Carroll v. Acme-Cleveland Corp.
| Decision Date | 09 March 1992 |
| Docket Number | 90-2330 and 90-2391,Nos. 90-2392,ACME-CLEVELAND,s. 90-2392 |
| Citation | 955 F.2d 1107 |
| Parties | Howard B. CARROLL, Jeannette B. Armstrong, Paul Armstrong, Mila C. Palmer, Robert J. Eck, Jean A. Pettigrew, Patricia C. Eck, and Robert A. Eck, Plaintiffs-Counterdefendants-Appellees, v.CORPORATION, Defendant-Counterplaintiff-Appellant. Appeal of George F. KARCH, Jr. and William G. Swindal, attorneys for Acme-Cleveland Corporation. |
| Court | U.S. Court of Appeals — Seventh Circuit |
William G. Swindal, Hinshaw & Culbertson, Chicago, Ill., George F. Karch, Jr. (argued), Thompson, Hine & Flory, Cleveland, Ohio, for defendant-counterplaintiff-appellant.
Richard F. Zehnle (argued), Edward C. Jepson, Jr., Steven G. Rudolf, Vedder, Price, Kaufman & Kammholz, Chicago, Ill., Gwenda Burkhardt, Deerfield, Ill., for plaintiffs-counterdefendants-appellees.
Before WOOD, Jr. * , and KANNE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
After lengthy pre-trial proceedings, the district court entered summary judgment in favor of plaintiffs-appellees Howard B. Carroll and other shareholders ("the shareholders") of Sheldon Machine Co., Inc. ("Sheldon"), and against defendant-appellant Acme-Cleveland Corporation ("Acme"). The district court also imposed Rule 11 sanctions against Acme and its attorneys. Acme, and its attorneys, argue that the district court committed several errors warranting reversal of the judgment and sanctions. We affirm.
Sheldon, before its sale to Acme, was a manufacturer of computer controlled lathes and machine tools used in manufacturing. Acme, until it acquired Sheldon, had several subsidiaries involved in the machine tooling industry, but did not sell computer controlled machine tools.
In May of 1981, Carroll, President of Sheldon, and Dennis D. Anderson, Vice President and Treasurer of Sheldon, contacted Acme with an offer to sell Sheldon. Acme prepared a draft of the agreement dated July 16, 1981 and sent it to Sheldon's attorney. After further negotiations, on August 14, 1981, pursuant to a stock-purchase agreement with Acme ("Agreement"), the shareholders sold their outstanding shares of Sheldon to Acme for a cash price of $4.3 million.
The Agreement, which was principally drafted by Acme, included several representations by the shareholders. The dispute between the parties centers on whether the shareholders failed to comply with one of those representations. In paragraph 1.12 of the Agreement the shareholders represented that:
[t]here is no pending or, to the knowledge of any of the [shareholders], threatened claim (including any product liability or warranty claim), litigation, proceeding, order of any court or governmental agency, or governmental investigation or inquiry against Sheldon, or involving any material adverse change in the financial position, business, assets, properties, or operations of Sheldon, or material interference with the sale of products sold by Sheldon, except as fully described in the Litigation List delivered by [the shareholders] to [Acme] (emphasis added).
In addition to the representations, the shareholders agreed to indemnify Acme if any representations proved incorrect. Acme retained the right, in certain circumstances, to set off any liability of the shareholders against any payment owed them by Acme. Paragraph 9.2(a) of the Agreement stated that:
the [shareholders] owning common stock of Sheldon shall jointly and severally ... indemnify [Acme] in an aggregate amount not to exceed $3,800,000 ... against any loss, cost, liability or expense (including but not limited to costs and expenses of litigation and reasonable attorneys' fees) incurred by [Acme] by reason of the incorrectness or breach of any of the representations, warranties, covenants, and agreements of the [shareholders] contained in this Agreement or given on the Closing Date. To the extent [Acme] incurs loss, cost, liability or expense in excess of $3,800,000 by reason of such incorrectness or breach, [the shareholders] owning preferred stock of Sheldon shall jointly and severally ... indemnify [Acme] against any such loss, cost, liability or expense in an aggregate amount not to exceed $500,000.... [Acme] may, at its option and without waiving any other remedies that may be available to it, satisfy its right of indemnification by setting off the amounts of any such losses, costs, liabilities, and expenses incurred by [Acme] on a pro rata basis against the amounts of principal and interest payable to [the shareholders] under the terms of the promissory notes referred to in Section 4(d) with respect to the indemnification by [the shareholders] owning preferred stock of Sheldon.
