1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

11-4-1994

Allegheny Int'l Inc. v. Allegheny Ludlum Steel Corp.

Precedential or Non-Precedential:

Docket 943-3177

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1994 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"Allegheny Int'l Inc. v. Allegheny Ludlum Steel Corp." (1994). 1994 Decisions. Paper 178.

http://digitalcommons.law.villanova.edu/thirdcircuit_1994/178
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 

 No. 94-3177 

 

 ALLEGHENY INTERNATIONAL, INC. 

v. 

 ALLEGHENY LUDLUM STEEL CORPORATION 

 ALLEGHENY LUDLUM CORPORATION 

 (formerly known as Allegheny 

 Ludlum Steel Corporation) 

 Appellant

 

 On Appeal from the United States District Court 

 for the Western District of Pennsylvania 

 (D.C. Civil No. 91-01959) 

 

 Argued September 21, 1994 

 BEFORE: GREENBERG and ROTH, Circuit Judges, 

 and FULLAM, District Judge* 

 (Filed: November 4, 1994) 

 

 Dennis J. Lewis (argued) 

 Laura A. Meaden 

 Cohen & Grigsby 

 625 Liberty Avenue 

 2900 CNG Tower 

 Pittsburgh, Pa. 15222 

 Attorneys for Appellee

 
* Honorable John P. Fullam, Senior United States District Judge 

for the Eastern District of Pennsylvania, sitting by 

designation. 

 Jeffrey G. Brooks 

 Kevin P. Lucas (argued) 

 Manion, McDonough & Lucas 

 600 Grant Street 

 Suite 882 

 Pittsburgh, Pa. 15219 

 Robert L. Byer 

 Kirkpatrick & Lockhart 

 1500 Oliver Building 

 Pittsburgh, Pa. 15222 

 Attorneys for Appellant

 

 OPINION OF THE COURT 

 

GREENBERG, Circuit Judge. 

 I. FACTUAL AND PROCEDURAL HISTORY 

 A. Factual History

 Allegheny Ludlum Corporation (Allegheny Ludlum), a 

company engaged in the business of designing, manufacturing and 

selling specialty steel products, appeals from an order for 

summary judgment entered against it in the district court. The 

appellee is Allegheny International, Inc. (Allegheny 

International), a Pennsylvania corporation formerly named 

Allegheny Ludlum Industries, Inc. Until mid-1979, Allegheny 

Ludlum was an operating division of Allegheny International but 

between mid-1979 and late 1980 was its wholly-owned subsidiary. 

At that time, Allegheny Ludlum was known as the Allegheny Ludlum 

Steel Corporation (Allegheny Ludlum Steel). 
 In late 1980, Allegheny International sold all of the 

outstanding common stock in Allegheny Ludlum Steel to the LSC 

Corporation, an entity formed by a group of Allegheny Ludlum 

Steel's senior managers. Following the sale, LSC Corporation was 

merged into Allegheny Ludlum Steel, which then became known as 

Allegheny Ludlum Corporation (Allegheny Ludlum). This action 

arises out of several agreements related to Allegheny 

International's sale of Allegheny Ludlum Steel. 

 To effectuate the sale of Allegheny Ludlum Steel, 

Allegheny International and LSC entered into a stock purchase 

agreement on November 26, 1980 (the 1980 stock purchase 

agreement).1 See app. at 26-84. Pursuant to the agreement, on 

December 26, 1980, Allegheny International sold all of Allegheny 

Ludlum Steel's common stock to LSC. At the same time, Allegheny 

International acquired all of Allegheny Ludlum Steel's $9.00 

Participating Preferred Stock. This controversy centers on two 

provisions of this agreement: (1) paragraph 12(d) and (e) 

regarding the disposition of any post-closing tax benefits or 

detriments to Allegheny Ludlum for pre-closing tax periods; and 

(2) paragraph 5(e) regarding certain post-closing insurance to be 

maintained by Allegheny International on behalf of Allegheny 

Ludlum. 

 

1. As we have set forth above, Allegheny International formerly 

was named Allegheny Ludlum Industries, Inc. Thus, the seller in 

the stock sale agreement is Allegheny Ludlum Industries, Inc. 

The purchaser is ALSCO Corporation rather than LSC Corporation, 

but it appears that the stock was conveyed to LSC Corporation 

which we thus will treat as the purchaser. 
 Paragraph 12(d) provides that LSC, now known as 

Allegheny Ludlum, would reimburse Allegheny International 

 to the extent of any tax benefit received by 

[LSC] in taxable periods subsequent to the 

Closing Time as a result of the adjustment in 

the taxable income or other tax attributes of 

[Allegheny Ludlum Steel] or [Oklahoma Tubular 

Products Company] or as a result of over 

payment of taxes for periods through and 

including the Closing Time. The 

reimbursement required by this section shall 

be made at the time any such tax benefit is 

determined by the filing of a tax return, 

amended tax return or otherwise. 

See app. at 77.2 Paragraph 12(e) provides that Allegheny 

International will reimburse LSC for any tax detriment suffered 

by LSC after the sale "as a result of any adjustments in the 

taxable income or other tax attributes of [Allegheny Ludlum 

Steel] or [Oklahoma Tubular Products Company] for periods through 

and including the Closing Time." Id. at 77-78. Paragraph 5(e) 

provides that Allegheny International 

 will keep the insurance set forth in Exhibit 

H in full force and effect [until the closing 

time] and thereafter for a reasonable time at 

[LSC's] request provided that [LSC] shall pay 

its allocable portion of the premiums and any 

claims thereunder shall be subject to any 

deductible of [Allegheny International] (and 

if a deductible applies to such loss as well 

as to some other loss sustained by [Allegheny 

International], to an allocable portion of 

such deductible). 

 

2. The parties do not discuss how Oklahoma Tubular Products 

Company is related to Allegheny International and Allegheny 

Ludlum in their briefs, and we thus conclude that the 

relationship is not germane to this case. 
See app. at 50. Allegheny International had maintained property 

and casualty insurance on behalf of Allegheny Ludlum Steel at 

least since 1976. Starting in 1976, these policies were written 

by Liberty Mutual Insurance Company, which charged Allegheny 

International for the cost of claims paid, an administrative cost 

adjustment, and a tax adjustment. 

 Following its acquisition by LSC, Allegheny Ludlum 

acquired certain insurance coverage in its own name which became 

effective July 1, 1981. In a letter agreement dated August 10, 

1981 (the 1981 insurance agreement), Allegheny International and 

Allegheny Ludlum recognized that Allegheny Ludlum had 

"established its own separate property and casualty insurance 

program," but agreed that Allegheny International would continue 

to provide Allegheny Ludlum with certain specified policies and 

management services until December 31, 1981. Id. at 86. The 

1981 insurance agreement also provided that Allegheny Ludlum 

would be 

 solely responsible for any insurance costs 

generated by or on behalf of [Allegheny 

Ludlum] under all previous programs 

established by [Allegheny International] for 

[Allegheny Ludlum]. Such costs would include 

but not be limited to audits, retrospective 

adjustments requiring additional premium 

payment, deductible payments or absorptions, 

renewals at the direction of [Allegheny 

Ludlum], etc. 

Id. 

 In a letter dated April 13, 1983, Allegheny 

International informed Allegheny Ludlum that it had a net 

operating loss during its 1982 tax year, and that as a result, it 
had filed "carryback claims" for 1979 and 1980, years in which it 

had deducted the 1982 loss from its taxable income. Id. at 750. 

