessel by a purchaser before its final delivery date?

STATEMENT OF THE CASE



On August 16, 2012, CHMM filed its complaint alleging negligence and

products liability claims for damage to the Vessel’s interior spaces and contents

resulting from the failure of a purportedly weathertight door manufactured and

supplied by Defendant-Appellee Freeman. (Compl., ER 301-314.) The claims

included negligence (first claim), defect in design (second claim), defect in

manufacture (third claim), failure to properly instruct (fourth claim), and negligent



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misrepresentation (fifth claim). Further, CHMM filed an Amended Complaint,

(ER 283-298), pleading in the alternative an omnibus sixth claim to the extent

discovery may reveal warranty and quasi contractual claims in connection with the

failure of the door.

CHMM alleged that, among other things, the interior outfitting of the Vessel

was property that had been purchased and installed by CHMM for which the non-

party shipyard, Nobiskrug, took no responsibility contractually and in its

performance under the shipbuilding contract. (Am. Compl. ¶¶ 7-11, ER 285.)

Freeman moved for dismissal on September 25, 2012, (ER 299-300), arguing that

recovery for damage to property added to the Vessel by CHMM was precluded

under the economic loss doctrine set forth in East River Steamship Corp. v.

Transamerica Delaval Inc., 476 U.S. 858, 859 (1986), and the Court heard oral

argument on November 29, 2012, (Mot. to Dismiss Hr’g Tr., ER 47-119). The

Magistrate Judge construed the motion as against the subsequently-filed Amended

Complaint, (F&R 2, ER 5), and issued Findings and Recommendation (“F&R”) on

December 17, 2012, (ER 4-22). CHMM timely filed Objections to the Findings

and Recommendation together with the Declaration of James L. Dolan in support

of its Objections. (ER 42-46; ER 26-41).



On February 7, 2013, the District Judge issued an order, (ER 1-3), which

adopted the Findings and Recommendation and dismissed in their entirety the First



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through Fifth Claims of the Amended Complaint, (ER 283-298), “for damage to

property installed on and integrated into the Vessel prior to its delivery by

Nobiskrug to Plaintiff,” and dismissed “that portion of the Sixth Claim alleging a

breach of contract,” (ER 1-2). The order granted CHMM leave to file a Second

Amended Complaint seeking tort remedies for damage to property added to the

Vessel after the date of delivery from Nobiskrug. (ER 3.) As such, the court

below eradicated several of the products liability claims asserted by CHMM

against Freeman. The dismissed claims represent the vast majority of CHMM’s

damages.

STATEMENT OF THE FACTS



Plaintiff-Appellant CHMM was and is the owner of the M/Y Jamaica Bay

(“the Vessel”), a motor yacht built by the German shipyard, Nobiskrug GmbH

(“Nobiskrug”), (Am. Compl. ¶ 6, ER 284), which included a purportedly

weathertight door manufactured and supplied by Defendant-Appellee Freeman,

(Am. Compl. ¶ 14, ER 286).



The Freeman door was a component installed by Nobiskrug on the Vessel's

exterior bulkhead near the bow, enabling passage from the exterior deck to the

inside cabin. (Am. Compl. ¶ 14, ER 286.) Freeman represented the Door to be of

a “weathertight” type of sufficient strength and design to withstand expected forces



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typically experienced in a seagoing environment, and suitable for installation at the

foredeck of the Jamaica Bay. (Am. Compl. ¶ 17, ER 286.)



However, on or about November 16, 2011, while the Vessel was underway

off the coast of the United States, the Freeman door (“Door”) failed in an

expectable marine environment, allowing the ingress of a substantial volume of

seawater into the Vessel, causing severe damage to its interior spaces and contents,

including woodwork, carpeting, electrical wiring and electronics. (Am. Compl. ¶

19-20, ER 287.)



This action concerns the damages to the Interior Outfit and additional

property added by CHMM to the Vessel, which were estimated to cost

$18,000,000.00 to repair, replace and otherwise restore to pre-incident condition.

