CEI Equipment Company v. Donald Gaddis and Karen Gaddis ( 2019 )

IN THE COURT OF APPEALS OF IOWA
No. 17-1544
Filed March 20, 2019
CEI EQUIPMENT COMPANY,
Plaintiff-Appellant/Cross-Appellee,
vs.
DONALD GADDIS and KAREN GADDIS,
Defendants-Appellees/Cross-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Linn County, Sean W. McPartland,
Judge.
A manufacturer appeals a grant of summary judgment to former
shareholders in an indemnity action. The former shareholders cross-appeal the
denial of attorney fees. REVERSED AND REMANDED ON APPEAL; AFFIRMED
ON CROSS-APPEAL.
J. Scott Bardole of Andersen & Associates, West Des Moines, for appellant.
David M. Caves and William T. McCartan of Bradley & Riley PC, Cedar
Rapids, for appellees.
Heard by Potterfield, P.J., and Tabor and Mullins, JJ.
2
TABOR, Judge.
CEI Equipment Company wants Donald and Karen Gaddis, one-time
shareholders, to pay for its defense of products liability claims brought by an
injured truck driver. More than three years before the driver sued CEI, the
Gaddises sold their shares. In their stock purchase agreement (SPA), they agreed
to several indemnification clauses with varying time limitations. The Gaddises now
say CEI’s request for indemnification is untimely under the SPA. Finding the SPA’s
unambiguous language did not include a time limit for this indemnification action,
we reverse the grant of summary judgment in favor of the Gaddises, reverse the
denial of CEI’s motion for summary judgment, and remand to the district court for
further proceedings. And, because the Gaddises are not the prevailing party in the
summary judgment proceeding, we affirm the denial of attorney fees.
I. Facts and Prior Proceedings
The material facts are not in dispute. The Gaddises previously owned
shares in CEI, a truck trailer design and manufacturing company. On
December 17, 2012, they sold their shares to Normandie Holdings, LLC, under a
detailed SPA. The SPA included terms indicating the Gaddises would indemnify
CEI in the event of certain claims against them.
On December 26, 2014, truck driver Barry Willets was injured when an
auger manufactured by CEI broke away from its trailer and fell on top of him. In
May 2016, he sued CEI, alleging defects in the auger’s design and manufacturing.1
1
Willets also filed negligence claims against Quam Contracting, L.L.C., which had
purchased the truck and trailer from CEI in April 2012. Willets settled his claims in their
entirety in September 2017. The Gaddises also initiated a third-party claim against
Travelers Indemnity Company and Travelers Property Casualty Company of America.
3
In July 2016, CEI answered Willets’s claims and filed a third-party petition
against the Gaddises seeking to enforce the indemnity provisions of the SPA and
for breach of contract. CEI insisted because the auger at issue was manufactured
before the Gaddises sold their shares, they have a contractual obligation to
indemnify CEI.
Contending CEI’s claims were time-barred under the SPA’s indemnification
provisions, the Gaddises sought summary judgment. CEI filed its own motion for
summary judgment seeking an order that the Gaddises indemnify it against the
claim. The district court granted the Gaddises’ motion, denied CEI’s motion, and
dismissed the Gaddises from the action. The Gaddises filed an application for
attorney fees against CEI, asserting the indemnity and breach-of-contract claims
were frivolous. The district court denied their application.
CEI appeals the district court’s rulings on the cross motions for summary
judgment; the Gaddises cross-appeal the denial of attorney fees.
II. Scope and Standards of Review
We review rulings on motions for summary judgment for correction of legal
error. Deeds v. City of Marion, 914 N.W.2d 330, 339 (Iowa 2018). Summary
judgment is proper if Gaddises established no genuine issue of material fact
existed and they were entitled to judgment as a matter of law. See id. Summary
judgment is also proper where the only issue to be decided is what legal
consequences follow from otherwise undisputed facts. Emmet Cty. State Bank v.
Reutter, 439 N.W.2d 651, 653 (Iowa 1989).
4
III. Analysis
A. Summary Judgment Ruling
CEI’s third-party claim against the Gaddises arises from the SPA’s
indemnification clause, which states:
6.1 Indemnification by the Sellers. The respective
representations, warranties and covenants contained herein or in
any Transaction Document shall survive the Closing . . . . [T]he
Sellers, jointly and severally, covenant and agree with Buyer to pay
and perform, and to indemnify Buyer, . . . and hold them harmless
from, against and in respect of any and all costs, losses, claims,
liabilities, fines, penalties, damages and expenses . . . (collectively,
“Sellers’ Indemnified Liabilities”) incurred by any of them, resulting
from, arising out of, or in connection with any or all of:
(a) Any breach of any of the representations or warranties
made in Article III hereof . . . ; or
(b) Any Liability of the Company arising during or attributable
to the time period prior to the Closing Date . . .