Originally, Allegheny International had offset a certain portion 

of its taxable income in 1979 and 1980 with investment tax 

credits generated by Allegheny Ludlum Steel's acquisition of 

equipment. However, because Allegheny International's subsequent 

net operating losses eliminated its taxable income for the tax 

years 1979 and 1980, it no longer needed the investment tax 

credits. It thus informed Allegheny Ludlum that the investment 

tax credits in those years should be used by Allegheny Ludlum to 

reduce its taxable income in 1981. Id. The investment tax 

credits were not available directly to Allegheny International, 

because they had been generated exclusively by Allegheny Ludlum 

Steel (Allegheny Ludlum's predecessor) when it was a wholly owned 

subsidiary of Allegheny International. Id. at 750 (letter from 

Allegheny International to Allegheny Ludlum); id. at 1312 

(Allegheny Ludlum's amended income tax return for 1981 tax year). 

 Thus, in its April 1983 letter to Allegheny Ludlum, 

Allegheny International requested that Allegheny Ludlum use the 

newly available investment tax credits (previously used by 

Allegheny International for tax years 1979 and 1980) to file a 

claim for a refund for the 1981 tax year. Id. at 750. Allegheny 

International also requested that pursuant to paragraph 12(d) of 

the 1980 stock purchase agreement, Allegheny Ludlum reimburse it 
for the value of the investment tax credits and any interest 

received. Id.

3 

 Allegheny Ludlum promptly filed these claims. Id. at 

1311. Moreover, in a letter dated April 22, 1983, Allegheny 

Ludlum responded to Allegheny International's April 13th letter, 

and stated that "[Allegheny Ludlum] will pay any reimbursement 

due to Allegheny International, Inc. (AI) resulting from the 

carryover of [the] 1979 and 1980 investment and foreign tax 

credits to 1981 as soon as possible after [Allegheny Ludlum] 

receives its refund check from the Internal Revenue Service." 

Id. at 752. 

 It was not until March 1989, three years after the 

execution of the 1986 agreement we discuss below, that the 

Internal Revenue Service (IRS) finally approved Allegheny 

International's reduction of its taxable income in 1979 and 1980 

by the use of later net operating losses. Accordingly, only then 

did the IRS notify Allegheny Ludlum that its refund claim would 

be allowed. Id. at 1035. In July 1989, the IRS sent Allegheny 

Ludlum a check in the amount of $5,490,363.86, reflecting the 

amount of the tax refund ($2,233,059.75) plus interest at the 

statutory rate under the Internal Revenue Code to the date of the 

payment of the refund. Id. at 1636 (pretrial stipulations), id. 

at 801 (check).4 The IRS sent Allegheny Ludlum a second check in 

 

3. The letter cites Section 12(e) but we believe that Allegheny 

International meant section 12(d). 

4. Allegheny International's brief states that the IRS sent 

Allegheny Ludlum checks in the amount of $5,787,665.38, 

reflecting the amount of the tax refund ($2,479,317) plus 
December 1989 for $307,301.52, which included the balance of the 

refund, $246,257.25, plus additional interest. Id. at 1636 

(pretrial stipulations), id. at 802 (check). Thus, Allegheny 

Ludlum received a total refund with interest of $5,797,665.38.5 

 Before Allegheny Ludlum obtained the refund, Allegheny 

International had filed a voluntary petition under Chapter 11 of 

the Bankruptcy Code in the United States Bankruptcy Court for the 

Western District of Pennsylvania on February 20, 1988. On May 

27, 1988, Allegheny Ludlum filed a claim against Allegheny 

International for reimbursement of certain tax costs pursuant to 

paragraph 12(e) of the 1980 stock purchase agreement. Allegheny 

Ludlum and Allegheny International settled this claim with a 

stipulation dated February 27, 1989, which was approved by the 

bankruptcy court. The stipulation fixed the value of Allegheny 

Ludlum's claim against Allegheny International and provided that 

it was subject to a setoff of any amounts owed by Allegheny 

Ludlum to Allegheny International pursuant to the 1980 stock 

purchase agreement. See id. at 1674-76. 

 On August 9, 1989, Allegheny Ludlum informed Allegheny 

International that, based on its construction of a February 18, 

1986 settlement agreement resolving numerous disputes between the 

parties, including a dispute over insurance matters, it intended 

(..continued) 

interest at the statutory rate under the Internal Revenue Code to 

the date of the payment of the refund. See br. at 8. 

5. Allegheny International's brief states that the total of 

$5,797,665.38 included $362.93 for an unrelated item. See br. at 

12. 
to retain the refund the IRS sent it in July 1989. Id. at 804. 

In particular, in 1985 Allegheny International had filed suit 

against Allegheny Ludlum in a Pennsylvania state court, the Court 

of Common Pleas of Allegheny County, to recover insurance costs 

that it claimed Allegheny Ludlum owed it. In the February 18, 

1986 agreement, Allegheny International stated that it would 

"withdraw and cause to be dismissed with prejudice as to all 

parties all legal proceedings" it initiated against Allegheny 

Ludlum, including this insurance matter. See 1986 agreement, at 

2 (Allegheny Ludlum br. Tab F). The 1986 agreement provided in 

return that Allegheny Ludlum would "purchase and redeem from 

[Allegheny International] all of the 650,000 shares of issued and 

outstanding shares of the $9.00 participating Preferred Stock . . 

. of [Allegheny Ludlum] owned by [Allegheny International] for an 

aggregate consideration of 37 million dollars." Id. at 1. This 

redemption agreement had the advantage of effectuating a clean 

break between the corporations including the termination of 

Allegheny International's representation on the Allegheny Ludlum 

board of directors. 

 Finally, the 1986 agreement stated that Allegheny 

International would release Allegheny Ludlum from certain claims. 

Pursuant to the agreement, on February 28, 1986, Allegheny 

International delivered a release to Allegheny Ludlum. The first 

clause of this document contains broad language seemingly 

releasing Ludlum from any and all claims arising before February 

19, 1986. The second clause, however, qualifies the first by 
excepting certain obligations under the November 26, 1980 

agreement. 

 The language of this release is virtually identical to 

the language which the 1986 agreement prescribed for the release. 

See app. at 109-10. While the release refers to the agreement 

having been dated February 19, 1986, rather than February 18, 

1986, that one-day difference is not significant, as it simply 

reflects the fact that Allegheny International's acceptance of 

the agreement was dated February 19, 1986.6 The resolution of 

this action turns in large part on the construction of this 

release. 

 B. Procedural History

 Allegheny International initiated this action for 

breach of contract and unjust enrichment against Allegheny Ludlum 

on November 28, 1989. However, pursuant to reorganization 

proceedings in the bankruptcy court, Sunbeam-Oster Company, Inc. 

has acquired Allegheny International's assets and thus it is 

prosecuting this action for Allegheny International, which 

nevertheless remains the named plaintiff. Notwithstanding 

Sunbeam-Oster's asset acquisition, it appears that Allegheny 

International's corporate existence has not been terminated, as 

the Pennsylvania Department of State certified on July 12, 1993, 

that it is an existing Pennsylvania corporation. 

 

6. Sections 12(a)(ii) and (iii) relate to inspection of records 

and certain post-closing undertakings not germane to this 

litigation. 
 Relying on the 1980 stock purchase agreement, Allegheny 

International seeks to recover the value of the refund received 

by Allegheny Ludlum and certain insurance costs incurred by 

Allegheny International after March 1, 1986. Allegheny 

International began the case as an adversary proceeding in the 

bankruptcy reorganization of In re: Allegheny Int'l, Inc., et 

al., Case No. 88-00448 (Bankr. W.D. Pa.). After Allegheny 

International filed its complaint, Allegheny Ludlum filed an 

answer, demanded a jury trial, made a motion for judgment on the 

pleadings based on the 1986 settlement agreement, and made a 

motion to transfer Allegheny International's action to the 

district court. See Allegheny Int'l, Inc. v. Allegheny Ludlum 

Steel Corp., 920 F.2d 1127, 1130 (3d Cir. 1990). The bankruptcy 

court denied Allegheny Ludlum's motion to transfer the case to 

district court. Id. at 1128-30. The district court then 

dismissed Allegheny Ludlum's appeal from that decision. Id. at 

1131. The district court also denied Allegheny Ludlum's motion 

for withdrawal of reference of the adversary action. Id. On 

further appeal, we dismissed for lack of jurisdiction Allegheny 

Ludlum's appeals from: (1) the district court's dismissal of 

Allegheny Ludlum's appeal of the bankruptcy court's refusal to 

transfer the case; and (2) the district court's denial of 

Allegheny Ludlum's motion for withdrawal of reference of the 

adversary proceeding. Id. at 1129. 

