JUDSON ATKINSON CANDIES, INC. v. KENRAY ASSOCIATES INC et al

Filing 151

ENTRY ON 132 PLAINTIFFS' MOTION TO SET ASIDE COVENANT NOT TO EXECUTE BASED UPON FRAUD IN THE INDUCEMENT - The motion is taken under advisement and a hearing for that purpose is hereby set for 9/22/2011, at 10:00 AM, New Albany time (EDT), in r oom #200, United States Courthouse, 121 W. Spring Street, New Albany, Indiana before Magistrate Judge William G. Hussmann Jr. Absent a showing by Atkinson that there was fraud in the inducement of the clause itself, the integration clause will prohibit the court from doing anything other than enforcing the covenant as written. Signed by Magistrate Judge William G. Hussmann, Jr on 6/29/2011.(JLM)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
ATKINSON CANDY COMPANY,

)
)
Plaintiff,
)
)
v.
)
)
KENRAY ASSOCIATES, INC.,
)
CHARLES A. “CHUCK” McGEE, and
)
KENNETH J. McGEE,
)
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Defendants.
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__________________________________________)
)
JUDSON ATKINSON CANDIES, INC.,
)
)
Plaintiff,
)
)
v.
)
)
KENRAY ASSOCIATES, INC.,
)
CHARLES A. “CHUCK” McGEE, and
)
KENNETH J. McGEE,
)
)
Defendants.
)

Cause No. 4:02-cv-242-WGH-SEB

Cause No. 4:03-cv-12-WGH-SEB

ENTRY ON PLAINTIFFS’ MOTION TO SET ASIDE COVENANT NOT TO
EXECUTE BASED UPON FRAUD IN THE INDUCEMENT
This matter is before the Honorable William G. Hussmann, Jr., United States
Magistrate Judge, on Plaintiffs’ Motion to Set Aside Covenant Not to Execute Based
on Fraud in the Inducement filed January 14, 2011.1 (Docket Nos. 162-63 in Cause
No. 4:02-cv-242-WGH-SEB (“the 2002 case”); Docket Nos. 132-33 in Cause No.

Pursuant to the consent of counsel and the orders of reference entered by the
Honorable Sarah Evans Barker, District Judge, on January 30, 2004.
1

4:03-cv-12-WGH-SEB (“the 2003 case”). Defendants filed their Response on March
28, 2011. (Docket No. 173 in the 2002 case; Docket No. 143 in the 2003 case).
Plaintiffs’ Reply was filed on April 15, 2011. (Docket No. 174 in the 2002 case;
Docket No. 144 in the 2003 case). On April 25, 2011, Defendants filed a Motion to
Strike and Response to Plaintiffs’ Reply. (Docket No. 176 in the 2002 case; Docket
No. 146 in the 2003 case).
Plaintiffs Atkinson Candy Company and Judson Atkinson Candies, Inc.
(hereafter collectively “Atkinson”) filed suit against Defendant Kenray Associates,
Inc. (hereafter “Kenray”) in Texas in May 2002. Eventually transferred to this court,
the cases were consolidated for purposes of trial. While the trial was in progress,
and in December 2004, the parties entered into certain agreed judgments. At the
same time, the parties entered into a Covenant Not to Execute. Pursuant to the
terms of the Covenant Not to Execute, Kenray agreed to actively pursue a coverage
action that was pending in the Indiana state court against their insurance agent.
Ultimately, in the declaratory judgment action pending in the Indiana state court,
the trial court found that there was no insurance coverage, and the court of appeals
affirmed.
Atkinson filed a Motion to Set Aside Covenant Not to Execute Based on Fraud
in the Inducement. For purposes of this order, the court must address the effect of
certain language found in paragraph 9 within the covenant which the Defendants
contend is an “integration clause.” That clause states: “The parties agree this
agreement represents the parties’ sole agreement . . . .”

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Conclusions of Law
Atkinson claims that they were fraudulently induced into signing the
Covenant Not to Execute at issue in this case. “Fraudulent inducement occurs
when a party is induced through fraudulent misrepresentations to enter into a
contract.” Lightning Litho, Inc. v. Danka Industries, Inc., 776 N.E.2d 1238, 1241 (Ind.
Ct. App. 2002). In order to demonstrate fraud, Atkinson must demonstrate:
(1) a material representation of past or existing facts which
(2) was false,
(3) was made with knowledge or reckless ignorance of its falsity,
(4) was made with the intent to deceive,
(5) was rightfully relied upon by the complaining party, and
(6) proximately caused injury to the complaining party.
Bilimoria Computer Sys., LLC v. America Online, Inc., 829 N.E.2d 150, 155 (Ind. Ct.
App. 2005). Fraudulent inducement vitiates the contract. A party bringing a claim
of fraudulent inducement must elect between two remedies: recision of the contract
or damages. Lightning Litho, 776 N.E.2d at 1241.
Defendants argue that Atkinson’s claim of fraudulent inducement must fail
because it is based on oral misrepresentations made by Defendants prior to signing
the agreement and that an “integration clause” bars the use of any such prior oral
representations.
A writing intended to be a final and complete agreement between two
parties is an integration. Franklin v. White, 493 N.E.2d 161, 166 (Ind. 1986).

