Liberty Mutual Insurance v. Curtis Noll Corp.

112 Mich. App. 182 (1982) 315 N.W.2d 890

LIBERTY MUTUAL INSURANCE COMPANY
v.
CURTIS NOLL CORPORATION.

Docket No. 53400.

Michigan Court of Appeals.

Decided January 5, 1982.

Seavitt, Westcott, Stowe, Magnuson & Beeby (by Thomas L. Misuraca), for plaintiff.

Garan, Lucow, Miller, Seward, Cooper & Becker, P.C. and Gromek, Bendure & Thomas (by Carl L. Gromek and Nancy L. Bosh), of counsel, for defendant.

Before: D.C. RILEY, P.J., and CYNAR and H.R. GAGE,^[*] JJ.

H.R. GAGE, J.

Plaintiff, as subrogee of its insured, appeals as of right from a jury verdict of no cause of action and an order denying its motion for a directed verdict. In a prior action, plaintiff's insured, Footburt Reynolds Machinery Division, Reynolds Metals Company (Reynolds), was sued on the basis of products liability for injuries sustained from a machine manufactured in 1958 by the Foote-Burt Company. Reynolds tendered the defense to defendant, Curtis Noll Corporation, which declined to assume it. Plaintiff, on behalf of Reynolds, ultimately settled the claim with the injured party and brought the instant action seeking common-law and contractual indemnification from defendant.

The relationship of the parties to each other is rather complex. The Foote-Burt Company designed the machine in question in 1958, and subsequently sold it to Detroit Diesel Allison Division of the General Motors Corporation (Diesel). Diesel placed the machine into use at its Detroit plant. In 1965, the Foote-Burt Company merged into defendant, Curtis Noll Corporation, the merger occurring in Ohio. Defendant continued to operate the company as a separate division. On November 1, 1967, defendant and Reynolds Metals Company entered into an agreement whereby the latter agreed to purchase the division from defendant. Reynolds Metals Company carried on the business as a separate division. In 1972, an employee of Diesel was injured on the machine in question and brought suit against Reynolds under a theory of successor liability. It is from Reynolds' settlement of that suit that the instant action arises.

Plaintiff first argues that the trial court erred in ruling as a matter of law that it was not entitled to common-law indemnification. The court determined that the liability of either Reynolds or defendant for injuries resulting from the defective machine could arise solely by virtue of the fact that each was a successor corporation to the original manufacturer. See Turner v Bituminous Casualty Co, 397 Mich. 406; 244 NW2d 873 (1976). It determined that the liability of each was vicarious in nature precluding any right to common-law indemnification.

This Court set forth the basic principles of common-law indemnity in Provencal v Parker, 66 Mich. App. 431, 435-436; 239 NW2d 623 (1976):

"Indemnification rests upon the equitable principle of a right to restitution. Dale v Whiteman [388 Mich. 698; 202 NW2d 797 (1972)]. The theory of indemnity is that where the wrongful act of one results in liability being imposed on another, such other person may have indemnity from the person actually guilty of the wrong. Hart Twp v Noret, 191 Mich. 427; 158 N.W. 17 (1916), Detroit, G H & M R Co v Boomer, 194 Mich. 52; 160 N.W. 542 (1916), Village of Portland v Citizens Telephone Co, 206 Mich. 632; 173 N.W. 382 (1919), Indemnity Insurance Co of North America v Otis Elevator Co, 315 Mich. 393; 24 NW2d 104 (1946). The party seeking indemnity must plead and prove freedom on his part from personal fault. Indemnity Insurance Co of North America v Otis Elevator Co, supra, Husted v Consumers Power Co, 376 Mich. 41; 135 NW2d 370 (1965). This has been interpreted to mean that the party seeking indemnity must be free from active or causal negligence, McLouth Steel Corp v A E Anderson Construction Corp, 48 Mich. App. 424; 210 NW2d 448 (1973), lv den 391 Mich. 754 (1973), Nanasi v General Motors Corp, 56 Mich. App. 652; 224 NW2d 914 (1974). There is no right of indemnification between actual joint tortfeasors or tortfeasors in pari delicto."

Reynolds' liability for the defective machine arose solely because it was a corporate successor to the manufacturer under Turner. Likewise, any potential liability on the part of defendant to the injured party could arise solely under Turner. This liability is vicarious in nature. Trimper v Bruno-Sherman Corp, 436 F Supp 349, 351 (ED Mich, 1977). Because the liability of either Reynolds or defendant to the injured party could arise only under Turner, they are in pari delicto. Reynolds is not entitled to common-law indemnity.

