ML20246H075
| ML20246H075 | |
| Person / Time | |
|---|---|
| Site: | Shoreham File:Long Island Lighting Company icon.png |
| Issue date: | 12/03/1987 |
| From: | Lieberman J NRC OFFICE OF ENFORCEMENT (OE) |
| To: | Martin J, Murley T, Jenny Murray NRC OFFICE OF INSPECTION & ENFORCEMENT (IE REGION V), Office of Nuclear Reactor Regulation, NRC OFFICE OF THE GENERAL COUNSEL (OGC) |
| Shared Package | |
| ML20244D281 | List: |
| References | |
| FOIA-89-192 NUDOCS 8909010077 | |
| Download: ML20246H075 (1) | |
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MEMORANDUM FOR: Thcnes E. Murley, Director flL L Office of Nuclear Reactor Regulation James P. Murray, Deputy General Counsel Office of the General Counsel John B. Martin, Regional Administrator Region V FROM:
hues Lieberman, Director Office of Enforcement SU3 JECT:
OE REVIEW OF 01 REPORT 5-84-008 REGARDING TRANSAMERICA DELAVAL Py memorendum dated hovember 25, 1987 the EDO provided the above OI repert. OE nas reviewed the report and concluded that enforcement actions cannot be pursued based en this report because due to the CBse's low priority 01 could not offer conclusions to substantiate or refute the allegations of potential wrongdoing.
Therefore, we consider no further action based on the 01 repcrt necessary.
We note that OGC has been monitoring the civil legal proceedings of tFe licenses and Transamerica Delavel, Incorporated and that relevant information has been coordinated with the FBI.
Should these matters develop into issues for which hRC enforcement actier.s may be ccnsidered, pie 6se inform this office.
s., L L James Lieberman, Director Officc cf Enforcement cc:
J. Taylor, DEDO T. Rehm, A0 M sh, RY B. Hayes, 01 0909010077 890629 PDR FOIA ROLFEB9-192 PDR E "
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RETURN RECEIPT REQUESTED g 3 gf:
Director, Division of-Rules and Records Manager'nt.
Office of Administration
.U.S. Nuclear Regulatory Commission Washington, D.C.
20555-
Dear' Sir:
This is a request for documents and records pursuant to the
~
Freedom of Information Act, 5 U.S.C..S 552 (1982) and'10 C.F.R.
SS.9.1.204.
This request is made on behalf of the Long Island Lighting Ccmpsny whose principal place of business is located in
.Hicksville, New York.
In this request, the terms " documents and files" are defined to include the following:
All reports, records, lists, inter-office memoranda, intra-office Juemoranda, data, telegrams; correspon-dence, schedules, photographs, sound reproductions, ledger books, log books, data sheets, graphs, catalogues, computer tapes, records or printouts, notes, records of telephone conversa-tiens, meeting Ujendas, attendance lints, minutes or notes of meetings, statements or any other handwritten, typewritten, printed, recorded or graphic material of any kind or
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HUNTON 8e WI LLI AMS April 26, 1989-Page 2 The documents and files sought in this request are:
All files of the Office of Investi-gations that pertain to any investi-gation of Transamerica Delaval, Inc. (or Imo Delaval, Inc. and Imo Industries, reflecting name changes since 1986) that previously were withheld under Exemption 7(A) of the Freedom of Information Act, 5 U.S.C. S 552(b)(7)(A) and 10 C.F.R. 9.5(a)(7)(i).
(See August-28, 1986 letter from T.S.
Ellis to NRC and October 6, 1986 letter from Donnie H.
Grimsley to T.S.
Ellis, III, enclosed) and any subsequent documents pertaining to Transamerica Delaval, Inc., Imo Delaval, Inc. or Imo Industries in the file of the NRC's Office of Investigation and all documents bearing report or tracking number O 5-84-008.
If the Nuclear Regulatory Commission withholds documents or records responsive to this request, then we request that you furnish us'with a detailed statement of the reasons for denying access to each document withheld and the following information regarding each such document so that we may determine whether to seek a judicial remedy under the Act:
1 (a) the date of each such l'
document or record; (b) the identity of the author or authors and addressee or addressees of each such document or record; (c) the identity of all persons in the Nuclear Regulatory Commission or elsewhere who received copies of each such document or record; (d) the title of each such document or record; (e) the general nature and subject matter of each such document or record; and
1 HuwTox ?& = WILLIAMS
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_Aprili 26,11989-H Page 3-(f). whether each.such document or
. record contains any' factual:
information, including,.but not
. limited to,. data, descriptions, and critiques.of. methodologies or statements.of policy.
J If portions'of any responsive documents are deleted.before disclosure, we request, pursuant to 10 C.F.R S 9.19, a. written y
- statement describing the scope and reasons for any deletion.
It is not necess'aryithat the documents be'. copied and delivered to us.
We will be happy. to ; review. the documents at.the:
production location.
LILCO will pay any appropriate; copying costs or fees attributable'to this request and needs no prior notice of the amount.of such fees.
We request a response 'ithin ten working' days'of receipt of-w this request-pursuant to 5 U.S.C. S $52(a)(6)(A)' and 10 C.F.R $.
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Please call me if you have any questions-regarding this l.
. request.
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1 Li CE RTI FI ED ' fMI L RETURN' RECEIPT REQUESTED FREEDOM OF INFORMATION ACT. REQUEST
[d1A --/6-h $ f Director, Office of Administration U.S.
Nuclear Regulatory' Commission hg/g g-g I
Washington, D.C.
20555
Dear. Sir:
This is a request for documents and records pursuant to the Freedom of Infor, nation Act, 5 U.S.C.
SS 552, et seo.,
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and 10 CPR SS 9.1, e_t, : e a.
This request is made on behalf of the Long Island Idghting Company whose principal place of business is located
'in Suffolk County, New York.
In this request, the' term " documents and records" is defined to include-the following:
All reports, records, lists, inter-1 office memoranda, intra-office memoranda, data, telegrams; correspon-dence, schedul?s, photographs, sound reproductions, ledger books, log books, data sheets, graphs, estalog'ues, cor-puter taoes, records or prir touts, notes, records of telechone conversa-tions, meeting agendss, attendance lists, minutes or notes of meetings, statements or any other handwritten, typewritten, printed, recorded or graohic material of any kind or de-seriptien whatsoever.
The documents and records sought in this request are as follows:
H UNTON & WILLI AM S
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August 29, 1986 Page 2 l
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l-All documents and recoris of any kind pertaining in any say to Nuclear Regu-l latory Commission audits, inspections or investigations of Transamerica Delaval, Inc. from 1974 to the present.
If the Nuclear Regulatory Commission decides to with-hold from our client and the public or to refrain from disclosing to our client and the public any documents or records responsive to this request, then we request that you furnish us with a detailed statement of the reasons for denying access to each document withheld and the following information regarding each such document or record in order to enable our client to consider whether to seek a judicial remedy under the Act:
(a) the date of each such docu-ment or record; (b) the identity of the author or authors and addressee or addressees of each such document or record; (c) the identity of all persons in the Nuclear Regulatory Commission or elsewhere who received copies of each such document or record; (d) the title of each such docu-ment or record; (e) the general nature and sub-ject matter of each such docunent or record; and (f) whether each such docunent or record contains any factual informa-j tion, including, but not limited to, dats, descriptions, and critiques of methodologies or statements of policy.
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x A'ugust 28, 1986 Page 3-o If' portions of-any responsive documents are deleted before' disclosure, we' request, pursuant to 10 CFR s_9.6,'3 statement in writing _ deseribing the _' scope 'and ' reasons for any deletion.
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It is not'necessary that the : documents be copied and l
delivered to us.-
'4e will be happy to review the--docuter.ts at L
the production' location.
Note that;LILCO is willing to pay any_ appropriate' copying costs or fees attributable"to this request and:needs.no prior. notice of the amount'of such fees 7 We respectfully request a response within' ten werking days of. receipt of this request pursuant to'5 U.S.C.
S l
- 552 ( a ) ( ti ) ( A ) and-10_CFR S 9.9.
Finally, I ask that you es11 me' if! you have any ques-tions regarding this request.
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DEC-16 6 33 DEC 2B ' PB 2 22
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'"if;'gjkt.iiid MEMORANDUM FOR:
Regional Acministretors FROM:
Williem J. Dircks Executive Director for Operations
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SUBJECT:
TD1 DIESEL GENERATORS Numerous problems heve occurred recently with emergency diesel generetors manufactured by Trensemerite Delevel, Inc. (TD1). These have' included fuel oil leeks et Grend Gulf, sen Dnofre, and Shoreten, problems with turbochergers et Grenc Gulf end Een Onofre, and broken end cretted crerikshefts et Sbcrehem.
In resp;nse ic these problems, the NRC has issued IE Information Notice E -5E end hes net with re:resen etives f rom Mississippi Power &-L st; ene, the Lonc Island Lighting Comperiy senere1 time! to understend the scope and cepin d the ptcblers.
Regien IV irispectors tese else tenducted severei vender inspections of the TDI plent end teve referrec some metters to the Office of investige-ions.
The NRC needs e central point for cerling with these technic 61 issue; beceuse TDI ciesel cer,eretors are or will be instelkd et H sepertte sites.
h is essentiel thet the HEC respDr.se 1C ID3 diesel problems be teChniCflIF COI'fEI*
reciere11v consistent, end integreted with on-pcing studies end resterch.
Accordingly, for eny TDI ciesel peneretor probien that you ?uege te require substantive NRC review or ection, I would like yDu to trensfer resper:sibility for NEC ection to NER.
Eeceuse we have l'-ic':s under.ey in inis ~ eree, *he fcilewir; puicelines aptly:
1 NER will eteluete end tete ep;rtpriete licensing ection es defined in its TDI Action Fien regerding plent. specific repeirs end nodifice*icns.
2.
Region IV will retein respor.sibility for any routine or speciel supocrting vender inspections cf TDto NE*, tenditions which indicete s
cither peneric or specific to perticuler TD1 diesel engirEb p
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c Freblems reieting te possible violations of the reguleticE ty t*e h 3.
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' Transfer: of. responsibility to NRR shell be mede by_memorendum to the~'
i Director Division of Licensing..NRR.
The memorendum should transmit es much information about the problem es'you initielly have eveilable...
You will, of_. course, reteincognirence over any potentiel plant-specific.
- er,f orcement. ections_ that mey be related to TDI diesel generators (r.g.,
0-i ftilure to-report, violation of Technical Specifications, etc.)
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Williem i Dircks Executive Director for Operr.tions
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UNITED STATES
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FEB 2 81984
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MEMORANDUM FOR:
Ben B. Hayes, Director l
Office of Investigations l
FROM:
Guy H. Cunningham, III i'
Executive Legal Director
~
SUBJECT:
SHOREHAM-TRANSAMERICA DELAVAL EMERGENCY DIESEL GENERATOR (EDG) CONTENTIONS ADVANCED BY SUFFOLK COUNTY I
As you may know, the above subject matter is pending before an Atomic Safety and Licensing Board (ASLB). At a Conference of Counsel held en February 24.,
1984, the Shoreham ASLB hearing tne EDG contentions made the following inquiry which it requested be forwarded to you:
I wou~id like the Staff to think about whether it can assist us procedurally and write a letter, something that we can get a copy of, a memo, whatever to 01 giving the posture of this
~
proceeding, telling them that the Board and the parties would like to know to the extent it can tell us without compromising whatever it is doing, I do not even know what to label what it is doing, whether it has begun an investigation or whether it is at the stage of considering whether or not to begin an investigation, whetner it can tell us what the subject is, if it cannot be specific, at least whether it l
relates to the dietels at Shoreham and what its schedule might be, and if you can send that kind of correspondence and ask them to either write. to you with a copy to us or you can forward the response to us. We would apareciate it if we could see something in writing one way or the other.
In order that this office might accommodate the Licensing Board and pSrties to the Shoreham proceeding, we would appreciate the assistance of the principal members of your staff working on these metters to assure that an appropriate report is prepared. Please have the person or persons you assign contact Mr. Edwin J. Reis of this office by March 2,1984. Should you er your staff require additional information concerning the Board's request, please do not hesitate to contact either Mr. Reis (27505),
RichardJ. Goddard (27417)orBernardM.Bordenick(295S6)ofmgstaff.
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UNITED STATES
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d NUCLEAR REGULATORY COMMISSION wAsmNcToN, p. c. 20sss l'-
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Y Docket No. 50-322
_@I,{d-d MEMORANDUM FOR: Ben Hayes, Director i
Office of Investigations FROM:
Harold R. Denton, Director Office of Nuclear Reactor Regulation
SUBJECT:
01 REVIEW OF TRANSAMERICA DELAVAL, INC. (TDI) ACTIVITIES (01 CASE #5-84-008)
On October 15, 1985, I forwarded to you a copy of the suit filed by the Long Island Lighting Company (LILCo) against TDI regarding the EDGs at Shoreham.
LILCo has continued to keep the staff informed of the progress of this case, and has forwarded to us copies of all of the significant pleadings.
Enclosed is a copy of a response by LILCo tr a TDI motior, to dismiss the case.
It contains many strong allegations that TDi deliberately nisled both LILCo and the NRC, starting in 1975 and continuing until after the EDG crankshaft failure in April, 1983.
It includes an affidavit of a former TDI employee who c!61ms to have personal knowledge of misleading acts by TDI. I expect that as discovery in this case continues this summer, more information of this type may become available.
In addition, if and when the case comes to trial, TDI is expected to allege in its defense that Stone and Webster, the Shoreham AE, was negligent or incompetent in performing its duties.
.My staff will continue to provide you with this material as we receive it.
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.n b 0ffice of Nuclear Reactor Regulation
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Enclosure:
As stated
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o.. evo.a6 o..o.,.6-8466 Mr.. Ralph Caruso Shoreham. Project Manager United States Nuclear Regulatory Commission Staff 7920 Norfolk Avenue bethesda, Maryland 20014 Long Island Lighting Company v. Transamerica Delaval, Inc.
Dear Ralphi Enclosed are copies of Long Island Lighting Company's Response to Motions to Dismiss and Stay Discovery.
The affidavits.and appendices filed with the Response are.not enclosed.
They are described in the Response.
If you want copies of them, however, please let me know.
Si your
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i'i Rdbert M. Rol e 177/6086 Enclosures put
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t UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
)
Long Island Lighting Company,
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a New York Public Service Corporation, )
)
Plaintiff,
)
)
v.
)
Civil Action No.
)
85 Civ. 6892 (GLG)
)
Transamerica Delaval, Inc.,
)
a Delaware Corporation,
)
)
Defendant.
)
)
RESPONSE OF LONG ISLAND LIGHTING COMPANY TO MOTIONS TO DISMISS AND TO STAY DISCOVERY Hunton & Williams 707 East Main Street P. O. Box 1535 Richmond, VA 23212~
1 Hannover Square Fayetteville Street Mall P. O. Box 109 Raleigh, NC 26701 100 Park Avenue New York, NY 10171 Attorneys For Long Island Lighting Company
1.
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK 1
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Long Island Lighting Company,
)
a New York Public Service Corporation, )
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Plaintiff,
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)
j.. g.7..4.ry) ptCivil Action No.
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85 Civ. 6892 (GLG)
)
l Transamerica Delaval, Inc.,
)
a Delaware Corporation,
)
)
Defendant.
)
)
RESP 0NSE OF LONG ISLAND LIGHTING COMPANY TO MOTIONS TO DISMISS AND TO STAY DISCOVERY
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a Hunton & Williams 707 East Main Street
.s P. O. Box 1535 Richmond, VA 23212 g
1 Hannover Square r
Fayetteville Street Mall.
P. O. Box 109 Raleigh, NC 26701 100 Park Avenue d
New York, NY 10171 Attorneys For Long Island Lighting Company l
TABLE OF CONTENTS
', Pace TABLE OF AUTHORITIES.
I
- o PRELIMINARY STATEMENT.
1 STATEMENT OF FACTS 6
o A.
The Complaint-.
7 B.
Additional Facts 15 1.
Contract Terms Not Disclosed by TDI 15 2.
Additional' Evidence Of Fraud.
19 ARGUMENT
'22 I.
LILCO'S LIMITED DELAY CLAIM IS NOT BARRED BY ITS UNSUCCESSFULLY ASSERTED POSITION ON A DIFFERENT ISSUE IN THE PSC'S RATEMAKING PROCEEDINGS.
23 A.
LILCO's Delay Claim Differs From The Issue Before The PSC 23 B.
Judicial Estoppel Does Not Preclude LILCO From Claiming Delay Damages.
26 C.
LILCO's PSC Testimony Is Not Conclusise On The Issue Of Delay Dan ages.
30 D.
The ASLB Findings Do Not Collaterally Estop LILCO's Delay Claim 30 II.
LILCO'S CLAIMS ARE TIMELY.
31 A.
The PSC Decision Does Not Preclude Equitable Estoppel of TDI From Reliance On Statutes of Limitations.
33
Pace 1.
The PEC's Legislative Proceedings.Have No Preclusive Effect 35 2.
Even If. Judicial, The PSC Decision Did Not Determine Issues Dispositive"Here 38 1B.
'LILCO's Contract'And Breach Of Warranty Claims Are Timely 43 1.
TDI's Warranties Of Future Performance Were Not Breached Until The Diesels. Failed.
44 2.
There Was No Tender-Of Delivery Until The Emergency Diesels Were Installed And Tested....-....'.
48 3.
Breach of TDI's Promise To
-Repair Or Repla:e Did Not Occur Until TDI Repuf,iated.
50 C.
LILCO's Negligence And Strict Liability Claims Are Timely.
51 1.
Count Two Asserts A Claim For Negligent Failure'To Perform Contractual Services.
51 2.
The Strict Liability And Negligence Claims In Counts Ten And Eleven Accrued When The Diesel's Failed.
54 D.
LILCO's Fraud And-Failure To Warn Claims Are Timely.
57 1.
LILCO's Failure To Warn Claim Accrued When The Diesels Failed.
57 1
2.
The Fraud Claim Accrued As Late As 1983 And Was Not Discovered Until Then 58 E.
LILCO's RICO Claim Is Timely.
61
'l (ii) 1
i Pace III. LILCO HAS STATED A RICO CAUSE OF ACTION.
62 A.-
.The Complaint-Alleges A Clear, Identifiable " Pattern Of l
Racketeering" And Gives Adequate Notice Of The Facts Supporting The RICO Claim.
64 1.
The Complaint Alleges A Pattern Of Racketeering j
Activity.
64 2.
The Complaint Ple&de The Predicate Acts With Sufficient Particularity.
73 B.
TDI, Through Its Officers And Agents, Conducted The Fraudulent Scheme That Injured.LILCO.
77 1.
A. Corporate " Enterprise" Can'Be Sued As The " Person" If The Corporation Conducts Its Affairs Through A Pattern Of Racketeering Activity.
77 2.
Alternatively, Transamerica Corporation Is The Enterprise.
81 C.-
The Ccmplaint Identifies The Enterprise In Which TDI Invested Racketeering Profits 83 IV.
LILCO MAS.A SEPARATE CLAIM FOR COMMON LAW FRAUD.
85 A.
Brick Applies Only To Prevent Circumvention Of The Statute Of Limitations.
88 B.
TDI's Fraud Was Extraneous To The Contract 92 V.
LILCO IS ENTITLED TO RECOVER DAMAGES UNDER ITS NEGLIGENCE AND STRICT LIABILITY CLAIMS.
95 (iii)
Pace VI.
THE PURPORTED CONTRACTUAL LIMITATION OF LIABILITY DOES NOT BAR LILCO'S RECOVERY OF DAMAGES.
104 A.
The Damages Sought By LILCO Are Not Consequential.
105 B.
TDI's Intentional Wrongdoing And Gross Negligence Entitle LILCO To Recover Consequential Damages.
106 C.
The Consequential Damage Exclusion Also Does Not Apply To Negligence And Strict Liability.....
109 D.
The Other Contract Remedies Have Failed Of Their Essential Purpose.
112 VII. DISCOVERY SHOULD NOT BE STAYED.
114~
CONCLUSION 115 (iv) m
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TABLE OF AUTHORITIES Page Allen v.
Zurich Insurance Co., 667 F.2d 1162 Cir. 1982)....-...........................(4th 26, 27 E.
Allington v.
Carpenter, 619 F. Su 1985)........................pp. 474 (C.D. Cal.
.......................... 70 American Elec. Power Co. v. Westinghouse Elec.
Corp., 418 F. Supp.'435 (S.D.N.Y. 1976) 107, 109, 111,.113 Angerosa v. White'Co., 248 A.D. 425, 290 N.Y.S. 204 (4th Dept. 1936), aff'd, 275 N.Y. 524 1
325 (1937)...........................,..
1 N.E.2d 41 Applications Inc. v. Hewlett-Packard Co., 501 F.
Supp. 129.(S.D.N.Y.
1980).............................
107 Arizona v. Shamrock Foods Co., 729 F.2d 1208 (9th Cir. 1984), cert. denied, 105 S.Ct. 980 (1985).........
29 Baratta v. Kozlowski, 94 A.D.2d 454, 464 N.Y.S.2d 803 (2d Dept.
1983)..............
..................... 91 Benjamin Center v. Hampton Affiliates, Inc., No.
381, slip op. at 2 (N.Y.Ct. App. Oct. 22, 1985).........
40 Bennett v. Berg,-710 F.2d 1361 (8th Cir. 1983),
cert. denied, 104 S.Ct. 527 (1983).................
80, 82 Bennett v. United States Trust Co. of N.Y., 770 F.2d 308 (2d Cir.
1985).................................
79, 80 Beth Israel Medical Center v.
Smith, 576 F. Su 1061 (S.D.N.Y. 1983)......................pp.
68, 73, 74 Bowling v.
Founders Title Co., 773 F.2d 1175 Cir. 1985)................................(11th 61
-I-i 1
7-
.1 Page l
I Brick v. Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d 4
902.(1937)......................................
87-92, 95 Bulk oil-(ZUG) A.G. v.
Sun Co., 583 F.Supp 1134 4
(S.D.N.Y. 1983), _aff'd, 742 F.2d 1431 2d. Cir~
l
'1984).................................(........
81 l0 Butler v. Pittway' Corp., No. 85-7092, slip op. (2d
'l Cir. Aug. 2, 1985)................................
99, 100 Capital ~ Telephone Co-
- v. Pattersonville Telephene Co.,.56 N.Y.2d 11, 17, 451 N.Y.S.2d 11, 436 N.E.2d 461 (1982)......................................
38 Cavuga Harvester Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5, 465 N.Y.S.2d 606 (4th Dept.
1983)......
112, 113 Chemical Bank v. Aetna Ins.
Co.,
99 Misc.2d, 803, 417 N.Y.S.2d 382 (1979)................................
27 City of New York v.
Pullman Inc., 662 F.2d 910 (2d-Cir. 1981), cert., denied, 454 U.S.
1164 (1982).........
49 Clark v.
International Harvester Co.,
99 Idaho 326, 581.P.2d 764 (1978)).................................,
112 Cloud v. Kit Manufacturing Co., 563 P.2d 248 1977)....................................(Alaska 99 Conan Properties, Inc.
v.
Mattel, Inc., 619 F.
Supp.
1157 (S.D.N.Y.
1985)...............................
69, 84 Conley v.
Gibson, 355 U.S. 41 (1957)................
3, 23, 64 Consolidated Edison Co.
- v. Westinghouse Electric Corp., 567 F.
Supp.'358 (SrD.N.Y. 1983), motion to dismiss denied, 594 F. Supp. 698 (S.D.N.Y.
1984)....................................
53, 96 Consumer Protection Bd. v..Public Service Comm'n, 97 A.D.2d 320, 471 N.Y.S.2d 332 (3d Dept.
1983).......
29, 36 Corva v. United States Automobile Associat (on, 108 A.D.2d 631, 485 N.Y.S.2d 264 (1st Dept. 1985)..........
40 II -
i l
I Page i
l Cover v. Cohen, 61 N.Y.2d 261, 473 N.Y.S.2d 37S, 461 N.E.2d 864 (1984)..................................... 92 I
i Credit & Finance Corp. v. Warner & Swasey Co.,
638 F.2d 563 (2d Cir.
1981)................................
73 Den Norske Ameriekalinie Actiesselskabet v.
Sun Printing & Publishing Association, 226 N.Y.
1, 122 N.E. 463 (1919)..<................................
106 Durante Bros. & Sons v.
Flushing Nat'l Bank, 755 F.2d 239 (2d Cir.), cert. denied 105 S.Ct. 3530 (1985)..........................,.......................
61 East River Stes:nship Corp. v. Delaval Turbine, Inc.,
752 F.2d 903 (3d Cir. 1985), cert. granted sub nom, East River Steamship Corp. v.
Transamerica Delaval, Inc., 106 S.Ct. 56 (1985)...........
97, 102, 103 Edwards v. Aetna Life Insurance Co., 690 F.2d 595 (6th Cir.
1982).........................,..........
..29 Environmental Concern, Inc. v.
Larchwood Construction Co.,
101 A.D.2d 591, 476 N.Y.S.2d 175 (2d Dept.
1984)....................................
26 Farr v. Nev=an, 14 N.Y.2d 183, 250 N.Y.S.2d 272, 199 N.E.2d 369 (1964);..................................... 40 FMC Finance Corp. v. Murphree, 632 F.2d 413 Cir. 1980)..............................(5th 78 Freyne v.
Xerox Corp., 98 A.D.2d 965, 470 N.Y.S.2d 187 (4th Dept.
1983)..............................
92, 95 Fustok v.
Conticommodity Serv., Inc., 618 F. Su 1076 (S.D.N.Y. 1985).......................pp.
61 Gemini Typographers, Inc. v. Mergenthaler Linotype Co.,
48 A.D.2d 637, 368 N.Y.S.2d 210 1975)................................(1st Dept.
l 48 l
l Clus v.
Brooklyn Eastern District Terminal, 359 U.S.
231 (1959).............................................
31 III -
l l
1 u____
I
i.
Page Creat American Indemnity Co. v.
Lapp Insulator Co.,
282 A.D. 545, 125 N.Y.S.2d 147 (4th Dept.
1953).......
55 Gross v.
Diversified Mortgage Investors, 431 F.
Supp. 1080 (S.D.N.Y. 1977), aff'd mem., 636 F.2d 1201 (2d Cir.
1980)....................................
75 Gross v.
Sweet, 49 N.Y.2d 102, 424 N.Y.S.2d 365, 400 N.E.2d 306 (1979).....................................
110 Guerrero v.
Katzen, 571 F. Supp. 714 (D.D.C.
1983)........
84 H. Novinson & Co. v. City of New York, 53 A.D.2d 831, 385 N.Y.S.2d 317 (1st Dept.
1976).............
88, 89 Hareco, Inc. v. American National Bank & Trust Co.
of Chicago, 747 F.2d 384 (7th Cir. 1984), aff'd on other grounds, 105 S.Ct. 3291 (1985)........
74, 81, 85 Hellenic Lines, Ltd. v. O'Hearn, 523 F. Supp. 244 (S.D.N.Y.
1981)........................................ 76, Hudson v. LaRouche, 579 F.
Supp. 623 (S.D.N.Y. 1983)... 76, 80 I.C.C. Metals, Inc. v. Municipal Warehouse Co., 50 N.Y.2d 657, 431 N.Y.S.2d 372, 376, 409 N.E.2d 849 (1980)..................................
107, 108, 109 ICI Australia Ltd. v. Elliott Overseas Co., 551 F.
Supp. 265 (D.N.J.
1982)...............................
100 In re American Cyanamid Co. v. Public Service Comm'n, 73 A.D.2d 985, 423 N.Y.S.2d 561, 563 Dept. 1980)..................................(3d 38 In re New York Telephone Co. v. Public Service Commission, 64 A.D.2d 232, 410 N.Y.S.2d 124 (3d Dept. 1978), mot. for IV. to app. den., 46 N.Y.2d 710, 414 N.Y.S.2d 1028, 387 N.E.2d 1221 (1979)................................................
36 International Business Machines Corp. v. Catamere Enterprises, Inc., 548 F.2d 1065 (1st Cir.
1976), cert. denied, 431 U.S. 960 (1977) (decid-ed under New York 1aw)................................
107 1
1
- IV -
)
l i
1 1
1 Page International Tel. and Tel. Corp. v. Americar. Tel.
and Tel.
Co.,
444 F.
Supp. 1148 (S.D N.Y.
1980)........
37 John R. Dudley Construction, Inc. v. Drott Manufacturing Co.,
66 A.D.2d 368, 412 N.Y.S.2d l
512 (4th Dept.
1979)...................................
99 Johnson v. California, 69 Cal.2d 782, 447 P.2d 352 73 Cal.Rptr. 240 (1968)............................
94, 95 Jordan v. Ford Motor Co.,
73 A.D.2d 422, 426 N.Y.S.2d 359 (4th Dept.
1980)....................e 31 Kalisch-Jarche, Inc.
v.
City of New York, 58 N.Y.2d 377, 461 N.Y.S.2d 746, 448 N.E.2d 413 (1983)..... 107, 109 Kaufman v. Chase Manhattan Bank, N.A.,
581 F. Supp.
350 (S.D.N.Y.
1984)....................................
80 Kent v. New York City Dept. of Sanitation, 549 F.
Supp. 570 (S.D.N.Y. 1982), aff'd, 722 F,2d 728 (2d Cir.1983),
cert. denied, 464 U.S.
941 (1983)................................................. 35 Kerr v. Koemm, 557 F. Supp. 283 (S.D.N.Y.
1983)............
93 Klock v.
Lehman Bros. Kuhn Loeb, 584 F.
Supp. 210 (S.D.N.Y.
1984)........................................
91 Konstantinidis v.
Chen, 626 F.2d 933, 939 (D.C.
Cir.
1980)..............................................
28 Kredietbank, N.V. v.
Joyce Morris, Inc., No.84-1903, slip. op.
(D.N.J. Oct. 11, 1985).......................
69 Kremer v. Chemical Constr., 456 U.S. 461 (1982),
reh'q denied, 458 U.S.
1133 (1982).....................
35 Lindsay v. Ortho Pharmaceutical Corp., 481 F. Supp.
314 (E.D.N.Y. 1979), rev'd on other grounds, 637 F.2d 87 (2d Cir.
1980).................................
57 Lumbard v. Maglia, Inc., 621 F. Supp. 1529 (S.D.N.Y.
1985)..................................................
84
-V-
l-I i
'l Page l
l Martin v. Edwards Laboratories, 60:N.Y.2d 417, 469 N.Y.S.2d.923, 457 N.E.2d 1150.(1983)...................
56 Mauriber-v. Shearson/American Express, Inc., 546 F.
Supp. 391 (S.D.N.Y.
1982)..............................
