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CHAMBERLAIN MFG. CORP. v. MAREMONT CORP.

March 14, 1996

CHAMBERLAIN MANUFACTURING CORPORATION, Plaintiff,
v.
MAREMONT CORPORATION, Defendant.



The opinion of the court was delivered by: PLUNKETT

 This case is before us on two motions of defendant Maremont Corporation ("Maremont"). First, Maremont seeks leave to file an amended answer and counterclaim based upon an assignment of a non-party's claims against Maremont to plaintiff Chamberlain Manufacturing Corporation ("Chamberlain"), executed in May 1995. Second, it moves for summary judgment for the second time on Chamberlain's RICO claim (Count I). *fn1" In that motion, it asserts that the Seventh Circuit's decision in Richmond v. Nationwide Cassel L.P., 52 F.3d 640 (7th Cir. 1995), constitutes a change in the law which calls into doubt our earlier ruling that Chamberlain has sufficiently distinguished between the RICO "person" and the RICO "enterprise" under section 1962(c). *fn2" For the reasons set forth below, we deny the motion for leave to file an amended answer and counterclaim, and we grant the motion for summary judgment on Count I. Because Count I was the basis for our subject matter jurisdiction, and because we decline to exercise our supplemental jurisdiction over Chamberlain's state law claims, we dismiss those claims without prejudice to their refiling in state court.

 Background3

 In or before 1963, Maremont acquired a controlling interest in Saco-Lowell Shops, located in Saco, Maine, which Maremont renamed as the New England Division of Maremont. Maremont engaged in, among other things, the manufacture and sale of various weapons to the United States government (the "government"). Maremont subsequently changed the New England Division's name to Saco Defense Systems Division, which remained a division of Maremont until December 31, 1984. On that date, Maremont transferred, sold and assigned all of the business, assets and contracts of Saco Defense Systems Division to Saco Defense, Inc. ("Saco"), *fn4" a shell corporation it had established in 1979. Until May 14, 1987, Maremont owned all outstanding shares of Saco.

 Beginning in approximately 1982, the Air Force awarded Saco a series of contracts for the production of 30mm gain twist gun barrels. Under these contracts, Saco ultimately produced and delivered to the government more than six thousand 30mm gain twist barrels, all but ninety-eight of which were shipped to the government before Chamberlain acquired Saco. The Air Force paid Saco over $ 9,000,000 for the gun barrels.

 During the summer of 1986, Chamberlain became interested in the possibility of acquiring Saco. Pursuant to a purchase agreement dated May 14, 1987, Chamberlain acquired from Maremont all outstanding shares of Saco for a total purchase price of $ 32,925,942.00.

 In March 1987, before Chamberlain's acquisition of Saco had been completed, Saco personnel allegedly learned from a representative of General Electric that the Air Force was investigating Saco's 30mm gun barrels. General Electric was under contract with the Air Force to test some of those gun barrels. It is undisputed that in December 1987, the government notified Saco, now a wholly-owned subsidiary of Chamberlain, of potential quality problems with the 30mm gain twist gun barrels. In October 1988, the government issued a latent defects letter to Saco.

 When Chamberlain learned of the problems, it hired outside counsel and conducted an investigation of Saco's practices. On December 22, 1988, Duchossois Industries, Inc. (Chamberlain's parent corporation), Chamberlain and Saco made an oral voluntary disclosure to the Office of the Inspector General of the Department of Defense ("DoD-IG") and sought admission into the Department of Defense's Voluntary Disclosure Program. At the same time, Chamberlain informed Maremont by letter that it was investigating these alleged deficiencies in Saco's production of 30mm gun barrels and that it might seek remedies against Maremont, including but not limited to indemnification under the purchase agreement. On March 31, 1989, Duchossois, Chamberlain, and Saco submitted a written voluntary disclosure report to the DoD-IG. On April 27, 1992, they entered into a settlement agreement with the government pursuant to which they paid the government $ 2,376,700.00.

