Ainsworth Corp. v. Cenco Inc.

• Decision Date: 11 June 1982
• Docket Number: No. 81-486,81-486
• Citation: 63 Ill.Dec. 168,437 N.E.2d 817,107 Ill.App.3d 435
• Parties: , 63 Ill.Dec. 168 AINSWORTH CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. CENCO INCORPORATED, a Delaware corporation and Sherwood T. Irvin, Defendants- Appellees.
• Court: United States Appellate Court of Illinois

Page 817

437 N.E.2d 817

107 Ill.App.3d 435, 63 Ill.Dec. 168

AINSWORTH CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. CENCO INCORPORATED, a Delaware corporation and Sherwood T Irvin, Defendants- Appellees.

No. 81-486.

Appellate Court of Illinois First District, Fifth Division.

June 11, 1982.

Myer, New, Berlin & Braude, Chicago, for plaintiff-appellant; Arthur E. Berlin, Curtis E. Sahakian, Chicago, of counsel.

James M. Amend, Bruce A. Featherstone, Kirkland & Ellis, Chicago, for defendants-appellees.

LORENZ, Justice:

Plaintiff Ainsworth Corporation (Ainsworth) appeals from an order of the circuit court of Cook County granting summary judgment in favor of defendants Cenco Corporation and Sherwood Irvin (Cenco).

Plaintiff's sole contention on appeal is that genuine issues of material fact remain with respect to whether the terms of a general release preclude the institution of a tort action against the defendants for fraud in the inducement of a contract.

Material to our disposition are the following facts.

In June of 1976, plaintiff and defendants entered into an Asset Purchase Agreement whereby plaintiff agreed to purchase, among other assets, all of the inventory and operating assets of the Medical Products Group of Cenco Medical Industries, Inc., a wholly owned subsidiary of Cenco. The Medical Products Group was engaged in the manufacture and sale of medical sutures and related hospital and medical products.

A section of the Asset Purchase Agreement entitled "Representations and Warranties of Sellers and Cenco" contained a provision which stated that the Medical Products Group manufacturing processes and sterility procedures implemented under Cenco were in compliance with state and federal safety laws, including the U. S. Pure Food and Drug Act. It provided in pertinent part that: "to the best of [Cenco's] knowledge none of the properties owned, occupied or operated by [Cenco], nor the ownership, occupancy or operation thereof, is, to any extent materially and adversely affecting the business of [Cenco], in violation of any law, ordinance or regulation or * * * federal, state and local safety laws, regulations and ordinances (including * * * the United States Pure Food and Drug Act, or similar laws and regulations * * *.)"

The consideration for this Asset Purchase Agreement included a small amount of cash at closing, a one year promissory note for $200,000 and $435,000 of Ainsworth preferred stock. The stock was convertible into a debt instrument in the event of Ainsworth's failure to pay dividends and make redemptions as specified in the Asset Purchase Agreement schedule.

Shortly after consummation of the purchase, a dispute arose between the parties which persisted for several months. Ainsworth alleged that there were substantial discrepancies in Cenco's statements concerning the liabilities and assets of the Medical Products Group, particularly relating to inventory assets. Ainsworth subsequently defaulted upon its promissory note payments and stock redemption obligations.

At the request of Ainsworth's president, Joseph Cvengros, both parties entered into a letter agreement in January of 1977 "in order to resolve the existing dispute between us."

This settlement agreement stated that:

"[Cenco has] contended that Ainsworth is in default with respect to certain of its obligations thereunder * * *. The [Asset Purchase] Agreement also contains various representations and warranties by [Cenco] and [Ainsworth] contend[s] that certain of those representations and warranties have been breached. In order to resolve the existing dispute between us, we have all agreed to the following * * *."

In the settlement agreement, Cenco agreed to substantial financial concessions as to plaintiff's payment obligations, including a reduction of interest on the $200,000 note, a 10 month deferral of any payments on the note, a 15 month deferral of stock dividend payment and redemption, and a waiver of past defaults.

