Buyer to Indemnify Business Seller for 3rd Party Asbestos Claim Punitive Damages

Introduction

Liability for asbestos claims is a common risk with manufacturing companies. Sophisticated buyers and sellers of manufacturing businesses are aware of the risk and usually manage it through an allocation between the buyer and the seller in the acquisition documents.

The deal

Here, the seller owned a division engaged in the business of manufacturing and remanufacturing brake parts for vehicle brake systems. Specifically, this division manufactured and sold automotive friction products (i.e., brake shoes), some of which were made using asbestos-containing friction lining from outside vendors.

For several years prior to the 1986 transaction with the buyer, civil lawsuits were filed against the seller alleging bodily injury as a result of alleged exposure to asbestos contained in its friction products. The seller disclosed the existence of these asbestos claims to the buyer during the due diligence that preceded the 1986 divestiture, and the parties expressly accounted for these types of actions in allocating liabilities arising out of post-closing product liability claims.

Basically, the buyer agreed to indemnify the seller for certain asbestos claims.

The lawsuit

This arrangement worked for 33 years when a California jury returned a $6 million punitive damages award in favor of a plaintiff in an asbestos case filed against the seller. The buyer claimed that punitive damages were not part of its indemnification obligation.

The seller then sued the buyer in an Ohio federal district court to resolve the dispute.

The buyer first argued that the indemnification provision in the asset purchase agreement did not refer to punitive damages, let alone expressly impose an obligation to indemnify against such damages for asbestos claims.

Construing the plain language of the asset purchase agreement, the court found that it was not ambiguous regarding liability and indemnification for punitive damages. The court said that the APA’s assumption of liabilities provision was broadly worded to include all liabilities and obligations of the seller, except for certain specified excluded liabilities; and punitive damages were not specified as excluded liabilities. The court found the asset purchase agreement’s broad assumption of all liabilities and obligations of the seller necessarily included claims for punitive damages in asbestos cases.

The court further noted that the assumption of liabilities and indemnification provisions of the asset purchase agreement were carefully negotiated between the buyer and seller and their counsel, and expressly allocated the parties’ relative liabilities as to the seller’s asbestos claims. The court found that the buyer and seller, through their counsel and with knowledge that many asbestos claims had already been filed and were currently pending, agreed that the buyer would assume all liabilities and obligations of the seller (including the seller’s asbestos claims) and indemnify the seller for from and against any and all liabilities, damages, losses, and claims.

The buyer next argued that, even if the asset purchase agreement extended indemnity to punitive damages such a provision would be void `because Ohio law prohibits the indemnification of monies paid to an award of punitive damages arising out of the insured’s own conduct. The buyer asserted that, because the punitive damages in the recent suit against the seller arose from the seller’s intentional conduct, Ohio’s public policy forbids their insurance by a third party.

The court rejected the buyer’s public policy argument stating the APA’s indemnification provision is not void as against public policy because it relates solely to the seller’s past conduct. Thus, the indemnification agreement was not a form of insurance against the seller’s future acts, but rather a negotiated solution for the financial consequences of actions that had already occurred.

In other words, the asset purchase agreement did not allow the seller to continue to engage in tortious conduct without fear of financial consequences in the form of punitive damages. Rather, the asset purchase agreement was limited solely to allocating responsibility for the seller’s past conduct. Accordingly, Ohio’s public policy concern that indemnification of punitive damages would diminish the deterrent effect of punitive damages awards, is not implicated under the circumstances presented.

This case is referred to as Parker Hannifin Corp. v. Standard Motor Products, Inc., Case No. 1:19cv00617, United States District Court, N.D. Ohio (October 23, 2019)  https://scholar.google.com/scholar_case?case=3437809212237959578&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017

Comment

The buyer and seller did not foresee any risk of punitive damages for third party asbestos claims when they allocated the asbestos risk in the 1986 asset purchase agreement. And over 30 years of post-closing experience confirmed that judgment.

For new deals, however, the buyer and seller will have to decide whether third party punitive damages will be an assumed liability or excluded liability; and expressly provide for that allocation in the purchase agreement.

Email:              jmccauley@mk-law.com

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