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PROMUTO v. WASTE MANAGEMENT

April 23, 1999

VINCENT L. PROMUTO, ALEXIS PROMUTO, LOUIS
v.
PROMUTO, KAREN A. PROMUTO, VAUX PROMUTO FINNIMORE, SALVATORE PROMUTO, LOUIS G. PROMUTO, SHANA PROMUTO, AND SONDRA P. LIEBERMAN, PLAINTIFFS, V. WASTE MANAGEMENT, INC., A DELAWARE CORPORATION, AND WASTE MANAGEMENT, INC., AN ILLINOIS CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: William C. Conner, Senior District Judge.

    OPINION AND ORDER

This diversity action is presently before the Court on defendants' motion to transfer the action to the United States District Court for the Northern District of Illinois, pursuant to 28 U.S.C. § 1404(a). Plaintiffs oppose the motion to transfer and have filed a motion pursuant to Rule 56 of the Federal Rules of Civil Procedure seeking partial summary judgment as to defendants' liability for breach of warranty. For the reasons discussed below, defendants' motion is denied and plaintiffs' motion is granted.

BACKGROUND

I.  The Promuto Action

Defendant Waste Management, Inc., a Delaware corporation previously known as WMX Technologies, Inc. ("WMX") provides waste management services throughout the United States. Defendant Waste Management, Inc., an Illinois corporation ("WMI"), is a wholly-owned subsidiary of WMX. At all relevant times, WMX and WMI had a principal place of business at Oak Brook, Illinois.*fn3

In 1994, Mickey Flood ("Flood"), an officer of WMX contacted the Promutos to discuss WMX's interest in their family business. (Vincent Decl. I ¶¶ 13, 20).*fn4 On February 24, 1995, as a result of negotiations with William P. Hulligan ("Hulligan"), then Executive Vice President of WMX, SalVin and VinSal entered into an Agreement of Limited Partnership (the "Limited Partnership Agreement") with Waste Management of New York City, Inc. ("WMNY") and Waste Management of NYC, Inc. ("WMNYC"), thereby creating Waste Management of New York City, L.P., a Delaware Limited Partnership (the "Limited Partnership"). (Hulligan Decl. I ¶ 3).

WMNY and WMNYC are wholly-owned indirect subsidiaries of WMI. (Hulligan Decl. I ¶ 4, Ex. 1, § 2.1). SalVin and VinSal were limited purpose business entities formed for the sole purpose of holding interests in the Limited Partnership.*fn5 The Limited Partnership Agreement was executed by plaintiff Vincent L. Promuto on behalf of VinSal and SalVin, and by William A. Rodgers, Jr. ("Rodgers") on behalf of WMNY and WMNYC.*fn6

The Limited Partnership gave WMNY and WMNYC an approximate 51% ownership interest in the Transfer Station.*fn7 After only one year, WMX decided to buyout the Promutos' interest in the Transfer Station for $28 million.*fn8

On April 12, 1996, the parties entered into a Plan of Reorganization and Agreement for the Exchange of Stock of WMX Technologies for Substantially All of the Assets of SPM, VAP, Provech and VinSal (the "Exchange Agreement").*fn9 Pursuant to the Exchange Agreement, the Sellers and Owners agreed to sell to WMI: (1) their entire membership interest in SalVin, including SalVin's limited partnership interest in the Limited Partnership, and (2) VinSal's general partnership interest in the Limited Partnership, in exchange for common stock of WMX. (Hulligan Decl. I ¶ 12). The deal was structured as a tax-exempt exchange of assets for common stock intended to comply with the provisions of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("I.R.C." or the "Code"). (Hulligan Decl. I ¶ 13, Ex. 2).

Consistent with the terms of the Exchange Agreement, WMX transferred 863,531 shares of its common stock to Sellers. The number of shares was determined, as set forth in the Exchange Agreement, by dividing the purchase price of $28 million by the average closing price of WMX common stock on the New York Stock Exchange during the period of six to ten days before closing (the first week of April, 1996), or $32.425. (Hulligan Decl. I ¶ 15).

