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Federalpha Steel LLC Creditors' Trust v. Federal Pipe & Steel Corp.

June 26, 2007

FEDERALPHA STEEL LLC CREDITORS' TRUST, PLAINTIFF,
v.
FEDERAL PIPE & STEEL CORPORATION, RUSSEL METALS, INC., GILLES LEROUX, AND SYLVAIN GARNEAU, DEFENDANTS.
FEDERAL PIPE & STEEL CORPORATION, DEFENDANT, THIRD-PARTY PLAINTIFF
v.
PHA STEEL, LLC, AN ILLINOIS LIMITED LIABILITY COMPANY, THIRD-PARTY DEFENDANT.



The opinion of the court was delivered by: Elaine E. Bucklo United States District Judge

Before me is a motion brought under Federal Rules of Civil Procedure 12(b)(6) and 14(a) by third-party defendant PHA Steel, LLC ("PHA Steel") to dismiss the third-party complaint brought by defendant Federal Pipe & Steel Corporation ("Federal Pipe"). Federal Pipe's complaint brings claims for indemnification and restitution, rescission, and unjust enrichment against PHA Steel. PHA Steel's motion to dismiss contends that Federal Pipe's complaint does not state a basis for PHA Steel's derivative liability as Rule 14(a) requires, and that by agreement Federal Pipe has released any and all claims it may have had against PHA Steel. For the reasons stated in this opinion, I deny PHA Steel's motion.

I.

In assessing PHA Steel's motion to dismiss, I must accept all well-pled facts in Federal Pipe's third-party complaint as true. Thompson v. Illinois Dep't of Prof'l Regulation, 300 F.3d 750, 753 (7th Cir. 2002). I must view the allegations in the light most favorable to Federal Pipe. Gomez v. Illinois State Bd. of Educ., 811 F.2d 1030, 1039 (7th Cir. 1987). Dismissal of a claim is proper if a plaintiff has not, at minimum, made sufficient factual allegations to raise a right to relief above a "speculative level." Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964 (2007) (citations omitted). Written instruments attached to the complaint are considered to be part of the complaint, so I may consider the September 30, 2003 agreement (the "Withdrawal Agreement") that Federal Pipe has attached to its complaint. See Moranski v. Gen. Motors Corp., 433 F.3d 537, 539 (7th Cir. 2005).

Under this standard, the facts relevant to PHA Steel's motion are as follows: Federal Pipe is a Delaware corporation with its principal place of business in Detroit, Michigan. (Compl. ¶ 1.) PHA Steel is an Illinois limited liability company with its principal place of business in Hammond, Indiana. (Id. at ¶ 2.) On October 20, 2003, Federal Pipe, an entity identified as "PHA LLC," Alpha Steel Corporation ("Alpha") and Federalpha Steel LLC ("Federalpha") executed a Withdrawal Agreement.*fn1 (Id. at ¶ 12.) The Withdrawal Agreement provides that Alpha and Federal Pipe formed Federalpha but "no longer desire[d] to jointly own" it. (Withdrawal Agreement at 1.) It further provides that the parties' intention was to release any claims against one another that might exist so that the parties "shall have no claims against one another . . . by reason of any matter related to" Federalpha. (Id. at ¶ 18.) Federal Pipe alleges that this provision was "a critical and crucial part of the consideration" for which it bargained in entering into the Withdrawal Agreement. (Compl. ¶ 17.)

As part of the Withdrawal Agreement, Federal Pipe agreed to take certain actions. First, pursuant to the Withdrawal Agreement Federal Pipe assigned its membership interest in Federalpha and its stock interest in FA Steel Management, Inc. ("FA Steel") to Alpha. (Withdrawal Agreement ¶ 3(h).) Federal Pipe also assigned the subordinated debt that it was owed by Federalpha (approximately $2.2 million) to PHA. (Id.) The Withdrawal Agreement also requires Federal Pipe to pay Federalpha $170,000 and to assume various other obligations. (Id. at ¶ 3.) Included in these other obligations is an obligation for Federal Pipe to fund a $1 million certificate of deposit (the "Federal CD"). (Id. at ¶ 3(a).) The Federal CD was to serve as collateral for Federal Pipe's "non-recourse guaranty" until Federalpha's indebtedness to certain banks, lenders of Federalpha, was satisfied in full. (Id.) At that time the Federal CD was to be deposited into an escrow account for the benefit of both Federal Pipe and PHA LLC, subject to certain indemnification provisions. (Id.) Any interest earned on the account was also to be paid in equal portions to Federal Pipe and PHA LLC. (Id.) Federal Pipe alleges that, at present, Federalpha's lenders have been paid in full, and that Federal Pipe's $1 million contribution remains in an escrow account. (Compl. ¶ 20.) It further alleges that the escrow account has been distributed on a 50/50 basis between Federal Pipe and PHA Steel, and that PHA Steel's distribution has been approximately $25,376. (Id.)

