Industrial Alloy Fabricators, Inc. v. Williams Industries, Inc.

Citations: 257 Va. 470; 514 S.E.2d 761; 38 U.C.C. Rep. Serv. 2d (West) 521; 1999 Va. LEXIS 61Docket: Record 981093

Court: Supreme Court of Virginia; April 16, 1999; Virginia; State Supreme Court

Original Court Document: View Document

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The case involves an indemnification and warranty dispute stemming from the purchase of corporate assets by Industrial Alloy Fabricators, Inc. and Precision Components Corporation from Williams Industries, Inc. and IAF Transfer Corporation. The appeal follows a judgment favoring the sellers. Industrial Alloy, a Pennsylvania corporation with operations in Richmond, Virginia, and its majority holder, Precision Components, also a Pennsylvania corporation based in York, entered into an Asset Purchase Agreement on October 31, 1994. The Buyers paid $3,600,000 for the assets, including the corporate name, and the Agreement is governed by Pennsylvania law.

Key provisions include Section 9.1, where the Sellers indemnified the Buyers against claims and liabilities, except for those explicitly assumed. Section 2.2 details the specific liabilities assumed by the Buyers, while Section 2.1 states that the Buyers are not liable for any undisclosed liabilities of the Sellers. Section 6.14 mandates compliance with the Virginia Bulk Sales Act and includes a warranty that all creditors have been disclosed to the Buyers. The case highlights issues of liability, indemnification, and adherence to statutory disclosure requirements in corporate asset transactions.

Section 9.3 mandates that the 'Indemnified Party' must notify the 'Indemnifying Party' by registered mail of any indemnification claims arising under the Agreement. Section 9.4 allows the 'Indemnifying Party' to participate in the defense against third-party claims. Section 9.5 stipulates that the 'Indemnified Party' cannot settle claims that would result in liability for the 'Indemnifying Party' without their written consent. 

In October 1994, a products liability action by Unitex Chemical Corporation against former Industrial Alloy Fabricators, Inc. was pending in North Carolina, initiated on March 31, 1994. The Buyers received a letter from the Sellers' counsel detailing this and other litigation before their asset purchase, which was incorporated into the Agreement. However, the North Carolina claim was not a liability assumed by the Buyers under Section 2.2 of the Agreement.

Core States Bank financed the Buyers’ acquisition and sought to protect collateral for the debt. Despite the Agreement requiring the Sellers to provide a list of creditors, none was supplied, leading the Bank to refuse fund release. Consequently, an escrow agreement was established to ensure compliance with the Virginia Bulk Sales Act, despite Sellers' belief that it did not apply. The Buyers published a notice in the Richmond Times-Dispatch announcing their intent to pay the Sellers' debts. 

On September 18, 1995, Unitex filed a complaint against the Buyers in Virginia, alleging a violation of the Bulk Sales Act due to their failure to notify Unitex of the asset transfer. The Buyers contended that they were exempt from notice requirements under Virginia Code § 8.6-103. Subsequently, Unitex sought to amend its complaint to obtain a declaratory judgment asserting that the Buyers had assumed the debts of the former Industrial Alloy Fabricators, Inc. through the published notice.

Unitex’s motion to amend was never ruled on by the district court due to a Stipulation and Settlement Agreement entered into on March 20, 1996, between the Buyers and Unitex to settle all claims in the Virginia Bulk Sales litigation. In exchange for Unitex dismissing this litigation, the Buyers agreed to cover any judgment against Unitex in a separate North Carolina litigation. The Sellers were aware of the Virginia lawsuit and scheduled depositions but were not notified about the settlement or given consent regarding its terms. The Buyers participated in settlement discussions for the North Carolina claim and contributed $300,000 towards that settlement. Subsequently, a Settlement Agreement and Mutual Release of All Claims was executed on June 10, 1996, after which the Buyers demanded the Sellers comply with indemnification provisions in the Agreement. The Sellers did not respond, prompting the Buyers to file a two-count motion for judgment on October 3, 1996, seeking to recover the $300,000 plus legal fees. Count I alleged breach of warranty for failure to disclose creditors of the former Industrial Alloy Fabricators, Inc., while Count II sought enforcement of the indemnification provisions. The Sellers argued they were not liable since they had not been notified or consented to the Virginia litigation settlement. Both parties filed motions for summary judgment, which led to the trial court denying the Buyers’ motion and taking the Sellers’ motion under advisement. During a bench trial, the Sellers reiterated their defense based on the lack of notice and consent per the Agreement's Sections 9.3 and 9.5. The Buyers contended these provisions were inapplicable, asserting the Sellers’ liability arose from a prior obligation related to a public notice in the Richmond Times-Dispatch. Ultimately, the court ruled against the Buyers, affirming that their failure to comply with the consent requirement precluded indemnification for the North Carolina litigation costs. The court referenced Pennsylvania law, which generally does not favor indemnification clauses and requires strict interpretation against the party seeking protection.

Pennsylvania law mandates a strict construction of indemnity agreements against the asserting party. Contract interpretation requires consideration of all provisions to ascertain the parties' intent from the entire agreement. For indemnification, if a party settles a claim and then seeks indemnity from the party primarily liable, proper notice must be given. The Buyers argue that the notice and consent requirements of the Agreement did not apply to their settlement of the Virginia Bulk Sales litigation, claiming the settlement merely recognized a pre-existing obligation under the Bulk Sales Act. They reference a Pennsylvania Supreme Court case defining 'liability' broadly, suggesting that their obligation arose at the time of the public notice, not at the settlement. However, the court disagrees, stating that accepting the Buyers' interpretation would contravene Pennsylvania law, undermine the indemnity provisions, and negate the Sellers' right to prior notice. The court emphasizes that Section 9.5 of the Agreement focuses on the settlement of claims as the event triggering the obligation to seek Sellers' consent, not the initial attachment of liability. Thus, liability arises for the Sellers only after the Buyers settle a claim that could trigger indemnification.

The trial court ruled that the Buyers' failure to obtain consent from the Sellers for the Virginia Bulk Sales settlement precludes them from seeking indemnification related to the North Carolina litigation. The Buyers contended that indemnification liability was not imposed until they paid $300,000 toward the settlement, arguing that the Sellers had approved this payment based on two letters from the Sellers' counsel. However, the trial court found that neither letter constituted consent or waived the requirement under the Agreement. The first letter confirmed that the Sellers had not agreed to any settlement, while the second indicated that the Buyers' actions relieved the Sellers of indemnification obligations. Additionally, regarding the Buyers' breach of warranty claim based on the Sellers' alleged failure to disclose creditors, the trial court held that this claim was barred due to the Buyers' non-compliance with the consent requirement. The trial court also found that any lack of creditor information did not cause the Buyers damage, as they had sufficient knowledge from their due diligence. The only relevant creditor, Unitex, had been disclosed prior to the asset purchase closing. Consequently, the court affirmed the trial court's judgment.