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The Boeing Co. v. Spirit Aerosystems, Inc.

Superior Court of Delaware

June 27, 2017

THE BOEING COMPANY, Plaintiff,
v.
SPIRIT AEROSYSTEMS, INC., Defendant.

          Submitted: March 22, 2017

         Upon Plaintiff The Boeing Company's Motion for Summary Judgment DENIED

         Upon Defendant-Counterclaim Plaintiff Spirit Aerosystems, Inc.'s Motion for Summary Judgment GRANTED

          William M. Lafferty, Esquire, John P. DiTomo, Esquire, Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Craig S. Primis, Esquire, Michael A. Glick, Esquire, Tracie L. Bryant, Esquire, Kirkland & Ellis LLP, Washington, DC, Eric F. Leon, Equire, Kirkland & Ellis, New York, New York, Attorneys for Plaintiff The Boeing Company

          John A. Sensing, Esquire, Jesse L. Noa, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Evan R. Chesler, Esquire, Darin P. McAtee, Esquire, Timothy G. Cameron, Esquire, J. Wesley Earnhardt, Esquire, Caravath, Swaine & Moore LLP, New York, New York, Attorneys for Defendant-Counterclaim Plaintiff Spirit Aerosystems, Inc.

          Eric M. Davis, Judge

         I. INTRODUCTION

         This civil action is assigned to the Complex Commercial Litigation Division of the Court. On December 5, 2014, Plaintiff The Boeing Company ("Boeing") filed a Complaint (the "Complaint") against Defendant Spirit Aerosystems, Inc. ("Spirit") for Breach of Contract and

          Declaratory Judgment. Through the Complaint, Boeing seeks a declaration that Spirit breached its indemnification obligation for liabilities arising out of certain pension and retiree medical benefits. Spirit argues that it has no indemnification obligation to Boeing because the liabilities at issue arose out of Boeing's Collective Bargaining Agreements, not Boeing's pension and retiree medical benefits. On September 25, 2015, Spirit answered the Complaint and asserted counterclaims against Boeing for Breach of Contract and Declaratory Judgment. Spirit seeks a declaration that Boeing must indemnify Spirit for the costs associated with this and other legal proceedings. Boeing answered Spirit's counterclaims.

         On December 20, 2016, the parties filed cross-motions for summary judgment (respectively, "Boeing's Motion" and "Spirit's Motion" and collectively, the "Motions."). The Motions seek summary judgment on the Breach of Contract and Declaratory Judgment counts based on the parties' differing characterization of the liabilities at issue. The Court held a hearing on the Motions on March 22, 2017. At the hearing, the parties advised the Court that no genuine issues of material fact existed. After hearing argument, the Court took the Motions under advisement. The Court also took this civil action off the trial calendar as both parties agreed that the various disputes between the parties would be resolved by the Motions.

         This is the Court's decisions on the Motions. For the reasons set forth below, the Court will DENY Boeing's Motion and GRANT Spirit's Motion.

         II. RELEVANT FACTS

         A. Boeing divests its manufacturing facilities

         Boeing's business consists of the design, manufacturing, and sale of commercial jetliners and military aircrafts.[1] In 2003, Boeing began divesting some of its commercial aircraft part manufacturing facilities to third-party manufacturers.[2] Under this divestiture strategy, Boeing would sell its manufacturing plants to third-party manufacturers, but would retain supply agreements with the buyers to obtain necessary parts.[3] In June of 2005, Boeing sold its manufacturing facilities in Wichita, Kansas and Tulsa and McAlester, Oklahoma (the "Kansas and Oklahoma facilities") to Spirit.[4] The parties memorialized the sale through an Asset Purchase Agreement (the "APA").[5]

         B. The APA

         The APA is a sophisticated agreement. As part of the APA, Boeing and Spirit apportioned certain assets and liabilities related to the employees working at the Kansas and Oklahoma facilities.[6] The APA defines Spirit as the "Buyer" and Boeing as the "Seller."[7] For purposes of this litigation, the relevant assets and liabilities are Boeing's collective bargaining agreements ("CBAs") and Boeing's benefit plans, including pension and retiree medical benefits.[8]

         The APA is "governed by and construed in accordance with the internal Laws (as opposed to the conflicts of Law provisions) of the State of Delaware."[9]

         i. The Assets and Excluded Assets

         Section 1 of the APA governs the purchase and sale of assets. Section 1.1(a)-(b) outlines the Assets and Excluded Assets related to the purchase and sale of the Kansas and Oklahoma facilities.[10] Under Section 1.1(a), the Assets purchased by Spirit include:

