Hawkins, Inc. v. American International Specialty Lines Insurance Company, No. A07-1529 (Minn. App. 10/14/2008)
| Decision Date | 14 October 2008 |
| Docket Number | No. A07-1529.,A07-1529. |
| Parties | Hawkins, Inc., et al., Appellants, v. American International Specialty Lines Insurance Company, Respondent. |
| Court | Minnesota Court of Appeals |
Appeal from the District Court, Hennepin County, File No. 27-CV-06-7489.
Richard D. Snyder, Laurie J. Miller, Edward T. Matthews, Fredrickson & Byron, P.A., (for appellants).
Charles E. Spevacek, Jenny L. Sautter, Meagher & Geer, P.L.L.P., (for respondent).
Lori L. Barton, Paul D. Peterson, Harper & Peterson, P.L.L.C., (for amicus curiae The Minnesota Association for Justice).
Considered and decided by Kalitowski, Presiding Judge; Hudson, Judge; and Collins, Judge.
UNPUBLISHED OPINION
On appeal from a grant of summary judgment in favor of respondent-insurer, appellants-insureds argue that the district court erred by ruling that Minnesota law governed their claims alleging that respondent breached its contractual obligations under two insurance policies, and granting respondent summary judgment on those claims. We affirm.
This case involves a dispute regarding the rights and obligations of the parties to two insurance policies issued by respondent American International Specialty Lines Insurance Company (AISLIC) to appellants Hawkins, Inc., et al., (Hawkins) in effect from September 30, 1998, to September 30, 2001. The primary policy had a per-occurrence limit of $1 million and an aggregate limit of $2 million; the umbrella policy had per-occurrence and aggregate limits of $10 million.
In April of 2000, Hawkins entered into an asset-purchase agreement to acquire all assets of appellant St. Mary's Chemicals, Inc., doing business as Universal Chemical (Universal),1 a repackager of bulk pharmaceutical compounds. Under the terms of the asset-purchase agreement, Universal expressly indemnified Hawkins for any breach of representation or breach of warranty as to the merchantability of the inventory it sold to Hawkins.
The incident that ultimately gave rise to litigation between appellants and AISLIC occurred in California. In December of 2000, a seven-year old girl, M.C., suffered a life-threatening reaction after taking prescribed medication. M.C. was in critical condition for a period of time, but eventually recovered. It was later discovered that M.C.'s reaction was the result of having taken mislabeled medication; she had been prescribed an anti-malarial medication, but the prescription's container contained an anti-hypertension medication. In September of 2001, M.C.'s parents (the plaintiffs), on her behalf and their own behalf, filed a lawsuit in California state court against several defendants, including Hawkins and Universal. The plaintiffs asserted, among others, claims of strict liability, breach of warranty, and negligence, and they sought both compensatory and punitive damages.
AISLIC retained the California law firm of Schaffer, Lax, McNaughton & Chen (Schaffer Lax) to defend both Hawkins and Universal. Within one month after the lawsuit was commenced, a Schaffer Lax attorney left a telephone message with Hawkins's corporate counsel inviting him to contact Schaffer Lax to discuss the lawsuit. Schaffer Lax engaged in discovery to evaluate the plaintiffs' damages claims, as well as to assess the potential liability of the respective defendants. Schaffer Lax informed AISLIC about the developments in the lawsuit, and Schaffer Lax's substantive communications regarding the developments generally were copied to Hawkins's corporate counsel or a Hawkins corporate officer, or both.
In September of 2002, the parties to the lawsuit engaged in mediation. The record includes two letters from Schaffer Lax that were copied to Hawkins's corporate counsel indicating that this mediation would be held in September of 2002, and that Hawkins's corporate counsel "should also plan on attending" the mediation. Following mediation, Schaffer Lax sent a letter dated September 9, 2002, to AISLIC, Hawkins's corporate counsel, and Hawkins's Vice President, Dan Soderlund, advising that "[n]o demand was received and no offer was made," and that "[w]e did not anticipate that the mediation would result in a resolution." The letter also advised that "although punitive damages have been alleged, we have never looked at this case as one that is legitimately having punitive exposure," and, "[b]ased upon the discussion with the mediator, I believe that he concurs with this analysis." Regarding punitive damages, the letter explained:
[E]ven assuming there was a basis of a punitive damage claim, it would be against Universal and not Hawkins, and given that Universal is no longer in business any award of punitive damages against them would not be recoverable, as this would be liability that Hawkins would not have assumed, as I did not believe that there were any independent acts on the part of Hawkins that would rise to the level of punitive exposure.
