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APPLIED INDUSTRIAL MATERIALS CORP. v. MALLINCKRODT

March 28, 2003

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



The opinion of the court was delivered by: Ronald A. Guzman, United States Judge.

This is a breach of contract action by Applied Industrial Materials Corporation ("AIMCOR") against Mallinckrodt, Inc. ("Mallinckrodt"). AIMCOR claims Mallinckrodt breached an indemnity provision in a stock purchase agreement between the parties which requires Mallinckrodt to defend and indemnify AIMCOR against certain liabilities. This action arises out of Mallinckrodt's refusal to defend AIMCOR against several personal injury lawsuits alleging asbestos-related injuries. The parties have cross motioned for summary judgment. For the reasons given below, the Court denies the parties' cross motions.

BACKGROUND FACTS

On October 31, 1986, Industry Holdings, Inc. ("Industry") and International Mineral & Chemical Corporation ("IMC") entered into a Stock Purchase Agreement ("SPA"). (SPA, p.1.) Under the SPA, Industry agreed to purchase from IMC two wholly owned direct subsidiaries.*fn1 (SPA, p. 1.) The Court will refer to the purchased subsidiaries collectively as the "Companies" At some point after Industry and IMC finalized the SPA, AIMCOR became a successor in interest to Industry and Mallinckrodt became a successor in interest to IMC.*fn2 (See Def's LR 56.1(b)(3)(A) ¶¶ 3, 4.) As successors in interest, AIMCOR assumed Industry's rights and obligations under the SPA, and Mallinckrodt assumed IMC's rights and obligations under the SPA (Id.) including the defense and indemnity obligations defined in Article VIII. (See SPA, pp 61, 63, 64, 65, 66.)

Section 8.2 of the S.P.A. requires Mallinckrodt to defend AIMCOR against asserted Excluded Liabilities and indemnify AIMCOR from existing Excluded Liabilities. (Id. p. 61.) Section 8.4 requires AIMCOR to defend Mallinckrodt against asserted Permitted Liabilities and indemnify Mallinckrodt from existing Permitted Liabilities. (Id. p. 63.) The parties' conflicting interpretations of Excluded Liabilities are at the heart of this dispute.

Beginning in 1988, AIMCOR was sued, along with several other corporations, fbr injuries caused by silica-containing products. (Def's LR 56.1(b)(3)(A) ¶ 15.) Mallinckrodt agreed to defend AIMCOR against these lawsuits pursuant to the SPA. (Id.) Around the same time, AIMCOR was also sued for asbestos related injuries.*fn3 (Def's LR 56.1(b)(3)(A) ¶615.) Many of these asbestos lawsuits were filed in Indiana, North Dakota, Minnesota, and Texas. These lawsuits are the subject of this litigation.

The 20 Indiana complaints allege injury from exposure to asbestos or asbestos-containing products AIMCOR either manufactured, sold, and/or distributed. (Mallinckrodt Ex. 8, p. 1.)*fn4 The complaints allege exposure "in powerhouses, ships, commercial establishments, paper mills refineries, schools and other places" in Indiana "during the period of 1935 to the present . . ." (Mallinckrodt Ex. 8, pp. 2-3.)

The North Dakota complaints allege injuries from exposure to asbestos or asbestos containing products AIMCOR either mined, manufactured, processed, imported, converted, compounded, wholesaled, and/or retailed in North Dakota. (Def's LR 56.1(b)(3)(B) ¶ 13.) The complaints do not define asbestos or asbestos related products, but instead simply refer to "various asbestos-containing products," "certain asbestos and asbestos related materials," "harmful" asbestos material and "asbestos-related insulation materials." (See Def's LR 56.1(b)(3)(B) ¶ 14; Mallinckrodt Response Ex. B, p.6, ¶¶ 4, 6.) In addition, these complaints only describe the locations of exposure as "various locations" in North Dakota, and describe the dates of exposure as "all times relevant to this action." (Def's LR 56.1(b)(3)(B) ¶¶ 15, 16.)

The Minnesota and Texas complaints similarly name several defendants, including AIMCOR, and allege injuries from exposure to asbestos or asbestos-containing products from 1935 to the present. (Def's LR 56.1(a)(3) ¶ 34)

It is undisputed that neither AIMCOR nor the Companies have ever produced or sold any asbestos-containing products. (Def's LR 56.1(b)(3)(A) ¶¶ 1, 8, 9, 13) However, Mallinckrodt produced at least one asbestos containing product from 1966 to 1974. (Id. ¶¶ 3, 10.)

Mallinckrodt refused to defend AIMCOR against the asbestos lawsuits, believing asbestos related injuries were outside the scope of its obligations under the SPA. (Def's LR 56.1(b)(3)(A) ¶ 15.) Mallinckrodt believes Excluded Liabilities, as defined in the SPA, are limited to liabilities arising out of the Companies' business activities. (Def's TM 56.1(b)(3)(B) ¶ 45.) And because the Companies never produced or sold any asbestos-containing product, Mallinckrodt was not obligated to defend AIMCOR against lawsuits alleging asbestos related injuries. (Id.)

Mallinckrodt first began denying AIMCOR's defense tenders in 1991. (Def's LR 56.1(b)(3)(A) ¶ 16.) At this time, Ken Burns was responsible for accepting or denying AIMCOR's tenders. (Id.) Russ Piraino took over this role after July 1996. (Id. ¶ 17.) Mallinckrodt also employed outside counsel Robert Haley and James Nyaste or Wildman, Harrold, Allen & Dixon to assist Burns and Piraino. (Id. ¶ 18.) Vincent Maloney was AIMCOR's attorney responsible for tendering complaints to Mallinckrodt. Def's LR 56.1(b)(3)(B) ¶ 18.)

Both Burns and Piraino believed that asbestos cases were always outside the scope of the defense and indemnity provision, and that the fact that a complaint only alleged asbestos related injuries was a sufficient basis to reject a tender. (Def's LR 56.1(b)(3)(A) ¶¶ 50, 51, 58, 59.) It is unclear whether Mallinckrodt considered any other factors when rejecting AIMCOR's tenders.*fn5

Consistent with Mallinckrodt's interpretation of Excluded Liabilities, Burns testified that he "doubted" Mallinckrodt investigated the asbestos tenders beyond reading the tendered complaints before rejecting them, (Id. ¶ 57.) Burns testified that Mallinckrodt would "apply to the tender everything [Mallinckrodt] knew about that litigation and also apply our own knowledge to what was in the complaint" before rejecting the tender. (AIMCOR Ex. 4, Burns Dep. 87:19-22.) Burns further testified that if a tendered complaint was from a jurisdiction where litigation was already pending and Mallinckrodt had local counsel present, Mallinckrodt would contact local counsel to get more information on the complaint. (Id. pp. 87-88.)

However, when the complaint was from a jurisdiction where there was no pending litigation, Mallinckrodt would rely on "what was in the pleading and [ifs] own knowledge of the business," to accept or reject the tender. (Id. pp. 88-89.) In cases when there was not enough information to determine whether Mallinckrodt had a duty to accept the tender. Mallinckrodt refused to accept ...


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