On appeal, the Gaddises do not dispute that CEI’s liability in the Willets’s
underlying lawsuit falls within the sellers’ indemnified liabilities in section 6.1 of the
SPA. Instead, they contest their obligation to indemnify because they allegedly
received CEI’s claim outside the applicable timeframe set out in section 6.2.
Section 6.2 outlines four different claims periods, depending on the type of liability.2
6.2 Time Limitations. . . . [T]he Sellers shall have no
obligation to indemnify any Buyer Indemnified Party hereunder
based upon, or alleged to be based upon, any of Sellers’ Indemnified
Liabilities for [1] (i) Tier III Matters as to which the Seller
Representative has not received a claim to indemnification prior to
the end of the sixteenth (16th) month following the Closing Date,
[2] (ii) Tier II Matters as to which the Seller Representative has not
received a claim to indemnification prior to the end of the sixtieth
(60th) month following the Closing Date and [3] (iii) Tier I Matters as
to which the Seller Representative has not received a claim for
indemnification prior to the expiration of the applicable statute of
limitations period. [4] The claims period for any covenants,
2
At oral argument, neither party could explain the policy underlying the different time
limitations.
5
agreements or undertakings made by the Parties in this Agreement
other than those specifically limited above shall survive the Closing
for the applicable statute of limitations.
Those time limitations are the crux of this appeal. The parties agree the
product liability claims for which CEI seeks indemnity do not implicate Tier I or
Tier II matters, as those are defined in the SPA.3 The Gaddises contend Willets’s
claims involved Tier III matters,4 governed by the sixteen-month limitation,
because they arose under a section of the SPA, not listed as a Tier I or Tier II
matter, entitled “Product and Service Warranties; Product Liabilities.”5 Because
the Gaddises did not receive CEI’s claim for indemnification by April 17, 2014 (the
closing date of December 17, 2012, plus 16 months), they no longer had an
obligation to indemnify the buyer based on any of the sellers’ indemnified liabilities.
The district court rejected the Gaddises’ interpretation, finding:
[D]espite what the section title may suggest, section 3.24 plainly did
not involve the Gaddises representing to their buyers that they would
remain liable for third-party customers’ product liability claims.
3
Tier I matters include claims for indemnification for breaches of the representation and
warranties in sections of the SPA addressing corporate matters, bank accounts,
transaction documents, and marketable title. Tier II Matters encompass claims for
indemnification for breaches of the representation and warranties in sections of the SPA
addressing taxes and environmental matters.
4
Tier III matters are those “relating to or arising in connection with actual or alleged
breaches of representations or warranties other than Tier I Matters and Tier II Matters.”
5
Section 3.24 provides:
Except as set forth in Section 3.24(a) of the Sellers Disclosure Schedule,
the Company does not make any express warranty or guaranty as to goods
sold, or services provided by, the Company, and there is no pending or, to
the Knowledge of the Sellers, threatened claim alleging any breach of any
such warranty or guaranty other than as reserved for on the Balance Sheet
or for immaterial claims made in the ordinary course since the Balance
Sheet date. Except as set forth in Section 3.24(b) of the Sellers Disclosure
Schedule, the Company does not have any material liability under such
warranty. The Company does not have any Liability (and there is no basis
for any present or future action or claim giving rise to any Liability) not
covered in full by applicable insurance arising out of any injury to individuals
or property as a result of the ownership, possession, or use of any product
manufactured, sold, leased or delivered by the Company.
6
Rather, the Gaddises represented to their buyer that the Company
made no warranties as to goods sold or services provided and that
they were aware of no such pending claims pending.
We agree with the district court that the indemnification claim at issue did
not fall into the Tier III category. Instead, the last sentence of section 6.2 governs
the indemnity CEI seeks for Willets’s claims. Under that catch-all category, the
claims period for indemnification “shall survive the Closing for the applicable
statute of limitations.”
That language is the sticking point. Both sides insist the wording
unambiguously supports their position. We start with the applicable statute of
limitations. Here, Willetts had two years to bring his products-liability action against
CEI from the time of his injury. See Iowa Code § 614.1(2) (2016) (requiring actions
for injuries to a person, whether based on contract or tort, to be brought within two
years “after their causes accrue”); see Franzen v. Deere & Co., 334 N.W.2d 730,
732 (Iowa 1983) (discussing discovery rule and two-year statute of limitations in
products liability case). The next question is when did the period for CEI to seek
indemnification from the Gaddises for Willets’ products liability claim expire.
