In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-1445
SMURFIT NEWSPRINT CORPORATION,
a Delaware corporation,
Plaintiff-Appellant,
v.
SOUTHEAST PAPER MANUFACTURING
COMPANY, a Georgia partnership,
now known as SP NEWSPRINT COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 1026—James B. Zagel, Judge.
____________
ARGUED OCTOBER 23, 2003—DECIDED MAY 21, 2004
____________
Before MANION, KANNE, and EVANS, Circuit Judges.
MANION, Circuit Judge. Smurfit Newsprint Corporation
(“Smurfit”) appeals a grant of summary judgment to
Southeast Paper Manufacturing Company, now known as
SP Newsprint Company (“SP”). The district court held that
the “no-prejudice” rule of New York insurance law should
apply to the indemnification provisions of an asset purchase
agreement, enabling SP to avoid a potential obligation to
2 No. 03-1445
indemnify Smurfit. We conclude that, were the New York
Court of Appeals presented with this question, it would not
apply the rule. We, therefore, reverse the holding of the
district court with respect to this issue. The district court
also held that SP did not breach the asset purchase agree-
ment, and we affirm that decision.
I.
Smurfit, a Delaware corporation with its principal place
of business in Illinois, is a manufacturer of newsprint. In late
1999, Smurfit decided to sell a paper mill it owned and
operated in Oregon. Smurfit solicited bids for a purchaser
and settled on SP, a general partnership with corporate
general partners in Georgia, Florida, and Virginia.
The parties negotiated and executed an Asset Purchase
Agreement (the “APA”). Under the APA, SP agreed to offer
employment to substantially all of the employees of the mill
who were members of the Association of Western Pulp and
Paper Workers Local No. 60 (the “Union”) on terms compa-
rable with those in an existing collective bargaining agree-
ment between Smurfit and the Union (the “Smurfit CBA”).
SP did not, however, assume the Smurfit CBA. Instead,
following closing, SP and the Union agreed to a new
collective bargaining agreement (the “SP CBA”).
The parties closed on the transaction on November 10,
1999. Shortly after the closing, SP announced that for the
calculation of pension benefits paid by SP, it would not
credit Union employees’ years of service accumulated
during the time Smurfit owned and operated the mill. In
effect, a hypothetical Union employee who retired two years
after SP’s purchase of the mill and had worked at the mill
for a total of 20 years would not receive, from SP, credit in
No. 03-1445 3
the calculation of pension benefits for the 18 years Smurfit
1
had been his employer.
After SP’s announcement, the Union filed a grievance
against Smurfit. The Union alleged that the Union employ-
ees were effectively terminated and thus entitled to sever-
ance benefits. Under the Smurfit CBA, Union employees
were entitled to severance benefits if Smurfit decided to
permanently close the mill. An arbitrator heard the griev-
ance and held that, insofar as Smurfit was concerned, the
mill had been closed, and thus the Union employees were
entitled to severance benefits. The arbitration award was
approximately $ 3.5 million. The decision of the arbitrator
1
Pursuant to the Smurfit CBA, the dollar amount payable for
each year of service has increased over the years. For example,
beginning April 1, 1999, a retiring Union employee would receive
$32 per month for each year of employment. Beginning April 1,
2000, a retiring Union employee would receive $33 per month.
Because SP has announced it would not credit years of service
while Smurfit operated the mill in the payment of pensions, a
Union employee who retired in December 2001, after having
worked at the mill for 20 years, would receive two pension
checks: one from Smurfit for the years he worked there while
Smurfit operated the mill, and one from SP for the years he
worked under SP. The checks would be calculated as follows:
from Smurfit he would receive $32 per month for each of the 18
years he worked for Smurfit for a total of $576 per month ($32 x
18); from SP he would receive $34 per month (after April 2001, an
employee was entitled to $34 per month for each year of service)
for each of the two years he worked for SP ($34 x 2). The two
checks would amount to $644 per month ($576 + $68). If, how-
ever, Smurfit had continued to run the mill until the employee’s
retirement, he would have received $680 per month ($34 x 20
years of service). Thus, the employee would receive $36 less per
month as a result of the transition of ownership.
4 No. 03-1445
was confirmed by the United States District Court for
Oregon. Smurfit Newsprint Corp. v. Association of Western
Pulp and Paper Wkrs., Local 60, No. Civ. 01-953-AS, 2001 WL
34043382 (D. Or. Aug. 14, 2001). This confirmation was
affirmed by the Ninth Circuit. Smurfit Newsprint Corp. v.
