KML Laboratories Ltd. v. Hopper

• Decision Date: 13 August 1993
• Docket Number: No. CV-87-281.,CV-87-281.
• Parties: K.M.L. LABORATORIES LTD., Plaintiff, v. Robert A. HOPPER, Jill S. Schneider, and Thomas P. Tobin, Defendants. Robert A. HOPPER, Jill S. Schneider, and Thomas P. Tobin, Plaintiffs By Counterclaim, v. Ray ADAMS, Ruby Argyro Adams, Ivan T. Flaschner and Decom Medical Waste Systems, Inc., Defendants By Counterclaim.
• Court: U.S. District Court — Eastern District of New York

830 F. Supp. 159

K.M.L. LABORATORIES LTD., Plaintiff, v. Robert A. HOPPER, Jill S. Schneider, and Thomas P. Tobin, Defendants.

Robert A. HOPPER, Jill S. Schneider, and Thomas P. Tobin, Plaintiffs By Counterclaim, v. Ray ADAMS, Ruby Argyro Adams, Ivan T. Flaschner and Decom Medical Waste Systems, Inc., Defendants By Counterclaim.

No. CV-87-281.

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

August 13, 1993.

COPYRIGHT MATERIAL OMITTED

Winthrop, Stimson, Putnam & Roberts, New York City, for plaintiff and defendants by counterclaim.

Munley, Meade, Burns & Nielsen, P.C., Great Neck, NY, for defendants and plaintiffs by counterclaim.

MEMORANDUM AND ORDER

DEARIE, District Judge.

Plaintiff KML Laboratories Limited ("KML") has moved, pursuant to Fed. R.Civ.P. 56, for summary judgment on its rescission and breach of contract claims and for dismissal of the counterclaims by defendants Robert A. Hopper, Jill S. Schneider, and Thomas P. Tobin ("Hopper Group"). Defendants have cross-moved for summary judgment against KML, certain KML officials, and an affiliated biomedical waste disposal company, Decom Medical Waste Systems, Inc. ("Adams Group"). For the reasons which follow, the Court grants plaintiff's motion for summary judgment on its rescission claim and plaintiff's motion to dismiss defendants' fraud and fiduciary duty claims. The Court denies defendants' motions.

BACKGROUND

This action stems from the sale of a biomedical waste disposal company that went awry. Plaintiff KML, an Ontario corporation with its principal place of business in Rexdale, Canada, is one of a related group of companies known as the Argyro Group that owned and operated a large group of medical laboratories in Canada. Defendants Hopper, Schneider, and Tobin ("Hopper Group") were the majority shareholders of Energy Combustion Corporation ("ECC"), a company engaged in the business of transporting and incinerating infectious waste generated by hospitals, laboratories and nursing homes within the New York metropolitan area. ECC maintained its incinerating operations at 311 Winding Road in Old Bethpage, New York.

In June, 1986, after several months of negotiations with the Hopper Group, KML agreed to purchase ECC. The parties entered into a written purchase agreement, dated June 10, 1986, pursuant to which KML was to acquire 100% of the issued and outstanding stock of ECC from the Hopper Group for $2,500,000 to be paid in various installments. The agreement, which specified a closing date of July 10, 1986, contained several representations and warranties made by the Hopper Group including, among others, that ECC's operations were (i) in compliance with all applicable statutes, rules and ordinances, and (ii) that except as otherwise disclosed, no impediments existed — legal or otherwise — to reduce ECC's ability to carry on its waste disposal business as it was then carried out. Agreement at 5(c) and 7(e).

The purchase agreement specifically enumerated the permits ECC held and represented that those permits constituted the only "licenses required to permit the Corporation to carry on its biomedical waste transportation and incineration business." Agreement at 5(a) and (b). The agreement further stated that "the representations and warranties contained in this agreement shall continue to be true and accurate on the closing date as if made on such date, and shall survive closing." Agreement at 7(e). Significantly, the agreement provided, "If any condition is neither waived nor satisfied, then this agreement shall be null and void and all monies shall be repaid to the Vendee with interest and without deduction." Agreement at 11.

On June 9, 1986, ECC ceased its waste incineration operations pursuant to a consent order between ECC and the New York State Department of Environmental Conservation. The consent order provided that ECC's permits would remain in force until July 10, 1986, but that incineration activity at the site would cease until that date. According to the defendants, ECC chose this date in consideration of the closing date contemplated by the purchase agreement and in light of KML's stated intentions to replace ECC's incinerators.

