In re Consolidated Industries Corp.
| Citation | 330 B.R. 227 |
| Decision Date | 07 November 2001 |
| Docket Number | Bankruptcy No. 98-40533.,Adversary No. 00-4027. |
| Parties | In re CONSOLIDATED INDUSTRIES CORP., Debtor. Enodis Corporation, Plaintiff, v. Wausau Insurance Company, et al., Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Indiana |
J. Joseph Bainton, New York, NY, John R. Burns, III, Fort Wayne, IN, for Plaintiff.
Cassandra L. Writz, Fort Wayne, IN, Danford R. Due, Mark A. Metzger, Jeffrey A. Doty, Bruce L. Kamplain, James W. Riley, Jr., Sharon Funcheon Murphy, Richard R. McDowell, Robert S. O'Dell, Richard A. Rocap, Rocap Witcheger LLP, G. Ronald Heath, Robert B. Clemens, Steven D. Groth, Indianapolis, IN, Thomas W. Yoder, James J. Shea, Fort Wayne, IN, John M. Stuckey, Stephen R. Pennell, Lafayette, IN, Robert W. Wright, Greenwood, IN, Brent D. Stratton, John H. Mathias, Robert M. Chemers, Chicago, IL, Sheila A. Ramacci, Highland, IN, Charles W. Browning, Milind Parekh, Stephen P. Brown, Bloomfield Hills, MI, for Defendants.
DECISION
By this adversary proceeding, the plaintiff, debtor's former parent, Enodis Corporation, seeks a declaratory judgment concerning its rights under a contract by which William Hall acquired all of the debtor's stock. In particular, Enodis asks the court to determine that it is entitled to cancel liability insurance it previously acquired for the debtor. The Trustee and Enodis have submitted that issue to the court for a decision upon an agreed statement of facts, and the briefs and arguments of counsel.1
Prior to January 6, 1998, the debtor was a wholly owned subsidiary of Welbilt and then Welbilt Holding Corporation. (Joint Pre-Trial Order ¶ 15(a), (b).) On that date, pursuant to a series of agreements executed by Welbilt, Welbilt Holding, William Hall and the debtor, Hall acquired all of the debtor's issued and outstanding stock. (Joint Pre-Trial Order ¶ 15(d).) As part of this agreement, Welbilt represented that it had maintained product liability insurance benefitting Consolidated for the ten year period prior to the sale and agreed that Consolidated would remain as an additional insured under those policies. (Joint Pre-Trial Order ¶ 15(f), Plaintiff's Statement of Genuine Issues ¶¶ 5, 7.) Welbilt also agreed to continue to procure and maintain product liability insurance to cover Consolidated for three years after the sale. (Joint Pre-Trial Order ¶ 15(g).) Since the insurance policies in question required Welbilt to pay a self-insured retention and to reimburse the insurance companies for various claims handling expenses when claims were made against Consolidated, Hall agreed that he would either pay these post-closing insurance costs or cause Consolidated to do so. (Joint Pre-Trial Order ¶ 15(h).) Consolidated guaranteed Hall's performance of this obligation. (Appendix of Exhibits, Exhibit A).
Prior to the petition Consolidated was named as a defendant in several class action lawsuits arising out of allegedly defective furnaces it had manufactured. This litigation has resulted in post-closing insurance costs which Enodis has had to pay and for which it is entitled to reimbursement. (Joint Pre-Trial Order ¶ 15(p), (s).) Since the date of the petition, May 28, 1998, neither Hall nor the debtor has reimbursed Enodis the amounts due it. (Joint Pre-Trial Order ¶ 15(v).) As of May 18, 1999, the unpaid post-closing insurance costs totaled $91,519.16. (Joint Pre-Trial Order ¶ 15(w).) Furthermore, Enodis will continue to incur additional costs and expenses for which it is entitled to reimbursement. (Joint Pre-Trial Order ¶ 15(aa — dd).)
The insurance policies in question provide that Welbilt may cancel them, in whole or in part, by giving written notice to the carrier. (Joint Pre-Trial Order ¶ 16(d).) Given the unreimbursed post-closing insurance costs it has already paid and faced with the prospect that it will continue to incur additional costs which will not be reimbursed, Welbilt initiated this adversary seeking a declaration that it is excused from any further obligations under the agreement. In particular, it asks the court to declare that it may proceed to cancel the debtor's insurance coverage.
