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APPLIED INDUSTRIAL MATERIALS CORP. v. MALLINCKRODT

May 25, 2000

APPLIED INDUSTRIAL MATERIALS CORPORATION, PLAINTIFF,
V.
MALLINCKRODT, INC., DEFENDANT.



The opinion of the court was delivered by: Schenkier, United States Magistrate Judge.

MEMORANDUM OPINION

On October 31, 1986, Industry Holdings, Inc. ("Industry Holdings") and International Minerals & Chemical Corporation entered into a Stock Purchase Agreement (the "Agreement"), pursuant to which Industry Holdings purchased two entities: IMC Industry Group, Inc., and IMC Group (Quartz) Inc. (collectively the "Purchased Companies"). Plaintiff in this case, Applied Industrial Materials Corporation ("AIMCOR"), a Delaware corporation with its principal place of business in Connecticut, is allegedly the successor to the rights and obligations of Industry Holdings (Compl. ¶ 2). Defendant Mallinckrodt, Inc. ("Mallinckrodt"), a New York corporation, with its principal place of business in Missouri, is the successor to the rights and obligations of International Minerals & Chemical Corporation (Compl. ¶ 4; Answer ¶ 4). Consequently, for purposes of convenience and clarity, this Opinion will refer to the Seller and the Purchased Companies collectively as "Mallinckrodt," and the Purchaser as "AIMCOR."

The Agreement contains certain indemnification clauses, pursuant to which Mallinckrodt agreed to indemnify and hold AIMCOR harmless under certain circumstances (Agreement Art. VIII). This lawsuit presents a dispute concerning the nature and extent of Mallinckrodt's indemnification obligation under the Agreement.

AIMCOR alleges that Mallinckrodt is obligated to indemnify and/or defend AIMCOR when third parties bring suits against AIMCOR that allegedly arise out of "Excluded Liabilities," as defined in the Agreement (Compl. ¶ 16). AIMCOR alleges that it has been sued by many such plaintiffs and has provided a "partial list" of 17 suits, but has not disclosed how many other times it has been sued (Compl. ¶ 14 (Ex. B)). AIMCOR further alleges that Mallinckrodt has refused to indemnify and/or defend AIMCOR in some — but not all — of those 17 suits (Compl. ¶ 18). AIMCOR does not disclose in how many of the 17 suits this allegedly has happened, but presumably Mallinckrodt knows: Mallinckrodt does not say it lacks notice of what AIMCOR is alleging, but rather admits that it accepted the defense and/or indemnity in some suits but not others (Answer ¶ 18). Neither party has alleged in the pleadings the basis on which Mallinckrodt decided to defend and/or indemnify in some suits but not others.

In Count I, AIMCOR alleges that Mallinckrodt has breached the Agreement by failing to discharge its obligation to defend and indemnify AIMCOR in certain suits, and seeks damages in excess of $300,000 (Compl. ¶¶ 24, 26-29). In Count II, AIMCOR alleges that an "actual controversy" exists as to Mallinckrodt's obligations to defend and indemnify as to future lawsuits, and seeks a declaratory judgment requiring Mallinckrodt to defend and indemnify AIMCOR in all personal-injury lawsuits which claim damages allegedly caused by products sold and delivered by Mallinckrodt prior to June 30, 1986 (Compl. ¶¶ 30-32; see also Pl.'s Response to Mallinckrodt's Motion to Dismiss or Alternatively for Judgment on the Pleadings ("Pl.'s Resp.") at 15). In Count III, AIMCOR seeks recovery of the fees and costs incurred as a result of bringing the instant action (Compl. ¶¶ 33-35). Mallinckrodt has moved to dismiss the complaint pursuant to FED. R. CIV. P. 12(b)(6) or, in the alternative, for judgment on the pleadings pursuant to FED. R. CIV. P. 12(c) (doc. # 11-1). AIMCOR argues that Mallinckrodt is not entitled either to dismissal or a judgment on the pleadings; AIMCOR asserts that, instead, AIMCOR should receive judgment on the pleadings in its favor on Count II, seeking declaratory relief (doc. # 13-1). For the reasons set forth below, Mallinckrodt's motion is denied as to Counts I and III, and is granted as to Count II; AIMCOR's corresponding motion for judgment on the pleadings as to Count II is denied.*fn1

I.

