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INDUSTRIAL ALLOY FABRICATORS, INC., et al. v. WILLIAMS INDUSTRIES, INC. et al.


INDUSTRIAL ALLOY FABRICATORS,
INC., et al.

v.

WILLIAMS INDUSTRIES, INC. et
al.


April 16, 1999
Record No. 981093

INDUSTRIAL ALLOY FABRICATORS, INC., ET AL.

v.

WILLIAMS INDUSTRIES, INC., ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
Present: All the Justices
OPINION BY CHIEF JUSTICE HARRY L. CARRICO


This is an indemnification and warranty case
involving the purchase of corporate assets by Industrial Alloy
Fabricators, Inc. (Industrial Alloy) and Precision Components
Corporation (Precision Components) from Williams Industries, Inc.
(Williams Industries) and IAF Transfer Corporation (IAF
Transfer). From a judgment in favor of Williams Industries and
IAF Transfer, we awarded Industrial Alloy and Precision
Components this appeal.

Industrial Alloy is a Pennsylvania corporation
with its principal place of business in Richmond, Virginia. At
all relevant times, it has been engaged in the business of
providing customers with design and production of custom pressure
vessels, tanks, reactors, distillation columns, and other process
equipment. Precision Components, which is also a Pennsylvania
corporation, is "the majority holder" of Industrial
Alloy. Precision Components’ principal place of business is
in York, Pennsylvania.

Williams Industries is a Virginia corporation
with its principal place of business in Fairfax County. IAF
Transfer is also a Virginia corporation based in Fairfax County,
and it is the wholly owned subsidiary of Williams Industries. IAF
Transfer formerly was known as Industrial Alloy Fabricators, Inc.
(a Virginia corporation), but changed its official corporate name
to IAF Transfer Corporation (a Virginia corporation) about the
time the parties entered into an "Asset Purchase
Agreement" (the Agreement), which is at the heart of the
present controversy.

The Agreement is dated October 31, 1994.
Pursuant to its terms, Precision Components and Industrial Alloy
(the Buyers) agreed to purchase for $3,600,000 all the assets,
including the corporate name, of the former Industrial Alloy
Fabricators, Inc. from IAF Transfer and Williams Industries (the
Sellers). The Agreement provided that it was to be governed by
and construed in accordance with the laws of the Commonwealth of
Pennsylvania.

In Sect. 9.1 of the Agreement, the Sellers
agreed to indemnify the Buyers "against and in respect of,
any and all claims, damages, actions, judgments, losses,
liabilities, and expenses, including reasonable fees and
disbursements of counsel, incurred by [the Buyers] arising from
or in connection with . . . (a) all Liabilities of [the
Sellers], whether accrued, absolute, fixed, contingent or
otherwise, other than Assumed Liabilities." The Sellers
further agreed in Sect. 9.1(b) to indemnify the Buyers
against "any breach of any covenant or obligation of [the
Sellers] incurred under this Agreement, or because any
representation or warranty by [the Sellers] contained herein
. . . shall be false or misleading."

In Sect. 2.2 of the Agreement, the Buyers
assumed certain liabilities shown on an October 31, 1994 balance
sheet as well as liabilities or obligations arising under certain
contracts. Section 2.1 provided, however, that, except for the
assumed liabilities, the Buyers would not be "liable for any
debt, claim, responsibility, damages, fines, penalties, costs,
expenses, liability or obligation of [the Sellers] . . . whether disclosed or undisclosed . . .
fixed or contingent [and] whether due or to become due."

Section 6.14 of the Agreement provided that the
Sellers shall comply with the provisions of the Virginia Bulk
Sales Act, Code Sects. 8.6-101 through -111, "in
connection with this sale of assets."
[1] In this
section of the Agreement, the Sellers also warranted that
"there are no creditors of any type or nature which have not
specifically been disclosed by identity and amount" to the
Buyers.