Association of Western Pulp and Paper Wkrs., Local 60, 59 Fed.
Appx. 207 (9th Cir. 2003).
Smurfit paid the award and then made a demand on SP to
assume responsibility for the award under the indemnifica-
tion provisions of the APA. This was the first specific
demand for indemnification made by Smurfit, although
Smurfit argues that SP was aware of the arbitration. Jack
Brandup, the former personnel manager of the mill under
Smurfit, had been retained by SP. Smurfit alleges that
Brandup was present when the Union demanded severance
benefits before closing. Smurfit also claims that it informed
SP’s management of the Union’s demand immediately after
closing.
SP refused to indemnify Smurfit and Smurfit filed this
action in the District Court for the Northern District of
Illinois. Smurfit’s complaint contained two alternative
counts. In Count I, Smurfit requested a declaration that SP
was responsible for the arbitrator’s award under the
indemnity provisions of the APA. In Count II, Smurfit
alleged that SP breached the APA’s requirement that SP
offer the Union employees employment on terms compara-
ble to the Smurfit CBA.
SP moved to dismiss the complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6). This motion to dismiss was
later converted to a motion for summary judgment on both
counts. With respect to Count I, SP contended, among other
things, that Smurfit failed to give SP timely written notice of
the Union’s grievance. With respect to Count II, SP con-
tended that the APA’s “comparable employment” language
No. 03-1445 5
did not require SP to include Union members’ prior years of
employment with Smurfit in determining their pension
benefits.
The district court, after a series of decisions, granted
summary judgment in favor of SP on both counts. In
interpreting the terms of the APA, the court gave effect to
the APA’s choice of law provisions and applied New York
law. With respect to Count I, the court found that prompt
written notice of a demand for indemnification was a
condition precedent to SP’s indemnity obligations under the
APA. The court found that the APA’s notice and indemnifi-
cation provisions were analogous to notice-of-claim provi-
sions in an insurance contract.
Under New York insurance law, notice-of-claim provi-
sions in an insurance contract are presumed to be conditions
precedent. Under contract law more generally, if one party’s
obligations under a contract are subject to a condition
precedent on the part of the other party, the first party’s
obligations are excused if the condition precedent is not
met. If, however, a party’s obligations under a contract are
subject to a duty of the other party, the first party’s obliga-
tions are excused only where it can demonstrate prejudice
to it in the failure of the second party to perform its duty.
Because the district court found that the notice requirement
of the APA was a condition precedent to SP’s obligation to
indemnify Smurfit, the court held that SP was not required
to demonstrate prejudice when it did not receive earlier
notice of the grievance by the Union. The court concluded,
therefore, that SP had no obligation to indemnify Smurfit.
With respect to Count II, the court found that the arbitra-
tor’s “award was not based on SP’s failure to count prior
years of service, but rather because Smurfit closed its mill
and terminated employees, which triggered severance
benefits.” As a result, the court held that the employees’
6 No. 03-1445
years of service were prior obligations that remained the
responsibility of Smurfit under the APA. As a result, there
was no breach of the APA in SP’s failure to consider prior
years of service.
II.
Smurfit appeals the decision of the district court with
respect to both counts. As to Count I, Smurfit argues that
notice was not required for a claim of indemnification for
payment of severance benefits. Smurfit also argues that,
even if notice were required, the district court improperly
applied New York insurance law to find that notice was
a condition precedent to SP’s obligation to indemnify
Smurfit. Finally, Smurfit argues that, even if notice were
required and were a condition precedent to SP’s obligation
to indemnify Smurfit, SP waived the written notice require-
ment because it had actual knowledge of the pendency of
the arbitration. With respect to Count II, Smurfit argues that
the failure of SP to include Union employees’ service while
employed by Smurfit in SP’s calculation of pension benefits
constituted a breach of SP’s agreement in the APA to
provide employment to Union employees at terms compara-
ble to their employment with Smurfit.
