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V&M Aerospace LLC v. V&M Co.

Superior Court of Delaware

July 18, 2019

V&M AEROSPACE LLC Plaintiff,
v.
V&M COMPANY, Defendant.

          Submitted: April 1, 2019

         Upon Defendant's Motion for Judgment on the Pleadings: Denied Upon Plaintiffs Motion for Partial Summary Judgment: Granted in Part

          Catherine A. Gaul, Esquire, Hayley M. Lenahan, Esquire of ASHBY & GEDDES, Wilmington, Delaware and Peter L. Loh, Esquire, Davis G. Mosmeyer, III, Esquire of FOLEY & LARDNER LLP, Dallas, Texas, Attorneys for Plaintiff.

          Robert A. Penza, Esquire, Christina M. Belitz, Esquire of POLSINELLI PC, Wilmington, Delaware and Michael Stiles, Esquire of STILESPOMEROY LLP, Pasadena, California, Attorneys for Defendant.

          MEMORANDUM OPINION

          LeGrow, J.

         The plaintiff in this action purchased all the assets of the defendant's chrome plating business except the real property on which the business was situated. Knowing the real property environmentally was contaminated, the parties included in their asset purchase agreement specific indemnification provisions governing which party would be liable for existing and future environmental contamination. The parties agreed the seller would bear responsibility for any contamination associated with the release of hazardous substances before the asset purchase, and the buyer would bear responsibility for contamination resulting from the release of hazardous substances after the purchase.[1]

         Although their agreement easily is stated, the parties have met significant difficulty applying their respective indemnification rights and obligations. In litigation pending in California, the parties are disputing who bears responsibility for various cleanup and remediation efforts on the property. While that litigation proceeds, the buyer has exercised a setoff right contained in the asset purchase agreement and has reduced the interest and principal payments the buyer owes the seller by the amount of attorneys' fees and litigation costs the buyer has incurred in the litigation. The seller contends this setoff is improper, and each side has filed a motion seeking judgment in its favor.

          The primary question presented by both motions is whether the terms of the asset purchase agreement allow the buyer to offset payments due under the contract against losses related to "Environmental Claims," even if those losses ultimately may not be subject to indemnification under the parties' agreement. Unlike other losses, the plain language of the asset purchase agreement requires the buyer to offset its losses related to Environmental Claims without regard to the parties' ultimate indemnification obligations. Accordingly, the buyer is entitled to partial summary judgment on this issue of contractual interpretation.

         FACTS AND PROCEDURAL BACKGROUND

         Unless otherwise noted, the following facts are drawn from the pleadings and the documents incorporated by reference therein.

         The Parties' Agreement and Later Dispute

         Plaintiff V&M Aerospace LLC ("Aerospace") was formed in 2015 to purchase a Los Angeles-based chrome plating business owned by Defendant V&M Company ("VMC"). On July 2, 2015, Aerospace and VMC[2] entered into an Asset Purchase Agreement (the "APA") under which Aerospace purchased all VMC's assets except the real property on which the business was situated. Shortly thereafter, the parties also executed a Promissory Note (the "Note") with a principal balance of $3 million. Under the Note, Aerospace agreed to pay VMC quarterly interest for five years and the $3 million principal on August 21, 2020.

         At the time they entered into the APA, the parties were aware the real property on which the chrome plating facility was situated environmentally was contaminated. That environmental contamination expressly was addressed in the APA, where the parties agreed to specific indemnification provisions allocating responsibility for environmental contamination depending on when a hazardous substance was released. Specifically, VMC agreed to indemnify Aerospace for any losses associated with any release or threatened release of a hazardous substance before the APA's closing date.[3] Conversely, Aerospace agreed to indemnify VMC for any losses associated with any release or threatened release of a hazardous substance after the closing date.[4]

         The parties' indemnification obligations have proved more difficult to apply than they are to summarize. In 2017, an individual filed an action against VMC in Los Angeles, California Superior Court (the "California Litigation"). The plaintiff in the California Litigation sought damages and contribution from VMC for environmental contamination at the facility. In October 2017, VMC filed its first amended cross-complaint against Aerospace in the California Litigation. The amended cross-complaint seeks indemnification from Aerospace for the contamination VMC alleges Aerospace caused at the facility.[5]

         After VMC filed its cross-complaint, Aerospace retained counsel and incurred attorneys' fees and consultant costs associated with the California Litigation. While the parties continued to litigate their respective clean-up obligations in California, Aerospace notified VMC in July 2018 that Aerospace intended to exercise its right to offset those attorneys' fees against the August 2018 quarterly interest payment due under the Note.[6]

