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United States v. All Meat and Poultry Products Stored at Lagrou Cold Storage

January 3, 2007

UNITED STATES OF AMERICA, PLAINTIFF,
v.
ALL MEAT AND POULTRY PRODUCTS STORED AT LAGROU COLD STORAGE, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hon. Blanche M. Manning

MEMORANDUM AND ORDER

After discovering rodent infestation at a food storage facility, the government began this civil in rem action against LaGrou Distribution Systems, Inc., as well as related corporate entities and individuals, seeking forfeiture of fourteen million pounds of meat and poultry. The companies that owned the food stored in the warehouse joined this civil case by filing third-party complaints against the LaGrou defendants. The LaGrou defendants have moved to dismiss the third-party complaints, which the court grants in part and denies in part.

BACKGROUND

Fifteen third-party plaintiffs filed 11 third-party complaints against 30 third-party defendants. The third-party defendants responded with 21 motions to dismiss, later consolidated to 11. Because the third-party complaints are virtually identical, as are the motions to dismiss, for the sake of simplicity the court will treat them as a single complaint and single motion to dismiss (except where distinguishing between them is necessary). Also for the sake of simplicity, the court will refer to the third-party plaintiffs merely as plaintiffs, and the third-party defendants as defendants.

The following facts are alleged in the complaint, which for purposes of the motion to dismiss are accepted as true. See Dawson v. Newman, 419 F.3d 656, 658 (7th Cir. 2005). Each of the plaintiffs entered into a Warehouse Storage Agreement with LaGrou Distribution, under which LaGrou agreed to store the plaintiffs' meat and other food products. The plaintiffs allege that they entered into the storage agreements with LaGrou based upon LaGrou's commitments to: (1) store their food in sanitary conditions that met all USDA and other governmental requirements; (2) store their food so that it would not become contaminated, damaged, or rendered unfit; and (3) return the food upon request.

However, according to the complaint, at the time LaGrou promised to take good care of the plaintiffs' food, it knew that its warehouse was infested with rats. LaGrou employees allegedly found rat droppings all over the warehouse, along with boxes that appeared to have been gnawed by rats. Warehouse employees were assigned to "rat patrols," and killed as many as five rats a day. Hundreds of pounds of food had to be destroyed every week, and though customers were told of the damage, they were not told that the damage was caused by rats.

Despite LaGrou's alleged efforts to cover up the infestation, customers began to complain when they received adulterated food. At about the same time, USDA inspectors found evidence of rat droppings, gnawed boxes, and food contaminated by rats. Inspectors noticed other problems, too, including hams stored in a freezer covered with rust and flaking paint. Additional inspections revealed that rats were living in the walls of the warehouse, and could gain access to every floor of the facility through holes in the freezers, as well as open sewer drains. Based upon the extensive problems uncovered, the USDA removed its inspectors and detained 14-million pounds of meat and poultry, including all of the meat and poultry stored by the plaintiffs. Additionally, the Illinois Department of Public Health placed an embargo on all the non-meat products stored at LaGrou, while the Chicago Department of Public Health suspended LaGrou's license. Although some of the detained food was reconditioned and sold, much of it was destroyed.

In their complaints, the plaintiffs allege the following claims against the LaGrou defendants: (1) breach of contract; (2) bailment; (3) violation of UCC § 7-403, see 810 Ill. Comp. Stat. § 5/7-403; (4) breach of implied warranty; (5) conversion; (6) consumer fraud, see 815 Ill. Comp. Stat. 505/2; (7) conspiracy to commit consumer fraud; (8) piercing the corporate veil; and (9) direct participant liability. The gist of the first five claims is that LaGrou entered into a contract to store the plaintiffs' food in sanitary conditions, but failed to do so and failed to return the food as a result of the detainer and embargo. The gist of the consumer fraud-related claims is that at the time LaGrou contracted with the plaintiffs, it knew that it could not fulfill its commitment to store the food in sanitary conditions because it knew about the infestation. According to the complaints, only LaGrou Distribution entered into agreements with the plaintiffs. But because corporate formalities were ignored, according to the complaints, the doctrine of piercing the corporate veil is applicable and liability should be imposed on all of the LaGrou defendants, which includes not only LaGrou Distribution but also 24 of its affiliated corporate entities as well as five individuals-Donald Schimek, Patricia Schimek, James Stancel, Jack Stewart, and Michael Faucher-who were owners or officers of various LaGrou corporate entities.

