Access Cardiosystems, Inc.

1
United States Bankruptcy Court
District of Massachusetts
_____________________________________
)
In re: 	) 	Chapter 11
) 	Case No. 05-40809-HJB
ACCESS CARDIOSYSTEMS, INC., 	)
)
Debtor 	)
_____________________________________ )
MEMORANDUM OF DECISION
Before the Court is the “Debtor’s Omnibus Objection to General Unsecured Claims
Asserted by European Distributors” (the “Objection” or “Objection to Claims”) filed by
Access Cardiosystems, Inc. (the “Debtor”). 	The Objection and various supplementary
memoranda filed by the Debtor and the claimants raise several issues of contract law and
interpretation. 	The Debtor asks this Court to disallow the claims in their entirety as
foreclosed by various provisions of agreements between the Debtor and the claimants.
The claimants, in turn, ask this Court to conduct an evidentiary hearing to determine factual
issues regarding the Debtor’s alleged breach of the contracts and the amount of damages
resulting from that breach.
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1 The 	Distributors 	are: 	Donna 	ehf, 	Innomed 	Medical, 	Inc. 	(“Innomed”), 	GS
Elektromediziniscghe Gerate G. Stemple GmbH (“GS Elektromed”), Kivex, Mortara Rangoni Europe
SRL (“Mortara Rangoni”), Ortho-Medical, Fenno Medical Oy (“Fenno Medical”), R.L. Dolby & Co.
Ltd. (“Dolby”), Reavita, AG (“Reavita”) and Schiller-Austria (“Schiller”).
2 For an exceedingly more detailed account of the Debtor’s history, including the
development of the AEDs, see Access Cardiosystems, Inc. v. Fincke (In re Access Cardiosystems,
Inc.), 340 B.R. 127 (Bankr. D. Mass. 2006).
3 The Agreements are all substantially similar; however, differences between certain cited
portions of the Agreements do exist and will be noted. Furthermore, the Agreements with Ortho-
Medical and Fenno Medical have not been produced. For purposes of the present controversy,
however, the parties appear to be in agreement that the differences between the Agreements are
not material and the missing Agreements are substantially identical to the ones produced.
2
I. 	FACTS AND TRAVEL OF THE CASE
A. 	The Distribution Agreements
The 	present 	controversy 	arises 	from 	several 	distribution 	agreements 	(the
“Agreements”) 	executed 	by 	the 	Debtor 	and 	various 	European 	distributors1 (the
“Distributors”) during the latter part of 2001 and the early part of 2002, several years prior
to the filing of the instant Chapter 11 bankruptcy case. 	Under the Agreements, the
Distributers were granted exclusive rights to market and sell the Debtor’s automated
external defibrillators (“AEDs” or “Access AEDs”)2 within their respective territories
throughout Europe. 3
Section 3 of the Agreements detailed various obligations of the Distributors,
including promotion, marketing, minimum commitments and training criteria. In addition,
under Section 3.17, except as otherwise provided or agreed to in writing by the Debtor and
a Distributor, the Distributors bore “all costs and expenses incurred in the performance of
Distributor’s obligations under th[e] Agreement[s].” In return, the Distributors each received
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4 More particularly, that section provided:
11.2 	Termination for Cause. Either party may terminate this Agreement
at any time prior to the expiration of its stated term in the event that:
(a) 	the other party fails to perform any other obligation, warranty, duty or
responsibility or is in default with respect to any term or condition undertaken under
this Agreement and such failure or default continues unremedied for a period of
twenty (20) days following written notice of such failure or default;
(b) 	Access CardioSystems in its sole discretion terminates Distributor’s rights
under this Agreement pursuant to Section 3.3 [setting forth minimum commitments
requirements] of this Agreement; or
(c) 	any bill or regulation granting Distributor extracontractual compensation upon
termination or expiration of this Agreement is introduced into or passed by the
legislature or other governing body of the Territory.
5 Section 11.6 of the Agreements provides, in relevant part:
11.6 	No Damages for Termination or Expiration. 	NEITHER ACCESS
CARDIOSYSTEMS NOR DISTRIBUTOR SHALL BE LIABLE TO THE OTHER FOR
DAMAGES OF ANY KIND, INCLUDING INCIDENTAL OR CONSEQUENTIAL
DAMAGES, ON ACCOUNT OF THE TERMINATION OR EXPIRATION OF THIS
AGREEMENT IN ACCORDANCE WITH THIS SECTION 11. . . . Neither Access
CardioSystems nor Distributor will be liable to the other on account of termination
or expiration of this Agreement for reimbursement or damages for the loss of
goodwill, 	prospective 	profits 	or 	anticipated 	income, 	or 	on 	account 	of 	any
expenditures, investments or leases or commitments made by either Access
CardioSystems or Distributor or for any other reason whatsoever based upon or
3
a limited license of the Debtor’s intellectual property rights to sell the AEDs exclusively
within their respective European territories.
The initial term of each Agreement was two years, unless terminated pursuant to
Section 11. Under Section 11.2, either party could terminate the Agreement for cause,4
and under Section 11.3, either party could terminate the Agreement with or without cause,
provided that written notice was given of the termination six months prior to the effective
date of the termination. The Agreement further limited liability with respect to terminations
under Section 11 of the Agreement. 5
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growing out of such termination or expiration. . . .
6 Section 14 of the Agreement between the Debtor and Donna ehf, labeled “DISCLAIMER
OF WARRANTIES,” provided:
14.1 	Disclaimer of Warranties. ACCESS CARDIOSYSTEMS MAKES NO
WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE
ACCESS CARDIOSYSTEMS PRODUCT TO DISTRIBUTOR; BUT SHALL MAKE
WARRANTIES ONLY TO END USERS OF THE ACCESS CARDIOSYSTEMS
PRODUCT. 	ACCESS 	CARDIOSYSTEMS 	HEREBY 	DISCLAIMS 	ALL
WARRANTIES REGARDING THE ACCESS CARDIOSYSTEMS PRODUCT,
EXPRESS 	AND 	IMPLIED, 	INCLUDING 	BUT 	NOT 	LIMITED 	TO 	IMPLIED
WARRANTIES 	OF 	MERCHANTABILITY, 	FITNESS 	FOR 	A 	PARTICULAR
PURPOSE AND NONINFRINGEMENT.
Section 14 of the Agreements between the Debtor and Innomed, GS Elektromed, Kivex, Mortara
Rangoni, Dolby, Reavita and Schiller, also labeled “DISCLAIMER OF WARRANTIES,” was
substantially similar and provided:
14.1 	Disclaimer of Warranties. ACCESS CARDIOSYSTEMS MAKES NO
WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE
ACCESS CARDIOSYSTEMS PRODUCT TO DISTRIBUTOR; BUT SHALL MAKE
WARRANTIES ONLY TO END USERS OF THE ACCESS CARDIOSYSTEMS
PRODUCT. A COPY OF THE WARRANTY FOR END USERS OF THE ACCESS
CARDIOSYSTEMS PRODUCT THAT IS IN EFFECT ON THE DATE OF THIS
AGREEMENT IS ATTACHED AS EXHIBIT D. ACCESS CARDIOSYSTEMS
RETAINS 	THE 	RIGHT 	TO 	REVISE 	SUCH 	WARRANTY 	AT 	ITS 	OWN
DISCRETION. 	ACCESS 	CARDIOSYSTEMS 	HEREBY 	DISCLAIMS 	ALL
WARRANTIES 	TO 	DISTRIBUTORS 	REGARDING 	THE 	ACCESS
CARDIOSYSTEMS PRODUCT, EXPRESS AND IMPLIED, INCLUDING BUT NOT
LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT.
4
Each Agreement also disclaimed all warranties relative to the Access AEDs, with the
exception of limited warranties extended 	to the ultimate end-users of the product. 6 In
addition to excluding warranties, Section 15 of the Agreements also limited the parties’
liability in the event of breach:
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15. 	LIMITED LIABILITY
15.1 	Limitations and Exclusions. 	REGARDLESS OF WHETHER
ANY REMEDY SET FORTH HEREIN OR ACCESS CARDIOSYSTEMS’S
LIMITED WARRANTY ACCOMPANYING DELIVERY OF THE ACCESS
CARDIOSYSTEMS PRODUCT FAILS OF ITS ESSENTIAL PURPOSE OR
OTHERWISE, 	NEITHER 	PARTY 	WILL 	BE 	LIABLE 	FOR 	ANY 	LOST
PROFITS OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL,
PUNITIVE 	OR 	OTHER 	SPECIAL 	DAMAGES 	SUFFERED 	BY
DISTRIBUTOR, ITS CUSTOMERS OR OTHERS ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR THE ACCESS CARDIOSYSTEMS
PRODUCT, FOR ALL CAUSES OF ACTION OF ANY KIND (INCLUDING
TORT, BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY AND
BREACH OF WARRANTY) EVEN IF ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
15.2 	Maximum Aggregate Liability. IN NO EVENT WILL ACCESS
CARDIOSYSTEMS’S TOTAL CUMULATIVE LIABILITY IN CONNECTION
WITH 	THIS 	AGREEMENT 	OR 	THE 	ACCESS 	CARDIOSYSTEMS
PRODUCT, FROM ALL CAUSES OF ACTION OF ANY KIND, INCLUDING
TORT, BREACH OF CONTRACT, NEGLIGENCE, STRICT LIABILITY AND
BREACH OF WARRANTY, EXCEED THE TOTAL AMOUNT PAID BY
DISTRIBUTOR TO ACCESS CARDIOSYSTEMS HEREUNDER.
