Mowbray v. Waste Management Holdings, Inc.

• Decision Date: 26 April 1999
• Docket Number: No. Civ.A. 98-11534-WGY.,Civ.A. 98-11534-WGY.
• Citation: 45 F.Supp.2d 132
• Parties: Robert MOWBRAY, Plaintiff, v. WASTE MANAGEMENT HOLDINGS, INC., Defendant.
• Court: U.S. District Court — District of Massachusetts

45 F.Supp.2d 132

Robert MOWBRAY, Plaintiff, v. WASTE MANAGEMENT HOLDINGS, INC., Defendant.

No. Civ.A. 98-11534-WGY.

United States District Court, D. Massachusetts.

April 26, 1999.

Edward F. Haber, Shapiro, Haber & Urmy, LLP, Boston, MA, for Robert Mowbray, on his own behalf and on behalf of all others similarly situated, plaintiff.

James R. Carroll, Skadden, Arps, Slate, Meagher & Flom, Boston, MA, John A. Sten, Skadden, Arps, Slate, Meagher & Flom LLP, Boston, MA, for Waste Management Holdings, Inc., defendant.

MEMORANDUM AND ORDER

YOUNG, Chief Judge.

I. Introduction

The plaintiff, Robert Mowbray ("Mowbray"), brings this action against the defendant, Waste Management Holdings, Inc. ("Waste Management"), alleging that it breached its contract with Mowbray when certain financial representations made by Waste Management turned out to be untrue. Mowbray has filed a motion for partial summary judgment as to liability on the breach of contract claim ("Motion for Summary Judgment"), arguing that there are no disputed material facts with respect to Waste Management's breach of contractual representations and warranties. Waste Management opposes the Motion for Summary Judgment on several grounds, and responds with a motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) ("Motion for Judgment on the Pleadings"), arguing that Mowbray failed to allege reliance, which is an essential ingredient of his contract claim. Mowbray in turn opposes the Motion for Judgment on the Pleadings by arguing that applicable state law does not require reliance when the existence of the warranty is undisputed and that, even if it does, Mowbray has alleged that he did rely on the warranty by affidavit filed in support of his opposition to the Motion for Judgment on the Pleadings. Finally, Mowbray files a motion for leave to file an amended complaint ("Motion to Amend") which seeks to insert an allegation of reliance into the complaint, as well as to add a new count for negligent misrepresentation.

After several rounds of filings, the parties have isolated the determinative issue for the Court: whether Illinois law requires a party to rely on an express warranty in order to sue for its breach. Although resolution of this issue is not unambiguous, the Court rules that Illinois law does not require reliance when the warranty is express and undisputed.

II. Factual Background

On July 31, 1992, Mowbray entered into an asset sale agreement (the "Agreement") with Waste Management and its wholly owned subsidiary, Waste Management of Dedham, Inc., wherein, in exchange for shares of Waste Management stock, Mowbray sold substantially all of the assets of Waste Disposal, Inc., a Massachusetts corporation wholly owned by him. See Haber Aff.Ex. A.

Section 2.23 of the Agreement reads:

Section 2.23 Securities Representations. Seller and Owners have received a prospectus of WMI dated May 7, 1992 with a supplement thereto dated June 29, 1992[,] an annual report of WMI for the year ended December 31, 1991 together with unaudited reports to the shareholders for the first quarter of the current year, and a WMI Report on Form 10-K for the year ended December 31, 1991 (collectively, the "Securities Filings").

Id. Section 3.5 of the Agreement reads:

Section 3 Representations and Warranties and Agreements of Purchaser and WMI. The Purchaser and WMI make the following representations, warranties and agreements:

Section 3.5 Financial Statements and Reports. WMI has previously furnished the Seller and the Owners with true and complete copies of the Securities Filings. As of their respective dates, the Securities Filings did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Since December 31, 1989 WMI has filed with the Securities and Exchange Commission all reports and registration statements and all other filings required to be filed with the Securities and Exchange Commission under its rules and regulations. The audited financial statements of WMI included or incorporated by reference in the Securities Filings have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in notes thereto) and fairly present the financial position of WMI as at the dates thereof and the results of its operations and changes in financial position for the periods then ended.

Id.