         The Indemnification and Offset Rights

         This offset right arose from the APA, wherein the parties agreed that Aerospace would offset losses it incurred against payments due under the Note and the parties' other agreements. Section 17 of the APA establishes that offset right and is at the center of the parties' current dispute. The first two sentences of Section 17 define Aerospace's offset right and the priority of payments against which Aerospace must offset its losses, providing:

Without limiting any other rights or remedies available to [Aerospace], [Aerospace] shall offset any claim for a Loss (other than Losses related to Environmental Claims) subject to indemnification pursuant to Section 15(a) by first withholding payments under the Note and/or offsetting against the principal balance of the Note and second withholding payments under the Lease if there is no remaining principal balance under the Note or [Aerospace] has offset the remaining principal balance under the Note. [Aerospace] shall offset any claim for any Loss related to Environmental Claims by first withholding payments under the Note and/or offsetting against the principal balance of the Note, second withholding payments under the Lease if there is no remaining balance under the Note or [Aerospace] has offset the remaining principal balance under the Note, and third withholding payments by [Aerospace] and Novaria under the Consulting Agreements if Buyer has withheld all payments to [VMC] under the Lease.[7]

         To summarize, for all losses other than losses relating to Environmental Claims (hereinafter, "Non-Environmental Losses"), Aerospace "shall" offset losses that are "subject to indemnification pursuant to Section 15(a)" by withholding payments first under the Note and then under the Lease. As to losses relating to Environmental Claims (hereinafter, "Environmental Losses"), Aerospace "shall" withhold payments first under the Note, then under the Lease, and finally under the parties' consulting agreements. The sentence pertaining to offsetting Environmental Losses does not contain the limitation that the losses must be "subject to indemnification pursuant to Section 15(a)" of the APA.[8]

         The terms "Loss" and "Environmental Claim" are defined under the APA. The APA classifies a "Loss" as including any "fee, charge, cost or expense

          (including the costs of attempting to avoid or in opposing the imposition thereof. . . and the fees, disbursements and expenses of attorneys, accountants and other professional advisors) . . . ."[9] "Environmental Claim" has a broad definition that includes any cause of action to recover costs or impose liability for pollution, contamination, cleanup, or the release of hazardous substances at the facility.[10]

         When Aerospace notified VMC of its intent to offset the interest payment, VMC disputed Aerospace's right to offset fees and costs for the California Litigation, arguing that all offset rights under Section 17 are limited to losses subject to indemnification. VMC argued Aerospace's losses incurred defending the cross-complaint in the California Litigation were not subject to indemnification because the cross-complaint only sought to impose liability on Aerospace for contamination caused by the release of hazardous substances after the closing date. After VMC disputed the offset, Aerospace filed this action seeking a declaratory judgment that it complied with the APA by offsetting the interest payment against Aerospace's losses incurred in the California Litigation.

         After filing an answer, VMC filed a motion for judgment on the pleadings. VMC urges the Court to enter judgment declaring that Aerospace may not withhold quarterly interest or principal payments for the California Litigation.[11]

         VMC argued that "in the absence of a right to indemnification under Section 15(a), no right to offset arises."[12] Shortly thereafter, Aerospace filed a motion for partial summary judgment, arguing the Court should hold (i) Aerospace has the right to offset the costs associated with the California Litigation, (ii) Aerospace properly offset those costs in August 2018, and (iii) Aerospace is not in default under the APA or the Note. The parties briefed and simultaneously argued both motions.

         For the reasons that follow, I conclude VMC's motion for judgment on the pleadings must be denied because Aerospace has the right to offset Environmental Losses irrespective of whether those losses are subject to indemnification. I therefore grant Aerospace's motion for summary judgment on that issue and on the issue of whether attorneys' fees are a "Loss" under the APA. I deny the balance of Aerospace's motion because factual issues preclude resolving the remaining issues at this stage of the proceedings.

         ANALYSIS

         A motion for judgment on the pleadings should be granted if, when viewing the facts alleged in the pleadings and the reasonable inferences to be drawn therefrom in favor of the non-moving party, no material issue of fact exists and the movant is entitled to judgment as a matter of law.[13] Summary judgment, on the other hand, should be awarded if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show 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."[14] In this case, the standard of review is immaterial to resolving the primary issue before the Court.

         Both parties' motions raise the issue of whether Section 17 permits Aerospace to offset Environmental Losses without regard to whether Aerospace ultimately will be entitled to indemnification from VMC for those losses. This question purely is one of contract interpretation, and neither side argues the contract is ambiguous. Therefore, whether analyzed under the pleadings-based standard or under the summary judgment standard, the question before the Court is the same: do the terms of the APA unambiguously provide Aerospace a right to offset the losses ...


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