J.M. Huber Corporation v. Engineered Carbons, Inc.

98-3957 (U.S. Dist. Ct. D. N.J. 1999) (Unpublished)
  • Opinion Date: July 6, 1999

CONTRACTS; INDEMNIFICATION—A contractual indemnification provision in an asset sale agreement covering claims “arising out of or resulting from” the seller’s acts does not cover claims related to the buyer’s subsequent conduct even if it is merely to continue the activities that gave rise to the claim in the first place, especially where the buyer has indemnified its seller for the buyer’s post-sale activities.

A manufacturer sold three facilities pursuant to an Asset Sale Agreement. Prior to the sale, a civil law suit had been filed against the seller for personal injury and property damage from carbon black emissions emanating from one of the facilities. That lawsuit was a disclosed law suit for which, “together with all claims that arise out of or result from the facts and circumstances alleged as causes of action in such law suit,” the seller would remain liable. Another provision of the agreement was that the buyer would indemnify its seller for claims arising out of the post-sale operation of the manufacturing facilities. The initial law suit was voluntarily dismissed by the claimants who then filed a second complaint against the original factory owner, adding its buyer as a defendant. The buyer claimed that its seller was responsible for the outcome of the entire suit, whereas the seller claimed that it was only responsible for that portion of expenses and damages attributable to the time period before the sale. In making its argument, the buyer demonstrated that the allegations of the second law suit were virtually identical to those in the first and, at a minimum, the claims arose out of or resulted from the same facts and circumstances underlying the initial law suit. The Court’s analysis turned on the degree to which the second law suit arose out of or resulted from the facts and circumstances underlying the initial litigation. The Court found that, while the claims alleged were similar, the actors and their actions were distinct. Although the buyer argued that it was named in the litigation solely for having “stepped into [the seller’s] shoes,” the Court did not agree. The buyer “was not added to the litigation as a successor in interest to [the seller], nor as an alternative source of recovery; [the buyer] was added because of its own alleged negligence.” The Court reached this conclusion because, in its view, the buyer ignored the crucial fact that the claimants revised their complaint to include specific allegations addressed to the buyer’s own conduct. As a result, the Court refused to adopt a very broad definition of the words “arise out of or result from the facts and circumstances alleged.” The Court believed it “abundantly clear that the allegations made specifically against” the buyer in the second litigation did not “arise out of or result from” the facts and circumstances of the initial litigation. Therefore, it held that any violations arising from conduct which predated the sale were the responsibility of the seller. To make the seller responsible for post-sale conduct would render “all of the distinctions in the agreement, with respect to pre-closing and post-closing responsibilities, irrelevant.” Further, it was evident to the Court that the seller’s obligation to indemnify its buyer for certain liabilities did not include indemnification for the buyer’s own negligence.