## Facts

- Royal Business Machines, Inc. sold Lorraine Corp. (through Michael L. Booher) 114 RBC I and 14 RBC II plain-paper copying machines over roughly 18 months.
- Before the sales, Booher asserted Royal and an affiliated entity (Litton Business Systems, Inc.) made representations about quality, low repair needs, available parts, low maintenance costs, extensive testing, safety (including no fire risk), low service calls, and expected profitability.
- Booher claimed the machines suffered frequent breakdowns, fires, and other defects; parts and service were inadequate; and the venture did not produce the represented profits.
- Booher sued Royal in Indiana state court for breach of warranties and fraud; Royal filed a federal action on financing agreements and removed the state case; the matters were consolidated in the Southern District of Indiana.
- After a bench trial, the district court found for Booher on express and implied warranties, fraud, and revocation of acceptance, awarding $1,171,216.16 in compensatory and punitive damages plus $156,800 in attorneys’ fees.
- The district court also denied Royal recovery of a previously assessed $596,921.33 indebtedness “for want of consideration,” while allowing a $12,020 setoff for an unpaid balance on other equipment.
- Royal and Litton appealed, challenging the findings on express warranties, implied warranties, and the timeliness/effectiveness of revocation of acceptance.

## Issues

1. Which alleged pre-sale statements constituted express warranties under Indiana’s U.C.C., and whether any were breached.
2. Whether the evidence supported breach of the implied warranties of merchantability and fitness for a particular purpose.
3. Whether the evidence supported common-law fraud under Indiana law, including the distinction between actionable misstatements of fact and non-actionable opinion or puffery.
4. Whether Booher’s revocation of acceptance was timely and effective under U.C.C. § 2-608, given continued use after discovery of defects.
5. Whether punitive damages and attorneys’ fees could stand given the required separation between contract-based warranty liability and tort-based fraud.

## Decision

- The Seventh Circuit reversed the judgment and remanded for a new trial.
- The court held the district court treated too many generalized sales representations as express warranties; only specific, factual assurances could qualify, and the findings were overinclusive.
- The court concluded the record did not adequately prove breach of the implied warranties of merchantability or fitness for a particular purpose.
- The court determined Booher’s revocation of acceptance was not timely in light of continued use of the machines despite knowledge of defects.
- The court ruled punitive damages required actionable fraud or similarly serious tortious conduct; the fraud findings were insufficiently cabined, so the punitive award could not stand on the existing findings.
- Because errors affected liability and damages across theories, the court ordered a new trial rather than modifying the award.

## Legal Principles

- Under U.C.C. § 2-313, an express warranty requires an affirmation of fact or promise that becomes part of the basis of the bargain; generalized commendations, predictions, and “sales talk” are typically not warranties absent concrete, verifiable content.
- Implied warranty of merchantability requires proof that goods are not fit for ordinary purposes; isolated problems or dissatisfaction, without adequate proof of class-wide unfitness tied to the legal standard, may be insufficient.
- Implied warranty of fitness for a particular purpose requires proof the seller knew the buyer’s particular purpose and that the buyer relied on the seller’s skill or judgment in selecting suitable goods.
- Indiana common-law fraud requires a material misrepresentation of past or existing fact, knowledge of falsity, intent to induce reliance, justifiable reliance, and injury; opinion and projections generally do not satisfy the misrepresentation element.
- Revocation of acceptance under U.C.C. § 2-608 must occur within a reasonable time after discovery or reason to discover nonconformity; continued commercial use after awareness of defects may render revocation ineffective as untimely.
- Punitive damages in this setting require independent tortious conduct (such as actionable fraud) and cannot rest on breach of contract or warranty alone; findings must separate tort grounds from contract-based theories.

## Conclusion

The Seventh Circuit set aside the district court’s expansive warranty, fraud, revocation, and punitive-damages determinations, holding that only specific factual representations could support express warranties, implied warranties were not sufficiently proven, revocation was untimely given continued use, and punitive damages required properly limited fraud findings; the case was remanded for a new trial.


Royal Bus. Machs., Inc. v. Lorraine Corp., 633 F.2d 34 (7th Cir. 1980)