Kaydon Acquisition Corp. v. Custum Mfg., Inc.

Decision Date11 February 2004
Docket NumberNo. C 03-3004-MWB.,C 03-3004-MWB.
Citation301 F.Supp.2d 945
PartiesKAYDON ACQUISITION CORP., Plaintiff, v. CUSTUM MANUFACTURING, INC., f/k/a Gold Star Manufacturing, Inc., America Central Industries, Inc., Lloyd Mefferd, and Floyd Mefferd, Defendants.
CourtU.S. District Court — Northern District of Iowa

Edward M. Mansfield, Holly M. Logan, James R. Swanger, Michael R. Reck, Belin, Lamson, McCormick, Zumbach, Flynn, Des Moines, IA, for Plaintiff.

Paul D. Lundberg, Lundberg Law Firm, Sioux City, IA, Redge O. Berg, Spencer, IA, for Defendants/Counter Claimant.

James R. Swanger, Belin, Lamson, McCormick, Zumbach, Flynn, Des Moines, IA, for Counter Defendant.

MEMORANDUM OPINION AND ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

BENNETT, Chief Judge.

TABLE OF CONTENTS

                I. INTRODUCTION .................................................................. 949
                
                A. Factual Background ......................................................... 949
                     B. Arguments Of The Parties ................................................... 952
                 II. LEGAL ANALYSIS ................................................................ 953
                     A. Standards For Summary ary Judgment ......................................... 953
                     B. Principles Of Iowa Indemnity Law ........................................... 954
                     C. Kaydon's Indemnity Claim ................................................... 956
                        1. Applicability of the indemnity provisions to the Irgens litigation ...... 956
                        2. What were the Mefferd Defendants required to do? ........................ 957
                           a. Was there a duty "to defend"? ........................................ 957
                           b. Was there an "on-going duty" to pay attorneys' fees and costs? ....... 958
                        3. Anticipatory repudiation ................................................ 961
                           a. Repudiation based on "on-going duties" ............................... 961
                           b. Repudiation based on assertion that Kaydon was the "wrong
                party" ............................................................. 962
                           c. Repudiation based on a statement of inability to perform ............. 962
                        4. Kaydon's failure to obtain consent to settlement ........................ 964
                           a. The "written consent" clause ......................................... 964
                           b. The "context" of the clause .......................................... 965
                           c. Effect of settlement without written consent ......................... 966
                        5. "Absurd" and "unreasonable" result ...................................... 966
                III. CONCLUSION .................................................................... 969
                

This is an action for indemnity, filed January 16, 2003, by plaintiff Kaydon Acquisition Corporation (Kaydon) against defendants Custum Manufacturing, Inc., formerly known as Gold Star Manufacturing, Inc., American Central Industries, Inc. (ACI), and Lloyd and Floyd Mefferd (collectively, the Mefferd Defendants), following settlement of a products liability action against Kaydon, the Mefferd Defendants, and others in California state court. This matter comes before the court pursuant to the Mefferd Defendants' December 8, 2003, motion for summary judgment (docket no. 13), and Kaydon's January 4, 2004, cross-motion for summary judgment (docket no. 14). The court heard oral arguments on the parties' cross-motions for summary judgment on February 6, 2004. At the oral arguments, Kaydon was represented by Edward M. Mansfield of Belin, Lamson, McCormick, Zumbach, Flynn, P.C., in Des Moines, Iowa, and the Mefferd Defendants were represented by Paul D. Lundberg of the Lundberg Law Firm, P.L.C., in Sioux City, Iowa. The pending motions are now fully submitted.

I. INTRODUCTION
A. Factual Background

Rather than attempt an exhaustive survey of the facts, undisputed and disputed, in this case, the court will provide here sufficient factual background to the parties' dispute to put in context their arguments concerning their cross-motions for summary judgment on Kaydon's indemnity claim against the Mefferd Defendants. Additional facts, or factual disputes, will be discussed as they become relevant in the court's legal analysis.