76 Milgard Tempering, Inc. v.
Selas Corp. of America, 761.F.2d 553 (9th Cir.
1985)..........................~113 Miller v.' Columbia Records, 70 Misc.2d 517, 415 1
1 N.Y.S.2d 869 (1st Dept.
1979)......................
92, 95-L Miller v. Volk & Huxley, Inc., 44 A.D.2d 810, ~
355~
N.Y.S.2d 605.(1st Dept.
1974)......................
92, 95 Mittasch v. Seal Lock Burial Vault, Inc., 42 A.D.2d 573, 344-N.Y.S.2d 101 (2d Dept.
1973)..................
46 Bank'of'Waukegan, 615 T. Supp. 836 Morgan v. 1985)...............................(N.D.
Ill.
70 Moss v. Morgan Stanley Inc., 719 F.2d 5 (2d Cir.
1983), cert. denied, 104 S.Ct. 1280 (1984).............
76 New Castle Cot 3ty Airport,Comm. v. Civil Aeronautics-Bd.,
371 F.2d 733 (D.C. Cir. 1966), cert.
denied, 387 U.S. 930 (1967)............................ 38 New York Seven-Up Bottling'Co. v. Dow Chemical Co.,
96 A.D.2d 1051, 466 N.Y.S.2d 478 (2d Dept.
1983), aff'd,- 61-N.Y.2d 828, 473 N.Y.S.2d 973, 462 N.E.2d 150 (1984)..................................
55 Northern Trust Bank /O' Hare, N.A. v.
Inryeo, Inc.,
615 F.
Supp. 828 (N.D. Ill.
1985)..................
71, 72 O'Brien v. Grumman Corp., 475 F. Supp. 284 (S.D.N.Y.
1979).................................................
111 Ottley v. Sheepshead Nursing Home, 607 F. Supp. 952, 955 (S.D.N.Y.
1985).................................... 35 Parzek v. New England Log Homes, Inc., 92 A.D.2d 954, 460 N.Y.S.2d 698 (3d Dept.
1983).................
46
- VI -
Page Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir.
1981)........
98, 99, 101, 103 Perry v.
A. H. Robins Co.,
560 F.Supp 834 1983).................................(N.D.N.Y.
31 Price Brothers v. Olin Construction, Inc., 528 F.
Supp. 716 (W.D.N.Y.
1981).............................
107 Professional Assets Management, Inc. v.
Penn Square
- Bank, N.A.,
616 F.
Supp. 1418 (W.D. Okla.
1985)........
71 Queensbury Union Free School District v. Jim Walter Corp., 82 A.D.2d 204, 442 N.Y.S.2d 650 (3rd Dept. 1981), appeal
- dismissed, 55 N.Y.2d 745, 447 N.Y.S.2d 157, 431 N.E.2d 642 (1981)................
55 Rae v. Union Bank, 725 F.2d 478 (9th Cir. 1984)............
80 Rochester Welding Supply Corp.
v.
Burroughs Corp.,
78 A.D.2d 983, 433 N.Y.S.2d 888 (4th Dept.
1980).......
46 Rojas v.
First Bank National Association, 613 F.
Supp. 968 (E.D.N.Y.
1985)..........................
70, 71 Renson Corp. v.
Liquifin Aktiengesellschaft
- Liquigas, S.p.A.,
375 F.
Supp. 628 (S.D.N.Y.
1974), app. dismissed, 508 F.2d 399 (2d Cir.
1974)..................................................
28 Roth v. McAllister Bros., 316 F.2d 143 (2d Cir.
1963).................................................. 28 Royal Indemnity Co. v. Westinghouse Elec. Corp., 385 F.
Supp. 520 (S.D.N.Y.
1974)..........................
109 RRX Industries, Inc. v. Lab-Con Inc., 772 F.2d 543 (9th Cir.
1985).......................................
113 Ryan v. New York Telephone Co.,
62 N.Y.2d 494, 478 N.Y.S.2d 823, 467 N.E.2d 487 (1984)....................
35 Schiavone Construction Co. v. Elgood Mayo Corp., 56 N.Y.2d 667, 451 N.Y.S.2d 720, 436 N.E.2d 1322 (1982).......................................
96, 100, 101
- VII -
Page
'Schumacher v. Richards Shear Co.,
59 N.Y.2d 239, 246-47, 464 N.Y.S.2d 437, 441, 451 N.E. 2d 195 (1983).................................................
93 Schwartz v. Heyden Newport Chemical Corp., 12 N.Y.2d 212, 216-17, 237 N.Y.S.2d-714, 717, ISS N.E.2d 142 (1963), modified, 12 N.Y.2d 1073, 239 N.Y.S.2d 896, 190 N.E.2d 253 (1963), cert.
I denied, 374 U.S. 808 (1963)............................
56 Sears, Roebuck & Co. v. Enco Associates, Inc., 43 N.Y.2d 389, 401 N.Y.S.2d 767, 768-69, 372 N.E.2d 555L/1977).............................................
53
- Sedima, S.P.R.L. v.
Imrex Co.,
105 S.Ct. 3275 (1985)... passim Seelv v. White Motor Co.,
63 Cal.2d 9, 403 P.2d 145, 45 Cal.Rptr. 17 (1965).........................
97, 98, 99 Serig v. South Cook County Serv. Corp., 581 F. Supp.
575 (N.D.Ill.
1984).................................... 76, Seville Industrial Machinery Corp. v.
Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.
1984), cert. denied, 105 S.Ct. 1179 (1985).............
74 Shaitelman v.
Phoenix Mutual Life Insurance Co.,
517 F.
Supp. 21.(S.D.N.Y.
1980)................
87, 88, 90, 92 i
Shapiro v.
Long Island Lighting Co.,
71 A.D.2d 671, 418 N.Y.S.2d 948 (2d Dept.
1979).......................
50 Sharon Steel Corp. v.
Lakeshore, Inc., 753 F.2d 851, j
855 (loth Cir.
1985)..................................
100 j
Sherkate Sahami Khass Rapel v.-Jahn & Son, 531 F.
Supp.
1048 (S.D.N.Y. 1982), aff'd, 701 F.2d
)
1049 (2d Cir.
1983)................................
92, 95 i
Southern Cal. Edison Co. v. Westinghouse Elec.
Corp., No. CV-83-1985/6, slip op. (C.D. Cal.
July 17, 1984).........................................
29 Spang-Industries v. Aetna Casualty and Surety Co.,
512 F.2d 365 (2d Cir.
1975)........................... 106 i
- VIII -
1 1
I i
Page I
Spearmen v._ Times Square Stores Corp., 96 A.D.2d 552, 465 N.Y.S.2d 230 (2d Dept.
1983)...................
5 Sperling v. United States, 692 F.2d 223 (2d Cir.
1982) (Van Graafe11and, J.,
concurring), cert.
denied, 462 U.S.
1131 (1983).......................
27, 28 Stell Manufacturing Corp. v. Century Industries, 15 A.D.2d 87, 221 N.Y.S.2d 528 (1st Dept. 1961).......... 88 Tarasoff v.
Regents of University of California, 17 Cal.3d 425, 551 P.2d 334, 131 Cal.Rptr. 14 (1976)............................................
94, 95 Todd v. Oppenheimer & Co.. 78 F.R.D. 415 (S.D.N.Y.
1978).............
.................................... 75 Trak Microcomputer Corp. v. Wearne Brothers, No.
84-C-7970, slip. op. (N.D. Ill. Oct. 25, 1985)..... 71, 73 Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737 (2d Cir. 1979), aff'd after remand, 651 F.2d 132 (2d Cir.
1981)............
47, 55, 60, 91, 92, 95 U.S. Home Corp. v. George W.
Kennedy Construction Co.,
565 F.
Supp. 67 (N.D.Ill.
1983)..................
100 United States v. Bedford Assoc., 713 F.2d 895 (2d Cir.
1983).............................................
28 Unite'd States v. Chovanee, 467 F.
Supp. 41 (S.D.N.Y.
1979)..................................................
67 United States v. Field, 432 F.
Supp. 55 (S.D.N.Y.
1977), aff'd, 578 F.2d 1371 (2d Cir. 1978) cert.
dismissed, 439 U.S. 801 (1978).....................
67, 83 United States v. Hartley, 678 F.2d 961 (lith Cir.
1982), cert. denied, 459 U.S.
1183 (1983).......
78 United States v. Mandel, 591 F.2d 1347 (4th Cir.
1978), cert. denied, 445 U.S. 961 (1980)...............
82 United States v.
Scotto, 642 F.2d 47 (2d Cir. 1980),
cert. denied, 452 U.S.
961 (1981)..................
82, 84 IX -
= _ _ _
0 l
L Page United States v. Stofsky, 409 F. Supp. 609 (S.D.N.Y.
1973), aff'd, 527 F.2d 237 (2d Cir.
1975)..........
66, 83
-United' States v. Utah Construction & Mining Co., 284
- U.S.
394.(1966).........................................
35 United States v. Weisman, 624 F.2d 1118 (2d Cir.
.1980), cert. denied. 449 U.S. 871 (1980)...............
67 United States v. Witherspoon, 581 F.2d 595 (7th Cir.
1978).................................................. 68 Unitron Graphics, Inc. v. Mergenthaler Linotype Co.,
75 A.D.2d 783, 428 N.Y.S.2d 243 (1st Dept.
1980)......
50 Universal City Studios, Inc. v. Nintendo Co.,
578 F.
~
Supp.
911-(S.D.N.Y.), a 19 8 3 ).............,f f ' d, 746 F.2d 112 (2d Cir.
28 Universal Fil:n Exchanges, Inc. v. Walter Reade, Inc., 37 F.R.D. 4 (S.D.N.Y.
1965).......................
5 Victorson v. Bock Laundry Machine Co., 37 N.Y.2d 395, 373 N.Y.S.2d 39, 335 N.E.2d 275 (1975)........
60, 98 Video Corp. of America v.
Frederick Flatto Assoc.,
58 N.Y.2d 1026, 462 N.Y.S.2d 439, 448 N.E.2d 1350 (1983)........................................
54, 91 Waters v. Massey-Ferguson, Inc., No. 84-1882, slip op. (4th Cir. Oct. 28, 1985)...........................
51 Waterside Ocean-Navigation Co. v.
International Navigation Ltd., 737 F.2d 150 (2d Cir.
1984)...........
28 Willard Van Dyke Productions, Inc. v. Eastman Kodak Co.,
12 N.Y.2d 301, 239 N.Y.S.2d 337, 189 N.E.2d 693 (1963)................................. 110
~
Wiltshire v. A.H. Robins Co..
88 A.D.2d 1097, 453 N.Y.S.2d 72 (3d Dept.
1982)............................ 47 Zuckerman v. City of.New York, 49 N.Y.2d 557, 427 N.Y.S.2d 595, 404 N.E.2d 718 (1980).....................
5
-X-1
i J
Administrative Cases i
Page D
Long Island Lfghting Co. (Shoreham Nuclear Power Station, Unit 1), LEP-83-57, 18 NRC 445 (1983)..........
24, 30 Long Island Lighting-Co. (Phasa II Proceeding), Case 27563, opinion and. Order Determining Prudent Costs. No. 85-23, slip op..(New York Public Service Co 1985)...............................mmission, December 16, 1
............... passim i
Long Island Lighting Co. (Shoreham Nuclear Pcwer Station, Unit 1), LSP-84-45, 20 NRC 1343 (1984)................
25 Long Island Lighting Co. (Shoreham Nuclear Power Station, Unit 1), LBP-85-18, 21 NRC 1637, (1985)...............
115 Federal Statutes, Regulations and Rules la U.S.C.
$ 1962 (1982)................................
passim 18 U.S.C.
5 3575 (1982)....................................
66 10 C.F.R Part 2".......................................
86, 93 10 C.F.R7 5 21.3(a)(1).....................................
93-10 C.F.R S 50.47......................................
24, 25 10 C.F.R. 5 50.57(c)......................................
25 10 C.F.R. Part 50, Appendir A, General Design Criterion 17. 93
- XI -
I' ace 1
\\
l
. Federal Rules of Civil Procedure
-Rule 8........................................
73, 75, 76, 84 L.
-Rule 9(b).................................
65,'73, 74, 75, 76 L
Rule 12(b)(6)...................................
3, 4, 64,.104 Rule 56(e)..................................................
4 State Statutes-Code of Professional-Responsibility, DR 5-101(B)............
5 New York Civil Practice, Law & Rules'(McKinney 19.72, Supp.
1986):
$2O3(f)...................................................
58 6213(2)....................................................
54
$213(8)................................................
58, 61 5214(2)..................................
61 6214(4)...................................................
54 Uniform Commerical Code (McKinney 1964):
$2-503(1)...................................................
48
$2-719(2).................................................
112 52-725(2)..............................................
44, 48 California Business & Professional Code $ 6775(c)..........
94 Miscellaneous Authorities Blakey, The RICO Civil Fraud Action in Context:
Reflections on Bennett v.
Berg, 58 Notre Dame L. Rev. 237 (1982)... 77
- XII -
1 i
a
Pace Prosser, Torts [4th ed.1 s 92..............................
60 l
Restatement.(Second) of Torts 5 388 (1965, Supp.
1984)..... 93 18 C. Wright, A. Miller and E. Cooper, Federal Practice and Procedure, 5 4477 at 787 (1981)......-.................. 27 10A C. Wright, A. Miller and M. Kane, Federal Practice and Procedure, 6 2738 at 495 (1983).........................
5 O
- J 1
1 I
1 I
- XIII -
b i
f
' UNITED' STATES DISTRICT COURT H
SOUTHERN DISTRICT OF NEW YORK' l
.................................x LONG: ISLAND LIGHTING COMPANY,
.a New. York Public Service Corporation, Civil Action No.
85 CIV 6892 (GLG)
' Plaintiff,
-v.
7RANSAMERICA DELAVAL, INC.,
a Delaware Corporation, Defendant.
x RESPONSE OF LONG ISLAND LIGHTING COMPANY TO MOTIONS TO DISMISS AND TO STAY DISCOVERY PRELIMINARY STATEMENT This action arises from the spectacular failure of three emergency diesel generators at the Shoreham Nuclear Power
' Station (Shoreham).
Such emergency diesel generators are required by the Nuclear Regulatory Commission (NRC) to power systems necessary for safe shutdown of the plant in certain instances.
They are vital safety equipment and must function reliably when needed to avoid a serious nuclear accident.
Because such failures resulted from numerous instances of intentional wrongdoing, other torts and breaches of contract by Transamerica Delaval Inc. (TDI), the supplier of the emergency
~ diesels, Long Island Lighting Company (LILCO) instituted this action.
Knowing the highly regulated nature of the nuclear f
i 1
l
s.
industry and the' vital safety function of emergency power sources, TDI contracted to provide three emergency diesels and related services to Shoreham.
Before shipment of the diesels to Shoreham, however, TDI discovered serious defects in them.
It learned that the crankshafts were undersized, would likely fail'under predicted torsional stresses and did not faa__.
J
- t e
N applicable contract h ode and NRC requirements j TDI nevertheless shippeT the diesels without any warning of this
' serious defect.
While the diesels were in storage at Shoreham I
i and before their insta11'ation, TDI learned of numerous other potential problems including, but not limited to, the possibility of casting defects which could_and did cause the
[
blocks on the emergency diesels to crack.
{
r-s Though it knew of these actual an
.ential defects, TDI never advised LILCO of the.
o the contrary, TDI repeatedly misrepresented the quality and condition of the diesels and concealed material information about their r
potential failures.
Despite NRC, common law and contract g - _
duties to provide such information, TDI intentionally failed to do so.
Despite repeated dealings with LILCO in the testing, e
l installation, inspection and start-up of the diesels, TDI
)
remained silent or provided deliberately misleading information.
Indeed, TDI's deception was part of a larger scheme to withhold safety information from its nuclear 2
u
t customers in order to escape difficulties with the NRC and
[."..
potential liability to the nuclear customers of-TDI's. products.
~
Inevitably, the Shoreham emergency diesels failed.
In' addition to scores of smaller pr.sbicms, in August 1983 the massive crankshaft of one diesel broke in two pieces; the other two crankshafts cracked.
Alarming block cracking'was encountered and one of the blocks had to be replaced.
As a result of these failures at a time critical to the licensing of Shoreham, LILCO incurred enormous damages to analyze the cause of the. failures, to attempt to repair the diesels, to replace them with other emergency power sources, to retest the diesels and to license all of its potential power sources, as well as I
other damages.
Accordingly, LILCO has alleged TDI's fraud, s
- -~~-
1 violation of RICO,, failure to warn, negligent provision of
,4-t
_h
= ~ ~..- _.., _ J contractual services, negligence in design, manufacture, inspection and testing, strict liability and numerous breaches of contract.
In response, TDI has moved to dismiss the Complaint l
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Yet, TDI does not show that "it appears beyond 7
doubt that [LILCO) can prove no set of facts in support of
'[its) claims which would entitle [it) to relief."
Conley v.
Gibson, 355 U.S. 41, 45-6 (1957).
Instead, TDI far exceeds the permissible scope of Rule 12(b)(6).
TDI ignores and
{ L-_-_________--.
,1
[
L mischaracterizes allegations in the Complaint.
It improperly relies on facts beyond the Complaint.
TDI even miscites applicable authority.
Based on the Complaint - the only consideration properly before the Court - TDI's Pule'12(b)(6) motion:should be denied.
LILCO does not invite the Court to look beyond the Complaint.
Yet, this Response shows that even an attempt to convert TDI's motion to one for summary judgment under Rule 56 would be procedurally improper and still result in denial of 1
the motion because numerous material factual disputes exist.
A Rule 12(b)(6) motion may be converted to a motion for summary
~
judgment only if Rule 56 is followed.
Rule 56, in turn, requires reliance on admissible evidence in the record.
- Yet, there is no record here beside the Complaint.
TDI has not produced proper affidavits allowing the Court to consider matters not pleaded.1/
l 1/
In an attempt to escape the pleadings and the Federal Rules of Civil Procedure, TDI has resorted to an improper i
l Affidavit by one of its attorneys.
The M111 stein Affidavit contains no admissible evidence, cannot support a motion for summary judgment and is not probative of any matter now before the Court.
It should be disregarded.
Rule 56(e) requires that " affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein.
Yet the Affidavit pervasively contains opinion and argument rather than facts.
Moreover, M111 stein's Affidavit evidences (Continued) 4 I
i
t Even the improper and insufficient Millstein Affidavit fails to demonstrate the existence of undisputed facts.
Instead, that affidavit and the Memorandum of Law in Support of Defendant's Motion to Dismiss (TDI Brief) reflect the very attitude that spewned this litigation.
Both fail to advise the Court of significant facts and legal authority.
For example, TDI argues that LILCO's contract claims are not timely and provides the Court with selected contract documents.
Yet neither the M111 stein Affidavit nor the TDI Brief mentions explicit contract language agreeing to extend (Continued From Previous Page) no personal knowledge of any of the facts contained in it.
Instead, he bases much of his affidavit on newspaper krticles.
Indeed, if Millstein had personal knowledge about these matters and was competent to testify, he should not be appearing in the case as counsel.
New York Code of Professional Responsibility, DR 5-101(B).
Nor are the documents Millstein proffers admissible.
The information he has gleaned from newspaper articles is, clearly hearsay.
The limited contract documents are on their face incomplete.
" Attorneys' affidavits are governed by the same rules that apply to other affidavits under Rule 56." 10A C.
- Wright, A. Miller and M. Kane, Federal Practice and Procedure, i 2738 at 495 (1983).
As New York's courts have long recognized "[i]t is.
. well settled that an opposing affidavit by an attorney without personal knowledge of the facts has absolutely no probativa value and should be disregarded.
Indeed, it is insufficient as a matter of law."
Spearmen v.
Times Square Stores Corp., 96 A.D.2d 552, 465 N.Y.S.2d 230, 232 (2d Dept.
1983).- See, e.g., Universal Film Exchanges, Inc. v. Walter Reade, Inc., 37 F.R.D.
4, 6 (S.D.N.Y. 1965);
Zuckerman v.
City of New York, 49 N.Y.2d 557, 563, 427 N.Y.S.2d 595, 598, 404 N.E.2d 718 (1980).
I c
L l
applicable warranties to one year after commercial operation of.
l
~
Shoreham,'an event not yet achieved.
For example, TDI argues that.LILCO is collaterally estopped by certain
.ndings of the New York Public Service Commission (PSC).
Yet, TDI fails to mention a directly applicable New York case in which PSC ratemaking decisions were held to have no collateral estoppel effect.
Other examples abound and undermine every aspect.of
' TDI's motion.
As discussed below, the Complaint states eleven good causes of f.ction'and TDI's motions to dismiss and to stay discovery should be denied. ~The Court should ' allow this action to proceed expeditiously and order TDI to provide the discovery-already requwered by LILCo.
STATEMENT OF FACTS TDI selectively relies on facts beyond the Complaint, yet neglects to mention many that are critical.
Consequently, LILCO provides a more accurate anc! comprehensive recitation of the facts.
First, LILCO summarizes the Complaint which contains the only facts properly before the Court.
Then LILCO discusses additional facts to counter TDI'S misleading discussion of matters beyond the Complaint. - _
.K:
7 N
j i
A.
The complaint l,
4 Emergency diesel generators'or some comparable source of backup AC power are required by the NRC-for nuclear-power.
plants'.
Complaint 1 6.
Such generators must be sufficient to
^
power: systems which cool the nuclear core and maintain the reactor's-containment in the event of postulated accidents.or 1
- anticipated' operational occurrences.
Complaint 1 6.
- Thus, Shoreham was required to.have such emergency diesel generators to protect public health and safety.
Through a. bid process, LILCO entered into a contract
~
with TDILto supply emergency diesel generators and related
- services sufficient to meet applicable NRC requirements.
Complaint 11 9,110.
The contract was not contained in one document, but in a series, including an invitation to bid, a proposal and numerous letters and telaxes culminating in a purchase order on March 20, 1974 incorporating the previous documents.
Complaint 11 8, 9.
The contract required TDI to design, manufacture, supply and provide services with respect to three emergency diesels.
Complaint 1 10.
Among the required design criteria were those imposed by the NRC's Regulatory Guide 1.9, which mandated that the diesels comply with the Institute of Electrical and Electronic Engineers (IEEE) Trial Use Standard 387.
It, in turn, incorporated the Standards of the Diesel Engine Manufacturers Association - _ = _ _ _ _ _- _ _ _ _ _ _ _ _ - _ - _ _ _ _ _ -.
v (DEMA).
Complaint _1 7.
The contract. expressly' admonished that
" extreme reliablity-is.
the main requirement" for:the diesels.
Complaint: 1'11.
LILCO subsequently paid TDI more than_$2,110,000 and TDI delivered the diesels to:Shoreham.
Complaint 1 15.
In the course of installation, inspection and testing, numerous defects were discovered, including leaking cylinder heads, defective jacket water pumps,- leaking fuel oil. injection lines, repeated turbocharger thrust bearing failures, inadequate pisten skirt to piston crown attachments, broken rockerarm shaft bolts,-cracked'rubcover assemblies, defective cylinder
' head studs, defectively designed air start valve capscrews, defective intermediate pushrods and defective turbocharger supports.
Complaint 1 17.
The most arresting failure occurred, however, on August 12, 1983, when the crankshaft in Emergency Diesel Generator 102: fractured during testing required af ter the replacement of defective cylinder heads.
Complaint 1 18.
Following that failure, cracks were discovered in the crankshafts of Emergency Diesel Generators 101 and 103.
After the crankshaft failures, NRC concerns compelled LILCO to undertake a comprehensive " Design Review Quality Revalidation Program" (DRQR) to disassemble the emergency diesels, inspect, analyze, repair and redesign them where necessary, and then to reassemble and retest the diesels, all }
).
1 E
.to prove their reliability.
Complaint.1 20.
During.the course L
.of this DRQR,'LILCO uncovered even more latent defects in the emergency diesels.
These included cracked connecting rod bearings, defective cylinder' head bolts,. cracks.in the modified l
' piston skirt' boss area, defective intermediate push rods, additional ~ defects in the jacket water pump, defective main push rods, cracks in the cylinder blocks, a defective governor drive coupling, repeated turbocharger thrust bearing failures, a damaged engine base, cracked wrist pin bushings, cylinder
~
liner scuffing, severely worn piston rings and improperly specified engine oil.
Complaint V 21.
Eventually, as a result of the' expensive and extensive DRQR, an Atomic Safety and Licensing Board of the NPC approved the diesels for use for a qualified load of 3300 KW.
Complaint 5 22.2/
Much to LILCO's surprise, its investigation as a result of the crankshaft failure revealed that many of the emergency diesels' defects were or should have been known to TDI for many years, but were never disclosed.
Among the many instances of 33 fraudulent concealment, the Complaint focuses on three principal examples.
2/
As evidenced by the limited contract documents provided the Court by TDI, the' emergency diesels were supposed to have a normal continuous rating of 3500 KW.
TDI Appdx. A-lO7. t
___.___m__
.a First, TDI learned prior to delivery of the diesel 1
generators to Shoreham that it had used erroneous data'in designing the crankshafts.
Complaint 1.27.
Although TDI had designed and. manufactured crankshafts 13" x 11" in diameter, Complaint'1 27, TDI became aware'before shipping the diesels to Shoreham that application of correct data would have required larger crankshafts.
Complaint 1 28.
Indeed, before the emergency diesels were delivered to Shoreham, TDI had already changed its data for calculations to test the adequacy of crankshaft designs on other diesels it was manufacturing.
~
Complaint 1 29.
Prior to delivery of the emergency diesels to Shoreham, TDI had already altered the crankshaft design for comparable diesel generators to incorporate 13" x 12" crankshafts.
Complaint 5 30.
Despite this knowledge, TDI repeatedly assured LILCO that the Shoreham diesels met the requirements of the specifications and were suitable for their intended purposes.
Complaint 1 31.
TDI represented that the torsional stresses on the crankshafts complied with DEMA and the IEEE 387 standards, when they did not.
Complaint 1 32.
Knowing that these emergency diesels could fail if called upon, TDI even represented to Stone & Webster, LILCO's architect-engineer for Shoreham,_that_the_ torsional stresses _on the
/
yankshaftsin'thedieselscompliedwiththeAmericanBureauof Shipping (ABS) standards, though on February 2, 1976, ABS.
_a____,____,_
advised TDI that the 13" x 11" crankshaft was inadequate.
TDI.
never disclosed this communication.
Complaint 33.
TDI., continued-its deception when it reported to LILCO that the diesels had successfully passed all of their qualification-tests.
Complaint 1 34.
Further, on May 9,
- 1977, TDI certified that the diesels met the requirements of the contract and reaffirmed this certification on March.4, 1981.
Complaint S 35.
In sum, TDI used the wrong analysis to predict the stresses on the crankshaft; TDI discovered the proper analysis and discovered that the crankshafts in the Shoreham diesels were inadequate; TDI made those discoveries before delivery o(
the' emergency diesels to Shoreham; yet TDI delivered the diesels to Shoreham without disclosing the flaws inherent in the engines.
Despite the NRC's requirements imposed in'1978 that nuclear vendors disclose potential defects in their equipment, TDI remained silent until the inevitable crankshaft failures in August 1983.
All of this happened despite TDI's continued cealings with LILCO to install, inspect, assist in testing and assist in other repairs of the emergency diesels.
Complaint 1 55.
Second, during manufacture, cracks developed in the cam gal 3.
-of +ka amargency d4a=*1='
blocks.
Rather than document or disclose the cracks to LILCO, TDI welded over them, r
_._3- <
m.
W
-c j
d Complaint 1 42.
Both the contract and the-NRC's regulations H
required that.any repairs to th e rH a =
- 1 m b1 documented and.
r inclose _d to LILCO, comn1= ht 1 40.
y were not LILCO subsequently discovered the cam galle en was cracked and that the blocks had been weld repaired.
Complaint 1 39.
Again, in response to LILCO's several inquiries about the cause of the cam gallery cracking, TDI repeatedly professed not to know of the cause and did not advise LILCO of the welds.
Ccmplaint 1 43.
Third, and equally blatant, TDI concealed knowledge of potential cracking in the top of the blocks of'the diesel generators.
The block of Emergency Diesel Generator 103 suffered severe cracking, at least. partially as a result of excessive, amounts of degenerate Widmanstaetten graphite, and ultimately had to be replaced.
Complaint 11 44, 47.
TDI knew that its castings might contain excessive 3 mounts cL. degenerate Widmanstaetten graphite.
Such degenerate material resulted from TDI's casting process and had been discovered by TDI in a number of its other' engines.
Complaint 1 45.
Yet, TDI withheld this knowledge.,,grom lT7" These concealment and deliberate misrepresentations by TDI were not merely the result of negligence or oversight.
Instead, TDI had a policy of withholding information from its nuclear customers because it feared litigation.
TDI instructed
AG--~~~
h
.- -G L,,
its employees not to advise its nuclear customers of. failures
'r potential' defects discovered in TDI encin.m o
in non-nucigar applications.
Further, TDI intentionally withheld from its
~ nuclear customers publications and other notices of potential defects sent to TDI's non-nuclear customers.
Complaint 1 48.
As a result of TDI's deception, LILCO suffered substantial damages.
Rather than discovering the defects at a time when they could be repaired well before completion of the plant and contested licensing proceedings, TDI's concealment and fraud postponed discovery of the defects until the emergency diesels failed in the public glare at a time critical to the licensing of Shoreham before the NRC and to the defense of the plant's costs before the PSC.
Consequently, LILCO had i
to repair and retest the emergency diesels and relicense them before.a highly skeptical NRC and in the face of relentless l
attacks by Shoreham's licensing opponents; LILCO had to purchase and test alternative emergency power sources for both low and full power; LILCO had to defend protracted proceedings before the New York PSC; and LILCO bore significant other burdens.
See Complaint 5 25.
On the basis of these facts, the Complaint makes the following claims:
I i
l l
i
! l
P l
1 Count Ort:
TDI negligently, grossly negligently, recklessly and wilfully and wantonly failed.to warn of the emergency i
diesels' defects; j
Codnt Two:
TDI negligently failed to-perform contractually required services by failing to advise LILCO of the defects after TDI's testing and while TDI had-i continuing responsibility for inepecting and advising conc =* '..;
.;-.1 "n
and insta tt$n; Count Three:
TDI fraudulently misrepresented and concealed information
- concerning the emergency diesels; _
k#'
Count Four:
TDI's repetitive fraud on I
LILCO and others in the nuclear industry violated RICO; Count Five:
TDI breached its contract; Count Six:.TDI b' reached its express warranty of design, workmanship and suitability for the intended use as-standby emergency power in a nuclear power plant; Count Seven:
TDI breached its promise to repair or replace the defective emergency diesels as contained in its express warranty of design, workmanship and suitability; Count Eight:
TDI breached its express performance warranty; Count Nine:
TDI breached.its promise to repair or replace contained in its express performance warranty; Count Ten:
TDI is strictly liable for the emergency diesels' defects; and Count Eleven:
TDI negligently and grossly negligently designed, manufactured, inspected and tested the
- -mergency diesels. - _ _ _ _ - _ _ - - - - - - _ - - - - _
I p
B.