In addition to Federal Pipe's obligations under the Withdrawal Agreement, the Withdrawal Agreement further provides that PHA LLC indemnify Federal Pipe by reason of (I) Any claim or cause of action to the extent that it arises from any of the provisions of this agreement, including the release of [Federal Pipe] from its guaranty obligation to the Banks or [Federal Pipe's] funding of the Certificate of Deposit as provided in paragraph 3(a) above, or (ii) the liabilities expressly assumed by Alpha in paragraph 5 above (the "Indemnified Claims") except that in the case of any Indemnified Claims arising under subparagraph 14(a)(I) above, [Federal Pipe] shall bear up to the first $100,000 of any such loss, damages or expenses, including reasonable attorneys' fees, and PHA shall be responsible for any such loss, damages or expenses incurred by [Federal Pipe] in excess of the amount of $100,000. Any monetary indemnification obligation of PHA under subparagraph 14(a)(I) above shall be satisfied only through a payment to [Federal Pipe] from the Escrowed Funds and is not otherwise payable to PHA. (Withdrawal Agreement ¶ 14(a).) Also under the Withdrawal Agreement, Federal Pipe shall be entitled to payment from the Escrowed Funds for the amount of any final judgment against it on an Indemnified Claim, as well as the amount of its costs of defense of any Indemnified Claim, including reasonable attorneys' fees, less, in the case of one or more Indemnified Claims arising under subparagraph 14(a)(I) above, the aggregate sum of $100,000 with respect to all such Indemnified Claims. (Id. at ¶ 14.)

Federal Pipe alleges that "PHA LLC," the entity that was a party to and referenced in the Withdrawal Agreement, is not the same entity as the present defendant PHA Steel. Federal Pipe alleges that PHA LLC was never incorporated, and instead that certain principals of Alpha incorporated an Illinois entity under the name of PHA Steel, and that PHA Steel has "purported to exercise the rights of PHA under the Withdrawal Agreement." (Compl. ¶ 14.)

Federal Pipe also alleges that the day after the execution of the Withdrawal Agreement, Federalpha filed a bankruptcy proceeding. Federalpha Steel LLC Creditors' Trust (the "Trust") then filed a complaint against defendants Federal Pipe, Russel Metals, Inc., Gilles Leroux, and Sylvain Garneau.*fn2 That complaint alleged that Federal Pipe operated a network of steel service centers throughout the United States. (Trust Compl. ¶¶ 6, 11.) In 2002 it partnered with Alpha to organize Federalpha, which would own and operate three steel service centers in Illinois, Michigan and Indiana. (Id. at ¶ 14.) Federal Pipe and Alpha executed an operating agreement for Federalpha that designated FA Steel to manage Federalpha. (Id. at ¶¶ 15-16.) However, the Trust alleges that while the operating agreement gave FA Steel exclusive management authority over Federalpha, "Federalpha actually was run as a joint venture or partnership in which Federal Pipe exercised active de facto management authority over Federalpha." (Id. at ¶ 20.) The Trust also alleges that Federal Pipe exercised control over Federalpha by unconditionally guaranteeing Federalpha's obligations to its lenders and by helping Federalpha obtain trade credit. (Id. at ¶¶ 23-27.) The Trust further alleges that eventually Federal Pipe made a "de facto withdrawal from Federalpha, ceasing to honor its duties and obligations under the Operating Agreement, and otherwise terminating its involvement with Federalpha." (Id. at ¶ 44.)

