Allied Sanitation v. Waste Management Holdings

• Decision Date: 23 May 2000
• Docket Number: No. 00-MISC-021.,00-MISC-021.
• Citation: 97 F.Supp.2d 320
• Parties: ALLIED SANITATION, INC., Star Recycling, Inc., Resource N.E., Inc., Resource N.E. of Long Island, Inc., Anthony Lomangino, Frances Gusmano, Leo Lomangino, Michael Vecchio, Joseph Vecchio, William Kaiser, Petitioners, v. WASTE MANAGEMENT HOLDINGS, INC., Respondent.
• Court: U.S. District Court — Eastern District of New York

97 F.Supp.2d 320

ALLIED SANITATION, INC., Star Recycling, Inc., Resource N.E., Inc., Resource N.E. of Long Island, Inc., Anthony Lomangino, Frances Gusmano, Leo Lomangino, Michael Vecchio, Joseph Vecchio, William Kaiser, Petitioners, v. WASTE MANAGEMENT HOLDINGS, INC., Respondent.

No. 00-MISC-021.

United States District Court, E.D. New York.

May 23, 2000.

Anthony M. Radice, Morrison & Foerster LLP, New York City, for petitioners.

William P. Frank, Skadden, Arps, Slate, Meagher & Flom LLP, New York City, for respondent.

MEMORANDUM AND ORDER

BLOCK, District Judge.

Invoking diversity jurisdiction, petitioners (collectively "the Resource Group"), who are members of a class of plaintiffs suing respondent Waste Management Holdings, Inc. ("Waste Management") for misrepresenting its financial statements in the course of acquiring the class members' assets in exchange for Waste Management common stock, bring this proceeding pursuant to § 4 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq.,¹ to stay "any and all arbitration or other alternative dispute resolution [("ADR")] between the parties." Petition for an Order Staying Arbitration, at 6. The parties' asset-for-stock agreement contains a section providing that they would resolve disputes arising under the agreement through an ADR negotiation procedure and, if that proved unsuccessful, by binding arbitration in New York (the "arbitration clause").² The Resource Group contends that Waste Management waived its right to invoke the arbitration clause by opposing class certification, as well as substantively participating in the underlying merits of the class action dispute; or, alternatively, that the arbitration clause was fraudulently induced.

The conduct that a party may engage in while opposing class certification without risking waiver of arbitration or other ADR contractual rights has not previously been the subject of judicial inquiry. Under the facts of this case, the Court concludes that there has been no waiver. The Court also rejects the fraudulent inducement claim.

BACKGROUND

On July 31, 1998, Robert Mowbray ("Mowbray") filed a class action complaint pursuant to Fed.R.Civ.P. ("Rule") 23(b)(3) against Waste Management in the United States District Court for the District of Massachusetts on behalf of all those, like himself, who had sold their assets to Waste Management prior to March 29, 1995 in exchange for Waste Management common stock. This litigation was triggered by a press release issued by Waste Management on February 24, 1998, admitting that due to improper accounting methods Waste Management's financial statements had overstated income by hundreds of millions of dollars during the prior eight years. Since Waste Management, in its asset acquisition contract with Mowbray, had expressly warranted the truth and accuracy of its financial statements, Mowbray sued for breach of this warranty.

In October 1998, about three months after Mowbray initiated his lawsuit, Waste Management produced over 100 asset-for-stock acquisition contracts dating from January 1, 1990 to February 24, 1998, in response to Mowbray's discovery request. Included in this submission was an agreement between Waste Management and the Resource Group, dated March 1, 1996. The agreement provided for the acquisition by Waste Management of substantially all of the Resource Group's assets in exchange for approximately $220,000,000 of Waste Management common stock. It contained similar express warranties by Waste Management in regard to its financial statements that were contained in Waste Management's contract with Mowbray. Also, as in Mowbray's contract, it contained a choice-of-law provision calling for the agreement to be governed by and construed in accordance with Illinois contract law.³

On December 23, 1998, Mowbray filed a motion for partial summary judgment as to liability on his breach of warranty claim. On January 19, 1999, Waste Management cross-moved for judgment on the pleadings and, alternatively, argued against the granting of summary judgment. A week later, on January 26, 1999, while the motions were sub judice, Mowbray served Waste Management with a motion to certify an expanded class to include all persons or entities involved in asset-for-stock transactions with Waste Management during the period from January 1, 1990 to February 24, 1998. This proposed amended class comprised 324 persons or entities entailing 119 transactions,⁴ and captured the 1996 $220,000,000 transaction with the Resource Group. It thereby raised the stakes of Waste Management's potential exposure in the class action litigation because, as Waste Management's counsel has acknowledged, the Resource Group was "[a] very big, major player." Transcript of Oral Argument, February 23, 2000 ("Tr."), at 39.