Additional Facts 1.
- Contract Terms Not Disclosed By TDI -
'Jhough.TDI's Appendix A purports to contain " Relevant
,o Contact.'[ sic) Documents," it does not.
Instead, TDI has selectively produced and argued about only'its unsupplemented initial proposal and the purchase order.
See TDI Br. at.10-11.
As alleged in Complaint 1 9'and shown by the Purchase Order included in TDI's limited Appendix A (A-107), the LILCO-TDI contract included the Invitation to Bid, Specification SH1-89, TDI'siproposal dated. January 25, 1974, supplemental letters dated February 11, 1974, February 13, 1974, Fe'bruary 25, 1974, March 5,.1974, and March 8, 1974 and telexes dated March 13 and April 4, 1974.
If the Court considers matters beyond the-Complaint, the neglected documents are crucial for they supply warranties of future performance and promises to remedy.that are ignored by TDI's statute of limitations and consequential damages arguments.
In contrast to the warranty provisions discussed by TDI, Specification SHI-89, and ultimately the contract, contained the following pertinent provisions:
. 1
_ = - _ - _ _ _ _ _ _ - - _ _ - _ _ _ - - -
HW i
WARRANTY-Warranty must. ext [end at~ least one year after. commercial.operatior. of the unit.
c
-Warranties extending-longer than this one year are encouraged and will'be taken into account in the bid evaluation.
Design, Workmanship And Materials.
Warranty The Seller warrants that the equipment and.all-parts thereof shall be free from defects in design, wor:cmanship and
- material and shall be suitable for their intended purpose.
' Remedy Should any-failure to fulfill-this warranty appear within one year after demonstration of warranted performance in place, Seller shall, upon written notice by the-Purchaser of a defect, repair or replace the defective. work.
The-decision as to whether tol repair or replace the defective work'shall be made by Seller.
This warranty shall be extended for one year from completion of original repair or reinstallation of those components'actually repaired or replaced.
Performance Warranty After all required tests have been made, the1 Seller shall warrant that the equipment will' achieve the warranted performance stated in the specification _- _
o.
when operating at the design conditions listed in the specification.
The t
Purchaser, at his option, may conduct tests to.be witnessed by the Seller to prove compliance with the guarantee.
In the event of failure to meet any.
guaranteed performance, the cost of the test shall be borne by the Seller.
Remedy In the event that the equipment fails to achieve the warranted performance in i
place, then, to the extent that the deficiency or failure to achieve the warranted performance is attributable to equipment supplied by Seller, Seller shall make such adjustments or modifications to enable the equipment to achieve the warranted performance., The cost of these adjustments-or modifications shall be for the Seller's account.
After such adjustments or modifications, should the equipment fail to achieve warranted performance, an equitable settlement shall be made, which may without limitation include an adjustment of the purchase order price.
Specification, pp. 5-6, LILCO Appdx. G-10-11.
Since the warranty proposed by TDI was more limited in scope and time than that required by Specification SH1-89, TDI i
and LILCO had a series of communications about the warranty.
In a March 5, 1974 letter, TDI ultimately agreed to " comply with extended warranty at no additional cost."
LILCO Appdx. G-217.
TDI again conf.irmed its agreement in a meeting held the next day with representatives of Stone & Webster.
As reflected by TDI's own minutes of the meeting:
l -____ _ __-_ _ ____ __ _ _ _ -_ __.
L 1.
Warranty Extension - DELAVAL agreed to comply with warranty requirement of the l
spec provided our storage requirements l-were met and the unitz were inspected by our service personnel prior to start-up.
This was agreeable to Stone & Webster.
March 8, 1974 letter from TDI to LILCO with attachments, LILCO j.
Appdx. G-226.
TDI's agreement to the extended warranty was also partially reflected in the purchase order which, in addition to incorporating the specification's terms, provided as follows:
The Seller warrants that the equipment and all parts thereof shall be free from defects in design, workmanship and materials and performance within one year from the date of initial operation of the plant (which date shall be. mutually agreed upon by the parties in writing) provided Seller's storage requirements are met by LILCO and the units are inspected by Seller's service personnel prior to start up.
This warranty inspection service will be provided by Seller at no additional cost to LILCO.
TDI Appdx. A-110.
Subsequent internal memos confirm TDI's understanding of the scope of its undertaking.
A June 18, 1974 TDI memorandum states that "[t]he date of operation is considered the date which-the Nuclear Plant goes on stream."
LILCO Appdx. G-233.
And a June 25, 1974 TDI memorandum states that "we have accepted the Warranty for a period of one year after the plant goes into operation."
LILCO Appdx. G-234.
As TDI argues vigorously, the plant has not yet achieved commercial operation.
Accordingly, TDI's warranties remain in effect. _ - -
I
~l
- 2. Additional Evidence of Fraud l
Even without the benefit of discovery, LILCO has uncovered.much evidence of TDI's fraud.
Because TDI has gone outside the pleadings and mischaracterized this as nothing more than a common contract dispute, LILCO describes below some of' this additional evidence of TDI's intentional and reckless tortious activity.3/
TDI knew that its calculations to predict the torsional stresses in the crankshafts were flawed.
Museler Aff. 1 11.
TDI knew of its defective engineering analyses at least as early as 1975, before the emergency diesels were delivered to.Shoreham.
In fact,-TDI's torsional vibration expert learned in 1975 that the stress levels on the crankshafts were so high as to render the crankshafts inadequate.
King Aff. 't 7.
TDI's vibration expert expressed this concern to TDI's manager of engineering and TDI's general manager and urged that the emergency diesels not be
~
shipped until larger-crankshafts were installed.
King Aff. 1 8.
His. concerns were rebuffed and TDI. shipped the engines knowing they were defective.
Yet, TDI never advised LILCO of the defect.
Instead,'TDI later certified that the diesels had successfully 3/
Filed with this response are affidavits of William J.-
Museler, formerly LILCO's Director of the Office of Nuclear;-
Geoffrey D. King, formerly a TDI service engineer, head of TDI's Service Department, and TDI's Manager of Product Engineering; and Marsha L. Lyons, formerly a TDI quality assurance technician and a quality analyst. _ - _ _ _ _ _ _ _ - _ _ _ _ - _ - - _ _ - - _ _ _ _.
h.
L, passed all qualification tests, including a'torsiograph test; and h
that the emergency diesels met.all contract specifications.
Museler Aff. 1.15.
Further, TDI never:tcid LILCO that ABS had p
advised'that the'13" x 11" crankshaft was' inadequate,.that-TDI g
had changed its data inputs for later. torsional analyses of.the
~
same model engine or that TDI had begun using a larger crankshaft in all post-Shoreham diesels of the same model.
Museler Aff.--11 18,'20.
-TDI had repeated opportunities to disclose the defects-prior to 1983 during its' continuous dealings with LILCO..Those
~
' dealings included provision of storage requirements for the emergency diesels, complete inspection of the emergency diesels prior to. start-up and' repeated efforts -- at.LILCO's expense --
Lto remedy numerous other defects in the emergency diesels which
.had arisen. prior to' August, 1983 when-the crankshaft failure suddenly occurred.
In fact,.TDI representatives were present'at Shoreham for. years and played'an active role in installation and testing of the emergency diesels.
Museler Aff. 1 25.
LILCO did not learn of the change in TDI's design analysis until late 1983
. when its engineering consultants noticed a discrepancy between the data inputs used in TDI's 1975 torsional analysis and those
~'
used in analyzing the 1983 replacement crankshafts.
Museler Aff. 1 27.
Even after the crankshaft failures in August, 1983, TDI deceived LILCO about the reason.
King Aff. 1 10.
Not until l
a December 1983 response to an-NRC inquiry d..d TDI admit that it i
had changed its data inputs twice before the emergency diesels were shipped to Shoreham.
Museler Aff. 1 26.
TDI'similarly withheld information about cracking in the.
J blocks.
It covered shrinkage cracks in the cam gallary area by 1
weld repairs and epoxy paint making the cracks and repairs undetectable by the naked eye.
Museler Aff. 1 31.
TDI not only failed to disclose these cracks and repairs, but it advised LILCO in 1983 that there had been no such repairs.
Id.
LILCO ultimately had to replace one of the blocks because of severe cracking resulting from the presence of Widmansteetten graphite.
Museler Aff. 1 32.
When LILCO questioned TDI representatives about TDI's knowledge of and experience with
="$?
" block cracking, TDI falsely resp 6nded that it knew nothing about
[
those types of cracks and had not seen them before.
Museler
.. _ _ _ _. _. _. - - =
Aff. 1 33.
This lack of information caused LILCO to spend large
)
amounts to discover the cause of the cracking.
Id.
Yet, TDI was aware of the presence of Widmanstaetten graphite in its castings at least as early as 1979.
King Aff. 1 4.
A January 29, 1979 letter from Professor John hallace of Case Western Reserve University advised TDI that its use of unstripped automobile engines could lead to casting problems resulting in the presence of the Widmanstaetten Graphite.
King Aff. 14.
Wallace's study had, in fact, resulted from TDI's experience with. - _ _ _ _ - - _ - _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _
l
{
l I
L I
cracking in blocks and other heavy castings.
Id.
None of this j
i was ever. disclosed to LILCO.
TDI's fraudulent concealment was not limited to LILCO.
f l.
TDI' pursued a course of systematically' concealing important information from its nuclear customers.
It maintained two lists v
of product improvements and two sets of service.information memoranda.
King Aff. 15.
The complete list was given only to
.non-nuclear customers.
Id.
TDI's nuclear customers were provided only incomplete versions because TDI was fearful that knowledge of additional problems might cause TDI financial and regulatory trouble.
Id.
Additionally, TDI's Quality Assurance Manager would allow parts to be shipped knowing that_they had,not
_ been inspected or df.d not meet specifications.
Lyons Aff. 1 4.
/
Quality assurance and quality control documents were even blindly
/((/-
g amped though no inspections of the components had occurred.
Lyons 1 5.
~
ARGUMENT TDI summarily raises numerous arguments, but fails to cite many applicable cases or mention governing principles at odds with its superficial assertionc.
Became the sufficiency of LILCO's allegations are apparent from the Complaint, LILCO does not attempt to recast TDI's motion by affirmatively demonstrating that each element of each cause of action is properly pleaded. _ - _.. _ _ _ _ - _ _ _ _ _ -
-l e
sx 1
Instead,:LILCO respondsipoint-by-point in the. order employed by q
TDI.4/
I.
LILCO'S' LIMITED DELAY CLAIM-IS NOT BARRED BY o
ITS. UNSUCCESSFULLY ASSERTED POSITION ON A-DIFFERENT ISSUE IN THE PSC'S RATEMAKING PROCEEDINGS 1
-A. LILCO's Delay Claim Differs From The Issue Before The PSC Among its damages, LILCO seeks the " increased costs and o
1 expenses to construct and operate Shoreham caused by the delays R
resulting from the defects in the Diesel Generators."
Complaint 1 25(e).
TDI spends almost one-third of its brief arguing that LILCO's statements during the PSC procseding preclude LILCO from requesting'any delay damages i-this action.
Yet, TDI.has
- ignored basic distinctions between the type of expenditures at issue before-the PSC and those alleged in this action.
In the PSC proceeding LILCO sought to include.in its~ rate base all AFUDC (Allowcnce for Funds Used During Construction) accrued on its investment in Shoreham plant.5/
AFUDC continues 4/
TDI bears the heavy burden of convincing the Court that there is no conceivable way for LILCO to recover in this action.
See Conley v. Gibson, 355 U.S. 41, 45-6 (1957).
It is surprising, therefore, that TDI has chosen the path of superficial argument.
If TDI has intentionally awaited its rebuttal opportunity to present'its primary arguments or raise new matters, LILCO requests the opportunity to respond again.
5/
AFUDC is a form of non-cash earning that a utility accrues en'its books during construction of a generating plant.
Defined simply, AFUDC represents interest cn the money a utility invests in a plant.
Through AFUDC, a utility is able to protect the time value of the money invested in the plant.
-23u
'1 e -
___-__m__._m._-________m._ - _ _ _.. _ - _ _ _ _ _ _
c.._.
j.. -
[
n+
Lto: accrue on the investment in_a plant until the plant'goes'into commercial' operation (usually at or'near full power).
Once
' commercial operation occurs, the direct' investment in the planti plus the accrued AFUDC.become the " booked ~cott" of the plant, from which customer rates are derived.
Commercial operation is, therefore,;the event that determines the total' cost of the plant for rate base purposes.
The PSC Staff and various interveners L
alleged that all AFUDC accrued after April 1, 1984 should be 1
excluded from LILCO's rate base..They contended that Shoreham-would have achieved commercial operation by April 1984 had the diesel generators not' failed.
LILCO respondedIthat the failure of the diesel generators had not delayed commercial operation,at all because LILCO did not yet have an NRC-approved offsite emergency plan as required by 10 CFR 6 50.47 due to the refusal ofLctate and local governments to cooperate in detteloping'such a plan.
In contrast,.the damages sought in this action do not relate to delay of Shoreham's commercial operation.
Paragraph 25(e) of the Complaint includes damages caused by delay in aspects of the plant other than ecmmercial operation.
For example, low power testing of Shoreham was unquestionably delayed by unavailability of the TDI emergency diesel generators.
- See, e.g.,
Long Island Lighting Co. (Shoreham Nuclear Power Station, Unit 1), LBP-83-57, 18 NRC 445, 634 (1983) (Shoreham ready for 1 i
= _ -
7-r d
1 low power testing except for questions about reliability of l
emergency' diesel generators);
Long Island Lighting Co. (Shoreham l
Nuclear Power Station, Unit 1), LBP-84-45, 20 NRC 1343, 1348-51 (1964).p/
Additional construction and operating costs pertinent to delay of low power operation will include, among-other things, the costs of technical advisors'and consultants who remained at LILCO longer than otherwise would have been necessary if the TDI diesels, as supplied, had been licensable, and construction costs
. incurred to install additional backup power equipment to replace the TDI energency diesels during low power testing.
These costs did not result from any delay of commercial operation incurred to date, but from the delay in getting the.
omergency diesels licensed.
Yet, delay of commercial operation was the issue before the PSC.
Long Island Lighting Co. (Phase II-
[roceeding), Case 27563, Opinion and order Determining Prudent Costs, No. 85-23, slip op. (New York Public Service Commission, December 16, 1985) (PSC Opinion).
Statements made by LILCO before the PSC referred only to the delay of commercial operation.
As the PSC recognized:
p/
NRC regulations permit the licensing of a nuclear plant for low power testing at up to 5% of rated power without an approved offsite emergency plan.
10 CFR $$ 50.47(d), 50.57(c). - _ - _ _ _ _ _ _ _ - _ _ _ - _ _ _
\\
f-L According to the company, the plant's commercial operation date has been postponed not because of the diesel i
failure,'but due to a lack of an acceptable emergency evacuation plan.
PSC Opinion at 123 (emphasis added).
Virtually every statement quoted by.TDI recognizes this distinction by referring expressly to delay of commercial operation.
TDI Br, at 17-19.
1 There is simply nothing in the record to support TDI's unwarranted assumption that LILCO here seeks damages it repudiated in a prior proceeding.
Accordingly, TDI's exegesis on judicial estoppel is nothing but an attempt to divert the Court's attention from TDI's serious misdeeds.
Nevertheless, because TDI's judicial estoppel argument typifies its disregard and misuse of applicable authority, LILCO briefly responds to TDI's legal argument.
B. Judicial Estoppel Does Not Preclude LILCO From Claiming Delav Damages
"[Fjederal law controls the application of judicial estoppel since it relates to protection of the_ integrity of the federal judicial process."2/
Allen v.
Zurich Insurance Co.,
a 2/
Thus, TDI's citation of New York cases in support of its judicial estoppel argument is erroneous.
Even so, the doctrine of judicial estoppel as applied by the New York state courts includes as essential elements mutuality of parties, success in asserting the prior position and detrimental
. reliance, none of which are satisfied by TDI's argument.
See Environmental Concern, Inc. v. Larchwood Constr. Co., 101 (Continuad) l i
e 3
li 667:F.2d.1162', 1167:n.4 (4th Cir. 1982); 18 C. Wright, H
A. Miller & E. Cooper, Federal Practice and Procedure, f 4477' at 787 (1931)..Those federal courts recognizing the doctrine of judicial estoppel insist that it is inapplicable'unless-the two positions.under consideration are unequivocally.
inconsistent.
E.g.,
Sperling v. United States, 692 F.2d 223 (2d Cir. 1982)-(Van Graafeiland, J.,
concurring), cert.' denied,
'462 U.S.
1131-(1983); Allen v.
Zurich Insurance Co.,
667 F.2d at'1166-67.
Yet, LILCO's position in this action with regard to delay damages is totally consistent with its position previously taken in the PSC proceeding.
As explained above, the damages LILCO seeks here are unrelated to commercial
. operation which was the issue in the PSC case.
'But even assuming arguendo that LILCO's previous position before the PSC.was inconsistent with its claim here, LILCO's claim still would not be barred by judicial estoppel.
The doctrine, which has never been definitively recognized in i
the Second Circuit,8/ requires successful prosecution of the i
(Continued From Previous Page) l A.D.2d 591, 476 N.Y.S.2d 175 (2d Dept. 1984) (success in maintaining prior position required);
Chemical. Bank v. Aetna Ins.
Co., 99 Misc.2d. 803, 417 N.Y.S.2d 382 (1979) (mutuality of_ parties and detrimental reliance required).
8/
TDI fails to advise the Court that the Second Circuit has avoided recognizing the doctrine of judicial estoppel.
See (Continued)
! j l
1
j
}
l pos'ition in the previous proceeding.9/ ' To date, LILCO haslnot a
i
=1 j
-(Continued From Previous.Page)
Waterside' Ocean Navigation Co. v.
International Navigati3n
~
Ltd., 737 F.2d 150.(2d Cir. 1984); United States v. Bedfoi,d Assoc.,e713 F.2d 895 (2d Cir. 1983).
Only Judge Van
'Graafeiland's. concurring opinion in Sperling v. United _Seates recognizes and applies the doctrine to preclude the:appallant-from asserting'a, position inconsistent with that succes7/ully argued.before the same court in an earlier proceeding.
n921 F;2d at 227-29.
This Court in Universal' City Studios 2 _Inc. v.
Nintendo Co.,
578 F..Supp. 911 (S.D.N.Y.), aff'd, 746 F.2d 112 (2d Cir. 1983), observed that "[t]here is considerable uncertainty as to the source and strength of the doctrino" of judicial. estoppel.
Jd. at 921 n.3.
9/
This Court recognized the " success requirement" in Universal City. Studios, Inc. v. Nintendo Co.:
Leaving aside the question of'the vitality of this doctrine in this Circuit
~
or elsewhere, the doctrine would not apply here'in any case because the courts that' have appli ed the. doctrine have required.that " success'in the prior proceeding is clearly an essential element of judicial estoppel.
578 F. Supp. at 920-921 (footnote omitted) (quoting Konstantinidis v. Chen, 626 F.2d 933, 939 (D.C. Cir. 1980)).
Again, TDI-does not mention the'" success" criterion, though one of the.two New York federal cases.it cites clearly enunciates the requirement.
Roth v. McAllister Bros., 316 F.2d 143, 145 (2d Cir. 1963) (a party "having succeeded in maintaining that position" in a prior proceeding may not thereafter assume a contrary position).
The Roth court actually applied collateral estoppel, but did discuss the related doctrinc of judicial estoppel.
Similarly, in Ronson Corp. v.
Licuifin Aktiengesellschaft
- Liquicas, S.p.A.,
375 F. Supp. 628 (S.D.N.Y. 1974), appeal 1:
dismissed, 508 F.2d 399 (2d Cir. 1974), the other New York federal case cited by TDI, it is difficult to determine whether the holding is based on collateral estoppel or estoppel against (Continued),
4 enjoyed such success in the highly politicized PSC proceeding.
Finally, judicial estoppel does not~ apply where the prior proceeding is neither judicial nor quasi-judicial in nature.
Co trary to TDI's assertion, Edwards v.
Aetna Life Insurance Co., 690 F.2d 595 (6th Cir. l'982) does not hold that judicial estoppel. applies where the prior position was asserted in an administrative proceeding.
The court' expressly declined to make such a holding.
Id. at 598 n.3.
Actually, the Edwards court refused to apply judicial estoppel because the Veteran's Administration's award of benefits resulted from an administrative settlement, not a judicial or quasi-judicial acceptance of plaintiff's original position.
Similarly, the.
PSC proceeding was neither judicial nor quasi-judicial in nature.10/
Therefore, judicial estoppel would not preclude (Continued From Previous Page) inconsistent positions.
Both opinions predate the cases questioning the validity of the doctrine of judicial estoppel in the Second Circuit.
TDI relies principally on Southern Cal. Edison Co. v.
Westinghouse Elec. Corp., No. CV-83-1985/6, slip op. (C.D. Cal.
July 17, 1984), where the district court refused to follow the Ninth Circuit's direction in Arizona v.
Shamrock Foods Co.,
729 F.2d 1208 (9th Cir. 1984), cert. denied, 105 S.Ct. 980 (1985).
The Ninth Circuit, in discussing requirements for applying judicial estoppel in Arizona, listed the success requirement.
Id. at 1215.
10/
The PSC was engaged in the process of ratemaking.
Ratemaking is a legislative function of the PSC.
Consumer Protection Bd. v. Public Service Comm'n, 97 A.D.2d 320, 471 N.Y.S.2d 332 (3d Dept. 1983).
See Section II A below.
2 _ _ _ - _ _ _ _ - - _ - _ _ _ _ _ _ _.
L LILCO-from asserting positions inconsistent with those-asserted before-the PSC.
C.
LILCO's PSC Testimony Is Not Conclusive on The Issue of Delay Damages TDI argues that "[e)ven if LILCO were not precluded by
~
the doctrine of judicial estoppel from asserting that Delaval is liable for delay damages, LILCO's admissions are conclusive-on this. issue."
TDI Br. at 24.
As discussed above, LILCO's delay claim here is different from the issue before the PSC.
There is.nothing in the record to suggest (1) that LILCO's delay claim in this action pertains to Shoreham's commercial operation, or (2) that LILCO has made admissions concerning any other delay-related damages.
D.
The ASLB Findings Do Not Collaterally Estop LILCO's Delay Claim As discussed above, the fact that Shoreham has not received'a full power license because of. emergency planning issues has nothing to do with delays claimed in this action.
TDI surely cannot claim that the ubiquitous defects in the Shoreham diesels led to no delay of low power testing.
- See, e.g., Long Island Lighting Co. (Shoreham Nuclear Power Station, Unit 1), LBP-83-57, 18 NRC 445, 634 (1983). _ _
s
.II.
LILCO'S CLAIMS ARE TIMELY TDI next contends that LILCO's claims are untimely.
TDI's various statute of limitations arguments suffer three general deficiencies, however.
First, as throughout TDI's u
motion, the arguments are procedurally premature.
Various dates on which TDI bases its argument do not appear in'the 4
Complaint and there is no competent affidavit supplying them.
Thus, the issues simply cannot be decided pursuant to Rules 12(b)(L; or 56, Second, TDI's intentional deceit as alleged in the Complaint estops TDI from pleading the statutes of limitations on all of LILCO's claims.
See, e. g_., Perry v.
A. H. Robins 4
Co., 560 F.Supp 834, 835-36 (N.D.N.Y. 1963); Jordan v. Ford Motor Co., 73 A.D.2d 422, 426 N.Y.S.2d 359, 360-61 (4th Dept.
1980).
Given TDI's intentional conduet concealing the numerous
. breaches of contract and torts alleged in the Complaint, the statutes of limitations on all causes of action are tolled until a reasonable. time after discovery.
In short, courts will not let an intentionally deceitful defendant profit by its wrongdoing.
Id.
See also Glus v. Brooklyn Eastern District Terminal, 359 U.S. 231, 232-34 (1959).
TDI acknowledges this principle, but seeks to avoid it by characterizing this case as a simple contract dispute.
For the reasons discussed throughout this Response, TDI's
- i
_ _ _ _ _ _ _ _ _ _ _ _ _ _ = _ _ __ _ _- - -,
a, intentional, grossly negligent and reckless conduct concerning.
equipment vital to public safety c'enstitutes far'more than breach of contract. ~ TDI's shocking conduct. is not en1"y an
~
answer to its' statute of' limitations arguments, but also the basis'for independent causes of action for fraud, RICO, failure-to warn and.others alleged in the comp 1 mint.
TDI also seeks to escape by arguing that LILCO is precluded by the PSC's findings from arguing that it did not
+
-know of.the defects.
As discussed in Section IIA below, collateral estoppel cannot apply here because (1) the PSC's proceedings were not judicial or quasi-judicial, and (2) there is no-identity of issues.
In fact, the PSC expressly indicated that its findings should have no preclusive effect in this action.
PSC Opinion at 100-101.
Consequently, Z)I's wrongdoing should estop it from reliance on the statute of limitations on all claims in the Complaint.11/
I 11/
To summarize, LILCO did not learn of the crankshaft y
failure until' August 1983.
Complaint 1 23.
Obviously, sometime thereafter LILCO learned of the reason for the L
failure.
The nature of block problems was not discovered until i
1984.
Museler Aff. 1 31.
LILCO acted promptly after the crankshaft failures to inspect and analyze the emergency
. diesels and the numerous failures.
It then negotiated a standstill agreement with TDI running from July 1, 1984 through June 30, 1985..Museler Aff. 146.
Within a reasonable time, LILCO filed this action on August 30, 1985.
To the extent TDI
{
would argue otherwise, a factual question is presented which E
must await discovery and submission of a proper record. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _
1 Finally, LILCO does not rely solely on equitable estoppel to prohibit TDI from. pleading the statutes of limit ations. - Each of the challenged claims independently is timely for'the reasons discussed in Sections IIB'through-IIE-
-below.
A.
The'PSC Decision Does Not Preclude Equitable Estoppel Of TDI From Reliance on Statutes of Limitations-The PSC's purpose was generally to determine what amount of Shoreham's costs was prudently incurred by LILCO and, therefore, should be included in LILCO's rate base upon commercial operation.
PSC Opinion at 1-2.
With respect to the emergency diesels, the PSC investigated whether prudent management of the Shoreham project would have disclosed the
' faulty crankshaft design.
PSC Opinion at 93.
The PSC concluded that LILCO did not prudently manage the project because:_(1) the TDI engines were an unproven commodity with no track record; (2) Stone & Webster and LILCO failed to monitor carefully and supervise TDI's testing of the diesels before their purchase; and (3) neither LILCO nor Stone & Webster sufficiently monitored TDI to assure that the diesels complied f
with contract and NRC requirements.
PSC Opinion at 92-93.
l ', _,, _., _ _, _ - - - - - - - - - - - _ -
Lj t
10m PSC did not consider whether TDI ccmmitted fraud.
Nor was there'any finding that-LILCO knew of any. defects in the crankshafts ~at any time before their. August 1983 failure.
Instaad,Lthe PSC faulted LILCO for delegating too'much responsibility to its architect / Engineer, Stone & Webster, and.
for failing toLoverree Stone & Webster's woli: sufficiently.
~
See PSC Opinion at 95.
Thus, the PSC found that LILCO's stockholders should bear' costs associated with the diesels instead of its ratepayers.
It decided nothing about TDI's liability to LILCO.
TDI' argues that it should not be estopped from reliance on statutes of limitations because the PSC found that Stone &.
Webster should have discovered the crankshaft design defect by mid-1977.
TDI Br. at 29.
In a non-sequitur, TDI contends that I
LILCO should therefore be precluded from asserting here that
'TDI fraudulently. concealed defects in the blocks and other components, as:well as the crankshafts, both before and after 1977, and that TDI induced LILCO to believe that the emergency diesels were not defective.
See TDI Br. at 30.
Although TDI terms the applicability of collateral estoppel " elementary,"
TDI is wrong.
A review of New York law indicates that the application of collateral estoppel here would be improper and l
contrary to express precedent.12/
12/
A federal court must apply state law in determining the collateral estoppel effect of state court or agency decisions.
(Continued)-
1 f I..
L__1__________-_______--
1
m.
I 1
s
- 1. The PSC's Legislative Proceedings Have No Preclusive-Effect P-Coll'ateral estoppel' applies in'the administrative
' context only wh.a. unlike'here, the agency acts in its. judicial or quasi judicial capacity.
The New. York Court of Appeals has p
stated that collateral estoppel is only " applicable to giva conclusive.effect.to the' quasi-judicini. determinations of administrative 1 agencies, when rendered pursuant to the
~
adjudicatory authority of. an agency to decide cases brought.
before'.its tribunals employing procedures substantially similar.
to those used in a court of law."' Ryan v. New York Telephone uCo., 62.N.Y.2d 494, 499, 478 N.Y.S.2d 823, 825-26, 467 N.E.2d"
- 487 (1984) (citations omitted).
See also United Stater v. Utah-Construction & Mining Co.,
384 U.S. 394, 420-22 (1966).
The doctrine.is inapplicable where an agency renders a determination pursuant tc its legislative authority.
(Continued From Previous Page) 28 U.S.C.
I 1738 (1982)...Kremer v. Chemical Constr., 456 U.S.
461, 466.(1982), reh'a denied, 458 U.S.
1133 (1982);
Kent v.
'New York City Dept. of Sanitation, 549 F. Supp. 570, 572
- (S.D.N.Y. 1982), aff'd, 722 F.2d 728 (2d Cir.1983),
cert.
denied, 464 U.S 941 (1983).
Thus, this Court must give preclusive effect to the PSC's decisien only if th) New York e
state courts would accord it preclusive'effect.
Ottley v.
Sheepshead Nursing Home, 607 F. Supp. 952, 955 (S.D.N.Y. 1985).
g.
l Y
w{\\[
TDI's collateral estoppel argument is neatly' answered in Consumer Protection Board v. Public Service Commission, 97 A.D.2d 320, 471 N.Y.S.2d 332 (3d: Dept. 1983).
There the isste before.the PSC was whether costs of a-cancelled nuclear plant and other projecte were prudently incurred and should be included in a utility's rate base.
A prior PSC decision considered inclusion of AFUDC for the same projects.in another utility's rate base.
The New York court held.that.the prior 1
-decision was made pursuant to'the PSC's legislative ratemaking function, rather than its judicial-function.
