On July 11, 2019, in Magnetek, Inc. v. The Travelers Indem. Co., Case No. 17 C 3173, Judge Robert Gettleman of the Northern District of Illinois issued an important decision preserving insurance coverage for a former subsidiary of a company that entered into a “policy buyback” settlement with its insurers after selling the subsidiary.

Back in the day, when lawsuits regarding coverage for long-tail environmental and toxic tort claims were all the rage, many corporations entered into settlements with their historic liability insurance carriers for such claims. Many settlements took the form of “buybacks,” where the insurers would pay the named insured in exchange for extinguishing all coverage under decades’ worth of policies, effectively buying them back from the insured. The parties also often agreed to “deem” the policies’ limits exhausted by the insurers’ payments.

The named insureds in many of these deals were large corporations that over the course of years had owned, acquired and sold many subsidiaries, which usually were included as insureds under the parents’ policies. Notwithstanding the long and sometimes complex corporate history of the parents and their subsidiaries, buyback settlements often simply had the parent unilaterally agreeing to extinguish coverage for itself and its current, former and future subsidiaries and affiliates in very broad language.

Many subsidiaries had their own issues with environmental and toxic tort claims, for which they may have been covered under some or all of their parents’ policies. If the subsidiaries were still owned by their parents at the time they entered into buyback settlements with the insurers, not surprisingly courts have held that the parents had the ability to extinguish their subsidiaries’ coverage rights as part of the settlement. See, e.g., Gen. Acc. Ins. Co. of Am. v. Old Republic Int’l Corp., 648 F. Supp. 634, 637 (N.D. Ill. 1986). But what about a subsidiary that the parent sold off before entering into a settlement with its insurers? Does the broad release language in the settlement apply to that subsidiary, on the theory that the policies belong to the parent and thus it can do what it likes with them? Despite the ubiquity of such settlements, there have been surprisingly few cases discussing this issue. Judge Gettleman’s decision in Magnetek thus is important because it provides some much-needed guidance in this area.

As related in the Magnetek decision, in the late 1960’s and early 1970’s, Northwest Industries, Inc., later known as Fruit of the Loom (“FOTL”), owned a company called Universal Manufacturing Corporation (“UMC”). UMC manufactured fluorescent light fixtures and ballasts that contained polychlorinated biphenyls (“PCBs”). From 1969 to 1978, Travelers Indemnity Company and Travelers Casualty and Surety Company (collectively “Travelers”) sold several general liability policies to FOTL that included UMC as an insured. In 1986, FOTL sold UMC to Magnetek, Inc. in a Stock Purchase Agreement. In 2004, FOTL entered into a policy buyback settlement with Travelers that purported to extinguish coverage for FOTL and “any Person insured by any of the Policies.” In 2016, Monsanto sued Magnetek, alleging that Magnetek was liable for PCB contamination caused by UMC’s products.

Travelers refused to defend or indemnify Magnetek and UMC, citing the 2004 settlement agreement. Judge Gettleman held that the settlement did not affect coverage for UMC under Travelers’ policies:

The problem with Traveler’s argument is that at the time of execution of the 2004 Settlement and Release Agreement, FOTL no longer owned or controlled UMC (plaintiff), one of the named insureds, having sold it in 1986. Thus, absent something in the [Stock Purchase Agreement] or Environmental Agreement, FOTL had no authority to release UMC’s rights under the policies.

Slip op. at 13. The judge found that Travelers had a duty to defend Magnetek in connection with Monsanto’s lawsuit. This common sense result – that a company cannot release the contractual rights of an entity it does not own or control without that entity’s consent – should assist other insureds who may confront this issue due to their own exposures to long-tail claims.

As an aside, I note that Judge Gettleman had some harsh words for the lawyers on both sides for their failure to follow correct summary judgment procedure. We’ll let the judge himself explain:

This case presents a complicated background, made all the more complicated because none of the parties have bothered to include a narrative factual description of the case in their legal memoranda. Instead, the parties elected to rely on their Local Rule 56.1 Statements by incorporating them into their briefs. As this court has noted in the past, see e.g. Strychalski v. Baxter Healthcare, Corp., 2014 WL 1154030 *2 (N.D. Ill. March 20, 2014), this practice is both improper and poor lawyering. L.R. 56.1 Statements are not intended to be substitutes for a statement of facts section in a memorandum of law. L.R. 56.1 Statements are to be limited to the material facts and are not to be argumentative. A statement of facts section in a brief is the “‘litigant’s opportunity to describe the underlying events, provide relevant background information, and persuade the court.’” Id. (quoting Sledge v. Comcast ABB Mgmt. LLC, 2012 WL 2368319 (N.D. Ill. 2012).

The parties’ failure to provide background sections in their briefs has left the court without a sufficient description of the underlying events leading to the contracts and documents on which plaintiff bases its claims and Travelers bases its defenses. The parties assume the court is as familiar as the parties with the underlying facts, jumping directly to their legal arguments without providing any context. “Rather than enlightening the court, the briefs have served only to confuse, focusing entirely on the narrow legal issues between the parties without providing sufficient background information to determine the import of those disputes.” Duchossois Indus., Inc. v. Crawford & Co., 2001 WL 59031, *1 (N.D. Ill. 2001). 

The judge’s admonishment serves as an important reminder that we lawyers take shortcuts at our peril, and we always should be aware of a judge’s attitude toward procedural shenanigans. Part of our job is to make life easier for the judge, which in some cases means more work for us but can be well worth it in the end.