Hallmark Cards v. Lee-Thomas, Inc. ( 2002 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 01-1611
Lee-Thomas, Inc., *
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Appellant, *
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v. * Appeal from the United States
* District Court for the Western
Hallmark Cards, Inc., * District of Missouri
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Appellee. *
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Submitted: November 16, 2001
Filed: January 2, 2002
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Before McMILLIAN, MORRIS SHEPPARD ARNOLD, Circuit Judges, and
NANGLE,1 Senior District Judge.
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NANGLE, Senior District Judge.
Appellant Lee-Thomas, Inc. appeals from a final order entered in the Western
District of Missouri,2 granting summary judgment in favor of Appellee Hallmark
1
The HONORABLE JOHN F. NANGLE, Senior United States District
Judge for the Eastern District of Missouri, sitting by designation.
2
The Honorable Nanette K. Laughrey, United States District Judge for the
Western District of Missouri.
Cards, Inc. (“Hallmark”) on its indemnity claim. For reversal, Appellant argues that
the district court: (1) erred by finding that Appellant was liable as a successor-in-
interest; (2) erred by concluding that Hallmark only needed to show potential rather
than actual liability to maintain its indemnification action; and (3) abused its
discretion by awarding over $7,000.00 in expert witness fees. For the reasons
discussed below, we affirm the district court’s well-reasoned opinion.
I. Background
On January 9, 1995, Deborah Reithmeyer filed a products liability action
(“Reithmeyer suit”) against Hallmark for selling an allegedly defective “Patty
Woodard” blouse. Hallmark operates a department store in Kansas City, Missouri
under the name “Hall’s” in which it sells merchandise including women’s clothing.
During discovery in the Reithmeyer suit, Hallmark learned that the manufacturer of
the blouse, Patty Woodard, had entered into a transaction with Appellant whereby
Appellant agreed to purchase certain assets and assume certain liabilities of Patty
Woodard.
In August 1996, Hallmark contacted Appellant to discuss the contention that
Appellant, as the successor-in-interest to the manufacturer of the allegedly defective
blouse, was obligated to indemnify Hallmark for expenses incurred in defending the
Reithmeyer suit. Appellant’s counsel informed Hallmark that it was tendering the
defense of the claim to its insurance carrier. On September 25, 1996, Hallmark made
a formal tender of the defense of the Reithmeyer suit, but counsel for Appellant’s
insurance carrier declined to defend or indemnify Hallmark in connection with the
suit. On November 7, 1996, Hallmark settled the Reithmeyer suit for $50,000.
Following the settlement, Hallmark filed the instant case against Appellant
seeking indemnification for the settlement amount and for its legal fees and expenses
incurred in connection with the Reithmeyer suit. Both parties filed motions for
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summary judgment. On February 8, 2001, the district court granted Hallmark’s
motion for summary judgment and denied Appellant’s motion. In its order granting
summary judgment to Hallmark, the district court concluded that: (1) in accordance
with the Asset Purchase Agreement (“the Agreement”), Appellant agreed to assume
Patty-Woodard’s liability for product defects; (2) Hallmark only had to show
potential, and not actual, liability in order to obtain indemnification for its settlement
of the Reithmeyer suit; (3) the settlement agreement was reasonable; and (4)
Hallmark timely tendered the defense of the Reithmeyer suit.
This appeal followed.
II. Discussion
A. Standard of Review
We review the district court’s order granting summary judgment de novo,
viewing the evidence and the inferences drawn from the evidence in the light most
favorable to the nonmoving party, to ensure “that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of law.”
Fed. R. Civ. P. 56(c); see Henerey v. City of St. Charles, 200 F.3d 1128, 1131 (8th
Cir. 1999).
B. Assumption of Liability
Appellant argues that the district court erred by finding that it is liable for the
products liability claims as a successor-in-interest to Patty Woodard. This argument
hinges on the district court’s interpretation of the Agreement which facilitated the
asset purchase transaction. Section 2.1 of the Agreement states as follows:
Assumption of Liabilities. Except solely as set forth in
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section 2.23 buyer shall assume all the liabilities of the
seller existing on the date of the closing, and liabilities
arising solely out of the business conducted by seller prior
to the closing and shall indemnify seller from the same and
from all costs or expenses associated therewith, in the same
manner and to the same degree as if buyer had purchased
all the outstanding capital stock of seller at the closing.
