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October 26, 1992

USG CORPORATION, a Delaware corporation; and USG INTERIORS, INC., a Delaware corporation, Plaintiffs,
DONALD A. BROWN, an individual; DONALD A. BROWN, as trustee of the Revocable Living Trust dated September 29, 1976; and MANUFACTURERS NATIONAL BANK OF DETROIT, as trustee of the Irrevocable Trust dated July 22, 1976, Defendants.


The opinion of the court was delivered by: JAMES B. MORAN

In this diversity case, plaintiffs USG Corporation and USG Interiors, Inc. (USG) seek indemnification from defendants (Brown), pursuant to a merger agreement, for costs incurred as a result of alleged violations of environmental laws and regulations prior to the merger date. Before us now is USG's motion for summary judgment on the issue of liability under Article 4(d) of the indemnity agreement. For the reasons below, we grant in part and deny in part USG's motion for summary judgment.


 Prior to February 25, 1986, defendants owned D.A.B. Holding Company, the parent of Donn Corporation (Donn) and American Metals Company (AMC). *fn2" Both Donn and AMC have manufacturing plant facilities on a site in Westlake, Ohio (Westlake site).

 On February 25, 1986, USG and Brown agreed to a merger of D.A.B. into USG Interiors, Inc., a subsidiary of USG Corporation. The official merger date was April 9, 1986. As part of the merger, USG and Brown executed an indemnity agreement providing for defendants to indemnify USG under certain conditions for expenses related to any pre-merger noncompliance with environmental laws or regulations.

 As part of the manufacturing process at the Westlake site certain waste was produced. The Westlake site has had a variety of arrangements for the purpose of storing and disposing of waste. Sludge was deposited in a sludge-drying pond until the mid- to late 1960s, when AMC decided to build a new building on the site of the sludge-drying pond. The pond was covered over with dirt and a building was built on top of the old pond. Defendants built a settling basin, a landfill and three surface impoundments to replace the sludge-drying pond as waste disposal and storage areas. The settling basin was also constructed in the mid- to late 1960s and was used to allow water to be separated from any excess sludge. AMC stopped using the settling basin in 1972. The landfill was created during construction of new buildings on the Westlake site as a source of dirt. It was also used until about 1974 to hold sludge from the surface impoundments that was not drying fast enough for off-site disposal. Because of changes in its waste storage and disposal practices, AMC no longer needed or used the surface impoundments as of about 1982. In 1982 AMC removed sludge from the surface impoundments and had it hauled off-site.

 The U.S. Environmental Protection Agency (USEPA) initiated an administrative proceeding against AMC on January 4, 1989. The proceeding was brought pursuant to Section 3008(a)(1) of the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 6928(a)(1). The EPA proceeding concerned alleged RCRA violations with respect to the surface impoundments. The USEPA proposed a civil penalty of $ 69,555 for the RCRA violations. On February 22, 1990, AMC (with USG's approval) entered into a consent order with the USEPA (Order I), under which AMC agreed to perform certain actions to bring the Westlake facility into compliance with applicable hazardous waste laws, including instituting a groundwater monitoring program. Also as part of Order I, USG negotiated and paid a lower penalty of $ 45,000.

 The USEPA also initiated a corrective action proceeding against AMC on March 13, 1990 (Order II). Order II had as its purpose for AMC

 (1) to perform a RCRA Facility Investigation (RFI) to determine fully the nature and extent of any release of hazardous wastes and hazardous constituents at or from the Facility; and (2) to perform a Corrective Measures Study (CMS) to identify and evaluate alternatives for the corrective action, if necessary, to prevent or mitigate any migration or releases of hazardous wastes or hazardous constituents at or from the Facility.

 Order II (plfs' ex. 4).

 USG seeks a declaratory judgment on liability requiring defendants to indemnify USG for any pre-merger noncompliance with environmental laws and for resulting costs from Orders I and II "regardless of when such loss, liability, or expense . . . is incurred or assessed."


 The Indemnity Agreement

 Because this is a breach of contract action, we must first examine the provisions of the indemnity agreement. Both sides agree that, per the provisions of the indemnity agreement, Ohio law governs. The indemnity agreement provided that defendants

 shall indemnify and hold harmless USG . . . with respect to any loss, liability or expense . . . incurred in connection with: . . . (d) any noncompliance prior to the Merger Date (whether noticed, cited or otherwise) with applicable environmental laws, ordinances, and regulations, including, but not by way of limitation, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act, and any state or local counterpart of any of the above laws, and any regulations issued under any of the foregoing; (e) any expenditures, incurred on a basis consistent with USG's past practice, for clean-up of hazardous substances or environmental restoration of any waste disposal site used . . . with respect to such use prior to the Merger Date.

 (Article 4, Indemnity Agreement ("Article 4")). USG, recognizing that resolution of claims under section (e) of Article 4 will probably involve factual determinations not appropriate on a motion for summary judgment, has limited its motion to section (d) of Article 4. USG's section (d) claims stem from post-merger USEPA action taken against USG; USG maintains that the costs it has incurred because of two USEPA orders are due to pre-merger noncompliance by the defendants.

 Other provisions of the indemnity agreement involve notice requirements (Article 6), limitation periods (Article 7), liability limitations (Article 8), the right of defendants to assume the defense of certain matters and the obligations of the parties with respect to settlements (Article 12). *fn3" Also, Article 13 describes the acceptable forms for notice under the agreement.

 USG claims that as a result of USEPA investigations of the Westlake facility both before and after the merger, the USEPA entered two orders against USG. USG seeks a declaratory judgment of liability based on defendants' alleged pre-merger noncompliance with various environmental laws and resulting costs attributable to the two EPA orders. *fn4"

 Defendants respond with numerous legal arguments and representations as to why summary judgment is inappropriate. Defendants maintain that plaintiffs cannot recover because they did not incur a "loss, liability or expense" within the limitation period provided by Article 7. Defendants also deny that plaintiffs complied with the requirements for proper and timely notice under the indemnity agreement. Also, defendants claim that plaintiffs have not demonstrated the lack of a genuine issue of material fact concerning defendants' noncompliance prior to April 9, 1986. Finally, defendants deny that USG has demonstrated a causal connection between any alleged violations and the entry of the two EPA orders.

 Both sides agree that Article 7 relieves defendants of liability for an obligation or claim under Article 4 if USG did not provide written notice to defendants by April 9, 1989. Defendants argue that because Article 4 provides for indemnity for a loss, liability or expense incurred in connection with pre-merger noncompliance, any indemnifiable amounts must themselves have been fully incurred within three years of the merger date. Thus, because both EPA orders were entered after April 9, 1989, defendants claim they are not liable under the agreement. This somewhat tricky argument does not reflect a reasonable reading of Articles 7 and 4. Article 7 says nothing about notice only for already incurred expenses; rather, it addresses only written notice of an Article 4 claim. Nothing under Article 4 prevents notice from being given before the claim is fully and finally adjudicated or settled, or before it is paid for by the indemnitee.

 As USG points out, other provisions of the indemnity agreement support this reasoning. Article 12, for example, provides that the indemnitor may elect to assume the defense of matters for which it has received notice. Also, it provides that neither party may settle an Article 4 ...

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