(Am. Compl. ¶ 29, ER 288.) The vast majority of the property that suffered

damage was supplied and placed on board the Vessel by CHMM and its

contractors prior to the Vessel’s final delivery date. This property included, among

other things, artwork, furniture, and other non-permanent personal property, as

well as wood paneling, carpeting, audio visual equipment, and the like. (Am.

Compl. ¶¶ 10, 20, ER 285, 287.) The electrical wiring and electronics in the

accommodation spaces included televisions and audio equipment unrelated to the

operation of the ship, (Pruzinsky Decl. Ex. G, ER 232-279), and the furnishings



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included sofas, loveseats, armchairs, footstools, tables, desks, beds, and electrically

operated blinds, (Pruzinsky Decl. Ex. E, F, ER 187-231).

Importantly, the damaged property was not acquired from or through the

shipyard, nor was it supplied or installed by the shipyard. The shipbuilding

contract between the Nobiskrug shipyard and CHMM provided that CHMM was

purchasing an unfurnished and partially outfitted vessel. Specifically, the

shipbuilding contract stated that Nobiskrug was only to provide a “bare ship” and

further set forth that Nobiskrug would not be responsible for the outfitting of the

Vessel’s interior. (Am. Compl. ¶¶ 7, 9, ER 285.) Instead, the outfitting of the

interior of the yacht was left to CHMM. (Am. Compl. ¶ 8, ER 285.) CHMM

outfitted the accommodation and other interior spaces by entering into agreements

with third parties that were wholly separate and distinct from the shipbuilding

contract and totaled more than $10,000,000.00. (Am. Compl. ¶¶ 7-10, ER 285;

F&R 4, ER 7; Pruzinsky Decl. ¶¶ 7-9, ER 122; Pruzinsky Decl. Ex. E, F, G, ER

187-279.) Accordingly, the Vessel, as sold by Nobiskrug under the shipbuilding

contract, did not include the interior outfitting and other property added to the

Vessel by CHMM prior to its final delivery date. (Declaration of James L. Dolan

¶¶ 9-10, ER 29.)







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SUMMARY OF THE ARGUMENT

The district court failed to accept as true CHMM's allegations of material

fact and to construe those allegations in the light most favorable to CHMM, the

non-moving party, and therefore failed to comply with the applicable standard for

evaluating a Rule 12(b)(6) motion. Further, in refusing to accept CHMM's

allegations as true, the district court engaged in impermissible fact finding based

upon materials placed before it and upon Freeman's unsubstantiated arguments.



With respect to Freeman’s liability for damages, the district court erred in

refusing to correctly differentiate between property added to the Vessel by CHMM

and the components incorporated into the Vessel by the shipbuilder, thereby

misapplying the economic loss rule set forth in East River Steamship Corp. v.

Transamerica Delaval Inc., 476 U.S. 858, 859 (1986), as later explained in

Saratoga Fishing v. J.M. Martinac & Co., 520 U.S. 875 (1997). As the district

court acknowledged, there is no decision of the Supreme Court, Ninth Circuit, or

any other court holding that tort recovery is not available for property placed on

board a vessel by a purchaser before its delivery date. (Mot. to Dismiss Hr’g Tr.

21, Nov. 29, 2012, ER 67.) Nevertheless, at the pleadings stage, the district court

arbitrarily drew a bright line between material that CHMM placed on board before

the Vessel’s final delivery date and material that CHMM placed on board the

Vessel after that date. In doing so, the district court failed to analyze the nature



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and character of the damaged property and fundamentally deprived CHMM of any

opportunity to recover for damage to obvious “other property” within the rule

established under East River as interpreted in Saratoga Fishing. The instant case is

not about components installed on board the Vessel by non-party shipbuilder

Nobiskrug pursuant to the shipbuilding contract. (ER 124-181.) Instead, the

relevant property was supplied and installed by CHMM through direct agreements

with third parties, which were separate and distinct from the shipbuilding contract

and totaled more than $10,000,000.00. (Am. Compl. ¶¶ 7-10, ER 285; F&R 4, ER

7; Pruzinsky Decl. ¶¶ 7-9, ER 122; Pruzinsky Decl. Ex. E, F, G, ER 187-279.)

