Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-01175/USCOURTS-ca10-88-01175-0/pdf.json

Nature of Suit Code: 195
Nature of Suit: Contract Product Liability
Cause of Action: 

---

' 

IN THE UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

MILTON D. JOHNSTON and BETTY L. 

JOHNSTON, 

) 

) 

) 

v. 

Plaintiffs/Appellants, ) 

) 

) 

) 

FI LED 

United States Court of .Appeals 

Tenth Ckruit 

AUG 9 1989 

ROBERT L. HOECKER 

Clerk 

AGRISTOR CREDIT CORPORATION; 

A.O. SMITH CORPORATION, INC.; 

A.O. SMITH HARVESTORE PRODUCTS, 

INC.; 4-J HARVESTORE SYSTEMS, 

INC., a division of A.O. Smith 

Harvestore Products, Inc., 

) 

) 

) 

) 

) 

) 

) 

) 

) 

No. 88-1175 

(D. Kansas) 

(D.C. No. 84-4421) 

Defendants/Appellees, 

and 

K-W-H-I COMPANY, INC., formerly 

known as K-W Harvestore, Inc.; 

WRIGHT (BUD) TURNER, d/b/a 

Turner Sales, Inc.; DONALD D. 

KRAUSE, an individual, 

Defendants. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

ORDER AND JUDGMENT* 

Before MOORE, ANDERSON and BRORBY, Circuit Judges. 

After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

* This order and judgment has no precedential value and shall 

not be cited, or used by any court within the Tenth Circuit, 

except for purposes of establishing the doctrines of the law of 

the case, res judicata, or collateral estoppel. 10th Cir. R. 

36.3. 

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 1 
34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

Milton and Betty Johnston appeal from a summary judgment for 

the defendants on the Johnstons' claim that the defendants fraudulently misrepresented the effectiveness of their grain storage 

facilities and especially the ability of the facilities to preserve the quality of the feed contained therein. The defendants/ 

appellees are (1) A.O. Smith Corporation ("A.O. Smith"), (2) two 

A.O. Smith subsidiaries--AgriStor Credit Corporation ("AgriStor") 

and A.O. Smith Harvestore Products, Inc. ("AOSHPI"), and (3) an 

AOSHPI subsidiary--4-J Harvestore Systems, Inc. ("4-J"). As the 

parent company, A.O. Smith provided engineering, financial and 

marketing support to its subsidiaries. In turn, AOSHPI manuf actured the agricultural equipment involved in this litigation, 

and AgriStor helped AOSHPI customers finance their purchases of 

Harvestore equipment. Finally, 4-J sold and serviced the 

Harvestore equipment in areas where independent dealerships were 

not operating. Although the Johnstons initiall y brought an action 

f or fraud, negligence, strict liability in tort, breach of express 

and implied warranties, usury, RICO violations, and violations of 

t he Kansas Consumer Protection Act, on appeal they challenge only 

t he dismissal of their fraud claim, which the district court held 

was barred by the relevant Kansas Statute of Limitations. After 

c onsidering the nature of the fraud allegat i ons and the chronology 

of the Johnstons' dissatisfaction with their Harvestore purchases, 

we AFFIRM the district court order. 

Preliminarily, we conclude that a technical error by two of 

-2-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 2 
the defendants did not foreclose the Johnstons' appeal. Upon our 

receipt of the first set of pleadings, we noticed that the record 

lacked a certificate of service establishing that a motion by A.O. 

Smith and AOSHPI to amend or alter the judgment had been served on 

the plaintiffs in a timely fashion. 1 Although the motion had been 

filed, as required, within ten work days of the initial judgment, 

we were unable to determine if service to the Johnstons had been 

given within the same time period. If it had, then the thirty-day 

period in which the Johnstons could file an appeal did not begin 

to run until the district court ruled on the motion, which it did 

on December 29, 1987. If service had not been given, then arguably the motion was of no effect and the Johnstons' appeal was 

untimely because it was not filed until January 28, 1988, more 

than sixty days after the date of the initial judgment. In 

response to our query, all parties to the appeal except AgriStor 

filed affidavits which collectively establish that copies of the 

motion were mailed to the relevant parties on December 3, 1987 and 

received on December 4, well within the allowable time frame. 

AgriStor remained silent as to the date it received its notice of 

the motion, and argued that the failure of its co-defendants to 

include a certificate of service with their motion to amend was 

necessarily fatal to the Johnstons' appeal. In our view 

AgriStor's arguments are disingenuous and are overwhelmed by affirmative evidence from every other party to this suit establish1 A.O. Smith and AOSHPI had moved the court to 

November 23, 1987 judgment to reflect recent case 

the statute of limitations governing RICO claims. 

affected only the reasoning but not the result of 

granting summary judgment. 

