United States District Court, Northern District of Illinois, E.D
January 8, 1982
SLATE PRINTING COMPANY, PLAINTIFF AND COUNTERDEFENDANT,
METRO ENVELOPE COMPANY, DEFENDANT AND COUNTERPLAINTIFF. METRO ENVELOPE COMPANY, CROSS PLAINTIFF, V. ALLIED PAPER, INC., CROSS DEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER*fn1
Slate Printing Company ("Slate") is plaintiff and
counter-defendant in this action, and Metro Envelope Company
("Metro") is defendant and counter-plaintiff. Metro has filed
a cross-complaint against Allied Paper, Inc. ("Allied"),*fn2
and Allied has now moved for its dismissal. Metro also seeks to
impose on Slate the burden of alleged judicial admissions, with
a consequent disposition of the entire litigation adversely to
Slate. For the reasons stated in this memorandum opinion and
(1) Allied's motion to dismiss Metro's
cross-claim is granted.
(2) Metro's motion for designation of judicial
admissions and consequential relief is denied.
Each of Slate, Allied and Metro provided either goods or
services for Metro's ultimate sale of printed envelopes to
Montgomery Ward & Co. ("Ward"). Ward had contracted with Metro
and Slate for the manufacture of envelopes by Metro from paper
printed by Slate. To fulfill its obligations Slate contracted
for purchase of paper stock from Allied, which was unaware of
Slate's other arrangements. Metro's cross-claim however asserts
that "Allied knew that Slate intended to sell the paper to
Slate is suing Metro for non-payment under the contract to
provide Metro with the printed paper. Metro counterclaims for
damages because it asserts the paper failed to meet
specifications. Metro's cross-claim
asserts the same damages against Allied on the theories that
(1) Metro was a third party beneficiary of the Slate-Allied
contract (Count I), (2) Allied was negligent in manufacturing
the paper (Count II) and (3) Allied breached the implied
warranty of fitness for a particular purpose (Count III).
Dismissal of Metro's Cross-Claim Against Allied
Metro's third-party-beneficiary claim rests on its allegation
that when Allied contracted with Slate "Allied knew that Slate
intended to sell the paper [presumably after processing it] to
another party" — a party that turned out to be Metro. Because
the paper allegedly did not conform to Slate's specifications,
Allied would have breached its contracts with Slate. Metro
claims standing to recover from Allied for that breach. Allied
moves to dismiss Count I on the ground that Metro was not a
third-party beneficiary of the Allied-Slate contract.
Under Erie principles state law provides the rule of decision
in this diversity case. Black-letter principles as to
third-party beneficiaries were stated by the Illinois Supreme
Court in Carson Pirie Scott & Co. v. Parrett, 346 Ill. 252,
257, 178 N.E. 498, 501 (1931) and have been quoted over and
over again for the past 50 years:
. . if a contract be entered into for a direct
benefit of a third person not a party thereto,
such third person may sue for breach thereof. The
test is whether the benefit to the third person is
direct to him or is but an incidental benefit to
him arising from the contract. If direct he may
sue on the contract; if incidental he has no right
to recovery thereon.
Application of the distinction between "direct" and
"incidental" benefit is a function of the intent of the parties
and must be made on a case-by-case basis. Vinylast Corp. v.
Gordon, 10 Ill. App.3d 1043, 1049, 295 N.E.2d 523, 527 (1st
Dist. 1973). More constructive than the direct-indirect
dichotomy, which tends to be result-oriented rather than an
analytical tool, is the recent reaffirmation in Midwest
Concrete Products Co. v. LaSalle National Bank, 94 Ill. App.3d 394,
396, 49 Ill.Dec. 968, 418 N.E.2d 988, 990 (1st Dist.
[I]nasmuch as people usually stipulate for
themselves, and not for third persons, a strong
presumption obtains in any given case that such
was their intention, and that the implication to
overcome that presumption must be so strong as to
amount practically to an express declaration.
Certainly there was no such express declaration in this case.
Nor were the circumstances of the Allied-Slate agreement such
as to overcome the "strong presumption." Illinois cases that
have reached the opposite result typically involve fact
situations like those in Gothberg v. Nemerovski, 58 Ill. App.2d 372,
385-86, 208 N.E.2d 12
, 19-20 (1st Dist. 1965) (automobile
liability insurance policy construed to make person injured by
policyholder a third-party beneficiary); Kravitz v. Lake
County, 62 Ill. App.3d 101, 104-05, 19 Ill.Dec. 611,
379 N.E.2d 126
, 128-29 (2d Dist. 1978) (land purchasers held able to sue
for violation of agreement between their vendor and county
providing that no water connection fee would be charged); or
Mearida v. Murphy, 87 Ill. App.3d 87, 90, 42 Ill.Dec. 650,
409 N.E.2d 145
, 148 (4th Dist. 1980) (adjoining landowners had
standing to enforce an easement provision in contract between
their common grantor and another grantee). In all such cases
contracting parties were obviously establishing jural
relationships that deliberately went beyond their own to
encompass third-party rights.