The purpose of a motion to dismiss under FED. R. CIV. P. 12(b)(6) is to test the sufficiency of the complaint, and not to decide the case on the merits. See Weiler v. Household Fin. Corp., 101 F.3d 519, 524 n. 1 (7th Cir. 1996). On a motion to dismiss, a court must construe the allegations of the complaint in the light most favorable to the non-moving party; all well-pleaded facts and allegations must be taken as true. See Bontkowski v. First Nat'l Bank of Cicero, 998 F.2d 459, 461 (7th Cir. 1993). While the complaint must allege facts sufficient to establish the essential elements of the cause of action, see Lucien v. Preiner, 967 F.2d 1166, 1168 (7th Cir. 1992), a court should not dismiss the complaint "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). These same standards govern the Court's consideration of a motion for judgment on the pleadings under FED. R. CIV. P. 12(c). See, e.g., Hentosh v. Herman M. Finch Univ. Health Sciences, 167 F.3d 1170, 1173 (7th Cir. 1999); Northern Indiana Gun & Outdoor Shows, Inc. v. South Bend, 163 F.3d 449, 452 and n. 3 (7th Cir. 1998).*fn2

II.

Under Illinois law, AIMCOR must plead each of the following elements to allege a breach of contract claim: (1) the existence of a valid and enforceable contract; (2) performance by the plaintiff; (3) breach of the contract by the defendant; and (4) resulting injury to the plaintiff. See Gallagher Corp. v. Russ, 309 Ill. App.3d 192, 242 Ill.Dec. 326, 721 N.E.2d 605, 611 (1999); Elson v. State Farm Fire & Cas. Co., 295 Ill. App.3d 1, 229 Ill.Dec. 334, 691 N.E.2d 807, 811 (1998). The complaint clearly alleges the existence of a contract, performance by AIMCOR, and damages resulting from the breach, see Compl. ¶¶ 26-29, and Mallinckrodt does not argue otherwise. The focus of Mallinckrodt's attack is instead on AIMCOR's allegation of breach. Because this attack turns on the parties' differing interpretations of what the Agreement requires Mallinckrodt to do (and when), we begin by setting out the relevant contract language.

A.

Article VIII of the Agreement, entitled "Indemnification," sets forth the parameters of the parties' respective duties to defend and indemnify each other under various circumstances. With respect to personal injury claims asserted against AIMCOR by third parties, Mallinckrodt's indemnification and defense obligations are set forth in several different subparts of Article VIII.

Article 8.2 of the Agreement provides in relevant part as follows (emphasis added):

[Mallinckrodt] shall indemnify, save and keep [AIMCOR] harmless against and from all liability, demands, claims, actions or causes of action, assessments, losses, penalties, costs, damages or expenses, including reasonable attorneys' . . . fees, sustained or incurred by [AIMCOR] . . . as a result of:
(c) the existence of . . . or the assertion against [AIMCOR] . . . of, any Excluded Liabilities (as herein defined).

Article 8.6 of the Agreement sets forth a list of "Excluded Liabilities." Of particular significance here is Article 8.6(e), which identifies one category of Excluded Liabilities as "any liabilities for injury to . . . persons . . . which do not constitute Permitted Liabilities described in Section 8.5(c)." "Permitted Liabilities," in turn, are defined as "all liabilities, including claims for consequential damages, for injury to . . . persons . . . occurring after the Balance Sheet Date [of June 30, 1986] (excluding any such liabilities which arose out of the sale and delivery by [Mallinckrodt] . . . of any product on or prior to the Balance Sheet Date"). Agreement Art. 8.5(c).

Finally, Article 8.8 sets forth the procedure for AIMCOR to claim indemnity, and how Mallinckrodt is to respond (emphasis added):

An Indemnified Party [AIMCOR] shall give an Indemnifying Party [Mallinckrodt] prompt written notice of any claim by a third party ("Third Party Claim") that has given or could give rise to a right of indemnification under this Article VIII, including any inquiry or investigation which the Indemnified Party believes may involve or expects will lead to such a claim. The failure of an Indemnified Party to give such notice shall not affect its right of indemnification, except to the extent the failure to give such a notice has resulted in an increase in the indemnification obligation of the Indemnifying Party. The Indemnifying Party shall have the responsibility of contesting, defending, litigating, settling or satisfying any Third Party Claim and shall have the right to employ its own counsel in connection therewith, provided that the Indemnifying Party has proceeded diligently and in good faith. The Indemnifying Party shall have full control over any actions (including without limitation any negotiation or litigation) in connection with any such claim; provided however, that the Indemnifying Party shall not settle any Third Party Claim without the consent of the Indemnified Party, but if the Indemnified Party shall refuse to consent to any settlement recommended by the Indemnifying Party and shall elect to contest the Third Party Claim, then the Indemnifying Party's liability for the Third Party Claim shall not exceed the amount for which the Third Party Claim could have been settled plus expenses incurred by the Indemnified Party up to the date of such refusal. The Indemnified Party shall also have the right to be represented by separate counsel at the Indemnified Party's expense in connection with any such claim. The Indemnified Party shall make available to the Indemnifying Party or its representatives all information, records and other materials in the possession of the Indemnified Party which are ...

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