The shipbuilder took no responsibility for that property and expressly contracted to

provide only a “bare ship”. (Am. Compl. ¶¶ 7-10, ER 285; Shipbuilding Contract

§ 1.2, ER 129-130 and § 2.10(a), ER 137.)

Accepting as true the allegations of material fact set forth in the Amended

Complaint and construing those facts in the light most favorable to CHMM in

accordance with the applicable standard for a Fed. R. Civ. P. 12(b)(6) motion to

dismiss, it is clear that the property damaged when the Door failed was not part of

the product as manufactured and provided by the shipbuilder, and therefore the

economic loss rule does not preclude recovery from Freeman. Further, in light of

the issues of first impression presented by this case with respect to “other property”



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in connection with the economic loss rule, the district court should have denied the

motion for dismissal at the pleadings stage.

STANDARD OF REVIEW



A de novo standard applies to this Court's review of an order of dismissal for

failure to state a claim upon which relief can be granted. Zadrozny v. Bank of

New York Mellon, --- F.3d ---, 2013 WL 3242528, at *2 (9th Cir. June 28, 2013);

Stacy v. Rederiet Otto Danielsen, A.S., 609 F.3d 1033, 1035 (9th Cir. 2010) (citing

Barker v. Riverside County Office of Educ., 584 F.3d 821, 824 (9th Cir. 2009)).

Upon review, this Court will “accept as true all well pleaded facts in the complaint

and construe them in the light most favorable to the nonmoving party.” Zadrozny,

--- F.3d ----, 2013 WL 3242528, at *2 (9th Cir. June 28, 2013) (citing Henry A. v.

Wilden, 678 F.3d 991, 998 (9th Cir. 2012) (citation omitted)).



To the extent that this case presents issues of law and contract interpretation,

this Court’s standard of review is also de novo. McKinstry Co. v. Sheet Metal

Workers’ Intern. Ass’n, Local Union No. 16, 859 F.2d 1382, 1385 (9th Cir. 1988);

see also U.S. v. Bear, 439 F.3d 565, 571 (9th Cir. 2006) (citing U.S. v. Lawton,

193 F.3d 1087, 1094 (9th Cir. 1999)).

ARGUMENT

POINT I

THE DISTRICT COURT ERRED IN FAILING TO
COMPLY WITH THE APPLICABLE STANDARDS



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IN CONSIDERING THE MOTION TO DISMISS.



The district court failed to comply with the standards applicable to a motion

to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). The

district court declined to accept as true CHMM's allegations of material fact and to

construe those allegations in the light most favorable to CHMM, as the non-

moving party. Further, the district court engaged in impermissible fact finding

based upon materials placed before it and treated those findings as if they were

undisputed facts. Both failings amount to reversible error.

A.




The District Court Erred in Refusing to Accept as True CHMM's
Allegations of Material Fact and to Construe those Allegations in the
Light Most Favorable to CHMM.

The district court's inappropriate dismissal of CHMM's tort claims stems in

large part from its failure to comply with the standard for consideration of a motion

pursuant to Fed. R. Civ. P. 12(b)(6), despite having acknowledged the governing

standards as follows:

In order to survive a motion to dismiss for failure to state a claim
pursuant to FRCP 12(b)(6), “a complaint must contain sufficient
factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009),
quoting Bell Atl. Corp. v. Twombly, 550 US 544, 570 (2007).
...

In evaluating a motion to dismiss, the court must accept the
allegations of material fact as true and construe those allegations in
the light most favorable to the non-moving party. Sateriale v. R.J.
Reynolds Tobacco Co., 687 F3d 777, 783 (9th Cir 2012).