After being adjourned for various reasons, the closing took place on July 31 and August 1, 1986. The parties closed in escrow, and executed an escrow agreement, dated July 31, 1986, which provided for the release of some funds but conditioned the exchange of additional funds on various events. These events included "approval by the appropriate regulatory agency to construct three incinerator units" on ECC's land and ECC's receipt "of a licence sic permitting the transfer of Infectious Waste from one vehicle to another" on ECC premises. (Pl.Exh. 49). The Hopper Group also executed, as required by Paragraph 10(a) of the purchase agreement, a certificate dated July 31, 1986 attesting to the truth, on that date, of the representations contained in the purchase agreement.

Further, at the closing, the parties executed three additional documents: (1) a deposit agreement, by which the Hopper Group deposited the ECC stock with KML's attorney and agreed that KML would be entitled to vote the shares and receive all dividends and distributions; (2) a pledge agreement, by which KML acknowledged its execution of two series of promissory notes; and (3) a document entitled, "Minutes of Special Meeting of Shareholders" accepting resignations from the Hopper Group and electing four KML individuals to be the new directors of ECC.

As might be expected, things did not go according to plan. On November 6, 1986, the Town of Oyster Bay commenced action against ECC alleging that ECC's operations violated a zoning ordinance prohibiting the incineration of garbage and offal¹ in an "H" zone, the type of zone in which ECC was located. The zoning ordinance at issue had existed throughout ECC's existence, made ECC's incineration of waste at the site illegal, and subjected each of ECC's existing permits to revocation for the failure to comply with local rules and regulations. (Pankoff Dep. 16, 18-20, 48-49; Tobin Dep. 72-78).

On December 24, 1986, KML notified the Hopper Group of its decision to rescind the purchase agreement pursuant to Paragraph 11 of the agreement which, as noted above, provided, "If any condition is neither waived nor satisfied, then this agreement shall be null and void and all monies shall be repaid to the Vendee with interest and without deduction." Agreement at 11. KML demanded the return of the money maintained in the escrow account and all funds advanced to the Hopper Group in connection with the transaction. When the Hopper Group refused KML's demands, KML instituted this action.

DISCUSSION

Standard For Summary Judgment

Fed.R.Civ.P. 56(c) provides for the granting of summary judgment when "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 the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Rule 56(c) mandates the entry of summary judgment "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2549, 91 L.Ed.2d 265 (1986). Movants may discharge their burden by showing "that there is an absence of evidence to support the nonmoving party's case." Id. at 326, 106 S.Ct. at 2554. The evidence and all factual inferences, however, must be viewed in the light most favorable to the nonmovant. Beacon Enterprise Inc. v. Menzies, 715 F.2d 757, 762 (2d Cir.1983).

Rescission of the Agreement

KML seeks rescission on grounds that the Hopper Group breached its warranties in the purchase agreement that (1) ECC's operations complied with all applicable statutes, rules and ordinances, and (2) that no violations existed that would reduce ECC's ability to carry out its business as it was carried out at the time of the purchase agreement. Defendants have cross-moved for summary judgment dismissing KML's rescission claim. Given the undisputed facts in the record regarding the zoning ordinance's existence and effect (Pankoff Dep. 16, 18-20, 48-49; Tobin Dep. 72-78), no factual issues exist regarding whether the Hopper Group actually breached the warranties in the purchase agreement.² This Court need only decide whether rescission is an appropriate remedy here.

Viewing the record in the light most favorable to defendants, the Court finds rescission appropriate because defendants' breach, even if innocent, defeated the purpose of the contract. Under New York law³, a breach in a contract which substantially defeats the purpose of that contract can be grounds for rescission. See Babylon Associates v. County of Suffolk, 101 A.D.2d 207, 475 N.Y.S.2d 869 (2d Dept.1984); Canfield v. Reynolds, 631 F.2d 169 (2d Cir.1980). Rescission "is not permitted for a slight, casual or technical breach, but, as a general rule, only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract." Callanan v. Keeseville, A.C. & L.C.R., 199 N.Y. 268, 284, 92 N.E. 747, 752 (1910). Moreover, a "failure to perform in every respect is not essential, but a failure which leaves the subject of the contract substantially different from what was contracted for is sufficient." Id.

Although an extraordinary remedy, rescission is appropriate here because the Hopper Group's inability to transfer a viable company constitutes a breach that goes "to the root of the contract." Direction Associates, Inc. v. Programming & Systems, Inc., 412 F.Supp. 714, 719 (S.D.N.Y.1976). See also National Conversion Corp. v. Cedar Building Corp., 23 N.Y.2d 621, 298 N.Y.S.2d 499, 246 N.E.2d 351 (1969) (rescission...