15.3 	Acknowledgment. 	Distributor agrees that the limitations of
liability 	and 	disclaimers 	of 	warranty 	set 	forth 	in 	this 	Agreement 	are
independent of any remedies hereunder and apply regardless of whether any
remedy fails of its essential purpose. Distributor acknowledges that Access
CardioSystems has set its prices and entered into this Agreement in reliance
on the disclaimers of liability, the disclaimers of warranty and the limitations
of liability set forth in this Agreement and that the same form an essential
basis of the bargain between the parties.
Given the nature of the AEDs and the regulations imposed by the United States
Food and Drug Administration (the “FDA”), it is unsurprising that the Agreements also
contained provisions regarding the parties’ rights and obligations in the event of a recall.
The relevant provisions of Section 9 of the Agreements provide:
9.2 	Notification 	by 	Access 	CardioSystems. 	If 	a 	product
investigation by a party or government office or agency results in a potential
product recall or correction of the Access Cardiosystems Product, Access
CardioSystems shall retain full authority and responsibility for decisions on
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7 This language is identical in the Agreements between the Debtor and Innomed, GS
Elektromed, Kivex, Mortara Rangoni, Dolby, Reavita and Schiller. Section 9.3 of the Agreement with
Donna ehf differed from this provision as follows:
9.3 	Procedure. 	Any such recall, correction or notification shall be
handled in accordance with the recall, correction and customer notification policy
and procedures maintained by Access CardioSystems in accordance with the FDA
Correction and Removals Regulation of 1997 (and any successor thereto) and any
other applicable law, rule or regulation.
6
such recall or correction. 	If Access CardioSystems decides to conduct a
recall or correction, Access CardioSystems will provide written notice to
Distributor within twenty-four (24) hours of such decision, and a summary of
the reason for and implementation of such action. Access CardioSystems
shall provide such information as Distributor may reasonably require to
prepare any additional customer notification of such recall or correction,
which notification shall be issued by Distributor.
9.3 	Procedure. Any such recall, correction or notification shall be
handled in accordance with the recall, correction and customer notification
policy and procedures maintained by Access Cardiosystems. 	Access
CardioSystems shall promptly reimburse all reasonable, necessary and
documented costs for any recall of the Access CardioSystems Product that
are incurred by Distributor with the prior approval of Access CardioSystems. 7
B. 	The Recall
In October of 2004, the Debtor learned of potential problems with the AEDs that
eventually led to the issuance, on November 3, 2004 of its “Urgent Recall Notice” (the
“Recall Notice”). 	The Recall Notice was mailed to customers and the Distributors, and
provided:
URGENT RECALL NOTICE - IMMEDIATE ACTION REQUIRED
Access CardioSystems, Inc.’s Access AED and AccessALS Automated External
Defibrillators
November 3, 2004
Dear Customer:
According to our records, you have purchased one or more of Access
CardioSystems, 	Inc.’s 	(“Access 	CardioSystems” 	or 	the 	“Company”)
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8 In addition to the above-quoted language, the Recall Notice also detailed the potential
problems identified by the Debtor with various AEDs and provided the specific serial numbers
associated with the affected devices.
7
AccessAED or AccessALS automated external defibrillator (“AED”) devices.
The Company has become aware of two potential issues involving certain of
its AEDs that warrant your immediate attention. . . .
. . .
PLEASE IMMEDIATELY DISCONTINUE USE OF AND REMOVE FROM
SERVICE ACCESS CARDIOSYSTEMS AED DEVICES WITH THE
ABOVE REFERENCED CATALOG AND SERIAL NUMBERS
IMPORTANT: Certain of the AccessAED or AccessALS AEDs in your
possession may have one, both, or neither of the issues described
above. However, the Company has made a business decision, effective
November 3, 2004, to discontinue manufacturing and marketing ALL
models of its AEDs and to discontinue supporting its AEDs that are
currently in the field. We are no longer accepting orders for disposable
parts used with our AEDs. Therefore, when your supply of disposable
parts is depleted, please immediately discontinue use of and remove
from service all of the Company’s AEDs that you have in your
possession. It is your responsibility to equip yourself with AEDs that
meet your medical needs.
* * *
Please immediately sign and return the attached form by facsimile to Access
CardioSystems . . . indicating that you have received and understand this
letter.
The Food and Drug Administration is being notified of this voluntary recall.
We regret any inconvenience that this action may cause. If you have any
questions about this letter, please contact the Recall Coordinator at [phone
number provided]. 8
The details of the events precipitated by this Recall Notice are the subject of some
dispute between the parties. According to the Distributors, they made numerous attempts
to contact the Debtor following receipt of the Recall Notice, but claim that the Debtor was
“totally non-responsive. Phone calls and correspondence from the European Distributors
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8
were completely ignored.” 	Two Distributors claim to have submitted “formal notices”
requesting reimbursement of costs associated with the recall, as provided by Section 9.3
of the Agreements. 	Relevant documents attached to the Distributors’ supplemental
response to the Objection (the “Distributors’ Supplemental Response”) include: (1) a letter
to the Debtor from Reavita dated November 14, 2004; (2) a letter to the Debtor from Arthur
M. Dolby (“Arthur Dolby”), Dolby’s managing director, dated November 22, 2004; and (3)
a second, undated, letter to the Debtor from Arthur Dolby. Both Reavita and Dolby raised
concerns regarding their inability to contact the Debtor and both referenced Section 9.3 of
the Agreements and the required approval of costs associated with the Recall. The Reavita
letter stated, in relevant part:
Dear Sir,
Accesscardiosystems sent us by courier an information dated November 3,
2004, about a Recall of Access products.
. . .
• 	There are two different “Recall phone numbers” mentioned. By today, none
of our calls has been answered personally neither is it possible to leave a
message.
• 	Calling the Recall phone number provided by Access, we are addressed to
the Access homepage for further information.
. . .
In our mutually signed International Exclusive Distributor Agreement, point
9, it is specified, what to do with Recalls initiated by Accesscardiosystems.
. . .
In Point 9.3 “Procedure” is written, that AccessCardiosystems shall promptly
reimburse all reasonable, necessary and documented cost for any recall of
the Access Cardiosystems Product that are incurred by Distributor. Kindly
ask you where to address our costs and how and when we shall be
reimbursed for.
. . .
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Please 	inform 	. 	. 	. 	who 	is 	an 	authorized 	contact 	person 	for 	us 	at
Accesscardiosystems and how to contact him/her.
. . .
Likewise, the November 22, 2004 letter from Arthur Dolby stated:
. . .
I refer you to section 9.3 of the Access Distribution Contract . . . .
. . .
Please give approval in principle for the costs incurred in connection with the
recall. These costs will be detailed after the recall is complete but will cover
the labour, transport costs and any other expenses involved in recalling the
units specified. It will also include the refund cost where a customer claims
for a refund of what he paid for his Access AED. Your recall states that the
AED is to be taken out of use and Access will not be ‘reconciling’ units
returned. We will only return units if Access agree to cover the freight of the
AEDs recalled and arrange for their uplift.
Please clarify the above and make clear what Access is prepared to pay in
relation to the commitment made in Section 9.3 above.
. . .
It also appears that other European Distributors were unsure of how to proceed following
the issuance of the Recall Notice. In the second letter from Arthur Dolby to the Debtor, he
states,
. . .
I have been in conference with many of the European Distributors over the
last 10 days . . . .
. . .
Many of us are highly suspicious about the circumstances surrounding the
recall notice and the Access decision to cease trading . . . .
Although we have had acknowledgments of messages left, Access is not
answering questions asked and merely direct callers to their web site. . . .
. . .
Could I ask you to acknowledge receipt of this letter . . . ? Your help and
assistance would be very much appreciated.
. . .
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9 In its First Supplemental Memorandum, the Debtor further reiterates this position:
After laying off all of its non-essential personnel not related to the recall, the Debtor
. . . maintained a sufficient staff in its finance, operations, engineering and support
staff to ensure that all of the necessary notices were sent out, to work with the FDA,
to respond to customer questions, to attempt to determine the root cause of the
problem.
10 As noted by the Debtor, the post-recall agreements appear to be, in substance, irrelevant
to the issues presently before the Court, and the Debtor relies on those agreements only to the
extent they evidence the Debtor’s post-recall responsiveness to the Distributors’ concerns.
