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Master Lock Co. v. Hawn

April 16, 2007

MASTER LOCK COMPANY, A DELAWARE CORPORATION, AMERICAN LOCK COMPANY, A DELAWARE CORPORATION, AND ALC HOLDING COMPANY, A DELAWARE CORPORATION, PLAINTIFFS,
v.
VAN ZANDT HAWN AND MICHAEL ISRAEL, INDIVIDUALLY AND AS STOCKHOLDER REPRESENTATIVE UNDER A CERTAIN AGREEMENT AND PLAN OF MERGER DATED AS OF MARCH 28, 2003, BY AND AMONG MASTER LOCK COMPANY, A DELAWARE CORPORATION, TWINSPIN ACQUISITION CO., A DELAWARE CORPORATION, ALC HOLDING COMPANY, A DELAWARE CORPORATION, AND THE STOCKHOLDER REPRESENTATIVE, DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiffs Master Lock Company ("Master Lock"), American Lock Company ("American Lock"), and ALC Holding Company ("ALC," together with Master Lock and American Lock, "Plaintiffs") brought this action against Defendants Van Zandt Hawn ("Hawn") and Michael Israel ("Israel") for breach of certain provisions of an Agreement and Plan of Merger executed by Plaintiffs and Defendants on March 28, 2003 (the "Merger Agreement"). Plaintiffs' five-count Complaint alleges that the terms of the Merger Agreement oblige Defendants to reimburse Plaintiffs for certain losses and environmental cleanup costs that Plaintiffs incurred as a result of: (i) breaches of certain environmental warranties contained in the Merger Agreement; (ii) investigating and remediating hazardous substances on and under certain real property located in Crete, Illinois (the "Crete Site") which is the subject of the Merger Agreement; and (iii) obtaining a No Further Remediation Letter ("NFR") from the Illinois Environmental Protection Agency ("IEPA") with respect to the Crete Site. Defendants disagree.

Before the Court are the parties' Motions for Summary Judgment on all counts of the Complaint. Plaintiffs argue that the clear and unambiguous language of the Merger Agreement requires Defendants to indemnify them for losses resulting from Defendants' breaches of certain representations and warranties and for other losses and environmental cleanup costs as those terms are defined in the Merger Agreement. Defendants, while they also contend that the language of the Merger Agreement is clear and unambiguous, interpret its indemnification provisions substantially differently than do Plaintiffs. Defendants argue that Plaintiffs have no claim for indemnification because the costs and losses at issue do not arise from third-party claims and because Plaintiffs were not otherwise required to incur those costs and losses by a governmental agency or third party claim. In other words, Defendants argue that Plaintiffs are not entitled to indemnification for the costs and losses at issue because those costs and losses were voluntarily incurred. Defendants also argue that the expenses Plaintiffs have incurred as a result of Defendants' alleged breaches of representations and warranties are either unreasonably high or not recoverable at all.

For the reasons set forth herein, Plaintiffs' motion for summary judgment is granted in part and denied in part and Defendants' Motion for Summary Judgment is denied.

STATEMENT OF FACTS

The Parties

On March 28, 2003, Plaintiffs and Defendants executed the Merger Agreement, which merged TwinSpin Acquisition Company, a wholly owned subsidiary of Master Lock into American Lock with American Lock continuing as the surviving corporation. (Pltfs.' 56.1 ¶ 1; Defs.' Response ¶ 1.)*fn1 For approximately fifty years, American Lock, a Delaware corporation, manufactured padlocks, keys and lock parts on the Crete Site. (Pltfs.' 56.1 ¶ 2; Defs.' Response ¶ 2.) The Crete Site, through April 16, 2003, consisted of approximately 40 acres of land, including several ponds, a 100,000 square foot manufacturing building, another smaller manufacturing building, and more than ten other buildings and structures. (Defs.' 56.1 ¶ 11; Pltfs.' Response ¶ 11.)