(v) All Contracts primarily related to the Business other than with regard to third-party customers and subject to the provisions of Section 5.2(d) and 5.2(e) (the "Assigned Contracts"), including but not limited to the Contracts set forth on Schedule 1.1(a)(v), but not including the Contracts described in Section 1.1(b);
(viii) Assets of Seller related to Benefit Plans to the extent provided in Section 6.2.[11]

         Under Section 1.1(b), the Excluded Assets, or those not "conveye[d], assign[ed], or transfer[ed]" to Spirit, include:

(xi) Assets of Seller related to all Benefit Plans, except as set forth in Section 6.2;
(xiii) The existing collective bargaining agreements covering the employees of the Business.[12]

Section 1.1(a)-(b) makes it clear what Spirit purchased from Boeing, with Section 1.1(a) specifically listing the included assets and Section 1.1(b) specifically listing the excluded assets.[13]

         ii. The Assumed Liabilities and Excluded Liabilities

         Section 1.2 of the APA governs the assumption of liabilities by Spirit. Section 1.2(a)-(b) explicitly allocates liability between Spirit and Boeing.[14] Section 1.2(a) lists the liabilities assumed by Spirit-defined in the APA as Assumed Liabilities.[15] The Assumed Liabilities include:

(ii) Liabilities arising after the Closing under the Assigned Contracts (other than Liabilities arising out of or relating to any act or omission that occurred prior to the Closing);
(iii) Liabilities of Seller arising after the Closing under any Assigned Contract included in the Assets that is entered into by Seller after the date hereof in accordance with the provisions of this Agreement (other than Liabilities to the extent arising out of or relating to any at or omission that occurred prior to the Closing);
(iv) Liabilities for pension Liability, Accrued Vacation, retiree medical flexible spending accounts, sick leave, and personal time to the extent provided in Section 6.2.[16] Section 1.2(b) lists the Excluded Liabilities, or those "retained, paid, performed, and discharged solely by" Boeing:
(iv) Liabilities of Seller related to all Benefit plans, except as set forth in Section 6.2;
(xiii) Liabilities under any Contract not assumed by Buyer under Section 1.2(a), including Liabilities arising out of or relating to Seller's credit facilities or any security interest related thereto.[17]

         Just like in Section 1.1(a)-(b), Section 1.2(a)-(b) makes it clear that Spirit shall not assume any liabilities other than those specifically set forth in Section 1.2(a).[18]

         iii. Pension and Retiree Medical Benefits

         Section 6.2 goes on to clarify the parties' obligations related to employee benefit plans as referenced throughout Sections 1.1 and 1.2.[19] Section 6.2(a) establishes procedures for hiring former Boeing employees, referred to under the APA as "Hired Employees."[20] With respect to these Hired Employees, Spirit must:

(i) provide compensation and levels of benefits under any Benefit Plan Buyer establishes for the Hired Employees ("Buyer's Benefit Plans") as determined by Buyer and (ii) credit periods of service prior to the Closing for purposes of determining eligibility (and benefit entitlement with respect to vacations and pension benefits pursuant to Sections 6.2(d) and 6.2(f)) under Buyer's Benefit Plans so long as Seller furnishes Buyer will all information necessary to implement this subsection 6.2(a)(ii) pursuant to the other provisions of this

         Agreement.[21] Section 6.2(f) then requires Spirit to "establish or maintain" three separate union and non-union pension plans for the Hired Employees, specifying that the pension plans must:

. . . include credit for Hired Union Employees and Hired Non-Union Employees' past service with Seller for eligibility and vesting and, contingent upon the transfer of assets in accordance with this Section 6.2(f), early retirement benefits and benefit accrual previously recognized under Seller's Pension Plans . . . Buyer's Pension Plans shall further include, indefinitely, credit for Hired Union Employees' and Hired Non-Union Employees' service with Buyer for eligibility, vesting, and early retirement.[22]

Section 6.2(f) concludes by assigning liability for pension plan benefits as follows:

Buyer's Pension Plans shall be liable for benefits with respect to service recognized under Seller's Pension Plans on or prior to the Closing Date with respect to the Hired Union Employees and Non-Union Employees, contingent upon the transfers of assets in accordance with this Section 6.2(f). Buyer agrees that neither Seller nor Seller's Pension Plans shall have any further responsibility with respect to the assets and Liabilities so transferred, including without limitation, obligations following such transfers with respect to the benefits accrued by the Hired Union Employees and Hired Non-Union Employees under the applicable Seller's Pension Plans.[23]

         Finally, similar to Section 6.2(f), Section 6.2(g) requires Spirit to also "maintain" certain retiree medical benefits, specifying that:

. . . Buyer shall be responsible for and shall maintain retiree medical coverage for the benefit of each Hired Employee who was eligible for or could have become eligible for (after meeting applicable age and service requirements) retiree medical coverage maintained by Seller and who is not receiving retiree medical benefits from Seller, and shall provide each such Hired Employee full credit for periods of service prior to the Closing . . . subject to the provisions of any collective bargaining agreements between Buyer and the unions.[24]

Section 6.2(g) concludes by assigning liability as follows:

Buyer agrees that Seller and its retiree medical plans shall have no further responsibilities after the Closing Date to provide to such Hired Employees retiree medical benefits. This Agreement does not limit Buyer's ability to make changes in or amendments to any Buyer retiree medical plan following the Closing.[25] iv. Indemnification Obligations

         After apportioning and clarifying liability, the APA provides certain indemnification rights to each party.[26] Under Section 9.1(a), Boeing must indemnify Spirit for:

. . . any and all losses, Liabilities, damages, costs and expenses, including costs of investigation and defense and reasonable fees and expenses of lawyers, experts and other professionals (collectively, "Indemnifiable Damages"), incurred by such Buyer Group Member in connection with or arising from: (i) any breach of any warranty or the inaccuracy of any representation of Seller contained in this Agreement . . ., (iii) any breach by Seller of, or failure by Seller to perform, any of its covenants or obligations contained in this Agreement, (iv) the Excluded Liabilities . . . .[27]

Under Section 9.2(a), Spirit must indemnify Boeing for:

. . . any and all Indemnifiable Damages incurred by such Seller Group Member in connection with or arising from: (i) any breach of warranty or the inaccuracy of any representation of Buyer contained in this Agreement . . ., (ii) any breach by Buyer of, or failure by Buyer to perform, any of its covenants and obligations contained in this Agreement, (iii) the Assumed Liabilities . . . .[28]

         As to indemnification for liabilities, Spirit must indemnify Boeing for its Assumed Liabilities, and Boeing must indemnify Spirit for the Excluded Liabilities under the terms of the APA.[29]

         C. Boeing decides to "terminate" the Hired Employees

         After the parties executed the APA, Boeing announced that former employees of Boeing hired by Spirit (the "Hired Employees") would be "terminated due to divestiture" rather than "laid off" from Boeing.[30] Boeing then transferred to Spirit's pension fund the assets in the Hired Employees' retirement accounts and declared that it had no further pension or health benefits obligations to the Hired Employees.[31] Boeing's decision to classify the Hired Employees as "terminated" instead of "laid off" gives rise to the liabilities at issue in this case.

         D. Boeing is sued for breach of its CBAs

         After Boeing terminated the Hired Employees, certain Hired Employees claimed that Boeing breached its obligation under its CBAs to provide certain early retirement benefits.[32] The Hired Employees claimed that Boeing should have classified them as "laid off" instead of "terminated."[33] Had Boeing classified them as "laid off, " the Hired Employees could have accessed a "layoff bridge" under Boeing's Benefit Plans.[34] Pursuant to that "bridge, " employees who were laid off within six years of turning 55 and who had at least 10 years of service were allowed to begin collecting early retirement benefits, including pension and retiree medical benefits, upon reaching age 55.[35] Boeing's CBAs, however, placed limits on union employees' entitlement to these early retirement benefits in cases of termination.[36]

         On July 21, 2005, the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (the "UAW") filed a grievance on behalf of certain Hired Employees (the "UAW Grievants") at the Oklahoma facilities.[37] Boeing denied the UAW's grievance on September 20, 2005.[38] Consistent with the CBA's grievance procedure, the UAW escalated its grievance to arbitration (the "UAW Arbitration").[39]

          Similarly, in June and August of 2005, the Society of Professional Engineering Employees in Aerospace ("SPEEA") and the International Association of Machinists and Aerospace Workers ("IAM") filed separate grievances on behalf of Hired Employees at the Kansas facilities.[40] Boeing declined to resolve the grievances.[41] SPEEA and IAM then commenced litigation.[42] Later, individual union members brought a class action suit in United States District Court for the District of Kansas (the "Kansas District Court"). This class action suit was consolidated with the litigation brought by SPEEA and IAM (the "Harkness Class Action").