10
The Debtor, in turn, disputes the Distributors’ assertions that it was unresponsive to
the Distributors. Describing the circumstances surrounding the recall, the Debtor says that,
although its production and sales staff were laid off, it retained necessary personnel and
“took other measures to ensure its response to the recall was prompt and efficient.” 9 As
further evidence of its responsiveness to the Distributors following the issuance of the
Recall Notice, the Debtor has produced copies of post-recall agreements executed by the
Debtor and the Distributors. 10
C. 	The Bankruptcy, the Claims and the Objection
On February 8, 2005, the Debtor filed for protection under Chapter 11 of the United
States Bankruptcy Code (the “Bankruptcy Code”), 11 U.S.C. § 101 et al., and has operated
as a debtor in possession since the inception of the case, see 11 U.S.C. §§ 1107(a), 1108.
On June 20, 2005, this Court issued an order establishing July 29, 2005 as the bar date for
non-governmental entities to file proofs of claim in the Debtor’s case (the “Bar Date Order”).
See Fed. R. Bankr. P. 3003(c)(3). 	Pursuant to the Bar Date Order and the “Notice of
Deadline and Procedures for Filing Proofs of Claim” (the “Bar Date Notice”), claims were
to be filed with Kurtzman Carson Consultants, LLC (“KCC”), the Debtor’s claims and
noticing agent. Although the Distributors’ claims (the “Claims”) were timely filed on July 27,
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11 The estimates of expenses associated with the claims appear to have been completed
on a standardized form. Thus, not all of the Distributors claimed amounts in all categories. Because
the parties have addressed their arguments globally, and for ease of discussion, the Court will not,
at this juncture, detail each separate expense claimed by each distributor.
12 The total amounts claimed for each distributor are as follows:
Donna ehf: $263,808.00
Innomed: $699,079.87
GS Elektromed: $479,457.62
Kivex: $303,196.00
Mortara Rangoni: $1,056,126.00
Ortho-Medical: $33,086.25
Fenno Medical: $109,500.00
Dolby: $1,807,239.00
Reavita: $2,266,695.00
Schiller: $1,434,694.00.
11
2005, each of the Claims (with the exception of GS Elektromed) was filed directly with the
clerk of the Bankruptcy Court and not with KCC.
For each of the Claims, in the portion of the proof of claim form labeled “Basis for
Claim,” there was a mark next to the box labeled “Other” and the words “Product recall/see
attached” were typed in. Attached to each Claim is an “estimate” of costs associated with
the recall, which include expenses associated with (1) “lawyers”; (2) information/mailings
to customers; (3) management and other personnel time; (4) technical tests; (5)
prospective expenses for testing; (6) expenses for repairs and replacement; (7) “logistics”;
(8) warranty claims; (9) stock and warehouse depreciation; (10) image damage; (11) “loss
of delivery”; (12) compensation for damages (“withdrawal of tenders”); and (13) additional
costs associated with reimbursing customers for returns of the AEDs. 11 Each Claim is
classified as a general unsecured claim, ranging from $109,500.00 to $2,266,695.00. 12
On November 14, 2006, the Debtor filed its Objection, the Distributors responded
on January 11, 2007 (the “Distributors’ Response”) and the Debtor thereafter filed a
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13 The Court acknowledges that the parties have made valiant efforts to flush out the
complex legal and factual issues within a somewhat shortened time-frame, as also pending before
this Court is the Debtor’s motion to approve its disclosure statement, the Debtor’s Chapter 11 plan
of reorganization and a motion to dismiss filed by the Committee of Unsecured Creditors, each of
which is currently scheduled for hearing on March 6, 2007.
12
supplemental memorandum of law (the “Debtor’s First Supplemental Memorandum”).
After a hearing on the Objection and response thereto, held on January 18, 2007, the Court
took the matter under advisement and invited the Distributors to file a further response.
The Distributors’ Supplemental Response was filed on February 1, 2007, and the Debtor
was granted leave to file a reply on February 7, 2007 (the “Debtor’s Second Supplemental
Memorandum”). Although the Court finds that issues of material fact preclude a final ruling
on the Objection, this memorandum should now dispose of certain legal issues raised by
the parties and focus the Debtor and the Distributors on the issues of fact remaining to be
established at trial. 13
II. 	POSITIONS OF THE PARTIES
The Debtor and the Distributors have raised various legal and factual arguments
relative to the Claims and the Objection. 	Generally, the various positions may be
categorized as those relating to: (1) procedural deficiencies in the filing of the Claims; (2)
contractual limits on liability and remedies, and the failure of contractual remedies’ essential
purpose; (3) breach of contract, including breach of the Debtor’s obligations of good faith
and fair dealing; and (4) indemnification. On each of these issues, the Debtor essentially
maintains that its Objection may be sustained now as a matter of law, while the Distributors
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14 As noted earlier, only GS Elektromed’s claim was filed with KCC.
15 The proofs of claim filed by GS Elektromed, Schiller and Dolby evidenced the requisite
authority; however, the remaining proofs of claim did not, as an official notice of appearance by the
filing attorney had not been entered on behalf of those Distributors and no power of attorney was
attached to the claims.
13
argue that material issues of fact exist that must be decided before the Court can properly
enter a dispositive ruling on the Objection.
A. 	Procedural Objections
The Debtor objects to certain of the Distributors’ Claims on two procedural grounds.
First, the Debtor argues that the Claims that were not filed with KCC in accordance with the
Bar Date Order and Bar Date Notice should be disallowed on grounds that they were not
timely and properly filed. 14 Second, the Debtor notes that several of the Claims were filed
by the Distributors’ attorney in the absence of a notice of appearance on the Distributors’
behalf and without 	attached powers of attorney. 15 Accordingly, says the Debtor, the
attorney lacked the requisite authority to execute the Claims on behalf of those Distributors
and the Claims are thus invalid and should be disallowed.
The Distributors concede that the proofs of claim, as originally filed, may have lacked
evidence of the attorney’s authority in strict compliance with the Federal Rules of
Bankruptcy Procedure (the “Bankruptcy Rules”). However, in conjunction with their
responses to the Objection, the Distributors filed the requisite powers of attorney, and
counsel for the Distributors has now filed a notice of appearance on behalf of all the
Distributors. 	Accordingly, the Distributors seek leave to amend the proofs of claim to
include evidence of the filing attorney’s authority to execute the Claims.
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14
The Distributors also acknowledge their failure to comply with the terms of the Bar
Date Order and Bar Date Notice by filing their proofs of claim directly with the clerk of the
Bankruptcy Court, and not with KCC, the Debtor’s claims agent. The Distributors argue
that this oversight does not render the Claims invalid, as it was a result of excusable
neglect and has not prejudiced the Debtor nor has it caused any delay in these judicial
proceedings. The Debtor concedes that, from the inception of the case, it has been aware
of, and in fact has engaged in negotiations regarding, the Distributors’ claims.
B. 	Liability and Damages, Remedies and Failure of Essential Purpose
The Debtor’s Objection is largely based on provisions of the Agreements that limit
the parties’ liability, remedies and recovery of incidental and consequential damages.
Assuming the Distributors can establish that the Debtor breached its obligations under the
Agreements, the Debtor nevertheless argues that the Distributors are foreclosed from
recovering all or a majority of the damages they now assert. First, according to the Debtor,
the Distributors’ sole remedy in the event of a breach was to terminate the Agreements in
accordance with Section 11, which section provided that neither party would be liable for
damages of any kind on account of such termination.
Second, under Section 14, the Debtor expressly disclaimed all warranties and, under
Section 15, the Debtor limited its liability to exclude incidental and consequential damages
in the event of a breach. 	Therefore most, if not all, of the Distributors’ damages are
precluded by those sections, as the claimed damages represent classic incidental and
consequential damages.
The Distributors take issue with the Debtor’s reliance on the damages exclusion
found in Section 11.6, because, they assert, the Debtor never effected a termination in
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accordance with Section 11.2. 	Instead, the Distributors rely on the Debtor’s breach of
Section 9.3 as the basis for their claims, which breach would remain unaffected by the
limitations found in Section 11.6.
The Distributors further argue that termination of the Agreements as sole remedy
for the Debtor’s breach fails of its essential purpose under the circumstances. Relying on
Section 2-719 of the Uniform Commercial Code, the Distributors say that termination of the
Agreements would ultimately result in their having no minimum adequate remedy, a result
viewed with disfavor by many courts and commentators.
The Debtor counters that the doctrine of failure of essential purpose is simply
inapplicable to the present case, since the Distributors specifically contracted to assume
the very risks that came to fruition. Moreover, even if the remedy of termination was found
to have failed of its essential purpose, that failure would not negate the limits on incidental
and consequential damages provided by Section 15 of the Agreements. Again, assuming
that 	a majority, if not all, of the Distributors’ claimed damages represent incidental and
consequential damages, they are not recoverable pursuant to the Agreements.