The LaGrou defendants seek to dismiss the complaints in their entirety. They contend that the contract-related claims should be dismissed because the plaintiffs failed to allege facts to support their claims, specifically, that privity of contract existed between the plaintiffs and the defendants. As for the consumer fraud-related claims, the defendants argue that those claims should be dismissed because they: (1) fail to comply with the heightened pleading requirements of Federal Rule of Civil Procedure 9(b); and (2) only LaGrou Distribution is alleged to have made any statement potentially actionable under the consumer fraud act. Additionally, the defendants argue that the claims for piercing the corporate veil and direct participant liability should be dismissed because they are not valid causes of action. Finally, the defendants argue that the plaintiffs' requests for consequential damages, prejudgment interest, and attorneys fees should be stricken because those types of damages are unavailable. All of the parties have assumed that Illinois law applies, so the court will too.

ANALYSIS

In resolving a motion to dismiss under Rule 12(b)(6), claims should be dismissed only if the complaint's allegations, being accepted as true, fail to "state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6); Cler v. Ill. Educ. Ass'n, 423 F.3d 726, 729 (7th Cir. 2005). A claim should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim entitling him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Sanville v. McCaughtry, 266 F.3d 724, 732 (7th Cir. 2001).

Contract-Related Claims Notice Pleading Governs Federal Complaints

The defendants move to dismiss as a group what they refer to as the plaintiffs' contract-related claims-comprised of claims for breach of contract, bailment, violation of the UCC, and breach of implied warranty-because each of those claims depends upon the existence of a contract, but the plaintiffs "have not pleaded any contractual relationship with any" defendant. Specifically, the defendants contend that the complaint lacks "any factual assertions showing the existence of a contractual relationship between the plaintiffs and defendant," quoting as authoritative a decision of an Illinois appellate court. See Gallagher Corp. v. Russ, 721 N.E.2d 605, 612 (Ill. App. Ct. 1999).

The defendants' argument is unavailing. First, the argument is based upon the faulty premise that plaintiffs must plead facts. Federal courts require only notice pleading, which as set forth in Federal Rule of Civil Procedure 8(a), requires only a "short and plain statement of the claim." As the Seventh Circuit recently reiterated, "[i]t is enough to name the plaintiff and the defendant, state the nature of the grievance, and give a few tidbits (such as the date) that will let the defendant investigate." Kolupa v. Roselle Park Dist., 438 F.3d 713, 714 (7th Cir. 2006). The defendants' reliance upon cases decided by Illinois courts is misplaced, because those cases analyze the sufficiency of complaints subject to the more strenuous fact pleading requirements of state court. See City of Chicago v. Baretta U.S.A. Corp., 821 N.E.2d 1099, 1112 (Ill. 2004) (distinguishing fact pleading from notice pleading).

The court has reviewed the contract-related allegations in the plaintiffs' complaints and concludes that they meet the requirements of Rule 8(a). The complaint alleges that the plaintiffs entered into contracts with LaGrou Distribution and that, while the agreement required LaGrou Distribution to maintain sanitary conditions and USDA accreditation, and to return the plaintiffs' food when requested, LaGrou Distribution failed to do any of these things. The complaint also detailed the time period during which LaGrou allegedly breached the contracts, as well as the food that was adulterated and how it got that way. As a result, the complaint sufficiently apprises the defendants of the nature of the plaintiffs' claims, and gives them more than enough of the "tidbits" they need to investigate. See Kolupa, 438 F.3d at 714.

Defendants' Liability Is Based Upon Piercing the Corporate Veil, Not Privity of Contract Alternatively, the LaGrou defendants argue that even under the minimal requirements of notice pleading, the complaint is deficient because it fails to allege that any LaGrou entity other than LaGrou Distribution contracted with the plaintiffs. Based upon this lack of privity, the defendants argue that the claims against all the other defendants must be dismissed. The plaintiffs respond that despite the lack of privity, all of the defendants should be equally accountable because they operated as alter egos of one another.

Under Illinois law, a court may disregard the corporate form of entities operating as the alter egos of one another upon a showing that: (1) there is such a unity of interest and ownership that the separate personalities of the corporations and/or individuals no longer exist; and (2) circumstances are such that adhering to the fiction of a separate corporate existence would promote injustice or inequity. See International Fin. Servs. Corp. v. Chromas Techs. Canada, 356 F.3d 731, 736-37 (7th Cir. 2004). Whether to disregard the corporate form is left to the discretion of the court. Id. at 736.

The plaintiffs argue that under the minimal requirements of notice pleading, they have sufficiently apprised the defendants of their legal theory of piercing the corporate veil. The court agrees. Numerous allegations provide notice to the defendants that the plaintiffs seek to pierce the corporate veil, including the following:

* individual defendants Donald Schimek, Patricia Schimek and James Stancel own and control each of the corporate defendants;

* Donald Schimek manages each of the corporate defendants and operates them as "mere instrumentalities of his own enterprise;"

* the owners of the corporate defendants have failed to observe necessary corporate formalities;

* the corporate defendants hold themselves out as one integrated system and operate as such; and

* individual defendants Michael Faucher and Jack Stewart represented themselves to be officers of LaGrou Distribution when, in fact, they were merely ...


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