In addition to responding to Smurfit, SP provides alterna-
tive grounds upon which this court could uphold the
district court’s grant of summary judgment. First, SP argues
that the notice of indemnification provision was an express
condition precedent to indemnification. If this were true, the
failure of Smurfit to provide prompt notice would have
excused SP from its indemnification obligation without
resort to the no-prejudice rule. Although the district court
rejected SP’s argument, it still found that the notice provi-
sion was a condition precedent, just not an express condi-
No. 03-1445 7
tion precedent. SP also argues that even if this court finds
that SP must demonstrate prejudice in not receiving earlier
written notice, it can make such a showing. The district
court did not decide whether SP was prejudiced by the
failure to receive earlier notice.
A. Governing Law
This case is premised upon diversity jurisdiction and we
must, therefore, determine the governing state law. A
federal court sitting in diversity applies choice-of-law rules
of the forum state, here, Illinois. Klaxon Co. v. Stentor Electric
Mfg. Co., 313 U.S. 487 (1941); Nelson v. Sandoz
Pharmaceuticals Corp., 288 F.3d 954, 963 n.7 (7th Cir. 2002).
Illinois law holds that the law applicable to a contract is the
law intended by the parties. When the parties express that
intent (such as through a governing law provision), that
express intent is generally recognized. Hofeld v. Nationwide
Life Ins. Co., 322 N.E.2d 454, 458 (Ill. 1975) (“Generally, the
law applicable to a contract is that which the parties in-
tended, assuming such an intent. When that intent is
expressed, it should be followed.”). An exception to this
general rule arises where the express choice of law “would
both violate fundamental Illinois public policy and Illinois
has a materially greater interest in the litigation than the
chosen State.” English Co. v. Northwest Envirocon, Inc., 663
N.E.2d 448, 452 (Ill. App. Ct. 1996) (emphasis in original).
The APA is governed by New York law. This is the intent
of the parties as expressed in § 10.03 of the APA. Section
10.03 provides that, “[t]his Agreement shall be governed by,
and construed in accordance with the laws of the State of
New York, applicable to contracts executed in and to be
performed in that State.” We have not been offered any
reason to believe that applying New York law would violate
8 No. 03-1445
Illinois public policy and that Illinois has a materially
greater interest in the litigation than New York. We there-
fore look to New York contract law to resolve the issues
presented.
B. Notice
SP first challenges the requirement that it must provide
prompt notice of a claim for indemnification. Indemnifica-
tion under the APA is primarily addressed in Article Eight.
Section 8.02(a) of the APA covers indemnification by SP.
Section 8.02 Indemnification by the Purchaser.
(a) [SP] agrees, subject to the other terms and conditions
of this Agreements [sic], to indemnify and defend
[Smurfit] against and hold [Smurfit] harmless from,
against and in respect of any and all claims, liabilities,
obligations, losses, costs, expenses, penalties, fines and
other judgments (at equity or at law) and damages
whenever arising or incurred (including, without
limitation, amounts paid in settlement, reasonable
attorneys fees and expenses) relating to or arising out of
(i) the breach of any representation, warranty, covenant
or agreement of [SP] herein, (ii) the Assumed Liabilities,
(iii) any fraud, willful misconduct, bad faith or inten-
tional breach of any representation, warranty, covenant
or agreement made by [SP] in this Agreement . . . and
(iv) the operations of the Business after the Closing Date
by Purchaser.
Section 8.02(b) requires Smurfit to give notice to SP where
it believes it may be entitled to indemnification.
(b) [Smurfit] agrees to give [SP] prompt written notice
of any claim, assertion, event or proceeding by or in
respect of a third party of which it has knowledge
concerning any liability or damage as to which may
No. 03-1445 9
request indemnification hereunder. [SP] shall have the
right to direct, through counsel of its own choosing, the
defense or settlement of any such claim or proceeding
at its own expense.
The APA also contains a separate section (§ 10.02) on notices
that directs Smurfit to provide any notice required under
the APA to SP at its headquarters in Dublin, Georgia, with
a copy to SP’s counsel in Atlanta, Georgia.
Smurfit argues that notice of an obligation to indemnify is
not required where it seeks indemnification under § 6.01(c)
of the APA. Section 6.01(c) provides as follows:
[SP] shall be responsible for all claims of severance
benefits which are properly payable under the terms of
[Smurfit’s] severance plan as currently in effect (a copy
of which has been furnished to [SP]) by (i) any Union
Employees, and (ii) any Non-Union Employees that (A)
[SP] fails to offer employment with [SP] as of the
Closing or (B) are offered employment by [SP] in which
the terms thereof are not in compliance with Section
6.01(b) and such Employees do not accept employment
with [SP] on such terms. [SP] agrees to indemnify and hold
[Smurfit] harmless from any claims described in the immedi-
ately preceding sentence.