Prior to agreeing to accept WMX stock in exchange for the assets, as acknowledged in Section 2.11 of the Exchange Agreement, Sellers and Owners received: (1) a prospectus of WMX dated May 1, 1995 with supplements thereto dated, November 27, 1995, December 13, 1995 and February 7, 1996; (2) an annual report of WMX for the year ended December 31, 1995; (3) a WMX Report on Form 10-K for the year ended December 31, 1995; and (4) a proxy statement of WMX for its May 1996 meeting of stockholders.

Section 3 of the Exchange Agreement contains the "Representations and Warranties of the Purchaser and WMX" and states in pertinent part:

  In order to cause the Sellers and Owners to enter
  into this Agreement and to consummate the
  transaction contemplated hereby, the Purchaser and
  WMX jointly and severally make the following
  representations and warranties: . . .
  Section 3.7 Securities Matters. . . . WMX has been
  subject to the reporting requirements of Section 13
  or 15 of the Securities Exchange Act of 1934, as
  amended, and the rules and regulations promulgated
  thereunder (the "1934 Act") and has filed with the
  SEC all documents required to be filed under the
  1933 Act and the 1934 Act since January 1, 1995
  (the "WMX SEC Documents"). As of their respective
  dates, the WMX SEC Documents complied in all
  material respects with the requirements of the 1933
  Act and the 1934 Act, as the case may be, and none
  of the WMX SEC Documents contained any untrue
  statement of a material fact or omitted 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. The prospectus of WMX and the
  supplements thereto referred to in Section 2.11 do
  not contain any untrue statement of 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 as of the date
  hereof. As of their respective dates, the
  consolidated financial statements of WMX included
  in the WMX SEC Documents complied as to form in
  all material respects with then applicable
  accounting requirements and the published rules
  and regulation of the SEC with respect thereto,
  were prepared in accordance with generally
  accepted accounting principles applied on a
  consistent basis during the periods involved
  (except as may be indicated therein or in the
  notes thereto) and fairly presented the
  consolidated financial position of WMX and its
  consolidated subsidiaries as at the dates thereof
  and the consolidated results of their operations
  and statements of cash flows for the periods then
  ended (subject, in the case of unaudited
  statements, to normal year-end audit adjustments
  and to any other adjustments described therein).

Section 10.1 of the Exchange Agreement further provided that "[a]ll of the respective representations and warranties of the parties to this Agreement shall survive the consummation of the transactions contemplated hereby."

With respect to a breach of the Purchaser's warranties, Section 5.3 of the Exchange Agreement provides in pertinent part:

  Indemnification by Purchaser. (a) Subject to the
  limitations set forth in this Agreement, from and
  after the Time of Closing, the Purchaser agrees to
  defend, indemnify and hold the Sellers and their
  officers, directors and shareholders (each, a
  "Seller Indemnitee") harmless from and against all
  indemnifiable damages of a Seller Indemnitee. For
  this purpose, "indemnifiable damages" of a Seller
  Indemnitee means the aggregate of all expenses,
  losses, costs, deficiencies, liabilities and
  damages (including attorneys' fees and court costs)
  incurred or suffered by any Seller or any of its
  officers, directors, shareholders, agents,
  employees or affiliates, as a result of or in
  connection with: (i) any inaccurate representation
  or warranty made by WMX or the Purchaser in this
  Agreement, (ii) any default in the performance of
  any of the covenants or agreements made by WMX or
  the Purchaser in this Agreement, or (iii) any
  failure of the Purchaser to pay, discharge or
  perform any of the Assumed Liabilities.