 One year later, in November 1991, before the bankruptcy 

court ruled on Allegheny's motion for judgment on the pleadings, 

the district court withdrew the reference to the bankruptcy 
court, and referred the case to a magistrate judge for pretrial 

proceedings. In its motion for judgment on the pleadings, 

Allegheny Ludlum asserted that the 1986 settlement agreement and 

the resulting release executed by Allegheny International barred 

Allegheny International's claims against Allegheny Ludlum for the 

tax refund and for insurance costs. See app. at 1379-83 (motion 

for judgment on the pleadings). In addition, Allegheny Ludlum 

maintained that Allegheny International's claim for insurance 

costs was "barred by reason of principles of res 

judicata/collateral estoppel" because, pursuant to the 1986 

agreement between the parties, the state court entered an order 

dismissing with prejudice Allegheny International's 1985 

insurance costs claim. Id. at 1383-84. Allegheny Ludlum argued 

that the claim for insurance costs was precluded, because in the 

1985 action which the state court dismissed with prejudice, 

Allegheny International had sought a declaratory judgment holding 

Allegheny Ludlum liable for future insurance claims. 

 On April 28, 1992, the magistrate judge recommended 

that the district court deny Allegheny Ludlum's motion for 

judgment on the pleadings and allow the case to proceed to 

discovery. See report (Allegheny Ludlum br. Tab C). Though 

Allegheny Ludlum filed objections to the report, on May 13, 1992, 

the district court issued a memorandum order denying Allegheny 

Ludlum's motion and adopting the magistrate's report as its 

opinion. See May 13, 1992 district court order (Allegheny Ludlum 

br. Tab D). The magistrate judge's report concludes that 

Allegheny Ludlum was not entitled to judgment on the pleadings 
based on the release because: (1) the release does not cover 

"claim[s] based on Allegheny Ludlum's failure to perform in the 

future under any earlier contract"; (2) "[i]n applying this 

language [in the release], the court or a trier of fact, must 

determine when plaintiff's claims accrued"; and (3) this question 

could not be resolved "solely on the basis of the pleadings." 

See report, at 7 (Allegheny Ludlum br. Tab C). The report also 

concluded that the dismissal with prejudice of Allegheny 

International's 1985 state court suit for insurance costs did not 

entitle Allegheny Ludlum to judgment on the pleadings with regard 

to Allegheny International's insurance costs claim. The 

magistrate judge relied on Allegheny International's contention 

that it was seeking reimbursement only for insurance costs it 

incurred on Allegheny Ludlum's behalf "in and after 1989" which 

"thus were not part of that state law action." Id. at 10.7 

According to the magistrate judge's report, this allegation 

raised a question of material fact which precluded the court from 

granting Allegheny Ludlum's motion for judgment on the pleadings. 

Id. 

 Allegheny Ludlum then expanded its defense to Allegheny 

International's complaint, as it filed a motion for summary 

judgment with supporting affidavits on June 14, 1993, alleging 

that it was entitled to summary judgment based on the 1986 

agreement, the resulting release executed by Allegheny 

 

7. The 1989 date is incorrect as Allegheny International is 

seeking reimbursement for costs since 1986. 
International, and the state court's entry of an order dismissing 

with prejudice Allegheny International's 1985 insurance costs 

claim. See app. at 131-43. On June 28, 1993, Allegheny Ludlum 

filed a second, separate "Motion for Summary Judgment Challenging 

Sunbeam-Oster Company, Inc.'s Right to Prosecute This Action," 

asserting that Sunbeam-Oster Company, Inc., which alleged that it 

was Allegheny International's successor in interest, had not 

established that it was the legal owner of the claims asserted 

against Allegheny Ludlum. Id. at 427-30. Also on June 28, 1993, 

Allegheny International filed a motion for summary judgment with 

supporting affidavits and other documents. Id. at 238-40. 

 On April 7, 1994, the district court issued a judgment 

order and memorandum opinion denying both of Allegheny Ludlum's 

motions for summary judgment, granting Allegheny International's 

motion for summary judgment, and awarding Allegheny International 

the damages it requested plus prejudgment interest and 

declaratory relief with respect to future tax benefits received 

by Allegheny Ludlum and insurance costs Allegheny Ludlum incurred 

on its behalf. See Allegheny Int'l, Inc. v. Allegheny Ludlum 

Steel Corp., No. 91-1959, slip op. (W.D. Pa. April 7, 1994) 

[hereinafter Allegheny Int'l, Inc., slip op.].8 The district 

court based its decision on the law of the case because it viewed 

its earlier decision denying Allegheny Ludlum's motion for 

judgment on the pleadings as already resolving the meaning of the 

 

8. The district court also denied Allegheny Ludlum's motion for 

sanctions and Allegheny International's motion for leave to file 

an amended pretrial statement. 
release language and the res judicata effect of Allegheny 

International's 1985 state court suit for insurance costs. 

Accordingly, the district court would not revisit these issues 

absent "extraordinary circumstances." See Allegheny Int'l, Inc., 

slip op. at 16. 

 In its earlier decision, the district court had 

concluded as a matter of law that the language of the release was 

unambiguous and that it excluded claims based on Allegheny 

Ludlum's "failure to perform . . . after February 1986, under any 

earlier contract." Id. at 14. The district court adhered to its 

earlier construction of the release "as the law of the case" 

because: (1) it already had interpreted it as a matter of law; 

and (2) Allegheny Ludlum did not allege that the 1986 agreement 

and the release were ambiguous, "but rather that [the magistrate 

judge], and this Court, misunderstood the clear and unambiguous 

import of these instruments." Id. at 20. 

 The district court concluded that although it had not 

expressly decided the res judicata effect of the dismissal of the 

1985 state court suit, it had done so "by necessary implication." 

Id. at 15. The district court reasoned that "[t]he materiality 

of the disputed factual issue . . . precluding the granting of 

defendant's motion for judgment on the pleadings [was] 

necessarily grounded [on the] legal conclusion that res judicata

will not bar an insurance claim based on insurance payments not 

forming part of the dismissed state court action." Id. at 15 

(citations omitted). The district court adhered to this earlier 
decision because it concluded that the decision was not "clearly 

erroneous." Id. at 24. 

 Thus, the district court concluded that based on its 

earlier decision, Allegheny International's claims were not 

barred. Then, applying the legal conclusions it had reached in 

its earlier decision, the district court held that because 

Allegheny International's tax claim accrued after February 1986 

and its insurance costs were incurred after March 1, 1986, 

Allegheny International was entitled to recover the tax benefits 

and insurance costs it claimed under the 1980 stock purchase 

agreement and the 1981 insurance agreement, respectively. Id. at 

28-29. 