The settlement agreement further provided "that the representations and warranties of [Cenco] in the [Asset Purchase] Agreement shall all expire on the date of [the settlement agreement] and Ainsworth and Cvengros waive any breach of any of such representations, warranties or covenants, or any default under the agreement which may have occurred prior to the date of this agreement." (Emphasis added.)

Approximately four months later, the U.S. Food and Drug Administration investigated the medical products facilities acquired by the plaintiff from Cenco, in order to ascertain its compliance with the Federal Food, Drug and Cosmetic Act.

The investigation revealed that the plaintiff's manufacturing process of the medical products and sterility procedures, originally instituted by Cenco and continued under Ainsworth, violated federal regulations.

The sanctions for noncompliance included a forced recall of medical products, which included products sold both by plaintiff and previously by defendants; and the manufacturing facility was rendered non-operational for approximately six months.

Ainsworth subsequently defaulted on the payment terms embodied in the settlement agreement. Cenco filed suit against plaintiff and obtained a favorable $478,634 judgment by confession on its note on June 2, 1978.

One week later, plaintiff petitioned for injunctive relief and monetary damages, and alleged that defendants had fraudulently induced it to purchase the medical products group by misrepresenting that it was being operated in accordance with government manufacturing and sterility procedures.

Defendants filed a verified answer which asserted several affirmative defenses, including plaintiff's waiver of any rights arising out of any breach of a warranty or representations in the Asset Purchase Agreement, by virtue of the terms of the settlement agreement. Plaintiff did not file a reply.

Following disposition of plaintiff's motion for injunctive relief, this cause was transferred to the Law Division, whereupon defendants moved for summary judgment. On the day of the hearing on the motion, plaintiff filed an affidavit signed by its president, Cvengros, who set forth, inter alia, (1) that during the course of negotiations he asked and received assurances from Cenco that the medical products facilities fully complied with the law, which he relied upon in entering into the Asset Purchase Agreement; (2) that the disputes resolved by the settlement agreement did not involve any question of compliance with FDA regulations, and (3) that both parties were silent with regard to such question in the negotiations leading up to and including the execution of the settlement agreement. Following this hearing, the trial court granted defendants' motion for summary judgment and this appeal was taken.

OPINION

We preface our discussion by noting that the purpose of a summary judgment proceeding is to determine whether issues of fact exist between the parties; and if the proceeding discloses issues of fact, the motion must be denied. (Morris v. Anderson (1970), 121 Ill.App.2d 169, 259 N.E.2d 601.) Summary judgment provides the means of disposing of cases with dispatch, but it is a drastic method and should be allowed only when the right of the party to invoke summary judgment is clear and free from doubt. Kolakowski v. Voris (1979), 76 Ill.App.3d 453, 32 Ill.Dec. 59, 395 N.E.2d 6.

Since facts, not conclusions, must be presented, the trial court may not draw fact inferences on a motion for summary judgment. (State Farm Mutual Automobile Insurance Co. v. Short (1970), 125 Ill.App.2d 97, 260 N.E.2d 415.) Moreover, if the issue is debatable the drastic remedy of summary judgment should not be granted where the facts, although not in dispute, are subject to conflicting inferences and the parties disagree as to what their intention was as shown by the facts. Kay v. Village of Mundelein (1975), 36 Ill.App.3d 433, 344 N.E.2d 29.

We turn first to consider plaintiff's argument that genuine issues of material fact remain with respect to whether the settlement agreement release bars a subsequent action against defendants for fraud in the inducement of the Asset Purchase Agreement.

In the case before us, the trial court found that the terms of the settlement agreement between these parties was unambiguous and effectively barred the subsequent tort action, as a matter of law. Although whether any contract is or is not ambiguous is ordinarily a question of law for initial determination by the trial court, we do not agree with the result reached in the present case where the taint of fraud has been alleged.

A careful review of the...