By contrast Metro can assert only that Allied knew, when it
contracted with Slate, that someone would appear farther up the
chain of supply — and that someone turned out to be Metro.
That has never been enough under Illinois law to be viewed as
"direct" rather than "indirect" benefit for third-party
beneficiary purposes. It is no different in kind or degree from
the typical owner-contractor-subcontractor situation, in which
the Illinois courts consistently refuse to afford the owner
third-party beneficiary rights against the subcontractor for
claims like those Metro makes here. See the strikingly
parallel case of Midwest Concrete Products Co., 94 Ill. App.3d
at 397, 49 Ill. Dec. 970, 418 N.E.2d at 990.
Every commercial transaction between businesses in a
supplier-manufacturer relationship involves the provision of
supplies with express or understood specifications. Whenever
those supplies are incorporated into an end product (with or
without further processing), other businesses in the supply
chain derive "benefit." But such benefit is classically viewed
as "indirect" — as not vesting a directly enforceable right —
absent some special expression by the original parties that
they intended a different result. That was lacking here. Count
I must be dismissed.
Metro's Count II asserts Allied's negligent manufacture of
the offset paper provided to Slate. Metro claims no personal or
property damages as flowing from Allied's alleged negligence,
but rather seeks purely "economic" recovery — damages for
additional business costs incurred and lost sales.
Illinois cases decided in the First Appellate District
— where this Court sits — have consistently rejected such
claims. See this Court's discussion in National Can Co. v.
Whittaker Corp., 505 F. Supp. 147, 149-50 (N.D.Ill. 1981). And
where there is a split between Illinois Appellate courts (here
a single sport reflects a contrary conclusion, Moorman Mfg. Co.
v. National Tank Co., 92 Ill. App.3d 136, 47 Ill.Dec. 186,
414 N.E.2d 1302 (4th Dist. 1980)), this Court is bound — like its
Illinois trial court counter-part — to travel the First
Appellate route. Instrumentalist Co. v. Marine Corps League,
509 F. Supp. 323, 339 (N.D.Ill. 1981), in part quoting National
Can, 505 F. Supp. at 148 n. 2.
That would dispose of the matter but for one
post-National Can fact advanced by Metro: Leave to appeal has
been granted by the Illinois Supreme Court in Moorman. Metro
urges that this Court stay its hand until the Supreme Court has
acted. But since Moorman the First Appellate District has
continued to adhere to its uniform position: Heat Exchangers,
Inc. v. Aaron Friedman, Inc., 96 Ill. App.3d 376, 389, 51
Ill.Dec. 828, 421 N.E.2d 336, 345 (1st Dist. 1981). This
Court's responsibility is to do the same. If it later develops
that the Illinois Supreme Court agreed to review Moorman to
affirm rather than reverse, Metro may then seek to reassert a
claim against Allied.
Metro's Count III must fail as well. Here Metro sues under
UCC § 2-315, Ill. Rev.Stat. ch. 26, § 2-315, which provides a
right of action for buyers of goods whose sellers breach an
implied warranty of fitness for a particular purpose. For such
a claim to lie under Illinois law Metro must satisfy one of
(1) There must be privity of contract between
Metro and Allied. Suvada v. White Motor Co.,
32 Ill.2d 612, 616-18, 210 N.E.2d 182, 184-85 (1965);
In re Johns-Manville Asbestos Cases, 511 F. Supp. 1235,
1239 (N.D.Ill. 1981).
(2) Metro must be in a position equivalent to
that of a third-party beneficiary of the
Allied-Slate contract. Frank's Maintenance &
Engineering, Inc. v. C.A. Roberts Co., 86 Ill. App.3d 980,
992-93, 42 Ill.Dec. 25, 408 N.E.2d 403,
412 (1st Dist. 1980); Rhodes Pharmacal Co. v.
Continental Can Co., 72 Ill. App.2d 362, 368,
219 N.E.2d 726, 730 (1st Dist. 1966).
(3) Metro must otherwise be able to sustain a
tort action against Allied. Berry v. G.D. Searle &
Co., 56 Ill.2d 548, 558, 309 N.E.2d 550, 556
There is of course no claim of privity here. This opinion's
discussion as to Count I negates the third-party beneficiary
possibility. And the analysis of Count II scotches the tort
liability extension of Section 2-315. Accordingly Metro is out
of court on its Count III claim too.