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(F&R 2-3, ER 5-6.) Nevertheless, the district court erred by instead employing a

standard under which, “[t]he court need not accept as true allegations in the

complaint that contradict” other material placed before the court. (F&R 3, ER 6.)

In making this statement, the court relied upon Daniels-Hall v. Nat’l Educ. Ass’n,

629 F.3d 992, 998 (9th Cir. 2010). However, the source of that citation to Daniels-

Hall comes, in fact, from Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d

1025, 1031-1032 (9th Cir. 2008), citing Warren v. Fox Family Worldwide Inc.,

328 F.3d 1136, 1139 (9th Cir. 2003), which itself draws upon language in Roberts

v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987) which more clearly states that

the court must accept as true allegations in the complaint “unless controverted by

undisputed facts in the record.” Therefore, it is clear the court below misconstrued

the rule in the Ninth Circuit that requires the district court on a 12(b)(6) motion to

accept as true facts alleged by the plaintiff unless they are contradicted by

undisputed facts.

This case contains an enormous number of disputed facts, to the extent that

the district court never should have considered dismissal at the pleadings stage.

For example, the parties’ duties and obligations with respect to the purchase and

installation of the door are factual issues obviously requiring discovery to

determine what the parties contracted for. The interpretation of the shipbuilding

contract itself necessarily will depend upon factual determinations of what the



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parties both intended and actually did in performing under its broad terms. The

same can be said of the various Interior Outfit contracts, including but not limited

to those before the district court at the motion to dismiss stage. (Pruzinsky Decl.

Ex. E, F, G, ER 187-279.)

Central to the district court’s dismissal of CHMM’s claims based on the

economic loss rule of East River Steamship Corp. v. Transamerica Delaval Inc.,

476 U.S. 858, 859 (1986), discussed in Point II below, was its unsubstantiated

finding that, “... pursuant to the Shipbuilding Contract, Nobiskrug delivered a

completely outfitted and legal vessel, not just a bare hull, to CHMM,” (F&R 10-11,

ER 13-14). This erroneous finding, adopted over CHMM's objections, (ER 44), is

the polar opposite of the allegations set forth in the Amended Complaint quoting

the shipbuilding contract as follows:



7.

The Shipbuilding Contract provides as follows:

2.10 Interior Outfit

(a)

The Interior Outfit of the Yacht is to be provided by the
Purchaser. The Builder does not assume any responsibility
or liability with regard to the Interior Outfit, except as
provided herein. The interface between the scope of work
of the Builder and the Interior Outfit is described in the
Interior Outfitting Demarcation List.

8.

The Shipbuilding Contract defines “Interior Outfit” as follows:

"Interior Outfit" means the Interior Outfit of the Yacht for which

the Purchaser is responsible.

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9.

The Shipbuilding Contract further provides as follows:

"Interior Outfitting Demarcation List" means the list
describing the interface between the bare ship and the Interior
Outfit, appended hereto as Schedule 10.

(Am. Compl. ¶¶ 7-9, ER 285; Shipbuilding Contract at 5-6, § 2.10(a)-(b), ER 129-

30, 137-38.) As alleged in the Amended Complaint and plainly stated in the

shipbuilding contract, CHMM – not Nobiskrug – was obligated to supply and

install the Interior Outfit, (Am. Compl. ¶¶ 7-10, ER 285). Even consideration of

contractual provisions not quoted in the Amended Complaint confirms CHMM’s

obligations regarding the Interior Outfit, such as the requirement that CHMM

ensure the Interior Outfit complied with Classification Society requirements.