Thus the court refused to afford it or any of'its supporting findings preclusive.effect:
While the doctrine of collateral estoppel has been held to. apply to administrative agency determinations, it is only applicable where the agency is acting in a judicial or quasi-judicial capacity.
The crocess of ratemakino has been held to be a legislative, rather than iudicial, activity.
Rochester-[the utility) argues that, in the instant case, the PSC was not setting rates but was making a legal determination based upon a set of facts.
However, even if Rochester is correct, there is no question that in Opinion No. 79-12 the PSC was doing nothing but setting Rochester's electric rates.
Thus, that decision cannot be afforded collateral estocoel effect.
Id. at 335 (emphasis added) (citations omitted).11/
121 A112 in 11/
TDI fails to mention this dispositive decision.
Instead, it recites in a footnote a test under federal law for (Continued)
N-re New York Telephone Co. v.
Public Service' Commission, 64 A.D.2d 232, 410 N.Y.S.2d'124, 127.(3d Dept. 1978), mot. for IV. to app.
den., v6-N.Y.2d 710, 414 N.Y.S.2d:1028, 387.N.E.2d 1221 (1979).
Similarly, the PSC proceeding involving LILCO.was part of g
the ratemaking process.
The express purpose of Phase II of the proceeding was to investigate the prudence of totalL Shoreham costs and determine whether and to what extent those costs should be-
. recognized in rate base.
PSC Order of July 9, 1979.
This inquiry was "a fundamental part of-[the PSC's] responsibility to set just and reasonable
~
rates." -PSC Opinion at 4.
Accordingly, the PSC's decision resulted from its legislative function and should not be
~
afforded collateral estoppel effect.14/
L (Continued From Previous Page)
I evaluating whether a federal administrative proceeding involved i
factfinding and procedural-safeguards.
TDI Br. at 31 n.16.
.TDI cites International Tel. and-Tel. Corp. v. American Tel.
and Tel. Co.,.444 F. Supp. 1148 (S.D.N.Y. 1980).
In assessing the applicability of collateral estoppel, this Court in ITT-did not apply New York law.
See id. at 1156.
In addition, this Court refused to apply collateral estoppel to the findings of the Federal Communication Ccmmission in a situation very similkr-to this: case.
This Court need not engage in such analysis, however, given the definitive holding in Consumer Protection Board.
14/'
In fact, the PSC itself does not have to accord preclusive effect to its own prior decisions:
An administrative agency concerned with (Continued) -
l i
2.
Even If Judicial, The PSC Decision Did Not Determine Issues Dispositive Here Collateral estoppel does not apply here for yet another i
reason:
the PSC did not determine issues precluding the
)
equitable estoppel of TDI from pleading the statute of limitations or otherwise precluding LILCO's claims.
The proponent of preclusion must establish that the issue sought to I
be precluded is identical to the issue decided in the prior proceeding.
Capital Telephone Co. v.
Pattersonville Telephone Co.,
56 N.Y.2d 11, 17-18, 451 N.Y.S.2d 11, 13-24, 436 N.E.2d 461 (1982).
TDI cannot satisfy this burden.
The issues in this action differ in several respects -
from those in the PSC proceeding.
The question before the PSC was whether diesel-related costs at Shoreham were prudently incurred.
The PSC even recognized the dissimilarity of that inquiry from issues likely to be involved in any litigation between TDI and LILCO:
(Continued From Previous Page) furtherance of the public interest is not bound to rigid adherence to precedent.
It may switch rather than fight the lessons of experience.
In re'American Cyanamid Co. v. Public Service Comm'n, 73 j.
A.D.2d 985, 423 N.Y.S.2d 561, 563 (3d Dept. 1930) (quoting New Castle County Airport Comm. v. Civil Aeronautics Bd.,
j 371 F.2d 733, 735 (D.C. Cir. 1966), cert. denied, 387 U.S. 930
)
(1967).
~ L_______--_-_-_____-.
4 y
'A finding that LILCO was-imprudent dces not absolve either Stone & Webster or Delaval in other forums from responsibility for the 1983 diesel failure, _because the issue in this proceeding is uhether a flaw which constituted a design defect could have been discovered earlier.if the procurement process had been managed responsibly.
Our finding of imprudence based on the record in this case.would not preclude a court from determining that Delaval'and Stone & Webster' failed to meet their legal obligations to LILCO.
PSC Opinion at 100-101.
In disallowing certain diesel-related costs from-LILCO's rate base, the PSC found that' Stone & Webster should~
have discovered that the crankshafts at Shoreham were undersized because of information it received while consulting at Gulf States Utilities' River Bend project, after the Shoreham emergency diesels had been delivered.
PSC Opinion at 94; Recommended Decision at 121-22.
Thus the PSC was persuaded that Stone & Webster gained constructive knowledge, while employed by another utility, that TDI had effected a crankshaft design change on other engines.
For purposes of prudence analysis, the PSC held LILCO responsible for overseeing Stone &
^
Webster's efforts and, accordingly, charged LILCO with Stone &
Webster's knowledge from all sources.
Whatever the effect of Stone & Webster's purported knowledge for prudence purposes, the fact that Stons & Webster later gained such knowledge at the River Bend project would be irrelevant in this action '
I
f, w
l i
uniess TDI proves.that. Stone & Webster actuallyLeonveyed that-knowledge to LILCO.
Knowledge. gained by-Stone & Webster outside the scope of its agency with LILCO cannot.be-imputed te LILCO'.
See Farr v. Newman, 14 N.Y.2d 183, 250 N.Y.S.2d 272,.
l.
ll
- 199 N.E.2d 369 '(1964);
Benjamin Center v. Hampton Affiliates,.
Inc., No. 381, slip op. at 2 (N.Y.Ct. App. Oct. 22, 1985).
Additionally, the PSC found that-LILCO should have asked more questions and overseen Stone & Webster's work in greater detail and that Stone & Webster should have discovered the design error.
PSC Opinion at 92-101.
LILCO's culpability, according to the PSC, was its failure to manage the project prudently.
There was no finding that LILCO had available.to it information indicating the existence of a design defect.
I n' short, as between LILCO and the ratepayers, the PSC found that LILCO's imprudent management should cause LILCO to bear the costs.
The PSC made no finding that LILCO was negligent with respect to any duty owed TDI, or that TDI should escape responsibility for its wrongs.
Yet, even such negligence would not be a defense to TDI's fraud in this case.
One guilty of fraud cannot claim his victim's negligence as a defense.
Indeed, a defrauded party owes'his defrauder no duty of due care to discover the fraud.
Corva v. United States Automobile Association, 108 A.D.2d 631, 485 N.Y.S.2d 264, 266 (1st Dept. 1985) (unreasonable reliance...
y____________-,__7
~;
s is. notL equivalent to contributory; negligence); -Angerosa v.
e White Co;,-248 A.D. 425, 290 N.Y.S. 204, 211'(4th' Dept. 1936),.
g aff'd 275"N.Y. 524, ll'N.E.2d 325'(1937)'(" contributory negligence is rot a defense to an action in fraud.
There is no
- comparison'between negligence and willful misconduct.").
Since the PSC made no finding of any actual knowledge by LILCO, even.
i
- a. finding of negligence would not'bar LILCO's fraud' claim.
Similarly, even a finding of negligence by LILCO would not bar application of equitable estoppel where TDI's conduct induced the negligence.
The PSC refused to consider the effect
~
of TDI's misrepresentations and concealment:
LILCO also claims that the design error was solely the fault of Delaval, which' knowingly misrepresented that there was no torsional stress problem.
However, as noted,.LILCO had the responsibility as owner and licensee to ensure that the emergency diesel generators met Shoreham's performance specifications and satisfied NRC requirements.
Thus, because LILCO failed to monitor Stone & Webster or to learn about or to assume that the diesel stress problem was resolved, any concealment of that problem by Delaval would not absolve LILCO of its responsibility to-the ratepayers in this matter.
PSC Opinion at 95-96.
To allow TDI to profit by its fraudulent conduct because of the PSC's findings which refused to consider that conduct would defeat the very purpose of the doctrine of equitable estoppel..
. _. _ - -. -. _ - -. - - - - - - - - - - - - - - ~ - - - - - - - - - -
f Further, there were no PSC findings about TDI's later misrepresentations and concealment.that induced LILCO, after Stone & Webster's-supposed ~ knowledge in 1977, to believe there were.no defects in-the Shoreham crankshafts.
For example,1TDI decertified the emergency diesels' compliance with all applicable requirements in 1981.
Complaint 1 35.
TDI also performed various inspections and.other services'in connection-with' installation and start-up, Complaint 11 8, 55, yet remained conspicuously. silent about defects which doomed the emergency. diesels to certain failure.
Thus, even if Stone &~
Webster or LILCO had known of the crankshaft d'esign error'in 1977, TDI's subsequent inducement to ignore'such purported knowledge would equitably estop it from pleading the statutes of limitations.
Finally, at most the PSC's findings pertained to crankshaft design.
LILCO's claims here are not so limited.
As alleged in the Complaint, TDI's fraud extended to numerous types of extensive block cracking as well as the concealment of other defectc.
In sum, there is no identity of issues precluding LILCO's claim that TDI is equitably estopped from pleading the statutes of. limitation.15/
As detailed in the following 15/
TDI argues that LILCO was aware of the preclusive effect of PSC determinations because "in its Brief on Exceptions in (Continued) _ _ _ _ - _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
i I
L q
f sections,'even absent equitable estoppel, LILCO's claims are timely.
B.
LILCO's Contract And Breach Of Warranty claims-Are Timelv' Count.Five alleges'TDI's breach of contract; Counts Six and Eight. allege breaches of express warranties; and Counts.
Seven and Nine allege breaches of TDI's promises to repair'or L
L replace'the defective emergency diesels.
Neglecting key contract documents and the allegations of the Complaint, TDI asserts that the Uniform Commercial Code's four-year limitations period bars each of these claims.
As encouraged by Federal Ru3e of Civil Procedure 8, LILCO's contract and warranty claims concisely allege the existence of the contract and relevant warranties and the dates of the emergency diesels' multiple failures.
TDI, however, relies on counsel's improper affiance of a 1976 delivery date (Continued From Previous Page)
Shoreham PSC proceedings, LILCO requested that the PSC make no findings at that time with regard.to.the diesel generators, because LILCO would be bound by those findings in a later proceeding between LILCO and Delaval."
TDI Br. at 32.
Overzealous in its advocacy, TDI has misquoted LILCO.
LILCO had requested that the Commission refrain from ruling on the diesel issues until after conclusion of litigation by LILCO against TDI because findings of the Commission " based on an incomplete record and erroneous assumptions concerning S&W ability to detect the design defect might have an adverse impact on the interests of LILCO and hence, its ratepayers in the lawsuit." Brief on Exceptions of.the Long Island Lighting Company at 134-35 (emphasis added); see LILCO Appdx.
I. _ _ _ _ _ _ - -
I for the emergency diesels,1!/ and argues that LILCO's claims were' barred in 1980.
TDI's motion to dismiss' Counts Five through Nine should be denied as premature and improper in its reliance on matters outside the complaint.
Nevertheless, there.
are at least three additional' reasons why these causes of action did not accrue in 1976 and why the counts are, therefore, timely.
1.
TDI's Warranties Of Future Performance Were Not Breached Until The Diesels Failed Even if delivery occurred in 1976, LILCO's claims are not barred because the emergency diesels were protected by warranties of future performance.
Section 2-725(2) of the New York Uniform Commercial Code provides in pertinent part that
[a] breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.
N.Y.U.C.C.
$ 2-725(2) (McKinney 1964).
By omitting the parties' agreement to an extended warranty, TDI disingenuously asserts that there is no warranty of future performance.
TDI Br. at 34 n.19.
1p/
M111 stein's Affidavit demonstrates no personal knowledge of the delivery date. - _ - _ _ _ _ _ - _ - _ _
k
)j i
Both the Complaint and the additional contract documents' demonstrate that TDI's warranties explicitly extend to future performance.- There can be no question that the express i
warranties alleged in Counts'Six and Eight of the Complaint
" extend at'least one year after commercial operation" of the plant.
LILCo.Appdx. G-10.
See also TDI Appdx. A-llo, LILCO Appdx. G-233, -234 12/
If the. parties insended the applicable limitation period on any warranty claim to begin with the tender of delivery, there would have been no need for an extension of thefwarranty until one year after commercial operation of the plant.
To the contrary, unless this constitutes a warranty of future performance, the language is superfluous.1p/
17/
TDI acknowledges an extension of the warranty in a footnote, but attaches no importance to it.
TDI Br. at 10 n.7.
In fact, TDI misleadingly says that the warranty was extended "to a date to be mutually agreed upon" by the parties.
Id.
TDI does not mention that the date to be agreed upon was the date of commercial operation and.that the warranty extends one year past j
that date.
o la/
In addition to the extended warranties, TDI also promised certain non-exclusive remedies with their own time limitations.
Each of the warranties in Counts Six and Eight separately.
specifies a remedy and each remedial provision warranty has its own independent time limit.
See Section II.B.3 below. For example, the remedy specified after the warranty of design, workmanship and materials provides that TDI shall repair or replace a defect occurring within one year after demonstration of warranted performance in place.
TDI's replacement or repair obligatien is pegged to operation of the diesels; its general warranty obligation is pegged to the' plant's commercial operation..
.._.___.._.a
-__-___-_-----_._..__1
~
In addition to the explicit contract language that extends the warranty to future performance, the nature of the transaction.itself creates a warranty of future performance.
New York courts have often recognized that the nature of the product can imply performance over an extended period of. time.
For example, in Mittasch v. Seal Lock Burial Vault, Inc., 42 A.D.2d 573, 344 N..Y S.2d 101 (2d Dept. 1973), a burial vault was warranted to give satisfactory services at all times.
When it was'later discovered to have leaked water and become vermin infested, the court recognized that a warranty of future performance was created both by the contract Janguage and the nature of the product.19/
Similarly, TDI sold diesels for use in emergencies over the life of a nuclear power-plant.
Complaint TS 6,10,11.
TDI was told that the diesels would be used sparingly, but that extreme reliability was a paramount concern.
Complaint 1 11.
Future performance was, therefore, the essence of the contract.
Again, in Rochester Welding Supply Corp. v. Burroughs Corp., 78 A.D.2d 983, 433 N.Y.S.2d 888 (4th Dept. 1980), purchase of a computer was subject to final approval of program 3
documentation.
When the computer was delivered, it was not i
19/-
See also Parzek v. New England Log Homes, Ine_., 92 i
A.D.2d 954, 460 N.Y.S.2d 698 (3d Dept. 1983) (warranty that logs in wood home were treated to protect against' insect infestation contemplated future performance by very nature of threat). i I
1
l l
i i
)
operational.
Ultimately, it could not be programmed, but more f
than four years elapsed between the initial delivery and filing i
l i
l suit.
The contract warranty of successful programming was a
{
warranty of future perforr.ance whose breach could not have been discovered upon delivery of the computers.
Thus, the cause of action accrued upon discovery that programming was impossible.
j Similarly, the LILCO-TDI contract contemplated I
performance at a future time and discovery cf the breach had to i
await such future performance.
The parties knew the diesels would be stored after delivery for some time prior to start-up.
LILCO Appdx. G-226, -233.
Storage pursuant to TDI's instruction was a condition precedent to the warranties, as was TDI's pre-start-up inspection.
TDI Appdx. A-llO.
Like the defective computers in Rochester Welding, the defects in the emergency diesels could not have been discovered until the diesels were operated, well after initial delivery.
See also Wiltshire v.
A.H.
Robins Co.,
88 A.D.2d 1097, 453 N.Y.S.2d 72, 74 (3d Dept.
1982) (warranty of future performance arises when breach cannot necessarily be ascertained upon tender and delivery of the device).
Given these warranties of future performance, the limitations period commenced when the defects were discovered or should have been discovered.
Triangle Underwriters, Inc. v.
Honeywell, Inc., 604 F.2d 737, 743 n.ll (2d Cir. 1979), aff'd 1 I
=
after remand, 651 F.2d 132 (2d Cir. 1981); Gemini Typographers, Inc. v. Mergenthaler Linotype Co.,
48 A.D.2d 637, 368 N.Y.S.2d 210,'211-12 (1st Dept. 1975).
The crankshaft failures did not occur and, hence, were not discovered until August 1983.
Complaint 1 23.
Other failures were not discovered until even later. Id.
The four-year limitations period, therefore, did not begin to run until August 1983 and these counts are timely.
- 2. There Was No Tender Of Delivery Until The Emergency Diesels Were Installed And Tested Even absent a warranty of future performance, the four-year limitations period did not expire.
Under the.UCC, a cause of action accrues upon tender of delivery.
N.Y.U.C.C. 6 2-725(2)
(McKinney 1964).
The Complaint does not allege when tender of delivery occurred.
It does, however, allege that installation occurred under TDI's supervision and that TDI had responsibilities with respect to start-up and testing of the diesels.
Complaint 1 55.
If, over LILCO's objection, the Court considers matters beyond the Complaint, additional facts also show that tender of delivery did not occur until installation and
^
testing.
Tender of delivery occurs when the seller puts conforming goods at the buyer's disposition.
N.Y.U.C.C. $ 2-503(1)
(McKinney 1964).
Here TDI retained substantial responsibility for the diesels beyond their initial physical delivery to i l
E__._______._______.__
y y
+
6 L.
~Shoreham. lAs seen'from the purchase order included with TDI's l
filing, TDI agreed to' provide storage requirements for the.
' diesels and was to inspect the diesels prior.to start-up.
TDI Appendix A-110._
In. fact, commencement of the warranties was contingent upon proper storage _and the pre-start-up. inspection.
Thus, for' purposes of interpreting the warranties, TDI cannot be said to have relinquished the diesels to LILCO until it' conducted-the inspection.
That was in 1981.
Museler Aff. 1 44.
Since the warranties did not take effect before this inspection, it would be impossible for a cause of action for breach of these warranties to have accrued previously.
Moreover, TDI had a duty to-furnish information and advise LILCO'"in attaining a properly installed, commissioned and tested installation."
Specification SHI-89, lines 2393-2395, LILCO Appdx. G-52.
Mere physical delivery often does not constitute tender of delivery.
For example, in City of New York v. Pullman Inc.,
662 F.2d 910, 918-19 (2d Cir. 1981), cert. denied, 454 U.S.
1164 (1982), ten subway cars out of 754 were delivered for on-line testing in advance of the remainder of the order.
That delivery
.was held not to constitute tender of delivery triggering the limitations period.
The court observed that the parties contemplated on-line inspection and testing of the cars and there could be no tender of conforming goods before such inspection and testing.-
Likewise, LILCO and TDI contemplated the storage, TDI's
later inspection, and TDI's participation in the testing of the emergency diesels.
Until TDI's inspection occurred, the warranty did not commence.
And, until installation, inspection and testing-were complete, there was no tender of conforming goods.
See also Unitron Graphics, Inc. v. Mergenthaler Linotype Co.,
75 A.D.2d'783, 428 N.Y.S.2d 243, 244 (1st Dept. 1980).
At the very least, a factual question exists as to when tender occurred.
3.
Breach of TDI's Promise To Repair Or Replace Did Not Occur Until TDI Repudiated i
l In addition to the breaches of warranty pleaded in Counts Six and Eight, LILCO has alleged that TDI repudiated and breached its express promises to remedy breaches of the two express warranties.
Complaint 1 77.
Separate remedial promises were made by TDI with respect to each warranty.
Complaint 11 85, 94.
The claims in Counts Seven and Nine are not for the breaches of warranty themselves, but for TDJ's refusal'to acknowledge and remed,. them.
Breach of such a promise constitutes a separate cause of action.
Even where the cause of action for breach of warranty may have expired, a cause of action for failure o comply with the promised remedy may continue to exist.
- See, e.g.,
Shapiro v.
Long. Island Lighting Co.,
71 A.D.2d 671, 418 N.Y.S.2d 948 (2d Dept. 1979) (breach of warranty claim for defective water heater j
had expired, but plaintiff could still sue for failure to remedy l 1
I
.u________________._
j
- or replace as promised).
See also Waters v.
Massey-Fergusent Inc., No. 84-1882, slip op. at 8 (4th Cir. Oct. 28, 1985)
(failure to deliver conforming goods and failure to correct nonconformity as promised constitute two breaches of the contract).
Accrual of such a cause of action does not occur until the failure to remedy.
Here TDI's failure to remedy could not have occurred until after LILCO's discovery of the defects in 1983.
C. LILCO's Negligence And Strict Liability Claims Are Timely 1.
Count Two Asserts A Claim For Negligent Failure To i
Perform Contractual Services Contrary to TDI's contention, LILCO does not assert three essentially identical causes of action for negligence or strict liribility.
Count Two alleges that the emergency diesels ultimately failed when and as they did because of TDI's negligent performance of technical and engineering services in connection with the design, start-up and testing of the diesel generaters.
Complaint S 55.
TDI failed to advise of, warn about and assist LILCO to discover the defects which were er should have been known to TDI at the time.
j Though these allegations are sufficient to withstand a Rule 12(b)(6) motion, TDI raises matters beyond the Complaint that indicate the nature and extent of TDI's undretakings.
As discussed above, at a minimum, TDI had an obligation to provide a
, 1
~ _ - - _ _ _ - _ _ _ -
l t
" warranty inspection service" prior to start-up.
TDI Appdx. A-llO.
Pursuant to Specification SH1-89, TDI had the. duty (1) to design the diesels, perform torsional analyses-in the design of the crankshaft, perfor;m-qualification testing and
. report any repairs to LILCO, TDI Appdx. A-4,
-5, LILCO Appdx G-1,
-53 to -54 (incorporated through Purchase Order at TDI Appdx.
A-lO7); (2) to submit welding procedures'for approval, LILCO Appdx. G-15; (3) to furnish services of erection and start-up advisore, LILCO Appdx, G-52; (4) to "furndsh all possible information and advice to assist the Purchaser and/or the engineers in attaining a properly installed, commissioned and tested installation," Specification SH1-89, lines 2393-239S, LILCO Appdx. G-52; and (5) to furnish quality assurance programs and equipment qualification information, Specification SH1-89,11nes 2407, 2447, LILCO Appdx. G-52,
-53.
Moreover, the contract provided that "this application is not a standard unit End requires complete engineering."
TDI Appdx. A-5.
In short, TDI undertook to provide numerous services in design, testing, inspection and assisting with the' installation and testing of the i
diesels.
Count Two alleges that TDI negligently failed to l
perform these services by failing to advise of defects, to report
)
test results, to advise that applicable codes were not met, to report field experience, to advise of prior repairs on the engines and to perform proper inspections..
l 1
I
_m__.___________________
4 k
i Q
k.
This Court recognized this:enuse.of action pleaded in Consolidated Edison Ce. v. Westinabouse= Electric Corp., 567 F.
Supp.-358 '(S D.N.Y. 1983), a suit in which TDI's present counsel' participated.
This Court stated:
Con Ed's claim that Westinghouse undertook to. perform inspections and compile test data with' respect to'the steam generators,~and delayed informing 9
Con Ed of the-problems' revealed by those data, can fairly be characterized as alleging negligence in the performance of-services.
In light of New York's well-established recognition of such a cause of' action, even where only. economic loss is sought to be recovered, we conclude that.these allegations state an actionable claim under New York law.
Id..at 366.
See Sears, Roebuck & Co. v. Enco Associates, Inc.,
43 N.Y.2d 389,--401-N.Y.S.2d 767, 768-69, 372 N.E.2d 555-(1977)
(recognizing-applicability of six-year limitation period to claim for negligent performance of contractually required services).- Additionally, this Court held that the six-year contract statute of limitations applies to this cause of action.
567 F. Supp. at 366-67.
Since the claim sounds in negligence, the cause of action does not accrue until injury is suffered.
See Section II.C.2 below.
In Count Two, the injury is not the supply of defective diesels, but the failure of the diesels resulting i
from TDI's negligent failure to warn of their dangerous latent defects and to report the findings of engineering studies,
. =
g.
k m
mz 1L r
h tests, quality assurance. efforts and inspections throughout the continuous course:of dealings between the parties..This. injury did not~ occur _until the components broke.in 1983 and later.
Accordingly, Count Two is timely.
2.
.The Strict Liability And Negligence Claims In Counts Ten And Eleven Accrued When The Diesels Failed n.
Count Ten alleges strict liability and Count Eleven
- c..
E
-alleges ne~ligence, gross negligence or reckless disregard-for.
g public safety, both resulting from TDI's design, manufactures and supply of diesels which were unreasonably defective.and Jdangerous.20/. Contrcry'to TDI's contention, a zix-year limitations' period' applies to claims for failure to exercise due care in the performance of a contract.- Video Corp. of America v.
Frederick Flatto Associates, 58 N.Y.2d 1026, 462 N.Y.S.2d 439, 448 N.E.2d 1350 (1983); 1983 Supplementary Practice Commentary, N.Y.C.P.L.R.
56 213:2, 214:4 (McKinney
.Supp. l'986).
Although the limitations period begins to'run on both counts when the injury occurs, TDI incorrectly argues that the a
injucy occurred when the emergency diesels were delivered with
.their latent defects.
TDI Br. at 35-37.
The New York courts y
4 20/.
Despite TDI's argument, LILCO's negligence and strict liablity causes of action do not simply rehash its contract and t
' warranty claims.. Here, TDI's conduct and LILCO's damage ought tc.
be addressed in tort.
Sea Section V below. l
---__-__-___x___-______x____.---_-_
k 4
have repeatedly held-'that' property. damage from defective' goods n
occurs'upon the first property' deterioration, not'when the defective goods are deJivered.
Thus, a cause of action for property: damage ' accrued when a radio tower collapsed, not when it was sold.
Great American Indemnity Co. v. Lapp Insulator Co., 282 A.D. 545, 125 N.7.S.2d 147, 148 (4th Dept. 1953)'.
Similarly, where a purchaser of a roof sued the seller as?a~
result of water seepage, the injury occurred'when deterioration of'the' roof was first manifested, "i.e.,
when damage to-the.
building caused by water seepage wes'[first] discovered," not when the roof was sold and installed.
Queensb'ury_. Union Free School District v.
Jim Walter Corp., 82 A.D.2d 204, 442 N.Y.S.2d 650, 651 (3rd Dept. 1981), appeal dismissed, 55 N.Y.2d 745, 447 N.Y.S.2d 157, 431 N.E.2d 642 (1981).
And, a strict liability claim accrued when styrofoam-insulation first caused splits in a roof membrane as. discovered by repairmen, not when the insuiationlwas sold five and six-years earlier.
New York Seven-Up Bottling Co. v. Dow Chemical Co.,
96 A.D.2d 1051, 466 N.Y.S.2d 478 (2d Dept. 1983), aff'd, 61 N.Y.2d 828, 473 N.Y.S.2d 973, 462 N.E.2d 150 (1984).
Not surprisingly, TDI relies principally on a long string of inapposite personal injury cases dealing with 1
introduction.of deleterious substances into the human body.
1 Seu TDI Br. at 36-37.21/
In those cases, the New York courts 21/
TDI also relies on Triangle Underwriters, Inc. v.
Honeywell, Inc., 604 E.2d 737, 744 (2d Cir. 1979).
There the (Continued) a ____ _ _
.q 3 I
o have: consistently rejected a discovery rule, holding that the body is: injured as soon as.the foreign substance is introduced.
As the'New York Court of Appeals has recognized, that rule does not apply even.to the failure of a mechanical device implanted infthe body.
Martin v. Edwards Laboratories, 60 N.Y.2d
.417, 425, 469 N.Y.S.2d 923, 928-29, 457 N.E.2d.1150 (1983)
(unlike cases where deleterious substances dissolve in the 1 human body and cause harm, when the action involves implantation of a device which fails, but does not dissolve,.
.the injury occurs upon failure, not implantation).
Also,L he t
Schwartz opinion cited by TDI, though a personal injury case, recognizes'that the statute of limitations does not begin to,
run until some actual deterioration occurs.
Schwartz v. Heyden Newport Chemical Corp., 12 N.Y.2d 212, 216-17, 237 N.Y.S.2d 714, 717, 188 N.E.2d 142 (1963), modified, 12 N.Y.2d 1073, 239 N.Y.S.2d 896, 190 N.E.2d 253 (1963), cert._ denied, 374 U.S. 808 (1963).
4
.(Continued From Previous Page) 1*
Second Circuit found a negligence clain to have accrued when a computer system initially failed, not when it was delivered.
This interpretation of New York law is precisely on point and demonstrates why LILCO's injury did not occur until the crankshafts broke knd the later failures occurred. _ _ _ _ - _ - _
h.
Accordingly,:LILCO's injury-was suffered when the-diesels components broke in 1983 and later.
The Complaint L
alleges that the emergency _ diesels did not fail'until then and-
.their' defects could not have been discovered sooner.
Therefore,fthe negligence and strict liability claims-are not
. time barred.
c.,
D.
- LILCO'S Fraud And Failure To Warn' Claims Are Timely 1.-
LILCO's Failure To Warn Claim Accrued When The Diesels Failed Count 10ne alleges that TDI negli: gently, wilfully and-intentionally failedzto warn LILCO of defects in.the emergency diesel' generators.
LILCO's cause of action for failure'to warn
-did not accrue'until LILCO suffered injury as a result of the failure.
That occurred in 1983 when the crankshafts broke and thereafter.as other defects were uncovered.
See Lindsay v.
Ortho Pharmaceutical Corp.,.481 F. Supp. 314, 343 (E.D.N.Y.
1979),Jrev'd on other grounds, 637 F.2d 87 (2d Cir. 1980)
(cause of action for inadequate warning accrued upon injury, not when the inadequate warning was given consumer). -Indeed, the essence of this count is that LILCO could not have known of the defecte in advance of their failure.
Count one, therefore, complies with New York's three-year negligence statute of limitations. _ - - _ _ _ _ = _ - - _ _ - _ _ - _ _ _ _ _ _ - _ _ _ _ _ - _ _ _ _ - _
~
f'
.2.
The Fraud Claim Accrued As Late As 1983 And Was Not Discovered Until Then Count Three alleges fraud.
More'specifically, it alleges a continuing scheme by TDI from 1974 through at least 1983 involving repeated misrepresentations and concealment.
As TDI acknowledges, the statute of limitations for fraud expires six years after commission of the fraud or twoLyears after actual or constructive discovery of the fraud.
N.Y.C.P.L.R.-
$$ 203(f), 213(8) (McKinney Supp. 1986).
TDI's affirmative misrepresentations occurred in 1974, 1975, 1976, 1977 and again in 1981 when it reinspected the emergency diesels and reaffirmed their worthiness.
TDI's concealment occurred repeatedly from 1974 through 1983.
The~
damages to LILCO from each of the fraudulent concealment and misrepresentations were essentially identical:
LILCO was precluded from discovering the defects and repairing or replacing the diesels until they actually failed.