-3-

amend its 

law affecting 

Their motion 

the order 

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 3 
ing that timely notice of the motion was given. "The sole flaw in 

the manner of service was occasioned by the [defendants] .... 

That this should torpedo the plaintiff's case would be a subversion of the notice statutes, as well as a miscarriage of justice." 

Kitchens v. Bryan County Nat'l Bank, 825 F.2d 248, 256 (10th Cir. 

1987). We conclude that the Johnstons' appeal was timely filed. 

We turn now to the substance of this appeal. Under Kansas 

law, a fraud claim must be brought within two years of its discovery and, technically, within two years of when the fraud first 

caused substantial injury or the injury became reasonably ascert ainable to the injured party. Kan. Stat. Ann. § 60-513(a)(3)and 

(b). 2 Kansas case law has interpreted the statute of limitations 

to bar a fraud claim if the fraud was discovered or "with reasona ble diligence could have been discovered" prior to two years from 

the filing date. See Waite v. Adler, 716 P.2d 524, 527 (Kan. 

1 986); Price v. Grimes, 577 P.2d 969, 972 (Kan. 1984); Augusta 

Bank and Trust v. Broomfield, 64 3 P.2d 100, 108 (Kan. 1982); 3 Wolf 

2 Fraud is only one of seven actions fall i ng within the two 

year limitation period provided for in subsection 60-513(a). 

Subsection 60-513(b) states that the above causes of actio n are 

deemed not to have accrued: 

"until the act giving rise to the cause of action first 

causes substantial injury, or, if the fact of injury is 

not reasonably ascertainable until some time after the 

initial act, then the period of limitati on shall not 

commence until the fact of injury becomes reasonably 

ascertainable to the injured party . . . . " 

Subsection (b) appears to be essentially inapplicable t o f raud 

actions, or no more than a redundancy, since discovery of fraud 

"is simultaneous with the discovery of the injury resulting 

t herefrom." Jennings v. Jennings, 507 P.2d 241, 251 (Kan. 1973). 

3 The Johnstons assert that language in the Augusta Bank case 

weakens the "reasonable diligence'' requirement and requires actual 

-4-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 4 
v. Brungardt, 524 P.2d 726 (1974). See also AgriStor Leasing v. 

Meuli, 634 F. Supp. 1208, 1221 (D. Kan. 1986), aff'd 865 F.2d 1150 

(10th Cir. 1988). 

Summary judgment is appropriate here if the trial court could 

satisfy itself that the undisputed facts established that at least 

two years prior to the date the Johnst o ns filed their claim 

a gainst the defendants they either (1) did discover the alleged 

f raud, or (2) had enough information so that with reasonable 

d i ligence they could have discovered the fraud. Since the 

Johnstons filed their claim on December 28, 1984, the question is 

whe t her the record establishes indisputably tha t the Johnstons 

discovered or, given the facts at their disposal, reasonably could 

have discovered the alleged fraud and injuries prior to December 

28, 1982. 4 See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 

knowledge of the fraud. The pertinent language i n Augusta Bank 

s tates: "'Discovery of the fraud' has been defined by this court 

to mean the time of actual discovery or when, with reasonable 

diligence, the fraud could have been discovered. It does, 

however, imply actual knowledge, not mere suspicion of wrong." 

Augusta Bank, 643 P.2d at 108 (citations omitted). We disagree 

with the appellants' interpretation of this quote. Subsequent 

cases have continued to invoke the statute of limitations where 

the injured party should have discovered the fraud, even citing to 

Augusta Bank for this proposition. The better interpretation of 

the "actual knowledge" language of Augusta Bank is that it clarifies that the injured party must have actual knowledge (i.e., some 

facts) which would have led a reasonably diligent person to investigate and uncover the fraud. This interpretation is consistent 

with the basic and oft-cited formulation invoked in the Wolf v. 

Brungardt decision: "'discovery of the fraud' ... means the 

discovery by the person defrauded of such facts indicating he had 

been defrauded as would cause a reasonably prudent person to 

investigate, and which, if investigated with reasonable diligence, 

would lead to knowledge of the fraud." Wolf, 524 P.2d at 734. 

4 Before reviewing the summary judgment briefs and supporting 

attachments, we note that we are denying the appellants' motion to 

supplement the record on appeal with the deposition testimony of 

Milton Johnston. We limit our review to the record before the 

-5-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 5 
247 - 48 (1986); Franks v. Nimmo, 796 F.2d 1230, 1235 (10th Cir. 

1 986) (court must examine the record to see if genuine issue of 

material fact remains and, if not, whether substantive law was 

correctly applied). 