(Shipbuilding Contract § 2.10(b), ER 137-38.) Rather than accepting as true

CHMM’s allegations of material fact as set forth in the Amended Complaint, the

district court engaged in a tortured pre-discovery interpretation of the shipbuilding

contract provisions urged upon it for the first time at the hearing by Freeman's

counsel – misleadingly and without substantiation in the record – to the effect that

Nobiskrug was somehow responsible for the Interior Outfit or for ensuring that the

electronics and interior furnishing supplied and installed by CHMM's contractors

met specifications and complied with flag state requirements. (Mot. to Dismiss

Hr'g Tr. 20-21, 53, ER 66-67, 99.) Freeman's counsel made these representations

despite the plain language of the Shipbuilding Contract setting forth that Nobiskrug



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was to provide only a “bare ship”, that Nobiskrug disclaimed all responsibility for

the Interior Outfit, and that CHMM was responsible for installing the Interior

Outfit within the construction time frame by using materials and methods

consistent with the requirements of the Classification Society and the Flag State.

(Am. Compl. ¶¶ 7-9, ER 285; Shipbuilding Contract at 5-6, § 2.10(a)-(b), ER 129-

30, 137-38.) Notably, no evidence of specific flag state or classification society

requirements relating to the Interior Outfit was submitted by Freeman. In this

connection, CHMM’s counsel repeatedly brought to the district court’s attention

the fact that Nobiskrug took no responsibility for the Interior Outfit and was to

provide only a “bare ship” pursuant to the Shipbuilding Contract, (Mot. to Dismiss

Hr'g Tr. 26-27, 44, 54, 60, ER 72-73, 90, 100, 106; Am. Compl. ¶¶ 7-9, ER 285),

and reminded the district court about the treatment of factual issues under the

applicable standard for a 12(b)(6) motion, (Mot. to Dismiss Hr’g Tr. 5, 24, 26, 31,

32, 39-40, 41, Nov. 29, 2012, ER 51, 70, 72, 77, 78, 85-86, 87). Accordingly, it

was a mistake on the part of the district court to conclude that Nobiskrug was

responsible for delivering a fully outfitted vessel, as nothing in the record at the

pleadings stage supports that conclusion. Accepting as true CHMM’s allegations

of material fact, CHMM asserted proper tort claims seeking recovery of damages

to items other than the “bare ship” and its defective Freeman Door.



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The district court’s erroneous finding is further contradicted by the

Declaration of James L. Dolan, (ER 26-41), which was submitted in support of

CHMM’s objections to the Findings and Recommendation. Mr. Dolan, an expert

with respect to classification society matters, reviewed the shipbuilding contract

and concluded that the fact that the vessel was subject to a sea trial and class rules

did not enlarge any commercial obligation of Nobiskrug to supply a “bare ship” or

otherwise support the finding that Nobiskrug had a contractual obligation to deliver

a completely outfitted vessel. (Dolan Decl. ¶¶ 8-10, ER 28-29; F&R 10-11, ER

13-14.) Specifically, Mr. Dolan stated that:

Nobiskrug had no contractual obligation to ensure that any of the
Interior Outfit was compliant with Class Rules; instead, this was
CHMM’s obligation. A sea trial before delivery has no relevance to
the interior outfitting of the vessel or the contractual undertakings
relating thereto.


(Dolan Decl. ¶ 10, ER 29.) Mr. Dolan further stated that CHMM’s obligation to

furnish Nobiskrug “with all documentation related to the Interior Outfit which is

needed for Classification of the Yacht,” (Shipbuilding Contract § 2.10(c), ER 138),

reflected only a ministerial act on the part of Nobiskrug to collect the relevant

documentation or approvals for those items that might be covered by a class rule.

(Dolan Decl. ¶ 8, ER 28.)



In this connection, the district court's reading of the shipbuilding contract

provisions relating to the obligations of CHMM – not Nobiskrug – to outfit the



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interior by using materials and methods consistent with the requirements of the

Classification Society and the Flag State, (Shipbuilding Contract §2.10(b), ER 137-

38), relied largely on Freeman’s illogical and unsupported pre-discovery

interpretation of the shipbuilding contract. This most certainly was a highly

disputed area which required the district court to hold firm to its obligation to

accept as true CHMM’s allegations of material fact and to construe those

allegations in the light most favorable to the plaintiff. See Sateriale v. R.J.