(Emphasis added.) There is no notice requirement in
§ 6.01(c) or any immediately surrounding section of the
APA. Thus, Smurfit argues, there is no notice requirement
for an indemnification claim where the indemnification
relates to claims for severance benefits. Section 8.02(b)’s
notice requirement, Smurfit contends, relates only to claims
for indemnification brought pursuant to § 8.02(a).
SP argues, to the contrary, that indemnification under
§ 6.01(c), at least insofar as this particular claim is con-
10 No. 03-1445
cerned, is the same as indemnification for claims under
§ 8.02, specifically § 8.02(a)(i) (indemnification arising out
of the breach of a representation, warranty, covenant or
agreement by SP) and (iv) (indemnification arising out of
the operations of the mill after the closing date of the APA).
Thus, the notice provisions of § 8.02(b) are applicable to
Smurfit’s claim. The district court agreed and held that
§§ 6.01(c) and 8.02(a) were both applicable to Smurfit’s
claim for indemnification. The district court found that
Smurfit’s claim for indemnification was covered by
§§ 8.02(a)(i) and (iv).
SP also argues in the alternative that, even if indemnifica-
tion under § 6.01(c) were different than indemnification
under § 8.02(a), the notice provision of § 8.02(b) would be
directly applicable to § 6.01(c). As SP points out, under
§ 8.02(b), Smurfit is required to provide SP “with prompt
written notice . . . concerning any liability or damage as to
which may request indemnification hereunder.” (Emphasis
added.) Section 10.10 of the APA provides that “[u]nless the
context of this Agreement otherwise requires . . . (c) refer-
ences to ‘hereof’, ‘herein’, ‘hereby’ and similar terms shall
refer to this entire Agreement.” (Emphasis added.) SP argues
that “hereunder” in § 8.02(b) is a similar term and, thus, the
notice provisions of § 8.02(b) apply to a claim for indemnifi-
cation under § 6.01(c). Smurfit concedes, as we think it
must, that “hereunder” is a similar term to “hereof, “herein”
and “hereby,” but argues that the context of § 8.02(b)
requires that its application be limited to claims for indem-
nification under § 8.02(a).
We hold that notice concerning Smurfit’s claim for
indemnification is governed by § 8.02(b). That is, Smurfit
was required to give “prompt written notice” of its claim
under § 6.01(c) as provided in § 8.02(b). We believe that the
use of the word “hereunder” in § 8.02(b) is meant to apply
No. 03-1445 11
that section’s notice requirement to all claims for indemnifi-
cation by Smurfit. We see no reason why the context of
§ 8.02(b) requires that its notice provision relates only to an
indemnification sought pursuant to § 8.02(a), and Smurfit
offers only the conclusory statement that “ ’[h]ereunder’ in
section 8.02 must be read to refer solely to section 8.02, and
not to any other claims provision, especially not a specific
provision that the parties placed at an entirely different part
of the APA.”
C. Notice as an Express Condition Precedent
We turn next to SP’s argument that the notice provision of
§ 8.02(b) was an express condition precedent to indemnifica-
tion. “A condition precedent is an act or event, other than a
lapse of time, which, unless the condition is excused, must
occur before a duty to perform a promise in the agreement
arises.” Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon
& Co., 660 N.E.2d 415, 418 (N.Y. 1995). An express condition
precedent is imposed by the parties in the terms of the
agreement. Preferred Mortgage Brokers, Inc. v. Byfield, 723
N.Y.S.2d 230, 231 (N.Y. App. Div. 2001). If SP is correct that
prompt written notice of a claim for an indemnification is a
condition precedent (express or otherwise) to indemnifica-
tion, then SP’s duty to provide such indemnification never
arose. Richard A. Lord, 13 Williston on Contracts § 38:6 (4th
ed. 2000) (“As a general rule, unless the performance [of a
condition precedent] is waived, excused, or prevented by
the other party, or unless he or she repudiates the contract,
conditions which are either express or implied in fact must
be literally met or exactly fulfilled or no liability can arise on
the promise qualified by such conditions.”).
