South Bend Lathe, Inc. v. Amsted Industries, Inc.

• Decision Date: 22 February 1991
• Docket Number: Nos. 90-1978,90-2041,s. 90-1978
• Citation: 925 F.2d 1043
• Parties: Prod.Liab.Rep.(CCH)P 12,740 SOUTH BEND LATHE, INC., Plaintiff-Appellee-Cross Appellant, v. AMSTED INDUSTRIES, INC., Defendant-Appellant-Cross Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1043

925 F.2d 1043

Prod.Liab.Rep.(CCH)P 12,740

SOUTH BEND LATHE, INC., Plaintiff-Appellee-Cross Appellant, v. AMSTED INDUSTRIES, INC., Defendant-Appellant-Cross Appellee.

Nos. 90-1978, 90-2041.

United States Court of Appeals Seventh Circuit.

Argued Jan. 8, 1991.

Decided Feb. 22, 1991.

James H. Pankow, John B. Ford, Jones, Obenchain, Ford, Pankow & Lewis, South Bend, Ind., for plaintiff-appellee-cross appellant.

Alan S. Rutkoff, David Bayless, McDermott, Will & Emery, Chicago, Ill., Terence

M. Austgen, Singleton, Levy & Crist, Munster, Ind., Lawrence L. Summers, Chicago, Ill., for defendant-appellant-cross appellee.

Before BAUER, Chief Judge, WOOD, Jr., Circuit Judge, and ESCHBACH, Senior Circuit Judge.

ESCHBACH, Senior Circuit Judge.

This appeal concerns the meaning of an indemnity provision in a contract for the sale of a business. By an agreement effective June 30, 1975 (the "Agreement"), Amsted Industries, Inc. ("Amsted") sold its Johnson toolmaking division to LWE, Inc., which we refer to by its current name, South Bend Lathe, Inc. ("South Bend"). As part of the sale, the parties divided responsibility for Johnson's liabilities. South Bend assumed liability for defects in Johnson products shipped after the effective date of the Agreement. Although it now disputes the point, Amsted essentially took responsibility for defects in Johnson products shipped before that date, and agreed to indemnify South Bend for claims that South Bend might have to pay arising out of such products.

Product liability suits arising from Johnson products shipped from 1937 to 1962 forced South Bend to pay $224,724.43 in damages and legal fees. Amsted, however, denied any responsibility to indemnify South Bend for these suits, leading South Bend to bring the present diversity action arising under Illinois law. Following a bench trial, the District Court awarded South Bend indemnity for the $224,724.43, plus legal fees in the present case of $162,885.86, and declared the rights and obligations of the parties regarding future product liability claims. Amsted appeals this judgment, and South Bend cross-appeals the District Court's denial of prejudgment interest. We affirm except as to the denial of prejudgment interest. The expenses that are the basis for the District Court's judgment were known to the penny at the time that South Bend incurred them, mandating an award of prejudgment interest under Illinois law.

Amsted's Obligation to Indemnify South Bend

The District Court concluded that the Agreement requires Amsted to indemnify South Bend for the $224,724.43 it has paid in product liability claims and attorneys' fees arising from defects in Johnson products shipped from 1937 to 1962. The District Court also ordered Amsted to pay South Bend's attorneys' fees of $162,885.86 in the present action, which Amsted apparently disputes only to the extent that the underlying indemnity award was improper. In any event, it has not raised any arguments to distinguish the two. This Court reviews the District Court's award de novo because it turns solely on the written words of the Agreement. See, e.g., Lowrance v. Hacker, 888 F.2d 49, 51 (7th Cir.1989).

The Agreement's terms lead us to the same conclusion that the District Court reached. Under the Agreement, South Bend is responsible for "product liability claims arising with respect to goods ... which are shipped after June 30, 1975 " and "none other." Agreement p 3.1 (emphasis added). For its part, Amsted must indemnify South Bend for "any liability or obligation of Amsted other than the liabilities and obligations to be assumed by [South Bend]." Id. at p 10.1. The most reasonable interpretation of this language is that South Bend is responsible for defects in products shipped after June 30, 1975, and Amsted for defects in products shipped before. This interpretation establishes Amsted's obligation to indemnify South Bend. The claims at issue are product liability claims arising from Johnson products shipped before June 30, 1975. Amsted, not South Bend, bears the responsibility for such claims under the Agreement.