Much of Plaintiff's initial argument is based upon the proposition that the agreement between it, Hall and the debtor constitutes an executory contract which was breached when the trustee failed to assume it within the sixty days following the conversion of this case to Chapter 7. See, 11 U.S.C. § 365(d)(1), (g). This has caused both parties to devote a great deal of attention to debating whether the agreement is or is not an executory contract. Yet, as this court has previously observed, the search for executoriness is often misplaced, see, In re Udell, 149 B.R. 898, 901-02 (Bankr.N.D.Ind.1992), and that observation is equally valid here. If the agreement does constitute an executory contract, it was rejected when to the Trustee failed to assume it within the time required, 11 U.S.C. § 365(d)(1), and, therefore, has been breached. See, 11 U.S.C. § 365(g)("the rejection of an executory contract ... constitutes a breach of such contract"). If, on the other hand, the agreement does not constitute an executory contract, it has been breached because Hall and the debtor have failed to reimburse Enodis the amounts due it. Either way, whether actually or only theoretically, the agreement has been breached. As a result, the court should focus its attention on the consequences of that breach and its effect on the rights of the parties, and not on whether the agreement is an executory contract.
The rights of the parties are initially determined by state law. See, e.g., Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); In re FBN Food Servs., Inc., 82 F.3d 1387, 1396 (7th Cir.1996). See also, In re C & S Grain Co., Inc., 47 F.3d 233, 237 (). Bankruptcy begins with these non-bankruptcy entitlements and then proceeds to adjust or modify them in order to accomplish the goals of the statute. As a result, the court must first consider what the rights of the parties would be under state law before it considers how those rights may have been changed by Consolidated's bankruptcy.
The court's job in construing the agreement is to "determine the intent of the parties at the time the contract was made." First Fed. Sav. Bank v. Key Markets, Inc., 559 N.E.2d 600, 603 (Ind.1990). To do so, absent ambiguity, the court should examine the language employed within the "four corners of the instrument."2 Evans v. Med. & Prof'l Collection Servs., Inc., 741 N.E.2d 795, 797 (Ind.App.2001); Abbey Villas Dev. Corp. v. Site Contractors, Inc., 716 N.E.2d 91, 99-100 (Ind.App.1999). The terms of the parties' agreement are clear and its goal is readily apparent. By it, Welbilt warranted that it had maintained product liability insurance for Consolidated's benefit for ten years prior to the sale, agreed that Consolidated would remain insured under those policies, and further agreed to procure and maintain product liability insurance for Consolidated's benefit for an additional three years. Hall, in turn, agreed to reimburse Welbilt for the sums it would be obligated to pay under those policies when claims were made against Consolidated, and Consolidated, the principal beneficiary of the insurance, guaranteed Hall's performance. The agreement involved the exchange of mutually dependent promises — in exchange for Welbilt's promise to maintain and procure insurance for Consolidated's benefit, Hall and Consolidated promised to reimburse Welbilt for the amounts that it would be obligated to pay as a result of the claims asserted against Consolidated. The intent of the parties to the agreement is illuminated by the context of the transaction, the sale of a business plagued with potential liability. Structured as it was, the agreement seems to represent a rational way of shifting the additional cost of debtor's insurance coverage from Welbilt to the parties who would benefit most from that coverage once ownership of Consolidated passed, namely to Hall and Consolidated.
When Hall and Consolidated subsequently failed to reimburse Welbilt for Consolidated's post-closing insurance expenses they breached their obligations under the agreement. This default deprived Welbilt of a substantial benefit of its bargain; it was, therefore, a material breach. See, e.g., Tomahawk Village Apartments v. Farren, 571 N.E.2d 1286, 1293 (Ind.App.1991); Goff v. Graham, 159 Ind.App. 324, 306 N.E.2d 758, 765 (1974). It is an immutable principle of contract law that, in the face of a material breach of contract, the non-breaching party may suspend its performance, see, e.g., Abbey Villas, 716 N.E.2d 91, 101-02(Ind.App.1999); American Nat'l Bank & Trust Co., v. St. Joseph Valley Bank, 180 Ind.App. 546, 391 N.E.2d 685, 687 (1979) and attempt to mitigate its damages. Indeed, the law imposes a duty on the non-breaching party to mitigate the damages it will sustain. See, Sallee v. Mason, 714 N.E.2d 757, 763 (Ind.App.1999); Sheppard v. Stanich, 749 N.E.2d 609, 612 (Ind.App.2001). In this instance, the only way Enodis can do so is by attempting to cancel Consolidated's insurance coverage. Otherwise, its damages will continue to accrue unabated. See, e.g., Nelson v. Marchand, 691 N.E.2d 1264, 1271 (Ind.App.1998). Under these circumstances, Enodis was no longer required to perform its obligations under the agreement. See, e.g., Sallee, 714 N.E.2d at 762-63; Tomahawk Village Apartments, 571 N.E.2d at 1293(citing Licocci v. Cardinal Assocs., Inc., 492 N.E.2d 48, 52 (Ind.App.1986)).
Under Indiana law, Enodis' duty to continue to pay post-closing insurance expenses and to maintain the debtor's insurance coverage was extinguished when Hall and Consolidated breached their obligation to reimburse Enodis for the costs it...
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