Industrial Alloy Fabricators, Inc. v. Williams Industries, Inc. , 257 Va. 470 ( 1999 )

Present: All the Justices
INDUSTRIAL ALLOY
FABRICATORS, INC., ET AL.
OPINION BY
v. Record No. 981093 CHIEF JUSTICE HARRY L. CARRICO
April 16, 1999
WILLIAMS INDUSTRIES, INC., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
This is an indemnification and warranty case involving the
purchase of corporate assets by Industrial Alloy Fabricators,
Inc. (Industrial Alloy) and Precision Components Corporation
(Precision Components) from Williams Industries, Inc. (Williams
Industries) and IAF Transfer Corporation (IAF Transfer). From a
judgment in favor of Williams Industries and IAF Transfer, we
awarded Industrial Alloy and Precision Components this appeal.
Industrial Alloy is a Pennsylvania corporation with its
principal place of business in Richmond, Virginia. At all
relevant times, it has been engaged in the business of providing
customers with design and production of custom pressure vessels,
tanks, reactors, distillation columns, and other process
equipment. Precision Components, which is also a Pennsylvania
corporation, is “the majority holder” of Industrial Alloy.
Precision Components’ principal place of business is in York,
Pennsylvania.
Williams Industries is a Virginia corporation with its
principal place of business in Fairfax County. IAF Transfer is
also a Virginia corporation based in Fairfax County, and it is
the wholly owned subsidiary of Williams Industries. IAF
Transfer formerly was known as Industrial Alloy Fabricators,
Inc. (a Virginia corporation), but changed its official
corporate name to IAF Transfer Corporation (a Virginia
corporation) about the time the parties entered into an “Asset
Purchase Agreement” (the Agreement), which is at the heart of
the present controversy.
The Agreement is dated October 31, 1994. Pursuant to its
terms, Precision Components and Industrial Alloy (the Buyers)
agreed to purchase for $3,600,000 all the assets, including the
corporate name, of the former Industrial Alloy Fabricators, Inc.
from IAF Transfer and Williams Industries (the Sellers). The
Agreement provided that it was to be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
In § 9.1 of the Agreement, the Sellers agreed to indemnify
the Buyers “against and in respect of, any and all claims,
damages, actions, judgments, losses, liabilities, and expenses,
including reasonable fees and disbursements of counsel, incurred
by [the Buyers] arising from or in connection with . . . (a) all
Liabilities of [the Sellers], whether accrued, absolute, fixed,
contingent or otherwise, other than Assumed Liabilities.” The
Sellers further agreed in § 9.1(b) to indemnify the Buyers
against “any breach of any covenant or obligation of [the
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Sellers] incurred under this Agreement, or because any
representation or warranty by [the Sellers] contained herein
. . . shall be false or misleading.”
In § 2.2 of the Agreement, the Buyers assumed certain
liabilities shown on an October 31, 1994 balance sheet as well
as liabilities or obligations arising under certain contracts.
Section 2.1 provided, however, that, except for the assumed
liabilities, the Buyers would not be “liable for any debt,
claim, responsibility, damages, fines, penalties, costs,
expenses, liability or obligation of [the Sellers] . . . whether
disclosed or undisclosed . . . fixed or contingent [and] whether
due or to become due.”
Section 6.14 of the Agreement provided that the Sellers
shall comply with the provisions of the Virginia Bulk Sales
Act, Code §§ 8.6-101 through -111, “in connection with this sale
of assets.” 1 In this section of the Agreement, the Sellers also
warranted that “there are no creditors of any type or nature
which have not specifically been disclosed by identity and
amount” to the Buyers.
Section 9.3 of the Agreement required the “Indemnified
Party” to notify the “Indemnifying Party” by registered mail
1
The Code sections formerly comprising the Bulk Sales Act,
§§ 8.6-101 through –111, were repealed in 1997 and replaced by
Code §§ 8.6A-101 through -110. 1997 Va. Acts ch. 121. Because
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whenever any claim for indemnification arises under the
Agreement. Section 9.4 gives the “Indemnifying Party” the right
to participate in the defense of any claim or demand by any
third party against the “Indemnified Party.” And § 9.5 provided
that “the Indemnified Party shall make no settlement of any
claim that would give rise to liability on the part of the
Indemnifying Party under an indemnity contained in this Section
9 without the written consent of the Indemnifying Party.”
(Emphasis added.)
At the time the parties entered into the Agreement in
October 1994, there was pending in the United States District
Court for the Middle District of North Carolina a products
liability action which had been initiated on March 31, 1994, by
Unitex Chemical Corporation against the former Industrial Alloy
Fabricators, Inc. Unitex Chemical Corp. v. Industrial Alloy
Fabricators, Inc., No. 2:94CV00164 (M.D. N.C., Greensboro Div.)