The Gaddises argued the two-year limitations period commenced at the
closing date for their stock sale, December 17, 2012, and ended on December 17,
2014. Therefore, the claim period expired before the date of Willets’s injury on
December 26, 2014, along with the Gaddises’ obligation to indemnify.
But CEI urged a different reading of the SPA. The company emphasized
the difference between Tier II and Tier III matters—which referenced the “Closing
Date” as a starting point for a fixed claim period of sixth and sixteenth months
respectively—and the catch-all language providing that claims period survived the
7
“Closing” for the applicable statute of limitations.6 CEI asserted: “Since Closing
Date was used twice in paragraph 6.2 it certainly could have been used again in
paragraph 6.2 and the fact that it was not used in the catch-all section shows that
there was no intent to use the Closing Date as a time reference for catch-all
claims.” CEI noted the statute of limitations at section 614.1(2) provides its own
starting date: the accrual of the cause of action. In CEI’s view, the period for its
indemnity claim ran from the date of Willets’ injury on December 26, 2014, for the
applicable two-year statute of limitations, until December 26, 2016.
Finding the contract language unambiguous, the district court sided with the
Gaddises. The court reasoned that CEI’s position that it could “seek
indemnification as long as the third-party claim has not been barred by the relevant
statute of limitation following the injury” would mean “the Closing Date language”
was “simply irrelevant” and the phrase “survive the Closing” would be
“superfluous.” The court also believed CEI’s interpretation violated “principles of
fairness” by creating an indefinite indemnification trigger. CEI’s interpretation, the
court concluded, was contrary to the intent of the parties in imposing time
limitations for indemnity.
On appeal, CEI counters the district court’s reasoning, renewing its previous
argument. In response to the court’s concern that contract language would be
rendered superfluous, CEI points out the term “Closing Date” does not appear in
the catch-all paragraph. Rather, the phrase “survive the Closing for the applicable
6
The SPA defines “Closing” to mean “the consummation of the actions described in
Section 1.4 and 1.5 of this Agreement”—i.e., the delivery of the shares and payment. The
SPA further defines “Closing Date” as “the date on which the ‘Closing’ occurs.”
8
statute of limitations” provides an indefinite period of indemnity, in contrast to the
defined limitations set out in the SPA for Tier II and Tier III matters.7 In response
to the district court’s fairness concern, CEI notes the SPA was an arms-length
transaction with both parties represented by counsel. CEI insists: “The SPA says
what it says and it does not anchor the beginning of the applicable statute of
limitations to the closing date.”
“Generally, when we interpret contracts, we look to the language contained
within the four corners of the document.” DuTrac Cmty. Credit Union v. Radiology
Grp. Real Estate, L.C., 891 N.W.2d 210, 216 (Iowa 2017). “In the construction of
written contracts, the cardinal principle is that the intent of the parties must control,
and except in cases of ambiguity, this is determined by what the contract itself
says.” Iowa R. App. P. 6.904(3)(n). “If the intent of the parties is clear and
unambiguous from the words of the contract itself, we will enforce the contract as
written.” DuTrac, Cmty. Credit Union, 891 N.W.2d at 216. “[W]e give effect to
language of the entire contract in accordance with its commonly accepted and
ordinary meaning.” Dickson v. Hubbell Realty Co., 567 N.W.2d 427, 430 (Iowa
1997). “[I]t is assumed that no part of [the contract] is superfluous and an
interpretation that gives a reasonable meaning to all terms is preferred to one that
leaves a term superfluous or of no effect.” Id.7
CEI also renewed its argument from the district court that the Gaddises’ obligation to
indemnify would not be infinite because Iowa Code section 614.1(2A) creates a fifteen-
year statute of repose—commencing on the date that the aggrieved party first purchased
the product or installed it for use. See Albrecht v. Gen. Motors Corp., 648 N.W.2d 87, 91
(Iowa 2002).
9
In this case, despite two strong, competing views on how to read the same
passage, neither party believes the language of the SPA is ambiguous. We agree
we can decipher the parties’ intent from the “four corners of the document.” See
Walsh v. Nelson, 622 N.W.2d 499, 503 (Iowa 2001) (explaining language is not
ambiguous “merely because the parties disagree about its meaning”).
Reading the plain language used in the catch-all category, we find the
parties intended to extend the indemnity-claims period for product-liability actions
from the date of their accrual through the end of the two-year limitations period. In
other words, the Gaddises’ duty to indemnify lasts until the statute of limitations
applicable to Willets’s underlying claim runs. To interpret the language otherwise
would be to apply a new meaning to the phrase “applicable statute of limitations.”