The Trust's complaint brings several causes of action against Federal Pipe, including avoidance of a release for actual fraud (Count I), constructive fraud under 11 U.S.C. §§ 548(a)(1)(A) and (B) (Count II), breach of the Withdrawal Agreement by failing to assume certain of Federalpha's pension liabilities (Count III), breach of the Illinois Limited Liability Company Act ("Illinois LLC Act") for failing to make required contribution of property and services under 805 ILL. COMP. STAT. 180/20-5(c) (Count IV), breach of the Operating Agreement by wrongfully dissociating from Federalpha and by violating the Operating Agreement's non-competition clause (Counts V and VI), breach of its fiduciary duties under the Illinois LLC Act, 805 ILL. COMP. STAT. 180/15-3 (Count VII), and intentional and negligent misrepresentation and omission to creditors regarding Federalpha's credit worthiness (Counts XI and XII). The defendants to the Trust's complaint subsequently filed a motion to dismiss which I granted in part and denied in part. See Federalpha Steel LLC Creditors' Trust v. Fed. Pipe & Steel Corp., No. 06 C 3188, 2006 WL 3626767 (N.D. Ill. Dec. 8, 2006). I dismissed Counts III, IV, XI and XII, but allowed Counts I, II, V, VI, and VII against Federal Pipe to stand. Id.

Federal Pipe then answered the complaint and filed its third-party complaint against PHA Steel. Its third party complaint brings two claims against PHA Steel: PHA is obligated under the Withdrawal Agreement to indemnify Federal Pipe for any final judgment entered against Federal Pipe as part of the Trust's original complaint in this matter (Count I) and, in the event I determine that the Withdrawal Agreement is not valid, PHA Steel is obligated to return the consideration Federal Pipe paid it as part of the Withdrawal Agreement, as well as any benefit it earned as result of the Withdrawal Agreement, under theories of restitution, rescission, and unjust enrichment (Count II). PHA's motion to dismiss the third-party complaint followed.

II.

PHA Steel's motion to dismiss argues that I should dismiss Count I because Federal Pipe does not allege that PHA Steel's liability is derivative of its own liability to the Trust, as Federal Rule of Civil Procedure 14 requires to raise such a claim in a third-party complaint. Federal Rule of Civil Procedure 14(a) sets forth the circumstances in which a defendant may implead a third party defendant. In relevant part, it provides that a third party plaintiff may serve a third-party complaint on "a person not a party to the action who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third-party plaintiff." FED. R. CIV. P. 14(a). Rule 14 therefore allows a defendant/third-party plaintiff to implead a third-party defendant when the third party defendant's liability to the third-party plaintiff is derivative of the third-party plaintiff's liability to the original plaintiff. See Hartford Accident and Indem. Co. v. Sullivan, 846 F.2d 377, 381 (7th Cir. 1988); Comtel Techs., Inc. v. Paul H. Schwendener, Inc., No. 04 C 3879, 2005 WL 433327, at *13 (N.D. Ill. Feb. 22, 2005); Forum Ins. Co. v. Ranger Ins. Co., 711 F. Supp. 909, 915 (N.D. Ill. 1989). The liability must be derivative; "[t]he fact that the third-party claim arose out of the same transaction or set of facts is irrelevant, since impleader cannot be used 'as a way of combining all controversies having a common relationship.'" Forum Ins. Co., 711 F. Supp. at 915 (quoting 6 CHARLES WRIGHT & ARTHUR MILLER, FEDERAL PRACTICE AND PROCEDURE § 1442 (1971)). Rule 14(a) "is designed to avoid circuitry of actions and to expedite the resolution of secondary actions arising out of or in consequence of the action originally instituted" and "guarantees consistent results" and "saves the time and cost involved in the needless repetition of evidence at a subsequent trial." Colton v. Swain, 527 F.2d 296, 299 (7th Cir. 1975).

PHA Steel contends that the liability Federal Pipe seeks to impose upon it is not derivative. Count II is clearly not derivative; it seeks the return of consideration Federal Pipe paid to PHA Steel and any benefit PHA Steel received as part of the Withdrawal Agreement. However, Rule 18 clearly states that a party asserting a third-party claim "may join, either as independent or as alternate claims, as many ...


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