In addition, the letter stated that the mediator had indicated that he believed that the settlement value of the case, without regard to punitive damages, was "something in the area of $500,000," although no specific demand had been received from the plaintiffs. The letter further stated that: (1) Schaffer Lax had notified the mediator that it was prepared to discuss settlement up to $200,000; (2) AISLIC had given settlement authority up to $250,000; and (3) additional authority from AISLIC would have been available had Schaffer Lax requested it.
Following the September 2002 mediation, discovery continued, and the plaintiffs began to articulate the basis for their punitive-damages claim. In May of 2003, Schaffer Lax informed AISLIC and Hawkins of the plaintiffs' position that they had a viable punitive-damages claim on the theory that, because Hawkins's acquisition of Universal "was spearheaded by Dan Soderlund," who is the brother to Patrick and William Soderlund, the owners of Universal, the due-diligence inquiry relative to potential quality-control issues "was not full and complete."
By letter dated September 18, 2003, Schaffer Lax informed AISLIC and Hawkins that the plaintiffs had made a demand for settlement in the amount of $3,999,999.97. Schaffer Lax offered to meet with Hawkins's board members, corporate officers, and corporate counsel before the second mediation, scheduled for October 7, 2003. Following receipt of the letter, Hawkins's corporate counsel wrote to AISLIC stating: "We are aware that the plaintiffs have made a claim for punitive damages, and that California law does not allow indemnification for punitive damage awards."
Schaffer Lax attorneys, Hawkins's corporate counsel, two Hawkins officers, and three AISLIC representatives attended the second mediation session. In a letter to AISLIC and Hawkins summarizing the discussions during the second mediation, Schaffer Lax reported that the plaintiffs continued to demand $4 million and that AISLIC had offered $850,000 for a full and complete resolution of the plaintiffs' claims against Hawkins and Universal. Schaffer Lax noted that it was their impression that the mediator did not agree with the plaintiffs' $4 million assessment of the value of the case. Schaffer Lax also advised that based on the discussions that took place during the second mediation, it was their view that the case could probably be settled for an amount between $2 million and $2.5 million.
In late October of 2003, a court-ordered settlement conference was held. Thereafter, Schaffer Lax informed AISLIC and Hawkins that the plaintiffs increased their settlement demand to $4.5 million. Schaffer Lax advised AISLIC and Hawkins that the district court suggested a settlement in the area of $2 million, but that the plaintiffs had replied that they were not ready to discuss a particular settlement amount until they received the results of M.C.'s brain scan. Schaffer Lax informed AISLIC and Hawkins that a second settlement conference was scheduled for November 10, 2003, and advised that persons from AISLIC and Hawkins with settlement authority should attend.
Shortly before the second settlement conference, AISLIC retained another law firm, Lynberg & Watkins, to serve as trial specialists. At the settlement conference, AISLIC maintained its offer of $850,000, but informed the district court that it would offer up to $1 million if that would settle the case. The plaintiffs held to their $4.5 million demand. Shortly thereafter, Hawkins informed Universal that the mediation and settlement attempts had been unsuccessful and reminded Universal of the likelihood that Hawkins would have to pay a sizeable amount of money not covered by insurance, in which case Hawkins would "invoke the indemnity provision" of the purchase agreement.
On January 20, 2004, an expert for the plaintiffs was deposed and a Food and Drug Administration (FDA) report from 1999 regarding quality-control concerns at Universal was disclosed. The report, of which Hawkins had not been made aware during its acquisition of Universal: (1) described a broad range of violations, irregularities, and regulatory infractions; (2) indicated a "much higher degree of FDA scrutiny and displeasure with Universal than was ever disclosed by [Universal] during Hawkins's due diligence investigation"; and (3) reflected a "defiant attitude" by Universal toward the FDA and its inspectors.
Also in January of 2004, AISLIC and Hawkins presented the case to three mock jury panels, with the mock plaintiffs seeking $4 million in compensatory damages and $15 million in punitive damages. One panel awarded $1.355 million in compensatory damages and $10 million in punitive damages; the second awarded $1.18 million in compensatory damages and $5 million in punitive damages; and the third panel awarded $3.436 million in compensatory damages and $10 million in punitive damages.
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