(the North Carolina litigation). It was stipulated below that
the Buyers, prior to their purchase of the assets in question,
received a letter signed by counsel for the Sellers which
provided a description and analysis of litigation pending
against the former Industrial Alloy Fabricators, Inc., including
the North Carolina litigation. It was further stipulated that
this litigation arose prior to the revision, we will cite to the
previous sections.
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the letter was incorporated by reference into the Agreement.
However, it is undisputed that the claim asserted in the North
Carolina litigation was not one of the liabilities assumed by
the Buyers pursuant to § 2.2 of the Agreement.
Core States Bank, N.A. (the Bank), had agreed to finance
the Buyers’ acquisition of the assets, and the Bank wanted to
protect the collateral that would act as security for the debt.
Although the Agreement required the Sellers to furnish the
Buyers a list of the Sellers’ creditors and the Buyers had
requested such a list, none had been furnished as the date
approached for closing under the Agreement, and the Bank refused
to release the funds. As a direct result, the parties and the
Bank entered into an escrow agreement, which provided for the
establishment of an escrow account to ensure the Sellers’
compliance with the Virginia Bulk Sales Act. Although the
Sellers believed the Bulk Sales Act did not apply to the
transaction involved in the Agreement, they acquiesced in and
agreed to the Buyers’ publication of a notice in the Richmond
Times-Dispatch of the Buyers’ intent to pay the Sellers’ debts
in full. 2
2
Code § 8.6-103(6) provided an exception to the Bulk Sales Act
for “[t]ransfers to a person maintaining a known place of
business in this State who becomes bound to pay the debts of the
transferor in full and gives public notice of that fact.”
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The notice, prepared by the Buyers’ then counsel, stated
that a bulk transfer was about to be made by the former
Industrial Alloy Fabricators, Inc., as the seller, to the new
Industrial Alloy Fabricators, Inc., as the buyer, and that
“Buyer has become bound by the terms of a certain agreement
between it and Seller to pay Seller’s debts in full.” The
notice appeared in the newspaper on November 3 and 10, 1994.
The parties then proceeded to close the transaction for the
asset purchase.
On September 18, 1995, Unitex Chemical Corporation, the
plaintiff in the North Carolina litigation, filed a complaint
against the Buyers in the United States District Court for the
Eastern District of Virginia alleging a violation of the Bulk
Sales Act for the Buyers’ failure to give Unitex notice of the
asset transfer. Unitex Chemical Corp. v. Industrial Alloy
Fabricators, Inc., Civil Action No. 3:95CV777 (E.D. Va.,
Richmond Div.) (the Virginia Bulk Sales litigation). In their
answer filed January 6, 1996, the Buyers responded that they
“were not required to provide [Unitex notice] because the
transaction was exempted, pursuant to Virginia Code § 8.6-103.”
Unitex then sought leave to amend its complaint to seek a
declaratory judgment that the Buyers had assumed the debts of
the former Industrial Alloy Fabricators, Inc. by virtue of the
notice published in the Richmond Times-Dispatch.
6
The district court never ruled on Unitex’s motion to amend
because, on March 20, 1996, the Buyers entered into a
“Stipulation and Settlement Agreement” with Unitex “to settle
all claims asserted” in the Virginia Bulk Sales litigation.
Pursuant to this agreement, Unitex dismissed the Virginia Bulk
Sales litigation in exchange for the Buyers’ agreement to pay
any judgment returned for Unitex in the North Carolina
litigation.
The Sellers were aware of the filing of the complaint in
the Virginia litigation and of the fact that depositions were
scheduled to be taken in the case. However, the Buyers neither
gave the Sellers prior notice of the settlement of the
litigation nor sought their consent to the terms of the
settlement agreement.
The Buyers participated in settlement discussions
concerning the claim asserted in the North Carolina litigation
and ultimately contributed $300,000 toward settlement of that
claim. The parties to the litigation entered into a “Settlement
Agreement and Mutual Release of All Claims” dated June 10, 1996.
The Buyers then made demand upon the Sellers to comply with
the indemnification provisions of the Agreement. The Sellers
made no response to the demand, and, on October 3, 1996, the
Buyers filed in the court below a two-count motion for judgment
against the Sellers seeking to recover the $300,000 the Buyers
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had contributed to settlement of the North Carolina litigation,
plus attorneys’ fees and costs.
In Count I of the motion for judgment, the Buyers alleged a
breach of warranty by the Sellers for their failure to disclose
all the creditors of the former Industrial Alloy Fabricators,
Inc. In Count II, the Buyers sought to enforce the
indemnification provisions of the Agreement. In their grounds
of defense, the Sellers responded, inter alia, that they were
not liable to the Buyers because the sums for which the Buyers
sought indemnification “were the product of a settlement [of the
Virginia Bulk Sales litigation] of which [the Sellers] were
given no advance notice, and to which [the Sellers] did not
consent.”