C. 	Breach of Contract
As clarified by counsel to the Distributors at the hearing on the Objection, the
Distributors’ Claims do not arise from the defects in the AEDs. Instead, the Distributors
base their Claims on the Debtor’s alleged breach of the Debtor’s obligations in the event
of a recall, as provided by Section 9.3. The Distributors argue that the Debtor may have
breached Section 9.3 by failing to conduct the recall in accordance with “the recall,
correction 	and 	customer 	notification 	policy 	and 	procedures 	maintained 	at 	Access
CardioSystems,” as required by that section. The Distributors also assert that the covenant
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of good faith and fair dealing imposed on all contracts under Massachusetts law obligated
the Debtor to not unreasonably withhold approval of costs associated with the recall, as
provided by Section 9.3 of the Agreements. 	The Distributors point to the Debtor’s
unresponsiveness to the Distributors’ communications following the issuance of the Recall
Notice as evidence that the Debtor abrogated its responsibility to approve costs associated
with the recall.
The Debtor disputes these allegations in two major respects. 	First, the Debtor
unequivocally asserts that its actions with regard to the recall were fully in accord with its
policy and procedures. 	Second, the Debtor claims that it was not unresponsive to the
Distributors following the recall and, in fact, the post-recall agreements evidence the
continuing cooperation and communication between the Debtor and Distributors regarding
issues involving the recall.
Furthermore, says the Debtor, none of the Distributors submitted requests for
approval of costs in accordance with Section 9.3 of the Agreements. According to the
Debtor, the letters appended to the Distributors’ Supplemental Response cannot be
considered requests for prior approval for two major reasons. First, the communications
provide no documentation, and do not demonstrate the reasonableness or necessity, of
specified costs associated with the recall. Instead, the Debtor characterizes the letters as
seeking “blank check” approval of any expenses that might be incurred. The Debtor states
that it “had no obligation to approve anything before it knew exactly what was being
requested.” Thus, it did not breach its obligations of good faith related to the approval of
costs to be reimbursed, because it was the Distributors, and not the Debtor, who failed to
abide by the terms of the Agreements.
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17
Second, the Debtor notes that the attached letters purporting to request approval for
expenses associated with the recall were not sent in compliance with Section 18.3 of the
Agreements, which specifies the manner in which all notices and demands are to be sent.
The Debtor says the letters were not compliant with Section 18.3, a fact which, according
to the Debtor, renders those requests ineffective under Section 9.3.
D. 	Indemnification
Apart from reliance on recovery of damages for breach of contract, the Distributors
also argue that they have common law indemnification claims against the Debtor for sums
the Distributors paid to settle claims with end-users of the AEDs. 	According to the
Distributors, they “have a right to seek indemnification against [the Debtor] as a result of
[the Debtor’s] negligent manufacture and also as a result of the fact that [the Debtor]
refused to honor its limited warranty obligations to end-users, for their liability to the end-
users.”
The Debtor says that principles of common-law indemnification are inapplicable
here, as the damages suffered by the Distributors are purely economic. 	Relying on the
cases cited by the Distributors, the Debtor argues that “common law indemnification applies
only where there is ‘injury,’ and not economic loss.” Thus, indemnification, according to the
Debtor, is not available to the Distributors for recovery of the amounts paid to settle claims
with end-users.
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18
III. 	DISCUSSION
A. 	Procedural Issues
As an initial matter, the Court must determine whether the procedural errors in the
Distributors’ proofs of claim preclude their viability. 	For if the Claims are invalid for
technical reasons, the substantive issues raised are moot.
1. 	Authorization
As the Debtor rightly notes, § 501(a) of the Bankruptcy Code provides that a creditor
may file a proof of claim, 11 U.S.C. § 501(a), and Bankruptcy Rule 3001(b) requires a proof
of claim to be executed by “the creditor or the creditor’s authorized agent . . . .” Fed. R.
Bankr. P. 3001(b). Where an attorney files a claim on a creditor’s behalf, the authorization
for such filing may be established in two ways. 	If the attorney has filed a notice of
appearance on a creditor’s behalf, that attorney is presumed to be authorized to a proof of
claim for the creditor. See In re Trebol Motors Distrib. Corp., 220 B.R. 500 (B.A.P. 1st Cir.
1998). Alternatively, an attorney may attach a power of attorney executed by the Creditor
to the official proof of claim form. See Official Form 11A.
Although, as initially filed, some of the Claims failed to evidence the filing attorney’s
requisite authority, that deficiency has now been resolved by the filing of powers of attorney
executed by the Distributors and the filing of a notice of appearance by counsel to the
Distributors. There has been no argument or evidence that any party will suffer prejudice
from allowing an amendment to the Claims to include the powers of attorney. No party has
suffered from a detrimental reliance on the Claims as originally filed. Likewise, there is no
evidence of bad faith, nor is there any question that the filing attorney did, in fact, have
authorization from the Distributors to file the Claims on their behalf. 	Therefore, to the
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19
extent the Distributors seek authority to amend their proofs of claim to include the executed
powers of attorney, that request is granted. See Helen Gens & Assoc. v. Resolution Trust
Corp. (In re Gens), 112 F.3d 569, 575-76 (1st Cir. 1997); Unioil v. Elledge (In re Unioil,
Inc.), 962 F.2d 988, 992-93 (10th Cir. 1992).
2. 	Failure to File the Claims with KCC
Regarding the failure to file the proofs of claim with KCC, this Court also finds that
procedural error to be of little or no import and insufficient to render the Claims invalid. As
the Distributors have noted, although they failed to file their Claims with KCC, they did
indeed timely file the proofs of claim. Furthermore, the Debtor has conceded that it has
suffered no prejudice from the Distributors’ filing of the Claims directly with the clerk of the
Bankruptcy Court. The Distributors argue that this error was the result of excusable neglect
and should not foreclose recovery on their Claims. The Court agrees.
Applying the factors applicable to determining whether the doctrine of excusable
neglect should forgive the error in filing, the Court is guided by the United States Supreme
Court’s analysis in Pioneer Investment Servs. Co. v. Brunswick Assoc. Ltd. P’ship, 507 U.S.
380, 395 (1993). Discussing “what sorts of neglect will be considered ‘excusable,’” the
Court stated:
we conclude that the determination is at bottom an equitable one, taking
account of all relevant circumstances surrounding the party’s omission.
These include . . . the danger of prejudice to the debtor, the length of delay
and its potential impact on judicial proceedings, the reason for the delay,
including whether it was within the reasonable control of the movant, and
whether the movant acted in good faith.
Id. 	There is no showing that the Debtor has been prejudiced or that judicial delay has
resulted. And there is no contention that the Distributors have acted with bad faith. Thus,
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16 The First Circuit has made clear that:
when a party’s or counsel’s misunderstanding of clear law or misreading of an
unambiguous judicial decree is the reason for the delay in filing . . ., we have
continued to uphold findings of “no excusable neglect” where the court cited the
absence of unique or extraordinary circumstances.
Graphic Commc’ns, 270 F.3d at 6.
20
the only remaining question is whether the reason for the delay rises to the requisite level
of “excusability.” See Graphic Commc’ns Inter’l Union, Local 12-N v. Quebecor Printing
Providence, Inc., 270 F.3d 1, 5 (1st Cir. 2001) (“there must still be a satisfactory
explanation for the late filing.”).
The “excuse” given by the Distributors is that the attorney filing the Claims
“inadvertently overlooked the instructions on the Bar Date Order which required all claims
to be filed with KCC.” While merely “misreading” or overlooking specifics of a Court order
may not, in the ordinary circumstance, excuse a late filing, see, e.g., Graphic Commc’ns,
270 F.3d at 6, 16 the circumstances here are unique.
Bankruptcy Rule 5005(a)(1) establishes that proofs of claim “shall be filed with the
clerk in the district where the case under the Code is pending.” Fed. R. Bankr. P.
5005(a)(1). 	Furthermore, under the Massachusetts Local Bankruptcy Rules (the “Local
Rules”), the Distributors were permitted to file proofs of claim electronically, as they did.
Mass. Local Bankr. R. 9036-1. In this case, however, the procedure for filing the proofs of
claim fell outside the ordinary course of filings in this district. 	Although this Court is
reluctant to excuse filings in contravention of a clear order, such as the Bar Date Order
issued in this case, given that: (1) the Claims were timely filed; (2) the Debtor received
timely notice of the filing; (3) the Distributors filed the Claims in good faith and pursuant to
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21
the Bankruptcy Rules and the Local Rules; and (4) no prejudice or delay has resulted, the
Court finds that the failure to file the Claims with KCC was the result of excusable neglect.
Any other result would be grossly inequitable.
B. 	Applicable Law
While the Distributors’ proofs of claim are prima facie evidence of the validity and
amount of the Claims, Fed. R. Bankr. P. 3001(f); Factors Funding Co. v. Fili (In re Fili), 257
B.R. 370, 372 (B.A.P. 1st Cir. 2001), the Debtor has provided sufficient evidence to rebut
that prima facie case. See Juniper Dev. Group v. Kahn (In re Hemingway Transport, Inc.),
993 F.2d 915, 925 (1st Cir. 1993); In re Lowenstein, -- B.R. -- (Bankr. D. Mass, Feb. 12,
2007) (Feeney, J.); Arcari v. Marder (In re Arcari), 225 B.R. 253, 255 (Bankr. D. Mass.