 Accordingly, the district court entered judgment in 

favor of Allegheny International in the amount of $7,476,499.97 

with respect to its tax refund claim and $508,073.70 with respect 

to its insurance cost claim. See April 7, 1994 district court 

order (Allegheny Ludlum Br. Tab A). The former amount was the 

sum of five figures: (1) $5,490,363.86 (the IRS check dated 

7/20/89); (2) $1,317,687.20 (interest on that amount from 8/1/89 

to 7/31/93); (3) $307,301.52 (the IRS check dated 12/11/89 minus 

$362.93 for an unrelated amount paid to Allegheny Ludlum by the 

IRS); (4) $66,022.39 (interest on this sum from 1/1/90 to 

7/31/93); and (5) $295,125 (interest from 8/1/93 to 4/7/94). The 

latter amount was the sum of $500,505 in insurance costs incurred 

by Allegheny International on behalf of Allegheny Ludlum and 

$7,568.70 in administrative fees and taxes incurred by Allegheny 

International on behalf of Allegheny Ludlum. Id. The district 
court also ordered that: (1) future tax benefits received by 

Allegheny Ludlum "which relate to tax periods prior to [its sale] 

are to be refunded to [Allegheny International] pursuant to the 

terms of the November 26, 1980 Stock Purchase Agreement"; and (2) 

"all future insurance costs incurred by [Allegheny International] 

which are attributable to [Allegheny Ludlum's] operations and 

which relate to incidents, claims or facts arising or occurring 

between 1976 and July 1, 1981, are to be paid by [Allegheny 

Ludlum] under the terms of the August 10, 1981 Insurance 

Agreement." Id. 

 The district court denied Allegheny Ludlum's motion for 

summary judgment challenging Sunbeam-Oster Company, Inc.'s right 

to prosecute the case because the court concluded that "by 

bringing [the motion] as late in the litigation as it [did,] 

[Allegheny Ludlum] waived any such defense." Allegheny Int'l, 

Inc., slip op. at 31 (citing 6A Charles A. Wright, et al., 

Federal Practice and Procedure § 1554, at 406-07 (1990)). 

Finally, the district court denied Allegheny Ludlum's motion for 

the imposition of sanctions on Allegheny International due to its 

alleged failure to allow meaningful discovery, noting "[i]n 

particular" that Allegheny Ludlum "failed to establish any 

prejudice in its defense against the insurance cost claim as a 

result of [Allegheny International's] alleged discovery 

shortcomings." Id. at 34-35. Allegheny Ludlum then appealed. 

The district court had jurisdiction pursuant to 28 U.S.C. §§ 

1334(a) and 157(d), and we have jurisdiction under 28 U.S.C. § 

1291. 
 II. DISCUSSION 

 A. The Release

 Allegheny International claims that the 1980 stock 

purchase agreement entitled it to reimbursement for the tax 

refund received by Allegheny Ludlum in 1989, and that both the 

1980 stock purchase agreement and the 1981 insurance agreement 

entitled it to reimbursement for the insurance costs it has 

incurred on Allegheny Ludlum's behalf since March 1, 1986. 

Allegheny Ludlum bases one of its defenses to these claims on the 

release executed by Allegheny International in February 1986 

pursuant to the 1986 stock redemption agreement. According to 

Allegheny Ludlum, the release "includes all claims for Allegheny 

Ludlum's breach of any contractual obligation that was to be 

performed after February 19, 1986." See Allegheny Ludlum br. at 

24. Allegheny Ludlum argues that it was not obligated to 

reimburse Allegheny International for the tax refund until the 

IRS made the refund in 1989 and that it was not obligated to 

reimburse Allegheny International for insurance costs incurred 

after March 1, 1986, as that date is after February 19, 1986. 

Id. at 24-25. Thus, it is Allegheny Ludlum's position that the 

release bars both Allegheny International's tax refund claim and 

its insurance costs claim. 

 We exercise plenary review over the district court's 

grant of summary judgment. See Petruzzi's IGA Supermarkets, Inc. 

v. Darling-Delaware Co., 998 F.2d 1224, 1230 (3d Cir.), cert. 
denied, 114 S.Ct. 554 (1993). Therefore, we must determine 

whether "the pleadings, depositions, answers to interrogatories, 

and admissions on file, together with the affidavits, if any, 

show that there is no genuine issue as to any material fact and 

that [Allegheny International] is entitled to a judgment as a 

matter of law." Fed. R. Civ. P. 56(c). 

 'The moving party has the initial burden of 

identifying the evidence that demonstrates 

the absence of a genuine issue of material 

fact, [but] the respondent (the "non-movant") 

must establish the existence of each element 

on which it bears the burden of proof.' 

FDIC v. Bathgate, 27 F.3d 850, 860 (3d Cir. 1994) (quoting J.F. 

Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d 

Cir. 1990), cert. denied, 499 U.S. 921, 111 S.Ct. 1313 (1991)). 

"[I]n applying this standard, 'all inferences must be drawn 

against the movant, . . . and in favor of the nonmovant.'" Id. 

at 860 (quoting Erie Telecommunications, Inc. v. City of Erie, 

853 F.2d 1084, 1093 (3d Cir. 1988)). However, "'where the movant 

has produced evidence in support of its motion for summary 

judgment, the nonmovant cannot rest on the allegations of 

pleadings and must do more than create some metaphysical doubt.'" 

Id. (quoting Petruzzi's IGA, 998 F.2d at 1230). 

 The 1980 stock purchase agreement states that it "shall 

be governed by and construed in accordance with the laws of the 

Commonwealth of Pennsylvania." See app. at 83. Although the 

1981 insurance agreement, the 1986 agreement, and the release do 

not identify the governing law, the parties have briefed the case 
under Pennsylvania law, which we thus apply. See Langer v. 

Monarch Life Ins. Co., 879 F.2d 75, 80 (3d Cir. 1989).9

 "Under Pennsylvania law, ambiguous writings are 

interpreted by the fact finder and unambiguous writings are 

interpreted by the court as a question of law." Mellon Bank, 

N.A. v. Aetna Business Credit, Inc., 619 F.2d 1001, 1011 n.10 (3d 

Cir. 1980) (applying Pennsylvania law) (citing Broker Title Co. 

v. St. Paul Fire and Marine Ins. Co., 610 F.2d 1174 (3d Cir. 

1979)). Thus, the first question "[c]ourts are left with [is] 

the difficult issue of determining as a matter of law which 

category written contract terms fall into - clear or ambiguous." 

Id. at 1011 (citing United Refining Co. v. Jenkins, 189 A.2d 574, 

580 (Pa. 1963); O'Farrell v. Steel City Piping Co., 403 A.2d 1319 

(Pa. Super. Ct. 1979)). If the court determines that a contract 

is clear, or unambiguous, then it construes the contract as a 

matter of law. Id. at 1011 n.10. See also Kroblin Refrigerated 

Xpress, Inc. v. Pitterich, 805 F.2d 96, 101 (3d Cir. 1986) ("It 

is well settled that unambiguous writings are construed as a 

matter of law.") (applying Pennsylvania law) (citing Ram 

Construction Co. v. American States Ins. Co., 749 F.2d 1049, 1052 

(3d Cir. 1984); Mellon, 619 F.2d at 1011 n.10). Therefore, 

because the district court determined that the release was 

 

9. It is difficult to understand how any other law could apply, 

as Allegheny International, Allegheny Ludlum, and the ALSCO 

Corporation, which was the purchaser named in the November 26, 

1980 agreement, are Pennsylvania corporations and the 

transactions involved in this case all took place in 

Pennsylvania. See n.1, infra. 
unambiguous, the court construed it as a matter of law. See

Allegheny Int'l, Inc., slip op. at 13-14, n.9, & 20. See also

USX Corp. v. Prime Leasing Inc., 988 F.2d 433, 436-37 (3d Cir. 

1993). We exercise plenary review over these legal 

determinations. 