A statute of limitations is not a free-floating length of time; it is a period with a
defined beginning and end. The defined beginning is when the cause accrues.
Iowa Code § 614.1. If the parties had intended the SPA’s closing date to serve as
the starting point for a two-year limitation, the drafters could have constructed the
catch-all sentence to match the Tier II and Tier III limits. To give full effect to all
terms of the contract, we must recognize a difference in the catch-all provision’s
reference to survival of the “Closing” instead of identifying a set time period
following the “Closing Date.”
Unlike the district court, we do not find CEI’s reading of the SPA to unfairly
allocate future liability between the parties. We are persuaded by the following
commentary to the ABA Model Stock Purchase Agreement:
It is customary for an acquisition agreement to specify the time period
within which a claim for indemnification must be made. The Sellers
want to have uncertainty eliminated after a period of time, and the
10
Buyer wants to have a reasonable opportunity to discover any basis
for indemnification. The time period will vary depending on factors
such as the type of business, the adequacy of financial statements,
the Buyer’s plans for retaining existing management, the Buyer’s
ability to perform a thorough investigation prior to the acquisition, the
method of determination of the purchase price, and the relative
bargaining strength of the parties. A two-year period may be
sufficient for most liabilities because it will permit at least one post-
closing audit and because, as a practical matter, many hidden
liabilities will be uncovered within two years. However, an extended
or unlimited time period for stock ownership, capitalization, products
liability, taxes, ERISA issues, and environmental issues is not
unusual.
Leigh Walton, Selected Provisions of the ABA Model Stock Purchase Agreement,
SL054 ALI-ABA 897, 970 (1995), § 10.5 cmt. (emphasis added.). We have no
evidence of the relative bargaining strength of the Gaddises in reaching the terms
of the SPA. But we are not prepared to say that their acceptance of an extended
or indefinite time period for indemnifying products liability claims would violate
“principles of fairness” or “defeat the reasonable intent of the contract.”
Parties bargain and provide consideration as they deem fit. Courts cannot
“rescue” a party from a “bad bargain.” Walker v. Gribble, 689 N.W.2d 104, 110
(Iowa 2004). Rather,
[c]ourts should support agreements which have for their object the
amicable settlement of doubtful rights by parties. Such agreements
are binding without regard to which party gets the best of the bargain
or whether all the gain is in fact on one side and all the sacrifice is on
the other.
Id. (edited for readability). Here, we cannot be sure of the calculus involved in the
exchange of consideration for the SPA, but the intent of the parties is reflected in
its plain language. We conclude, as a matter of law, CEI’s indemnity claim against
the Gaddises was not limited to the two years following the date of closing. Rather
the indemnity claim period extended beyond the closing—ending when the statute
11
of limitations ran for the underlying claim, subject to the statute of repose. Willets’s
injury occurred on December 26, 2014, and he filed his claim against CEI in May
2016, within the applicable statute of limitations. CEI timely invoked the Gaddises’
duty to indemnify in July 2016. There are no remaining issues of material fact, but
the Gaddises were not entitled to judgment as a matter of law. We reverse the
order for summary judgment in favor of the Gaddises and remand to the district
court for entry of orders denying the Gaddises’ motion and granting CEI’s motion.
B. Attorney Fees
We also affirm the district court’s denial of the Gaddises’ request for
attorney fees. The Gaddises are no longer the prevailing party. And even if they
were, their reliance on Iowa Code section 625.22 was misplaced. The statute’s
first paragraph allows recovery on a written contract that contains an agreement
to pay attorney fees. The SPA contained no provision for recovery of attorney
fees. The statute’s second paragraph is limited to actions to recover payment on
a dishonored check or draft as defined in Iowa Code section 554.3014. See Iowa
Code § 652.22 (allowing successful defendant in dishonored-check case to
recover reasonable fees if court determines action was frivolous). This litigation
did not involve collection on a dishonored check, so the Gaddises could not have
recovered under that statute in any scenario.
IV. CONCLUSION
For the preceding reasons, we reverse the grant of summary judgment in
favor of the Gaddises and remand for entry of an order denying their motion for
summary judgment. We also reverse the denial of CEI’s motion and remand for
entry of an order granting its motion for summary judgment, as well as any further
12
proceedings that may be necessary. We affirm denial of the application for
attorney fees.
REVERSED AND REMANDED ON APPEAL; AFFIRMED ON CROSS-
APPEAL.