SP argues that the language of § 8.02(a), making its
obligation to indemnify “subject to the other terms and
12 No. 03-1445
conditions of this Agreement,” is evidence that § 8.02(b)’s
requirement of prompt written notice of a claim for indem-
nification is an express condition precedent. Smurfit argues
that “subject to” was not sufficiently clear such that prompt
written notice is an express condition precedent.
We agree with Smurfit. Prompt written notice pursuant to
§ 8.02(b) was not an express condition precedent to SP’s
2
obligation to indemnify Smurfit. The New York Court of
Appeals has held that “a contractual duty ordinarily will
not be construed as a condition precedent absent clear
language showing that the parties intended to make it a
condition.” Unigard Sec. Ins. Co. v. North River Ins. Co., 594
N.E.2d 571, 573 (N.Y. 1992). The general language that the
obligation of SP to indemnify Smurfit is “subject to other
terms and conditions of [the APA]” is not sufficiently
precise to make prompt written notice an express condition
precedent to indemnification. Although the obligation to
indemnify is “subject to other terms and conditions,” there
is no “clear language” in § 8.02(b) to indicate that notice is
an express condition precedent.
2
Unlike the district court, we have some doubt as to whether
Smurfit’s claim for indemnification is the type of indemnification
covered by §§ 8.02(a)(i) or (iv); therefore, even if notice pursuant
to § 8.02(b) were an express condition precedent to indemnifica-
tion under § 8.02(a), because Smurfit’s claim for indemnification
may not be a type of indemnification covered by § 8.02(a), the
“subject to” language of that section may not apply.
We need not resolve these doubts, however, because as we
discuss, even if Smurfit’s claim for indemnification could be
considered the type of indemnification covered by § 8.02(a), the
“subject to” language is not sufficient to require notice as an
express condition precedent to indemnification.
No. 03-1445 13
D. The No-Prejudice Rule
We turn next to the primary argument of the parties:
whether New York’s no-prejudice rule applies to the APA’s
notice provisions. Under general New York contract law,
“one seeking to escape the obligation to perform under a
contract must demonstrate material breach or prejudice.”
Unigard, 594 N.E.2d at 573; see also American Home Assurance
Co. v. International Ins. Co., 684 N.E.2d 14, 16 (N.Y. 1997).
This rule applies to prompt-notice provisions. Unigard, 594
N.E.2d. at 574; American Home Assurance Co., 684 N.E.2d at
16. Thus, as a general matter, SP would have to demonstrate
that it was prejudiced by Smurfit’s failure to provide
prompt written notice before it could rightfully refuse to
indemnify Smurfit.
New York, however, has developed a “limited exception,”
American Home Assurance Co., 684 N.E.2d at 16, for notice
provisions in a primary or excess insurance contract. Under
this no-prejudice rule, where the insured has not complied
with notice-of-claim provisions, an insurer need not demon-
strate prejudice before it may refuse to perform its insurance
obligations. Unigard, 594 N.E.2d. at 573 (“It is settled New
York law that the notice provision for a primary insurer
operates as a condition precedent and that the insurer need
not show prejudice to rely on the defense of late notice.”);
see also American Home Assurance Co., 684 N.E.2d at 18
(extending the no-prejudice rule to excess insurers). The
New York Court of Appeals has offered several rationales
for the no-prejudice rule. These include “the insurer’s need
to protect itself from fraud by investigating claims soon
after the underlying events; to set reserves; and to take an
active early role in settlement discussions.” In re Brandon,
769 N.E.2d 810, 813 (N.Y. 2002); see also Unigard, 594 N.E.2d
at 573.
14 No. 03-1445
Here, SP seeks to extend the no-prejudice rule to the
notice for indemnification provisions in an asset purchase
agreement. The district court agreed. We, however, do not
believe that the New York Court of Appeals would permit
such an extension. The New York Court of Appeals has
consistently referred to the no-prejudice rule as a “limited”
exception for insurance contracts. In re Brandon, 769 N.E.2d
at 813; American Home Assurance Co., 684 N.E.2d at 16;
Unigard, 594 N.E.2d at 573. We have been directed to no
decision of that court, or any other New York state court
decision, that has applied the no-prejudice rule outside of
the insurance contract context.