This Court recently addressed a similar issue. Langley v Harris Corp, 103 Mich. App. 287; 303 NW2d 1 (1980). In Langley, an employee of King-Seeley Thermos Company (King-Seeley) was injured on a machine manufactured by the defendant's predecessor corporation. The plaintiff sued the defendant for negligent design and manufacture, through its predecessor, and also sued King-Seeley for negligence in knowingly allowing the plaintiff to operate the defective machine. King-Seeley was granted a summary judgment under the exclusive remedy provisions of the Worker's Disability Compensation Act, and was dismissed from the case. The defendant then filed a third-party complaint against King-Seeley for indemnification. King-Seeley was granted a summary judgment on the defendant's claim under GCR 1963, 117.2(1).

This Court affirmed. It ruled that any liability to which the defendant was subjected flowed from its predecessor corporation under Turner. The defendant was made to stand in the shoes of the manufacturer. The defendant could be liable to the injured party only if the manufacturer was actively negligent. One of the prerequisites of indemnity is freedom from personal fault. If active negligence on the part of the manufacturer was shown this prerequisite would not be legally present. If active negligence was not shown, the defendant would have a complete defense to any liability. Langley, supra, 290-291.

In the instant case, plaintiff concedes that the Foote-Burt Company was actively negligent in the design and manufacture of the machine. Plaintiff also concedes that Reynolds' liability to the injured party was based solely upon its status as a successor corporation to the manufacturer. Thus, if Langley is applied to the instant case, plaintiff is not entitled to common-law indemnification.

Plaintiff seeks to distinguish Langley on the basis that Langley involved indemnification between a successor corporation and an employer whereas the instant case involves two successor corporations. The basis for the Langley decision, however, was not dependent upon who was the indemnitor and who the indemnitee. The crucial factor was from whom the indemnitee's liability to the injured party flowed. In Langley, the liability flowed from the original manufacturer. So too, in the instant case, Reynolds' liability to the injured party ultimately flowed from the manufacturer. Although Reynolds was not the immediate successor to the manufacturer, its liability to the injured party arose solely from the fact that it was a successor corporation to the manufacturer and that the manufacturer was actively negligent in the design or manufacture of the machine. Thus, as was the case in Langley, one of the essential prerequisites of indemnity, being without personal fault, is not legally present. The trial court did not err in ruling as a matter of law that plaintiff was not entitled to common-law indemnification from defendant.

Plaintiff next argues that the trial court erred in denying its motion for a directed verdict on its claim for contractual indemnity. That provision of the purchase agreement between Reynolds and defendant upon which plaintiff relies provided in pertinent part:

"[A]ll costs, charges, expenses, debts, liabilities and obligations arising out of the operations of Foote-Burt prior to the Effective Date [of the agreement] shall be for the account of CURTIS NOLL, and those arising on and after the Effective Date shall be for the account of REYNOLDS. * * * Each party shall indemnify, reimburse and save the other harmless from all such items arising during its respective period of responsibility."

Plaintiff argues that, because the operation giving rise to Reynolds' liability, i.e., the manufacturing of the machine, occurred prior to the effective date of the purchase agreement, it is a liability which defendant agreed to assume. The trial court was of the opinion that the provision was ambiguous.

An indemnity contract is construed in accordance with the rules for the construction of contracts generally. Meadows v Depco Equipment Co, 4 Mich. App. 370; 144 NW2d 844 (1966). The cardinal rule in the construction of indemnity contracts is to enforce them so as to effectuate the intention of the parties. Title Guaranty & Surety Co v Roehm, 215 Mich. 586; 184 N.W. 414 (1921). See also Pritts v J I Case Co, 108 Mich. App. 22, 29; 310 NW2d 261 (1981).

The only evidence presented on this matter was the contract itself. Plaintiff called no witnesses to testify as to the meaning of the language used or the intent of the parties. Instead, plaintiff relied solely upon a decision of the Louisiana Court of Appeals interpreting a contractual provision identical to that involved in the instant case as imposing liability as a matter of law on the Curtis Noll Corporation under factual circumstances similar to those in the instant case. Rosales v Dixie Mill Supply Co, 376 So 2d 179 (La App, 1979). In Rosales, Curtis Noll was the party seeking indemnification from Reynolds. Reynolds was granted a summary judgment.

Plaintiff's reliance on Rosales is misplaced. First, Louisiana law is not binding precedent in this state. Second, the basis for the court's decision in Rosales is inconsistent with Michigan law. Louisiana law apparently draws a distinction between a corporate acquisition by merger and one by asset purchase. Thus, when the Foote-Burt Company merged into Curtis Noll, the latter succeeded to all of Foote-Burt's liabilities, including its negligence. When Reynolds later purchased those assets from Curtis Noll, however, under Louisiana law the liabilities remained with Curtis Noll. Rosales, supra, 180, fn 1. The court concluded that in the absence of any express language indemnifying it for its own negligence, Curtis Noll was not entitled to indemnification.

