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Quadrant EPP USA, Inc. v. Menasha Corp.

September 30, 2010


The opinion of the court was delivered by: Stengel, J.


Quadrant EPP USA, Inc., acquired four manufacturing facilities from Menasha Corporation through a Stock Purchase Agreement in 2005. Shortly after closing on the Agreement, Quadrant received a notice of violation from the Occupational Safety and Health Administration regarding a potential dust explosion hazard at one of the sites. Quadrant paid a fine to OSHA and then took steps to remediate what it perceived to be dust explosion hazards at each of the four acquired facilities. In this action, Quadrant asserts a declaratory judgment claim, and seeks contractual indemnification from Menasha for the cost of remediating the dust hazard in the four facilities.

A bench trial was held and on the basis of the evidence presented at trial, the court makes the following:


1. The plaintiffs are Quadrant EPP USA, Inc., and Quadrant PHS, Inc.

2. Quadrant EPP USA is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business in Reading, Pennsylvania.

3. Quadrant PHS is a corporation organized and existing under the laws of the State of Delaware with its principal place of business in Fort Wayne, Indiana.

4. Quadrant PHS was formerly known as Poly Hi Solidur, Inc., and is the successor to Poly Hi Solidur, Inc.

5. The defendant is Menasha Corporation.

6. Menasha is a corporation organized and existing under the laws of the State of Wisconsin with its principal place of business in Neenah, Wisconsin.

7. Pursuant to a Stock Purchase Agreement signed on June 25, 2005, Quadrant EPP purchased from Menasha all of the issued and outstanding shares of capital stock of Poly Hi for approximately $84.5 million dollars.

8. Poly Hi was, and continues now as Quadrant PHS, to be engaged in the development, manufacture, conversion, fabrication, marketing and sale of ultra high molecular weight polyethylene, polypropylene, high and low density polyethylene, chlorinated polyvinyl chloride and polytetrafluorethylene products used in a wide variety of applications and in a wide variety of industries.

9. The Agreement involved the sale of four Poly Hi manufacturing facilities. Keyser Valley, Laurel Lines, and Delmont are all located in Pennsylvania. The fourth facility is located in Fort Wayne, Indiana.

10. The Agreement sets forth various express warranties made by Menasha.

11. Among those warranties were warranties concerning "environmental matters" set forth at Section 4.19 of the Agreement which provides, inter alia, that Menasha and each of the facilities acquired under the Agreement were at all times in material compliance with, were not in violation of, nor had any liability under any environmental laws and had received no written notices from any governmental authority of any alleged, actual, or potential violation or failure to comply with any environmental laws.

12. Attached to the Agreement is Schedule 4.19, a document related to Section 4.19, which contains, inter alia, a section entitled "Non-Compliance."

13. The Agreement also sets forth provisions which provide indemnity by Menasha for any losses suffered by Quadrant as the result of any environmental condition which existed at the four facilities to the extent that the environmental condition was caused by or resulted from the operations of Menasha.

14. The Agreement defines "losses" as "any and all Liabilities, losses, costs, claims, damages, obligations, liens, judgments, taxes, fines, penalties, and expenses including interest and penalties imposed or assessed by any judicial or administrative body or other governmental authority or any arbitrator or arbitration panel."

15. The Agreement also provides that Menasha shall be responsible for remediation costs, including the reasonable costs of satisfying the then applicable standards of compliance with environmental laws in the applicable jurisdiction for manufacturing/industrial properties. (Emphasis added).

16. The Agreement defines "environmental condition" as "any violation of environmental law on or before the closing date, which results in an environmental liability."

17. The Agreement defines "environmental liabilities" as "liabilities arising from or under any environmental law."

18. The Agreement defines "environmental law" as "any other federal, state, foreign, or local law relating to the protection of the environment or human health and safety . . . any Order promulgated under any such law."

19. Before the parties executed the Agreement on June 25, 2005, and continuing until the closing on the Agreement, Quadrant engaged in thorough due diligence.

20. As part of that due diligence, Quadrant personnel physically visited all four of the Poly Hi facilities to be purchased and performed detailed walk-through inspections.

21. James Bush was the North American Operations Manager for Quadrant prior to August 2005, and was one of four Quadrant representatives who conducted the inspections of those facilities. The others included Glen Steady, Quadrant's President; Arno Schenk, a member of Quadrant's Board of Directors; and Arie Zwep, Quadrant's Operation Manager for Europe.

22. After August 2005, Mr. Bush became Integration Projects Manager.

23. Mr. Bush obtained his professional engineering license in 1976 and has worked for Quadrant for over 30 years.

24. During his due diligence inspections, Mr. Bush noticed that there was a powder on the floor of each of the four facilities, and he described the conditions in each facility as "slippery," noting that it was sometimes difficult to walk around because of the dust on the floor.

25. Before the Agreement, Quadrant's process handled, with few exceptions, mostly resins which came in pellets rather than powder. Quadrant's Reading facility had a compression molding area that used powder as a raw material.