 "A contract is ambiguous if it is reasonably 

susceptible of different constructions and capable of being 

understood in more than one sense." Hutchison v. Sunbeam Coal 

Corp., 519 A.2d 385, 390 (Pa. 1986) (citations omitted). See

also Hullett v. Towers, Perrin, Forster & Crosby, Inc., No. 94-

1517, slip op. at 6 (3d Cir. Oct. 28, 1994); Langer, 879 F.2d at 

80 (quoting Hutchison's definition of ambiguity). The Supreme 

Court of Pennsylvania has identified two types of ambiguity: (1) 

patent ambiguity, and (2) latent ambiguity, and has defined them 

as follows: 

 '[a] patent ambiguity is that which appears 

on the face of the instrument, and arises 

from the defective, obscure, or insensible 

language used.' Black's Law Dictionary 105 

(rev. 4th ed. 1968). In contrast, a latent 

ambiguity arises from extraneous or 

collateral facts which make the meaning of a 

written agreement uncertain although the 

language thereof, on its face, appears clear 

and unambiguous. Easton v. Washington County 

Ins. Co., 391 Pa. 28, 137 A.2d 332 (1957). 

Steuart v. McChesney, 444 A.2d 659, 663 (Pa. 1982). 

 Thus, we will begin by examining the language of the 

release to determine whether it contains a patent ambiguity. The 

release states the following: 

 [Allegheny International] hereby releases 

[Allegheny Ludlum] from any and all claims 

and causes of action (including the 
litigation referred to in Section 3(b) of the 

aforesaid letter agreement dated as of 

February 19, 1986) attributable to events or 

agreements occurring prior to February 19, 

1986, whether or not arising out of the 

agreement dated November 26, 1980, pursuant 

to which [Allegheny Ludlum] was purchased 

from [Allegheny International,] provided; 

however, that the release shall not release 

any claim or cause of action based on the 

failure of [Allegheny Ludlum] [or] LSC 

Corporation ("LSC") . . . to perform any 

obligation which [Allegheny Ludlum] [or] LSC 

. . . has to [Allegheny International] under 

said agreement dated November 26, 1980 (other 

than obligations under Sections 12(a)(ii) and 

(iii) thereof) or under any other written 

obligation to [Allegheny International] which 

was to have been performed by [Allegheny 

Ludlum] [or] LSC . . . at or prior to 

February 19, 1986. 

See release, at 1-2 (Allegheny Ludlum br. Tab G). 

 As the district court recognized, the release consists 

of two clauses. The first clause contains broad language 

releasing Allegheny Ludlum from: 

 any and all claims and causes of action 

[including Allegheny International's 1985 

insurance cost suit] attributable to events 

or agreements occurring prior to February 19, 

1986, whether or not arising out of the [1980 

stock purchase agreement], pursuant to which 

[Allegheny Ludlum] was purchased from 

[Allegheny International]. 

See Allegheny Ludlum br. Tab G, at 1. This language in itself is 

unambiguous and, if it stood alone, we would conclude it covers 

both Allegheny International's tax refund claim and its insurance 
cost claim, as these claims arise from "agreements occurring 

prior to February 19, 1986."10 

 However, the second clause of the release contains 

"language which limits the apparent carte blanche release" 

contained in the first clause. See magistrate judge's report at 

7 (Allegheny Ludlum's br. Tab C). The second clause provides 

that 

 the release shall not release any claim or 

cause of action based on the failure of 

[Allegheny Ludlum] to perform any obligation 

which [Allegheny Ludlum] has to [Allegheny 

International] under said agreement dated 

November 26, 1980 (other than obligations 

under Sections 12(a)(ii) and (iii) thereof) 

or under any other written obligation to 

[Allegheny International] which was to have 

been performed by [Allegheny Ludlum] at or 

prior to February 19, 1986. 

See release, at 1-2 (Allegheny Ludlum br. Tab G). As we noted 

above, the district court held that this clause excluded from the 

 

10. It is undisputed that Allegheny International's claims are 

based on the 1980 stock purchase agreement and the 1981 insurance 

agreement. Allegheny International argues that the first clause 

of the release does not bar its claims because it contains "no 

clear and unequivocal expression of an intent" to release claims 

based on a failure to perform in the future obligations which 

arise out of agreements reached prior to February 19, 1986. See

Allegheny International br. at 22. We disagree. As Allegheny 

Ludlum points out, the first clause of the release "clearly 

demonstrates the parties' intention that plaintiff released 

Allegheny Ludlum from 'any and all claims and causes of action,' 

regardless when they arose or when performance [was] due, so long 

as those claims 'were attributable to events or agreements 

occurring prior to February 19, 1986.'" See Allegheny Ludlum 

reply br. at 4. Our conclusion is consistent with the magistrate 

judge's report, which the district court adopted, which stated 

that if the first clause "were the full extent of the release 

[Allegheny Ludlum's] claims would be well-founded." See report, 

at 7 (Allegheny Ludlum br. Tab C). 
release claims based on Allegheny Ludlum's "failure to perform . 

. . after February 1986, under any earlier contract." See

Allegheny Int'l, Inc., slip op. at 14 (emphasis added); 

magistrate judge's report, at 7 (Allegheny Ludlum br. Tab C) 

("Specifically, the release excludes from coverage any claim 

based on Allegheny Ludlum's failure to perform in the future 

under any earlier contract."). 

 The district court's construction of the second clause 

in the release is inconsistent with the constructions advanced by 

both Allegheny International and Allegheny Ludlum. See Allegheny 

Ludlum reply br. at 8. Moreover, the district court's 

construction of the second clause is inconsistent with language 

in the clause, namely the phrase: "which was to have been 

performed by [Allegheny Ludlum] at or prior to February 19, 

1986." See release, at 1-2 (Allegheny Ludlum br. Tab G). 

Allegheny International takes the position that this phrase 

modifies only the phrase which immediately precedes it, namely, 

"any other written obligation to [Allegheny International]," and 

not obligations under the 1980 stock purchase agreement. See

Allegheny International br. at 23, 26. Thus, Allegheny 

International maintains that the second clause exempts from the 

release any claim based on Allegheny Ludlum's failure to perform 

in the future (i.e. subsequent to the February 1986 execution of 

the release) any obligation under the 1980 stock purchase 

agreement, but does not adopt the district court's view that the 

second clause exempts from the release any claim based on 

Allegheny Ludlum's "failure to perform . . . after February 1986, 
under any earlier contract." See Allegheny Int'l, Inc., slip op. 

at 14 (emphasis added); magistrate judge's report, at 7 

(Allegheny Ludlum br. Tab C). 

 In fact, Allegheny International indicates that the 

release bars claims based on Allegheny Ludlum's failure to 

perform after February 1986 under written obligations other than 

the 1980 stock purchase agreement, and that the second clause of 

the release only preserves claims arising out of such other 

written obligations if they accrued "prior to the date of the 

Release." See Allegheny International br. at 23 ("The second 

part of the proviso relates to [Allegheny Ludlum's] obligations 

under agreements other than the [1980 stock purchase 

agreement]"). Nonetheless, Allegheny International argues that 

the district court reached the correct result because: (1) the 

second clause exempts from the release any claim based on 

Allegheny Ludlum's failure to perform in the future (i.e., 

subsequent to the February 1986 execution of the release) any 

obligation under the 1980 stock purchase agreement, id. at 22-24; 

and (2) thus its claims based on Allegheny Ludlum's failure to 

reimburse it for the 1989 tax refund and the insurance costs 

Allegheny International incurred after March 1, 1986, are not 

barred by the release. 