- Thus,
- another six years began with the 1981 affirmative misrepresentation that the diesels complied with the specifications and were. worthy for operation, and with each subsequent concealment.
Similarly, under the discovery rule, LILCO's cause of action did not arise until 1983 when the crankshafts broke causing LILCO's engineering analysis which led to discovery of the fraud.
By either standard, LILCO's fraud action is timely.,
1
p t
p
[.
TDI does not propose a different analysis.
Instead, it p
argues that LILCO is collaterally estopped by the PSC's findings to claim i+. was defrauded after 1977.
For the reasons discussed in Section II.A above, LILCO is not collaterally estopped by the PSC's legislative findings that, at most, prudent management and oversight of Stone & Webster's activity would have led to questions about the crankshaft design, Moreover, even TDI only argues that the PSC found that LILCO should have discovered the crankshafts' design defect, not the fraud, in 1977.
And, the PSC made no finding relating to the block cracking.
TDI also argues that Count Three is no more than a breach of contract action in fraud garb.
As a result, TDI argues, the UCC's four-year limitation period applies.
Even if TDI's premise were correct, LILCO's contract claims are not time-barred.
See Section II.B above.
But, TDI's premise is incorrect; LILCO's fraud claim is independent cf its contract claims.
See section IV below.
As the courts of New York have recognized:
The fundamental difference between tort o
and contract lies in the nature of the interests protected.
Tort actions are created to protect the interest in
~
freedom from various kinds of harm.
The duties of conduct which give rise to them are imposed by the law, and are based primarily upon social policy, and not necessarily upon the will or the intention of the parties.
/
~Victorson v. Bock Laundry Machine Co.,
37 N.Y.2d 395, 373' N.Y.S.2d 39, 41, 335 N.E.2d 275 (1975) (quoting Prosser,.2...
leth ed.).l 92, p. 613).
TDI's wrongdoing here goes beyond its.
mere failure to provide diesels conforming to its contract, though it certainly failed to do that.
TDI has deliberately or recklessly endangered the people of New York by knowingly l
providing defective equipment critical to the safety of a nuclear-power plant.
This is conduct which the law does not countenance; the potential harm is not simply' economic.22/
Indeed, TDI has violated NRC regulations imposing an. obligation to report defects.
But for the extensive testing and subsequent analysis performed by LILCO, the results of TDI's intentional wrongdoing could have been catastrophic.
.TDI.cannot escape responsibility for its conduct by dismissing the fraud claim as simply another way of seeking contract damages.
22/
TDI's reliance on Trianale Underwriters, Inc. v.
Honeywell, Inc. is again misplaced.
That case involved a defective computer system used in an insurance business, not a product vital to public health and safety..
In contrast to the NRC's regulations imposing duties on TDI, there were no regulations governing the seller's conduct with respect to defects in_the computers.
The Second Circuit acknowledged that fraud extraneous to the contract would support an independent fraud claim, but it found no such extraneous fraud alleged to have occurred after the contract was executed.
The buyer had alleged a " continuous treatment"' theory and made only a " blanket reference" to material misrepresentations, concealment and misstatements of fact.
604 F.2d at 746.
In contrast, LILCO has alleged particular instances of fraudulent conduct by TDI.
i j
l r
t E.
~LILCO'S RICO Claim Is Timely
-Count'Four all'eges that TDI's repeated fraud violated i 1962(a),and 1962(c) of RICO.
TDI wrongly' asserts 12utt Count Four is. barred by application of C.P.L.R. I 214(2) 2_3f Whether applying the two-year discovery rule in C.P.L.R.
I 213(8) or Lthe three-year discovery rule derived from the combination of
.C.P.L.R. l 214(2) and' federal' law concerning.the accrual of causesLof action, the. limitations period would not begin until LILCO knew or should have known cf the deception. causing injury.
See Bowling v. Founders Title Co.,
773 F.2d 1175, 1178 (11th Cir.'1985) (claim barred when plaintiffs learned they:had' been deceived too long before action filed);
N.Y.C.P.L.R.
l 213(8)-(McKinney 1972).
The Complaint alleges that LILCO did not discover the diesels' defects until August 1983 and thereafter, and could not have discovered them earlier.
Complaint 1 23.
Discovery of the fraud must have come later.
23/
Contrary to TDI's assertion, this Court has rejected the notion that the three-year New York limitation period for liabilities " created or imposed by statute,"
N.Y.C.P.L.R.
I 214(2), applies uniformly to all RICO claims.
- Instead, N.Y.C.P.L.R.
I 214(2) contains a specific exception for fraud.
As a result,.New. York's six-year /two-year statute of limitations governing an action based on fraud, C.P.L.R.
5 213(8), should apply to a RICO claim alleging acts of mail and wire fraud.
Fustok v. Conticommodity Serv., Inc., 618 F. Supp. 1076, 1080-81
- (S.D.N.Y. 1985).
TDI miscites Durante Bros. & Sons v. Flushing Nat'l Bank, 755 F.2d 239 (2d Cir.), cert. denied, 105 S.Ct. 3530 (1985). That case did not involve a RICO claim predicated on
-underlying acts of fraud. -_
1" f
1:
1 l
Thus, the limitations period could not have begun until Ju2 gust 1983 at the earliest.
The parties had a standstill agreement for one-year between July 1, 1984 and June 30, 1985.
This action was filed on Axigust 30, 1985, within two years of discovering the predicate acts of fraud.
As discussed above, the'PSC's findings are not l
dispositive.
Again, in addition to the lack of issue preclusion resulting from the PSC's legislative ratemaking, the RICO issues.here are clearly different.
The PSC made no finding about when LILCO knew or should have known that it had been defrauded or about the effect of nunerous' post-1977 misrepresentations-and concealment.
Nor did the PSC discuss
.the blocks. 'TDI addresses none of these differences.
For all of these reasons, the motion to dismiss Count l
Four ought to be denied.
III.
LILCO HAS STATED A RICO CAUSE OF ACTION I
Overlooking allegations of repeated mail and wire fraud, TDI argues that Count Four fails to state a cause of action under RICO.
According to TDI, "[ijt is difficult to imagine circumstances which would ever give rise to both a breach of warranty or products liability suit and a RICC suit."
TDI Br. at 43 n.28.
This wishful assertion ignore's the facts in this case.
The Complaint particularly alleges a pattern of concealment and misrepresentations calculated to prevent LILCO
~62-
j 1
and'others~from. discovering numerous known or suspected defects in complex machinery necessary for the protection of.public health and safety..
It requires-no imagination to see that the repeated fraudulent representations and concealment to LILCO,,
l to the American Bureau of Shipping and other owners of nuclear
. power plants manifest a pervasive fraudulent scheme conducted
-by TDI and is precisely the type of fraud-for-profit business that RICO is intended to remedy and deter.24/
Thus, none of-14/
TDI wrongly characterizes RICO as a statute which outlaws-only racketeering activity " engaged in by. mobs.ters." - TDI Br. atL
- 42. - This narrow view of RICO was unequivocally rejected by the Supreme CourtLin Sedima, S.P.R.L. v.
Imrex Co., 105 S.Ct. 3275 (1985)..
Section 1962.
. makes it unlawful for any person
-- not just mobsters -- to use money derived from a pattern of-racketeering activity to invest in an enterprise, to acquire control of an enterprise through a pattern of racketeering activity, or.to conduct an enterprise through a pattern of racketeering activity.
66 1962(a)-(c).
Id. at 3285 (emphasis added).
- Moreover, Congress wanted to reach both "legi-timate" and "illeginate" enterprises.
The former enjoy neither an inherent incapacity for criminal activity nor immunity from its consequences.
The fact that [RICO) is used against respected businesses allegedly engaged in a pattern of specifically identified criminal conduct is hardly a sufficient reason for assuming that the provision is being misconstrued.
Id. at 3287 (citation omitted).
- D
.-m-TDI's arguments warrant dismissal of all'or any part of LILCO's RICO' claim.
A.
The Complaint Alleges A Clear, Identifiable " Pattern Of-Racketeering" And Gives Adequate Notice of-The Facts Supporting The RICO Claim l-1.
'The Complaint Alleges A Pattern of Racketeering Activity Although LILCO's Complaint describes a. continuous, pervasive pattern-of racketeering consisting of much more than two. isolated acts, TDI characterizes its conduct as a " single, unitary. fraudulent scheme" evidenced by only isolated acts.
TDI Br. at 46.
TDI attempts to parlay this mischaracterization of LILCO's Complaint into.an argument that LILCO's RICO count.
fails to' allege a " pattern of racketeering "
TDI apparently has lost sight of both the Complaint and the liberal standard for evaluating it under Rule 12(b)(6).
See Conley v.
- Gibson, 355 U.S. 41, 45-6 (1957).
LILCO has alleged a pervasive scheme to defraud that far exceeded a fraudulent scheme to sell emergency diesels to LILCO.
See TDI Br. at 46.
TDI's scheme extended over at least u
9 years, long after the sale, included withholding of vital safety information required by law to be disclosed, and involved fraudulent misrepresentations made not only to LILCO, but to the American Bureau of Shipping and other nuclear customers as well.
Complaint 11 4-25, 27-50, 58-74.
The - _ - _ - _
p,, m
- = - - - - - - - - - - -- ------- = -
iE*
~
'W
' 4 a
wp y,
,e fraudulent scheme alleged by LILCO constitutes a pattern oi o
- racketeering' sufficient to satisfy any' test-thus far announced.
- t.,e Accordingly,-LILCO's'cause ofLaction should not be.
^
dihmissed.21/
Contrary to' TDI-'s assertion, Sedima did not instruct:
s..
11e '" federal; courts 'to apply a stringent pattern _ requirement to narrow the increasing divergence between what Congress intended
- p and'theextraordinaryfuses to which civ.il RICO has been put.'"
TDI Br. at 45..The Supreme Court's dictum in Sedima only stated that lower courts had failed to' develop a meaningful concept of pattern.
105 S.Ct. at 3287.
It did not assert that two acts of racketeering activity will almost'never constitute the requisite' pattern.
Id. at 3285 n.14. -Moreover, by-suggesting that lower courts develop a more meaningful concept of " pattern" by requiring continuity plus' relationship, the Court did not indicate that pre-Sedima cases dealing with the pattern requirement were decided incorrectly.
Id.
In fact, the-Second Circuit and this Court had begun to develop a meaningful concept of pattern well before the Sedima decision.
i.
That concept comports with the Supreme Court's sedima guidance.
I 21/
As discussed below, TDI wrongly argues that the RICO count is insufficiently particular to satisfy Rule 9(b).
Such H
requirement of additional particularity applies, at most, to the underlying acts of fraud, not to the " pattern" requirement. L____-_
h
x This Court ~first. defined a " pattern of racketeering" in
]!nited States v. Stofsky, 409 F. Supp. 609 (S.D.N.Y. 1973),
aff'd,'527 F.2d 237 (2d Cir. 1975).
In Stofsky, officials and employees of.a fur garment manufacturing union were charged with criminal RICO violations predicated on a series of violations of the Taft-Hattley Law.
Id. at 614.
When the union defendants meved to dismiss the RICO count for failure to allege a " pattern of racketeering,"
the Court acknowledged a need to limit the " pattern concept" and stated that "the word
' pattern' should be. construed as requiring more than accidental or unrelated instances of prescribed behavior."
Id. at 613.
The Stefsky court t's guided by 18 U.S.C.
i 3575 of the Organized Crime Control Act of 1970, a later provision of the same bill that enacted RICO.
Sedima, likewise suggested that l
the language of 6 3575(e) may be useful to interpret RICO's
" pattern" requirement.
Sedima, 105 S.Ct. at 3285 n.14.
Section 3575(e) defines d' pattern of criminal conduct" as follows:
l
[C]riminal conduct forms a pattern if it embraces criminal acts that have the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.
18.U.S.C. $ 357' ie) (1982). After considering the definition of
" pattern" in 5 3575(e), the Stofsky Court stated: - -
vrm;.
Y
- lT]he entire statutory:schemefindicates-that?if these acts were isolated and unrelated they do not. add up:to the kind of activity Congress meant to; desgr.i' e g
when it used the word " pattern. ". Thz's '
Court therefore' construes the' word
'" pattern"~as' including.a' requirement that' 4
'the racketeering. acts must have been-connected with.~each other by'some common H.
. scheme, plan or motive so asito constitute.a pattern and not simply a, series of' disconnected acts.
409 F.Supp at 614.26/
Thus, the predicate acts must be related and part of a common. scheme.
This Court has twice rejected the argument advanced by TDI that separate acts of mail and wire fraud
- arising out of a common nucleus of facts (or "a single, unitary scheme")'doLnot. form a " pattern of racketeering."
In United
~
L States v. Chovanec, 467 F. Supp. 41 (S.D.N.Y. 1979), the Court rejected the defendant's contention that six incidents of wire 26/ '
See also United States v. Field, 432 F. Supp. 55, 60
~ (S.D.N.Y. 1977), aff'd, 578 F.2d-1371 (2d Cir. 1978) cert.
dismissed, 439 U.S. 801 (1978)
("[A]ssuming arguendo'that two isolated acts of racketeering activity within ten. years of each other is g2r se insufficient to constitute a pattern.
. Field is in a poor position to obtain a dismissal of the indictment on this-ground.
He is charged here with fourteen separate acts within a four year period under circumstances which, if proved at trial, would seem to' constitute a clear pattern of conduct.");
United States v. weisman, 624 F.2d 1118, 1122~42d Cir. 1980),
cert. denied, 449 U.S. 871 (1980) ("While we agree with appellant Weisman that RICO was not intended.to apply to sporadic and unrelated criminal acts the enterprise itself supplies a significant. unifying' link between the various predicate acts specified in Section 1961(1) that may constitate a ' pattern of racketeering activity.'")
_.L_L._..-
.-------....n..,_
_.m I
' fraud on one victim over a four-week. period did not comprise a
'.[
pattern of racketeering activity.
Relying on Stofsky, the.
Court stated:
[I']t.is precisely the fact that the same victim is alleged that may serve as the connecting link in predicate acts to establish a " pat tern. "
It appears that defendant "would,equire a showing of separate and unrelated schemes, as a
.x precondition for finding twoLindictable
' acts'.-
. that would constitute a
' pattern of racketeering activity'.under
[RICO)."
United States v. Witherspoon, 581 F.2d 595, 601 n.2 (7th Cir. 1978).
The Court declines to adopt an inter-pretation of the statute.as urged by defendant which is not only contrary to the. plain language of the statute, but which might render it unconstitutional.
Id. at 44.
Similarly, in Beth Israel Medical Center v.
Smith, 576 F. Supp. 1061 (S.D.N.Y.
1983), this Court rejected the contention that separate acts of mail and wire fraud did.not form a " pattern of racketeering" because they arose out-of a common nucleus of facts:
First, the plain language of the statute refers to "any act which is indictable" under the mail or wire fraud statutes, without a qualification that each act must occur in a different factual situation.
Second, it would contradict the requirement of a " pattern of racketeering activity" to hold that the acts making up the pattern must take place in unconnected factual circumstances. ____-__-__:__-___-_______--_--___
l 4
4 L
I-I o
Id. at 1066.
1
~
Again, in-a post ~Sedima decision directly responsive to 3
TDI's argument,:. this Court stated:
Although it is.true that "two isolated
-acts of. racketeering do not constitute a pattern," Sedima, S.P.R.L.
v.
Imrex Co.,
U.S.
105 S.Ct. 3275, 3285 n.14 (1985), when two acts which relate to each other and arise out of the same scheme are alleged, the requirement of pleading a " pattern of racketeering activity" has been met.
Conan Properties, Inc.
v.
Mattel, Inc., 619 F. Supp. 1167, 1170 (S.D.N.Y. 1985).
Thus, TDI's " single scheme" argument simply does not reflect the applicable law.
Accordingly, it is no accident that TDI fails to cite,a single case from this Court or by the Second Circuit on the
" pattern" requirement.
Instead, TDI relies on several cases from other jurisdictions.
Even they do not support its argunient,
In Kredietbank, N.V. v. Joyce Morris, Inc., No.84-1903, I
slip. op. (D.N.J. Oct. 11, 1985), the court concluded that the mere submission of two false affidavits in connection with a single matter under litigation would not, without more, constitute a pp.ttern of racketeering activity.
The court noted, however, that "[iln contrast, the fact that an
. enterprise makes it a practice to submit false affidavits in lawsuits in general in which it is involved might well indicate '
g ll1 l :. n b
',J.L o
1-a patterncof. unlawful activity." Id.
Paragraph 48 of LILCO's Complaint alleges that TDI.made it a practice'to make 1
. fraudulent representations"to other nuclear owners as well as TDI.
In Allington v.
Carpenter,L619 F. Supp. 474 (C.D. Cal.
' 1985), before idue court even discussed the " pattern of
. racketeering activity," it held that the: plaintiffs had1 failed c,
l to allege that.any of the defendants acted with an intent'to L
IL defraud or that they had participated in the alleged: scheme in any'way at all.
Id. at 476 17/
In Morgan'v. '4,ank of Waukeaan, 615 F. Supp. 836 (N.D. Ill. 1985), the complaint was so deficient that the court found it'"hard to decipher precisely what [t]he cause.of action was when sought to be:placed da the RICO matrix.".id. at 838.
As a result, Morgan did not even analyze the' concept of " pattern of racketeering," but merely stated that the complaint did not satisfy the " pattern 1of racketeering activity" requirement.
Similarly, the court in Rojas v. First Bank National Association, 613 F.
Supp. 968-
-(E.D.N.Y. 1985) did not dismiss the complaint for failure to allege a sufficient pattern, but because the complaint alleged 27/_
Only then did the Allington court state that three alleged acts of wire fraud within a few weeks of each other did not demonstrate a' sufficient threat of continuity to constitute a
. pattern ofl racketeering activity.
In any event, LILCO's Complaint alleges a persistently fraudulent method of doing business. demonstrating a serious threat of future recurrence. <
i___._____._____________
mrn
.j l
i
-no facts'to. support'any finding of fraud.
Id. at 971.28/
I Additionally, Northern Trust Bank /O' Hare, N.A. v.
.Inryeo, Inc.,:615 F. Supp. 828 (N.D. Ill. 1985) has been rejected by a'later decision from the same court.
In Trak Microcomputer Corp. v. Wearne Brothers, No. 84-C-7970, slip.
op. (N.D. Ill. Oct. 25, 1985), the court asserted:
[T]his court does not agree with the suggestion [in Inryco) that a " pattern of racketeering activity" cannot be' established with respect to a single
- fraudulent scheme.
The act does-not suggest that a " pattern of racketeering activity" means a pattern of fraudulent schemes; it merely requires a pattern'of " racketeering activity."
~
Sedima does not compel a contrary interpretation.
Nothing in the language of Sedima suggests that in order to find i'
a " pattern of racketeering activity" a pattern of fraudulent schemes must be pled.
Rather, Sedima only requires that the racketeering activity be continuous and'related.
Id.29/
Consequently, Professional Assets Management, Inc. v.
28/
Accordingly, the Rojas court did not even analyze the
'* pattern" requirement.
It merely stated in a dictum footnote that "[e}ven if plaintiff had proved the acts charged in the complaint, he would still not have demonstrated a ' pattern' of racketeering activity," id. at 971 n.1, because the complaint l-only outlined isolated acts arising out of two discrete transactions.
Id.
29 Inryco also runs afoul of Sedima.
The Inryeo court ju/stified its interpretation of RICO by the " normal canon of (Continued) f
1 Penn Square Bank, N.A.,
616 F. Supp. 1418 (W.D. Okla. 1985) is also suspect because-of its reliance on Inryeo.
More important, the alleged fraud in Assets Management related-to a-
-single' audit report, a pale comparison to TDI's fraudulent scheme against LILCO affecting 3 emergency diesels and other entities ~over 6 years.
In sum, LILCO's Complaint alleges an expansive nine-year scheme to defraud by TDI, in'which the RICO predicate acts are all related to the same industry-wide scheme with the intent of deceiving LILCO, the American Bureau of Shipping, TDI's other nuclear customers and, by implication, the NRC.
TDI specifically defrauded LILCO about the defective crankshafts, block top cracking and cam gallery cracks.
The fraudulett scheme should be a classic example of " continuity plus relationship which combines to produce a pattern."
Sedima, 105 S.Ct. at 3285 (quoting S. Rep. No.91-617, p. 158 (1969) (emphasis in original).
(Continued From Previous Page) narrowly construing penal statutes."
615 F.Supp at 832.
Yet the Supreme Court has instructed that civil RICO is a remedial statute, not a penal statute, and "is to be read broadly."
Sedima, 105 S.Ct. at 3286.. _ _ _ _. _ _ _ _.
L l
I 2.
The Complaint Pleads The Predicate Acts With Sufficient Particularity TDI claims that LILCO has failed to plead the RICO predicate offenses of mail and wire fraud with sufficient particularity, in violation of Rule 9(b) of the Federal Rules of Civil Procedure.
TDI Br. at 44 n.29.
Perhaps sensing the futility of the argument, TDI relegates it to a footnote.
O Although Rule 9 requires that the circumstances constituting fraud be stated with particularity, it does not abrogate Rule 8 which requires only that a plaintiff give I
notice of the nature of his claim by "a short and plain statement of the claim showing that the pleader is entitled to relief."
Fed. R. Civ. P.
8(a)(2).
Rule 9 merely specifies
~
what is required to give notice to a defendant when fraud is alleged.
Credit & Finance Corp. v. Warner & Swasey Co.,
638 F.2d 563, 566-67 (2d Cir. 1981) (only fair notice to the defendant of the plaintiff's claim and the grounds upon which it rests is required).
A RICO complaint satisfies Rule 9(b) if it specifies the nature and operation of the scheme in which the defendant 9
is alleged to have participated.
Beth Israel Medical Center v.
Smith, 576 F.
Supp. at 1070-71.
See Trak Microcomputer Corp. v. Wearne Brothers, No. 84 C-7970, slip op. (N.D.Ill.
Oct. 25, 1985)
(Rule 9(b) requires allegations of fraud to be sufficiently particular to notify defendants of the conduct
) __
i.
l;l el e
o..
i complained'of;and. enable them to prepare a defense, but.does-Fnot; require ~ plaintiff to plead evidentiary matters);
- Haroco,
[
Inc. v.LAmerican' National-Bank &' Trust Co. of Chicago, 747 F.2d 7
384, 405 (7th Cir; 1984), aff'd on other grounds; 105 S.Ct.
3291 (1985)
'(complaint satisfied Rule 9(b) because it "specified the transactions, the content of the allegedly-. false
~
representations, and'the identities of those involved l.
- [which) put defendants on fair notice of.the time. and. place of the alleged false' representation");
Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984),Ecert. denied, 105 S.Ct. 1179 (1905) (while
~
allegations of.date, place or time' fulfill the functions of Rule 9(b), "nothing in the. rule requires them [in a'RICO e
complaint).
Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into i
'their' allegations of fraud.").
LILCO's' Complaint.gives a detailed description-of the.
fraudulent scheme conducted by TDI.
Complaint 11 4-25, 27-50, 58-74.
In fact, LILCO's Complaint is even more specific than the Complaint upheld by this Court in Beth Israel which did not specify particular. communications that violated the mail and wire fraud statutes.
576 F. Supp. at 1071.
Despite this, the Beth Israel Court refusad to dismiss because "[i]n light of the complaint's allegations, it [was) certainly reasonable to infer _ - _ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ - _
~
f l-Lj 1
)
i
-that mail and/or telephone communications were used in the furtherance of the defendant's scheme.
Id.
LILCO's Complaint does not require this Court to infer that TDI used the mail and wires in its fraudulent. scheme.
It describes at' least five specific predicate acts of mail or wire fraud.
L Complaint 11.31-35, 69.
Although TDI cites several cases in which RICO Complaints.were dismissed for failure to satisfy Rule 9(b), TDI never states any particular reasons why LILCO's Complaint fails to comply with Rule 9(b).
TDI Br. et 44 n.29.
TDI merely cites its cases, and then states "[a]s discussed in detail below, plaintiff has totally failed to meet the 9(b) requirements for pleading a fraud claim.
See IV.
B., supra."
Id.
Yet,Section IV. B.
of TDI's Brief never discusses this assertion in detail; it merely states that "LILCO fails to set forth the misrepresentations referred to in Comp 1. 1 13 with particularity."
TDI Br. at 57-58.
TDI ignores the specific r:: misrepresentations alleged in 11 31-35 of the Complaint.30/
30/
TDI'.sSection IV. B. also relies on Todd v. Oppenheimer &
Co.,
78 F.R.D. 415, 420-21 (S.D.N.Y. 1978) and Gross v.
Diversified Mortgage Investors, 431 F. Supp. 1080, 1087 (S.D.N.Y.
1977), aff'd mem., 636 E.2d 1201 (2d Cir. 1980).
Todd acknowledges that Rule 9(b) must be reconciled with the notice pleading requirement i Rule 8.
78 F.R.D. at 419.
Both cases i
recognize that the three purposes of the specificity requirement l
are (1) to inhibit the filing of complaints as a pretext for discovery of unknown wrongs; (2) to protect potential defendants (Continued) - __
GQ}M y/
3
[
N m u.
u. om 4
F n; sum' LILCO l gives ample'- notical of. its claiim.-. It:
I
~
specifies;the nature of'the' fraudulent predicate acts.
It specifies 5when the frauddoccurred and'what was said or I
' concealed.
Accordingly, Rules 8 and 9(b) are satisfied.
1
'(Continued From Previous'Page)-
- from" harm to their reputations from groundlers allegationsLof fraud;'and (3)'to ensure that allegations ofLfraud are concrete and particularized enough to'give notice to-the defendants;of.the-fraud alleged.
431 F.-Supp. at-1087, 78.F.R.D. at 419-20..
t LILCO's ' detailed Complaint' satisfies c a11 these concerns: (1) the wrongdoing of TDI-is known -- though its full extentoremains.
. uncovered'-- and there is no pretext; (2).both:the allegations in-the. Complaintand.the--Affidavits" filed with this Response remove any. hint that.the allegations'are groundless; and (3 ) -TDI has:
certainly been. apprised of the claim.
1Similarly. inapposite are the.other cases cited-by TDI where RICOLcounts were dismissed for lack of. specificity..See Moss'v.' Morgan' Stanley'Inc., 719 F.2d 5,'17-19 (2d Cir. 1983),
cert.Ldenied,,104 S.Ct. 1280 (1984)-(plaintiff failed to' allege that defendant defrauded him in violation of the securities fraud
' laws);.'Mauriber v.
Shearson/American Express, Inc., 546 F. Supp.
391, 394;(S.D.N.Y. 1982)-(complaint < failed-to "specify which
. defendant told which lie and under what circumstances ');
' Hellenic Lines, Ltd. v. O'Hearn, 523 F.:Supp. 244, 249 (S.D.N.Y.
1981) (plaintiff asserted that-it had'been presented with " false-and fraudulent invoices," but failed tonspecify any particular.
' invoices:that were fraudulent);
Hudson v. LaRouche, 579 F. Supp.
623,~629-(S.D.N.Y. 1983) (RICO count failed to. allege the' involvement of any of the defendants in the fraudulent. acts and also failed'to describe'in'any way the fraudulent representations made);
-Serig'v. South' Cook County Serv. Corp., 581 F. Supp.
'575,579-80 (N.D.Ill. 1984) (plaintiff did not. allege sufficient
' facts from which a fraudulent scheme could be. inferred, did not state a violation'of the mail fraud statute under state or federal law, and failed to allege what.the" enterprise was and how the' enterprise's activities were engaged in or affected interstate commerce).
. =
l
}
B.
TDI, Through Its Officers And Agents, Conducted The Fraudulent Scheme That Injured LILCO 1.
A Corporate'" Enterprise" Can Be Sued.As The
" Person" If The Corporation Conducts Its Affairs Through A Pattern Of Racketeering Activity i.-
As one alternative, 1 71 of_the Complaint alleges that "TDI conducted and participated in the conduct of its own
~
affairs through a pattern of racketeering activity in violation of 18 U.S.C. i 1962(c)."31/
TDI contends that the RICO count should be dismissed because it is alleged to be the " person" who has conducted a pattern of racketeering ac.tivity as well as the " enterprise" whose affairs were conducted through a pattern of racketeering.
TDI Br. at 50.
~
While it would be inappropriate to allege that a corporation is both the culpable defendant and the enterprise where the corporation is :nerely a passive instrument or victim of the racketeering activiuy, it is entirely appropriate to do so in this situation whe: 2 TDI itself is the perpetrator of the fraudulent scheme.
See Blakey, The RICO Civil Fraud Action in Context:
Reflections on Bennett v. Berg, 58 Notre Dame L. Rev.
237, 323 (1982) ("[T]he remedial purpose of the statute would 31/
In the alternative, the Complaint alleges that TDI conducted the affairs of Transamerica Corporation.
See Section III.B.2 below.
Thus, Count Four is sufficient regardless of the outcome of this argument. - - - _ -
1
'be enhan~ced bylsuch'an. attribution where the individual-or:
entity'was pl'aying the' role of ' perpetrator.'") -TDI's i
fraudulent' scheme was so pervasive and continued over such a j
.q
.long period of time that TDI was, in fact,-conducting its own I
l affairs through a pattern of racketeering activity, The' scheme U
alleged was so extensive that it demonstrates-a corporate knowledge of the scheme and corporate intent to defraud.
In United States v. Hartley, 678 F.2d 961 (11th Cir-.
1982), cert. denied, 459 U.S.
1183 (1983), the Eleventh Circuit held that a corporation could simultaneously be named as a defendant and the enterprise under 9 1962(c).
It noted the Supreme Court's. willingness to read the statute broadly and expand the scope of its application.
Id. at 988.
See also Sedima, 105 S.Ct. at 3286.
The court stressed that its decision was supported not only by RICO itself, but also by principles of basic corporation law.
Although.a corporation is a distinct legal entity, "[ijn rare, special circumstances,
. courts will ' pierce the corporate veil' FMC Finance Corp. v. Murphree, 632 F.2d 413, 421 (5th L
Cir. 1980).
the do not intend to analyze this issue under corporate doctrines, but by analogy [this corporation) can be dissected and viewed in a different light for each of the roles it assumes in this case.
As a defendant, it can maintain its separate legal status as an ongoing business venture.
By piercing through L
this sterile exterior, however, it can be revealed as an association of employees, i
officers, and agents working as a unit to effectuate a common purpose -- to defraud _ _ _ _ - _ _ - - _ - _ - _ _ _ _ _ - _ - _ - _ _ _ _ - - - _
L
, ;./
i lv p
the governments Viewed in.this manner, it takes the form'of a " group.of.
individuals ~associatednin fact," or !.n
~the1words of.the.[ Supreme) Court, "a
n
- group of persons' associated.together. for E
a commonLpurpose of.engagingsin a course-of conduct.." 452.U.S. at 583, 1 0 1~ S. '. C t.
at~2528.' Evidence of itsfongoing: nature,
, and "that the. various associates function-
- as a continuing unit" satisfies the enterprise element of RICO.