Appellant asserts that the district court erred by relying on Missouri law to
interpret the Agreement as unambiguous and to exclude an affidavit of Appellant’s
attorney, Mr. David Lynn. In the affidavit, Mr. Lynn states that it was Appellant’s
understanding that under Section 2.1 “Lee-Thomas would assume expenses and debts
accrued from all costs of conducting business generally . . . not liabilities from
extraordinary events such as tort claims.” Appellant claims that the district court
should have interpreted the Agreement in accordance with California law and
determined whether Mr. Lynn’s affidavit presents a “reasonably susceptible”
interpretation of the Agreement. Appellant further argues that because the Agreement
does not specifically mention “product liability claims” or “unknown” or “contingent”
claims, the district court erred by finding that the assumption of liability provision
covers a products liability claim which arose over twenty years after the Agreement
took effect. We conclude that neither of these contentions has any merit because we
find that the Agreement’s assumption of liability provision unambiguously requires
Appellant to assume Patty Woodard’s liabilities with respect to the products liability
suit.
Interpreting the Agreement under California law, we find that Mr. Lynn’s
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Section 2.2 of the agreement only excludes certain liabilities for taxes
incurred prior to the closing of the transaction.
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affidavit does not provide a reasonable interpretation of the Agreement.4 Appellant
correctly notes that the California courts have severely eroded the parol evidence rule.
Wilson Arlington Co. v. Prudential Ins. Co. of Am., 912 F.2d 366, 369 (9th Cir.
1990). Under California law, “[t]he test of admissibility of extrinsic evidence to
explain the meaning of a written instrument is not whether it appears to the court to
be plain and unambiguous on its face, but whether the offered evidence is relevant to
prove a meaning to which the language of the contract is reasonably susceptible.”
Barris Ind., Inc. v. Worldvision Enters., Inc., 875 F.2d 1446, 1450 (9th Cir. 1989).
Thus, even if a contract appears to be absolutely clear on its face, the court is required
to engage in preliminary consideration of extrinsic evidence to see whether it creates
an ambiguity. Id. However, “if the extrinsic evidence advances an interpretation to
which the contract is not reasonably susceptible, the extrinsic evidence is not
admissible.” Id. (citing A. Kemp Fisheries v. Castle and Cook, Inc., 852 F.2d 493
(9th Cir. 1988). Finally, “the mere existence of extrinsic evidence supporting an
alternative meaning does not foreclose summary judgment where the extrinsic
evidence is insufficient to render the contract susceptible to the non-movant’s
proffered interpretation.” Id. (citing Trident Ctr. v. Conn. Gen. Life Ins. Co., 847
F.2d 564 (9th Cir. 1988)).
Applying this standard, we find that Mr. Lynn’s affidavit does not present a
reasonable interpretation of the Agreement’s assumption of liability provision. It is
important to note at the outset that the Agreement is an integrated contract.
Paragraph 19 of the Agreement states that “This Agreement, together with the
documents and exhibits referred to herein, embodies the entire understanding among
4
In its response brief, Hallmark appeared to concede that the district court
should have applied California law. We do not need to decide whether Missouri’s
choice of law rules would require this Court to apply California law to the Asset
Purchase Agreement because the result is the same regardless of which state law
applies. Because Appellant did not contest the district court’s application of
Missouri law, we will focus our attention on the application of California law.
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the parties and merges all prior discussions or communications among them, and no
party shall be bound by any definitions, conditions, warranties, or representations
other than as expressly stated in this Agreement . . . .” Because this is an integrated
contract, “extrinsic evidence is not admissible to add to, detract from, or vary the
terms of a written contract.” Pac. Gas and Elec. Co. v. G.W. Thomas Drayage & R.
Co., 69 Cal. 2d 33 (1968). However, in accordance with California law, the court
must consider whether Mr. Lynn’s affidavit advances an interpretation to which the
Agreement is “reasonably susceptible.”