The Johnstons insist that although they discovered fairly 

soon after purchase that their Harvestore grain and forage silos 

wer e not performing as efficiently as they had been led t o 

beli eve, they did not associate health and b r eeding probl ems in 

t heir dairy herd with possible design deficiencies in the silos 

un til 1984. In support of their position they point out that 

t heir initial purchases and installation of Har vestore equipment 

had occurred in 1976, mastitis in the herd did not develo p until 

1 980, and because of the time lapse they d i d not link the mastitis 

and other developing health problems to the known financ i al inefficiencies of their silos. 5 The Johnstons did not link herd 

health problems with their Harvestore equipment until 1984 when 

t hey apparently learned that possible design defects in the silos 

c ould be allowing enough oxygen seepage and temperature variation 

d i strict court and must ascertain simply if the trial court could 

determine from the undisputed facts before it that summary 

judgment was in order. 

We also note that, the appellees, out of an abundance of 

caution, moved for the inclusion of the summary judgment briefs 

and attachments, since the appellants did not specify them in 

their motion to supplement the record. We grant the appellees' 

motion, although we would have reviewed the summary judgment 

briefs and attachments in any event. 

5 The record establishes that purchases and installation of 

additional Harvestore grain and forage silos continued during the 

years 1977-79. It also establishes that a drop in milk production 

occurred soon after installation of the first Harvestore silos, 

although feed analysis apparently revealed the problem to be field 

c ontamination of the grain. 

-6-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 6 
to contaminate and spoil the ensiled wet grain and haylage. 

Spoilage of the forage and grain crops was allegedly responsible 

for various toxins entering the digestive system of the cows and 

migrating to their extremities, causing various herd health 

problems, including mastitis, decreased weight gain, and breeding 

problems. 6 

In counterargument, the defendants point out that Milton 

Johnston's deposition testimony and answers to interrogatories 

allege a series of ten specific misrepresentations, all of which 

he admits discovering prior to December 28, 1982. The alleged 

misrepresentations were as follows (a number of the statements 

appear to be variations on the same theme): 

1. "Switching from alternative storage methods to the 

Harvestore System would save plaintiffs in excess of $100,000.00 

yearly." 

2. "Plaintiffs would not need to buy any supplemental 

protein for their herd." 

3. "Plaintiffs' operation would be more efficient." (The 

AOSHPI push-button unloading system would distribute precise rations of haylage, thus saving labor time.) 

4. "The system would pay for itself in less than 5 years." 

5. "Plaintiffs' purchased feed costs would be less." 

6. "If I yielded 5 ton of hay per acre, then I would yield 

10 ton of haylage [medium moisture silage] per acre." 

6 The record does not disclose exactly when health problems 

other than mastitis arose. 

-7-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 7 
7. "If grain was wet when stored, it would be equal pound 

for pound in energy as dry grain." 

8. "The protein level of stored products would rise." (The 

appellants' briefs explain that anaerobic respiration would cause 

the protein level to rise in the moist grain during storage.) 

9. "Rain does not hurt alfalfa haylage very much." 

10. "The Slurrystore [a structure to store and preserve 

manure for fertilizer use] would eliminate the fertilizer bill." 

AOSHPI's Interrogatories and Answers, R. Vol. 1 at Doc. 145, Appendix. Taken together these alleged misrepresentations suggest 

that the Johnstons thought the Harvestore system would produce a 

financial savings to them over time and understood that they would 

be switching from a system of dry feed storage to a system of 

moist feed storage. The appellants' briefs go beyond the deposition testimony and affidavits in the record to state that the appellants understood the Harvestore system to be an oxygen-limiting 

system of moist feed storage which maximized the preservation of 

stored nutrients in the feed. Appellants' Brief at 4; Appellants' 

Reply Brief at 2-3. 

Record excerpts from Milton Johnston's deposition establish 

that he discovered long before 1982 that the above ten representations were false. He discovered within the first months that 

moist grain was not equal in nutritional energy to dry grain on a 

pound-for-pound basis and that supplemental protein was needed. 

Within the first year or so of operation of the push-button 

unloader system, he discovered that a great deal of labor time was 

required to adjust and refine the operation of the unloader. At 

-8-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 8 
least by the end of 1977 he discovered that haylage which had been 

rained on did not perform as well as haylage that had not been 

rained on. By 1980 he knew that his dairy farm was losing money, 

not saving $100,000 a year. Finally, he discovered that he needed 

to use commercial fertilizer every year in which he used the 

Slurrystore manure storage structure. 

The appellants are not in a position to deny their own discoveries, and they appear to concede that summary judgment is appropriate with respect to representations about the Slurrystore 

structure, the rained-on haylage, and the push-button unloader. 

Moreover, they knew the feed silos were not as economical as they 

had been led to believe but they argue that they still believed 

the silos to be the "finest feeding system available, regardless 

of cost." Appellants' Brief at 13. While they knew the representations as to the financial efficiency of the silos were misleading, they assert that they did not know and reasonably could 

not have known that the silos actually were poisoning their herd. 

