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FIREMAN'S FUND INS. COS. v. SIEMENS ENERGY & AUTOM

December 24, 1996

FIREMAN'S FUND INSURANCE COMPANIES, ASSOCIATED INDEMNITY COMPANY and NATIONAL SURETY COMPANY, as subrogees of ALLIS-CHALMERS CORPORATION, ALLIS-CHALMERS REORGANIZATION TRUST, and ALLIS-CHALMERS PRODUCT LIABILITY TRUST, Plaintiffs, against SIEMENS ENERGY & AUTOMATION, INC., Defendant.


The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 Plaintiffs here seek to recover costs incurred by them in defending and settling two products liability cases brought against Allis-Chalmers Corporation ("Allis"). They claim that defendant Siemens Energy Group & Automation, Inc. ("Siemens") is obliged by contract to indemnify Allis and certain related entities for any such liability and, in consequence, that they are entitled to recover as subrogees. Jurisdiction is based on diversity of citizenship. *fn1"

 Following the denial of cross-motions for summary judgment, the parties agreed to trial on a stipulated record and as to the damages to be awarded in the event plaintiffs prevail. (Order for Trial to the Court, Aug. 26, 1996) The record includes extensive deposition testimony, some of it videotaped. *fn2" This is the Court's decision after trial and includes its findings of fact and conclusions of law. FED. R. CIV. P. 52(a).

 I

 The Genesis of the Dispute

 Siemens' Acquisition of Allis' Electrical Products Group

  On January 1, 1978, Siemens-Allis, Inc. *fn3" purchased all of the assets of Allis-Chalmers Electrical Products Group (the "EPG") from Allis. As is typical in such transactions, the Transfer Agreement between the parties specifically addressed post-closing responsibility for products liability claims arising out of products manufactured by EPG. It provided, in relevant part, that Siemens would:

 
"assume and agree to discharge, and indemnify and hold harmless [Allis] from, any and all claims, losses, expenses or liabilities of any kind or nature now in existence or hereafter arising from or relating to the conduct of the [EPG] by [Allis] including but not limited to . . . those relating to products, including parts, manufactured or sold, or services of the kind currently provided by the [EPG], including any predecessor models or versions of such products regardless of whether the date of manufacture, sale or service is before or after the Closing Date, including any pending uninsured litigation in which a defect in such a product is asserted . . ." (Granofsky Aff. Ex. 3 (the "Transfer Agreement"), Art. II, § 2.01.C)

 Allis cross-indemnified Siemens with respect to any claims, inter alia, with respect to products of Allis' discontinued transformer operations. (Id.)

 Following the sale, plaintiffs ("FFIC") *fn4" issued various commercial general liability ("CGL") insurance policies to Allis. The two product liability cases at issue here, the Griffith and Shook suits, were commenced against Allis in 1984 and April or May 1987, respectively, and were within the coverage of plaintiffs' policies. Nevertheless, as contemplated by the Transfer Agreement, Siemens hired defense counsel and initially defended these among other cases. (Feuss Dep. I, 27-28)

 The Allis Bankruptcy

 On June 29, 1987, Allis filed for bankruptcy protection under Chapter 11. This led to protracted proceedings between Allis and FFIC and between Allis and Siemens.

 The Allis-FFIC Settlement

 The policies pursuant to which FFIC insured Allis prior to and at the time of the bankruptcy filing were retrospective premium policies pursuant to which Allis was obliged to reimburse FFIC for defense and indemnification costs at the conclusion of each policy period. *fn5" (Braza Dep. 144-45; Granofsky Aff. Ex. 6, at 14) Disputes concerning FFIC's claims for reimbursement from the debtor and other matters led to the commencement of litigation in the Bankruptcy Court between FFIC and Allis. Among other things, FFIC sought either to avoid the insurance obligations under the CGL policies or force Allis to assume the retrospective premium agreements in bankruptcy. (Braza Dep. 145-46) Allis' creditors, however, were unwilling to agree to the assumption of the retrospective premium obligations. (Id. 146) In June 1988, Allis and FFIC reached a settlement that ultimately was signed by the parties and approved by the Bankruptcy Court in October 1988. (Id. 146-47; Granofsky Aff. Exs. 7-8)

 Under the terms of the settlement, the FFIC insurance policies remained in place but were converted from retrospective premium to more conventional insurance, with the agreed amount of the pre-petition premium treated as an allowed claim in the bankruptcy. (Braza Dep. 45-46, 153-54) In reaching the settlement, the parties negotiated a fixed premium based upon their respective projections of what the costs of defense and indemnification for the relevant exposures would be. (Id. 46-47) The Shook and Griffith cases, as well as the others that were being defended by Siemens, were not considered in this process (id. 46), doubtless on the assumption that Siemens would continue to handle them under the Transfer Agreement indemnity.

 The Plan of Reorganization

 On September 14, 1988, Allis filed its plan of reorganization, which was confirmed on October 31, 1988 (the "Plan"). The provisions of the Plan dealing with product liability claims are important to the resolution of this controversy.

 The universe of existing and potential future products liability claims was divided into two classes. Class 7 consisted of all "Insured Claims," a defined term meaning, among other things, product liability claims arising out of events or occurrences prior to January 1, 1988 "to the extent such Claims are covered by the" FFIC insurance policies. (Feuss Dep. Ex. 9, § 2.7 & Ex. A. at 9) Class 8 included, in addition to claims of other general unsecured creditors, "Other Product Liability Claims," which was defined in relevant part to include product liability claims arising from events or occurrences on or after January 1, 1986. *fn6" (Id. § 2.8 & Ex. A, at 11) As will appear, the treatment of the two classes was quite different.