LI_d.
.(This corporation's) problem liesLin the fact that its corporate structure admits the characteristics essential to-the formation of'an: association in fact -.a
' fact which renders its argument concerning the elimination'of the enterprise element nugatory.
678 F.2d at 989.
s:
TDI fits Hartley's description of a corporation that can and-should-be both defendant and enterprise in a'$ 1962(c}
claim.
.The' extensive fraudulent scheme alleged'in LILCO's Complaint ~ reveals TDI to be an association of employees, officers and agents' working as a unit to effectuate a common purpose -- to defraud LILCO and other purchasers of TDI diesel
- engines.
Therefore, LILCO's Complaint properly casts TDI as both the enterprise and the defendant in its claim under i 1962(c).
The Second Circuit's holding in Bennett v. United J
States Trust Co. of N.Y., 770 F.2d 308-(2d Cir. 1985) does not bar this allegation.
Although the Court there held that separate entities must be alleged as the enterprise and the defendant in a 6 1962(c) claim, its reasoning is not totally - _ _ _ _ _ _ - _ _
n-,,-
3 1
i l
]
~
preclusive.
After observing that the Act's language envisions
-two entities,.the-court explained:
q 4
[R]equiring a distinction between'the enterprise,and the' person comports with legislative intent and policy Such a distinction focuses the section on the culpable party and recognizes that the enterprise itself is often a passive instrument'or victin of the racketeering activity.
- 770'F.2d at 315.
TDI, however, was not a passive instrument or victim of the fraudulent' scheme against LILCo.
LILCo's allegation;that TDIEconducted its own affairs through a pattern of racketeering in violation of 5 1962(c) is consistent with legislative intent and policy,.as well.as the rationale of the Second Circuit's
~
holding in Bennett.32/
32/
TDI also cites several other cases without discussing the
' holdingn of those cases.
In three of the cases, the court merely stated that 6 1962(c) requires separate entities as the defendant and the enterprise as m' foregone conclusion, but did.not analyze I
i the issue.
Rae v. Union Bank, 725 F.2d 478 (9th Cir. 1984);
i Bennett v. Berg,.710 F.2d 1361 (8th Cir. 1983), cert. denied, 104 S.Ct. 527 (1983);
Kaufman v. Chase Manhattan Bank, N.A.,
581 F. Supp. 350 (S.D.N.Y. 1984).
Indeed, in Bennett v. Berg, the extent of the court's treatment of the issue was'a footnote which read in its entirety "With respect to Count II, the panel concluded that plaintiffs have failed to allege an enterprise apart from John Knox Village, the only defendant named in Count II."
710 F.2d at 1364 n.4.
.It is' interesting to note that in Hudson v. LaRouche, 579
. F..Supp. 623.(S.D.N.Y. 1983), one of the cases cited by TDI (TDI Br. at 51), the court did "[ fault the] complaint for failure to distinguish enterprises from the individual defendants."
579 F.
(Continued) f l
u
9:
J Alte' natively, Transamerica Corporation Is The Enterprise 2.
r
.Even if the Court'does not hold that TDI could be both'
~
the " person" and the " enterprise" under i 1962(c), the Complaint.nevertheless is sufficient.
Paragraph 72. alleges alternatively that TDI conducted and participated in the O
conduct of the affairs of its' parent corporation, Transamerica, through'a pattern of racketeering activity.
TDI's characterization of this allegation as a " transparent attempt to plead around the Bennett Rule,"
TDI Br. at 51 n.35, once again disregards the procedural standards appl'icable to its motion and.the applicable substantive precedent.
Though no Second Circuit cases directly address the point, the Seventh Circuit has rejected the position taken by TDI.
In Haroco, Inc. v.
American National Bank & Truct Co. of (Continued From Previous Page)
.Supp. at 628. Despite this, however, the court did not dismiss the plaintiff's complaint because, if read liberally, it appeared to allege an enterprise separate from the defendants.
Id.
LILCO's Complaint, if read liberally, alleges that TDI and its parent corporation, Transamerica Inc. were an enterprise separate from TDI.
TDI also cites Bulk Oil (ZUG) A.G. v. Sun Co.,
583 F.Supp 1134 (S.D.N.Y. 1983), aff'd, 742 F.2d 1431 (2d. Cir.1984) but fails to explain that the court did not dismiss the complaint for alleging an identical person and enterprise, but rather because,
"[m] ore significantly.
the complaint [did] not state a claim of' injury from violation of section 1962(c) no matter who is considered the person or the enterprise."
Id. at 1145. - _ _ _ _ _ _ _ _ - _
n - _-
2!
Chicago, 747 F.2d 384 (7th Cir. 1984),-aff'd on other grounds, 105-S.Ct. 3291: (1985), the defendants argued that mere allegation of a parent-subsidiary relationship was not e
I sufficient'under 6 1962(c).
The court disagreed, stating:
q l
However, the complaint alleges that ANB I
is a. wholly owned' subsidiary of Heller International, and we think it virtually
{
self-evident that a subsidiary nets on behalf of, and thus conducts the affairs of, its parent corporation.
We doubt that more detailed allegations on the subject would serve any useful purposa and we see no reason to require them.
-Id. at 402-03 (footnote omitted).
1 Improvidently citing United States v.
Scotto, 641 F.2d 47 (2d Cir. 1980), cert. denied, 452 U.S.
961 (1981), TDI suggests that Transamerica, the parent corporation, cannot be the enterprise unless it can be shown that it participated in the wrongdoing.
TDI Br. at 51.33/
In Scotto, the defendant argued that the predicate acts must concern or relate to the operation or management of the enterprise and affect the affairs of the enterprise in its eesential function.
The Second Circuit squarely rejected this argument:
,3,3/
The other two cases cited by TDI in support do not deal with this issue.
Both Bennett v. Berg, 710 F.2d 1361, 1304 (8th Cir. 1983),.and United states v. Mandel, 591 F.2d 1347, 1375 (4th
)
Cir. 1978), cert. denied, 445 U.S.
961 (1980), merely hold that 6 1962(c) requires some involvement of the. defendant in the i
conduct of the enterprise.
~82-I l
m7 1;
l
.Section 1962(c) nowhere requires proof regarding the. advancement of the i
b
[ enterprise's] affairs by the defendant's activities, or. proof that the
[ enterprise] itself is' corrupt, or proof-that the.[ enterprise) authorized the defendant to do whatever acts form the.
E
' basis for the charge.
It requires only L
that the defendant's acts were L-committed in the conduct of the
[ enterprise's]' affairs.
641 F.2d at 54 (quoting United States v. Field, 432 F. Supp. at 58).
See also United States v.
Stofsky, 409 F. Supp. 609, 613' (S.D.N.Y 1973) (RICO does not require that the predicate acts be in furtherance of the enterprise).
Accordingly, LILCO's 5 1962(c) claim sufficiently alleges that TDI conducted the affairs of Transamerica through a pattern of racketeering and, for this alternative reason should not be dismissed.
'f
.)
C.
.The Complaint Identifies The Enterprise In Which TDI l
Invested Racketeering Profits Paragraph 70 of LILCO's Compl'aint alleges that i
i TDI received income, either directly or indirectly, from a pattern of racketeering activity in which TDI-participated at a principal and used and invested part of such income and the proceeds of such income in ope ~ating an enterprise engaged in, and whose activities affect, interstate commerce in violation of 18 U.S.C. i 1962(a).
Yet, TDI wrongly claims that LILCO's i 1962(a) claim is legally deficient because it does not identify an enterprise in l l
l FF 1
which TDI invested racketeering profits.
TDI Br. at.52.
Only.
two enterprises are alleged in Count Four, TDI and Transamerica.
The allegation of either is sufficient to 1
i support a cause of action under i 1962(a).
Thus, the Complaint complies with the notice pleading requirements of Rule 8 of the Federal Rules of Civil Procedure.34/
TDI maintains that "[ijf Delaval is claimed to be the enterprise, the Bennett rule is violated; if Transamerica is claimed to be the enterprise, the Scotto rule is violated."
TDI Br. at 53.
Again, TDI ignores precedent.
TDI can be both the defendant and the enterprise under 6 1962(a) without violating the "Bennett rule".
As this Court noted in.
Lumbard v.
Maglia, Inc., 621 F.
Supp. 1529, 1534, (S.D.N.Y, 1985), Bennett'only discussed whether the enterprise and defendant could be the same entity under 5 1962(c), not i 1962(a).
See also Conan Properties, Inc. v. Mattel, Inc.,
619 F. Supp. 1167 (S.D.N.Y. 1985)
. (plaintiff adequately pleaded l
34/
TDI cites only one case, Guerrero v. Katzen, 571 F. Supp.
714 (D.D.C. 1983) and once again misstates its holding.
TDI states that in Guerrero, "[t]he RICO counts were dismissed since the failure to identify an enterprise went to the heart of a violation of i 1962(a)."
TDI Br. at 52-3.
While the complaint in Guerrero f ailed to allege the enterprise," it, more fundamentally, " allege [d) nothing about the investment of the proceeds of racketeering activity in an enterprise."
571 F.
Supp, at 721.
Additionally, the court dismissed for failure to allege " racketeering enterprise" injury, id. at 720, a requirement specifically rejected by Sedima.
1 N
o a-cause'of; action:underil 1962(a) by' alleging that.the k
defendantLinvestedithe proceedsJof a patternnof racketeering
]
g activity;in its own operations).35J
[LILCO's i 1962(a)" claim is.also sufficient because it alleges that the proceeds of' racketeering activity were 6:
invested in Transamerica.
As is_ explained above,.there is no "Scotto.rul'e" requiring that.Transamerica, as the enterprise,
-have any involvement in'the racketeering activity.36/
r IV. - LILCO'HAS A SEPARATE CLAIM FOR COMMON LAW' FRAUD Count Three alleges that LILCO was fraudulently induced
'to enter.the contract with TDI, to accept delivery of, install and operate the emergency diesel: generators and to forestall, t
testing,. examination and. analysis of the emergency diesels until n' time when-the discovery of the defects greatly 35/
- The-Seventh Circuit has followed this reason 1ng also
' Subsection (a) does not-contain any of the language in subsection (c) which suggests that the liable person and the enterprise must.be separate.
1 Under subsection (a), therefore,~the liable person may be a corporation'using the proceeds of a pattern of racketeering activity in its operations.
Haroco, Inc. v. American Nat'l Bank & Trust Co.,
747 F.2d at 402.
36/
As a practical matter, the scope of Transamerica's involvement-is-unknown, but the subject of pending discovery.
LILCO has noticed the deposition of Transamerica, but has deferred the deposition pending resolution of TDI's motion to stay' discovery.
i 85.
i l
i
)
___-m_
_________._____--_-____m._m._~______.m__m_-__
_____m_
= _ _ _ _. _
m
nn
~
I I
increased LILCO's costs in constructing and licensing Shoreham.
1
.J l
Complaint
.62.
TDI'sffraud prevented LILCO from discovering.
j and corr'ecting the defects and' seeking. appropriate remedies at.
an. earlier. time.
Complaint S 63 The fraud contravened TDI's common-law' duties, the professional responsibilities.of engineers employed by.TDI and express reporting. duties imposed 1
by the NRC.
See 10 CFR Part 21.
Ignoring the Complaint's allegations of repeated and continuous deception concerning this vital safety equipment,
~
r
-TDI argues that LILCO fails to state a separately cognizable fraud claim because."New York law does not recognize a cause of action for ' fraudulent breach of contract.'"
TDI Br. at 54.37/
TDI characterizes LILCO's allegations.of fraud as "Delaval's
. purported failure te properly perform the contract," and asserts that the allegations of fraud "do not state a claim 37/
TDI also argues that the Connplaint fails with particularity to set out a claim of fraud in the inducement to contract.
The Complaint sets forth many specific instances of fraudulent. misrepresentations and concealment which occurred after the contract was issued,~but, in part, before delivery of the emergency diesels.
Some of'these related to design defects known to TDI, others to known or suspected casting defects.
Since LILCO's discovery requests to TDI have not been substantively answered, LILCO believes, but does not know the particulars, that (1) TDI never intended to perform the necessary design checks, quality assurance and quality control functions necessary to produce the emergency diesels.as required by the NRC, and (2) TDI further misrepresented the industry's experience
.with various components on TD1 diesel engines and TDI's in-place mechanism to accumulate, evaluate, disseminate and apply information concerning such industry experience. -
I l
L
_ separate from-the. alleged breach of contract."
Id. at 55.. :n)I.
also argues that it has no liability for consequential damages.
l TDI Br. at 67-69.-. Essentially, therefore, TDI argues that its contract is a' license to defraud LILCO and imperil those'who might be affected by a nuclear accident.
Contrary to TDI's contention, the applicable law does not permit a contracting e
l-party to commit fraud with impunity.
TDI incorrectly contends that Brick v.
Cohn-Hall-Marx Co., 276 N.Y. 259, 11 N.E.2d 902 (1937) and progeny flatly disallow a claim of fraud in the same action with a claim for breach of contract.
TDI's argument fails for at least two reasons.
The holding in. Brick only applies when plaintiffs artificially seek to extend a contract limitations period by casting a contract claim in fraud clothing.
Shaitelman v.
. Phoenix Mutual Life Insurance Co.,
517 F. Supp. 21, 23 (S.D.N.Y. 1980).
As discussed throughout this Response, LILCO has stated distinct contract'and fraud claims.
Perhaps most important, TDI'a fraud was extraneous to the contract because TDI breached independent, non-contractual duties owed to LILCO.
I i
)
I u
l.. l
<j
-i'l 1
A.
BrickEApplies Only To Prevent Circumvention Of'The' Statute Of' Limitations Brick does not: instruct that claims for fraud and-
. breach of contract cannot arise from the.same' underlying facts.
New York courts have often recognized separately stated fraud claims arising out of the same transactions that occasion l--
claims for breach of contract.
- See, e.g.,
Shaitelman v.
Phoenix Mutual Life Insurance Co., 517 F. Supp. 21-(S.D.N.Y.
1980);
H. Novinson & Co. v. City of New York, S'3 A.D.2d 831, 385 N.Y.S.2d 317 (1st Dept. 1976);
Stell Manufacturing Corp.
- v. Century Industries, 15 A.D.2d 87, 221 N.Y.S.2d 528 (1st Dept. 1961).
Brick only prevents a party from attempting to cast a stale contract claim in terms of fraudulent breach of
contract to take advantage of a longer statute of limitations.
In Stell Manufacturing, money was wrongfully withheld through wrongful double debiting pursuant to a factoring agreement, thereby causing plaintiffs to make an assignment of assets'for the benefit of creditors.
The court rejected defendants' argument that Brick precluded the action, stating instead that Brick merely related to statute of limitations issues, not the right of a plaintiff to maintain a' claim for fraud:
In the case before us no question of the statute of limitations is involved.
Even if this be deemed an action in contract, admittedly the action is timely. Nor do we think Brick v. Cohn-Hall-Marx Co.,
supra, should be construed as holding l i
_m
~
N s
J that where a' contract is the source of a relationship between' parties,: torts-y committed in the course of and made
'possible by such' relationship should be protected-from. independent attack, and the limit of. recovery.be restricted to damages for the breach of such contract.
This would seem an unnecessary extension a
of-the views there expressed and, in
?
effect,. provide a shield or umbrella of
' protection for a wrongdoer.
If there was a knowing and intentional fraudulent-misrepresentation, intended to induce reliance, which was justifiably relied on, thereby causing damage to plaintiffs,. plaintiffs should be allowed to plead and prove their case.
221 N.Y.S.2d at 530-31.
In.H. Novinson & Co.,
the City counterclaimed for fradd
'in'the inducement of payments for work not performed.
,Though
.11er recipients admitted improper billing and acknowledged that the. City had made the payments in question, the trial court dismissed the fraud' counterclaim because of-Brick..The LAppellate Division reversed, stating:
In Brick.... the issue was whether the statute of limitations for fraud or for contract should be imposed where plaintiff. claimed fraudulent misrepresentation of sales upon which, pursuant to contract, royalties were to be. calculated.
The Court held the contract period of limitations (which had expired) applied.because the plaintiff l
had no claim in the absence of the i
contract.
Here, while the relationship had its genesis in contract, the right to recover and counterclaim does not depend upon contract enforcement.
Furthermore, '
l the requests for damages seeking forfeiture and punitive-relief.do not render the claim insufficient. -Punitive and exemplary damages are allowed when-the fraud is{ aimed at the public' generally.
385 N.Y.S.2d at 318 (citations omitted).
And, in Shaitelman v. Phoenix Mutual Life Insurance go, this Court considered an action for breach of contract, 2
i
' fraudulent misrepresentatiori,-and wrongful' discharge by two insurance salesmen.against their former employer.
Plaintiffs alleged that the. employer fraudulently induced them to continue in its employ.by knowing and false misrepresentations.about their compensation.
This Court rejected the' employer's argument that the fraud claim was simply a restatement of the' breach of contract claims and allowed plaintiffs to maintain their-claims for fraudulent misrepresentation, as well as their claims for breach of contract.
The Court noted an action for fraudulent misrepresentation, independently pleaded, can constitute a cause of-action in addition to, or as an alternative to, an action for breach of contract.
The Court distinguished Brick, saying:
The string of cases relied upon-by the defendant for the proposition that New York Courts will disallow an alternative pleading of fraud in an action for breach L
ni contract are inapposite.
In a number of those cases the plaintiff brought an action for fraud rather than for breach l-of contract or alleged a fraudulent breach of~ contract in order to circumvent the shorter statute of limitations which i
f I'
attaches in'an action for breach of contract.
Brick v. Cohn-Hall-Marx Co.,
L 276 N.Y. 259, 11 N.E.2d 902 (1937);
Trianale Underwriters, Inc. v. Honeywell Inc., 457 F.
Supp. 765, 770 (E.D.N.Y.
1978).
Still others of.the cases relied upon by defendant pertain to situations where no independent claim of fraud was set forth in the pleadings.
Rather, the plaintiffs in those actions pleaded fraudulent breach of contract or breach of contract with fraudulent intent.
Id. at 23 (citations omitted).38/
In sum, the limited holding of Brick and progeny, even if still viable, has no application here. The limitations period for LILCO's'several contract and warranty claims has not expired.
See Sections II.A, II.B above.
Therefore, LILCO has no need to attempt to circumvent the contract limitations period by pleading fraud.
Instead, LILCO has pleaded an independent fraud claim to remedy egregious fraud extraneous to the contract.39/
38/
Indeed, it is questionable whether even Brick's limited holding is still good law.
The premise underlying Brick was that plaintiff's claim for fraud was time barred because the " essence of the action" was breach of contract and the contract statute of limitations had expired.
But this " essence of the action" rule has no application in contemporary civil practice and has been abandoned by the New York courts in cases alleging injury to commercial interests.
See Video Corp. of America v. Frederick Flatto Assoc., 58 N.Y.2d 1026, 462 N.Y.S.2d 439, 448 N.E.2d 1350 (1983);
Baratta v. Kozlowski, 94 A.D.2d 454, 464 N.Y.S.2d 803 (2d Dept. 1983); Klock v. Lehman Bros. Kuhn Loeb, 584 F. Supp.
210 (S.D.N.Y. 1984).
39/
The New York Court of Appeals has not expounded on the breadth of Brick's application and the Appellate Division cases _
(Continued) l i
B.
TDI's Fraud Was Extraneous To The Contract Even Brick expressly recognizes the actionability of.
fraud extraneous to the contract, i.e.,
arising'from independent duties owed by the defendant.
See Shaitelman v.
Phoenix Mutual Life Insurance Co.,
517 F. Supp. 21, 23 (S.D.N.Y. 1980) (fraud can be based on an independent duty which springs from a contract relationship).
TDI's fraud violated several independent duties owed LILCO.
First, TDI had a common law duty to warn LILCO of potential defects in the emergency diesel generators that.might pose a danger to the public health and safety.
- See, e.g.,
Cover v'. Cohen, 61 N.Y.2d 261, 274-75, 473 N.Y.S.2d 378, 385,'
461 N.E.2d 864 (1984) (manufacturer has continuing duty to warn of dangers in use of a product that came to his attention (Continued From Previous Page) are in conflict.
of the cases cited at pp. 54-55 of TDI's Brief, Miller v. Colunbia Records, 70 Misc.2d 517, 415 N.Y.S.2d 869, 871 (1st Dept. 1979); Miller v. Volk & Huxley, Inc., 44 A.D.2d 810, 355 N.Y.S.2d 605, 606-07 (1st Dept. 1974), Freyne v. Xerox Corp.,
98 A.D.2d 965, 470 N.Y.S.2d 187, 188 (4th Dept. 1983), and Sherkate Sahami Khass Rapol v. Jahn & Son, 531 F. Supp.
- 1048, 1061 (S.D.N.Y. 1982), aff'd, 701 F.2d 1049 (2d Cir. 1983),
applied Brick when there was no statute of limitations question.
None of those cases discussed whether Brick is restricted to limitations questions, however, so this Court should assume that issue was simply not considered and the courts, consequently, applied Brick incorrectly.
The Brick issue in Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 748 (2d Cir.
1979) arose in a statute of limitations context. E__________
f L
after, manufacture or sale); Schumacher v. Richards Shear Co.,
159'N.Y.2d 239, 246-47, 464 N.Y.S.2d 437, 441, 451 N.E. 2d 195 (1983) (enunciating general duty to warn where there is a special relationship, " frequently economic")
See also Kerr v.
Koemm, 557 F. Supp. 283, 286 (S.D.N.Y. 1983);
Restatement ISecond) of Torts i 388 (1965 Supp. 1984).49/ When that common law duty is simply ignored,'there is negligence.
When that duty is flaunted.by affirmatively and fraudulently misleading conduct, there is fraud.
'Second, apart from the contract,. federal regulations impose a duty to report and warn of defects.
NRC regulations require all vendors of components used in nuclear power plants to report to the NRC and the plant owner any actual or potential deficiencies in the components.
These regulations have been effective since 1978.
Id.
TDI, as a supplier of equipment for use in a nuclear power plant, was required to' report known or potential defects in the emergency-diesel generators.31/ Again, TDI's affirmatively misleading conduct concealing known and suspected defects constituted a 40/
The duty to warn of dangerous defects arises from common law, though the contract also imposes such a duty in this case.
41/
There is no question that emergency diesel generators
.come within the reporting requirements.
Compare 10 C.F.R.
I 21.3(a)(1) (deIining " basic components") with 10 C.F.R. Part 50 Appendix.A, General Design Criterion 17 (prescribing the requirement for emergency power sources). - _ _ _ _ _ _ _ _
- - _ =
' i.
. fraudulent violation of these standards imposed by the NRC independent of the LILCO-TDI Coutract.
Third, TDI'also breached the independent duty of'its
~
staff engineers to warn users about design defects.
The D -
fraudulent misrepresentation made by TDI were explicitly made or sanctioned by engineers in California who have a duty to
~
warn identifiable persons off engineering deficiencies that pose an imminent risk of serieur; injuries, whether or not the engineer was responsible for causing the defect.
See opinion of'the California Attorney General's Office, no.85-208, Sep-I tember 17, 1985 (LILCO Appdx~. J); Cal. Bus. & Prof. Code i 6775(c) (West'1975, Supp. 1986) (LILCO Appdx. K).-
TDI not only knew or suspected.the emergency diesel generators were defective and posed an imminent risk of serious injury, TDI was responsible for creat$ng the defeecs.
Under these facts, TDI had an affirmative, extra-contractual duty to warn LILCO of the defects.
See also lohnson v. California, 69 Cal.2d 782, 447 P.2d 352, 355, 73 Ca.1.Rptr. 240 (1968) (state held liable for damages because employee of Youth Authority placed youth with homicidal tendencies in a foster home without giving notice to foster parents of youth's dangerous propensities); Tarasoff v.
Regents of University of California, 17 Cal.3d 425, 551 P.2d 334, 351, 131 Cal.Rptr. 14 (1976) (psychotherapist held liable I
for wrongful death because of failure to warn victim that i
1 patient had expressed intention to kill her).
A professional has a duty to warn when there is a predictable threat of harm to a readily identifiable group of victsms.
TDI's conduct is more egregious than that in Johnson or Tarasoff because TDI was directly responsible for the creation of the defective and dangerous condition of the emergency diesels.
Again, TDI actively, not just negligently, concealed the defects from LILCO.
In sum, Brick does not bar LILCO's fraud claim which stands independent of TDI's contractual duties.42/
The motion to dismiss Count Three should, therefore, be d'enied.
V.
LILCO IS ENTITLED TO RECOVER DAMAGES UNDER ITS NEGLIGENCE AND EIRICT LIABILITY CLAIMS
~
TDI seeks to avoid liability for damages which it characterizes as " economic loss"43/ on the ground that LILCO's 42/
The cases cited by TDI do not support its analysis.
TDI Br. at 54-55.
In Miller v. Columbia Records, Miller v. Volk &
Huxley, Triangle Underwriters v. Honeywell and Freyne v. Xerox Corp, there was no analysis of the fraud claim.
In Sherkate, the alleged. fraud involved compensation claimed under a letter of credit for nonconforming goods.
The issue was clearly whether the goods conformed to the contract.
l 43/
Whether LILCO's Complaint seeks " economic loss" which is not recoverable or damages to its property which are recoverable under tort theories of liability begs the question.
As the discussion indicates, the analysis must focus on the nature of the harm created by TDI's conduct.
If the injury is caused by exposure to an unreasonably dangerous and defective condition, LILCO is entitled to recover damages, including those damages which might otherwise be described as economic loss, under its negligence and strict liability claims.
l (..
r negligence and' strict liability claims allege-only that the emergency diesel, generators' failed to perform c: expected.
Relying upon a line of cases beginning with Schiavone Construction'Co. v. Elgood Mayo Corp., 56 N.Y.2d 667, 451 N.Y.S.2d 720, 436fN.E.2d 1322 (1982), TD1 contends that claimants seeking to recover economic loss for'the non-performance of a product are' relegated to contractual. remedies and may not sue in negligence or strict liablity.
TDI's e
contentions-ignore both the pleadings and well settled law.
TDI employs this argument to attack Counts Two, Ten and
-Eleven.
As discussed above, TDI wrongly lumps Count Two with-the others.
Count Two alleges TDI's negligent failure to perform contractual services.
This Court-has expressly recognized the recoverability of economic loss in such a claim.
Consolidated Edison Co. v. Westinghouse Electric Corp., 567 F.
Supp. 358, 363-66 (S.D.N.Y. 1983), motion to dismiss denied, 594 F.
Supp. 69b (S.D.N.Y. 1984)
See Section II.C.1 above.
As to Counts Ten and Eleven, TDI's argument ignores important distinctions between the actual-injury incurred and the risk of injury posed by the defective diesels.
The gravamen of LILCO's strict liability claim is that TDI sold diesel generators-to LILCO that were " unreasonably dangerous" and TDI failed to warn LILCO'about the unreasonably dangerous and defective condition.
Complaint 11 98 and 100.44/
Count 44/
Where the issue presented is the application of the rule against recovery of economic loss, the courts do not distinguish (Continued)
Eleven alleges'that TDI negligently designed and manufactured the emergency diesels and concealed information about their defective. design.
Complaint 11 49-53.
The complaint further alleges-that TDJ's misconduct endangered public safety.
Complaint 1 104.
Without operative diesels, safety systems necessary to cool the reactor's core and shut down'the reactor might not operate in the event of postulated accidents and anticipated operational occurrences.
Complaint 1 6.
In that event, the safety of workers at the plant and residents outside the plant, as well as property at and around the plant would be imperiled.
In short, TDI's conduct created serious risk of injury to persons and property.
Moreover, both the Complaint and the Museler Affidavit plainly establish that the crankshaft failures were rudden and totally unexpected.
Complaint 1 23, Museler Aff. 1 21.
The crankshaft fracture rendered one emergency diesel generator insperable.
Later LILCO discovered that the two remaining emergency diesels also had cracks in their crankshafts.
That (Continued From Previous Page) between claims sounding in negligence and strict liability.
E.g.,
Seely v. White Motor Co.,
63 Cal.2d 9, 403 P.2d 145, 151, 45 Cal.Rptr. 17 (1965).
If there is an unreasonable risk of i
harm, then both theories of liability should lie.
East River Steamship Corp. v. Delaval Turbine Inc., 752 F.2d 903, 908 n.2 (3d Cir. 1985),. cert. granted sub nom, East River Steamship Corp.
- v. Transamerica Delaval, Inc., 106 S.Ct. 56 (1985).
I - _ _.
no cn3 was physically harmsd by the calamitous fracture of tha
. crankshaft is a distinction without a difference.
Thus, the gist of LILCO's tort claims is not that it
" failed to receive the quality of product [it] expected, but that [it and the public have] been exposed, through a hazardous
' product, to an unreasonable risk of injury to.
. person or.
. property."
Pennsylvania Glass Sand Corp. v.
Caterpillar Tractor Co.,
652 F.2d 1165, 1169 (3d Cir. 1981)
(footnote omitted) (even though damage limited to the defective product, unreasonable risk of injury supported a tort remedy).
" Tort law has traditionally redressed injuries properly classified as physical harm to person or property.
Id. at 1170.
See also Victorson v.
Bock Laundry Machine Co., 37 N.Y.2d 395, 373 N.Y.S.2d 39, 335 N.E.2d 275 (1975).
The seminal case that applied the distinction between qualitative defects and defects posing physical harm to person or property is Seely v. White Motor Co.,
63 Cal.2d 9, 403 P.2d 145, 45 Cal.
Rptr. 17 (1965).
In Seely, Justice Traynor wrote that when the defect-is of a type that creates a safety hazard, "[p]hysical injury to property is so akin to personal injury that there is no reason for distinguishing them."
403 P.2d at 152.
While deterioration and other defects of poor quality should be considered non-recoverable economic loss, "' sudden and calamitous damage will almost always result in direct property )
damnga' racovarablo in tort."
Pennsylvania Ginsa Sand Corp. v.
1
. Caterpillar Tractor Co.,
652 F.2d at 1172 (quoting Cloud v. Kit Manufacturing Co., 563'P.2d 248, 251 (Alaska 1977)).
See also John R. Dudley Construction, Inc. v. Drott Manufacturing Co.,
66 A.D.2d 368, 412 N.Y.S.2d 512, 515 (4th Dept. 1979)'(sudden structural failure of bolts connecting superstructure of crane to undercarriage caused collapse of crane with consequent damage to the crane).45/
A manufacturer's responsibility to market safe products does not depend on the fortuity of whether or not a person
~
escapes injury.