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“In general, where the parties to an agreement have reduced the agreement to
a written document and have included an integration clause that the written
document embodies the complete agreement between the parties . . . the parol
evidence rule prohibits courts from considering parol or extrinsic evidence for the
purpose of varying or adding to the terms of the written contract.” Krieg v. Hieber,
802 N.E.2d 938, 943 (Ind. Ct. App. 2004).
An integration clause “express[es] the parties’ intention that all prior
negotiations, representations, previous communications, and the like are either
withdrawn, annulled, or merged into the final written agreement.” Lawlis v.
Kightlinger & Gray, 562 N.E.2d 435, 439 n.1 (Ind. Ct. App. 1990).
An integration clause does not always control whether or not the parties
intended a writing to be a completely integrated agreement. Franklin, 493 N.E.2d at
166. A court must examine all of the relevant evidence to determine if the parties
intended a writing to be totally integrated. Id. However,
[w]here two sophisticated parties engage in extensive preliminary
negotiations, an integration clause may, in fact, reflect their mutual
intention to abandon preliminary negotiations in favor of a complete
and final statement of the terms of their agreement. To decide that an
integration clause in a document executed by sophisticated parties was
not effective to demonstrate the intentions of the parties would
effectively nullify the usefulness of this devise and deprive all
contracting parties of the opportunity to employ this drafting technique.
Prall v. Indiana Nat. Bank, 627 N.E. 2d 1374, 1377-78 (Ind. Ct. App. 1994)(citation
omitted).
The Indiana Court of Appeals in America’s Directories Incorporated, Inc., v.
Stellhorn One Hour Photo, Inc., 833 N.E.2d 1059, 1067 (Ind. Ct. App. 2005),

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determined that, even when a valid integration clause is present in a contract, the
parol evidence rule may be used to show that fraud, intentional misrepresentation,
or mistake entered into the formation of a contract. However, in Circle Centre
Development Co. v. Y/G Indiana, L.P., 762 N.E.2d 176, 179-80 (Ind. Ct. App. 2002),
the Indiana Court of Appeals noted that the parties who agree to an integration
clause are expressly disclaiming any reliance on prior oral representations. If a
court were to allow a party who has disavowed such prior oral representations to
then rely on prior representations outside the four corners of the contract,
“contracts would not be worth the paper on which they are written.” Id. at 180
(internal citations and quotations omitted). Therefore, the Indiana Court of Appeals
in Circle Centre determined that a party who has signed a contract with an
integration clause can only be relieved of such a contract by showing fraud in the
inducement of the integration clause itself, not the contract generally. Id. at 18081.
Analysis
Issue 1: Does this covenant contain an “integration clause”?
The first question which this court must address is whether the language in
the Covenant Not to Execute constitutes a proper integration clause when it says,
“The parties agree this agreement represents the parties’ sole agreement . . . .” This
language does not specifically state that this section of the agreement is intended to
be an integration clause. It does not use explicit language which might have been

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used to expressly state that any prior representations made by the parties were
extinquished. On the other hand, the Magistrate Judge is unable to ascertain what
other purpose existed for incorporating such language into the agreement.
The Magistrate Judge is faced with two choices. First, the Magistrate Judge
could conclude that paragraph 9 is ambiguous – specifically, that reasonable men
could differ as to whether the language used in paragraph 9 was intended to be an
integration clause. If he were to do so, he would likely be required to conduct a
hearing on the parties’ intent when they entered into this agreement. This is
because the parties have specifically addressed ambiguity in the document at
paragraph 8, which says: “The parties have jointly prepared this agreement. The
parties agree that any presumption pertaining to the scrivener drafting of this
document shall not apply.”
On the other hand, the Magistrate Judge could conclude that paragraph 9 is
unambiguous and that it serves no other purpose except to act as an integration
clause. As such, under Indiana law, and specifically under the Circle Centre
Development case, Atkinson can only be relieved of such a contract by showing
fraud in the inducement of the integration clause itself, not the contract generally.
Reading the documents as a whole, the Magistrate Judge will conclude that
paragraph 9 is not ambiguous because there is no other purpose existing for such
language. Therefore, paragraph 9 constitutes an integration clause. Parol evidence
will not be heard to vary the terms of the agreement.

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Issue 2: Can Atkinson demonstrate that there was fraud in the inducement of
paragraph 9?
There is significant conflicting evidence concerning what was represented
between the parties at the time the covenant was drafted that has been produced to
the court at this time. The evidence presented does not specifically address the
genesis of paragraph 9.
The Magistrate Judge concludes that before he can determine whether to set
aside the Covenant Not to Execute, he must conduct a hearing to determine
whether Atkinson can show fraud in the inducement of the integration clause itself,
and not the contract generally. Therefore, the motion is TAKEN UNDER
ADVISEMENT and a HEARING for that purpose is hereby set for THURSDAY,
SEPTEMBER 22, 2011, at 10:00 a.m., New Albany time (EDT), in Room 200,
U.S. Courthouse, New Albany, Indiana. Absent a showing by Atkinson that there
was fraud in the inducement of the clause itself, the integration clause will prohibit
the court from doing anything other than enforcing the covenant as written.
SO ORDERED the 29th day of June, 2011.

__________________________
William G. Hussmann, Jr.
United States Magistrate Judge
Southern District of Indiana

Electronic copies to:
Percy L. Isgitt
LAW OFFICES OF PERCY L. “WAYNE” ISGITT
[e-mail]

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Eric Thomas Eberwine
WATERS TYLER HOFFMAN & SCOTT
[e-mail]
Rodney Lee Scott
WATERS TYLER HOFFMAN & SCOTT
[e-mail]
Tricia Kirkby Hofmann
WATERS TYLER HOFFMAN & SCOTT
[e-mail]
C. Zan Turcotte
LAW OFFICE OF PERCY L. ISGITT, PC
[e-mail]
Derrick H. Wilson
MATTOX MATTOX & WILSON
[e-mail]
D. Bryan Wickens
WARD TYLER & SCOTT
[e-mail]

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