1998); In re Inter-Island Vessel Co., 98 B.R. 606, 608 (Bankr. D. Mass. 1988). The Debtor
has submitted to this Court copies of relevant Agreements that, if interpreted as the Debtor
urges, would preclude the Distributors’ recovery on their asserted Claims.
Because the Debtor has met this initial burden, this Court must confront “the
question of which party bears the ultimate burden of proof.” Thinking Machs. Corp. v. New
Mexico Taxation & Revenue Dept., 211 B.R. 426, 429 n.2 (D. Mass. 1997). This question
may only be answered by looking to the substantive law applicable to the underlying
dispute that would apply outside the bankruptcy context. 	See, e.g., Internal Revenue
Service v. Levy (In re Landbank Equity Corp.), 973 F.2d 265, 270 (4th Cir. 1992); Thinking
Machs., 211 B.R. at 429-30 (citing Butner v. United States, 440 U.S. 48, 55 (1979);
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17 As the Fourth Circuit Court of Appeals has explained:
[T]he Bankruptcy Code, in most instances, while providing a forum and procedures
for an expedient dispute resolution, does not endeavor to supplant the substantive
law under which the claim against the estate (or for that matter any defenses,
counterclaims, or other rights claimed by either party to the dispute) arose.
In re Landbank Equity, 973 F.2d at 270. The parties have certainly not disputed this well-
established proposition.
18 According to the addresses listed on the Agreements and powers of attorney, the
locations of the various Distributors are: Harfnar Jordur, Iceland (Donna ehf); Budapest, Hungary
(Innomed Medical); Kaufering Germany (GS Elektromed); Hoersholm, Denmark (Kivex); San Giogio
di Piano, Italy (Mortara Rangoni); Stirling, Scotland (Dolby); Zurich, Switzerland (Reavita); Linz,
Austria (Schiller); Vantaa, Finland (Fenno Medical); and Biltoven, Netherlands (Ortho-Medical).
22
Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161 (1946)). 17 At the
outset, it is imperative to note that the Distributors hail from various European countries, 18
thus raising a potentially thorny choice-of-law problem. See, e.g., In re Fraden, 317 B.R.
24, 33 n.18 (“the Court must make the appropriate choice of law decision”). Fortunately,
however, a complex conflicts-of-laws problem is avoided in this case.
The Distributors have not asserted that any foreign law governs the resolution of the
substantive issues raised by the Claims and Objection. Pursuant to Federal Rule of Civil
Procedure (the “Federal Rules”) 44.1, made applicable to these proceedings by Bankruptcy
Rule 9017, “[a] party who intends to raise an issue concerning the law of a foreign country
shall give notice by pleadings or other reasonable written notice.” 	Fed. R. Civ. P. 44.1;
Fed. R. Bankr. P. 9017. 	Having declined to do so, the Court need not consider the
applicability of any foreign laws to the present dispute. Putnam Res. v. Pateman, 958 F.2d
448, 463 n.19 (1st Cir. 1992).
In the absence of any applicable foreign law, the Court can discern no option but to
apply the law of Massachusetts. This conclusion comports with the parties’ apparent
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19 This is further supported by the language of the Agreements themselves. Although the
Agreements do not contain a global choice of law provision, they do indicate that the parties
intended that Massachusetts law apply to the resolution of disputes. 	Section 17.1 of the
Agreements bound the parties to arbitrate their disputes, a contractual provision which, if
enforceable in these proceedings, see In re Mirant Corp., 316 B.R. 234, 238-40 (Bankr. N.D. Tex.
2004), both parties have implicitly waived. See Tyco Int’l Ltd. v. Swartz, 422 F.3d 41 (1st Cir. 2005);
Lomas v. Travelers Prop. Cas. Corp., 376 F.3d 23 (1st Cir. 2004); Restoration Pres. Masonry, Inc.
v. Grove Europe Ltd., 325 F.3d 54, 60-62 (1st Cir. 2003); Jones Motor Co. v. Chauffeurs,
Teamsters & Helpers Local Union No. 633, 671 F.2d 38, 42-43 (1982). And Section 17.4 provided:
The law of the Commonwealth of Massachusetts, USA . . . excluding the Convention
on Contract for the International Sale of Goods, shall be the applicable substantive
law. . . .
20 The Debtor’s principal place of business is, and at all times has been, located in
Massachusetts. This location was the situs for all communications and activities associated with
the Debtor and related to the underlying Agreements.
21 The parties, and the Court, agree that the parties contracted for the sale of goods; thus
Article 2 of the Uniform Commercial Code, as adopted by Massachusetts, see M.G.L. ch. 106, §
2-101 et seq., governs their contractual disputes.
23
assumptions as well, as both parties have defined the contours of their legal arguments
primarily with reference to the Uniform Commercial Code and relevant Massachusetts case
law. 19 Furthermore, the First Circuit Court of Appeals has held that, in the absence of
contrary argument or notice under Federal Rule 44.1, parties “consent to having their
dispute resolved according to the law of the forum.” Carey v. Bahama Cruise Lines, 864
F.2d 201, 206 (1st Cir. 1988); see also Restoration Pres., 325 F.3d at 63 n.4. And common
restrictions placed upon “de facto” application of local law do not apply here, as
Massachusetts “bears a reasonable relationship to the dispute,” 20 and there is no evidence
to suggest the parties are “conspiring to avoid the policies of any other sovereign whose
laws might otherwise apply to the dispute.” Carey, 864 F.2d at 206.
C. 	Contract Issues21
Contract interpretation presents, in the first instance, a question of law, and
is therefore the court’s responsibility. 	If, however, a contract is thought
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24
ambiguous, the court may receive extrinsic evidence, even parol evidence,
to determine whether uncertainty exists. 	Contract language is usually
considered ambiguous where an agreement’s terms are inconsistent on their
face or where the phraseology can support reasonable difference of opinion
as to the meaning of the words employed and obligations undertaken.
Determining whether or not a contract is ambiguous is, like other questions
of contract construction, a matter for the court.
Fashion House, Inc. v. K Mart Corp., 892 F.2d 1076, 1083 (1st Cir. 1989) (citations
omitted); see also Liberty Mutual Ins. Co. v. Greenwich Ins. Co., 417 F.3d 193, 197 (1st Cir.
2005); Boston Helicopter Charter, Inc. v. Augusta Aviation Corp., 767 F. Supp. 363, 369-70
(D. Mass. 1991). The issues raised by the parties present questions of both law and of
fact. Portions of the dispute may be resolved purely as a matter of law; others remain to
be established through an evidentiary hearing. The following discussion will hopefully aid
the parties in focusing on the legal and factual issues that remain to be decided.
1. 	Limitations on Remedy and Failure of Essential Purpose
Before pressing on to examine whether the Debtor has breached any provisions of
the Agreements and which, if any, damages flow from the alleged breach, it seems
appropriate to first determine whether some or all of the asserted damages are precluded
by operation of law under the terms of the Agreements.
Under the Debtor’s most broad-sweeping argument, the Distributors are entirely
barred from recovering monetary damages, as their sole remedy in the event of the
Debtor’s breach was to terminate the Agreements pursuant to Section 11.2. Relying on
UCC § 2-719 and the comments thereto, the Distributors have responded by arguing that
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22 See M.G.L. ch. 106, § 2-719(2) & cmt.1 (“it is of the very essence of a sales contract that
at least minimum adequate remedies be available . . . where an apparently fair and reasonable
clause because of the circumstances fails in its purpose or operates to deprive either party of the
substantial value of their bargain, it must give way to the general remedy provisions of [Article 2].”).
25
such a remedy fails of its essential purpose, as under the circumstances, they would in
effect be left with no remedy. 22
Under Massachusetts law, parties to contracts for the sale of goods are free to
shape their own remedies through contract negotiation and drafting. See Canal Elec. Co.
v. Westinghouse Elec. Corp., 756 F. Supp. 620, 625-26 (D. Mass. 1990); M.G.L. ch. 106,
§ 2-719 cmt.1. 	Pursuant to § 2-719, a contract for the sale of goods “may provide for
remedies in addition to or in substitution for those provided in [Article 2] and may limit or
alter the measure of damages recoverable under [Article 2]. . . .” M.G.L. ch. 106, § 2-
719(1). The parties’ freedom to contract away all remedies is circumscribed, however, by
subsection (2), which provides:
Where circumstances cause an exclusive or limited remedy to fail of its
essential purpose, remedy may be had as provided in this chapter.
M.G.L. ch. 106, § 2-719(2). 	Thus, the Debtor and the Distributors have devoted
considerable effort toward persuading this Court that the limited remedy of contract
termination either does, or does not, fail of its essential purpose.
The Court concludes, however, that the question of whether the remedy has failed
of its essential purpose is really not a question at all. “Before considering the enforceability
of a limited remedy, the court must first ‘establish[ ] that the contract contains “an exclusive
or limited remedy.”’” Myrtle Beach Pipeline Corp. v. Emerson Elect. Co., 843 F. Supp.