 Chamberlain filed this action on December 10, 1990. In its Revised Second Amended Complaint, which is currently pending, it brought a RICO claim under section 1962(c) against Maremont (Count I), which is still pending; a RICO claim under section 1962(c) against Arvin, Maremont's parent corporation (Count II), on which we have already granted Arvin summary judgment; a RICO claim under section 1962(a) against Maremont (Count III), on which we have already granted Maremont summary judgment; a common law fraud claim against Maremont (Count IV), which is still pending; a common law fraud claim against Arvin (Count V), on which we have already granted Arvin summary judgment; a breach of contract claim against Maremont (Count VI), which is still pending; and an indemnification claim against Maremont (Count VII), which is also still pending.

 Discussion

 I. Motion for Leave to File Amended Answer and Counterclaim

 Maremont seeks leave to file an amended answer and counterclaim on the grounds that Saco assigned any claims it may have against Maremont to Chamberlain in a written assignment executed in May 1995 (the "assignment"). According to Maremont, the assignment means that Chamberlain is not longer suing merely on its own behalf to recover damages that it alone allegedly incurred, but rather that Chamberlain is also suing as Saco's assignee for damages incurred by Saco. Maremont contends that, as a result of the assignment, it now has available to it defenses and claims against Saco that it could not have asserted previously against Chamberlain. Specifically, Maremont asserts that it did not know of Saco's fraud upon the government, and that if Maremont is liable to Chamberlain for failing to disclose that fraud, then Maremont is entitled to indemnification from Saco in the same amount.

 Chamberlain responds that the assignment is much ado about nothing. It expressly states that it is not suing as Saco's assignee and is not asserting any claims that Saco may have against Maremont. In fact, at oral argument on this motion, Chamberlain's counsel acknowledged that Saco most likely has no claims against Maremont. Maremont responds that, even without the assignment, the items Chamberlain has identified as its damages are largely expenses which Saco, not Chamberlain, incurred as a consequence of the government's investigation of the nonconforming gun barrels and the subsequent settlement, and that Chamberlain may not recover expenses paid by Saco. Moreover, according to Maremont, in representing to Chamberlain that there had been no fraud upon the government, it relied upon Saco's representation to it; in other words, Maremont insists that it is as much a victim of Saco's fraud as is Chamberlain. Therefore, it reasons, to the extent that it is liable to Chamberlain because of the misrepresentations in connection with the sale of Saco, then Saco is liable to Maremont in the same amount. In essence, Maremont seeks indemnification from Saco if Maremont is found liable to Chamberlain.

 The flaw in Maremont's argument is that its liability to Chamberlain, if any, would be based upon its own conduct, not Saco's, and therefore it has no legal recourse against Saco. Chamberlain is seeking to hold Maremont directly liable for fraud, which it may do only if it can show that Maremont participated in the fraud. Esmark, Inc. v. National Labor Rel. Bd., 887 F.2d 739, 755-56 (7th Cir. 1989) (parent corporation may be held liable for subsidiary's wrongful conduct where parent directly participated). It is Maremont's own conduct, not Saco's, which will provide the basis for Maremont's liability to Chamberlain if Chamberlain wins this case. Obviously, Maremont may not seek indemnification from Saco for Maremont's own misconduct, for Saco has no legal liability for that.

 If Maremont is right that Saco pulled the wool over its eyes, its relief lies not in its ability to seek indemnification from Saco, but in its ability to defend itself successfully on Chamberlain's claims against it. In other words, if Maremont successfully shows that Saco defrauded the government without Maremont's knowledge and then lied to Maremont in connection with the sale to Chamberlain, then Maremont will be found not liable to Chamberlain, for Chamberlain will have failed to prove that Maremont participated in the fraud. And so Maremont will not need to be indemnified by Saco.

 Because Chamberlain is not asserting any claims Saco might have against Maremont (of which there apparently are none), and because Maremont has no legal basis for seeking indemnification from Saco if Maremont is found liable to Chamberlain, Maremont's ...


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