 Unlike Allegheny International, Allegheny Ludlum takes 

the position that the phrase "which was to have been performed by 

[Allegheny Ludlum] at or prior to February 19, 1986," modifies 

more than the phrase which immediately precedes it, namely, "any 

other written obligation." See Allegheny Ludlum br. at 23-24. 
According to Allegheny Ludlum, it modifies the phrase "any 

obligation which [Allegheny Ludlum] has to [Allegheny 

International]" under the 1980 stock purchase agreement and its 

obligations under "any other written obligation to [Allegheny 

International]." Id. Thus, Allegheny Ludlum argues that the 

second clause preserves only those claims based on obligations 

which were to be performed on or before February 19, 1986. Based 

on this reading of the second clause of the release, the release 

bars Allegheny International's claims based on Allegheny Ludlum's 

failure to reimburse it for the 1989 tax refund and the insurance 

costs Allegheny International incurred after March 1, 1986, 

because these claims are not based on obligations that Allegheny 

Ludlum was to have performed prior to February 19, 1986.11

 We acknowledge that the use of the conjunction "or" to 

separate the phrase "under [the 1980 stock purchase agreement]" 

from the phrase "under any other written obligation" could be 

construed to indicate that the phrase "which was to have been 

performed by [Allegheny Ludlum] at or prior to February 19, 1986" 

modifies only the phrase "any other written obligation." 

However, as the Pennsylvania Supreme Court stated in Dilks v. 

Flohr Chevrolet, Inc., 192 A.2d 682, 685 (Pa. 1963), 

 

11. As Allegheny Ludlum points out, "[i]t is undisputed that the 

time for Allegheny Ludlum's performance with respect to the tax 

refund claim was not until 1989 after it received the tax refund 

from the Internal Revenue Service," and that "the time for 

Allegheny Ludlum's performance of the insurance cost 

reimbursement in question did not arise until those costs were 

incurred at various times after March 1, 1986." See Allegheny 

Ludlum br. at 24-25 (citing app. at 1422, 284-85, 1492). 
 [w]ords and phrases on one side of the word 

'or' may, and often do, modify and apply to 

words and phrases on the other side of the 

word 'or' in the same sentence. 

Moreover, in Hutchison, the court held that a paragraph in a 

lease was ambiguous, because it was susceptible to both the 

appellant's construction of the paragraph, which "rest[ed] wholly 

on the use of the word 'or' to connect the series [of words]," 

and the appellee's construction, which was "not totally 

consistent with the use of the word 'or,' but seem[ed] more 

natural." Hutchison, 519 A.2d at 390. In our view, it seems 

unnatural to construe the second clause of the release to 

preserve claims based on future obligations under one contract 

between the parties and claims based on past obligations under 

other contracts between the parties. Thus, the mere use of the 

conjunction "or" does not render the clause unambiguous, and we 

conclude that the clause is susceptible to more than one meaning.

 

 Allegheny International makes two other arguments to 

support its contention that the second clause of the release is 

unambiguous. First, it argues that the language of the second 

clause of the release is not reasonably susceptible to Allegheny 

Ludlum's construction because "[t]o read the phrase 'to have been 

performed . . . at or prior to February 19, 1986' as referring to 

[the 1980 stock purchase agreement] turns the first clause of the 

proviso into mere surplusage" in violation of "standard rules of 

contract construction." See Allegheny International br. at 26. 

We do not believe that this argument is determinative because 
Allegheny International's construction of the second clause of 

the release also seems to turn a portion of the first clause into 

surplusage. 

 Allegheny International next argues that the second 

clause of the release is not reasonably susceptible to Allegheny 

Ludlum's construction because "[u]nder [Allegheny] Ludlum's 

construction, no contractual claims, including the insurance 

claims which were in litigation at the time the Release was 

executed, were released." Id. at 25. According to Allegheny 

International, such a construction of the second clause of the 

release "lead[s] to an absurdity" and thus should be rejected in 

favor of its own interpretation which "'will effectuate the 

reasonable result intended.'" Id. at 25 (quoting Laudig v. 

Laudig, 624 A.2d 651, 654 (Pa. Super. Ct.) appeal denied, 634 

A.2d. 224 (Pa. 1993)). 

 Allegheny International argues that Allegheny Ludlum's 

construction "lead[s] to an absurdity," because it is 

inconsistent with the express provision in the 1986 agreement 

(also referenced in the first clause of the release), which 

provides for the dismissal with prejudice of all proceedings 

pending between the parties including the 1985 insurance costs 

suit. We agree that Allegheny Ludlum's construction is 

inconsistent with the dismissal with prejudice of pending 

insurance cost proceedings because such claims are based on 

obligations under the 1980 stock purchase agreement which were 

supposed to have been performed before February 19, 1986. Under 

Allegheny Ludlum's construction, the second clause of the release 
preserves claims based on obligations under the 1980 stock 

purchase agreement if these obligations were to be performed "at 

or prior to February 19, 1986." 

 This argument also is not determinative, however, 

because Allegheny International's construction of the second 

clause suffers from the same infirmity. The insurance costs 

proceedings pending when the 1986 agreement and release were 

executed also were based on the 1981 insurance agreement. Thus, 

Allegheny International's construction of the second clause of 

the release to preserve claims based on obligations under other 

agreements if the obligations were supposed to be performed "at 

or prior to February 19, 1986" also seems inconsistent with the 

dismissal with prejudice of pending insurance cost proceedings. 

 Overall, we conclude that the language of the second 

clause of the release is "reasonably susceptible" to both 

Allegheny International's construction and Allegheny Ludlum's 

construction. Hutchison v. Sunbeam Coal Corp., 519 A.2d at 390 

(citations omitted).12 Thus, the release is patently ambiguous, 

and we must reverse the district court's grant of summary 

judgment in favor of Allegheny International on this basis. 

 Because of our holding that the contract is patently 

ambiguous, we do not reach the question of whether the contract 

 

12. We reject Allegheny Ludlum's argument that its construction 

of the second clause of the release is "the only plausible 

reading," and that, therefore, the release is unambiguous. See

Allegheny Ludlum br. at 19. 
is latently ambiguous as well.13 As a corollary, we also need 

not decide the scope of extraneous evidence admissible under 

Pennsylvania law to demonstrate that a contract is latently 

ambiguous. Of course, upon remand, the trier of fact must look 

to extraneous evidence to determine the contracting parties' 

intent. The scope of extraneous evidence admissible to interpret 

the meaning of an ambiguous contract (as distinguished from 

determining whether or not the contract is in fact ambiguous) is 

not before us on this appeal, and in the first instance should be 

decided by the district court. 

 Allegheny Ludlum urges that we should go further than 

simply reversing the summary judgment in favor of Allegheny 

International, as it argues that even if we conclude that the 

release is ambiguous, we should grant its motion for summary 

judgment because Allegheny International failed to meet its 

burden to respond to Allegheny Ludlum's motion under Fed. R. Civ. 

P. 56. See Allegheny Ludlum br. at 21-22. According to 

Allegheny Ludlum, it is entitled to summary judgment because 

Allegheny International failed to refute the evidence of the 

parties' intent contained in affidavits it submitted which, if 

accepted, would establish that the release bars this action. Id. 

However, we have no need to describe these affidavits in detail 

because there is extrinsic evidence which tends to support a 

 

13. In fact we cannot reach that point because an agreement is 

latently ambiguous only when extraneous or collateral facts make 

uncertain language which facially is clear and unambiguous. 

Steuart v. McChesney, 444 A.2d at 663. Thus, by definition, an 

agreement can be latently ambiguous only if it is patently clear. 
conclusion that the release does not bar this action. See, e.g., 

app. at 1325-26 (May 5, 1988 letter from Allegheny Ludlum to 

Allegheny International recognizing that Allegheny International 

primarily was responsible for protesting the IRS's initial 

disallowance of the tax refund for which Allegheny International 

now seeks reimbursement), id. at 1675 (February 1989 stipulation 

recognizing that Allegheny Ludlum still may have obligations to 

Allegheny International under the 1980 stock purchase agreement). 