Metro's "Judicial Admission" Motion*fn3
While Allied and Slate were still crossing swords, Slate
filed two pleadings
that asserted the same defects in Allied's paper that Metro now
claims against Slate:
(1) an affirmative defense in the now-dismissed
Allied suit against Slate in this Court, 80 C
(2) Slate's third-party complaint against
Allied, filed in this action when it was pending
in state court before removal to this Court.
Slate now denies any such defects, and Metro seeks to foreclose
it from such denial.
Metro's argument is a simple one: Slate's statements in the
prior pleadings are "judicial admissions" binding Slate as a
matter of law. Because they would dispose of the only liability
issue between Metro and Slate, the "judicial admissions" would
be conclusive to award Metro judgment on the pleadings as to
But that argument runs head on into our Court of Appeals'
recent opinion in Enquip, Inc. v. Smith-McDonald Corp.,
655 F.2d 115 (7th Cir. 1981). Enquip's factual situation was
substantively indistinguishable from ours: Smith-McDonald sued
Gardner Construction Co. ("Gardner") in federal court. In its
counterclaim against Smith-McDonald, Gardner claimed that oil
separator tanks supplied by Enquip did not meet specifications.
In Gardner's separate state court lawsuit against the Illinois
State Toll Highway Authority and its architect-engineer,
Gardner alleged that the tanks did meet the specifications.
Smith-McDonald moved for summary judgment against Gardner in
federal court, citing Gardner's pleading in the state court
action. In reversing the District Court's grant of summary
judgment, the Court of Appeals stated the applicable law (655
F.2d at 118, emphasis added):
It is well established in this circuit and
elsewhere that such matter from one proceeding is
indeed admissible and cognizable as an admission
in another. [citations omitted] Furthermore, the
trial court properly ruled that while such
evidence was admissible it was not a judicial
admission, and thus not binding or conclusive.
One of Slate's pleadings — its affirmative defense in 80 C
6038 — was in a lawsuit other than this one, so that Enquip is
on all fours.*fn4
As for the other — Slate's now-withdrawn
third-party complaint against Allied in this action — Enquip
confirms that the same principle applies (id.):
Such an opportunity [to explain the purported
admission to demonstrate that there is an issue of
material fact] is particularly necessary in a
complex third-party situation such as this one
where claims pleaded in the alternative are sought
to be used as admissions. See Continental Insurance
Co. v. Sherman, 439 F.2d 1294, 1298 (5th Cir. 1971)
(prejudicial error to allow a third-party cross
claim to be used as an admission in the same suit).
In Continental Insurance the Court of Appeals for the Fifth
Circuit held it prejudicial error to allow a third-party
cross-claim to be used as an admission in the same suit (439
F.2d at 1298):
Strictly applied, however, this rule would place a
litigant at his peril in exercising the liberal
pleading and joinder provisions of the Federal
Rules of Civil Procedure in that inconsistent
pleadings under Rule 8(e)(2) could be used, in the
proper circumstances, as admissions negating each
other and the allegations in third-party
complaints and cross-claims seeking recovery over
in the event of liability in the principal action
could be used in that action as admissions
Rule 8(e)(2) is clearly implicated by the rule allowing an
inconsistent pleading to be an
admission in the same case, at least in the context of
three-party disputes. And there is no magic, as Metro would
have it, in a party's having to label its inconsistent
pleadings "alternative" or "hypothetical" to invoke the
principle underlying the Rule.
Enquip establishes that when Slate, in a separate action,
engaged in the inconsistent pleading presented here, such
inconsistency has become admissible against Slate, but not as a
"judicial admission," which is conclusive or binding.
Continental Insurance would go even farther as to an
inconsistent pleading in the same action, holding it entirely
inadmissible, let alone a legally binding judicial admission.
It is not now necessary to decide whether Enquip's favorable
citation of Continental Insurance imports an agreement with the
latter's holding of total inadmissibility.*fn5 For present
purposes it is enough to conclude that Metro's assertion of a
"judicial admission" cannot prevail.
Allied's motion to dismiss Metro's cross-claim is granted
under Rule 12(b)(6), for none of Metro's claims states a cause
of action. Metro's argument on the "judicial admission" issue
is equally misplaced, and its motion to dismiss Slate's
Complaint and to strike Slate's answer to Metro's counterclaim
is therefore denied.