Section 9.3 of the Agreement required the
"Indemnified Party" to notify the "Indemnifying
Party" by registered mail whenever any claim for
indemnification arises under the Agreement. Section 9.4 gives the
"Indemnifying Party" the right to participate in the
defense of any claim or demand by any third party against the
"Indemnified Party." And Sect. 9.5 provided that
"the Indemnified Party shall make no settlement of any
claim that would give rise to liability on the part of the
Indemnifying Party under an indemnity contained in this Section 9
without the written consent of the Indemnifying Party
."
(Emphasis added.)

At the time the parties entered into the
Agreement in October 1994, there was pending in the United States
District Court for the Middle District of North Carolina a
products liability action which had been initiated on March 31,
1994, by Unitex Chemical Corporation against the former
Industrial Alloy Fabricators, Inc. Unitex Chemical Corp. v.
Industrial Alloy Fabricators, Inc.
, No. 2:94CV00164 (M.D.
N.C., Greensboro Div.) (the North Carolina litigation). It was
stipulated below that the Buyers, prior to their purchase of the
assets in question, received a letter signed by counsel for the
Sellers which provided a description and analysis of litigation
pending against the former Industrial Alloy Fabricators, Inc.,
including the North Carolina litigation. It was further
stipulated that the letter was incorporated by reference into the
Agreement. However, it is undisputed that the claim asserted in
the North Carolina litigation was not one of the liabilities
assumed by the Buyers pursuant to Sect. 2.2 of the
Agreement.

Core States Bank, N.A. (the Bank), had agreed
to finance the Buyers’ acquisition of the assets, and the
Bank wanted to protect the collateral that would act as security
for the debt. Although the Agreement required the Sellers to
furnish the Buyers a list of the Sellers’ creditors and the
Buyers had requested such a list, none had been furnished as the
date approached for closing under the Agreement, and the Bank
refused to release the funds. As a direct result, the parties and
the Bank entered into an escrow agreement, which provided for the
establishment of an escrow account to ensure the Sellers’
compliance with the Virginia Bulk Sales Act. Although the Sellers
believed the Bulk Sales Act did not apply to the transaction
involved in the Agreement, they acquiesced in and agreed to the
Buyers’ publication of a notice in the Richmond
Times-Dispatch
of the Buyers’ intent to pay the
Sellers’ debts in full.
[2]

The notice, prepared by the Buyers’ then
counsel, stated that a bulk transfer was about to be made by the
former Industrial Alloy Fabricators, Inc., as the seller, to the
new Industrial Alloy Fabricators, Inc., as the buyer, and that
"Buyer has become bound by the terms of a certain agreement
between it and Seller to pay Seller’s debts in full."
The notice appeared in the newspaper on November 3 and 10, 1994.
The parties then proceeded to close the transaction for the asset
purchase.

On September 18, 1995, Unitex Chemical
Corporation, the plaintiff in the North Carolina litigation,
filed a complaint against the Buyers in the United States
District Court for the Eastern District of Virginia alleging a
violation of the Bulk Sales Act for the Buyers’ failure to
give Unitex notice of the asset transfer. Unitex Chemical
Corp. v. Industrial Alloy Fabricators, Inc.
, Civil Action No.
3:95CV777 (E.D. Va., Richmond Div.) (the Virginia Bulk Sales
litigation). In their answer filed January 6, 1996, the Buyers
responded that they "were not required to provide [Unitex
notice] because the transaction was exempted, pursuant to
Virginia Code Sect. 8.6-103." Unitex then sought leave
to amend its complaint to seek a declaratory judgment that the
Buyers had assumed the debts of the former Industrial Alloy
Fabricators, Inc. by virtue of the notice published in the Richmond
Times-Dispatch
.

The district court never ruled on Unitex’s
motion to amend because, on March 20, 1996, the Buyers entered
into a "Stipulation and Settlement Agreement" with
Unitex "to settle all claims asserted" in the Virginia
Bulk Sales litigation. Pursuant to this agreement, Unitex
dismissed the Virginia Bulk Sales litigation in exchange for the
Buyers’ agreement to pay any judgment returned for Unitex in
the North Carolina litigation.