Thus, a dispute of fact remains. Accordingly, we will affirm the 

denial of Allegheny Ludlum's motion for summary judgment on 

Allegheny International's tax refund claim, and unless we 

determine that the dismissal with prejudice of Allegheny 

International's 1985 suit for insurance costs precludes the 

insurance costs claim, we also will affirm the denial of 

Allegheny Ludlum's motion for summary judgment on that claim. 

 B. Dismissal of the State Case

 As we have indicated, in 1985 Allegheny International 

filed suit to recover insurance costs that it claimed Allegheny 

Ludlum owed it under the 1980 stock purchase agreement and the 

1981 insurance agreement. However, in the 1986 agreement, 

Allegheny International stated that it would "withdraw and cause 

to be dismissed with prejudice as to all parties all legal 

proceedings" pending between Allegheny International and 

Allegheny Ludlum including its insurance claim. See 1986 

agreement, at 2 (Allegheny Ludlum br. Tab F). Subsequently, on 

February 28, 1986, the state court issued an order approving a 
stipulation by the parties dismissing the 1985 suit with 

prejudice. See app. at 425. Allegheny International's 1985 suit 

sought reimbursement for insurance costs it already had incurred 

on behalf of Allegheny Ludlum as well as a declaratory judgment 

entitling it to reimbursement for insurance costs it would incur 

on Allegheny Ludlum's behalf in the future. Id. at 155-64. In 

its present insurance costs claim, Allegheny International seeks 

reimbursement for the insurance costs it has incurred on 

Allegheny Ludlum's behalf since March 1, 1986. Id. at 1647-50 

(Allegheny International's Third Amended Pretrial Statement). 

 The magistrate judge concluded that the dismissal with 

prejudice of Allegheny International's 1985 state court suit for 

insurance costs did not entitle Allegheny Ludlum to judgment on 

the pleadings because Allegheny International sought 

reimbursement only for insurance payments it made on Allegheny 

Ludlum's behalf "in and after 1989" which "thus were not part of 

that state law action."14 See magistrate judge's report, at 10 

(Allegheny Ludlum br. Tab C). According to the magistrate's 

report, this allegation raised a question of material fact which 

precluded granting a judgment on the pleadings. Id. 

 Allegheny Ludlum argues that the district court "erred 

in ruling, as a matter of law, that the dismissal with prejudice 

of the 1985 Insurance Lawsuit did not bar relitigation of 

[Allegheny International's] insurance cost claim." See Allegheny 

 

14. We are confident that the magistrate judge intended to 

indicate 1986. 
Ludlum br. at 37. Allegheny Ludlum concedes that Allegheny 

International's present insurance costs claim does not seek 

reimbursement for any costs it incurred on behalf of Allegheny 

Ludlum prior to the dismissal of its 1985 suit. Id. at 39. 

However, according to Allegheny Ludlum, the dismissal of the 1985 

suit bars Allegheny International's present insurance costs suit 

because the 1985 suit sought not only reimbursement for insurance 

costs Allegheny International already had incurred, but also a 

judgment declaring that all future claims costs it would incur on 

Allegheny Ludlum's behalf were to be paid pursuant to the 1981 

insurance agreement. Id.; see app. at 163. Our review of the 

district court's conclusion is plenary. 

 Federal courts must "give the same preclusive effect to 

state court judgments that those judgments would be given in the 

courts of the State from which the judgments emerged." Kremer v. 

Chemical Constr. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 1889 

(1982) (citing 28 U.S.C. § 1738) (footnote omitted); see also

Davis v. United States Steel Supply, 688 F.2d 166, 170 (3d Cir. 

1982), cert. denied, 460 U.S. 1014, 103 S.Ct. 1256 (1983). This 

principle is embodied in 28 U.S.C. § 1738, which provides that 

state court judgments: 

 shall have the same full faith and credit in 

every court within the United States and its 

Territories and Possessions as they have by 

law or usage in the courts of such State. 

 Under Pennsylvania law, the doctrine of res judicata

holds that "'a final valid judgment upon the merits by a court of 

competent jurisdiction bars any future suit between the parties 
or their privies, on the same cause of action.'" Keystone Bldg. 

Corp. v. Lincoln Sav. and Loan Ass'n, 360 A.2d 191, 194 (Pa. 

1976) (citations omitted). 

 Application of the doctrine of res judicata 

requires the concurrence of four elements. 

They are: (1) identity of the thing sued for; 

(2) identity of the cause of action; (3) 

identity of persons and parties to the 

action; [and] (4) identity of the quality in 

the persons for or against whom the claim is 

made. 

City of Pittsburgh v. Zoning Bd. of Adjustment, 559 A.2d 896, 901 

(Pa. 1989) (citations omitted); see also Davis v. United States 

Steel Supply, 688 F.2d at 170-71 (applying Pennsylvania law). 

Moreover, "'[i]t is well settled, as a general proposition, that 

a judgment or decree, though entered by consent or agreement of 

the parties, is res judicata to the same extent as if entered 

after contest.'" Keystone, 360 A.2d at 194 n.6 (citation 

omitted). See also Gambocz v. Yelencsics, 468 F.2d 837, 840 (3d 

Cir. 1972) ("[d]ismissal with prejudice constitutes an 

adjudication of the merits as fully and completely as if the 

order had been entered after trial") (citing Lawlor v. National 

Screen Serv. Corp., 349 U.S. 322, 327, 75 S.Ct. 865, 868 (1955)). 

Thus, the fact that the dismissal with prejudice of the 1985 suit 

was based upon a stipulation by the parties is irrelevant. 

 Nonetheless, we conclude that the dismissal with 

prejudice of the 1985 suit is not res judicata in Allegheny 

International's present suit for insurance costs. Although the 

suits involve the same parties, they do not involve the same 

causes of action. In its present insurance costs claim, 
Allegheny International is suing for reimbursement of expenses it 

had not even incurred at the time that its 1985 suit was 

dismissed with prejudice. The fact that Allegheny 

International's 1985 suit included a claim for declaratory 

judgment regarding its rights to the reimbursement of future 

insurance expenses it would incur on behalf of Allegheny Ludlum 

should not bar Allegheny International's present claim for 

expenses incurred subsequent to the dismissal of the 1985 suit.15 

 

15. Allegheny Ludlum cites Exner v. Exner, 407 A.2d 1342 (Pa. 

Super. Ct. 1979), and Mintz v. Carlton House Partners, Ltd., 595 

A.2d 1240 (Pa. Super. Ct. 1991) in support of its argument that 

the dismissal with prejudice bars Allegheny International's 

present claim for costs incurred subsequent to the dismissal of 

the earlier action. But these cases are distinguishable. 

 The plaintiff in Exner first filed actions in assumpsit 

alleging breaches of a separation agreement and then filed an 

action in equity alleging breaches of the separation agreement 

and seeking specific performance of the separation agreement. 

The court in Exner entered judgment in the equitable action and 

ordered specific performance of the separation agreement. 

Subsequently, the plaintiff filed a motion for summary judgment 

in the consolidated assumpsit actions alleging breaches of the 

separation agreement. The Exner court held that the assumpsit 

actions were barred by the judgment in the equitable action based 

in part on the fact that "[t]he complaint in equity recited all 

prior defaults, including those alleged in the prior assumpsit 

actions . . . [and thus,] the causes of action alleged in the 

consolidated assumpsit actions were included among the breaches 

of contract averred and decided in the equity action." Exner, 

407 A.2d at 1344. Thus, this case is distinguishable as 

Allegheny International's previous complaint did not and could 

not allege the "defaults" alleged in the complaint before us. 

