Dexter Corp. v. Whittaker Corp.

• Decision Date: 21 February 1991
• Docket Number: No. 90-1500,90-1500
• Citation: 926 F.2d 617
• Parties: DEXTER CORPORATION, Plaintiff-Appellant, v. WHITTAKER CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 617

926 F.2d 617

DEXTER CORPORATION, Plaintiff-Appellant, v. WHITTAKER CORPORATION, Defendant-Appellee.

No. 90-1500.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 8, 1990.

Decided Feb. 21, 1991.

Jay A. Canel, Peter M. King, Stephen D. Davis, Canel, Davis & King, Chicago, Ill., for plaintiff-appellant.

David S. Fleming, Schaefer, Rosenwein & Fleming, Chicago, Ill., Ronald M. Greenberg, Los Angeles, Cal., for defendant-appellee.

Before POSNER and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

POSNER, Circuit Judge.

This is an appeal from the dismissal, on the defendant's motion for summary judgment, of a suit for fraud and breach of contract brought by Dexter Corporation against Whittaker Corporation. The basis of federal jurisdiction is diversity of citizenship, and the parties agree that Illinois law supplies the substantive rule of decision. The case arises out of the sale by Whittaker of its "end sealant" business to Dexter; the facts, of course, must be viewed as favorably to Dexter as the record permits.

An end sealant is a chemical compound used to seal the ends of a can for beer or other foods or beverages to the can's body. The sealant is applied in liquid form during the manufacture of the can, and it dries to form a rubber-like gasket. A division of Whittaker manufactured a new type of end sealant, called a "high solids" end sealant, designed to meet the specifications of the Environmental Protection Agency by replacing polluting solvents with nonpolluting solids ("high solids" means "high in solids"). Whittaker developed two generations of high solids end sealant, the first called 7201C and the second, which was even higher in solids, 2136C.

Whittaker sold the second-generation product, 2136C, to American Can. That was when the trouble began. In September 1983, American Can advised Whittaker that one of American Can's customers was complaining about leakage from its cans. Gene Gluba, Whittaker's chief chemist for sealing compounds, determined that the leakage was due to premature aging of 2136C. He suspected that the cause of this condition was that the antioxidant in 2136C "was not doing its job." Although there had been no complaints as yet from purchasers of 7201C, the first-generation product, Gluba suspected that it too would age prematurely, because it contained the same antioxidant. He communicated his findings and concerns to Jeffrey Leyh, the sales manager of the division that manufactured sealing compounds. Within days an officer of Whittaker was on the phone to Dexter Corporation offering to sell Whittaker's end sealant business to Dexter. Dexter was engaged primarily in the manufacture of coatings for the inside of food and beverage cans. It had developed a high solids end sealant but had failed to bring it to market.

Dexter was interested, and in March 1984 negotiations began. Although Whittaker instructed its negotiators not to discuss the American Can problem with Dexter, Dexter knew of it and the matter came up in the negotiations. The reason Dexter knew about the problem was that it had coated the defective cans and at first American Can had thought Dexter might be the supplier at fault. Leyh assured Dexter's representatives that the end sealant which it had sold to American Can had been totally different from anything it had sold its other customers, that that product had come out of old inventory, that it had been discontinued--and anyway that the American Can problem was a shipping problem, not a defective-product problem at all. Leyh also directed Gluba to throw away the "retains" from the American Can sale, that is, the samples that Whittaker retains of each batch of product that it makes. Leyh's misrepresentations, and his direction to Gluba to destroy the retains, are the foundation of Dexter's claim that its purchase of Whittaker's end sealant business was procured by fraud.

Before and during the contract negotiations American Can conducted a "heat age" test on all high solids end sealants, including Dexter's pathetic entry. Cans were subjected to high temperatures in the expectation that changes in the sealant brought about by the heat would predict how the sealant would stand up in ordinary use at much lower temperatures. All the high solids end sealants that were tested flunked, but Whittaker and Dexter agreed that this might just mean that the test was not a good one.

On July 2, 1984, the deal was closed and Dexter obtained Whittaker's sealing business for $1.8 million. In the contract of sale Whittaker promised to indemnify Dexter should Dexter become liable to its customers for defects in the inventory of end sealants that Whittaker had sold Dexter, provided Dexter complied with certain conditions similar to those in standard insurance contracts (insurance is a form of indemnity).

Gluba and other employees of Whittaker's end sealant division became employees of Dexter. Gluba told one of Dexter's sales managers that he was concerned with premature aging of 7201C. Nevertheless Dexter kept on making and selling that compound. Five months after the sale Ball Corporation complained to Dexter about premature aging of the end sealant compound--none other than 7201C--that Ball had bought from Whittaker before the sale. Ball followed up the complaint with a suit against both Whittaker and Dexter in 1986. Other complaints flowed in during 1985. All were settled without litigation; the Ball suit was settled, too. But because Dexter had never sought Whittaker's prior written consent to any of the settlements, as the district judge thought the contract required it to do as a condition precedent to obtaining indemnification, the judge dismissed Dexter's breach of contract claim. He dismissed the fraud claim also, because Dexter had failed to show reasonable reliance on the alleged misrepresentations. Dexter "had sufficient information before the closing on the contract to know that there was a premature aging problem with defendant's sealants and had the expertise to understand the implications of this information." Dexter "was aware both that there was a general problem being experienced with high solids compounds and that American Can, a major...