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GLOBAL POLY INC. v. FRED'S INC.

March 10, 2004.

GLOBAL POLY INC., an Illinois Corporation, Plaintiff,
v.
FRED'S INC., a Tennessee Corporation, Defendant



The opinion of the court was delivered by: SIDNEY SCHENKIER, Magistrate Judge

MEMORANDUM OPINION AND ORDER

The plaintiff, Global Poly, Inc. ("Global Poly") has filed a motion (a) to dismiss or, in the alternative, stay the defendant, Fred's, Inc. ("Fred's"), counterclaims, and (b) to strike Fred's affirmative defenses (doc. # 11). For the following reasons, the motion to stay the counterclaims is granted; the motion to strike the affirmative defenses is granted in part and denied in part.

I.

  Global Poly has brought a two-count complaint against Fred's in connection with a business relationship that existed between the two parties. In Count I, Global Poly alleges a claim for an account stated, based on three invoices for products provided by Global Poly that Fred's has failed to pay, In Count II, Global Poly alleges a breach of contract as a result of Fred's alleged failure to pay those same three invoices, as well as for an alleged failure to pay for other goods ordered but not yet shipped. This complaint was originally filed in the Circuit Court of Cook County, Illinois and was then removed to the Northern District of Illinois pursuant to 28 U.S.C. § 1441(a), pursuant to this Court's diversity jurisdiction. In its answer and counterclaim, Fred's admits to withholding Page 2 payment but claims it did so for justifiable reasons. In addition, Fred's raises five affirmative defenses: setoff, waiver, laches, estoppel and unclean hands.

  Fred's also asserts a three-count counterclaim against Global Poly and Tom Wolf, individually, as owner and president of Global Poly. Count I of the counterclaim asserts a claim for breach of contract; Count II asserts a breach of warranty claim; and Count III asserts a claim for non-conforming goods. Fred's counterclaims all ARB based on three purchase orders issued by Fred's to Strategic Merchandising Solutions ("SMS") in January, February and April 2002 (see Motion to Dismiss, Ex. B, Count I ¶¶ 8-10), and SMS's alleged failure to perform on those purchase orders (Id., at Count I, ¶¶ 12-14; Count II, ¶¶ 17-20; Count n, ¶¶ 17-18). Fred's seeks to hold Global Poly and Mr. Wolf liable for alleged conduct of SMS, another company allegedly owned by Wolf, under a "piercing the corporate veil" theory.

  SMS (not a party here) has filed a complaint against Fred's that currently is pending in the Circuit Court of Cook County. In that complaint, SMS asserts a claim for account stated based on three invoices that SMS issued to Fred's (different than those from Global Poly that ARB at issue in this case), but that Fred's allegedly has not paid. In the SMS suit, Fred's has asserted a counterclaim against SMS that sets forth the same three contract claims alleged in Fred's counterclaims this case, based on the same allegations Fred's has made in this case, and that seeks the same monetary recovery that Fred's seeking in this case (see Motion to Dismiss, Ex. D, Count I, ¶¶ 4-6, 8-10; Count U, ¶¶ 12-15; Count III, ¶¶ 12-13). The only difference between Fred's counterclaims in the two cases is that here Fred's asserts a piercing the corporate veil theory to impose liability on Global Poly and Mr. Wolf along with SMS, but does not do so in the SMS case pending in state court. Page 3

  II.

  Global Poly argues that Fred's counterclaims should be dismissed based on 735 ILCS 5/2-619(a)(3), which states that an Illinois court may dismiss a pending action if "there is any other action pending between the same parties for the same cause." Fred's rejoinder is that Section 2-619(a)(3) does not apply to this case, based on AXA Corporate Solutions v. Underwriters Reinsurance Corp., 347 F.3d 272 (7th Cir. 2003). Fred's is right: In. AXA, the Seventh Circuit held that Section 2-619(a)(3) is a procedural rule for Illinois courts to follow, and that under Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), federal courts may not dismiss a case arising under federal diversity jurisdiction on that basis. AXA, 347 F.3d at 276-78.

  However, that determination does not end the matter, because Global Poly and Mr. Wolf argue in the alternative that the counterclaims should be dismissed or stayed under Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976). Under Colorado River, "a federal court may stay or dismiss a suit when there is a concurrent state court proceeding and the stay or dismissal would promote `wise judicial administration.'" AXA, 347 F.3d at 278 (quoting Colorado River, 424 U.S. at 818). In deciding whether Colorado River abstention applies, a court first must consider whether two lawsuits ARB parallel, which means that `"substantially the same parties ARB contemporaneously litigating substantially the same issues in another forum.'" Id. If that is so, then the court must consider ten factors in deciding whether to abstain. Id. "[T]he decision whether to defer to the state court is necessarily left to the discretion of the district court in the first instance." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 19 (1983). Page 4

  Employing the analysis required under Colorado River and AKA, this Court finds that the underlying state court lawsuit and the case before us ARB parallel and that, on balance, the relevant factors weigh in favor of abstention.

  III.

  We address first the question of whether Fred's counterclaims in the state court and in this Court ARB parallel. Suits ARB parallel when substantially the same parties ARB litigating substantially the same issues. AXA, 347 F.3d at 278. "[T]he mere presence of additional parties or issues in one of the cases will not necessarily preclude a finding that they ARB parallel." AAR Int'l, Inc. v. Nimelias Enters. S.A., 250 F.3d 510, 518 (7th Cir. 2001).

  The underlying issues that ARB being litigated in Fred's counterclaims in both cases ARB substantially similar. The underlying facts involve purchase orders by Fred's to SMS for peg hooks and shopping carts on January 23, 2002, February 21, 2002, and April 2, 2002. In both cases, Fred's alleges that Fred's paid for these purchases, that the products supplied by SMS were defective, that Fred's notified SMS of the defects, but that SMS did not accept a return of the merchandise or repay Fred's.

  The only difference between Fred's counterclaims in the two cases is that Fred's has sued only SMS in the state court action, but in this Court seeks to impose liability for the same conduct on Global Poly and Mr. Wolf on a theory that the corporate veil should be pierced. Central to this theory is that Global Poly and SMS ARB "merely business conduits or alter egos of Tom Wolf' (Motion to Dismiss, Ex. B. Count I, ¶ 15), which is tantamount to an admission by Fred's that it considers these parties to be "substantially similar." The fact that Global Poly and Mr. Welfare not joined as parties in the state court case on a piercing the veil theory (although Fred's surely could Page 5 have done so) does not preclude a finding that the two cases ARB substantially similar. ...


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