1027, 1041 (D.S.C. 1993) (quoting Chatlos Sys., Inc. v. Nat’l Register Corp., 635 F.2d
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23 See, e.g., Liberty Mutual v. Greenwich Ins., 417 F.3d at 197 & n.3 (“Under both case law
and general usage, the term “may” indicates something that is permissive . . . .”) (citing
Massachusetts cases).
26
1081, 1085 (3d Cir. 1980), cert. dismissed, 457 U.S. 1112 (1982); UCC § 2-719(1)(b)).
Under § 2-719(1)(b), remedies provided by a contract are optional, and cumulative, “unless
the remedy is expressly agreed to be exclusive, in which case it is the sole remedy.” M.G.L.
ch. 106, § 2-719(1)(b) (emphasis added); see also Roy Anderson, Contractual Limitations
on Remedies, 67 Neb. L. Rev. 548, 557-59 (1988), reprinted from Roy Anderson, Damages
Under the Uniform Commercial Code (Callaghan 1988).
The remedy of contract termination pursuant to Section 11.2 is simply not an
exclusive remedy under the Agreements. 	Section 11.2 does not expressly provide that
termination of the contract is the sole or exclusive remedy in the event of a breach. Rather,
it states that “either party may terminate this Agreement” (emphasis added). The use of
the word “may” is clearly permissive 23 – the parties had the option to terminate the contract
as a remedy for the other party’s breach, but were not required to do so. See Myrtle Beach
Pipeline, 843 F. Supp. At 1041; Lincoln Pulp Paper Co., Inc. v. Dravo Corp., 436 F. Supp.
262, 276 (D. Me. 1977). They could, as they in effect have, seek other remedies provided
by Article 2 in the event of a breach.
2. 	Contractual Limits on Liability
Although the Distributors are not limited to termination of the contract as remedy for
the Debtor’s breach, Sections 15.1 and 15.2 both contain language limiting the Debtor’s
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24 To the extent the Debtor relies on Section 11.6 of the Agreement, which provides that the
parties will not be liable for damages of any kind (including, presumably, direct damages), this Court
finds that the limitation is inapplicable. Section 11.6 limits liability of the parties “on account of
termination or expiration . . . in accordance with this Section 11" (emphasis added). The Debtor
has presented no colorable argument that the Agreements were terminated in accordance with
Section 11, and the Distributors clarified at the hearing on the Objection that they were not seeking
damages arising from the termination or expiration of the agreements. Instead, the Distributors
allege a breach of Section 9.3. Thus, this Court must look to generally applicable provisions of the
Agreements to determine contractual limits of liability.
25 Section 2-719(3) provides:
Consequential damages may be limited or excluded unless the limitation or
exclusion is unconscionable. Limitation of consequential damages for injury to the
person in the case of consumer goods is prima facie unconscionable but limitation
of damages where the loss is commercial is not.
M.G.L. ch. 106, § 2-719(3). Comment 3 to that section reinforces the validity of consequential
damage limitations in the commercial context:
Subsection (3) recognizes the validity of clauses limiting or excluding consequential
damages but makes it clear that they may not operate in an unconscionable
27
liability under the Agreements. 24 Section 15.1 limits the types of damages recoverable
under the Agreements, and provides that “neither party will be liable for any lost profits or
for any indirect, incidental, consequential, punitive or other special damages. . . .” Section
15.2, in turn, limits the total amount of damages recoverable by providing that “in no event
will Access CardioSystems’s total cumulative liability . . . exceed the total amount paid by
Distributor to Access CardioSystems . . . .” The validity of these two provisions has not
really been contested, and the Court concludes that both provisions are enforceable.
Although Article 2 of the UCC provides that incidental and consequential damages
are recoverable, M.G.L. ch. 106, §§ 2-714(3), 2-715; Hendricks & Assoc., Inc. v. Daewoo
Corp., 	923 	F.2d 	209, 	213-14 	(1st 	Cir. 	1991) 	(applying 	and 	citing 	cases 	under
Massachusetts law), parties may limit their liability for such damages in accordance with
§ 2-719(3). M.G.L. ch. 106, § 2-719(3).25 The Distributors do not claim that the exclusion
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manner. Actually such terms are merely an allocation of unknown or undeterminable
risks. . . .
Id. at cmt.3.
26 It is far from clear whether the Distributors’ allege that the limitations on liability under
Section 15.2 fail of their essential purpose. In order to lay the issue to rest, however, the Court
notes that, under the present circumstances, it is inclined to agree that:
A clause limiting damages to the purchase price should never fail of its essential
purpose. Like exclusions of consequential damages and modifications of warranty,
a damage ceiling may not create an “exclusive or limited remedy” within the
meaning and purview of section 2-719(2). 	In any event, since its only apparent
purpose is to exclude resultant damages, it will “fail” only if a court refuses to
enforce it. . . . [This type of] clause generally leaves the buyer the value of his
bargain (measured by the parties as the price of the goods) and . . . at the outset
permits a fair quantum of remedy (the value of the bargain). 	When a remedy’s
purpose includes loss allocation, it does not fail merely because loss occurs.
Andrew M. Baker et al., Special Project: Article Two Warranties in Commercial Transactions, 64
28
of incidental and consequential damages is unconscionable, nor, does it seem, could they.
Clearly, all the parties here are commercially sophisticated, and the liability limitations
created by Section 15.1 “simply reflect[ ] a decision by highly sophisticated business
entities about how to allocate certain risks . . . .” Canal Elec. Co. v. Westinghouse Elec.
Co., 973 F.2d 988, 996 (1st 1992); see also Logan Equip. Corp. v. Simon Aerials, Inc., 736
F. Supp. 1188, 1195-96 (D. Mass. 1990) (citing and quoting Canal Elec. Co. v.
Westinghouse Elec. Corp., 548 N.E.2d 182, 185, 406 Mass. 369 (1990); American Elec.
Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435, 458 (S.D.N.Y. 1976)).
Likewise, the Court finds that Section 15.2, which limits damages to the price paid
by the Distributors, pursuant to Section 15.2, is enforceable. Again, there is no contention
that the provision is unconscionable. 	And, to the extent the Distributors’ argument
regarding failure of essential purpose is aimed at this limitation, the Court finds no such
failure. 26 Such limits have been routinely upheld and provide a minimum adequate remedy,
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Cornell L. Rev. 30, 239-41 (1978); accord Sunny Indus., Inc. v. Rockwell Int’l Corp., 1999 U.S. App.
LEXIS 7001, *29, 38 U.C.C. Rep. Serv. 2d (Callaghan) 827 (7th Cir. 1999) (“Under the UCC, a
remedy does not fail of its essential purpose simply because one party struck a bad bargain that
it later regrets. . . . Moreover, it ‘does not mean that an exclusive remedy has failed “of its essential
purpose” whenever a contracting party loses money because a limited remedy provision prevents
him from being fully reimbursed for the damages caused by the other party’s breach.’”) (quoting J.D.
Povlak, Ltd. v. William Davies Co., Inc., 351 N.E.2d 243, 246, 40 Ill. App. 3d 1 (Ill. App. Ct. 1976)).
29
“even when . . . damages exceed[ ] the total contract price.” Canal Elec. Co., 548 N.E.2d
at 185 (citing Deerskin Trading Post, Inc. v. Spencer Press, Inc., 495 N.E.2d 303, 398
Mass. 118 (1986)); accord Canal Elec. Co., 973 F.2d at 996; Sunny Indus., 1999 U.S. App.
LEXIS 7001 at *29 (Illinois law) (citing JOM, Inc. v. Adell Plastics, Inc., 151 F.3d 15, 28 (1st
Cir. 1998)); Pig Improv’t Co., Inc. v. Middle States Holding Co., 943 F. Supp. 392, 402 n.14
(D. Del. 1996); Ritchie Enter. v. Honeywell Bull, Inc., 730 F. Supp. 1041, 1049 (D. Kan.
1990) (Massachusetts law); Posttape Assoc., Inc. v. Eastman Kodak Co., 450 F. Supp.
407, 411 (E.D. Pa. 1978) (Pennsylvania law).
In sum, the Court finds that the contractual limitations on liability found in Sections
15.1 and 15.2 of the Agreements are enforceable. The Distributors may recover for direct
damages proved as resulting from the Debtor’s breach of the recall provisions, but in any
event in an amount no greater than that paid by each Distributor under their respective
Agreements. Recovery of any amount depends, of course, on the Distributors’ ability to
prove their damages are direct damages as a result of a breach. This, in turn, assumes
a successful showing that the Debtor breached the Agreements, a topic to which we now
turn.
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30
3. 	Breach of Contract
As alluded to above, the Distributors contend that the Debtor breached two
contractual obligations under Section 9.3 of the Agreements, which section governs the
parties’ rights and obligations in the event of the recall of the Access AEDs. 	For the
reasons discussed below, the Court determines that it has insufficient evidence to decide
whether the Debtor has breached the Agreements and, if so, the amount of damages
incurred as a direct result.