         i. The UAW Arbitration

         The UAW Grievants claimed that Boeing's decision to classify them as "terminated" rather than "laid off" resulted in a breach of Boeing's CBA.[43] Article XI, Section 17 of the CBA sets out the basis for breaking seniority and terminating employees.[44] Article XI, Section 17 provides that a worker loses seniority rights, including the "layoff bridge" to early retirement benefits in Boeing's Benefit Plans, if the worker is terminated in any of eleven ways.[45] The UAW Grievants argued that Boeing breached its CBA by classifying them as "terminated" because divestiture of Boeing facilities or alike are not among the listed ways to terminate a worker under Article XI, Section 17.[46] Consequently, the UAW Grievants asserted that Boeing should have designated them as "laid off" after Boeing's divestiture, which would have preserved their rights to early retirement benefits under Boeing's Benefit Plans.[47]

         The arbitrator agreed with the UAW and sustained the grievance.[48] The arbitrator found that Boeing violated the CBA when it repudiated its obligation for early retirement benefits to the workers who were, in essence, "laid off."[49] As a remedy, the arbitrator ordered Boeing to "reinstate seniority of the employees and afford them benefits appurtenant thereto" (the "2008 Award").[50] After further disputes by the parties, the arbitrator directed the UAW Grievants to apply to Boeing's plan administrator for the plan benefits to which they were entitled.[51] Should the plan administrator deny their benefits claims, the arbitrator ordered Boeing to assume the plan's obligations to those workers minus any entitlement that they may have under their Spirit benefit plans (the "2009 Award").[52]

         Boeing appealed the 2009 Award, arguing that the relief ordered by the arbitrator violated the Employee Retirement Income Security Act of 1974 ("ERISA").[53] Boeing argued that a claim for ERISA benefits must be submitted to a plan administrator, as properly ordered by the arbitrator.[54] However, if an ERISA-benefit claim is denied, Boeing argued that a worker's only remedy is a suit under ERISA challenging the plan administrator's interpretation of the plan.[55]To make its claim, Boeing necessarily construed the arbitrator's remedy as providing ERISA benefits.

         The United States District Court for the Northern District of Illinois (the "Illinois District Court") and the United States Court of Appeals for the Seventh Circuit (the "Seventh Circuit") rejected Boeing's claims and upheld the arbitrator's award.[56] The Illinois District Court and the Seventh Circuit both disagreed with Boeing's classification of the award as one for ERISA benefits.[57]

         ii. The Harkness Class Action

         The Harkness Class Action arose out of the same circumstances as the UAW Arbitration. Under the CBA at issue here, an employee's active Boeing employment could end only in specific, enumerated events. These specific, enumerated events included a situation where Boeing "laid off" employees.[58] The Harkness Class Action plaintiffs' complaint alleged that Boeing's decision to "terminate due to divestiture" fits into the broad definition of "layoff" enumerated in the CBA.[59] The Harkness Class Action plaintiffs thus contended that their "termination" was, in effect, a "lay off" such that they maintained their rights to the early retirement benefits under Boeing's Benefit Plans.[60]

         The Harkness Class Action plaintiffs sued for breach of contract, and violations of ERISA and the Labor Management Relations Act of 1947 ("LMRA").[61] The complaint named both Boeing and Spirit as defendants, as neither agreed to pay for the early retirement "bridging rights" to pension and health benefits.[62] After years of discovery, the Harkness Class Action plaintiffs dismissed all claims against Spirit with prejudice.[63]

         Boeing and the Harkness Class Action plaintiffs filed cross-motions for summary judgment.[64] The Kansas District Court denied the cross-motions, finding that the CBAs were ambiguous as to the meaning of "laid off."[65] On June 12, 2014, Boeing reached a settlement with the Harkness Class Action plaintiffs.[66] Under the settlement, Boeing agreed to contribute to a settlement fund for the benefit of class members to resolve their claims for pension and retiree medical benefits.[67]

         Boeing now seeks indemnification from Spirit for the costs (and/or damages) Boeing paid and will pay for the UAW Arbitration and the Harkness Class Action.

         III. PARTIES' CONTENTIONS

         A. Boeing's contentions

         Boeing argues that the liabilities at issue are Spirit's Assumed Liabilities under the APA. To reach this conclusion, Boeing classifies the costs of the UAW Arbitration and the Harkness Litigation as costs related to employee benefits assumed by Spirit under the APA. Boeing argues that the payments made to the UAW Grievants and the Harkness Class Action plaintiffs were payments for early retirement benefits due under Boeing's Benefit Plans. Boeing claims, under its interpretation, that Spirit is responsible for these benefits because Spirit assumed liability for pension and retiree medical benefits for Hired Employees under Sections 1.2(a)(iv) and 6.2. Therefore, Boeing contends that Spirit must indemnify Boeing for these Assumed Liabilities under the terms of Section 9.2(a)(iii).

         B.Spirit's ...


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