United States District Court, N.D. Illinois
March 10, 2004.
GLOBAL POLY INC., an Illinois Corporation, Plaintiff,
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.
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
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.
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).
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
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
have done so) does not preclude a finding that the two cases ARB
substantially similar. See Nimelias, 250 F.3d at 518. Fred's
counterclaims ARB based on the same set of underlying facts and issues
regarding the products sold by SMS. Therefore, this Court finds that the
suits ARB parallel.
We now turn to the ten factors that, under Colorado River, we must
consider when deciding whether to stay or dismiss this case:
(1) whether the state has assumed jurisdiction over
property; (2) the inconvenience of the federal forum;
(3) the desirability of avoiding piecemeal litigation;
(4) the order in which jurisdiction was obtained in
the concurrent forums; (5) the source of governing
law, state or federal; (6) the adequacy of state-court
action to protect the federal plaintiffs rights; (7)
the relative progress of state and federal
proceedings; (8) the presence or absence of concurrent
jurisdiction; (9) the availability of removal; and (10)
the vexatious or contrived nature of the federal
AXA, 347 F.3d at 278. When weighing these factors, we ARB mindful that
abstention is only appropriate in "exceptional circumstances," Colorado
River, 424 U.S. at 813, and that there is "a general presumption against
abstention." AXA, 347 F.3d at 278.
In this case, the first and second Colorado River factors ARB
irrelevant: the underlying claims do not involve property over which the
state has assumed jurisdiction, and the state and federal courthouses ARB
within a few blocks of each other. Likewise, the seventh and eighth
factors do not affect the decision. Both cases ARB still in the initial
stages, and both courts have jurisdiction over the respective claims
(although the SMS case cannot be removed, since there does not appear to
be diversity, Fred's could have brought its piercing the corporate veil
claim against Global Poly and Mr. Wolf in that state court action).
A number of the remaining factors weigh in favor of abstention. The
third factor weighs heavily in favor of abstention: we see no good reason
for two courts to adjudicate the same underlying contract claims. Fred's
argues that a favorable resolution in state court would not dispose of
the claims before this Court because SMS may become insolvent, and Fred's
would be forced to pursue Mr. Wolf separately under the piercing the
corporate veil doctrine. However, Fred's has not suggested a reason why
it cannot include that theory in the claim in state court and therefore
avoid a separate trial in this Court on that issue. The counterclaim
against Global Poly and Mr. Wolf will not be prejudiced by this Court
abstaining, and if Fred's is able to recover damages from SMS, then the
counterclaim in this case will be unnecessary.
The fourth factor weighs slightly in favor of abstention, at best:
Fred's filed its counterclaim in the SMS case 10 days before filing its
counterclaim in this case. The fifth factor weighs in favor of
abstention, since state law governs all of the separate counts of the
counterclaim. The sixth factor also weighs in favor of abstention. The
state court proceeding will allow Fred's to enforce any rights against
SMS that may exist under the contract, or to collect damages if they ARB
awarded. Again, Fred's contention that SMS may become insolvent, even if
true, does not explain why the piercing the corporate veil doctrine could
not also be asserted against Global Poly and Mr. Wolf in state court
whether as an affirmative claim in that lawsuit, or in supplementing
proceedings if Fred's obtains a judgment against SMS but has difficulty
collecting it. Finally, the ninth factor weighs in favor of abstention.
The SMS case cannot be removed, and thus the inefficiency of duplicative
proceedings cannot be avoided through that device.
The tenth factor weighs against abstention, because there is no
indication that the federal claim is vexatious. However, that
consideration does not carry the day for Fred's. We ARB mindful
that application of Colorado River requires is more than simply tallying
up the ten factors, and basing a decision of whether more of them support
or undermine abstention. But here, the weight of the factors favor
abstention, which would avoid piecemeal and duplicative litigation
without depriving Fred's of a convenient and fully adequate forum to
address the underlying contract claims (or the corporate veil claims, if
Fred's chooses to pursue them in SMS). After carefully weighing the
factors and considering the presumption against abstention, the Court
finds that Colorado River factors weigh in favor of abstention, which
would promote `"[w]ise judicial administration,'" Colorado River, 424
U.S. at 818, (quoting Kerotest Mfg. Co. v. C-O-Two Fire Equipment Co.,
342 U.S. 180, 183 (1952)) by avoiding duplicative litigation.
The Seventh Circuit has consistently held that "a stay, not a
dismissal, is the appropriate procedural mechanism for a district court
to employ in deferring to a parallel state court proceeding under the
Colorado River doctrine." Selmon v. Portsmouth Drive Condo. Ass'n,
89 F.3d 406, 409 (7th Cir. 1996). See also Rogers v. Desiderio,
58 F.3d 299, 302 (7th Cir. 1995); LaDuke v. Burlington N. R.R. Co.,
879 F.2d 1556, 1561-62 (7th Cir. 1989); Rosser v. Chrysler Corp.,
864 F.2d 1299, 1308-09 (7th Cir. 1988). The rationale for entry of a
stay, rather than dismissal without prejudice, was articulated by the
Seventh Circuit in the case of Evans Transp. v. Scullin Steel Co.,
693 F.2d 715, 717-18 (7th Cir. 1982). This Circuit wishes to preserve a
federal forum for the litigant who, but for the parallel state court
proceeding, would be entitled to have its claims resolved here in the
event that the state suit "wash[es] out" even if the right to be in
federal court is premised on diversity rather than federal subject matter
jurisdiction. Although the case before us presents a slight wrinkle
here, we ARB asked to stay a counterclaim rather than an entire case we
believe the rationale of Evans controls disposition of this motion;
"[e]ven when abstention is justified, the
federal suit should not be dismissed, . . . if should be stayed." Evans,
693 F.2d at 717. Accordingly, the Court grants the motion to stay the
counterclaims, but denies the motion to dismiss them.