The shareholders submitted the Litigation List to Acme, but the list did not mention an incident relating to Martin Manufacturing Co., Inc. ("Martin"). Martin had purchased, in 1980, a hydraulic machine tool from Sheldon but was dissatisfied with it. On October 1, 1981, Martin filed a lawsuit against Sheldon based on that incident.
Pursuant to the Agreement, the shareholders initially received an aggregate lump sum payment of $1.8 million and received Acme's promissory notes for the remaining balance payable in two installments: July 1, 1982 and July 1, 1983. Acme paid the shareholders the initial installment, and all outstanding interest, on July 1, 1982. Acme has refused to pay the shareholders the second installment, under which Acme was obligated to pay the shareholders the remaining principal of $1,249,737.50 plus interest at the rate of 12%. By letter dated June 30, 1983, Acme claimed that it was withholding the second installment because of potential expenses from the lawsuit filed by Martin.
On May 18, 1984, the shareholders brought suit against Acme to recover the second installment and all accrued interest. Acme's answer included a general denial of the allegations of the shareholders' complaint. The answer asserted only one affirmative defense: that the complaint failed to state a claim upon which relief could be granted. No counterclaim was brought against the shareholders.
The shareholders, after the completion of discovery, moved for summary judgment. The district court, on September 14, 1987, denied the shareholders' second motion for summary judgment. The court, however, held that the complaint adequately notified Acme of the shareholders' claim that Acme did not comply with the terms of the Agreement's set-off provision. The district court also held that paragraph 9.2 of the Agreement unambiguously stated that Acme could only set off the costs actually incurred as of July 1, 1983, and not those costs which might be incurred in the future. The district court denied the motion on the ground that there was a genuine issue of material fact: the amount of any attorneys' fees incurred by Acme prior to July 1, 1983.
On November 3, 1987, Acme moved for leave to file a counterclaim instanter. Acme argued in its reply brief that the court should allow it to bring the counterclaim because the district court's September 14, 1987 ruling "changed the nature of the case." The district court denied the motion under Rule 13(f) on the ground that Acme's delay was inexcusable. The district court also found Acme's argument that the nature of the case had been changed to be disingenuous because the complaint adequately notified Acme of the set-off issue. Acme did not move for reconsideration.
On June 16, 1988, Acme filed a second motion for leave to file a counterclaim, and also filed the counterclaim as an independent action. Acme argued that because the Martin litigation had not been settled until May, 1988, its action for indemnity did not accrue until that time. The court rejected this position because of its prior ruling that Acme's right of indemnification was fixed by the contract, not by Illinois common law, and accrued the moment Acme incurred expenses in connection with the Martin litigation. The district court then denied the motion on the ground that the first motion to file a counterclaim was filed inexcusably late. See FED.R.CIV.P. 13(f). The court noted that Acme's "renewed attempt to file the same counterclaim that had been rejected four months earlier borders on the frivolous...."
The district court, when the final pretrial order was entered, denied Acme's motion in limine to exclude parol evidence offered by the shareholders to construe the meaning of § 1.12. Specifically, the shareholders argued that the phrase: "There is no pending or ... threatened claim (including any product liability or warranty claim), litigation, proceeding, order of court ... against Sheldon ..." was ambiguous. Acme argued that "threatened claim" included every request for service of one of Sheldon's machines. The district court concluded that this interpretation was incorrect because it required "threatened warranty claim" and "warranty claim" to have the same meaning. The court concluded that the drafter, Acme, did not intend the agreement to be redundant. The district court held that this phrase was ambiguous as a matter of law, and that parol evidence was admissible to resolve the ambiguities.
On December 6, 1989, the district court granted the shareholders' motion in limine to bar the testimony of Robert Lehmkuhl and Charles L. Tomlinson, both employees of Acme at the time the parties entered into the Agreement. Lehmkuhl and Tomlinson were involved in Acme's efforts to settle the Martin litigation. Acme claimed that they would testify that they discovered undisclosed defects in the type of machine purchased by Martin. The court held that their testimony was not relevant because "the defects themselves are not at issue in this case." The court noted that their testimony would be relevant if it concerned attempts to conceal defects or anticipated litigation. Because neither witness was involved with the stock...
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