 In Mintz, the court held that the plaintiffs' claims 

alleging that the defendant breached their lease agreement 

already had been fully discharged by the bankruptcy court's entry 

of an order confirming the defendant's plan of reorganization. 

The court based its determination that the doctrine of res 

judicata barred plaintiffs' claims in part on the finding that 

although plaintiffs may have incurred damages subsequent to the 

confirmation of defendant's plan of reorganization, the alleged 
 As the United States Supreme Court held in Lawlor v. 

National Screen Serv. Corp., 349 U.S. 322, 328, 75 S.Ct. 865, 868 

(1955), while a "judgment precludes recovery on claims arising 

prior to its entry, it cannot be given the effect of 

extinguishing claims which did not even then exist and which 

could not possibly have been sued upon in the previous case."16 

The plaintiffs in Lawlor had brought an antitrust action seeking, 

in part, injunctive relief, that was dismissed with prejudice in 

1943 pursuant to a settlement agreement. Subsequently, they 

brought a second action alleging antitrust violations based on 

conduct subsequent to the 1943 judgment, and the court held that 

the earlier judgment did not bar the action. Moreover, the court 

noted that its conclusion was "unaffected by the circumstance 

that the 1942 complaint sought, in addition to treble damages, 

injunctive relief which, if granted, would have prevented the 

illegal acts now complained of." Id. at 328, 75 S.Ct. at 869. 

(..continued) 

breach occurred prior to the confirmation of defendant's plan of 

reorganization. Mintz, 595 A.2d at 1244. Thus, Mintz is 

distinguishable because the breaches on which Allegheny 

International bases its present suit occurred after the entry of 

judgment in the 1985 suit. 

16. See also Federated Dep't. Stores, Inc. v. Moitie, 452 U.S. 

394, 398, 101 S.Ct. 2424, 2428 (1981) ("[a] final judgment on the 

merits of an action precludes the parties or their privies from 

relitigating issues that were or could have been raised in that 

action.") (citations omitted) (emphasis added); Alexander & 

Alexander, Inc. v. Van Impe, 787 F.2d 163, 166 (3d Cir. 1986) 

(res judicata "applies only to claims arising prior to the entry 

of judgment. It does not bar claims arising subsequent to the 

entry of judgment and which did not then exist or could not have 

been sued upon in the prior action.") (citation omitted). 
 We think that the Pennsylvania Supreme Court would 

follow the logic of Lawlor in the situation before us. In 

reaching this conclusion, we recognize that when declaratory 

relief is sought it may be possible to sue on a claim which could 

be regarded as not yet existing. Yet we think that it is 

reasonable to consider that when both damages for past conduct 

and declaratory relief governing future events are sought, the 

parties naturally would focus their attention on the existing 

monetary claims. Indeed, we believe that a court should be 

cautious in according res judicata effect to the dismissal of the 

declaratory judgment aspects of a combination damages and 

declaratory judgment action, lest a settlement leading to a 

dismissal with prejudice could have unintended consequences. For 

example, a delinquent defendant with an ongoing relationship with 

a plaintiff, by making its account current, might obtain a 

dismissal of an action against it for the overdue payments and 

for declaratory relief that it will be liable for future 

payments. In such a situation it would be remarkable if the 

defendant could use the dismissal of the action as a defense in a 

later case if it failed to make the future payments as its 

obligation to make them matured. 

 Furthermore, in a technical sense it is questionable 

whether a voluntary dismissal with prejudice of a claim for 

declaratory relief should be regarded as extinguishing the 

anticipated substantive claim underlying the declaratory judgment 

action, for such a dismissal is in terms simply a disposition of 

a claim for declaratory relief. Accordingly, it seems 
unreasonable to regard the disposition as the equivalent of a 

disposition of the plaintiff's substantive claims for monetary 

relief as the claims mature. Indeed, at a time when the claim 

for declaratory relief is dismissed, the circumstances on which 

future liability later may be predicated will not even exist. 

Overall, we are convinced that whatever might be true in other 

contexts, for res judicata purposes a cause of action for 

declaratory relief with respect to a party's obligation to make 

payments in the future should not be regarded as a cause of 

action for the recovery of the payments as they become due. In 

these circumstances, we conclude that the Allegheny 

International's present claim for insurance costs should not be 

regarded as stating the same cause of action asserted in the 

state litigation. Consequently, we apply Pennsylvania law to 

hold that the dismissal of Allegheny International's 1985 suit 

does not bar its present claim.17 

 

17. Of course, when there is an actual adjudication of an issue 

in a declaratory judgment action regarding a debt not due, the 

adjudication may be preclusive under collateral estoppel 

principles as to that issue in a later action to recover the 

debt. Thus, our result in no way undermines the effectiveness of 

a declaratory judgment. But collateral estoppel does not apply 

here because the dismissal with prejudice of the 1985 suit did 

not actually "decide" or "adjudicate" any issues. See City of 

Pittsburgh, 559 A.2d at 901 ("[c]ollateral estoppel applies if 

(1) the issue decided in the prior case is identical to one 

presented in the later case; (2) there was a final judgment on 

the merits; (3) the party against whom the plea is asserted was a 

party or in privity with a party in the prior case; (4) the party 

or person privy to the party against whom the doctrine is 

asserted had a full and fair opportunity to litigate the issue in 

the prior proceeding and (5) the determination in the prior 

proceeding was essential to the judgment.") (citations omitted). 
 C. Sunbeam-Oster's standing

 In a second and separate motion for summary judgment, 

Allegheny Ludlum challenged Sunbeam-Oster Company's right to 

prosecute this action on behalf of Allegheny International 

because Sunbeam-Oster did not file a motion to amend the caption 

of the case or otherwise substitute itself for Allegheny 

International as plaintiff. See Allegheny Int'l, Inc., slip op. 

at 30. The district court denied Allegheny Ludlum's motion, 

holding that Allegheny Ludlum had waived any defense it might 

have had to Sunbeam-Oster's prosecution of this action by raising 

it "as late in the litigation as it has." Id. at 31 (citing 6A 

Charles A. Wright, et al., Federal Practice and Procedure § 1554, 

at 406-07 (1990)). We agree. Any objection alleging that the 

plaintiff is not the real party in interest "should be done with 

reasonable promptness." See 6A Charles A. Wright, et al., 

Federal Practice and Procedure § 1554, at 407 (1990). 

"Otherwise, the court may conclude that the point has been waived 

by the delay and exercise its discretion to deny motions on the 

ground of potential prejudice." Id. at 407-08. See also Gogolin 

& Stelter v. Karn's Auto Imports, Inc., 886 F.2d 100, 102-03 (5th 

Cir. 1989) (holding that defendant waived real-party-in-interest 

defense by "untimely assertion," where defendant raised it for 

the first time in a motion for directed verdict), cert. denied, 

494 U.S. 1031, 110 S.Ct. 1480 (1990).18 

 

18. In light of our decision, we need not reach an argument 

advanced by Allegheny Ludlum that the district court erred in 
 III. CONCLUSION 

 In view of the aforesaid, we will reverse the district 

court's order of summary judgment of April 7, 1994, in favor of 

Allegheny International, but we will affirm its denial of 

Allegheny Ludlum's motions for summary judgment. We will remand 

the matter to the district court for further proceedings 

consistent with this opinion. The parties will bear their own 

costs on this appeal. 

(..continued) 

determining as a matter of law that Allegheny International was 

entitled to the interest the IRS paid on the refund as a tax 

benefit, and Allegheny Ludlum's further argument that the court 

should not have awarded Allegheny International prejudgment 

interest for certain litigation delay.