Because the Agreement is not reasonably susceptible to Lynn’s interpretation,
we find that the district court correctly granted Hallmark’s summary judgment
motion. Under Section 2.1 of the Agreement, Appellant agreed to indemnify Patty
Woodard for all “liabilities arising solely out of the business conducted by the seller
prior to the closing.” Liabilities based on the sale of defective products sold by Patty
Woodard prior to closing clearly fall within this category. Further, Section 2.2 of the
Agreement reiterates that the tax liability is the “sole exclusion to the generality” of
the assumption of liability provision. The Agreement does not limit Appellants’
liability in any other way. Taken together, these sections firmly support the
conclusion that Mr. Lynn’s interpretation of the contract is not reasonable.
Interpreting the Agreement under California law, we conclude that Appellant
intended to assume all of Patty Woodard’s prior liabilities which arose out of the
business. See A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc., 852 F.2d 493, 497
(9th Cir. 1988) (refusing to read alleged oral warranties in to an unambiguous
contract). Because we find that the Agreement’s assumption of liability provision is
not ambiguous, we affirm the district court’s conclusion that Appellant assumed any
liability of Patty Woodard stemming from claims for defective products.
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C. Potential Liability
In general, a seller of a defective product to prevail on an implied indemnity
theory, the seller must show: (1) a right to indemnity; (2) its own potential liability
in the underlying action; (3) the reasonableness of the settlement amount; and (4)
tender to the manufacturer the choice of approving the settlement or taking over the
defense and agreeing to hold the seller harmless. Acceptance Ins. Co. v. SDC, Inc.,
952 F. Supp. 644, 646 (E.D. Mo. 1997) (emphasis added). However, a defendant who
fails to tender the defense to a manufacturer must provide a showing of “actual
damage” to sustain and indemnity suit. See Elrac, Inc. v. Cruz, 699 N.Y.S.2d 647
(1999).
Here, Appellant argues that failure to timely tender a defense should be treated
as a failure to tender and thus that Hallmark needed to prove it was actually liable in
the Reithmeyer suit to maintain an indemnity action. More specifically, Appellant
asserts that the district court erred by not relying on Dixon v. Fiat Roosevelt Motors,
Inc., 509 P.2d 86, 90 (Wash. Ct. App. 1973) in which a Washington Court of Appeals
concluded that an indemnitee had to prove it was actually liable in an indemnity
action because its tender of the defense less than one month prior to trial did not give
the indemnitor adequate notice to prepare for trial. Undisputed facts prove that
Hallmark formally tendered the defense on September 25, 1996 and the Reithmeyer
suit was schedule to go to trial on November 12, 1996. Because Hallmark tendered
the defense approximately one and a half months prior to trial, Appellant argues that
the untimely notice was tantamount to not having any notice at all and thus Hallmark
must prove actual liability to recover in its indemnity action.
Like the district court, we are unpersuaded by Appellant’s argument; therefore,
we conclude that the district court did not err in refusing to consider the Dixon case.
In Dixon, a car manufacturer, Fiat, sought indemnification from American Racing
Equipment (“A.R.E.”) because A.R.E. allegedly manufactured a defective wheel . On
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October 7, 1969 a Complaint was filed against Fiat and Fiat tendered its defense to
A.R.E. on October 24, 1969. Id. at 90. The trial court ordered an early trial which
was held on November 10, 1969. The jury found against Fiat; thereafter, Fiat moved
for summary judgment on his third-party complaint against A.R.E. for
indemnification. Id.
The court found that Fiat had to prove that A.R.E.’s wheel was actually
defective because tendering a defense less then one month before trial did not give
A.R.E. adequate notice to prepare a defense. Id. The court stated that “Oral argument
before this court indicated that a request for a continuance was denied by the trial
court and a speedy trial was ordered so as to allow Dixon his day in court in light of
his terminal illness.” Id. Thus, “because of the accelerated trial date,” the court
concluded that A.R.E. was not provided an opportunity to prepare a sufficient
defense. Id.