At this point we assume for purposes of summary judgment that 

the Johnstons' allegations of a link between the Harvestore equipment and the health problems of their dairy herd are true. The 

key question on appeal then becomes whether discovery of misrepresentations with respect to the nutritional preservation and 

enhancement of the stored feed should have led to the discovery 

that failure of the Harvestore equipment to adequately limit 

oxygen was injuring the cows. In other words, did the Johnstons 

have "some information which [would] put [them] on inquiry to 

discover the true facts[?]" Wolf v. Brungardt, 524 P.2d at 735. 

-9-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 9 
For reasons to be described, we answer this question in the affirmative. 

Preliminarily, we reject the defendants' inferences that none 

of the ten quoted misrepresentations addressed the physical health 

of the herd. We conclude that representations that the wet grain 

would be equivalent in energy to dry grain, that plaintiffs would 

not need to buy supplemental protein for their herd, and that the 

protein level of the stored products would rise all implicitly 

include a representation that Harvestore storage of the wet feed 

would not result in a toxic feed supply that would threaten the 

health of the herd. The representations were directed at assuring 

the Johnstons that the wet storage would be at least as nutritional as dry storage, if not more so. The underlying representation 

then must be that the Harvestore structures certainly would not 

spoil the feed stored therein. Contrary to defendants' inference 

that knowledge by the Johnstons prior to 1982 of all ten misrepresentations established their actual discovery of all alleged 

misrepresentations, there is no reason to believe that the 

Johnstons knew the underlying representation was false until 1984. 

We sympathize with the Johnstons' unawareness. Nonetheless, we 

are compelled to conclude that the question under the Kansas 

statute of limitations and case law is not simply did they know 

but also should they have known at least two years sooner? 

As for this key question, the Johnstons' complaint alleges 

that they had been told the basic nature of their Harvestore 

system, i.e., that it was designed to store wet grain and forage 

rather than dry crops and that it would both preserve and even 

-10-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 10 
enhance the nutritional value of the crops through its oxygenlimiting silos. R. Vol 1, Doc. 1 at 5. The fact that the 

Johnstons may not have understood until 1984 the nature of possible design defects allowing excess oxygen seepage into the silos 

is immaterial. When the equipment did not perform as expected, 

followed by a drop in milk production, decreased weight gain, 

development of mastitis in the herd, and breeding problems, a 

reasonably prudent dairy farmer would have been on notice to 

investigate the new equipment along with other possible sources of 

the problems such as the weather, grain contamination in the 

field, the milking equipment, etc. The fact that when the health 

problems accelerated the Johnstons investigated a variety of 

sources of the problems does not excuse their failure to investigate a possible relationship between the Harvestore equipment and 

their herd health problems. If additional protein was needed as a 

dietary supplement, it meant either that (1) anaerobic respiration 

was not occurring for some reason or (2) that anaerobic respiration was occurring but would not preserve the nutritional value of 

the feed any better than dry storage. A reasonably diligent 

farmer, with actual knowledge of the failures of the Harvestore 

equipment as is the case here, would have investigated both possibilities and not just assumed the latter. If anaerobic respiration was not occurring, it would indicate that oxygen was leaking 

into the silos. If oxygen was combining with the wet crops, a 

reasonably prudent farmer would want to know the effects. In 

other words, since it was clear to the Johnstons that the equipment was based on a different feed storage principle and was not 

-11-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 11 
performing as expected, the failure to investigate a relationship 

between herd health problems and the feed storage facilities does 

not represent reasonable prudence. Instead, it seems to reflect 

misplaced trust in their original salesman. 

Where the undisputed facts clearly establish actual discovery 

of misrepresentations as to the functioning of the equipment and 

actual discovery of substantial economic injury related to those 

equipment flaws, we conclude that although the Johnstons may not 

have realized the full extent of their economic injury from the 

misrepresentations, i.e., those flowing from their herd health 

problems, Kansas law required them to investigate prior to 

December 28, 1982 the possibility that their Harvestore feed silos 

were spoiling their feed supply. Although it is certainly 

disputed whether or not the grain storage problems in this case 

actually caused mastitis and some of the other specific health 

problems such as deformed hooves, what is beyond question is that 

a reasonably diligent investigator would have investigated the 

Harvestore equipment before December 28, 1982 and thereby uncovered the specific fraud alleged in this appeal. For these 

reasons we hold that the trial court correctly ruled that under 

Kansas law summary judgment was proper. 

AFFIRMED. The mandate shall issue forthwith. 

ENTERED FOR THE COURT 

Stephen H. Anderson 

Circuit Judge 

-12-

Appellate Case: 88-1175 Document: 01019974448 Date Filed: 08/09/1989 Page: 12