As with the Limited Partnership Agreement, the Exchange Agreement was negotiated by Flood and Hulligan*fn10 in New York and executed by Rodgers on behalf of WMX and WMI. Upon closing the transaction, 863,531 shares of WMX common stock were issued to Sellers. As a result of the reorganization, Sellers dissolved and the shares were distributed to plaintiffs.*fn11

On February 24, 1998, WMX announced, via press release, a restatement of earnings for 1992 through 1996 and the first three quarters of 1997. (Defendants' Rule 56.1 Stmt. ¶ 20).*fn12 Robert S. Miller, Acting Chairman and Chief Executive Officer of WMX gave the following reason for the restatement:

    The actions we are announcing today reflect our
  determination to comprehensively address and
  definitively resolve the financial reporting
  issues affecting our Company and its credibility
  with investors. The steps we are taking are the
  strong prescription we believe is needed to
  acknowledge past mistakes, clarify our financial
  reporting picture, and begin the process of
  restoring investor confidence in Waste Management
  and its ability to prosper in the future.*fn13

With respect to restated earnings, the press release explains:

    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 value
  assumptions, and made mistakes in the corporate
  financial reporting process.
    The matters reflected in prior-period
  restatements include earlier recognition of asset
  value impairments (primarily related to land,
  landfill and recycling investments) and
  environmental liabilities (primarily remediation
  and landfill closure and postclosure expense
  accruals).
    The Company also concluded that capitalized
  interest relating to landfill construction
  projects was misstated. On January 1, 1995, the
  Company adopted a more conservative accounting
  method for calculating capitalized interest.
  However, the required cumulative accounting
  "catch-up" charge was not properly reflected in
  the 1995 financial statements and mistakes were
  made in applying the new accounting method in
  subsequent years. Capitalized interest for 1995,
  1996, and 1997 has accordingly been restated. . ..
    The Company is accordingly restating its
  financial results for the years 1992 through 1996.
  . . . The effect of the restatements is to reduce
  previously reported net income by a total of . . .
  $263.8 million in 1995.*fn14

On March 30, 1998, WMX filed its Form 10-K with the SEC for the fiscal year ending December 31, 1997, in which it restated net income for 1995 from $603.9 million to $340.1 million. (Defendants' Rule 56.1 Stmt. ¶ 20). On the same day, WMX issued its 1997 Annual Report to stockholders containing the revised Consolidated Financial Statements for years 1992 through 1996 along with explanatory notes regarding the restatements.*fn15 In his opening letter to shareholders, Robert S. Miller, as Chairman and CEO of WMX reported that:

    Waste Management undertook a thorough review of
  its business and accounting practices in 1997. . .
  . [and] found that certain items had been
  incorrectly reported, causing us to restate
  financial results from 1992 through 1996.*fn16

The Restated Consolidated Financial Statements disclosed in the 1997 Annual Report reflect marked reductions in net income and stockholders' equity for 1995:

      As Reported in 1996*fn17 As Restated in
      1998*fn18
             (000's omitted except per share amounts)
Net Income                $603,899         $340,097
Stockholders' Equity      $4,942,339       $4,042,646
Earnings Per Share        $1.24            $0.70

The notes accompanying the Financial Statements repeat essentially the same explanations set forth in the February 24th Press Release, i.e.,

    As a result of a comprehensive review begun in
  the third quarter of 1997, the Company determined
  that certain items of expense were incorrectly
  reported in previously issued financial
  statements. These principally relate to vehicle,
  equipment and container depreciation expense,
  capitalized interest and income taxes. With
  respect to depreciation, the company determined
  that incorrect vehicle and container salvage
  values had been used, and errors had been made in
  the expense calculations. The Company also
  concluded that capitalized interest relating to
  landfill construction projects had been misstated.
  On January 1, 1995, the Company changed its
  accounting for capitalized interest . . . but the
  cumulative "catch-up" charge was not properly
  recorded in the 1995 financial statements, and
  errors were made in applying the new method in
  subsequent years. Capitalized interest for 1995 .
  . . has accordingly been restated.*fn19

