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KRAVITZ v. HOMEOWNERS WARRANTY CORP.

May 20, 1982

James P. KRAVITZ and Philip Nalibotsky, Individually and t/a Lafayette Associates
v.
HOMEOWNERS WARRANTY CORPORATION and Homeowners Warranty Council of Philadelphia and Suburban Counties and INA Underwriters Insurance Company and Elliot R. Titcher, on behalf of himself and all others similarly situated



The opinion of the court was delivered by: POLLAK

MEMORANDUM

Plaintiffs James P. Kravitz and Philip Nalibotsky, home builders trading as Lafayette Associates, brought this action for declaratory and injunctive relief seeking to rescind a set of agreements arising out of their participation in the National Home Warranty Program (the "HOW Program") developed by one of the defendants, Homeowners Warranty Corporation ("HWC"). The complaint names four defendants-HWC; Homeowners Warranty Council of Philadelphia and Suburban Counties (the "Local Council") which administers the HOW program in the Philadelphia area; the Insurance Company of North America ("INA") which underwrites the program; and Elliot Titcher, who is sued both as an individual purchaser of a home built by plaintiffs and covered by the program, and on behalf of all other similarly situated home buyers. The defendants have moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction and, alternatively, under Rule 12(b)(6) for failure to state a claim upon which relief may be granted.

 Under the HOW program, participating home builders provide home buyers with a written warranty guaranteeing that the purchased home has been constructed in accordance with standards of workmanship established by the program. Initially, plaintiffs entered an agreement with the Local Council which provided for the registration with the Council of homes built by plaintiffs and inspection of those homes. This agreement also recited the builder's obligation to construct registered homes according to HWC-approved standards and set forth the builder's warranty obligations to home purchasers. Plaintiffs then sold a number of homes to purchasers such as defendant Titcher which were covered by Home Warranty Agreements. Under these agreements, plaintiffs promised to repair, replace or pay the reasonable cost of repairing or replacing any defective item covered by the warranty. The agreement also set forth the procedures available to purchasers for notifying the builder of any defects, and described the procedure for conciliation and arbitration of any resulting disputes between purchaser and builder. In addition, the agreement noted that the warranty obligations of the builder were secured by the insurer, defendant INA, against default, and that in case of such a default and subsequent payment by INA, the purchaser agreed to assign its claim against the builder to INA.

 A number of purchasers of homes built by plaintiffs, including defendant Titcher, have claimed defects in the homes; plaintiffs have disputed these claims and apparently have not made any payments or repairs. Following plaintiffs' default, INA undertook according to the HOW program to bear the cost of making necessary repairs. As subrogee to the contractual claims of these purchasers, INA has filed a related civil action against plaintiffs, No. 81-4545, which has also been assigned to my docket.

 I.

 Plaintiffs assert that jurisdiction is based on 28 U.S.C. §§ 1331 and 1337, arguing that this is a case which "arises under the Constitution, laws or treaties of the United States." *fn1" Defendants contend that plaintiffs have simply stated a claim for rescission under state law which does not raise any federal question that may serve as a basis for this court's jurisdiction.

 To rule on defendants' motion, it is important to appreciate plaintiffs' claim in some detail. Plaintiffs seek a declaration that the June 14, 1978 agreement with the Local Council is rescinded and that the home warranty agreements it entered with various home purchasers are rescinded. Further, plaintiffs seek restitution of all payments made to defendants to participate in the program, and an injunction preventing defendants from seeking to recover any judgment on the warranty agreements undertaken by plaintiffs. Reduced to its essentials, plaintiffs' claim appears to be (a) that defendants HWC and the Local Council induced plaintiffs to participate in the HOW program by representing that the warranties provided for under the program complied fully with the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301, et seq., and regulations promulgated by the Federal Trade Commission under that Act; (b) that such representation was false in that the terms of the HOW program providing for arbitration binding on the builder-warrantor differ from FTC regulations which provide only for non-binding arbitration, 16 C.F.R. § 703.5(i); and finally (c) that such false representations as to a material fact on which plaintiffs relied entitles plaintiffs unilaterally to rescind the contract. Seen in this way, plaintiffs' assertions represent a straightforward claim under the doctrine of fraud which generally provides that if the party seeking rescission has tendered an offer of rescission within a reasonable time which has been rejected, and is able to demonstrate a false representation of a material fact constituting an inducement to enter a contract, the court, exercising its equitable power, may rescind the contract-declaring it to be null and void. The court may then award restitution so that the parties are restored to the status quo ante as if the fraudulent contract had never been made. See Adelman v. CGS Scientific Corp., 332 F. Supp. 137, 146 (E.D.Pa.1971); Dunsmore v. Criville, 34 D. & C.2d 337, 83 Montg. 246 (1963).