Reynolds Tobacco Co., 687 F.3d 777, 783 (9th Cir. 2012).

There can be no question that the district court erred in adopting a strained

and disputed interpretation of Nobiskrug’s performance under the shipbuilding

contract rather than accepting as true the plain language of the provisions set forth

in the Amended Complaint by non-moving party CHMM. This error is critical to

the extent that it formed the basis for the district court's finding as to the relevant

product delivered by the shipbuilder, leading to a determination that CHMM is

precluded from pursuing damages on the order of $18,000,000.00 in connection

with property purchased, supplied, and installed by CHMM through direct

agreements with third party contractors.

B.

The District Court Engaged in Impermissible Fact Finding based upon
Materials Placed Before it and Unsubstantiated Arguments, and
Treated those Findings as if they were Undisputed Facts.





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Further, the district court made impermissible factual findings based upon

materials and arguments placed before it with no substantiation in the record, and

erroneously treated those findings as if they were undisputed facts.



In addition to the key finding discussed in Point I(A) above, there are several

examples of the district court's engagement in impermissible fact finding rather

than complying with the applicable standard requiring it to accept as true the

plaintiff’s allegations of material fact and to construe those allegations in the light

most favorable to the plaintiff. See Sateriale v. R.J. Reynolds Tobacco Co., 687

F.3d 777, 783 (9th Cir. 2012). For example, over CHMM's objection, (ER 45), the

district court found as follows:

Freeman’s duty to supply the door arose solely pursuant to a
subcontract with Nobiskrug in accordance with the requirements of
the Shipbuilding Contract. The presence of its representative during
installation was merely to ensure that installation occurred in
accordance with that contractual duty.



(F&R 15, ER 18.) However, there is no basis in the record for this statement.

Freeman's contract with Nobiskrug was not even before the court on the motion to

dismiss. Further, in alleging that one or more Freeman representatives assisted at

the shipyard in connection with problems experienced in the installation and

testing of Freeman doors on board the Vessel, CHMM did not allege that Freeman

attended pursuant to any contractual duty or even as a matter of course, (Am.

Compl. ¶¶ 16, 38-39, 74, ER 286, 289, 294). CHMM alleged that Freeman



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attended the Vessel in response to a problem, (Am. Compl. ¶ 11, ER 303), not

“merely to ensure” the installation went smoothly, (F&R 15, ER 18). The district

court employed its unsupported finding in its dismissal of CHMM’s tort claims.

(F&R 15, ER 18.)

Likewise, to the extent that the district court treated the Shipbuilding

Contract and the contracts for the Interior Outfit as “coordinated transactions”,

(F&R 8, 14, ER 11, 17), that must be disregarded as an impermissible finding of

fact. There was no undisputed evidence of “coordinated transactions” as there was

no evidence before the court as to how CHMM and Nobiskrug conducted their

business. In this connection, the court below misconstrued its obligations in

considering a 12(b)(6) motion to dismiss by expanding the scope of contract

interpretation to include fact finding at the pleadings stage. Indeed, it is obvious

that there was not a series of coordinated transactions leading to assembly of a

fully outfitted yacht by Nobiskrug as the court below erroneously found, (F&R 10-

11, ER 13-14), as evidenced by the tremendous amount of supplemental material

submitted regarding the provision and installation of the Interior Outfit by

CHMM’s third party vendors. (Pruzinsky Decl. Ex. E, F, G, ER 187-279.)



Perhaps the most glaring example of impermissible and erroneous fact

finding is the district court's statement that, “... At this juncture, CHMM does not

know whether Freeman manufactured the door ...” (F&R 7 n.4, ER 10.) There is



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absolutely no basis in the record for this statement, which is entirely inaccurate. In

fact, CHMM expressly alleged that Freeman manufactured the Door. (Am. Compl.

