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Alderney Dairy Co. v. Hawthorn Mellody Inc.

decided: February 23, 1981.



Before Adams, Garth and Sloviter, Circuit Judges.

Author: Sloviter



This is an appeal from an order granting defendants' motion for summary judgment in a breach of warranty dispute resulting from the sale of an ongoing business. The district court based its order on the ground that defendants did not breach any warranty or representation made in their agreement of sale. We believe the court erred in this finding and therefore vacate the judgment. Because we believe that there may be factual issues to be resolved as to the duration of the warranty, we will remand to the district court.


On January 20, 1972 appellant, Alderney Dairy Co., Inc. (New Alderney), bought certain assets of Old Alderney, a company which sold and distributed milk and other dairy products. At the time of the sale, Old Alderney was wholly owned by appellee Hawthorn Mellody, which in turn was wholly owned by appellee National Industries (hereinafter jointly referred to as "Old Alderney"). The Agreement of Sale provided that New Alderney would assume all of Old Alderney's obligations with respect to, inter alia, the industry-wide Pension Plan and collective bargaining agreements. Old Alderney expressly warranted that all of its obligations under the Pension Plan had been performed, and agreed to indemnify and hold New Alderney harmless from any breach of warranty.

The operative provision of the agreement stated:

5. Buyer's Assumption of Specific Contracts and other Liabilities : As of January 1, 1972, Buyer assumes and agrees to perform the provisions of only those contract, (sic) agreements, leases, commitments and undertakings (hereafter collectively "Contracts") specifically set forth on Schedule "H" hereto annexed and made part hereof, on Seller's part to be performed, as same shall exist on January 1, 1972. Seller expressly warrants and represents that all obligations, covenants and agreements in each of said Contracts contained and on Seller's part to be performed, have been duly performed and satisfied and that except as to any breaches, defaults or violations that may be deemed to have arisen by the execution of this Agreement, no breaches, defaults or violations of any of the provisions of any of said Contracts have been committed or suffered by Seller to the date of this Agreement. Seller hereby agrees to indemnify, protect and save the Buyer harmless from any and all liability, expense, injury or damage of any kind arising from or out of any breach, default or violation by Seller of the foregoing warranty. Subject to the foregoing, Buyer shall hold Seller harmless from and indemnify Seller against any claim or liability for breaches or violation occurring after January 20, 1972 on any Contract so assumed by Buyer, or arising out of or resulting from Buyer's operation of the business after January 20, 1972, provided, however, that due and timely notice shall be given to Buyer of the assertion of any claim in respect to the foregoing, that Buyer shall be afforded an opportunity to defend and that no settlement shall be made without Buyer's written approval.... (text emphasis added).

A multi-employer collective bargaining agreement and the multi-employer Pension Plan existing pursuant thereto were among the scheduled contracts. Additional representations were made by Frederick Magruder, Vice President and Treasurer of Old Alderney and Senior Vice President of Hawthorn Mellody, to the effect that all undertakings pursuant to the Agreement of Sale were unconditionally guaranteed and that the Pension Plan was paid up.

On June 18, 1974, two and one half years after the sale, employees of Tuscan Dairy Farms, the largest of the employers participating in the Pension Plan, filed a class action in the United States District Court for the District of New Jersey against the trustees of the Pension Plan, Tuscan Dairy Farms, Borden, Inc., New Alderney and others, alleging that the assets of the Plan were being depleted. Plaintiffs sought protection of their pension benefits. While the federal suit was pending, Tuscan received an arbitration award on November 7, 1975 permitting it to withdraw from the Plan and to adopt a separate pension plan covering its own employees. Shortly thereafter, on November 30, 1975, the union and multi-employer bargaining unit entered a new collective bargaining agreement providing that all employers would cease making contributions to the Plan and would, instead, create separate funds to provide pensions for their currently active employees.

Concerned about the interests of the retired employees then receiving benefits, the trial judge, Judge Stern, appointed a receiver to represent the interests of the retired pensioners who were thereafter joined in the suit as class plaintiffs. The receiver interposed a claim in that suit on their behalf, requesting that the employers be required to cover the cost of lifetime pension benefits owed to the then retired employees. The employers vigorously contested imposition of any such obligation.

In September 1976, Judge Stern issued an opinion and order, reported as Hurd v. Hutnik, 419 F. Supp. 630 (D.N.J.1976). He found that the retired employees were entitled to lifetime pensions under the Pension Plan and held the defendant employers jointly and severally liable, each to make contributions according to actuarial projections to be determined. Thereafter, the parties reached a settlement, approved by Judge Stern, under which the Pension Benefit Guaranty Corporation became trustee of the Plan, and each of the defendant employers made contributions in varying amounts to fund that Pension Plan. New Alderney's share of the total settlement was $372,258.00, which it paid in full. A small portion of that amount was directly attributable to New Alderney and is not the subject of the present suit. A large part was attributable to pension rights which vested prior to January 20, 1972, the date of the closing of the sale of Old Alderney.

In this suit filed in the district court on the basis of diversity of citizenship, New Alderney seeks to recover from Old Alderney the amount of the settlement contribution attributable to Old Alderney, plus pre-judgment interest and attorney's fees incurred in the Hurd ...

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