 Plaintiffs' cause of action is rooted in the law of Pennsylvania. The ground for characterizing this Pennsylvania case as one which "arises under the ... laws ... of the United States" is that an essential element of plaintiffs' "right to relief depends upon the construction of the ... laws of the United States...." Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 199, 41 S. Ct. 243, 245, 65 L. Ed. 577 (1921). For, as our Court of Appeals declared in Lindy v. Lynn, 501 F.2d 1367, 1369 (1974), "(an) action arises under the laws of the United States if ... it requires the construction of a federal statute...." But of course the Court of Appeals did not mean to suggest that every case which "requires the construction of a federal statute" is a federal question case. Thus, in Moore v. Chesapeake & Ohio Ry., 291 U.S. 205, 54 S. Ct. 402, 78 L. Ed. 755 (1939), the Court held that a law suit for injuries suffered by the plaintiff while engaged in intrastate commerce, presenting claims pursuant to the Kentucky Employers' Liability Act, was not a federal question case, notwithstanding that the plaintiff alleged that defendant's train did not satisfy the requirements of the Federal Safety Appliance Act-an allegation of potentially decisive legal consequence for the reason that the Kentucky Employers' Liability Act precluded the defenses of contributory negligence and assumption of risk " "where the violation by such common carrier of any statute, state or federal, enacted for the safety of employees, contributed to the injury or death of such employee.' " 291 U.S. at 212-13, 54 S. Ct. at 404-05. The Court pointed out that in a case of that sort brought in a state court, questions "relating to the scope or construction of the Federal Safety Appliance Acts are, of course, federal questions which may be appropriately reviewed in this court. But it does not follow that a suit brought under the state statute which defines liability to employees who are injured while engaged in intrastate commerce, and brings within the purview of the statute a breach of the duty imposed by the federal statute, should be regarded as a suit arising under the laws of the United States and cognizable in the federal court in the absence of diversity of citizenship." 291 U.S. at 214-15, 54 S. Ct. at 405-06 (citations omitted).

 Perhaps the explanation of Moore is that it was perceived by the Court as kin to the myriad cases holding that a plaintiff cannot frame a state-law claim as an "arising under" case by anticipating a defense based on federal law. See H. Hart & H. Wechsler, The Federal Courts and the Federal System, 883-90 (2d ed. 1973). *fn2" If Moore is thus narrowly read, the present case might be classifiable as one in which plaintiffs' claim "requires the construction of a federal statute." However, while I acknowledge that such a classification would be defensible under the relevant case law, I would add that I cannot identify any compelling reasons of federal judicial policy for embracing a case of this kind as a federal question case. The essential Pennsylvania elements of plaintiffs' suit for rescission would be more appropriately dealt with by a Court of Common Pleas than by this court; and, with respect to the lesser-included issue of federal law, Pennsylvania's courts are fully competent to interpret the Magnuson-Moss Warranty Act and the relevant F.T.C. regulations, subject to review by the United States Supreme Court. Nonetheless, I will assume arguendo that the complaint in this case does state a proper "arising under" claim. I make this assumption because it permits me to address what I regard as a far simpler question-the viability of plaintiffs' complaint. To that question I now turn.

 II.

 In ruling on a motion to dismiss, a court must, of course, assume the truth of the matter alleged in the complaint. Making that assumption in this case, I am nevertheless persuaded that plaintiffs' complaint must be dismissed for failure to state a claim upon which the relief requested may be granted.

 As to defendants INA and Titcher, this seems particularly clear, since there is no allegation that these parties made any representation, fraudulent or otherwise, to plaintiffs which was an inducement to enter the contracts at issue. Plaintiffs never allege, nor does it appear likely that they could allege, that INA or Titcher made any representations concerning the compliance of the program with the FTC regulations. Accordingly, plaintiffs' claims against INA and Titcher, both as an individual and as a putative class representative, will be dismissed with prejudice.

 With respect to defendants HWC and the Local Council, the situation is somewhat different. In my view, even though there may be some federal question concerning the relationship between the FTC regulations and the HWC home warranty contract, no ground for the rescission relief requested by plaintiffs has been asserted in the present complaint.

 Plaintiffs' complaint alleges that defendants represented that the home warranty program "would place such builders (as plaintiffs) in full compliance with the provisions of the Magnuson-Moss Warranty Act ..." and that the "program was being operated in accordance with the requirements of the Act and the regulations of the FTC issued pursuant thereto." Complaint at P 11. As noted earlier, to enforce a claim for rescission under Pennsylvania law, plaintiffs would have to establish that such representations were false. See Adelman, supra. Plaintiffs, of course, allege that defendants' representations were false in that the HWC program called for seller-binding arbitration whereas the FTC regulations called for non-binding arbitration. See Complaint at P's 14-18. For defendants' representations to be considered "false," it would clearly be necessary for plaintiffs to show that they face potential liability for ...


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