SP directs our attention to only one decision applying
New York law and invoking the no-prejudice rule outside
of the insurance context, and neither party can show that
any other state that applies the no-prejudice rule has
3
applied such a rule outside of the insurance context. SP
cites a decision of the United States District Court for the
Southern District of New York where that court, with
limited analysis, extended the no-prejudice rule to an
indemnification provision in a non-insurance contract. See
EMI Catalogue P’ship v. CBS/Fox Co., No. 86 CIV 1149, 1994
3
This may, in part, be due to the apparent trend away from the
no-prejudice rule in favor of a rule requiring an insurer to show
prejudice. Citing a Tennessee Supreme Court decision, the New
York Court of Appeals has noted that only two states, New York
and Colorado, that had considered the issue in the preceding
twenty years continued to adhere to the no-prejudice rule and
that Colorado has since abandoned the no-prejudice rule. In re
Brandon, 769 N.E.2d at 813 n.3 (citing Alcazar v. Hayes, 982 S.W.2d
845, 850 (Tenn. 1998)); cf. Charles C. Marvel, Modern Status of
Rules Requiring Liability Insurer to Show Prejudice to Escape Liability
Because of Insured’s Failure or Delay in Giving Notice of Accident or
Claim, or in Forwarding Suit Papers, 32 A.L.R.4th 141 (1984).
No. 03-1445 15
WL 163700, at *9-10 (S.D.N.Y. Apr. 28, 1994). In that case,
the court noted that the indemnitor “was functioning
analogously to a primary insurer.” Id. at *10. The persuasive
strength of that opinion, given its limited analysis, is
significantly reduced, however, by a decision (albeit, again
with limited analysis) of the same court, two years later,
refusing to apply the no-prejudice rule to an indemnifica-
tion provision in another non-insurance contract. See Red
Ball Interior Demolition Corp. v. Palmadessa, 947 F. Supp. 116,
123 (S.D.N.Y. 1996) (“[D]espite some superficial similarities
between the indemnification agreement and insurance
contracts, this Court declines to create a new exception to
the general rule that contractual obligations are to be
construed as independent promises, rather than conditions
4
precedent to performance.”).
The policy rationales for the no-prejudice rule have
minimal application outside the insurance context. A
principal foundation of the insurance business is the
necessity of processing claims and making payments to the
4
In its brief, SP argues that reliance on Red Ball is misplaced
because Red Ball relied primarily on the intermediate appellate
court decision in American Home Assurance Co., which was later
vacated by the New York Court of Appeals, for the proposition
that there is a distinction when there is a right but not an
obligation to defend against or investigate a claim. SP appears to
be mistaken, however. The court in Red Ball relied primarily on
the New York Court of Appeals decision in Unigard, a decision
that remains good law. See Red Ball, 947 F. Supp. at 123-24. It is of
no matter, however: we rely on Red Ball solely to show that the
only court that has considered the application of New York’s no-
prejudice rule outside of insurance context has reached two
different decisions. We do not adopt or reject the holding of Red
Ball.
16 No. 03-1445
insured. An insurance company can be faced with hun-
dreds, if not thousands, of claims at any given time. Such
circumstances require particularly strict standards for
processing claims that allow the insurer to allocate its
financial and human resources more efficiently. While it is,
of course, true that SP, like an insurance company (or any
other business), has an interest in protecting itself from
fraud and participating in settlement discussions, SP is not
routinely engaged in the business of insurance. Therefore,
it is not faced with the volume of claims routinely facing an
insurance company. We see no reason, therefore, why SP’s
interest in protecting itself from fraud and its contractual
right to participate in settlement discussions is not ade-
quately protected by the more general rule that it must
show prejudice from a failure to receive prompt written
notice. As SP itself points out, at least one New York court
has found prejudice where a delay in notice of an insurance
claim precluded an insurer from “a timely investigation . . .
and the chance to effect an early settlement.” Hartford Fire
Ins. Co. v. Baseball Office of the Comm’r, 654 N.Y.S.2d 21, 22
5
(N.Y. App. Div. 1997).
As to the other rationale stated by the New York Court of
Appeals for the no-prejudice rule, the need to set reserves,
SP is not, as far as the record indicates, required to set
reserves comparable to those required of insurance compa-
nies under New York law. See N.Y. Ins. Law § 1303. SP does
state, in passing, that it is required to set reserves but does
5
As we discuss below, we have decided to remand this case to
the district court to determine whether SP was prejudiced by
Smurfit’s delay in providing notice of its claim for indemnifica-
tion. We do not, therefore, mean to suggest by citing Hartford that
SP has actually been prejudiced by Smurfit’s delay. The determi-
nation of whether SP has been prejudiced is for the district court
to decide.