Pennsylvania Glass, supra, at 1172 (citing Seely v. White Motor-Co., 403 P.2d at 151).
When the damage.
caused by a dangerous condition is lj.niisd te the product alone with no' attendant injury to persons or other property, the "line that is drawn usually depends on the nature of the defect and the manner in which the damage occurred."
Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co.,
652 F.2d at 1169.
"The defect causing the injuries must be unreasonably dangerous to the owner of the product or to third parties."
Butler v.
Pittway Corp., No. 85 7092, slip op, at 5397 (2d Cir. Aug. 2, 45/
Like the failure in the Dudley case, the failure of the crankshaft in Diesel Generator 102 severely damaged other engine components including connecting rod bearings, the jacket water pump, governor and generator rotor.
Muzeler Aff. T 22, Complaint 1 21. t
1985) (quoting Schievenn, 56 N.Y.2d at 669,-451 N.Y.S.2d at 721).
Certainly, many defects do not create such a hazard, while others expose the owner, third parties, or property to an unreasonably dangerous condition.
- See, e.g.,
Sharon Steel RCorp. v. Lakeshore, Inc., 753 F.2d 851, 855 (10th Cir. 1985)
(improper manufacture of sheave wheel shaft created j.
unreasonable risk of. injury); U.S. Home Corp. v. Georae W.
Kennedy Construction Co.,
565 F.
Supp. 67, 68-69 (N.D.Ill.
1983) (truss pipe failure caused collapse of portion of sewer system); ICI Australia Ltd.. v. Elliott Overseas Co., 551 F.
Supp. 265, 268 (D.N.J. 1982) (sudden and catastrophic failure of compressor coupling caused damage to feedgas train).
Not surprisingly, TDI fails to mention the Second Circuit's recent de-4aion in Butler v. Pittway Corp., supra.
The opinion demonstrates that TDI's reliance upon Schiavone and its progeny is completely misplaced in this context.
In Butler, the plaintiffs purchased Pittway smoke detectors which failed to sound a timely alarm, aggravating the extent of fire damage to the Butlers' home.
Like TDI, Pittway moved to dismiss plaintiffs' property damage claim arguing that
" economic losses" were not recoverable in a tort action.
The district court granted Pittvay's motion concluding that the detectors had only failed to " perform as promised."
The Second Circuit reversed, explaining a distinction established in Schiavone that:
-100-
o' plaintiff in Nsw York'is rologntsd to contractual rcmsdios and cannot maintain a tort action.when a " product, although not itself unduly ~ dangerous, does not function L
properly; resulting in economic loss other than physical damage to persons or-property."
l Id. at 228, 439 N.Y.S.2d at.937.
However.,
j the dissent [whose position was later adopted j
on appeal] distinguished those cases for i
which recovery in tort might be sought, namely:
"[w]here the product.is unduly dangerous so that the defect causes physical
. damage, presumably due to an accident, to either persons or property."
Id., 439 N.Y.S.2d at 937.
Id. at 5394 (quoting the lower court's dissenting opinion by Judge Silverman).
1
-Following the Third Circuit's lead in Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir. 1981), the Second Circuit concluded that the analysis does not stop with a simplistic characterization of plaintiff's claim as economic loss.
Instead, a court must examine the nature of the defect and determine whether the defect creates a safety hazard which exposes plaintiff to an unreasonably dangerous condition.
Slip op. at 5397-98.
The cases upon which TDI relies were distinguished because they
" oversimplified [d] the holding of Schiavone."
Slip op. at 5400 n.1.
.Those cases "were properly characterized as economic loss actions because the products' defects were either not dangerous and/or there was no personal injury or property damage suffered."
Id.
Because the court could not say as a matter of
-101-
~$
- w
-lcwithst:0 malfunctioning smoka detector is not a dengarous-3
_ product,11t hel'd-that plaintiffs were' entitled to an opportunity to show that the alleged failure of the smoke detector exposed them to:an unreasonably dangerous condition.
Slip'op. at 5400-01.-
y It is also not surprising that TDI fails to~ mention the c.
Third' Circuit's"most-recent treatment'of this issue.
In'. East River Steamship Corp. v. Delaval' Turbine, Inc., 752 F.2d 903 (3d-Cir,'1935), cert. cranted sub nom, East River Steamship Corp.-v. Transamerica Delaval, Inc., 106 S.Ct. 56'(1985), TDI contracted to provide high bressure turbines as the main propulsion units for four supertanker.
The turbines developed
.mechanicaliproblems including defective parts which required'
~
replacement.
The issue before the court was whether damage to-a product; caused by a design defect is recoverable in tort.
Applying analogous admiralty law, the Third Circuit explained that such damage is'not recoverable unless.the design defect
" pose [s] an. unreasonable risk of harm to persons or property-other than the product itself, as measured by the nature of the
' design defect, the manner in which the defect manifests itseli',
and the nature of the inherent risk, if any, created by the
' design defect."
Id. at 904.
-102-
Send,.tha~ccurt daccrib2d tha framawork.f r datormining wh2n plaintiff's l'co mny b2 radrancsd $n otrict liability or o
s
- negligence:
In determining whether tort law should provide a remedy for the plaintiff's losses, the court in PGS considered the nature of the defect, the manner in which the defect manifested itself, and the nature of the risk which was inherent in the defect.
The court held that because the design defect was safety-related, because the defect could and did manifest itself in sudden and calamitous manner, and because the safety hazard posed a serious risk to persons and property, the
' plaintiff stated a cause action in tort for the damages it suffered.
Id. at 908.
Unlike the case at bar, the supertanker owners in East River Steamship proved no risk other than to their economic interests.
Id. 'When the turbines developed mechanical problems, there was no threat to the safety of persons or property.
Id. at 909.
"Unlike PGS, there was no ' sudden or calamitous' event'which triggered the manifestation of the defect and the resulting damage" to the Delaval turbines.
Id.
The risk created by the defect was simply that the ships' speed 7
would be reduced causing down-time for repairs and lost profits.
Id.
Unlike LILCO, the supertanker owners failed to allege that the Delaval turbines were unreasonably dangerous or caused injury.
-103-l
.th31cvailcbility of;o-' tort rsmsdy'.
The potential for. failure.
'inLcmargsney dioosl ganaratoro cupporting a nuclear power plant creates ~a serious risk and threat to personal safety and property.- That the crankshaft, block and other-defects manifested themselves during LILCO's comprehensive' testing 1
_ program-instead of during.a nuclear accident'does not alter the unreasonable danger created by TDI's misconduct.
Accordingly, LILCO should.be. afforded'an opportunity to demonstrate that the diesel. generators' defects exposed LILCO and the public to an unreasonably dangerous condition and that:its damages flowed-from those defects and the resulting failures.
Counts Two, Ten and Eleven should not be dismissed.
VI.
THE PURPORTED CONTRACTUAL LIMITATION OF LIABILITY DOES NOT BAR LILCO'S RECOVERY OF DAMAGES Again exceeding the proper scope of a Rule 12(b)(6) motion, TDI argues generally that consequential damages are barred by the LILCO-TDI contract.
TDI Br. at 67-69.
The allegedly applicable contract provision is not contained in the Complaint.46/
Yet even if the Court considers this 46/
There is at least a factual conflict as to whether the purported contract limitation on consequential damages is partially or totally abrogated by other contract provisions.
For example, the Purchase Order includes TDI's agreement to indemnify (Continued)
-104-
1 l'
l procedurally premature argument, the damage allegations should net be dismissed in whole or in part because (3) the damages sought are not consequential; (2) TDI's intentional wrongdoing and gross negligence overcome the effect of any contract limitation;. (3) the contractual damage' limitation is also not applicable to TDI's negligence and strict liability; and (4) the. limitation is ineffective even to contract damages because other contractually provided remedies have failed of their
~
essential purpose.
A.
The Damages Sought By LILCO Are Not Consequential Contrary to TDI's assertions, the damages which LILCO seeks to recover in thi's lawsuit cannot be characterized as consequential.
Paragraph 25 of the Complaint, which TDI wants to dismiss. totally, includes such damages at the price LILCO paid TDI for the diesels, the costs of determining the cause of the defects and fixing the diesels and testing the remedies, licensing costs, and future inspections and monitoring to ensure the reliability of the diesels, all clearly direct (Continued From Previous Page)
LILCO for all liability, costs, and the like arising out of any claim or suit or for "public charges and penalties for failure to comply with Federal,. State or local law" arising out of any "act or omission, negligent or otherwise," of TDI, except when LILCO
.was solely negligent as judicially established.
TDI Appdx. A-113.
l
-105-1 I
)
damages.
Other damages, such as costs of purchasing other diesels to mitigate for the absence of the defective emergency diesels were necessarily incurred because the repair or replacement promised by TDI in its contract was hot delivered.
Necessary expenses incurred to mitigate damages are always j
recoverable.
E.g.,
Spang Industries v. Aetna Casualty and Surety Co.,
512 F.2d 365, 369-71 (2d Cir. 1975); Den Norske Ameriekalinje Actiesselskabet v.
Sun Printing & Publishing Association, 226 N.Y.
1, 122 N.E. 463, 465 (1919).
In contrast to LILCO's particularized damage allegations, TDI does not undertake any specific discussion of the damages claimed.
The Court should, therefore, conclude that this is but a half-heartei argument which TDI knows is inappropriate at this time.
Since it is impossible to determine on the record before the Court that the damages claimed are consequential, dismissal is not appropriate and TDI's motion should be denied.
B.
TDI's Intentional Wrongdoing And Gross Negligence Entitle LILCO To Recover Consequential Damages Even if the Court could characterize the damages as consequential, the Complaint states a valid claim for their
~
recovery.
A contractual limitation of liability may not be enforced if it would permit a party to avoid liability for damages caused by intentional wrongdoing or gross negligence.
-106-
I 1
Ealisch-Jarche, Inc.
- v. City of_New York, 58 N.Y.2d 377, 461 N.Y.S.2d 746, 749-50, 448 N.E.2d 413 (1983);
I.C.C. Metals, 4
Inc. v. Municipal Warehouse Co.,
50 N.Y.2d 657, 431 N.Y.S.2d 372, 376, 409 N.E.2d 849 (1980).
Thus dismissal would be inappropriate since the Complaint alleges in detail fraud, i
willful and wanton conduct and gross negligence by TDI.
Such callous disregard for safety plus the inherent bad faith in TDI's contractual dealings should not be rewarded by upholding the contractual damage limitation.
It has long been settled that a contractual limitation of liability for consequential damages does not bar recovery of such damages if a party's claims of fraudulent inducement to contract are sustained.
See International Business Machines Corp. v. Catamere Enterprises, Inc., 548 F.2d 1065, 1076 (1st Cir. 1976), cert.,deni ed, 431 U.S. 960 (1977) (decided under New York law); Price Brothers v. Oldn Construction, Inc., 528 F. Supp. 716, 721 (W.D.N.Y. 1981); Applications Inc.
- v. Hewlett-Packard Co., 501 F. Supp. 129, 136 (S.D.N.Y. 1980);
American Electric Power Co.
- v. Westinghouse Electric Corp., 418 F. Supp.
l, 435, 460 (S.D.N.Y. 1976).
Recent developments in New York law indicate that LILCO is also entitled to consequential damages if it suffered such damages as a result of TDI's intentional misconduct.or grass negligence in the performance of its duties under the contract.
In Kalisch-Jarcho, Inc. v. City of New
-107-l 1
o___-------------_.---
1 I
i
'q York, supra, a construction contractor contended that the j
I f
delays were caused by the-City's active interference.
The New York Court of Appeals held that a contractual limitation on delay damages could not be enforced when, in contravention of acceptable notions of morality, the misconduct for which it would grant immunity smacks of intentional wrongdoing.
This can be explicit, as when it is fraudulent, malicious.or prompted by the sinister intention of one. acting in bad faith.
Or, when, as in gross negligence, it betokens a.ceckless indifference to the rights of others, it may be implicit.
461 N.Y.S.2d at'750 (footnotes and citations omitted).
The court emphasized that "the policy which condemns such conduct is so firm" that it overcomes the intentions of the parties in framing such a provision.
Id.
Similarly, in I.C.C. Metals, Inc. v. Municipal Warehouse, Co.,
supra, the Court of Appeals held that a contractual limitation on liability could not be enforced if there was a showing of intentional wrongdoing:
It has long been the law in this State that a warehouse, like a common carrier, may limit its liability for loss of or damage to stored goods even if the injury L
or loss is the result of the warehouse's negligence.
This rule is premised on the distinction between an intentional and an unintentional tort.
Although public policy will in many L
situations countenance voluntary prior I
limitations upon that liability which the law would otherwise impose upon one who acts carelessly, such prior limitations may not properly be applied so as to
-108-l I
g
_7
-1 l
- \\
dismissione's-liability 1for injuries resulting from an affirmative and intentional act of-misconduct
.. Any.
other rule would encourage wrongdoing.
l
. 431 N.Y.S.2d at 376 (citations omitted).
l
}
oncefagain, the cases cited by TDI are inapposite.
-j l --
t
. Only one,. American~ Electric Power Co. v. Westinghouse'Electrie Corp., supra, involves claims of intentional wrongdoing.- It.is also-the only case cited which was decided under New York law.47/
And, contrary to.TDI's position,.there the court held
.that'a contractual limitation precluding recovery of consequential damages could not'be effective if the plaintiff's.
fraud claims were sustained at' trial. '418 F.
Supp. at 460.
Furthermore,fthe decision predated.I.C.C. Metals, Inc. v.
Municipal Warehouse Co.,
supra, and Kalisch-Jarche, Inc. v.
- City of New York, supra.
. C.
The Consequential Damage Exclusion Also Does Not Apply To Negligence And Strict Liability In addition to its inapplicability to fraud, intentional' wrongdoing and gross negligence, any contractual damages limitation would also be inapplicable to LILCO's
- recovery under Counts Two,-Ten and Eleven alleging various theories of negligence and strict liability.
d7/
Royal Indemnity Co. v. Westinghouse Elec. Corp., 385 F.
Supp. 520 (S.D.N.Y. 1974), was decided under New Jersey law.
-109-wh
-m__.__2mm-_._______
_m___m__m.
___m m.__.m._
New York recognizes contractual disclaimers of tort-liability' only when the exclusion is " clear," " explicit," and-
" unequivocal."
Gross v.~
Sweet, 49 N.Y.2d 102, 424 N.Y.S.2d 365, 368, 400 N.E.2d 306 (1979).
The limitation of liability 4
must plainly' extend to negligence or other fault.
Id.
See a3so Willard Van Dyke Productions, Inc. v. Eastman Kodak Co.,
12 N.Y.2d 301, 239 N.Y S.2d 337, 339, 189 N.E.2d 693-(1963).
p.
Even then, such exculpatory clauses are not favored and are closely scrutinized.
Id.
Every inference is drawn against their enforcement.
Gross v.
Sweet, supra, at 367.
The purported limitation of liability cited.in TDI's Brief, p. 68, has no such explicit language.
It broadly states that "[u]nder no circumstances shall Delaval be liable for special or consequential damages.
It does not mention negligence or any other tort liability.
Especially, therefore, at the pleadings stage, the Court should presume the purported contractual limitation of liability inapplicable to tort damages.
While New York courts do not require that the word
" negligence" explicitly appear, "words of similar import" must be used.
Gross v.
Sweet, 424 N.Y.S.2d at 368.
Language such at "without warranty or liability of any kind" has been held ineffective to disclaim liability for negligence.
Willard Van Dyke Productions, Inc. v. Eastman Kodak Co., 239 N.Y.S.2d at
-110-i
.,g
+
+
4 L'
RH,
.3401-IniO'Brien v.-
Grumman' Corp.,'475 F.
Supp. 284.(S.D.N.Y.
11979), this Court found the following language.did not evidence the unmistakable. intent of the-parties _to exclude liability for
- negli'gence :
' Buyer hereby waives and releases all.
?'
rights, claims and remedies-withl respect to.any and.all warranties,1 express, Limplied orfstatutory.... ' duties,
' obligations and'11 abilities arising by law'or otherwise and; including, but.
without~being limited.to, any obligation of Grumman with respect to incidental or consequential damages or damages for loss of use.
. Id. at 288. 'Like the O'Brien contract, the TDI' contract does not mention compensatory or punitive damages, but only "special:-
~
and consequential" damages.4p/
Accordingly, this is yet a third reason why the damages claim-should not be dismissed.
43/'
Also,slike the O'Brien contract, the TDI contract
' discusses potential negligence of TDI in other parts of the
- contract, e.g.,
the Liability:and Indemnification section, but-not in the " Limits of Liability" section.
Compare American Elec.
Power'Co. v. Westinghouse'Elec. Corp.,=418 F. Supp. 435, 452 n.25 (S.D.N.Y. 1976) where this Court enforced a contract limitation
- on negligence liability where " negligence" was specifically mentioned in the limitation clause.
The Court observed-that the contract stated that the repair or replacement: of parts would be an exclusive. remedy-and that it "would ' constitute fulfillment of all liabilities of the Company to the purchaser, whether based on
. contract, negligence or otherwise with respect to or arising out-of such equipment.'"
Besides lacking any reference to negligence-or tort liability, the TDI contract has no language making
- exclusive its promise'to repair or replace defective equipment.
TDI has not argued that its promises to repair or replace --
which were repudiated -- were exclusive remedies.
l
-111-l I
4 I-D.
The Other_ Contract Remedies Have
. Failed of Their Essential Purpose A fourth l reason for rejecting TDI's reliance on its
.i limitation of remedy is N.Y.U.C.C.
$ 2-719(2) (McKinney 1964)-
f
- which' states that "[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be-1
' had-as provided in.this Act."
An exclusive ~or limited remedy.
'l fails. of its essential purpose when it operates "to deprive a 1
. party,of the substantial ~ benefit of the bargain."
Cayuga Harvester Inc. v. Allis-Chalmers Corp., 95 A.D.2d 5,1465 N.Y.S.2d 606, 611 (4th Dept. 1983) (quoting. Clark v.
' International Harvester Co.,
99 Idaho 326,-340, 581 P.2d:784 (1978))..Whether'this occurs is.a question'of fact.
Id. at
- 611-12.
Such a fact question is clearly raised by the Complaint which alleges that TDI intentionally deceived LILCO w th. respect to the defects, that TDI was notified of each of the defects and that TDI. repudiated its obligation to remedy the defects and repair or replace the emergency diesel generators.
As a result, LILCO was deprived of the benefit of its bargain, i.e.
licensable, reliable' emergency diesel generators.
Although New York courts generally hold that a consequential damages exclusion is enforceable despite the failure of a repair or replacement provision, on the theory that they are two discrete ways of limiting liability, the H
-112-
{
-_-__n___--
--n- - - - - -- - - -. - -
\\
courts implicitly recognize exceptions to the rule.
For example, in.Cayuga Harvester, _the court held the two provisions independent but noted that the buyer did not allege that the i
seller repudiated its limited remedy obligations or was 1
j j
willfully dilatory.
Instead, the court observed that the j
seller had made extensive efforts to comply.
465 N.Y.S.2d at-a i
612.
Importantly, the court strongly implied that if the seller had willfully repudiated the limited remedy, the consequential damages exclusion would not be enforced.
Id. at' 614-616.49/
j i
In sum, the Complaint plainly presents a claim for the.
I damages described in 1 25.
At a minimum, the enforceability of the alleged consequential damages exclusion is a questian of fact which is not ripe for the Court's determination.
j 49/
In a case pre-dating Cayuga Harvester, this Court had interpreted New York law differently.
American Elec. Power Co.
- v. Westinghouse Elec. Corp., 418 F. Supp. 435, 458-59 (S.D.N.Y.
1976).
There the Court enforced a consequential damage exclusion even assuming repudiation of the obligation to repair or replace,
{
absent a showing of fraudulent inducement.
Cayuga, however, more
)
accurately reflects New York law which makes enforceability of l
such a provision a fact question.
Other courts applying the same UCC provision agree.
E.c., RRX Industries, Inc. v. Lab-Con Inc.,
772 F.2d 543, 547 (9th Cir. 1985) (applicability of consequential damage exclusion in face of failure of remedy is question of fact); Milgard Tempering, Inc. v. Selas Corp. of America, 761 F.2d 553, 556-57 (9th Cir. 1985) (summary judgment inappropriate since only after all of the circumstances surrounding the negotiation and performance of the contract have been determine.d at trial can the enforceability of consequential damage limitation be determined).
1
-113-
?
at l ' q
(.
^t VII.
DISCOVERY SHOULD NOT EE STAYED LILCO served its-First Set of Interrogatories and Request for Production of Documents to TDI on' August. 30, 1985 and its second set on November 7, 1985..Though TDI has responded.with several specific objections and some general
+
. promises to. supply information, it has not responded l
substantive 1y'to anything.
Instead, it has moved to stay
.?
h
' discovery pending resolution of its motion to dismiss LILCO's noticed deposition of Transamerica Corporation has been deferred for the'same reason.
TOI's request for a stay of discovery 'is nearly moot since TDI has arrogated' to itself a stay by simply objecting in whole to LILCO's First and Second Sets of Interrogatories and I
Request for Production of Documents.
While LILCO has not to date pressed this issue, discovery should.not be stayed any longer, implicitly or otherwise.
Thus, LILCO requests that the Court order discovery to proceed immediately.
TDI's' request for a stay is predicated upon its unwarranted inference of a claim for delay of Shoreham's commercial operation.
As discussed above, LILCO makes no such claim here.
Consequently, the torrent of discovery on that issue and joinder of additional parties predicted by TDI will not be necessary.
While discovery by LILCO will necessarily require TDI to produce much information -- much of it no doubt
-114-
- _ ~ -
e L
l L
incriminating and' harmful to TDI's claim, based on information already obtained from former TDI employees -- that is no reason for the stay of' discovery.
LILCO has pleaded eleven good claims in this action.
It has made a prima facie showing of extensive wrongdoing by TDI.
A further stay will only delay inevitable discovery and unnecessarily protract this case.
Moreover, given the evidence a
already uncovered of TDI's fraud and deceit, and given LILCO's ongoing concern since the TDI diesels remain in use at Shoreham (where they have been thoroughly rebuilt) and other plants, it is-important that LILCO be afforded access to TDI's documents and pertinent witnesses'quickly to avoid further wrongdoing.50/
CONCLUSION For the reasons discussed above, LILCO's Complaint cites eleven claims up
- t.i.L 4 Aaw;.;r
=nd should, be
/
granted against TDI. TDI's intentional wrongdoing, j_
1 v recklessness, negli4m. ice and breach or ww.
.cw w2th respect to emergency diesel generators vital to the safe operation of the Shoreham Nuclear Power Station should not be shielded by a
~
plethora of misapplied procedural ploys.
)
50/.
It is no secret that the NRC's Office of Investigation f
has been ordered to investigate TDI.
Long Island Lighting Co.
(Shoreham Nuclear Power Station, Unit 1), LBP-85-18, 21 NRC 1637, 1643-45 (1985).
-115-
I Accordingly, TDI's' motions.to dismiss and to stay discovery should be denied.
-Dated:
February 3, 1986 HUNTON ILLIAMS
.)
i By ! I
(( A Member of thd Tir -)
299 Park Avenue New York,-New York 101 1 (212) 980-8200 707 East Main Street
'P.O. Box 1535 Richmond, Virginia 23212 (804) 788-8466 1 Hannover Square Fayetteville Street Mall Raleigh, North Carolina 27601 (919) 899-3019 Counsel for Long Island j
Lighting Company l
- 1 1
)'l 1
l J
4 I
i i
-116-1
i _.
AFFIDAVIT OF SERVICE I hereby certify that a true' copy of'the foregoing RESPONSE OF LONG ISLAND LIGHTING COMPANY TO MOTIONS TO DISMISS AND TO STAY' DISCOVERY was this day' delivered'by hand'to Robert E. Smith, Esq., Rosenman, Colin, Freund, Lewis & Cohen, 575 Madison Avenue,'New York, New York 10022 and to Ira M. Millstein, Esq. and James W.
- Quinn, Esq., Weil, Gotshal'& Manges, 767 Fifth Avenue, New York, 1
Ne'v York 10153.
This the day of February, 1986.
l l
l l
l ll.
g a
A y+
UNITED STATES-DISTRICT COURT-
- SOUTHERN DISTRICT OF NEW YORK x
LONG -IS LAND - LIGHTING COMP ANY, 2
65 Civ. 6892-(GLG)
Plaintiff, t
-against-TRANSAMERICA DEL 4 VAL-INC.,
Defendant.
x
~
STATE ; OF C ALIFdRNI A
')
.)
ss.:
COUNTY. 0F SAN' MATLO
-)
GEOFF. REY D. KING,-being first duly sworn deposes and says that:
1.
My name'is Geoffrey D. King and I presently reside at.36145 Elba Place, Freement, California.
I am currently a senior engineer with Failure Analysis Associates- (FaAA).
2.
I graduated from Cal Poly in 1972 with a B.S.
in Mechanica1' Engineering and immediately went to work with Peterbilt Motor Company as a design engineer.
I stayed with Peterbilt approximately 2-1/2 years until 1975 when, because of the fuel crisis, I was r= leased.
Two days after my release i
' from Peterbilt I began work with Transamerica DeLaval, Inc.
(TDI) as a service engineer.
My duties as a service engineer
__-m___
l with TOI were to provide technical support to the field repre-sentatives, to perform field testing and to analyze broken parts or components.
I was with TOI f rom 1975 until Detober, 1993 and during that period I was also temporary head of the Service Department and manager of Prodnet Engineering.
3.
During the period of time that I was a service en-gineer I reported to Bud Trussell and I worked on many, many TOI problems that required much of my time to travel to various TOI engine sites throughout the world.
Much of my work was concerned with attempting to diagnose and solve numerous prob-less occurring with various components of the TOI engines.
4.
TOI was aware of. ligament cr.acks in 61'ocks in 1978 because they had been discovered in blocks at Valdez, Alaska, in the Biehl boats, at Kodiak, Alaska and at Anamax Mining Com-pany in Tucson, Arizona.
TOI was aware of circumferential and stud to stud cracks at least as early as 1992, because of cracks found on the MV Columbia, owned by the Alaska Marine Righway, and on the MV Gott, owned by U.S. Steel.
To the best of my knowledge, as reflected in correspondence from Jack Wallace, TOI was aware as early as 1979 of the potential for degraded materials in certain large components in TDI engines.
See letter dated January 29, 1979 from Wallace to Dobrec atta-ched hereto as an Exhibit.
I recall having heard the term "Widmanstaetten graphite" utilized in some of the discussions at TOI that were taking place in 1979 or 1979 relative to problems with castings.
I.
.)
l 5.
TDI. maintained two lists of product improvements l
land/or service information. memos (SIMs).
One list contained i
all'of the product improvements and service information memos
.and was' solely for the non-nuclear clients while the other list, solely for the nuclear clients, contained only selected SI4s and product improvements.
I was told by Clint Mathews and Bud Trussell that the rationale for this was that TDI did not-want the nuclear owners including LILCO, to know of certain problems or occurrences because TDI was fearful'that mere i
knowledge of these problems would scare the nuclear owners and perhaps raise significant problems for TDI.
Trussell and Mathews m'ade the decision whether to send SIMS to the nuc1'ar e
o wner s.
Prior' to Trussell's involvement, Warren Rhoades had been involved in those decisions.
To the'best of my knowle'dge, such things as cylinder head cracking, piston crown separation, block cracking, wrist pin bushing problems, cylinder liner scuffing and push rod problems were cover [d in service informa-
. tion memos sent to non-nuclear installations, but were not sent out to nuclear installations, including LILCO.
6.
I also recall that in early or mid-1983 I formu-lated a complete list of product improvements and service in-formation memos in response to a request from John Kammeyer of Stone & Webster.
I subm'itted this list to Clint Mathews and Bud Trussell and, as a result of their review, the list was ex-tensively pared down.
When the list was finally sent out to _ _ - _ - _ - _ _ _ - - _ _ _ _ _ _ _ _ - _ _ -
9..
s.
LILCO it was.substantially different from the previous list that I had put together.
To the best of my knowledge, this list was apparently in response to the meeting that was held between LILCO, Stone s' Webster and TDI in the spring of 1983.
- 7.. In September, 1993,-after the failure of the Shoreham 13x11 inch crankshafts, and after Roland Yang (TDI's torsional vibration expert) had visited Shoreham to view the crankshafts, Roland and I had several discussions as to the reason for the crankshaft failures at Choreham.
As I recall, these discussions were held several days after he returned from Shoreham and we were in the engineering building at the time of the/ discussions.
[ asked Yang why LILCO.had the only'.13x11 inch crankshafts in existence for DSR-48 engines.
Yang'then told me that in 1975, prior to the time the engines were shipped to LILCO, he had done an analysis of the torsional as-pects of the 13x11 inch crankshafts intended for'the DSR-48s at Shoreham.
Yang's analysis predicted stresser that did not re-ally concern him at that time.
However, shortly after Yang concluded his analysis in 1975, a torsiograph was performed on the 13x11 inch crankshafts in one of the Shoreham'DSR-4Bs at the TDI factory, and Yang noted that there was much more tor-1 I
sional vibration demonstrated by the torsiograph than his ana-lytical formula had predicted.
Indeed, Yang indicated to me that the disagreement between empirical data from the torsiograph and the analytical data from his formula was so.
large that he was very surprised and very concerned about the accuracy of his analysis.
This was one of the first analyses that Yang had performed af ter coming to TDI.
Yang further stated to me that as a result of this large difference between predicted stress and the torsiograph results he began to ex-L piore the reasons for the differential.
Yang stated that even-tuc11y he found that he was not analyzing the torsional aspects of the crankshaf t correctly, perhaps as a result of not having the correct Tns or some other aspect of the input data.
8.
Yang further informed me that he became convinced that the 13x11 inch crankshafts that were being placed in the Shoreham engir i for. shipment,'were not suitable for.their in-tended purpose and that in his opinion, the crankshafts'were not adequate and should be larger.
Yang also told me that be-cause of his concern he went to his superiors to no avail and then went to Martini, who was then the general manager of TDI, and related to him all of his conce.ns.
Yang also told me he attempted to convince Martini that the engines should not be shipped with the 13x11 inch crankshafts.
Yang indicated that he told Martini that larger crankshef ts should be ordered and put in the engines.
According to Yang, Martini did not take his advice and indeed allowed the engines to be shipped with the 13x11 inch crankshafts over Yang's objections.
9.
I believe that Warren Rhoades, who was the manager of the engineering department at the time Roland discovered the.
L
. problem with the crankshaft, was well aware of the crankshaft problem because the only reason Yang would have gone to Martini was because he did.not get snywhere with Rhoades.
