Bouton v. Litton Industries, Inc.

Decision Date19 March 1970
Docket NumberNo. 17979.,17979.
Citation423 F.2d 643
PartiesDavid K. BOUTON, Arthur W. Buttenheim, Carl W. Shattuck, John C. Smaltz and G. Robert Compton, as Trustees in Liquidation of M-T Liquidation Corporation (formerly McKiernan-Terry Corporation) (Plaintiff) v. LITTON INDUSTRIES, INC., and Liberty Mutual Insurance Company (Defendant). LITTON INDUSTRIES, INC., a Delaware Corporation (Plaintiff) v. David K. BOUTON, Arthur W. Buttenheim, Carl W. Shattuck, John C. Smaltz and G. Robert Compton, as Trustees in Liquidation of M-T Liquidation Corporation (formerly McKiernan-Terry Corporation, a corporation of the State of New Jersey) Litton Industries, Inc., (One of the Defendants), Appellant.
CourtU.S. Court of Appeals — Third Circuit

Murry D. Brochin, Lowenstein, Sandler, Brochin & Kohl, Newark, N. J., for appellant.

Edward T. O'Donnell, Carpenter, Bennett & Morrissey, Newark, N. J. (Elmer J. Bennett, and John C. Heavey, Jr., Newark, N. J., on the brief), for appellees.

Before FREEDMAN, ALDISERT and GIBBONS, Circuit Judges.


GIBBONS, Circuit Judge.

This is an appeal from an order of the district court for the District of New Jersey which granted summary judgment to the plaintiffs against the defendant Litton Industries and which denied Litton's cross-motion for summary judgment against the plaintiffs. A second defendant, Liberty Mutual Insurance Company, in whose favor summary judgment was entered against the plaintiffs, is not involved in this appeal. The case was removed from the Superior Court of New Jersey, Chancery Division, for diversity of citizenship. At least one claim asserted by the plaintiffs has not been fully adjudicated, but the district court, pursuant to Rule 54(b), Federal Rules of Civil Procedure, directed that final judgment be entered in favor of the plaintiffs, and the order is, therefore, appealable.

Plaintiffs are the trustees in liquidation of M-T Liquidation Corporation, a New Jersey corporation formerly known as McKiernan-Terry Corporation (hereinafter called M-T). Until September 21, 1962, M-T was engaged in the design, manufacture and sale of heavy machinery, including radar pedestals for the Defense Department's Distant Early Warning System, and arresting engines used to halt airplanes landing on carriers. On that date, pursuant to the terms of a contract dated July 12, 1962, defendant, Litton Industries, (hereinafter called Litton) acquired all of the assets, business and good will of M-T in exchange for Litton stock and the assumption by Litton of certain M-T liabilities. The disputed liabilities are in two categories:

1. The claim of General Electric Company against M-T for breach of contract because a number of radar pedestals furnished by M-T for the D.E.W. System failed to perform in accordance with contract specifications resulting in damage to G.E. This claim is in suit against both M-T and Litton.1 The G.E. dispute had arisen prior to September 21, 1962, but it did not result in a lawsuit until November 14, 1966.
2. Two personal injury claims, both of which arise out of accidents which took place after September 21, 1962, and in both of which the accident is alleged to have been caused by the failure at sea of aircraft arresting engines made and sold by M-T in 1958. One claimant, Sevits, was injured on August 19, 1963. The other, Baldwin, was injured on September 12, 1964. Both claims have resulted in suits against M-T and Litton.2

At the time of the M-T to Litton closing on September 21, 1962, M-T was the insured under a comprehensive general liability policy issued by defendant, Liberty Mutual Insurance Company. The term of this policy was from November 1, 1961 to November 1, 1962. Apparently neither M-T nor Litton continued similar coverage after November 1, 1962. Plaintiffs sought in the complaint a declaratory judgment that Liberty Mutual insured against both the G.E. and the personal injury claims. The district court granted Liberty Mutual a summary judgment that it does not insure against the Sevits and Baldwin claims because the accidents arose after the expiration of the policy. M-T and Litton concede that this determination was correct, since product liability insurance coverage is written on the basis that the carrier on the risk at the time of the accident affords coverage.

The G.E. claim is being defended by Liberty Mutual pursuant to a reservation of rights agreement. The district court dismissed the complaint against Liberty Mutual without prejudice to the claim of M-T or Litton that Liberty Mutual is an insurer against the G.E. claim.

Plaintiffs' complaint and its motion for summary judgment against Litton sought a declaratory judgment that Litton is obliged to assume the defense of both the G.E. and the personal injury actions and to pay any judgment arising therefrom. Plaintiffs also sought injunctive relief and damages consistent with such a declaration. In support of its motion it filed affidavits which identified for the district court the M-T to Litton contract of July 12, 1962 and the exhibits thereto, the pleadings in the G. E. and the personal injury actions, and the assumption agreement which Litton furnished to M-T at the September 21, 1962 closing.