 The Plan created two trusts, the Product Liability Trust and the Reorganization Trust. each of which received from the debtor certain cash and non-cash assets. (Feuss Dep. Ex. 9, Art. IV) In consideration of these transfers, the Reorganization Trust assumed all of the debtor's obligations to make cash distributions in respect of allowed Class 8 claims, among others. (Id. §§ 4.2A, 4.3) The Product Liability Trust in turn assumed the obligations of both the debtor and the Reorganization Trust to make cash distributions in respect of allowed Other Product Liability Claims. (Id. § 4.2B)

 Class 7 claims were unimpaired and were to be liquidated and paid in cash in full "in accordance with the Fireman's Fund Settlement Agreement and the Fireman's Fund . . . Insurance Policies." (Id. § 3.7) Class 8 claims, on the other hand, were impaired. Holders of such allowed claims were to receive pro rata shares of cash and certain common stock as provided in the Product Liability Trust Agreement. (Id. § 3.8A) It is common ground that Class 8 product liability claimants would not receive anything approaching one hundred cents on the dollar.

 The Plan's treatment of present and future product liability claims left a number of potential issues unresolved. To begin with, the use of a product liability trust to pay claimants on an impaired basis, although incorporated in earlier plans, was untested. It remained possible that a successful challenge to the concept would result in the reorganized Allis having full dollar liability to such claimants. (Braza Dep. 70-71) Moreover, the rights of a Class 7 claimant, to the extent of any recovery in excess of the available insurance, were unclear. (See id. 272-74) The possibility existed of a claim against reorganized Allis for the excess. (See id. 221-22)

 The Allis-Siemens Settlement

 Siemens and Allis had substantial disputes in the bankruptcy proceedings as well. Among many other issues entirely unrelated to this case, Siemens took the position that it was entitled to set off against its obligation to defend and indemnify Allis under the Transfer Agreement claims that it had against the debtor. Allis, for its part, contended that Siemens' assertion of the right of setoff violated Section 362 of the Bankruptcy Code.

 The Allis-Siemens disputes were resolved by a post-confirmation agreement concluded in approximately June and approved by Judge Lifland on August 15, 1989. (Granofsky Exs. 9-10; Braza Dep. Ex. C, at B0194-98) The relevant provisions of the agreement, with the portions upon which the parties rely most heavily italicized, stated:

 
"3. Indemnification. Siemens . . . agrees to assume, discharge, indemnify and hold harmless [Allis], the Reorganization Trust, and the Product Liability Trust from any and all claims, losses, expenses or liabilities of any kind or nature now in existence or hereafter arising from, or relating to, the conduct of the business of the former [EPG] including, but not limited to, . . . (b) those relating to products, including parts, manufactured by the former [EPG] as of January 1, 1978, including any predecessor models or versions of such products regardless of whether the date of manufacture, sale or services was before or after January 1, 1978, including any uninsured litigation which was pending as of January 1, 1978 in which a defect in such a product is asserted . . .
 
"4. Compromise and Settlement of Claims for Which [Siemens] Has Agreed to Indemnify [Allis], the Reorganization Trust and the Product Liability Trust. [Allis], the Reorganization Trust and the Product Liability Trust . . . agree under the conditions described below to attempt to compromise and settle all product liability claims brought against [Allis] and [Siemens] for which [Siemens] has agreed to indemnify [Allis], the Reorganization Trust and the Product Liability Trust as provided in paragraph 3 above.
 
"The parties agree to exchange a separate letter stating the current status of all claims subject to this paragraph.
 
"[Allis], the Reorganization Trust and the Product Liability Trust further agree (a) to consult with [Siemens] with respect to the compromise and settlement of all claims, and (b) that no compromise and settlement shall be made without the consent of [Siemens]. If consent to a proposed compromise or settlement is withheld by [Siemens] over the recommendation of the Reorganization Trust or the Product Liability Trust or if the parties agree that settlement by negotiation is not available, [Siemens] shall immediately assume defense and all further activity with regard to the particular claim, and [Siemens] will directly assume and pay all costs of defense . . .
 
* * *
 
"It is the intention of [Siemens] to utilize the services of the Reorganization Trust and Product Liability Trust only for purposes of attempting to effectuate a settlement. Accordingly, it is the intention of [Siemens] to retain all counsel and experts in connection with the analysis and defense of the claims. [Siemens] agrees that it shall reimburse [Allis], the Reorganization Trust and the Product Liability Trust for [expenses relating to the administration of claims.] Nothing in this Agreement shall be construed to in any way expand any obligations of [Siemens] for payment to either [Allis], the Reorganization Trust, or any third-party beyond the obligations of [Siemens] to indemnify and reimburse [Allis], the Reorganization Trust and the product [sic] Liability Trust as expressly provided by this Agreement." (Granofsky Ex. 9, §§ 3-4)

 As is readily apparent, the language of Section 3 of the Allis-Siemens settlement agreement was identical in all material respects to that of the relevant provision of the Transfer Agreement *fn7" save that it included as indemnitees the Reorganization and Product Liability Trusts.

 The Dispute Arises

 The August 9, 1989 Meeting

 On August 9, 1989, even before Judge Lifland approved the settlement, representatives of Allis and Siemens met to discuss the procedures for handling the existing product liability claims for which Siemens was responsible, *fn8" which at the time included Griffith and Shook. (Feuss Dep., June 5, 1996 [hereinafter "Feuss Dep. II"], 7) On August 22, 1989, one week after Judge Lifland approved the Allis-Siemens settlement agreement, Siemens' inside counsel, Linda Feuss, wrote to Allis, purportedly to confirm the August 9, 1989 discussion, and provided the list of pending cases "which, it was agreed, fall within the scope of ...


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