Unlike the Dixon case, the Reithmeyer suit was not proceeding at an
accelerated pace, and Appellant did not suggest or make any efforts to secure a
continuance. Although Hallmark formally tendered the defense a month and a half
before trial, Appellant had notice of the suit in August 1996, more than two and a half
months before trial. The Dixon case is readily distinguishable from the case sub
judice; therefore, the district court did not err by refusing to follow Dixon.
Moreover, the district court’s reliance on Acceptance Ins. Co. v. SDC, Inc., 952
F. Supp. 644 (E.D. Mo. 1997) to support its conclusion that Hallmark had satisfied
the last element of its indemnity claim by timely tendering the defense was not
misplaced. In Acceptance Insurance, the Acceptance Insurance Company (“AIC”),
the indemnitee, settled a personal injury claim involving an allegedly defective boat
seat casting. Id. at 645. SDC, Inc. (“SDC”) manufactured the seat base involved in
the accident. AIC sought to recover from SDC the cost of the settlement, plus costs,
expenses, expert witness fees, and attorney’s fees under an implied indemnification
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theory. Although AIC had tendered defense of the case to SDC one month prior to
trial, the Acceptance Insurance court found that this was sufficient to satisfy the last
element of an implied indemnity claim. Id. at 646. “With the trial date of June 26,
1995 glaring down, AIC’s actions in settling the case were sound. SDC’s indolence
in doing nothing was not. Accordingly, the Court finds that the tender of the defense
was timely.” Id. at 647. Based on this finding, the Acceptance Insurance court
allowed AIC to rest its indemnity action on potential and not actual liability.
We find that the district court properly relied on the Acceptance Insurance case
to support its conclusion that Hallmark timely tendered the defense. As we discussed
above, Appellant had more than the one month notice deemed acceptable by the
Acceptance Insurance court. Also, Appellant did not mention the untimeliness of the
tender when it refused to take over the defense of the Reithmeyer suit. Instead,
Appellant asserted that it did not have to defend the suit because the Patty Woodard
blouse was not dangerous or defective and was the not cause of the accident giving
rise to the suit. The district court stated that “Lee-Thomas has not produced any
evidence that it was somehow prejudiced by Hallmark’s tender relatively late in the
game.” We agree with this conclusion and accordingly find that the district court did
not err by allowing Hallmark to maintain its indemnity action by proving it was
potentially liable in the Reithmeyer suit.
D. Litigation Expenses
Appellant argues that the district court erred when it awarded Hallmark
$7,448.18 in expert witness fees which allegedly were incurred before Hallmark
tendered the defense of the Reithmeyer suit. In awarding fees and costs, the district
court permitted Hallmark to recover only the fees and costs incurred after September
26, 1996, the date on which Hallmark formally tendered the defense. Appellant
asserts that the district court erred by including an invoice for Hallmark’s expert
witness Dr. LeBlanc dated October 31, 1996 in the fees and costs award, because the
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witness allegedly provided his services prior to the September 26, 1996 trigger date.
We do not need to consider Appellant’s contention that the court erred in
calculating costs because it raises this issue for the first time on appeal. See
Alexander v. Pathfinder, Inc., 189 F.3d 735, 742 (8th Cir. 1999) ("We will not
consider arguments raised for the first time on appeal."). Even if we were to consider
the issue, Appellant failed to present any evidence that the district court abused its
discretion in determining the amount of costs. Treece v. City of Little Rock, No. 97-
1238, 1998 WL 66714, at *1 (8th Cir. Feb. 19, 1998) (“The district court has the
discretion to determine the amount of the fees and costs, and we review the exercise
of that discretion for abuse.”).
Appellant does not present any evidence to substantiate its contention that Dr.
LeBlanc’s services were provided prior to September 26, 1996. Meanwhile,
Hallmark presented evidence that although Dr. LeBlanc was initially contacted in
March, 1996, almost all of Dr. LeBlanc’s services were provided after the September
26th trigger date. Accordingly, we find that the district court did not abuse its
discretion in calculating fees and costs.
IV. Conclusion
For the foregoing reasons, the district court’s order granting summary judgment
and granting attorneys’ fees and expenses is affirmed.
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A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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