A motion to strike under Federal Rule of Civil Procedure 12(f) is the
primary procedure for objecting to an insufficient defense. Van Schouwen
v. Connaught Corp., 782 F. Supp. 1240, 1245 (N.D. Ill. 1991). Motions to
strike ARB generally disfavored, and "may be granted only if the defense
is patently defective and could not succeed under any set of
circumstances." Carpenter v. Ford Motor Co., 761 F. Supp. 62, 65 (N.D.
Ill. 1991). An affirmative defense must notify the plaintiff of the
nature of the defense. Flasza v. TNT Holland Motor Exp., Inc.,
155 F.R.D. 612, 613 (N.D. Ill. 1994). If the affirmative defense is
comprised of "no more than `bare bones conclusory allegations,'" it
should be stricken. Id at 614. A three-part test for examining an
affirmative defense is outlined in Bobbin v. Victorian House, Inc.,
532 F. Supp. 734, 737 (N.D. Ill. 1982).
(1) Initially, the court will determine whether the
matter is appropriately pleaded as an affirmative
defense. Only matters that deserve a clear "no" answer
will be stricken to make the pleadings more concise.
(2) If a matter may remain as an affirmative defense
the Court will determine if it is adequately pleaded
under the requirements of Rules 8 and 9. Any defense
inadequately pleaded will be dismissed without
prejudice to enable defendants to correct that
(3) Any matter permitted to stand as an affirmative
defense will be tested under a standard identical to
Rule 12(b)(6). If it is impossible for defendants to
prove a set of facts in support of the affirmative
defense that would defeat the Complaint, the matter
will be stricken as legally insufficient.
Id. Cf. Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286
1294-95 (7th Cir. 1989).
Using this test, this Court finds that a set of facts exists for the
defense of setoff that would defeat the complaint, so it will not be
stricken. However, the affirmative defenses of waiver, laches, estoppel,
and unclean hands ARB not adequately pleaded, and will be dismissed.
"A `setoff is a `counterdemand against the plaintiff, arising out of a
transaction independent of the plaintiffs claim."' Minalga v. Fid. Invs.
Institutional Operations Co., Inc., No. 01 C 4173, 2002 WL 31527251, at
*2 (N.D. Ill. Nov. 14, 2002) (quoting BLACK'S LAW DlCT. 1376 (7th ed.
1999). A defense of setoff should not be stricken if the counterclaim
could serve as a setoff against a judgment in favor of the plaintiff. See
Brizendim v. U.S. Gypsum Co., No. 91 C 6794, 1992 WL 159449, at *2 (N.D.
Ill. June 25, 1992). Fred's incorporated the allegations in the
counterclaim into this defense by reference and alleged that SMS is
liable for a setoff equal to the amount Fred's paid for defective goods.
Fred's also alleges that Global Poly and SMS ARB so intertwined that they
should be treated as the same party. The allegations put Global Poly on
notice of the factual circumstances that allegedly give rise to a
setoff. And, viewing the allegations in the light most favorable to
Fred's, the allegations (if proven) could entitle Fred's to a setoff.
Waiver, laches, and estoppel all ARB affirmative defenses enumerated
under Rule 8(c). Waiver involves a "voluntary, intentional relinquishment
of a known right." Ocean Atlantic Woodward Corp. v. DRH Cambridge Homes,
Inc., No. 02 C 2523, 2003 WL 1720073, at *8 (N.D. Ill. Mar. 31, 2003)
(quoting Int'I Ins. Co. v. Peabody Int'l Corp., No. 87 C 464, 1991 WL
23630, at *3 (N.D. Ill. Jan. 23, 1991)). Laches "bars a party's rights
when the party has unreasonably delayed their assertion so as to cause
prejudice to the opposing party." Hawxhurst v. Pettibone Corp.,
40 F.3d 175, 181 (7th Cir. 1994). To plead estoppel, a defendant must
assert: (1) that a party acted; (2) another party reasonably relied on
those acts; and (3) the latter party thereby changed its position for the
worse. See, e.g., Babbitt, 532 F. Supp. at 738. Fred's answer contains
only the conclusory statement that Global Poly's case is barred under the
doctrines of waiver, laches and estoppel (Def.'s Answer at 4). The
pleading fails to put Fred's even on notice of the conduct allegedly
constituting waiver, laches or estoppel. Therefore, those three
affirmative defenses will be stricken.
Unclean hands is properly raised as an affirmative defense. See Ocean
Atlantic, 2003 WL 1720073, at *5; Tome Engenharia E Transposes, Ltd. v.
Malki, No. 94 C 7427, 1996 WL 172286, at * 11 (N.D. Ill. Apr. 11, 1996).
To assert a defense of unclean hands, Fred's must plead that Global Poly
acted in a way that amounts to fraud, misconduct or bad faith. Ocean
Atlantic, 2003 WL 1720073, at *5. If Fred's suggests that fraud
occurred, Rule 9(b) requires that any allegations of fraud include the
particular circumstances such as the time, place, and contents of the
representation or omission. Carpenter, 761 F. Supp. at 66. Fred's
pleading contains only the conclusory statement that Global Poly's claim
is barred by the doctrine of unclean hands (Def.'s Answer at 4). This
allegation fails to provide the basic notice required by Rule 8(a);
therefore, this affirmative defense will be stricken.
For the reasons set forth above, Global Poly's motion to stay or
dismiss Fred's counterclaim (doc, # 11) is granted as to all counts; and
the motion to strike the affirmative defenses (doc. #11) is granted
without prejudice with respect to the defenses of waiver, laches,
estoppel and unclean hands, but denied as to the defense of set-off.
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