The Rosales court specifically declined to consider the effect of Turner on its decision. Rosales, supra, 181, fn 2. Michigan law does not distinguish between a corporate acquisition by merger and one by asset purchase. If the circumstances surrounding the transaction establish a basic continuity of the enterprise of the seller corporation, the purchasing corporation may be liable in products liability. It assumes the liabilities of its predecessor. Turner, supra, 426. Reynolds does not contend that there is no continuity of the business enterprise. Thus, under Turner it assumed the liabilities of its predecessor corporation.

The Rosales court recognized that the contractual language quoted above could constitute an ambiguity. In that case, however, the ambiguity would not be fatal to a summary judgment. As noted above, the court concluded that the negligence of Foote-Burt remained with Curtis Noll after the asset purchase by Reynolds and the contract, as a matter of law, did not indemnify Curtis Noll for its own negligence. In the instant case, plaintiff seeks indemnification. Under Michigan law, indemnity contracts are construed most strictly against the party seeking indemnification. Gartside v Young Men's Christian Ass'n, 87 Mich. App. 335, 339; 274 NW2d 58 (1978), Robinson v A Z Shmina & Sons Co, 96 Mich. App. 644, 649; 293 NW2d 661 (1980). The trial court, as did the Rosales court, determined that the contractual language was ambiguous. Thus, it did not err in leaving the interpretation of the contract to the jury.

Plaintiff next contends that the trial court erred in admitting into evidence, over objection, the insurance policy between plaintiff and Reynolds which was in effect at the time Reynolds purchased the assets from defendant. Under that policy Reynolds maintained coverage for liabilities of others which it assumed under contract. In closing argument, defendant argued to the jury that they could consider the policy as evidence that Reynolds intended to assume any liability of defendant at the time it entered into the purchase agreement.

Plaintiff's only objection at trial to the admission of the policy was on the grounds of relevancy. Relevant evidence means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence. MRE 401. Admissibility rests within the trial court's discretion and will not be set aside unless there has been an abuse of that discretion. Aetna Life Ins Co v Brooks, 96 Mich. App. 310, 314; 292 NW2d 532 (1980). The trial court determined that the indemnity provision of the sales agreement was ambiguous with regard to the intent of the parties in allocating the liabilities. The insurance policy provided that Reynolds was insured for liabilities which it assumed under contract. The weight to be given the evidence was a matter for the jury. The trial court did not abuse its discretion in admitting the policy.

Plaintiff argues for the first time on appeal that admission of the policy was unduly prejudicial because it was precluded by statute from mentioning the fact that defendant was also insured. MCL 500.3030; MSA 24.13030. Plaintiff's reliance on this statutory principle is misplaced. The statute applies only in an original action brought by an injured person or his or her personal representative in the case of death. It is not applicable to the instant action.

Further, a review of the record reveals that defendant's reference to the policy was fairly minimal during closing argument. On the other hand, plaintiff's reference to it was rather extensive. Plaintiff particularly pointed out to the jury the time which had elapsed between the issuance of the policy and the execution of the sales agreement between Reynolds and defendant. The admission into evidence of the policy does not entitle plaintiff to a new trial.

Lastly, plaintiff contends that the trial court erred in instructing the jury, over objection, that in a products liability action the cause of action accrues at the time of injury and not at the time of manufacture. Plaintiff argues that the instruction left the jury with the impression that the court was instructing them as a matter of law that the original personal injury claim arose after the effective date of the sales agreement and, thus, under the terms of the agreement, was assumed by Reynolds. The trial court determined that the instruction was relevant for purposes of ascertaining the intent of the parties in drafting the sales agreement.

In reviewing a challenge to an instruction given by the trial court, this Court must review the instructions in their entirety. Federoff v Meyer Weingarden & Sons, Inc, 60 Mich. App. 382, 391; 231 NW2d 417 (1975). In addition to the instruction complained of, the court also instructed the jury that they must consider the conditions and circumstances surrounding the contracting parties and the subject matter with which those parties dealt, that they must give a meaning to the contract that would be attached to it by a reasonably intelligent person, that they were to give the language of the contract its ordinary significance as far as possible, and that they were to deduce the intention of the parties from the entire instrument. This Court's review of the instructions leads to the conclusion that the jury was correctly instructed that they must determine what the intent of the parties was with regard to the allocation of liabilities from all of the facts and circumstances surrounding the execution of the contract. The challenged instruction was relevant to that ultimate determination and did not remove that ultimate determination from the jury's consideration.

Affirmed.

NOTES

[*] Circuit judge, sitting on the Court of Appeals by assignment.