The Sellers were aware of the filing of the
complaint in the Virginia litigation and of the fact that
depositions were scheduled to be taken in the case. However, the
Buyers neither gave the Sellers prior notice of the settlement of
the litigation nor sought their consent to the terms of the
settlement agreement.

The Buyers participated in settlement
discussions concerning the claim asserted in the North Carolina
litigation and ultimately contributed $300,000 toward settlement
of that claim. The parties to the litigation entered into a
"Settlement Agreement and Mutual Release of All Claims"
dated June 10, 1996.

The Buyers then made demand upon the Sellers to
comply with the indemnification provisions of the Agreement. The
Sellers made no response to the demand, and, on October 3, 1996,
the Buyers filed in the court below a two-count motion for
judgment against the Sellers seeking to recover the $300,000 the
Buyers had contributed to settlement of the North Carolina
litigation, plus attorneys’ fees and costs.

In Count I of the motion for judgment, the
Buyers alleged a breach of warranty by the Sellers for their
failure to disclose all the creditors of the former Industrial
Alloy Fabricators, Inc. In Count II, the Buyers sought to enforce
the indemnification provisions of the Agreement. In their grounds
of defense, the Sellers responded, inter alia, that
they were not liable to the Buyers because the sums for which the
Buyers sought indemnification "were the product of a
settlement [of the Virginia Bulk Sales litigation] of which [the
Sellers] were given no advance notice, and to which [the Sellers] did not consent."

Both the Buyers and the Sellers filed motions
for summary judgment. The trial court denied the Buyers’
motion and took the Sellers’ motion under advisement. At a
bench trial, the Sellers contended that the Buyers were not
entitled to recover because they failed to give notice of, or
obtain the Sellers’ consent to, the settlement of the
Virginia Bulk Sales litigation, as required by Sects. 9.3
and .5 of the Agreement. The Buyers contended that the notice and
consent provisions of the Agreement were not applicable because
the Sellers’ liability to indemnify the Buyers did not arise
from the settlement of the Virginia Bulk Sales litigation.
Rather, the Buyers said, the Sellers’ liability was a
preexisting obligation arising from the publication in the Richmond
Times-Dispatch
of the notice whereby the Buyers agreed to be
bound to pay the Sellers’ obligations in full, in which
publication the Sellers acquiesced.

Upon conclusion of the trial, the court issued
a letter opinion, which it incorporated into its final order by
reference. The court rejected the Buyers’ contention that
the notice and consent provisions of the Agreement were not
applicable and agreed with the Sellers that the Buyers’
"failure to adhere to [the consent requirement of] Section
9.5 of the Asset Purchase Agreement will preclude the [Buyers] from obtaining indemnification for their contribution to the
North Carolina litigation."

As noted previously, the Agreement provides
that it is to be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania. In that Commonwealth,
"indemnification clauses are generally ‘not favored by
the law’ and are subject to a strict construction compelling
an interpretation ‘against the party seeking their
protection.’" Lackie v. Niagara Mach. & Tool
Works
, 559 F. Supp. 377, 378 (E.D.Pa. 1983) (quoting Dilks
v. Flohr Chevrolet, Inc.
, 192 A.2d 682, 687 (Pa. 1963)); see
also Kiewit Eastern Co. v. L & R Constr. Co.,
44 F.3d 1194, 1202 (3d Cir. 1995) (Pennsylvania law requires that
an indemnity agreement be strictly construed against party
asserting it.)

In the interpretation of a contract,
Pennsylvania law requires that "‘each and every part of
it must be taken into consideration and given effect, if
possible, and the intention of the parties must be ascertained
from the entire instrument.’" Bethlehem Steel Corp.
v. MATX, Inc.
, 703 A.2d 39, 42 (Pa. Super. 1997) (quoting Marcinak
v. Southeastern Greene School District
, 544 A.2d 1025, 1027
(Pa. Super. 1988)); see also Department of Transp. v.
Manor Mines, Inc.
, 565 A.2d 428, 432 (Pa. 1989) (when
interpreting a contract, court must give effect to all its
provisions).