Hawn and Israel acquired American Lock and the Crete Site in 1998 and owned both until 2003, when they sold to Plaintiffs pursuant to the Merger Agreement. (Pltfs.' 56.1 ¶ 3; Defs.' Response ¶ 3.) Hawn and Israel are parties to the Merger Agreement and are designated therein as "Stockholder Representatives" for the sellers. Id. With respect to Defendants (sellers), Hawn had ultimate responsibility for the Merger Agreement. (Pltfs.' 56.1 ¶ 6; Defs.' Response ¶ 6.)

For Plaintiffs (buyers), Allan John Snape ("Snape") had primary responsibility for the Merger Agreement. (Pltfs.' 56.1 ¶ 5; Defs.' Response ¶ 5.) Snape is Vice President of Business Development for Fortune Brands, the parent company of Master Lock, American Lock and ALC. Id.

Environmental Indemnity Terms in the Merger Agreement

Section 10.01 of the Merger Agreement provides that Defendants: shall indemnify, defend, reimburse and hold harmless [Plaintiffs] from and against any and all Losses . . . resulting from or relating to . . .

(a) any breach of any representation or warranty . . . contained in Article III of this Agreement . . .

(g) . . . (i) any Cleanup Costs . . . incurred or suffered by the [Plaintiffs] as a result of Hazardous Substances existing on, in or under the Real Property to the extent such Hazardous Substances require investigation, remediation or any other action under Environmental Laws to meet cleanup criteria applicable to the Real Property; and (ii) Cleanup Costs incurred or suffered by the [Plaintiffs] as a result of actions reasonably necessary to obtain determinations from the applicable state governmental entity that no further remediation is required with respect to the Real Property.

(Pltfs.' Exh. 3, Merger Agreement at § 10.01.) (emphasis added). With respect to Section 10.01(a), Defendants represented and warranted in Section 3.15(b) of the Merger Agreement that:

(i) Each of ALC and the Company complies in all material respects with all Environmental Laws applicable to the operation of its business . . .

(ii) Each of ALC and the Company possesses (or has timely filed applications pending for) all material licenses and permits required by all Environmental Laws applicable to the ownership of its assets and the conduct of its business; . . .

(iv) No underground storage tanks are or to the knowledge of ALC have ever been located on the Real Property which contain or, to the knowledge of ALC, previously contained any Hazardous Substances . . .

With respect to Section 10.01(g), the Merger Agreement defines "Losses" as: any and all demands, claims, payments, obligations, actions or causes of action, assessments, losses, liabilities, damages, costs and expenses paid or incurred, including without limitation any legal or other expenses reasonably incurred in connection with investigating or defending any claims or actions and all amounts paid in settlement of claims or actions in accordance with Section 10.04 hereof. . . Id. at § 10.10. The term "Cleanup Costs" is defined as: reasonable costs, liabilities, damages and expenses, (including, without limitation, legal and consultant expenses and response costs under CERCLA and other Environmental Laws), to investigate, monitor, remediate, clean up or otherwise address Hazardous Substances.

Id. at § 10.01. The term "Hazardous Substance" is defined to include:

(i) any pollutant, contaminant, hazardous substance or waste, solid waste, regulated, defined, or designated as hazardous, extremely or imminently hazardous, dangerous, or toxic under any Environmental Law, including but not limited to the following federal statutes and their state counterparts, as well as these statutes' implementing regulations: the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. §9201 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. § 6901 et seq., and the Hazardous MaterialsTransportation Act ("HAZMAT"), 42 U.S.C. §1801 et seq.; (ii) petroleum or any fraction thereof; (iii) friable asbestos; and (iv) natural gas synthetic gas, and any mixture thereof.

Id. at § 3.15(a)(ii).

The Merger Agreement also provides that Fees and expenses of Leisch Associates, Inc. that were or will be charged to ALC or the Company that are not incurred in connection with the transactions contemplated pursuant to this Agreement . . . and have not been paid by ALC or the Company prior to the Closing shall first be charged against any funds remaining in the escrow established by the 1998 Escrow Agreement and, if those funds are insufficient or are otherwise unavailable to be used for such purpose, shall be deemed to constitute Environmental Claims subject to indemnification hereunder.

Id. at § 10.08(b)(ii).