Plaintiffs' counsel immediately notified defendants in writing of the alleged breach of warranty with respect to the financial information provided to Sellers and Owners pursuant to the Exchange Agreement and requested an acknowledgment of liability.*fn20 The parties failed to reach an amicable resolution of the matter and plaintiffs filed the within diversity action on May 18, 1998. Defendants moved to stay this action pending resolution of a consolidated class action in the Northern District of Illinois on behalf of open market purchasers of WMX stock or, alternatively, to transfer the action to the Northern District of Illinois pursuant to 28 U.S.C. § 1404(a). Plaintiffs opposed the motion and moved for partial summary judgment with respect to defendants' liability for breach of warranty.

II. Illinois Class Action

Numerous class actions brought in the Northern District of Illinois in connection with the financial restatements were consolidated into one action captioned In re Waste Management, Inc. Securities Litigation, No. 97 C 7709 (N.D.Ill.). The plaintiffs in the consolidated class action allege, in connection with the restatement of prior period earnings for the years 1992 through 1996 and the first three quarters of 1997, that WMX and certain of its officers and directors knowingly or recklessly issued financial statements that failed to conform to Generally Accepted Accounting Principles ("GAAP"), in violation of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5.

The parties to the consolidated class action have since signed a Memorandum of Understanding, and a Special Master was appointed to supervise discovery with respect to the fairness of the proposed settlement. The Special Master is expected to report his findings as to the fairness of the proposed settlement, by April 30, 1999.

DISCUSSION

I.  Defendants' Motion to Transfer

Defendants argue that this action should be transferred to the Northern District of Illinois pursuant to 28 U.S.C. § 1404(a), which provides that "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."

As a threshold matter, defendants must prove that plaintiffs could initially have brought this action in the proposed transferee forum. See Hoffman v. Blaski, 363 U.S. 335, 80 S.Ct. 1084, 4 L.Ed.2d 1254 (1960) (venue must properly lie in the transferee forum and defendants must be subject to in personam jurisdiction). Here, venue would be proper and defendants would be subject to personal jurisdiction in the Northern District of Illinois because, at the time the action was commenced, both defendants maintained a principal place of business at Oak Brook, Illinois.*fn21

Once plaintiffs' ability to bring suit in the transferee forum has been established, the Court must consider the following factors in determining whether or not a transfer is warranted: (1) the convenience of the parties; (2) the convenience of material witnesses; (3) the relative means of the parties; (4) the locus of operative events; (5) the relative ease of access to sources of proof; (6) the weight accorded to plaintiff's choice of forum; (7) the availability of process to compel the presence of unwilling witnesses; (8) the forum's familiarity with the governing law; and (9) trial efficacy and the interests of justice based upon the totality of the circumstances. See Schomann Int'l Corp. v. Northern Wireless, Ltd., 35 F. Supp.2d 205, 213 (N.D.N.Y. 1999); Telebrands Corp. v. Wilton Indus., Inc., 983 F. Supp. 471, 477 (S.D.N.Y. 1997). No single factor is determinative, and the decision of whether or not to transfer the action lies wholly within the broad discretion of the district court. See Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 29, 108 S.Ct. 2239, 101 L.Ed.2d 22 (1988).

Plaintiffs' choice of forum should be given substantial weight, particularly when plaintiffs reside in the district where the action was brought. See Schomann Int'l, 35 F. Supp.2d at 213. Indeed, plaintiffs' choice of forum should not be disturbed unless defendants clearly establish that the balance of the above factors weigh heavily in favor of transfer to the proposed forum. See id.; see also Toy Biz, Inc. v. Centuri Corp., 990 F. Supp. 328, 330 (S.D.N.Y. 1998). Defendants have not met this burden.

A.  Convenience of the Parties and Witnesses

The convenience of the parties and the convenience of the witnesses are generally considered the most important factors. See Telebrands Corp., 983 F. Supp. at 477; Dwyer v. ...


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