No. 03-1445 17
not indicate whether those reserve requirements are statu-
tory, contractual, or an accounting practice, or even whether
the reserves are in any way related to its indemnity obliga-
tion to Smurfit.
We hold that the New York Court of Appeals, were it
faced with this question, would not extend the no-prejudice
rule to indemnification provisions of an asset purchase
agreement. We need not, therefore, consider Smurfit’s
motion to certify this question of state law to the New York
Court of Appeals. In addition, we need not consider
Smurfit’s argument that, even assuming notice were a
condition precedent to indemnification, SP waived its right
to notice because it had actual knowledge of its potential
liability.
E. Actual Prejudice
SP argues that, assuming this court were to find that the
no-prejudice rule does not apply and that SP must show
prejudice in the failure to receive prompt notice, it can show
prejudice. SP concedes, however, that it did not argue actual
prejudice in the district court. Although this court may
affirm a grant of summary judgment “on any ground that
finds support in the record, . . . the ground must have been
adequately presented in the trial court so that the
non-moving party had an opportunity to submit affidavits
or other evidence and contest the issue.” Box v. A & P Tea
Co., 772 F.2d 1372, 1376 (7th Cir. 1985) (internal citations
omitted). That is not the case here. Smurfit did not have the
opportunity to present, and the district court did not have
the opportunity to consider, an argument that SP suffered
no prejudice in the delay in notifying SP of its indemnifica-
tion obligation. We remand this issue, therefore, to the
18 No. 03-1445
district court for it to consider whether SP suffered preju-
dice as a result of the late notice of its potential indemnifica-
tion obligation.
F. Breach of Contract
We turn next to the question of whether SP breached the
APA. As we indicated above, this issue centers on whether
SP failed to offer Union employees “terms and conditions
comparable to the [Smurfit CBA]” when it announced it
would not consider the Union employees’ years of service
in calculating pension benefits. We hold that SP did not
breach the APA and, therefore, we affirm the district court’s
grant of summary judgment to SP on Count II of Smurfit’s
complaint.
The terms and conditions of the Smurfit CBA applicable
here are those related to an employee’s creditable service
and his pension benefits. The Smurfit CBA provided for
payment of a certain dollar amount per month for each year
of “credited service.” Under the Smurfit CBA, credited
service ran from the most recent date of hire.
As we indicated above, SP did not assume the Smurfit
CBA. Instead, SP entered into a new collective bargaining
agreement with the Union. The SP CBA is, however,
substantially identical to the Smurfit CBA. Importantly, the
SP CBA retained the same formula for calculating an em-
ployee’s benefits: x dollars per month for each year of
credited service with credited service being measured from
the most recent date of hire.
When SP took over operation of the mill, the most recent
date of hire for every employee changed. The APA did not
provide for a smooth transfer whereby the employees
No. 03-1445 19
(Union and non-union) had one boss one day and another
the next. Instead, the employees had to apply for their old
jobs and be hired by SP. Prior to closing, SP sent a letter to
the Union’s president informing him that SP “will consider
[for employment] all of the members of the present
workforce who submit an application.” The effective date
for an employee’s hiring was the closing date—November
10, 1999.
Thus, the decision of SP to calculate the pension benefits
it offered Union employees from the date it took over the
mill is in keeping with the terms of the SP CBA, which in
turn are identical to the Smurfit CBA. The most recent date
of hire for Union employees is now the closing date of the
APA. A Union employee’s credited service under the SP
CBA runs from November 10, 1999. Because SP’s calculation
of pension benefits—from the most recent date of hire—was
identical to the method of calculation of pension benefits
utilized by Smurfit, SP did not fail “to offer terms and
conditions comparable to the [Smurfit CBA].”
III.
The no-prejudice rule of New York insurance law is a
limited exception to the general principles applicable to
contracts governed by New York law. We hold that the New
York Court of Appeals would not apply the no-prejudice
rule to the indemnity provisions of an asset purchase
agreement. We therefore reverse the district court’s determi-
nation to the contrary and remand this case to the district
court to determine whether SP was prejudiced by Smurfit’s
failure to provide prompt notice of SP’s potential obligation
to indemnify Smurfit. We affirm, however, the district
court’s decision that SP has not breached the APA.
AFFIRMED IN PART; REVERSED IN PART
20 No. 03-1445
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-21-04