¶ 14, ER 286.) Further, Freeman has not even argued that it was not the

manufacturer of the Door. CHMM timely objected to this finding, (ER 43), and

brought the foregoing points to the attention of the court in its accompanying

memorandum of law. Moreover, in its Response to CHMM’s Objections, Freeman

stated that it was unaware of anything disputing the fact that it manufactured the

Door, and even admitted for purposes of the motion that it manufactured the Door.

(Def.’s Resp. to Pl.’s Objections 25, d.e. 34.) This particular finding is troubling

inasmuch as it suggests that the district court dismissed at the pleadings stage

CHMM’s claims on the order of $18,000,000.00 without careful consideration of

the facts as plainly alleged and without adherence to the standards for a motion to

dismiss.

Accordingly, disregarding the district court’s impermissible fact finding,

accepting as true CHMM’s allegations of material fact, and construing those

allegations in the light most favorable to non-movant CHMM, as the Court must in

reviewing de novo a dismissal pursuant to Fed. R. Civ. P. 12(b)(6), the relevant

product manufactured and sold by the shipyard was a “bare ship” and damage was

sustained to “other property” added by CHMM for which tort recovery is

permitted, as discussed in Point II below. Therefore, it is respectfully submitted



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that this Court needs to reverse the district court’s order, reinstate CHMM's

dismissed tort claims, and remand for further proceedings on the merits.

POINT II

THE DISTRICT COURT ERRED IN DISMISSING CHMM'S TORT
CLAIMS AT THE PLEADINGS STAGE, GIVEN THAT THERE IS
NO DECISION OF THE SUPREME COURT, NINTH CIRCUIT, OR
ANY OTHER COURT HOLDING THAT TORT RECOVERY IS NOT

AVAILABLE FOR PROPERTY PLACED ON BOARD A VESSEL

BY A PURCHASER BEFORE ITS DELIVERY DATE.

Even if the district court complied with the applicable procedural standards,



which is denied, the court erred in dismissing CHMM's negligence and products

liability claims against Freeman at the pleadings stage. (ER 1-3.) There is no

decision in the Supreme Court, Ninth Circuit, or any other court holding that tort

recovery is not available for property added by a purchaser to a vessel before its

delivery date. Indeed, in addressing Freeman's counsel during oral argument, the

district court recognized that none of the cited cases stand for that proposition:

THE COURT: ...



It looks like all the cases that you cite in support do involve after-
added property, but none of them specifically state the rule, do they,
quite in the way that you're stating it now.

There's just -- there just wasn't an issue in those cases, I believe, and --
as to whether it was after-added or added prior to completion.


(Mot. to Dismiss Hr’g Tr. 21, Nov. 29, 2012, ER 67.)



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Nevertheless, at the pleadings stage, the district court, without any

supporting authority, arbitrarily drew a bright line between material that CHMM

placed on board before the Vessel’s final delivery date and material that CHMM

placed on board the Vessel after that date. In doing so, the district court failed to

analyze the nature and character of the damaged property and fundamentally

deprived CHMM of any opportunity to recover for damage to obvious “other

property” within the economic loss rule established under East River Steamship

Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 859 (1986), as later explained in

Saratoga Fishing v. J.M. Martinac & Co., 520 U.S. 875 (1997).

In East River, the Supreme Court recognized products liability, including

strict liability in tort, as part of the general maritime law. 476 U.S. at 865. The

general maritime law, which is drawn from state and federal sources, is an

amalgam of traditional common-law rules, modifications of those rules, and newly

created rules. Id. at 865 (citing Kermarec v. Compagnie Generale Transatlantique,

358 U.S. 625, 630 (1959); Romero v. International Operating Co., 358 U.S. 354,

373–375 (1959)).