The Distributors first argue that the Debtor breached Section 9.3 by failing to
conduct the recall “in accordance with the recall, correction and customer notification policy
and procedures maintained by Access CardioSystems.” 	The evidence provided on this
issue is inconclusive, at best. 	Two documents have been appended to the parties’
pleadings in an effort to bolster their assertions that the Debtor either did or did not comply
with its policy. The Distributors produced a document purported to be an excerpt from the
Debtor’s “Quality System Manual” with the heading “Corrective and Preventive Action.”
The Debtor has produced a copy of an Establishment Inspection Report issued by the FDA
in conjunction with the recall. These documents do not, taken together, establish whether
the manual excerpt constitutes the “policy” referred to under the contract. Nor does the
FDA report establish whether the Debtor’s actions complied with the Debtor’s policy.
Additionally, the Court has no guidance from the Distributors as to which damages
it asserts flow directly from the alleged breach. Therefore, material issues of fact remain
regarding the content of any such policy maintained by the Debtor and whether the Debtor
acted in conformity with that policy. 	And, assuming that the Debtor did not conduct the
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27 Under Massachusetts law,
A condition precedent defines an event which must occur before a contract
becomes effective or before an obligation to perform arises under the contract. See
Malden Knitting Mills v. United States Rubber Co., 301 Mass. 229, 233 (1938);
Wood v. Roy Lapidus, Inc., 10 Mass. App. Ct. 761, 763 n.5 (1980). If the condition
31
recall in accordance with its own policy, material issues of fact remain with regard to
whether the Distributors suffered damages as a direct result of that breach.
The Distributors also allege that the Debtor breached the implied covenant of good
faith and fair dealing through its unresponsiveness in the wake of the recall and its failure
to approve the Distributors’ associated costs. Under Massachusetts law, “[e]very contract
implies good faith and fair dealing between the parties to it.” Anthony’s Pier Four, Inc. v.
HBC Assoc., 583 N.E.2d 806, 820, 411 Mass. 451 (1991) (quoting Warner Ins. Co. v.
Commissioner of Ins., 548 N.E.2d 188, 192 n.9, 406 Mass. 354 (1990)); see also M.G.L.
ch. 106, § 1-203 (“Every contract or duty within this chapter imposes an obligation of good
faith 	in 	its 	performance 	or 	enforcement.”). 	The 	obligation 	of 	good 	faith 	under
Massachusetts law prohibits parties from “do[ing] anything which will have the effect of
destroying or injuring the right of the other party to receive the fruits of the contract . . . .”
Druker v. Roland Wm. Jutras Assoc,, Inc., 348 N.E.2d 763, 765, 370 Mass. 383 (1976)
(citations omitted).
The obligation of good faith finds particular application in contracts that contain a
condition precedent to a contracting party’s obligation under the contract. 	The Court
agrees in principle with the Debtor that the Distributors had to obtain approval of costs
associated with a recall before the Debtor would be obligated to reimburse those costs.
Thus, approval of costs was a condition precedent to recovery under Section 9.3. 27
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is not fulfilled, the contract, or the obligations attached to the condition, may not be
enforced. See generally 5 S. Williston, Contracts § 663 (3d ed. 1961 & Supp. 1990);
Restatement (Second) of Contracts § 255 (1981).
Mass. Mun. Wholesale Elec. Co. v. Town of Danvers, 577 N.E.2d 283, 288, 411 Mass. 39 (1991).
Although the parties did not use traditional wording, such as “provided that,” to create the condition
precedent, the Court still finds that a condition precedent was intended after considering “the words
used by the parties, the agreement taken as a whole, and surrounding facts and circumstances.”
Id. at 45-46; see also Malden Knitting Mills v. U.S. Rubber Co., 16 N.E.2d 707, 710, 301 Mass. 229
(1938). 	Considering the structure and the wording of Section 9.3, with some light shed by the
parties’ pleadings as to their intent with regard to that provision, the Court finds that approval of
costs was a condition precedent to reimbursement.
32
Likewise, a second condition on reimbursement is found in that section. 	In addition to
obtaining approval for costs incurred in connection with the recall, the Distributors were
required to submit documentation of those costs prior to reimbursement.
The Debtor asserts that the Distributors failed to fulfill either condition, thus
precluding recovery under Section 9.3. Whether couched in terms of the covenant of good
faith and fair dealing, or labeled the “prevention doctrine,” Massachusetts law is clear: a
party that prevents the other from satisfying a condition precedent cannot rely on the failure
of the condition to avoid its own obligations under a contract. See Ne. Drilling, Inc. v. Inner
Space Servs., Inc., 243 F.3d 25, 40 (1st Cir. 2001); N. Heel Corp. v. Compo Indus., Inc.,
851 F.2d 456, (1st Cir. 1988); State Fuel Co. v. Gulf Oil Corp., 179 F.2d 390, 397-98 (1st
Cir. 1950); Fortune v. The Nat’l Cash Register Co., 364 N.E.2d 1251, 1259, 373 Mass. 96
(1977). Some courts have relied upon the covenant of good faith and fair dealing to reach
this conclusion. See, e.g., Bradford Dyeing Assocs., Inc. v. J. Stog Tech GmbH, 465 A.2d
1226, 1237-38 (R.I. 2001). 	Others have cited the “prevention doctrine.” 	See, e.g., Ne.
Drilling, 243 F.3d at 40. Either way, the conclusion here is the same: if the Debtor made
it impossible for the Distributors to obtain, or if the Debtor in bad faith withheld, the
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28 The prepositional phrase “by Distributor” modifies the verb “incurred.” Likewise, the words
“with the prior approval of the Debtor” constitute a separate prepositional phrase that also modifies
the verb “incurred.” Therefore, reimbursable costs were those incurred “with prior approval” – i.e.,
after approval had been obtained.
33
necessary approval of reasonable costs associated with the recall, the Debtor cannot now
rely on that failure to avoid its obligation to reimburse those expenses.
Two further arguments raised by the Debtor must be addressed. First, the Debtor
has argued that the Distributors may not avail themselves of the “good faith” argument,
because the Distributors did not first comply with their obligations under the Agreements.
According to the Debtor, the Distributors were obligated, under Section 9.3, to provide
documentation of all reasonable and necessary costs before the Debtor’s obligation to
approve such expenses would arise. But this is not so. Section 9.3 says that the Debtor
“shall promptly reimburse all reasonable necessary and documented costs for any recall
. . . that are incurred by Distributor with the prior approval of [the Debtor]” (emphasis
added). Logically read, this provision indeed required the Distributors to obtain approval
from the Debtor. That approval, however, would need to be obtained before such costs
were incurred. 28 The Distributors were thus not required to produce documentation of their
costs 	in 	order 	to 	obtain 	approval, 	but 	were 	required 	to 	provide 	the 	necessary
documentation to ultimately receive prompt reimbursement of approved expenses – a
production that will need to be met before their Claims can be allowed on this basis.
The Debtor also says the Distributors are precluded from recovery under Section 9.3
because they failed to communicate their requests for approval in accordance with Section
18.3 of the Agreements, which provides,
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29 The Court refers, for example, to Section 1.1 (“Access CardioSystems shall notify
Distributor”), Section 3.3 (“upon . . . advance written notice”), Section 5.4 (“where Distributor has
given Access CardioSystems written notice” and “Access CardioSystems will give Distributor written
notice”), Section 6.1 (“upon at least sixty (60) days’ prior written notice”), Section 6.2 (“may be
cancelled . . . by written notice”), Section 6.6 (“upon written notice”), Section 9.1 (Distributor . . . will
notify Access CardioSystems in writing”), Section 9.2 (“Access CardioSystems will provide written
notice”), Section 11.2 (“following written notice”), Section 13.1 (“prompt written notice”).
34
All notices and demands hereunder will be in writing and will be send [sic] by
a reputable international express courier to the address of the receiving party
set forth in this Agreement (or at such different address as may be
designated by such party by written notice to the other party) . . . .
But Section 9.3 does not require the Distributors to seek approval of necessary expenses
via the type of notice or demand that appears to be contemplated by Section 18.3. The
request for approval, unlike, perhaps, a request for reimbursement, does not clearly
constitute a “demand” within the normal usage of the word. Furthermore, if the parties had
contemplated that requests for approval required “notice” pursuant to Section 18.3, they
could have specified as such by using the word “notice” or “written notice” as they did in
many other provisions of the Agreements.29
To recapitulate: the Court rules that the limitations on liability under Sections 15.1
and 15.2 are enforceable and the Distributors’ recovery is capped to the amounts paid by
each Distributor pursuant to its individual agreement with the Debtor. However, material
issues of fact remain on the following issues: 	(1) the content of the Debtor’s policies
regarding recall procedures; (2) whether the Debtor did or did not comply with its recall
policies; (3) assuming the Debtor failed to comply with its recall policies, the direct
damages, if any, incurred by the Distributors as a result of that failure; (4) whether the
Distributors’ failure to obtain approval of costs associated with the recall was a result of the
Debtor’s actions; (5) assuming the Debtor prevented the Distributors from obtaining
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35
necessary approval, whether the Distributors have incurred reasonable, necessary and
documented costs associated with the recall.