On April 26, 1999, the district court denied Waste Management's motion for judgment on the pleadings and granted Mowbray's motion for partial summary judgment. See Mowbray v. Waste Management Holdings, Inc., 45 F.Supp.2d 132 (D.Mass.1999) ("Mowbray I"). As set forth in the court's decision, Waste Management did not dispute its financial representations contained in its agreement with Mowbray or the facts recited in the press release. Rather, it sought dismissal of the complaint on the ground that Illinois law required reliance in order to sue for breach of express warranty. The court rejected this argument.

Although the court resolved the substantive liability issue, it did not at that time address the issue of class certification. Rather, it allowed the parties to develop the record in order to explore fully whether any class should be certified at all and, if so, the appropriate constituency of the class. See Clerk's Notes re: Case Management Conference, Civil Docket for Case No. 98-CV-11534 ("Civil Docket"), (May 4, 1999), attached as Ex. 6 to Levitt Aff., at 9 (Entry 62) (setting hearing date and noting that "[a]t the hearing the Court will allow the parties to argue the existence and extent of any class under Rule 23"). Waste Management vigorously availed itself of such opportunity, submitting extensive papers and engaging in oral argument in opposition to class certification. On October 15, 1999, the court rendered its class certification decision. It certified the following class:

[a]ll persons or entities which engaged in transactions, during the period January 1, 1990 to February 24, 1998, with Waste Management, whereby (i) Waste Management ... acquired assets of those persons and entities ... for ... common stock of Waste Management, (ii) Waste Management furnished financial statements to those persons and entities pertaining to its results during the period January 1, 1990 to February 24, 1998, and (iii) Waste Management expressly warranted by contract provision the truth and accuracy of such financial statements.

Mowbray v. Waste Management Holdings, Inc., 189 F.R.D. at 202 ("Mowbray II"). Thus, the Resource Group's status changed at that time from putative class member to certified class member.

In this decision, the court first explained that it had previously decided to address Mowbray's summary judgment motion prior to addressing the issue of class certification because it believed that doing so would help to define the class. Specifically, the court reasoned that:

if counsel for the named plaintiff can frame a compelling motion, even for partial summary judgment, its allowance will operate with preclusive effect upon the defendant and will produce a substantive record that will inform the Court, as nothing else could, of the proper parameters of the plaintiff class and whether the named plaintiff will fairly and accurately represent that class.

Id. at 197. On the merits, in ruling that class membership should be accorded to all those, such as Mowbray and the Resource Group, whose contracts contained express warranties by Waste Management as to the truth and accuracy of its financial statements, the court rejected a host of arguments advanced by Waste Management against the Rule 23(b)(3) commonality and predominance prerequisites. See id. at 198-201. Notably, at no time did Waste Management argue that any of the proposed class members, including the Resource Group, should be barred from class membership because a contractually binding arbitration clause was extant.

On October 29, 1999, Waste Management filed a petition in the United States Court of Appeals for the First Circuit seeking leave to file an interlocutory appeal of the class certification order, pursuant to Rule 23(f). However, it did not seek a stay of the class action litigation. Accordingly, on November 24, 1999, Mowbray, representing the newly certified class, quite logically again sought partial summary judgment as to liability for breach of express warranty. Facing a problematic scenario, especially in light of the district court's rationale for addressing Mowbray's prior summary judgment motion on the merits—that "its allowance will operate with preclusive effect upon the defendant"—Waste Management then took the following actions:

1. On December 7, 1999, it obtained an order from the district court extending its time to respond to the summary judgment motion to December 29, 1999, and at a status conference on that date, asserted for the first time that the Resource Group should not be included in the class because of the arbitration clause.

2. On December 10, 1999, it served the Resource Group with a Notice of Demand for Alternative Dispute Resolution ("Demand"), which provided, in relevant part:

Waste Management, Inc., ... hereby demands that all parties to the Agreement ... opt out of the pending class action entitled Mowbray v. Waste Management Holdings, Inc., Case No. 98-11534-WGY (D.Mass.) and submit to alternative dispute resolution ("ADR").

* * * * * *

The parties have agreed that they will participate in the ADR procedure to its conclusion and will not terminate negotiations...