In East River, a shipbuilder engaged defendant Transamerica Delaval to

design, manufacture, and supply steam turbines to be used as the main propulsion

for four tank vessels. 476 U.S. at 859. Defective components of the steam

turbines caused damage to the turbines themselves, but no property other than the



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steam turbines was damaged. 476 U.S. at 860-61. East River Steamship

Corporation, the bareboat charterers of the vessels, sought to recover repair costs

and lost profits from Transamerica Delaval for the time period during which the

vessels could not trade. The Supreme Court held that, “… a manufacturer in a

commercial relationship has no duty under either a negligence or strict products

liability theory to prevent a product from injuring itself.” East River, 476 U.S. at

871. The East River court found that each turbine was the relevant “product”,

because each turbine, including all component parts, was supplied by Transamerica

Delaval as a complete unit for installation on the respective vessels. East River,

476 U.S. at 867. The Supreme Court endorsed the reasoning that all but the

simplest machines have component parts, and therefore a contrary holding would

eliminate the distinction between warranty and strict products liability. Id. The

court went on to state that:

Damage to a product itself is most naturally understood as a warranty
claim. Such damage means simply that the product has not met the
customer's expectations, or, in other words, that the customer has
received “insufficient product value.” The maintenance of product
value and quality is precisely the purpose of express and implied
warranties. Therefore, a claim of a nonworking product can be
brought as a breach-of-warranty action.


Id. at 872 (citations omitted).

The rule of East River has come to be known as the “economic loss

doctrine”, applicable to cases in which no person or property other than the product



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itself is damaged. East River, 476 U.S. at 870. The Court has outlined the

economic loss rule as follows:

The economic loss doctrine in product liability cases can be easily
stated. If a plaintiff is in a contractual relationship with the
manufacturer of a product, the plaintiff can sue in contract for the
normal panoply of contract damages, including foreseeable lost profits
and other economic losses. Whether or not the plaintiff is in a
contractual relationship with the manufacturer, the plaintiff can sue
the manufacturer in tort only for damages resulting from physical
injury to persons or to property other than the product itself.


Giles v. General Motors, 494 F.3d 865, 874 (9th Cir. 2007).

There is qualitatively no difference between “other property” introduced to

the vessel either before or after the vessel’s final delivery date, and no maritime

case has allowed recovery to turn on such a fortuity. Indeed, in Saratoga Fishing v.

J.M. Martinac & Co., the Supreme Court refused to permit liability to turn on a

similar fortuity, i.e., whether a loss to added equipment occurred before or after a

product was re-sold by a purchaser. See 520 U.S. 875, 881 (1997). As discussed

in Point II(A) below, the focus of Saratoga Fishing was a differentiation between a

vessel as purchased from a manufacturer and property added by an initial

purchaser, in the context of a subsequent purchaser’s rights to tort recovery as

against the manufacturer, addressing only the specific factual circumstance before

that Court in which the “other property” happened to have been added after

manufacture. 520 U.S. 875. The Supreme Court made clear that there are no



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qualifications with respect to the time at which a user adds items to a purchased

product when it stated:

Regardless, the case law does suggest a distinction between the
components added to a product by a manufacturer before the
product’s sale to a user, e.g., Airlift Int’l, Inc. v. McDonnell Douglas
Corp., 685 F.2d 267 (C.A. 9 1982); King, supra; Shipco 2295, supra;
and those items added by a user to the manufactured product, e.g.,
Nicor Supply Ships Assocs. v. General Motors Corp., 876 F.2d 501
(C.A. 5 1989); and we would maintain that distinction.


Saratoga Fishing, 520 U.S. at 884 (emphasis added; citations omitted). The court

below either disregarded or misinterpreted this language as imposing a timetable

controlling the definition of property added by a user to a product sold by a

manufacturer. Nothing in the law makes the product delivery date the point for

distinguishing between the product itself and property added to it by a purchaser.

The proper inquiry is a qualitative determination dependent upon the party that

added particular items to a vessel.

In the case at bar, the relevant product covered by the Nobiskrug contract is

the “bare ship”, of which the defective Freeman Door is a component. (Am.

Compl. ¶¶ 7-9, 13-15, ER 285-86.) Consistent with the economic loss doctrine,

CHMM does not seek to recover for damage to other parts of the “bare ship”

caused by the failure of the Freeman door, but rather for damage to items added by

CHMM to the product that Nobiskrug man