Litton filed no answering affidavits, but made a cross-motion for summary judgment in which it relied "upon the exhibits annexed to plaintiffs' notice of its pending motion for summary judgment."3 Litton made these contentions:

1. The agreement between the parties is only an undertaking of indemnity and no liability arises on Litton\'s part until after M-T pays a judgment, and then only in the amount paid on account of the judgment.
2. Its liability on the G.E. claim is in the contract limited to $150,000.
3. It did not assume any liability to M-T with respect to product liability claims resulting from accidents occurring after the September 21, 1962 closing.

The district court rejected each of these contentions and entered a judgment that Litton is liable to M-T:

A. To defend and pay any judgment in the G.E. suit without limit, except to the extent that Liberty Mutual satisfies the same.
B. To indemnify M-T against any judgment in the personal injury actions, and to undertake the defense of these actions at Litton\'s expense.
C. To pay M-T all attorneys\' fees and disbursements reasonably paid and incurred by M-T in defending these actions.

The M-T to Litton contract provides that it shall be construed and interpreted according to New York law. It is undisputed that the contract, although the subject of negotiations, is in the general form originally prepared by counsel for Litton. Litton's three contentions must, therefore, be determined under New York law, Lauritzen v. Larsen, 345 U.S. 571, 73 S.Ct. 921, 97 L.Ed. 1254 (1953); Tele-Controls, Inc. v. Ford Industries, Inc., 388 F.2d 48 (7 Cir. 1967); Barzda v. Quality Courts Motel, Inc., 386 F.2d 417 (5 Cir. 1967); Lebeck v. William A. Jarvis, Inc., 145 F.Supp. 706 (E.D.Pa.1956), modified, 250 F.2d 285 (3 Cir. 1957), and in the light of the fact that as the draftsman the agreement will be construed strictly against it. Mutual Life Ins. Co. v. Hurni Co., 263 U.S. 167, 44 S.Ct. 90, 68 L. Ed. 235 (1923); Rentways, Inc. v. O'Neill Milk and Ice Cream Co., 308 N. Y. 342, 126 N.E.2d 271 (1955); Broadway Realty Co. v. Lawyers' Title Ins. & Trust Co., 226 N.Y. 335, 123 N.E. 754 (1919); Janos v. Peck, 21 A.D.2d 529, 251 N.Y.S.2d 254, aff'd, 15 N.Y.2d 509, 254 N.Y.S.2d 115, 202 N.E.2d 560 (1964); Sklar Door Corp. v. Locoteta Homes, 33 Misc.2d 299, 224 N.Y.S.2d 294 (Sup.Ct.1961); City of New York v. Columbus Circle Apartments, Inc., 29 Misc.2d 763, 216 N.Y.S.2d 993 (Sup.Ct. 1961).

Two documents are involved, because at the September 21, 1969 closing, pursuant to a provision in the July 12, 1962 contract, a separate written undertaking respecting assumption of liabilities was furnished by Litton. Since, however, the language of this separate undertaking is identical in all material respects with the July 12, 1962 contract, we will refer hereafter only to the latter.

The contract is entitled Agreement and Plan of Reorganization, and it follows a familiar general outline for the acquisition of a going business. After setting forth the consideration flowing from each side (Section 1) and fixing a closing date (Section 2) it sets forth the representations and warranties of M-T (Section 3), and lists conditions precedent to Litton's obligation to close (Section 7). It provides for post-closing indemnification by M-T of Litton (Section 9) against and in respect of all liabilities of or claims against M-T not assumed by Litton pursuant to paragraph (d) of Section 1.

Section 1(a) sets forth the assets and business to be transferred by M-T. These include every conceivable tangible and intangible property and asset, including policies of insurance, and all cash on hand and in banks. Section 1(b) provides that Litton will deliver 27,500 shares of its stock for the M-T assets and business. Ten percent of the shares are by virtue of Section 1(c) subject to a one year holdback to secure the M-T indemnification agreement set forth in section 9.4

Besides delivering stock, Litton in Section 1(d) makes the undertaking with respect to liabilities which gives rise to this litigation. In this rather complicated provision5 Litton undertakes four broad categories of liability. In Section 3 it receives, in turn, from M-T warranties and representations about the liabilities which it has undertaken. Section 7(a) makes it a condition precedent to closing that those representations be true at the time of closing, and Section 9 provides for post-closing indemnification of Litton by M-T against liabilities not assumed.

The first of the broad categories in Section 1(d) are financial statement liabilities. Annexed to the contract as an exhibit are financial statements as of May 31, 1962. In Section 1(d) (i) Litton undertakes ...

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