At the time Roland and I were having these. discussions, Roland was visibly
. upset and he indicated to me that he had been concerned about this situation since 1975 and was fearful that. something exact-ly-like this would happen.
Roland also told me that he be-lieved that TDI management thought they had done a " con job" on Stone & Webster back in the mid-70s when Stone s Webster's en-gineers had asked for the torsiograph.
TDI management, ac-cording to Yang, believed they had convinced Stone & Webster that nothing was wrong with the crankshafts.
10.
When Bud Trussell came back from Shoreham after viewing the crankshaft break in September, 1983, I recall he indicated to me that he told LILCO the crankshaft failure was a failure caused by bending, when indeed, as he told me, he knew a.t the time it was a torsional failure.
Trussell also indi-cated to me that he thought LILCO would eventually discover the torsional nature of the failure and that this was just a matter of time.
Nonetheless, the party line at TDI was "we do not know why the crankshaft broke."
11.
To the best of my knowledge, the only other DSR-4Bs in service with a 13x11 inch erankshaft were in Saudi Arabia, but those engines operated at lower speeds, 427 or 350 rpm and at much lower KW output than the Shoreham EDGs.
I seem to l _ _ _ _ _ - _ __ _-_-_- - _- ___-_
recall after the failure had occurred that Trussell said that the 13x11 inch crankshaft was under designed.- I believe that both Lowery and Trussell probably said something like "it ap-pears now that the crankshafts were over stressed".
I also be-lieve that FaAA's conclusions as to the f ailure mechanism of the 13x11 inch crankshaft were generally accepted at TDI in that Trussell snd Lowery, or for that matter any other TDI per-sonnel, simply did not dispute the analysis and the bottom line.
Further deponent saith not.
This the / '3 d ay o f.7dA/
,198[.
l~P Lu
/
[j/ f fREY D.JKING Sworn to and subscribed.to bef re me this the /3dMay 3
o f /*1*.ad u/, 19By.
,,,,,,.... e.... auum M
-. IA c:_;t,AN A. KR rAMER f
[
L.:
a -C'.
tc:;m Pueuc.cAUFORNIA
!.A.Q PRiNciPAt. OFFICE IN
(./
TP SAN MATEO COUNTY g
w, c = t - te wr g
~
Notary Publig
- 1y Commission Expires: b /.3 -[d l
1 1
1 1
i 1
1 AFFIDAVIT OF SERVICE t
1 o
I hereby certify that a true copy of the foregoing AFFIDAVIT OF GEOFFREY K. KING was this day delivered by i
hand to Robert E. Smith, Esq., Rosenman,_ Colin, Freund, i
Lewis &-Cohen,_575 Madison Avenue, New York, New York 1
10022 and to Ira M. Millstein, Esq. and James W. Quinn, Esq., Weil, Gotshal & Manges, 767 Fifth Avenue, New York, New York 10153.
This the day of February, 1986.
i i
i
lq THE UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK i
'LONG IGLAND LIGHTING'
)
C OMP ANY,
)
)
Plaintiff,
)
)
l; v.
)
85CV6892(GLG)-
)
TRANS4MERIC A DEL %V4L, INC.
)
-)
Oefendant.
)
)
STATE OF C4LIFORNIA
)) ss:
COUNTY OF CONTRA COSTA 1-Marsha L.
Lyons, being first duly sworn, deposes and says that:
1.
My name is Marsha L.
Lyons and I presently reside at:1524 Camelia Court, Oakley, California.
I am presently em-ployed as a clerk by Video Cinema.
2.
I joined' Transamerica DeLaval, Inc. (TDI) in March 1978. as a quality assurance (QA) technician working on piping in the ASME room.
I was responsible fer all non-destructive examination reports and inspections with regard to piping.
3.
In 1980 I was promoted to Quality Analyst.
I
' oversaw complete contracts making sure that all spare parts were up to code.
I would also take QA and Non-Destructive Ex-amination Inspectors up to the parts room to look at parts in
. order to make inspections.
- _ _ _ - ___ _ _ -_ A
i 4.
On many occasions Dick Boyer, Quality Assurance i
i Manager for TDI, would allow parts to be shipped that were out i
of specification or in f act not inspected at all.
On many oc-casions Mr. Boyer also overruled the QA people even though they felt like certain documentation was not checked or needed to be checked off.
The result was that Boyer would let the parts or components (o out of the plant "as is".
5.
I was aware of a praccice that consistently oc-curred in TDI's Plant where quality assurance inspectors would stamp paper work indicating that the engines and/or their com-ponents were okay without ever looking at the engine or compo-
'nent.
I have seen " blind stampers" who would stamp quality as-surance or quality control paperwork without looking behind it as is required.
.w Further, deponent sayeth not this the _ day of
=.:. e
, 19By.
M.:s L.
MARSHA L.
LYONS Sworn to and subscribed to before me this Ithday of Janun g 1986 V,-
OFFICIAL SEAL
"/ d e ecg b M045,Mfgjf.
} Notary P g e te p
,7 mmm Wy comfrL expres APR 8,1989 My Commission Expires: h-B-89 2_
t
lj c
~
?
i i
l AFFIDAVIT OF SERVICE-I hereby certify ~that a true copy of the foregoing AFFIDAVIT OF MARSHA L. LYONS was this day delivered by hand to Robert E. Smith, Esq., Rosenman, Colia, Freund, Lewis & Cohen, 575 Madison Avenue, New York, New' York 10022 and to Ira M. Millstein, Esq. and James W.
This the day of February, 1986.
e 4
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK j
l l
)
LONG ISLAND LIGHTING COMPANY,
)
Civil Action No.
a New York Public Service Corporation,)
85 CIV B692 (GLG)
Plaintiff,
)
)
-against-
)
AFFIDAVIT OF
)
WILLIAM J. MUSELER TRANSAMERICA DELAVAL, INC.,
)
i a Delaware Corporation,
)
Defendant.
)
)
STATE OF NEW YORK
)
)
ss:
COUNTY OF NASSAU
)
WILLIAM J. MUSELER, being duly sworn, deposes and says:
1.
I am currently Vice-President for Electric Operations for Long Island Lighting Company (LILCO).
From 1973 until 1984, I held various positions in the Office of Nuclear for LILCO, ranging from Assistant Project Engineer to the Director of the Office of Nuclear.
In these positions,~I held various responsibilities at the Shoreham Nuclear Power Station (Shoreham), including responsibilities for overseeing the I
procurement, installation, testing and start-up of the emergency diesel generators Aupplied to LILCO by Transamerica DeLaval, Inc. (TDI).
My resume is included in LILCO Appendix A.
1
7_
2.
I submit this Affidavit to provide the Court with relevant information to correct many misleading impressions created by the facts outside the Complaint discussed in TDI's Motion to Dismiss the Complaint and Affidavit of Ira M.
M111 stein, which were filed in this matter.
I also submit this l
Affidavit to demonstrate additional knowledge in LILCO's possession which could be pleaded, if the Court deems it necessary, to add specificity to the fraud and RICO silegations in the Complaint.
3.
In order to construct and operate Shoreham, LILCO was required by Nuclear Regulatory Commission (NRC) regulations to provide an onsite (standby) power supply of sufficient capacity and capability to power all necessary safety systems to assure safe shutdown of the reactor in the event of an accident or transient event and a loss of off-site power.
This requirement is established in 10 C.F.R. Part 50, Appendix A, General Design 1
Criterion 17.
LILCO purchased three emergency diesel generators from TDI to fulfill this requirement at Shoreham.
The failure of such emergency diesels to function in the event of an accident or transient event at Shoreham could result in the unavailability of power for safety systems necessary to cool the core and shut the reactor down safely.,
E______.
l v:
b-l 8
4.
In the event two of the three emergency diesel q
generators had suffered a common mode failure during a loss of off-site power (LOOP). coupled with a major loss of coolant j
1 accident'(LOCA), the results could have been very serious.
In j
I that situation, coolant in the vessel is lost at once and since-j insufficient'AC power would be available.from the operable diesel generator, coolant make up to the reactor would be deficient.
Thus, within a short-time, the core could be uncovered and exposed and it could begin melting in a short period of-time, probably in less than an hour depending upon the level of power being generated and the age of the fuel at the time of the event.
Additionally, loss of two of the emergency diesel generators could prevent containment cooling so that pressure caused by decay heat from the core could build up in.the containment building.
Ultimately, this. radioactive gas could' vent to the secondary containment as a result of seals failing or the failure of the containment building-1 itself.
Since no AC power would be available for the secondary I
containment, the systems which are designed to cool and filter the secondary containment atmosphere would be unavailable, and eventually direct fission products could be released to the atmosphere.' Consequently, a vital power producing facility would now be contaminated and thus unable to operate. :
I
5.
TDI's filings'purportLto provide,_by use of. hearsay
+
materials,.information outside1of the Complaint _about.the-LILCO-TDI ' contract - and-the dealings : under that. contract.
Without attempting a comprehensive recitation of the facts
- pertinent to.the contract and TDI's lack of performance, following'are several matters not mentioned by_TDI but
~
necessary forJa ' complete understanding.of the points TDI-
' raises.
.TDI's Fraud 6.
The following facts demonstrate, in part, the basis
~for-LILCO's claim:that TDI intentionally concealed information
' about deficiencies.in the Shoreham emergency diesel generators which', if LILCO!had not uncovered them through extensive
, pre-operational testing, could have crippled the diesel i
generators and caused'their failure when called upon to ensure q
safe shutdown ef.Shoreham.
If LILCO had been informed of these deficiencies-it would have rejected the emergency diesel i
generators or required TDI to correct all such deficiencies.
I
]
7 As noted in paragraph 39, TDI had sole responsibility
]
'for designing the diesel generators.
This design responsibility _ included designing the crankshaft of the engines 3
of the diesel generator sets and ensuring the torsional adequacy of.those crankshafts.
The specifications of the
- contract stated that TDI was responsible for designing the engines to avoid torsional and other vibratory problems. 1 i
=_ _ _ _ _-_
l 8.
The bid specification invoked two standards that set forth requirements related to torsional stresses on the s
crankshafts of the engines, i.e., the Diesel Engine Manufacturers Association (DEMA) Standard Practices and the Institute of Electrical and Electronic Engineers (IEEE) Trial Use Standard 387 (1972).
1 9.
On or about August 1974, TDI provided to Stone &
Webster a design t.nalysis for the crankshafts of the engines.
That analysis provoked inquiry by Stone & Webster because at
'certain speeds the predicted stress levels exceeded the DEMA standards.
10.
TDI responded to Stone & Webster's inquiry in a letter dated March 13, 1975.
(LILCO Appendix B)
TDI assured Stone &
Webster that the crankshafts were acceptable.
In subsequent conversations between Stone & Webster personnel and TDI personnel, TDI repeated its representations that the crankshaft design was adequate, 11.
At some time prior to the shipment of the emergency diesel generators to Shoreham, TDI discovered that the input data used in the torsional analysis of the Shoreham engines was incorrect.
The analysis performed by TDI assumes that the torsional stress on a crankshaft is directly proportional to a forcing function (referred to by TDI as Tn) that represents the torsional loading of a particular order of vibration.
The Tn _ _ _
o l '
inputs used.by TDI were less than half of the correct'value at certain of the most important orders.
As a result of the use of this incorrect input data, TDI's calculation of stress on the crankshafts significantly understated stress levels that
'should have been predicted.
Predicted stress on the crankshafts for the most important order (the fourth order) would be over twice that initially calculated by TDI.
As a.
result, the design of the crankshaft was inadequate and did not meet the DEMA and IEEE requirements.
Proper analysis would have predicted that the crankshafts would fail during the intended operation of the diesel generators.
- 12. 'TDI did not inform LILCO of the error in the input data, nor of the fact ' hat TDI had discovered its initial t
calculation of. stress levels was incorrect.
Rather, despite repeated opportunities to make such disclosures to LILCO, TDI chose to conceal the problem from LILCO.
13.'
In addition to its calculation of stress levels, TDI also'had available to it empirical test data on one of the assembled Shoreham engines that disclosed the stress levels on the crankshafts were dangerously high.
TDI neither provided this test data to LILCO, nor informed LILCO of the problem.
14.
As shown by the Affidavit of Geoffrey D. King, a former TDI employee, TDI's torsional vibration expert (Roland Yang), after performing a crankshaft stress test (known as a - - - - _ - ____ ______ _
1 torsiograph test) in 1975, learned that the stress levels on 1
the crankshafts of the Shoreham engines were:
(a) much higher f
.than initially calculated; and (b) so high as to render the crankshafts inadequate.
Mr. Yang became convinced that the crankshafts of the Shoreham engines were not suitable for their intended purpose and.should have been made larger.
Mr. Yang-took his concern'to his superiors at TDI and attempted to convince them that the engines should not be shipped to LILCO f
j until larger crankshafts were installed.
TDI's managemer.t ignored Mr.. Yang's concern and shipped the engines to LILCO with the defective crankshafts.
LILCO was never informed of Mr. Yang's opinion that the stress levels were unacceptably high, er of his efforts to prevent the shipment of the engines.
Had LILCO been told of this we would have rejected the engines.
15.
Despite Mr. Yang's knowledge and his communication of it to his supervisors, on January 26, 1976, TDI issued a Qualification Test Report which stated that the emergency
(
diesel generator used to qualify the EDGs for nuclear service (EDG #101) had successfully passed its qualific'ation tests.
The torsiograph test was listed'as one of the tests that the emergency generator passed successfully.
The report by TDI stated that "the unit successfully completed its qualification test by meeting or exceeding the contract requirements."
(LILCO Appendix C contains the relevant pages from that _ _ _ _ - _ _ - - _ _ _ _
i i
i report.)
This information in the Qualification Test Report was i
false.
The emergency generators were subsequently shipped by l
TDI to the Shoreham plant.
i 16.
On May 9, 1977, TDI issued _a certificate of Compliance that certified that the emergency generators met all the requirements of the bid specification, which included compliance with mandateri :..ress limits.
(LILCO Appendix D)
This certification was false.
17.
At the time TDI made oral and written representations to LILCO and Stone & Webster that the engines met specification requirements, it was aware that:
(a) the input data used in the torsional analyses was incorrect; (b) the predicted stresses for certain orders of vibratien on the crankshafts were actually over twice that represented by TDI; (c) the crankshafts did not meet. applicable stress limit requirements; and (d) the crankshafts did not meet the applicable specification requirements.
16.
Shortly af ter performing the torsiograph test for the Shoreham diesel engines, TDI sought approval by.the American Bureau of Shipping (ABS) for the shipboard use of the exact model diesel engine supplied for Shoreham.
One month after seeking such approval, ABS informed TDI that "the crank pin diameter [11 inches) does not meet the requirement of Section 34.17.1 of our rules."
TDI never informed LILCO or Stone &
. 4
Webster that ABS rejected its' diesel engine because its crankshaft was too small to withstand the torsional stresses imposed upon it.
19.
One week after the ABS notice, TDI informed ABS that "for our stationary application we have used 12 inch crank pin shafts for our R-48 engine.
This statement by TDI to ABS was false.
The :rankshaft of the Shoreham engines had an 11 inch crank pin.
20.
Subsequent to determining the error in its torsional analysis for the Shoreham diesel engines, TDI redesigned the crankshaft for other diesel engines of the same raodel supplied for Shoreham.
This redesigned crankshaft had a larger crank pin diameter and was suitably sized to withstand the torsional stresses upon it.
TDI never informed LILCO of this redesign, nor of the fact that the crankshafts of the Shoreham engines were too small.
TDI never offered to replace the crankshafts of-the Shoreham engines, nor suggested that such replacement might be necessary.
The Shoreham engines were the only TDI engines of their power rating that had the 13 inch by 11 inch I
crankshaft.
The next engines of this power rating built by TDI l
had a larger crankshaft.
LILCO was not informed of this fact
)
until after the crankshaf t of the Shoreham engine f ailed.
TDI never reported to the NRC any actual or suspected inadequacy of the crankshafts in the emergency diesel generators at Shoreham, - _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _
4 despite~TDI's knowledge that the. crankshafts were inadequate and would likely fall when needed in emergency situations and despite applicable NRC requirements in effect since 1978 requiring 1that such actual or potential defects in vital safety equipment at nuclear power plants be reported.
The Failure of the Crankshafts 21.
On August 12, 1983, during testing of the Shoreham diesel generators necessitated by the replacement of defective cylinder heads supplied by TDI for the emergency diesels, one of the diesel engines experienced a dramatic failure..
After stopping the engine and examining the components, LILCO determined that the crankshaft in the engine had completely severed.
The failure of the crankshaft was sudden and totally unexpected.
Subsequent inspection of the other two engines
-disclosed that the crankshafts in~these engines were cracked and would likely fail upon further operation.
22.
As a direct result of the severing of the crankshaft, mai; bearings, connecting rod bearings, connecting rods and the engine base assembly in that engine sustained substantial damage.
Subsequently these components had to be repaired or replaced, all at substantial cost to LILCO.
23.
Following the crankshaft failure, LILCO retained independent experts to assist LILCO in determining the cause of the crankshaft failure, as well as the cause of the cracks that were found in the crankshafts of the other two diesel engines. - - _ _ _ - _ _ _ _ _
La.
S 5
24.
Tests and analyses by.the independent experts revealed that the crankshaft fractured'because torsional stresses imposed upon the crankshaft during-operation: vere significantly.
higher than those TDI. represented to LILCO in the torsional analyses provided-to-LILCO.
-2 5.
Despite continuous dealings and' contact with.LILCO during installation and startup testing of the emergency diesels, TDI never revealed that the crankshafts were inadequate.
Among these continuous dealings were TDI's provision of storage requirements for the diesels, TDI's complete inspection of the diesels prior to startup, and TDI's repeated dealings with LILCO to remedy numerous other defects in the. diesels which arose prior to the sudden crankshaft failure in August, 1983.
These pre-crankshaft' problems had already-been so numerous that the NRC had questioned the reliability'of the diesels, though the crankshaft failure was by:far the most calamitous failure and "the straw that broke the camel's back" with respect to the potential for licensing the diesels without major rebuilding and repair. efforts and reanalysis of the diesels' design.
After the crankshaft failure, and as a result of NRC loss of confidence in and concerns regarding the entire engine, LILCO was required to undertake a Design Review and Quality Revalidation program (DRQR) to review and evaluate the design and quality of all
. l
j i
y l
i critical components of the engines.
This effort required LILCO to expend millions of dollars and thousands of manhours and
. disc)osed a number of additional defective components which had i
to be repaired or replaced.
All of the repairs to date on the 1
emergency diesels at Shoreham have been made at LILCO's expense f
as TDI,has refused to acknowledge its responsibility.
26.
TDI, in a December 1983 response to an inquiry by the NRC, after the failure of the crankshaft, admitted that in 1975 it doubled the Tn value at certain orders of vibration used in its calculation of torsional stresses.
For example, the Tn value for the critical fourth order vent from 13.30 to 29.04.
(LILCO Appendix E)
In fact, TDI admitted changing these Tn values twice in 1975 before the Shoreham diesel generators were shipped by TDI.
27.
LILCO first learned of the change in the Tns in late 1983, after the crankshaft failure, when LILCO's independent i
experts noted a discrepancy between the Tns used by TDI in the 1975 torsional analysis provided to LILCO and Tns used by TDI in performing a torsional analysis on a replacement crankshaft.
28.
TDI personnel knew of t'he design error before the diesel engines were shipped to LILCO, and were aware of the torsional stress problem.
TDI allowed the engines to be shipped, despite their unfit condition and the attendant dangers.
TDI thereafter made mispresentations to LILCO and Stone & Webster in order to conceal the stress problem.
29.
As shown by the Affidavit of Geoffrey D. King, a former TDI employee, TDI pursued a course of systemat,ically withholding.important information from LILCO and other utilities.
TDI maintained two lists of product improvements and service information memoranda.. One list contained all of the product improvements and service information memoranda and was solely for TDI's non-nuclear clients..The other list, which was given to nuclear clients, contained only selected portions of this information.
Mr, King was told by TDI management officle's tnat the rationale for this was that TDI did not want its nuclear clients to learn of certain problems or occurrences, because TDI was fearful that knowledge of such problems would scare TDI's nuclear clients and perhaps raise significant problems for TDI.
Mr. King notes that such matters as cylinder head cracking, piston crown separation, block cracking, vrist pin bushing problems, cylinder liner scuffing and push rod problems were discussed in service information niemoranda sent by TDI to its non-nuclear clients, but were not sent to TDI's nuclear clients.
i l
Problems with TDI Blocks 30.
In March 1983, LILCO personnel discovered cracks in the blocks of the TDI engines during a routine inspection.
Subsequent inspections of other blocks at TDI's Oakland foundry revealed the same type of cracks.
Based upon TDI's _ _ _ _ _ _ _ _ _ - _ _ - _. _ _ _ _.
s; reprer.entations, LILCO and its consultants concluded that the cracks were caused during fabrication.
' 31.
In August 1984, additional and extended _ testing and analysis was performed on the block cracks as a result of NRC concerns.
Destructive testing of one of the engine blocks revealed that_the cracks originally observed were veld shrinkage cracks resulting from weld repairs performed by TDI in'its foundry.
These repairs by TDI were made in an apparent L
attempt to conceal the existence of larger underlying casting shrinkage cracks.
TDI performed veld repairs to this area, polished these veld repairs, and then covered this entire area with epoxy paint which rendered them not visible to the naked eye.
TDI at no time indicated to LILCO that these cracks were weld shrinkage cracks that occurred when attempts were made to cover.up the larger underlying casting shrinkage cracks.
Rather, when asked in 1983 whether TDI veld repaired areas such as this, TDI representatives stated unequivocally they did not.
From December 1983 to September 1984, LILCO discovered several additional forms of cracking in the TDI blocks..
32.
As a result of the above-described cracking of the TDI blocks and the related questions raised in the Atomic Safety and Licensing Board proceedings before the Nuclear. Regulatory Commission, LILCO and its consultants undertook detailed and extensive engineering analyses of these various types of cracks.
Subsequent to these analyses, the decision was made to replace the block of one of the engines because of the quantity and nature of.its cracks.
Subsequent destructive testing of the block that was' replaced revealed that the cast iron in the block was severely degraded and not in accordance with applicable standards.
This degradation of the block material was determined by LILCO's consultants to be due to the presence of Widmanstaetten graphite, which is thought to be caused by the presence in raw material of tramp elements such as lead in combination with a slow cooling rate.
33.
During the_ time that LILCO was experiencing these various types of cracking with the Shoreham blocks, LILCO and its consultants continually questioned TDI personnel as.to their knowledge of these types of cracks, their causes and TDI's field experience.
LILCO on many occassions was told either "we don't know anything about those types of cracks" or "we've never seen those kinds of cracks before."
As a result of LILCO's having little, if any, information from TDI about these various types of cracks, LILCO was forced.to expend millions of dollars and thousands of man-hours in an effort to determine the cause of the cracking, and whether the cracking would continue to grow.
34.
As a part of its investigation in the course of the DRQR, LILCO contacted other TDI engine owners and learned, t
after the fact, that other TDI engines had experienced the exact type of cracking as experienced on the engine blocks at Shoreham.
Indeed, LILCO learned that TDI had previously investigated the same types of cracking and was aware of their origins and growth characteristics well before LILCO began its investigation.
This fact is confirmed in the Affidavit of Geoffrey King.
35.
As can also be seen from the King Affidavit, TDI was aware of the presence of Widmanstaetten graphite in its castings as early as 1979, and had reason to suspect it might have castings in the field which contained degraded material caused by inappropriate use of junked iron for its raw material.
In fact, during this time TDI is believed to'have been using unstripped motor vehicle engines for its castings.
See letter from John F. Wallace to TDI dated January 29, 1979, attached hereto as LILCO Appendix F, which shows that TDI had reason to believe as early as January 1979 that its castings might be suspect.
Throughout this period, TDI concealed and/or misrepresented its knowledge of these matters.
36.
This concealment and/or misrepresentation by TDI with regard to the crankshafts and the blocks vas in direct contravention of the reporting requirements of 10 CFR Part 21 which became applicable to vendors of nuclear-related components in 1978.
10 CFR Part 21 requires that a nuclear l
vendor such as TDI immediately notify the Nuclear' Regulatory Commission if it obtains information reasonably' indicating that any component supplied to a nuclear plant such as Shoreham, d
fails to comply with any rule, regulation, etc., relating to a substantial safety hazard or that the component supplied contains a substantial defect which could create a substantial safety hazard.
37.
'Indeed, some of the defects previously described, created a substantial safety hazard.
These defects could, under certain circumstances, have resulted in a common mode failure of two or more of the diesels and a resulting loss of the on-site emergency AC power required by NRC regulations.
This on-site emergency AC power source powers the various safety systems that enable the plant to maintain the integrity of the nuclear core in'the event of the loss of off-site power.
The potential consequences of such a failure could be very serious, as previously described in paragraph 4.
LILCO's Purchase of the DeLaval Diesel Generators l
38.
As noted above, TDI's filings purport to provide information about the LILCO-TDI contract.
The information provided by TDI is incomplete and erroneous.
Following is a brief rec.ltation of certain pertinent facts relating to the LILCO-TDI contract. _ _ _
39.
In Jate 1973, LILCO issued a bid specification for three diesel generators to seven potential bidders.
That bid specification, SH1-69, was a " performance specification."
The specification set forth requirements such as the operating conditions, the various ways the apparatus must perform, the governing industry and regulatory codes, and the tests by which performance was to be verified.
The specification left to the prospective vendors the responsibilities for designing and fabricating diesel generators that would meet the requirements set forth in the bid specification.
40.
In response to the bid specification, TDI and four other prospective vendors submitted bids.
TDI's initial proposal is included in the Appendix A, entitled " Relevant Contract Documents," submitted by TDI with its Motion to Dismiss.. Based on TDI's representations concerning its experience, abilit'ies and product, Stone & Webster Engineering Corporation (Stone & Webster), the architect / engineer for Shoreham, determined the bid by TDI met the technical I
requirements of the bid specification.
LILCO's Board of Directors on April 24, 1974, approved the purchase of the three diesel generators from TDI and the con.r.ct was awarded to TDI.
41.
Ira M. Millstein, in his Affidavit of November 15, 1985, purported to include the contract documents between LILCO and TDI.
(11e Mi11 stein Affidavit, 1 6, Appendix A)
Mr.
p p
l p
M111 stein ~ included, however, only a portion of that 1
i documentation.
TDI amended'its proposal in several substantial J
(
respects and the final-contract between the parties expressly l
-included the following' documents in addition to those contained
'in TDI's Appendix A filed with its Motion to Dismiss the Iw Complaint:-
a.
Specification SH1-89, l
b.
February 11, 1974. letter from' John J. Bezek of TDI to M. C. Buckley of_LILCO with attached quality control manual; c.-
February 13, 1974~ letter from John J. Bezek to M. C.
1Buckley; d.
February 25, 1974 letter from John J. Bezek to M. C.
Buckley; e.
March 5, 1974 letter from Wayne A. Truesdale of TDI to M. C. Buckley; f.
March 8, 1974 letter from Wayne A. Truesdale to M. C.
.Buckley; g.
March 13, 1974 telex from L. Efremsky of TDI to John J. Bezek of TDI; and h.
April 4, 1974 telex from Wayne A. Truesdale of TDI to Tony Rinaldi of Stone & Webster.
Purchase Order 301552 (TDI Appendix A-107) expressly incorporates these documents, which are included in LILCO Appendix G to this Affidavit.
42.
Among the important provisions in these documents omitted from TDI's filings is TDI's agreement to comply with the extended warranty contained in S;ccification SH1-89 rather _ _ _ - _
L e
r L
3 than the more limited warranty in TDI's initial proposal.
In addition to an. expanded scope, the extended warranty expressly.
was to extend'to one year'after commercial operation of
'Shoreham.
TDI's memorandum and Appendix A mention only the more limited warranty, even though tha-parties' agreement to-an extended warranty is referenced in the Purchase Order.(TDI Appendix A-110).
43.
Confirmation of TDI's understanding that the extended warranty would remain in effect until one year after Shoreham reaches commercial operation - which, as TDI asserts, has not yet occurred - is further evidenced by two TDI internal
-memoranda which are also included in LILCO Appendix G.
They are:
a.
June 18, 1974 memorandum from C. Moeller of TDI to Bud Trussell of TDI; and b.
June 25, 1974 memorandum from C. Moeller of TDI to D.
Peterson of TDI.
44.
The contract also required LILCO to store ?.he emergency diesel generators in accordance witi: instructions
-from TDI and required TDI to inspect the diesels before their startup.
TDI was further required to provide various technical and advisory services during startup and testing.
Thus, TDI had personnel present on the Shoreham site almost continuously for a number of years both before and after the crankshaft
' failure.
Installation was not completed until October 1981 and pre-operational testing was not completed until June 1983.
, l
!.)
45.
In TDI's Quality Control Manual,: vhich was provided to LILCO by letter of February 11, 1974, and incorporated in TDI's l-proposal, TDI. advised LILCO that it collected information from its customers' use of its products, from in-plant' data and from other sources, and carefully monitored this information to H
verify and improve the quality of its products.
.(LILCO Appendix G)
From the information LILCO has learned preparatory to this litigation,-it appears that TDI.did not diligently pursue and collect such-information, did not use it to verify the' quality.of the shoreham diesel generators and' intentionally failed to advise LILCO -~and perhaps other nuclear plant operators - of known'and potential defects in the emergency diesel generators.
46.
TDI, in its. filings, fails to mention the standstill agreement entered into by LILCO and TDI regarding this litigation.
On July 1, 1984, LILCO and TDI agreed to toll any applicable limitation periods for one year.
(LILCO Appendix H)
Further deponent sayeth not.
Given under my hand this M7dk day of January, 1986.
Vice Presiden/J. Mbseler
-W/
t, Electric Operations Long Island Lighting Company 175 East Old Country Road Hicksville, NY 11801 4'-
Sworn to and subscribed before me this the 17 day of
' January, 1986.
'M ja [M*h Rosa LtE C'NEROS Notary Pub 1ic Ney ut:. :' ate of Nw Yo$
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t:o. :: c = a Qualified in Nasuu County 3 ) 3'<j g.
comminion expires mar. so, id4 My Commission Expires:-.
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AFFIDAVIT OF SERVICE l
I hereby certify that a true copy of the foregoing i
AFFIDAVIT OF WILLIAM J. MUSELER was this day delivered by hand to Robert E. Smith, Esq., Rosenman, Colin, Freund, Lewis & Cohen, 575 Madison Avenue, New York, New York 19022 and to Ira M. Millstein, Esq. and James W. Quinn, Esq., Weil, Gotshal & Manges, 767 Fifth Avenue, New York, New York 10153.
This the day of February, 1986.
G S
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