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08/07/87 Ainsworth Corporation, v. Cenco Incorporated Et Al.

August 7, 1987





511 N.E.2d 1149, 158 Ill. App. 3d 639, 110 Ill. Dec. 829 1987.IL.1145

Appeal from the Circuit Court of Cook County; the Hon. Benjamin Nelson, Judge, presiding.


JUSTICE MURRAY delivered the opinion of the court. LORENZ and PINCHAM, JJ., concur.


This is the second appeal in a case involving alleged fraud in the inducement of a 1976 asset purchase agreement. The agreement concerned the transfer of several medical products companies and was between plaintiff Ainsworth Corporation, as buyer, and defendants Cenco Incorporated and Sherwood T. Irvin, as sellers.

In the original appeal which involved a fraud in the inducement claim (Ainsworth Corp. v. Cenco, Inc. (1982), 107 Ill. App. 3d 435, 437 N.E.2d 817), this court reversed a trial court's order granting summary judgment to defendants and remanded the cause for further proceedings. In its original opinion, this court found that there were factual issues as to whether the alleged fraud claim had been waived by a subsequent settlement agreement between the parties in 1977 and whether a release in the settlement agreement was limited to contractual claims concerning an inventory shortfall.

On remand, plaintiff filed an amended complaint, adding counts for breach of contract and breach of warranty to the original count for fraudulent misrepresentation. In November 1983, the trial court granted defendants' motion for summary judgment on the contract and warranty counts based on the 1977 release. Defendants answered the fraud count, asserting various affirmative defenses to which plaintiff replied, and alleged a setoff based on a June 2, 1978, judgment obtained against plaintiff in the amount of $478,634.70.

A four-day trial on the common law fraud issue commenced on April 3, 1985. At the close of plaintiff's case, the trial court granted defendants' motion for a directed verdict and dismissed the cause for failure to prove fraud. Plaintiff's post-trial motions were denied and this appeal followed. The facts underlying this dispute are as follows.

Prior to June 1976, defendant Cenco offered several companies for sale, including Eisele & Company, Inc., of Nashville, a wholly owned subsidiary of Cenco, H. Wills Company of Chicago, and Lukens Suture Company (Lukens) of St. Louis, all of which were divisions of Cenco Medical Industries, Inc. , a wholly owned subsidiary of Cenco. These companies were engaged in the manufacture and sale of medical sutures and related hospital and medical products. This cause of action relates only to representations concerning the Lukens division. Lukens manufactured and sold surgical sutures, bone wax, and cultural media. Its medical products were regulated by the Food and Drug Administration under the Pure Food, Drug and Cosmetics Act (21 U.S.C. ch. 9, secs. 301 et seq. (1970)). The Act requires that certain medical products be labelled as sterile under standards delineated by the United States Pharmacopoeia. 21 C.F.R. secs. 130 through 146(3) (1970).

On June 25, 1976, after substantial negotiations, an asset purchase agreement involving the assets and inventory of the Lukens, H. Wills, and Eisele companies was entered into between plaintiff and defendants. Ainsworth was incorporated for the purpose of acquiring these assets by Joseph M. Cvengros, president of Ainsworth. The sellers were represented by defendant Sherwood T. Irvin, who was vice-president of Cenco, president of CMI, and chairman of the board of Eisele. All parties were represented by counsel during negotiations and formalities surrounding the sale.

Paragraph 7 of the purchase agreement, entitled "Representations and Warranties Sellers and CENCO," provided in part: "to the best of Sellers' knowledge none of the properties owned, occupied or operated by any of them, nor the ownership, occupancy or operation thereof, is, to any extent materially and adversely affecting the business of any of them, in violation of any law, ordinance or regulation or . . . federal, state and local safety laws, regulations and ordinances (including . . . the United States Pure Food and Drug Act, or similar laws and regulations . . ..) No notice from any governmental body or other person has been served upon Sellers . . . claiming any violation of any such law, ordinance, regulation, agreement or code . . . which has not been complied with . . .."

Consideration for this agreement included payment of $487 at closing, the issuance of a $200,000 note payable by plaintiff one year later, and $435,000 of Ainsworth preferred stock which was convertible into a debt instrument if Ainsworth failed to pay dividends and make redemptions as provided for in the agreement. Plaintiff never paid off the note nor did it pay any dividends or retire the preferred stock.

At the closing, defendant Irvin, at Cvengros' request, signed certificates attesting to the truth of the representations and warranties contained in the purchase agreement. Shortly after the closing, a dispute between the parties arose concerning inventory shortages in the companies now owned by Ainsworth. On January 27, 1977, a letter settlement agreement was reached "in order to resolve the existing dispute between us." Paragraph 6 of the settlement agreement stated that "Ainsworth and Cvengros agree that the representations, warranties and covenants of CMI, Eisele and Cenco in the Agreement shall all expire on the date of this agreement and Ainsworth and Cvengros waive any breach of any of such representations, warranties and covenants, or any default under the ...

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