With respect to indemnification, the common law
of Pennsylvania requires that "[w]hen a party settles a
claim with an injured individual, then sues the party primarily
responsible for the harm for indemnity, the settling party must
prove[, inter alia,] that proper notice was given
to the party from whom it seeks indemnity." Consolidated
Rail Corp. v. Youngstown Steel Door Co.
, 695 F. Supp. 1577,
1581 (E.D.Pa. 1988); see also Tugboat Indian Co.
v. A/S Ivarans Rederi
, 5 A.2d 153, 156 (Pa. 1939) (one
secondarily liable for injury may recover indemnity from one
primarily responsible provided he has given proper notice).

On appeal, the Buyers contend, as they
contended below, that the notice and consent provisions of the
Agreement did not apply to their settlement of the Virginia Bulk
Sales litigation because that "settlement did nothing more
than recognize an obligation previously created [upon the Buyers] by virtue of the Bulk Sales Act public notice." The Buyers
state that Sect. 9.5 requires consent when a settlement
"would give rise to liability on the part of the
Indemnifying Party." They then note that in Plymouth
Township v. Borough of Larksville
, 110 A. 801 (Pa. 1920), the
Pennsylvania Supreme Court defined the term "liability"
as including "every kind of obligation, even obligations
that are unascertained or imperfect." Id. at 802.

From this, the Buyers argue that, "even
though the monetary amount of the obligation to Unitex was
unascertained at the time of the Agreement, liability still
attached to Buyers at the time of the Bulk Sales Act public
notice in November, 1994," and that it was this event, which
had the Sellers’ approval, and not the settlement of the
Virginia Bulk Sales litigation, which "gave rise to the
Sellers’ indemnification liability." Hence, the Buyers
conclude, the settlement of the Virginia litigation "had no
legal significance," and the trial court erred when it
selected the settlement "as the triggering event."

We disagree with the Buyers’ conclusion.
To adopt their view would, contrary to Pennsylvania law, require
a strict construction of the indemnification provisions of the
Agreement against the Sellers, rather than the Buyers, fail to
give effect to each and every part of the Agreement, deny the
Sellers the right to prior notice as provided by Sect. 9.3
of the Agreement and Pennsylvania common law, and effectively
write the consent provision of Sect. 9.5 out of the
Agreement.

Although we express no opinion on the subject,
the Buyers may be correct in saying, as they say on brief, that
upon publication of the Bulk Sales notice, they "became
unconditionally liable to pay the North Carolina product
liability claim." However, as the Sellers point out,
Sect. 9.5 of the Agreement "by its terms is not
concerned with the time at which the basis of Buyers’
liability . . . arose" but, instead, "the
event triggering the [Buyers’] obligation to seek and obtain
the [Sellers’] consent is the [Buyers’] ‘settlement of any claim that would give rise to liability on
the part of the [Sellers] under an indemnity contained in [the
Agreement]
.’"

In other words, Sect. 9.5 contemplates
that regardless of the point in time at which liability may arise
against the Buyers for a claim within the intendment of the
Agreement, it is not the attachment of such liability to the
Buyers but the subsequent settlement of the claim that is
decisive. Under the terms of Sect. 9.5, not until that time
arrives does there exist a "settlement . . . that
would give rise to liability on the part of the Indemnifying
Party under an indemnity contained in [the Agreement]." The
settlement of the Virginia Bulk Sales litigation was such a
settlement, the Sellers’ consent thereto was required, and,
in the words of the trial court, the Buyers’ "failure
to [obtain the consent] will preclude [them] from obtaining
indemnification for their contribution to [settlement of] the
North Carolina litigation."