The Agreement closed on April 16, 2003. (Defs.' 56.1 ¶ 25; Pltfs.' Response ¶ 25.) At that time, Defendants placed $2 million in escrow to cover any indemnification obligations they might have under the terms of the Merger Agreement. Id.

Defendants' Environmental Investigation and Remediation Efforts at the Crete Site.

As part of their due diligence in connection with the acquisition of the Crete Site, Defendants hired Dana Wagner ("Wagner") of Liesch Associates, Inc. ("Liesch") to perform a site visit and author a Phase I Environmental Site Assessment ("Phase I Assessment"). (Pltfs.' 56.1 ¶ 9; Defs.' Response ¶ 9.) Under standards promulgated by the American Society for Testing and Materials ("ASTM"), a Phase I Assessment includes a determination of whether a property has any "recognized environmental conditions" ("RECs"), which are defined as "the presence or likely presence of any hazardous substances or petroleum products on a property under conditions that indicate an existing release, a past release, or a material threat of a release . . . into structures on the property or into the ground, groundwater, or surface water." Id. Wagner's 1998 Phase I Assessment concluded that there were six RECs and sixteen environmental compliance or investigative activities of note at the Crete Site, including potential concerns with the north pond, the truck loading-dock area, the hangar area, and potential concerns regarding residential underground storage tanks ("USTs"). (Pltfs.' 56.1 ¶ 10; Defs.' Response ¶ 10.)

Liesch oversaw a Phase II Environmental Site Assessment ("Phase II Assessment") in the areas of the six RECs at the Crete Site. (Pltfs.' 56.1 ¶ 12; Defs.' Response ¶ 12.) A Phase II Assessment involves intrusive sampling of soil and/or groundwater in an attempt to resolve RECs identified in a Phase I Assessment. Id. In addition to the areas of the six RECs, Liesch also oversaw sampling of the north pond, but did not obtain data for the area of the pond near the discharge pipe of the facility's effluent. Id.

After Defendants acquired the Crete Site in 1998, and based upon the sampling results from the Phase II Assessment, they asked Liesch to obtain on their behalf a focused NFR from the IEPA for the truck loading-dock and airplane hangar areas only. (Pltfs.' 56.1 ¶ 13; Defs.' Response ¶ 13.) NFRs are available under the IEPA's voluntary Site Remediation Program ("SRP"). (Defs.' 56.1 ¶ 15; Pltfs.' Response ¶ 15; Pltfs.' 56.1 ¶ 35(a).) Liesch worked for approximately five years to obtain a focused NFR for the truck loading-dock and airplane hangar areas at a cost to Defendants of approximately $200,000 -- 250,000. (Pltfs.' 56.1 ¶ 15). Liesch was not able to obtain a focused NFR as of the closing date for the agreement at issue in this case. Id.

Plaintiffs' Environmental Investigation and Remediation Efforts at the Crete Site.

In late 2002, Defendants decided to sell American Lock -- and the Crete Site along with it. (Pltfs.' 56.1 ¶ 17; Defs.' Response ¶17.) Because the Plaintiffs entered the bidding process late, Defendants required them to complete their due diligence promptly. Id. As part of their due diligence, Plaintiffs asked Defendants for information related to environmental conditions at the Crete Site. (Pltfs.' 56.1 ¶ 18; Defs.' Response ¶18.) In addition to requesting information from Defendants, Plaintiffs hired their own environmental consultant -- Environmental Resources Management, Inc. ("ERM") -- to conduct an updated Phase I Assessment. (Pltfs.' 56.1 ¶ 19; Defs.' Response ¶19.) ERM was aware of Liesch's environmental work at the Crete Site and was also aware of Liesch's efforts to obtain a focused NFR with respect to the truck loading-dock and airplane hangar areas.

ERM's Phase I Assessment identified nine RECs and various environmental compliance issues at the Crete Site. (Pltfs.' 56.1 ¶ 20; Defs.' Response ¶20.) ERM noted concerns about the impact hazardous materials may have had upon various parts of the Crete Site beyond the truck loading-dock and hangar areas. Id. More specifically, ERM noted visual evidence of spills of hazardous materials in various parts of the facility, including areas with floor cracks, a former oil ...


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