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CH2M Hill Central Inc. v. Madison-Madison International Inc.

decided: June 9, 1989.

CH2M HILL CENTRAL, INC., PLAINTIFF-APPELLEE,
v.
MADISON-MADISON INTERNATIONAL, INC., DEFENDANT-APPELLANT



Appeal from the United States District Court for the Eastern District of Wisconsin. No. 87 C 0564 -- John W. Reynolds, Judge.

Coffey, Easterbrook and Ripple, Circuit Judges.

Author: Coffey

COFFEY, Circuit Judge.

The plaintiff-appellee CH2M Hill Central, Inc. (CH2M Hill) filed this suit invoking the district court's diversity jurisdiction and seeking indemnification of $31,316.46 from its subcontractor, Madison-Madison International, Inc. (MMI), the defendant-appellant. The district court granted summary judgment in favor of CH2M Hill, and MMI appeals. We affirm.

Sometime prior to July 1979 the plaintiff-appellee CH2M Hill, an Oregon engineering firm, contracted with the Milwaukee Metropolitan Sewerage District to perform certain design and construction management work in the Milwaukee Water Pollution Abatement Program. The Pollution Abatement Program is partially funded through the Environmental Protection Agency (EPA), and contractors performing work on EPA projects are required to maintain records "directly pertinent to performance on EPA grant work . . . in accordance with generally accepted accounting principles and practices . . . ." 40 C.F.R. § 33.1030(b)(9) The contract between CH2M Hill and the Sewerage District provided:

"The ENGINEER [CH2M Hill] will indemnify the DISTRICT against any unrecoverable loss due to grant disallowance because of any adjustment in charges for services of the ENGINEER or its subcontractors based on the determination in an audit by an appropriate agency that adequate administrative accounting or related procedures were not in place."

On July 12, 1979, CH2M Hill and the defendant-appellant MMI entered into a contract with MMI agreeing to perform as a subconsultant on the Pollution Abatement Program. At that time, MMI was an Ohio corporation doing business in Ohio and a number of other states and consisted of but two shareholders--Julian Madison, an engineer, and Robert Madison, his brother, an architect. The MMI-CH2M Hill contract, as amended on July 11, 1983, required MMI's compliance with the EPA accounting regulations contained in 40 C.F.R. § 33.1030. It also provided as follows:

"SUBCONSULTANT [MMI] hereby agrees to indemnify CH2M against any claims, damages, compensation, suits, actions and expenses, including without limitation attorneys' fees, arising out of or relating to any unrecoverable loss of the DISTRICT due to grant disallowance because of any adjustment in charges for services of the SUBCONSULTANT, or its subcontractors if any, based on the determination in an audit by an appropriate agency that adequate administrative accounting or related procedures were not in place."

In a document captioned "Agreement and Plan of Reorganization," dated March 1, 1985, Robert and Julian Madison reorganized MMI "in a manner which would split off MMI's activities outside of the state of Ohio from its activities within the state of Ohio. . . ." Robert Madison became the president and sole shareholder of MMI, the Ohio corporation,*fn1 and Julian Madison became the president of a number of new corporations (including one known as MMI of Wisconsin), in states other than Ohio. As part of the reorganization, Robert Madison (on behalf of the assignor MMI) and Julian Madison (on behalf of the assignee MMI of Wisconsin) executed a separate document captioned "Assignment." That document, also dated March 1, 1985 (effective "for all purposes as of September 30, 1984"), made reference to the Agreement and Plan of Reorganization and provided in relevant part:

"NOW, THEREFORE, in consideration of the recitals and the premises therein the parties hereto agree as follows:

1. Assignor does hereby sell, assign and transfer, to Assignee all of its rights, duties, and obligations in all of the contracts listed in EXHIBIT 'A' which is attached hereto and incorporated herein.

2. Assignee hereby accepts the assignment of all of the contracts listed in EXHIBIT 'A', and agrees to assume the performance of all of the Assignors [sic] duties and obligations under all such contracts assigned hereby, and farther agrees to hold Assignor harmless from the performance or non performance by Assignee of those obligations and duties."*fn2

In 1986 the public accounting firm of Touche Ross & Co. performed an audit of MMI's books and records to determine the allowability of costs MMI billed to CH2M Hill for subconsultant work MMI performed on the Pollution Abatement Program between August 1, 1979, and September 30, 1984.*fn3 Touche Ross issued an audit report in the fall of 1986 detailing all of the costs MMI billed to CH2M Hill during the time period under audit. The report recommended that certain costs be disallowed and explained the basis for the disallowance.*fn4 The audit findings were forwarded to Robert Madison, who filed a letter response with CH2M Hill. In his response, Robert Madison stated that he concurred that certain claimed costs totalling $31,316.46 were properly challenged for the reasons set forth in Touche Ross' audit report, but questioned other costs as having been improperly disallowed. On or about December 8, 1986, CH2M Hill, acting in compliance with the indemnification provision in its contract with the Sewerage District, sent the Sewerage District a check in the amount of $31,316.46, along with a letter stating that the check "represents the total of uncontested questioned costs identified in Touche Ross' audit of Madison-Madison International, Inc." On the same day, CH2M Hill made a written demand for $31,316.46 from MMI as reimbursement for MMI's disallowed costs, based on the indemnification provision in the MMI-CH2M Hill amended agreement. MMI contested CH2M Hill's demand and refused to make the payment.

CH2M Hill filed suit on May 6, 1987, demanding payment of the $31,316.46. MMI filed an answer raising the affirmative defense that it was not the proper defendant--that, as a result of MMI's "Agreement and Plan of Reorganization" and "Assignment" dated March 1, 1985, the liability sued upon was the responsibility of MMI of Wisconsin. CH2M Hill filed a motion for summary judgment, contending that MMI could not enter into an assignment without CH2M Hill's written consent, and no such Writing existed.*fn5 CH2M Hill also argued that "the [assignment] is dated March 1, 1985, and this could only affect contractual relationships between CH2M Hill and MMI after March 1, 1985. The audited costs claimed in this action arose prior to September 30, 1984, thus the attempted assignment could not have affected obligations which arose prior to March 1, 1985." (Emphasis in original). Though the district court acknowledged "some doubt as to . . . whether the assignment was properly approved in writing by CH2M Hill," the court found that "these disputes do not require the denial of summary judgment because ...


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