26. None of Poly Hi's representatives informed Mr. Bush during the inspections that dust at the facilities created a fire or explosion hazard.

27. After performing due diligence but before the closing, Mr. Bush and the other Quadrant representatives discussed the potential for a dust explosion at the Poly Hi facilities, and noted those concerns in their due diligence reports which they sent to Quadrant's Board of Directors in Zurich.

28. All of the submitted due diligence reports identified the potential risk of a dust explosion as an existing hazard at the Poly Hi facilities.

29. One report specifically contemplated that capital expenditures by Quadrant might be necessary to address the dust explosion risk.

30. On June 27, 2005, two months after the initial due diligence inspections, and two days after the execution of the Agreement, an OSHA inspector visited the Keyser Valley facility in Scranton, Pennsylvania, to investigate a non-dust related employee complaint.

31. At the Keyser Valley facility, Poly Hi employed two processes, i.e., sheet pressing and extrusion, in its production of four foot by ten foot sheets of high density plastic. The raw material used to manufacture these sheets is a plastic powder, described at trial as "polypropylene resin," notable for its ultra-high density. The material is mixed with additives and, during the pressing cycle, converted into sheets of plastic. The edges are trimmed by saws, with the removed material being recycled by pulverizing it into powder for further use in the manufacturing process. The extrusion process also involves the trimming of edges by the use of saws.

32. While investigating the complaint, the OSHA inspector noticed dust accumulation in the extrusion area of the plant.

33. The OSHA inspector noted the potential risk of harm from a dust explosion, took dust samples for testing, and suggested that, until testing is completed, employing simple housekeeping measures, i.e., more frequent and effective removal of the dust, would help reduce any risk.

34. In response, Poly Hi formed a Project Team, including several of its engineers, whose mission was to identify hazards and fugitive dust sources; to identify the equipment that handled combustible dust; and to determine what steps to take to resolve those hazards.

35. Poly Hi also engaged an industrial cleaning firm to clean up the dust.

36. Poly Hi performed its own testing on the dust which confirmed that the dust could present an explosion risk and that some level of mitigation might be required.

37. A couple of days before closing, Menasha forwarded to Quadrant a supplemental Schedule 4.19 which added the following paragraph to the original:

In 2005, Company's Keyser Valley (Scranton) facility was the subject of a complaint to OSHA filed by a worker alleging chemical exposure in manufacturing operations. In the course of an investigation that occurred on Monday, June 27, 2005, an OSHA inspector concluded that the reported exposure issue had no merit. However, the OSHA inspector noted that Company was not in compliance with [National Fire Protection Association] explosion venting regulations with respect to dust collectors in extrusion operations. The OSHA inspector collected samples of dust from the dust collector equipment and will test it for explosive potential. Company engaged an industrial cleaning firm to clean the extrusion room of dust. Company has separately tested the dust, which test confirms that some level of mitigation may well be required. Company is not currently under notification by OSHA of violation.

38. In response, Quadrant sent a written notice to Menasha on the first day of closing informing Menasha that it considered the supplemental Schedule 4.19 to be for informational purposes only, and that the disclosures contained in that supplement did not modify in any respect any representations, warranties, covenants, or obligations of Menasha in the Agreement.

39. Quadrant also informed Menasha that all such matters disclosed in the supplement constituted seller identified pre-closing breaches pursuant to Section 13.14(c)(ii) of the Agreement, and that Quadrant's right of indemnification for those breaches would survive closing.

40. Section 13.14(c) is found in Article XIII of the Agreement entitled "Indemnification," and provides, in pertinent part:

Quadrant may send a written notice to Seller between the date hereof and the Closing that Quadrant has reason to believe that Seller or Company has breached one or more of its representations and warranties under this Agreement. Such Notice of Breach shall describe in reasonable detail the alleged breaches of representations or warranties and provide Quadrant's good faith estimate of the Losses that are reasonably expected to result from the Quadrant identified pre-closing breaches. In the event Quadrant's good faith estimate of such losses for (i) all Quadrant identified pre-closing breaches and (ii) all breaches of representations and warranties which Seller has disclosed to Quadrant in accordance with Section 15.18 is one million dollars or less in the aggregate, the parties hereto shall be required to close the transactions contemplated by this Agreement. . . If Closing occurs, Quadrant's indemnification claims with respect to all pre-closing breaches shall survive the Closing. . . . If Quadrant's good faith estimate of losses that are reasonably expected to result from all pre-closing breaches exceeds One Million Dollars in the aggregate, either Quadrant or Seller may terminate this Agreement pursuant to Section 12.1(f). In the event the parties elect to close the transactions contemplated by this Agreement, notwithstanding such pre-closing breaches, Quadrant's claims for such pre-closing breaches shall survive Closing.

41. Mr. Bush and the others at Quadrant knew about the combustible dust issue both from their own due diligence ...

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