Clark Equipment Co. v. Dial Corp.
| Decision Date | 18 August 1994 |
| Docket Number | No. 93-3018,93-3018 |
| Citation | 25 F.3d 1384 |
| Parties | Prod.Liab.Rep. (CCH) P 13,915 CLARK EQUIPMENT COMPANY, Plaintiff-Appellee, v. The DIAL CORPORATION, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Fred Schulz (argued), Susan L. Walker, Wildman, Harrold, Allen & Dixon, Chicago, IL, for plaintiff-appellee.
Shayle P. Fox, William H. Barrett, Paul A. Olsen (argued), Fox & Grove, Chicago, IL, for defendant-appellant.
Before POSNER, Chief Judge, and CUMMINGS and EASTERBROOK, Circuit Judges.
This appeal requires us to consider the meaning of products liability. Back in 1971, Clark Equipment Company purchased from Armour and Company the principal assets of the Construction Equipment Division of an Armour subsidiary, Baldwin-Lima-Hamilton Corporation. The division (we'll call it "Lima") manufactured Lima construction cranes. These are, of course, highly durable products, and Clark was naturally concerned about the possibility of being made a defendant in products liability suits arising from defective cranes manufactured long before its purchase of Lima's assets. Armour for its part was naturally concerned about the possibility of being sued for defects in cranes manufactured and sold after the sale of the assets to Crane. The parties therefore decided to include in the contract of sale a mutual indemnification provision. Armour agreed to indemnify Clark for any legal expense (including judgments) "arising out of the conduct of the business of [Lima] ... prior to the Closing Date" of the sale of Lima's assets to Clark and Clark agreed to indemnify Armour for any legal expense (including judgments) "arising out of the conduct of the business of [Lima] ... on and after the Closing Date." Further, and critically, the parties agreed that for the purpose of the indemnification provision "product liability claims shall be deemed to arise out of the conduct of the business of [Lima] by the party selling the equipment or part to which the claim pertains." At the time Armour was a subsidiary of Greyhound Corporation, now called Dial Corporation. Dial is the defendant in this case, having assumed Armour's liabilities to Clark.
In 1986 John Morrie, a construction worker who had been injured when a crane manufactured by Lima and sold to Morrie's employer prior to the acquisition of Lima's assets by Clark dropped a load of steel on him, brought a diversity suit in the federal district court in New Hampshire against Clark and Armour. The first three counts were standard products liability claims and did not differentiate between the two defendants. The fourth count (misnumbered Count V) was against Clark alone and charged that by virtue of a "continuity of the relationship between Clark Equipment Company and the customers of [Lima]," Clark had a duty to warn those customers of any defect it knew about in a Lima crane. The fifth count (Count VI, naturally) alleged that by virtue of having "direct and specific knowledge of a defective and dangerous condition" of the Lima crane that had injured Morrie and that Clark "had serviced," Clark had a duty to warn people who it knew or should have known would be operating the crane in its defective condition. Both defendants moved for summary judgment. The suit against Armour (that is, the three counts that had named it) was dismissed; as the parent of the corporation that had manufactured the crane, rather than the manufacturer itself, Armour was not liable for the defective condition of the crane. All but Count VI against Clark was dismissed too, on the ground that Clark was not liable as a successor to the tortfeasor. Count VI the judge retained because the Supreme Court of New Hampshire had "acknowledged the possibility of duty to warn as a separate factor 'concomitant with the general duty of the manufacturer,' " quoting Thibault v. Sears, Roebuck & Co., 118 N.H. 802, 395 A.2d 843, 847 (1978). The judge noted that "duty to warn as a base for liability because of negligence by a successor corporation to the customers of the predecessor 'is still in the developmental stage,' " quoting Polius v. Clark Equipment Co., 802 F.2d 75, 84 (3d Cir.1986). He added that "courts adopting the doctrine weigh factors like succession to service contracts, coverage of a particular machine by a contract, service of that machine by the successor corporation, and successor's knowledge of the defect and of the machine owner's location."
After the district judge in the New Hampshire suit issued his opinion, Clark settled Morrie's claim against it (now down to Count VI) for $450,000. The load of steel, which was suspended from the crane's hoist, had fallen on Morrie because the crane's hoist brake pedal had not been properly engaged. According to Morrie's evidence, Clark knew that the brake pedal on the model was unsafe yet failed to notify dealers or owners, even though it routinely mailed service bulletins to its dealers for distribution to owners of Lima cranes containing maintenance and safety advice on the cranes whether they had been sold before or after 1971. After the settlement in Morrie's case, Clark began to include a prominent warning about the brake pedal in its service bulletins and to supply its dealers with warning decals for distribution to the owners of this model of Lima crane.
The present suit, a diversity breach of contract suit, was brought by Clark against Dial to obtain indemnification for the $450,000 that Clark paid in settlement of Morrie's suit, plus modest attorney's fees incurred in the defense and settlement of that count. The district judge held that since the crane had been manufactured before 1971, the accident to Morrie was the responsibility of Dial, so he gave judgment for Clark, and Dial appeals.
It is plain from the indemnification provision that if Count VI of Morrie's complaint, the only count that was still alive when Clark settled with Morrie, is a "product liability" claim within the meaning of the provision, then Dial, as Armour's successor, is, as between itself and Clark, liable for the cost of defending and then settling Morrie's suit. The rest of the counts plainly were products liability counts, and the crane on which Morrie was injured had been sold before the closing date of the sale of Lima's assets to Clark. Dial argues that Count VI could not have been a products liability claim, since it was not made against the manufacturer or seller of the crane. The crane had been manufactured and sold by Armour's Lima subsidiary before Clark had come on the scene. Clark was not responsible for the defective or dangerous condition of the crane, but only for failing to warn about that condition.
The indemnification provision does not define "product liability." But the contract of which the provision is a part recites that the contract is to be construed in accordance with Michigan law, and a Michigan case, Pelc v. Bendix Machine Tool Corp., 111 Mich.App. 343, 314 N.W.2d 614, 621 (1981), appears to endorse the "successor's duty to warn" theory that was articulated in the New Hampshire district court's opinion, in Polius and in a number of other cases, illustrated in this circuit by Leannais v. Cincinnati, Inc., 565 F.2d 437, 441-42 (7th Cir.1977), and Travis v. Harris Corp., 565 F.2d 443, 448-49 (7th Cir.1977), and in other courts by Florom v. Elliott Mfg., 867 F.2d 570, 577, on rehearing, 879 F.2d 801 (10th Cir.1989) (per curiam), and Harris v. T.I., Inc., 243 Va. 63, 413 S.E.2d 605, 610 (1992). Like these other cases, the Michigan case was decided long after 1971. But we take it that the parties intended the term "product liability" in the indemnification provision to mean whatever it might mean when indemnification was sought, rather than requiring an historical inquiry into the state of the law in 1971. An historical inquiry would yield indeterminate results. There was no duty to warn about someone else's product back in 1971, so the historical question would...
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