The audited financial statements of Waste Management contained or incorporated by reference in the Securities Filings included the audited financial statements for Waste Management for the year ended December 31, 1991 (the "1991 Financial Statements"). Those reports represented that Waste Management's earnings for the years ended December 31, 1989, December 31, 1990, and December 31, 1991 were $562,135,000; $684,762,000; and $606,323,000 respectively. See id. at Ex. C. Also included among the Securities Filings were the unaudited reports for the quarter ended March 31, 1992 (the "1992 Report") which represented that Waste Management's earnings for the first quarter of 1991 and 1992 were $165,653,000 and $192,094,000, respectively. See id. at Ex. E.

On February 24, 1998, Waste Management issued a press release (the "Press Release") which read in part:

During the comprehensive financial review, management and the Audit Committee determined that certain items of expense were incorrectly reported. These principally relate to the calculation of vehicle, equipment and container depreciation expense and capitalized interest. In the depreciation area, the Company employed incorrect vehicle and container salvage assumptions, and made mistakes in the corporate financial reporting process ...

... The Company is accordingly restating its financial results for the years 1992 through 1996 and the first three quarters of 1997. The effect of the restatements is to reduce previously reported net income by a total of $180.9 million for the first nine months of 1997, $231.4 million in 1996, $263.8 million in 1995, $156.9 million in 1994, $110.3 million in 1992, and $208.9 million in 1991 and prior periods.

See id. at Ex. F.

Mowbray views the admissions contained in this Press Release as dispositive of his breach of contract claim. He therefore seeks partial summary judgment as to Waste Management's liability for breaching the pertinent representation and warranty clauses of the Agreement. Waste Management does not dispute the contents of the Agreement or the facts recited in the Press Release, but instead seeks dismissal of Mowbray's breach of contract claim because he failed to allege reliance, an essential element of that claim. In the alternative, Waste Management opposes summary judgment on the grounds that (1) Mowbray has not offered any potentially admissible evidence to support its motion, and (2) Waste Management has had insufficient opportunity for discovery regarding the extent and character of Mowbray's reliance on the alleged misrepresentations and any possible waiver by Mowbray of the warranty protections. Mowbray, in turn, has moved to amend his complaint to add both an allegation of reliance, and a new count for negligent misrepresentation.

III. Analysis

A. Whether Reliance Is a Required Element under Illinois Law

Illinois law¹ is not entirely clear on whether reliance is an essential element for breach of contact claims that are premised on warranty provisions. As a threshold matter, it is clear that reliance is not a required element for ordinary breach of contract suits. See Chamberlain Mfg. Corp. v. Maremont Corp., No. 92-0356, 1995 WL 103803, at *7 (N.D.Ill. Mar. 6, 1995) ("To establish a breach of contract under Illinois law, [a plaintiff] must show: (1) the existence of a valid and enforceable agreement; (2) performance by the [p]laintiff; (3) breach of the contract by defendant; and (4) damage or injury proximately resulting from the breach."); id. at *8 ("[A] breach of contract claim does not require [the plaintiff] to prove reliance....").

It is also clear that reliance is a required element for determining whether an express or implied contractual warranty has been created. See Beckett v. F.W. Woolworth Co., 376 Ill. 470, 34 N.E.2d 427, 430 (1941) ("A positive assertion of a matter of fact made by a seller at the time of the sale, for the purpose of assuring the buyer of the fact and inducing him to make the purchase, if relied on by the purchaser, constitutes a warranty."); Hrosik v. J. Keim Builders, 37 Ill.App.3d 352, 345 N.E.2d 514, 515 (1976) ("Essential to the formation of a warranty is the buyer's reliance on the representations of the seller."). This doctrine is equivalent to the "basis of the bargain" rule found under the Uniform Commercial Code. See, e.g., Stamm v. Wilder Travel Trailers, 44 Ill. App.3d 530, 3 Ill.Dec. 215, 358 N.E.2d 382, 385 (1976) (noting that under section 2-313 of the Uniform Commercial Code, the "`affirmation of fact or promise' ... [must] be part of the `basis of the bargain,' before an express warranty is created.").

What is not clear, however, is whether reliance is a required element where, as here, no dispute exists over the creation and effectiveness of the contractual warranty. Cases addressing this question under Illinois law have produced divergent results. Mowbray relies upon Wikoff v. Vanderveld, 897 F.2d 232, 241 (7th Cir.1990), a Seventh Circuit decision under Illinois law that squarely held, "[t]he `basis of the bargain' rule is not applicable to situations where the warranties are clear and express." Id. at 241. In Wikoff, the defendant, like Waste Management in this case, did not challenge the existence of the warranty. Nevertheless, the district court held that the plaintiff could not have relied upon the warranty because it conducted its own...