The Buyers, however, cite a statement in the
trial court’s letter opinion that "a liability or debt
cannot be ‘pre-existing’ if it has yet to be
imposed." The Buyers then argue that if the publication of
the Bulk Sales notice did not impose indemnification liability
upon the Sellers then the liability was not imposed until the
Buyers contributed the $300,000 toward settlement of the North
Carolina litigation. This settlement, the Buyers say, occurred
with the Sellers approval, as demonstrated by two letters written
by the Sellers’ corporate counsel shortly before the
$300,000 was paid.

However, the trial court made the explicit
finding that "[n]either letter evinces ‘consent’
by the [Sellers] to the Virginia settlement nor is it a waiver of
the consent requirement under the Agreement." Our reading of
the two letters satisfies us of the correctness of the trial
court’s finding. Indeed, the first letter, addressed to the
Buyers’ counsel, while noting that the addressee earlier had
been authorized to contribute $300,000 toward the effort to
settle the North Carolina litigation, stated that "[t]here
has not been any waiver, settlement or other understanding
between [the Buyers] and [the Sellers] regarding the efforts to
settle or defend this case, and all rights have been reserved as
asserted in the various correspondence or otherwise."

The second letter, addressed directly to
Precision Components, while urging the Buyers to settle the North
Carolina litigation, stated that "[the Sellers] believe that
your voluntary assumption of the Unitex claim under [the
agreement settling the Virginia Bulk Trades litigation], without
notice to or consent by us, relieves us of any obligation to
indemnify you for the claim and constitutes a violation of the
Asset Purchase Agreement."

Finally, the Buyers argue that the trial court
erred in denying them recovery on the breach of warranty claim
alleged in Count I of their motion for judgment. The Buyers base
this claim upon a purported violation by the Sellers of
Sect. 6.14 of the Agreement, which required the Sellers to
furnish the Buyers a list of creditors as described by Code
Sect. 8.6-104 of the Bulk Sales Act and to warrant
"that there are no creditors of any type or nature which
have not specifically been disclosed by identity and amount to
[the Buyers.]" The Buyers complain that the Sellers did not
provide them with a list of creditors and did not specifically
disclose all creditors by identity and amount.

The Buyers assert that the trial court
implicitly held that the Buyers’ failure to comply with the
consent provision of Sect. 9.5 "cut off their breach of
warranty claim." However, we find nothing in the trial
court’s letter opinion or final order to support this
argument. Rather, in its letter opinion, the trial court adopted
the Sellers’ proposed findings of fact and conclusions of
law. Included was a finding that any failure of the Sellers to
furnish a list of creditors was not the proximate cause of any
damage to the Buyers since they had sufficient information from
"the due diligence performed on [the Sellers]" to
satisfy "any obligations [the Buyers] had under
Sect. 8.6-104 [and –105] of the [Bulk Sales] Act to
send notices to [the Sellers’] creditors."

Furthermore, as the Sellers point out,
"the only creditor of [the former Industrial Alloy
Fabricators, Inc.] relevant to this litigation is Unitex, and it
is undisputed that Sellers specifically disclosed to Buyers the
existence of Unitex’s outstanding claim . . . well
in advance of the closing date of the asset purchase."
Hence, any discussion of the Sellers’ failure to furnish a
list of irrelevant creditors would be purely academic.

For the reasons assigned, we will affirm the
judgment of the trial court.

Affirmed.

 

 

 

FOOTNOTES:

[1] The Code sections formerly comprising
the Bulk Sales Act, Sects. 8.6-101 through –111, were
repealed in 1997 and replaced by Code Sects. 8.6A-101
through -110. 1997 Va. Acts ch. 121. Because this litigation
arose prior to the revision, we will cite to the previous
sections.

[2] Code Sect. 8.6-103(6) provided an
exception to the Bulk Sales Act for "[t]ransfers to a person
maintaining a known place of business in this State who becomes
bound to pay the debts of the transferor in full and gives public
notice of that fact."

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