Amsted seeks to avoid this conclusion by focusing on the nature of the claims in dispute. Amsted contends, and South Bend apparently agrees, that those claims arise under the "product line" rule of liability, which several states (but not Illinois) have adopted. Under this rule, a corporation that sells its goods under a trade name previously used by another company may be liable for defects in the prior company's products, at least where the prior company no longer exists. See, e.g., Ramirez v. Amsted Industries, Inc., 86 N.J. 332, 431 A.2d 811 (1981); Ray v. Alad Corp., 19 Cal.3d 22, 136 Cal.Rptr. 574, 560 P.2d 3 (1977). The rationale is, in part, that the later company profits from the good will that the prior company established in the trade name, so the later company should bear the economic consequences of past mistakes rather than the random users of the product who suffer injury. See, e.g., Ramirez, 431 A.2d at 820; Ray, 136 Cal.Rptr. at 576, 560 P.2d at 5.

The product line rule had not been accepted by any state appellate court when the Agreement was executed in 1975. Amsted argues that the Agreement must be interpreted in light of the law in effect at the time of its execution, see, e.g., Lincoln National Life Ins. Co. v. Watson, 71 Ill.App.3d 900, 903, 28 Ill.Dec. 339, 342, 390 N.E.2d 506, 509 (1979), and contends that this precludes indemnity for then-nonexistent liabilities. Amsted further argues that the Agreement's language supports its view. Under the Agreement, Amsted is obligated to indemnify South Bend only for liabilities "of Amsted." Agreement, p 10.1. But the claims in dispute are not liabilities "of Amsted," the argument goes, because they arise from products shipped from 1937 to 1962, before Amsted acquired Johnson. Under this view, any liability that South Bend faces from these claims is a liability "of South Bend," not "of Amsted," in that Amsted and South Bend are equally innocent of any wrongdoing. Amsted buttresses its position with the Illinois rule that indemnification agreements are to be construed against the indemnitee. See, e.g., Ervin v. Sears Roebuck & Co., 127 Ill.App.3d 982, 82 Ill.Dec. 709, 715, 469 N.E.2d 243, 249 (1984). In particular, "an agreement will not be construed as indemnifying a party against its own strict liability unless the language of that agreement clearly and specifically shows that this was the intent of the parties." Smith v. Clark Equipment Co., 136 Ill.App.3d 800, 805, 91 Ill.Dec. 520, 524, 483 N.E.2d 1006, 1010 (1985). Amsted also argues that indemnification conflicts with the purposes of the product line rule. Again, part of the rationale for that rule is that a party that derives current benefit from a trade name should bear the liabilities associated with that name. Amsted urges that its sale of Johnson to South Bend ended any benefit that Amsted could derive from the Johnson name. In sum, Amsted argues that the parties' intent, the contractual language, Illinois' rules of construction, and the purposes of the product line rule are all inconsistent with requiring Amsted to indemnify South Bend for liabilities arising under the rule.

These points are unpersuasive. Amsted's strongest position would be that the non-existence of product line liability in 1975 shows that the Agreement is ambiguous. Ambiguity may be intrinsic in the words of a contract or may arise from extrinsic facts. See generally Federal Deposit Insurance Corp. v. W.R. Grace & Co., 877 F.2d 614, 620-621 (7th Cir.1989) (applying Illinois law). Along these lines, Amsted could argue that the subsequent change in the law renders ambiguous the otherwise clear language of the Agreement. The parties spoke plainly, but they still may not have meant for their plain language to apply to a form of liability that did not exist at the time. If Amsted had argued that the Agreement suffers from this kind of ambiguity, it might have been able to present evidence in the District Court bearing on the parties' intent regarding indemnification.

The problem is that Amsted's position here and in the District Court has been that the Agreement is not ambiguous and that extrinsic evidence should not be considered to determine its meaning. See Memorandum and Order (March 30, 1990), p. 7; Amsted's Reply Brief, pp. 6-7. This position should not be thought a blunder on Amsted's part. The outside evidence includes an admission by Amsted's counsel in other litigation that it is liable to South Bend for indemnity of the product line claims at issue here, ¹ and suggests a course of dealing between the parties that undercuts Amsted's current position. Amsted may well have concluded that it stood a better chance of prevailing by confining the case to the words of the Agreement and avoiding any argument that the Agreement has extrinsic ambiguity.

Although Amsted's choice may have been sound strategy, the cost to Amsted is that it becomes irrelevant that product line liability did not exist at the time that the parties executed the Agreement. True, Illinois law requires that a contract be interpreted in light of the law that exists at the time of its execution. But the words of the Agreement leave nothing to interpret. The Agreement's language is intrinsically plain in apportioning responsibility for "product liability claims." Agreement, p 3.1(b). Without dispute, product line claims are a form of "product liability claim," and they were recognized as such in 1975 even by courts that rejected the doctrine. See, e.g., Ortiz v. South Bend Lathe, 46 Cal.App.3d 842, 120 Cal.Rptr. 556 (1975). Product line claims are thus within the terms of the Agreement. Having given up the opportunity to argue extrinsic ambiguity, Amsted must live with the Agreement's terms.

When it tries to work within those terms, Amsted fares no better. As Amsted has emphasized, the Agreement...