Both the Buyers and the Sellers filed motions for summary
judgment. The trial court denied the Buyers’ motion and took
the Sellers’ motion under advisement. At a bench trial, the
Sellers contended that the Buyers were not entitled to recover
because they failed to give notice of, or obtain the Sellers’
consent to, the settlement of the Virginia Bulk Sales
litigation, as required by §§ 9.3 and .5 of the Agreement. The
Buyers contended that the notice and consent provisions of the
Agreement were not applicable because the Sellers’ liability to
indemnify the Buyers did not arise from the settlement of the
Virginia Bulk Sales litigation. Rather, the Buyers said, the
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Sellers’ liability was a preexisting obligation arising from the
publication in the Richmond Times-Dispatch of the notice whereby
the Buyers agreed to be bound to pay the Sellers’ obligations in
full, in which publication the Sellers acquiesced.
Upon conclusion of the trial, the court issued a letter
opinion, which it incorporated into its final order by
reference. The court rejected the Buyers’ contention that the
notice and consent provisions of the Agreement were not
applicable and agreed with the Sellers that the Buyers’ “failure
to adhere to [the consent requirement of] Section 9.5 of the
Asset Purchase Agreement will preclude the [Buyers] from
obtaining indemnification for their contribution to the North
Carolina litigation.”
As noted previously, the Agreement provides that it is to
be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. In that Commonwealth,
“indemnification clauses are generally ‘not favored by the law’
and are subject to a strict construction compelling an
interpretation ‘against the party seeking their protection.’”
Lackie v. Niagara Mach. & Tool Works, 559 F. Supp. 377, 378
(E.D.Pa. 1983) (quoting Dilks v. Flohr Chevrolet, Inc., 192 A.2d
682, 687 (Pa. 1963)); see also Kiewit Eastern Co. v. L & R
Constr. Co., 44 F.3d 1194, 1202 (3d Cir. 1995) (Pennsylvania law
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requires that an indemnity agreement be strictly construed
against party asserting it.)
In the interpretation of a contract, Pennsylvania law
requires that “‘each and every part of it must be taken into
consideration and given effect, if possible, and the intention
of the parties must be ascertained from the entire instrument.’”
Bethlehem Steel Corp. v. MATX, Inc., 703 A.2d 39, 42 (Pa. Super.
1997) (quoting Marcinak v. Southeastern Greene School District,
544 A.2d 1025, 1027 (Pa. Super. 1988)); see also Department of
Transp. v. Manor Mines, Inc., 565 A.2d 428, 432 (Pa. 1989) (when
interpreting a contract, court must give effect to all its
provisions).
With respect to indemnification, the common law of
Pennsylvania requires that “[w]hen a party settles a claim with
an injured individual, then sues the party primarily responsible
for the harm for indemnity, the settling party must prove[,
inter alia,] that proper notice was given to the party from whom
it seeks indemnity.” Consolidated Rail Corp. v. Youngstown
Steel Door Co., 695 F. Supp. 1577, 1581 (E.D.Pa. 1988); see also
Tugboat Indian Co. v. A/S Ivarans Rederi, 5 A.2d 153, 156 (Pa.
1939) (one secondarily liable for injury may recover indemnity
from one primarily responsible provided he has given proper
notice).
10
On appeal, the Buyers contend, as they contended below,
that the notice and consent provisions of the Agreement did not
apply to their settlement of the Virginia Bulk Sales litigation
because that “settlement did nothing more than recognize an
obligation previously created [upon the Buyers] by virtue of the
Bulk Sales Act public notice.” The Buyers state that § 9.5
requires consent when a settlement “would give rise to liability
on the part of the Indemnifying Party.” They then note that in
Plymouth Township v. Borough of Larksville, 110 A. 801 (Pa.
1920), the Pennsylvania Supreme Court defined the term
“liability” as including “every kind of obligation, even
obligations that are unascertained or imperfect.” Id. at 802.
From this, the Buyers argue that, “even though the monetary
amount of the obligation to Unitex was unascertained at the time
of the Agreement, liability still attached to Buyers at the time
of the Bulk Sales Act public notice in November, 1994,” and that
it was this event, which had the Sellers’ approval, and not the
settlement of the Virginia Bulk Sales litigation, which “gave
rise to the Sellers’ indemnification liability.” Hence, the
Buyers conclude, the settlement of the Virginia litigation “had
no legal significance,” and the trial court erred when it
selected the settlement “as the triggering event.”
We disagree with the Buyers’ conclusion. To adopt their
view would, contrary to Pennsylvania law, require a strict
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construction of the indemnification provisions of the Agreement
against the Sellers, rather than the Buyers, fail to give
effect to each and every part of the Agreement, deny the Sellers
the right to prior notice as provided by § 9.3 of the Agreement
and Pennsylvania common law, and effectively write the consent
provision of § 9.5 out of the Agreement.