D. 	Indemnification
The Distributors assert that, quite separate from their breach of contract allegations,
they are entitled to indemnification from the Debtor for amounts they have expended to
settle end-users’ claims related to the Access AEDs. Under Massachusetts law, however,
the Distributors are not entitled to indemnification in these circumstances.
As the First Circuit Court of Appeals has so succinctly explained,
Three 	different 	sets 	of 	circumstances 	may 	give 	rise 	to 	a 	right 	to
indemnification. 	First, 	an 	express 	agreement 	may 	create 	a 	right 	to
indemnification. W. Prosser, Law of Torts § 51 	(4th ed. 1971). Second, a
contractual right to indemnification may be implied from the nature of the
relationship between the parties. Ryan Stevedoring Co. v. Pan-Atlantic S.S.
Corp., 350 U.S. 124, 133-34, 100 L. Ed. 133, 76 S. Ct. 232 (1956). Third, a
tort-based right to indemnification may be found where there is a great
disparity in the fault of the parties. Zapico v. Bucyrus-Erie Co., 579 F.2d 714,
718 (2d Cir. 1978); W. Prosser, Law of Torts § 51.
Araujo v. Woods Hole, 693 F.2d 1, 2 (1st Cir. 1982); see also Coons v. A.F. Chapman
Corp., 460 F. Supp. 2d 209, 223-24 (D. Mass. 2006); Leasetec Corp. v. Inhabitants of the
Cty. of Cumberland, 896 F. Supp. 35, 38-39 (D. Me. 1995) (applying Massachusetts law)
Rathbun v. W. Mass. Elec. Co., 479 N.E.2d 1383, 1384-85, 395 Mass. 361 (1985); Decker
v. Black & Decker Mfg. Co., 449 N.E.2d 641, 643-45, 389 Mass. 35 (1983); Hollywood
Barbecue Co. v. Morse, 50 N.E.2d 55, 56, 314 Mass. 368 (1943); Larson v. Landvest, Inc.,
2005 Mass. Super. LEXIS 315, *16-18, 19 Mass. L. Rep. 479 (Mass. Super. Ct., June 3,
2005); Clark v. Gen. Inv. & Dev. Co., 1999 Mass. App. Div. 205, 206-07, 1999 Mass. App.
Div. LEXIS 80 (Mass. App. Div. 1999); Nicholas P. Alexander, Developments in Indemnity
Law: Express, Implied Contractual, Tort-Based and Statutory, 79 Mass. L. Rev. 50 (1994).
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30 Although the Agreements did provide for indemnification for certain intellectual property
claims, that provision explicitly limited indemnification to circumstances not relevant here. 	No
provision of the Agreements provides for indemnification under the present circumstances, and
there are no “unique special factors” present that would indicate “the parties intended that the
[Debtor] bear the ultimate responsibility” for the types of claims asserted by the Distributors. Araujo,
693 F.2d at 2; see also Coons, 460 F. Supp. 2d at 223-24; Leasetec, 896 F. Supp. at 38-39; Fall
River Housing Auth. v. H.V. Collins Co., 604 N.E.2d 1310, 1313, 414 Mass. 10 (1992); Fireside
Motors, Inc. v. Nissan Motor Corp., 479 N.E.2d 1386, 1391, 395 Mass. 366 (1985); Decker, 449
N.E.2d at 643; Croall v. Mass. Bay Transp. Auth., 526 N.E.2d 1320, 1322, 26 Mass. App. Ct. 957
(Mass. App. Ct. 1988); Oats v. Diamond Shamrock Corp., 503 N.E.2d 58, 59, 23 Mass. App. Ct.
446 (Mass. App. Ct. 1987)
36
The Distributors do not argue that the principles of either express or implied
contractual indemnification apply here. 30 Rather, they assert that they are entitled to
indemnification under the “common law.” Although the term “common law” indemnification
has occasionally been used by the courts, the more appropriate term under Massachusetts
law is “tort-based indemnification.” Clark v. Gen. Inv., 1999 Mass. App. Div. at 207 n.5.
And therein lies the rub. To recover under tort-based indemnification principles, the party
seeking indemnification must establish “a tort-based right where one party is held
derivatively or vicariously liable for the wrongful act of another.” Larson v. Landvest, 2005
Mass. Super. LEXIS 315 at * 16; see also Fireside Motors, 479 N.E.2d at 1388; Decker,
449 N.E.2d at 644-45 (“This right to indemnify is limited to those cases in which the would-
be indemnitee is held derivatively or vicariously liable for the wrongful act of another.”)
(citing Stewart v. Roy Bros., 265 N.E.2d 357, 358 Mass. 446 (1970); Hollywood Barbecue,
50 N.E.2d 55; Gray v. Boston Gas Light Co., 114 Mass. 149 (1873); Lowell v. Boston &
Lowell R.R. Corp., 23 Pick. 24 (1839)).
Here, there is no evidence of an underlying tort for which the Distributors have been
held vicariously liable. Although the Distributors refer to the Debtor’s having “negligently”
manufactured the AEDs, there is no assertion that the Distributors have settled negligence
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31 In fact, the Distributors rely heavily on their allegations that they settled claims with end-
users based on the Debtor’s failure to honor the end-users’ warranties. Warranty claims, however,
are not tort claims. On an additional note, there is no evidence that the Distributors discharged any
claims for which they were liable by operation of law. See, e.g., Decker, 449 N.E.2d at 644; Elias
v. Unisys Corp., 573 N.E.2d 946, 410 Mass. 479 (1991); Larson, 2005 Mass. Super. LEXIS 31, *15-
16 (quoting Santos v. Chrysler Corp., 715 N.E.2d 47, 430 Mass. 198 (1999)). They may well have
settled their customers’ claims in order to preserve good will or a favorable business reputation, but
these sorts of voluntary payments do not give rise to indemnification rights under Massachusetts
law.
37
claims with end-users, 31 nor is there any allegation that an end-user suffered personal
injury damages which the Distributors settled. As the First Circuit Court of Appeals has
recently noted, the “common law indemnity doctrine has been recognized only in personal
injury tort actions.” Nicolaci v. Anapol, 387 F.3d 21, 27 (1st Cir. 2004); see also Effanzee
Assoc. v. Thermo Electron Corp., 1994 U.S. Dist. LEXIS 773, *25-26 (E.D. Pa. 1994)
(where underlying action not based in tort, no right to indemnification under Massachusetts
common law); Leasetec, 896 F. Supp. at 39 (same). Thus, because the Distributors have
not been held vicariously or derivatively liable on any underlying tort claims, they are not
entitled to indemnification from the Debtor for the claims asserted by the end-users.
In fact, the Distributors seek recovery for solely economic and commercial loss –
both their own and the end-users’. 	Indemnification under a tort-based theory is not
available where the only losses are economic, and tort-based theories cannot be used to
avoid monetary repercussions associated with contractual allocations of risk. MacGlashing
v. Dunlop Equip. Co., 89 F.3d 932, 937 (1st Cir. 1996) (“Massachusetts law . . . adopts the
majority view which draws a clear distinction between tort recovery for physical injury and
contract recovery for economic loss”); see also E River S.S. Corp. v. Transamerica Delaval,
Inc., 476 U.S. 858 (1986); W.R. Constr. & Consulting, Inc. v. Jeld-Wen, Inc., 2002 U.S.
Dist. LEXIS 18686, *18 (D. Mass. 2002); Logan Equip. Corp. v. Simon Aerials, Inc., 736 F.
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38
Supp. 1188, 1198 (D. Mass. 1990); Hart Eng’g Co. v. FMC Corp., 593 F. Supp. 1471, 1482
(D.R.I. 1984) (collecting cases); Bay State-Spray v. Provincetown Steamship, Inc., 533
N.E.2d 1350, 1353, 404 Mass. 103 (1989); Marcil v. John Deere Indus. Equip. Co., 403
N.E.2d 430, 433-34, 9 Mass. App. Ct. 625 (Mass. App. Ct. 1980). 	Thus, as there is no
underlying 	tort, there is no right to tort-based indemnification. Accord Fortune View
Condominium Assoc. v. Fortune Star Dev. Co., 90 P.2d 1062, 1068 (Wash. 2004) (where
underlying claim was for economic loss, party seeking indemnification could not proceed
under tort-based indemnification theory).
IV. 	CONCLUSION
For the reasons discussed above, the Court can presently neither sustain nor
overrule the Objection in its entirety. The Distributors are entitled to an evidentiary hearing
on their breach of contract claims and to determine the amount of their direct damages, if
any. 	However, pursuant to the parties’ Agreements, the Distributors may not recover
incidental and consequential damages on account of any established breach, and the total
of all damages shall not exceed the amounts paid by the Distributors under the relevant
Agreements. Furthermore, the Distributors are not entitled to indemnification on account
of amounts paid to settle the claims of end-users. 	An order in conformity with this
memorandum shall issue forthwith.
Dated: February 16, 2007 	Henry J. Boroff
United States Bankruptcy Judge
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