The parties agree that Kaydon acquired the assets of the Mefferd Defendants' hydraulic cylinder manufacturing business on March 11, 1997, under an Asset Purchase Agreement with the Mefferds, American Central Industries, Inc., and Custum Manufacturing, Inc., d/b/a Gold Star Manufacturing, Inc.1 As to indemnity of the sellers, i.e., the Mefferd Defendants, the pertinent provisions of the Asset Purchase Agreement provided as follows:

12.2 Indemnification by Seller. Seller, ACI and the Mefferds shall, jointly and severally, indemnify and hold Buyer (and its shareholders, directors, officers, employees and affiliates) harmless from and against any and all claims, liabilities (including any strict liabilities with respect to any Loss specified under clause (iv) below), fines, penalties, natural resource damages, losses, damages, (including incidental or consequential damages such as lost profits resulting from any disruption of operation of the Assets), costs and expenses (including costs and counsel fees) incurred by Buyer from or related to any of the following (hereinafter called a "Loss" or "Losses"):

* * * * * *

(iii) any product liability claim or other claim for the breach of any express or implied warranty, and any other claim of whatever nature, and from all damages resulting therefrom, which may be made in connection with the sale of products manufactured by Seller prior to the Closing Date[.]

Defendants' Appendix at 29 (emphasis added). Certain additional provisions of the Asset Purchase Agreement apply to the prosecution and settlement of claims to which indemnity may apply:

12.4 Indemnification Notice, etc.

(a) If any action, suit or proceeding shall be commenced, or any claim or demand shall be asserted, in respect of which a party entitled to indemnification pursuant to this Agreement (the "Indemnitee") demands indemnification under this Section 12, the party from which such indemnification is demanded under this Section 12 (the "Indemnitor") shall be notified to that effect with reasonable promptness and shall have the right to assume entire control of its defense (including the selection of counsel), subject to the right of the Indemnitee to participate (with counsel of its choice) in, the defense, compromise or settlement thereof.

* * * * * *

(c) The Indemnitee shall cooperate fully in all respects with the Indemnitor in any such defense, compromise or settlement, including, without limitation, by making available all pertinent information under its control to the Indemnitor. The Indemnitor will not compromise or settle any such action, suit, proceedings, claim or demand without the prior written consent of the Indemnitee; provided, however, that in the event such consent is withheld, then the liabilities of the Indemnitor shall be limited to the total sum representing the amount of the proposed compromise or settlement and the amount of counsel fees accumulated at the time such consent is withheld. The Indemnitor shall not be liable for any settlement by Indemnitee of any action, suit, proceedings, claim or demand, unless the Indemnitee obtains the prior written consent of the Indemnitor.

Defendants' Appendix at 30-31 (emphasis added).

By letter dated August 17, 2001, Kaydon "demand[ed] that [the Mefferd Defendants] indemnify and hold Kaydon harmless pursuant to Paragraph 12.2 of the Asset Purchase Agreement" in litigation brought by James and Robert Irgens against Kaydon in the Superior Court of California for the County of San Diego arising from the alleged malfunction of a cherry picker, which utilized a hydraulic cylinder manufactured by the Mefferd Defendants prior to March 11, 1997. See Defendants' Appendix at 36. Although this initial demand to "indemnify and hold harmless" tracks the language of Paragraph 12.2 of the Asset Purchase Agreement, in a subsequent paragraph of the letter, Kaydon "demand[ed] that [the Mefferd Defendants] defend and indemnify it in relation to this matter." Id. The letter continued,

Please note that if [the Mefferd Defendants] do not assume Kaydon's defense in this matter in a timely manner, Kaydon will provide its own defense and initiation [sic] litigation against the indemnitors to recoup the expenses incurred in relation to the above litigation, including all costs and attorneys fees.

Id. at 37. Thus, Kaydon demanded not only "indemnity," but a "defense" by the Mefferd Defendants.

By letter dated August 21, 2001, counsel for the Mefferd Defendants advised Kaydon that he "d[id] not understand how Kaydon could have been brought into this lawsuit [by the Irgens plaintiffs] as a party"; advised Kaydon to argue that Kaydon was not a proper party; and stated that "[i]t is further our position that there is no indemnity in this instance, because Kaydon is obviously not an appropriate party," where Kaydon did not purchase the Custum Manufacturing corporation, but only its assets and a few specifically identified liabilities. See Kaydon's Appendix at 185-86. The record does not show whether Kaydon ever challenged its status as a party to the Irgens litigation, as suggested by the Mefferd Defendants, based on the theory that Kaydon did not purchase the liabilities of Custum Manufacturing, and thus was not a true "successor" to Custum Manufacturing, where the hydraulic cylinder in question was undisputedly manufactured before Kaydon bought the Mefferd Defendants' assets.

Although the Mefferd Defendants were eventually added as defendants in the Irgens litigation, Kaydon and the Mefferd Defendants were represented by separate counsel for almost all of that litigation. The parties agree that, despite several additional demands from Kaydon...

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