Although we express no opinion on the subject, the Buyers
may be correct in saying, as they say on brief, that upon
publication of the Bulk Sales notice, they “became
unconditionally liable to pay the North Carolina product
liability claim.” However, as the Sellers point out, § 9.5 of
the Agreement “by its terms is not concerned with the time at
which the basis of Buyers’ liability . . . arose” but, instead,
“the event triggering the [Buyers’] obligation to seek and
obtain the [Sellers’] consent is the [Buyers’] ‘settlement of
any claim that would give rise to liability on the part of the
[Sellers] under an indemnity contained in [the Agreement].’”
In other words, § 9.5 contemplates that regardless of the
point in time at which liability may arise against the Buyers
for a claim within the intendment of the Agreement, it is not
the attachment of such liability to the Buyers but the
subsequent settlement of the claim that is decisive. Under the
terms of § 9.5, not until that time arrives does there exist a
“settlement . . . that would give rise to liability on the part
12
of the Indemnifying Party under an indemnity contained in [the
Agreement].” The settlement of the Virginia Bulk Sales
litigation was such a settlement, the Sellers’ consent thereto
was required, and, in the words of the trial court, the Buyers’
“failure to [obtain the consent] will preclude [them] from
obtaining indemnification for their contribution to [settlement
of] the North Carolina litigation.”
The Buyers, however, cite a statement in the trial court’s
letter opinion that “a liability or debt cannot be ‘pre-
existing’ if it has yet to be imposed.” The Buyers then argue
that if the publication of the Bulk Sales notice did not impose
indemnification liability upon the Sellers then the liability
was not imposed until the Buyers contributed the $300,000 toward
settlement of the North Carolina litigation. This settlement,
the Buyers say, occurred with the Sellers approval, as
demonstrated by two letters written by the Sellers’ corporate
counsel shortly before the $300,000 was paid.
However, the trial court made the explicit finding that
“[n]either letter evinces ‘consent’ by the [Sellers] to the
Virginia settlement nor is it a waiver of the consent
requirement under the Agreement.” Our reading of the two
letters satisfies us of the correctness of the trial court’s
finding. Indeed, the first letter, addressed to the Buyers’
counsel, while noting that the addressee earlier had been
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authorized to contribute $300,000 toward the effort to settle
the North Carolina litigation, stated that “[t]here has not been
any waiver, settlement or other understanding between [the
Buyers] and [the Sellers] regarding the efforts to settle or
defend this case, and all rights have been reserved as asserted
in the various correspondence or otherwise.”
The second letter, addressed directly to Precision
Components, while urging the Buyers to settle the North Carolina
litigation, stated that “[the Sellers] believe that your
voluntary assumption of the Unitex claim under [the agreement
settling the Virginia Bulk Trades litigation], without notice to
or consent by us, relieves us of any obligation to indemnify you
for the claim and constitutes a violation of the Asset Purchase
Agreement.”
Finally, the Buyers argue that the trial court erred in
denying them recovery on the breach of warranty claim alleged in
Count I of their motion for judgment. The Buyers base this
claim upon a purported violation by the Sellers of § 6.14 of the
Agreement, which required the Sellers to furnish the Buyers a
list of creditors as described by Code § 8.6-104 of the Bulk
Sales Act and to warrant “that there are no creditors of any
type or nature which have not specifically been disclosed by
identity and amount to [the Buyers.]” The Buyers complain that
the Sellers did not provide them with a list of creditors and
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did not specifically disclose all creditors by identity and
amount.
The Buyers assert that the trial court implicitly held that
the Buyers’ failure to comply with the consent provision of
§ 9.5 “cut off their breach of warranty claim.” However, we
find nothing in the trial court’s letter opinion or final order
to support this argument. Rather, in its letter opinion, the
trial court adopted the Sellers’ proposed findings of fact and
conclusions of law. Included was a finding that any failure of
the Sellers to furnish a list of creditors was not the proximate
cause of any damage to the Buyers since they had sufficient
information from “the due diligence performed on [the Sellers]”
to satisfy “any obligations [the Buyers] had under § 8.6-104
[and –105] of the [Bulk Sales] Act to send notices to [the
Sellers’] creditors.”
Furthermore, as the Sellers point out, “the only creditor
of [the former Industrial Alloy Fabricators, Inc.] relevant to
this litigation is Unitex, and it is undisputed that Sellers
specifically disclosed to Buyers the existence of Unitex’s
outstanding claim . . . well in advance of the closing date of
the asset purchase.” Hence, any discussion of the Sellers’
failure to furnish a list of irrelevant creditors would be
purely academic.
15
For the reasons assigned, we will affirm the judgment of
the trial court.
Affirmed.
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