United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
JOHN Z. LEE, District Judge.
Plaintiff Ixmation, Inc., ("Ixmation") and Defendant Switch Bulb Company, Inc. ("Switch") entered into an agreement whereby Ixmation agreed to manufacture a custom automated system for Switch. To secure payment, Switch obtained a Letter of Credit, which had an expiration date of October 1, 2014, from Wells Fargo Bank, N.A., issued for Ixmation's benefit. However, before Ixmation could complete its work and collect fully on the Letter of Credit, Switch told Ixmation to halt work on the project and later executed an assignment for the benefit of creditors under California law. In response, Ixmation commenced an arbitration proceeding against Switch in April of this year and, worried that the Letter of Credit would expire, filed this suit and a motion for temporary restraining order in September, requesting that the Court maintain the status quo until the arbitration is concluded.
Granting Ixmation's motion, the Court previously issued a temporary restraining order placing an equitable lien on the Letter of Credit to maintain the status quo pending the arbitration. The Letter of Credit has since expired by its terms, but the equitable lien was extended over the funds that Switch previously had deposited with Wells Fargo to secure the Letter of Credit. Ixmation now moves for issuance of a preliminary injunction to maintain the equitable lien over the funds. Switch opposes Ixmation's motion, arguing that this Court lacks authority to enter the injunctive relief Ixmation requests, that Ixmation has not met the requirements for an equitable lien, and that Ixmation has not met its burden to obtain preliminary injunctive relief. For the reasons discussed below, the Court concludes that Ixmation has failed to meet its burden to obtain a preliminary injunction, and its motion is denied.
I. Factual and Procedural Background
A. The Proposal, Production, and Breach
Ixmation builds and sells production machinery and automated systems. Switch designs, manufactures, and sells various LED lighting solutions. Switch and Ixmation entered into a contract (the "Proposal") on July 12, 2013, for the manufacture of a custom automation system. See Am. Compl. ¶ 4; id. Ex. A. By the terms of the Proposal, Ixmation agreed to design and build the custom automation system for Switch in return for $3, 908, 000.00, and Switch issued a purchase order for the automation system. See id. ¶ 6; id. Ex. B. The Proposal required Switch to pay Ixmation in increments contingent on Ixmation's successful completion of certain milestones. See id. ¶ 8; id. Ex. A. The Proposal's Appendix, documenting Ixmation's terms and conditions of sale, contained an arbitration provision requiring the parties to arbitrate, inter alia, breach of contract claims. Id. Ex. A, Appendix I, ¶ 19. The arbitration provision also required that any disputes regarding the Proposal would be governed by Illinois law. Id.
Throughout the months following the Proposal and purchase order, the parties agreed to several change orders. Of particular relevance is a November 2013 change order that resulted in a credit of $573, 670.00 to Switch and delayed the project delivery schedule by seven to nine weeks. See Pl's Mot. Prel. Inj., Curtis Aff. ¶ 7. This delay was, at least partly, due to Switch unilaterally putting the project on hold for several weeks. Id. Switch later acknowledged in a February 28, 2014, email that the November 2013 change order's revised delivery schedule meant Factory Assurance Testing ("FAT"), a production milestone stage, would not occur until the week of March 31, 2014. Id. ¶ 8; see also id. Ex. 2. In this email, Switch documented a detailed schedule for finishing production of the machine from the FAT stage of production through shipping and delivery in late April. See id. Ex. 2.
In August 2013, Ixmation requested a Letter of Credit from Switch to secure payment for the custom automation system. On August 5, 2013, Wells Fargo issued the Letter of Credit in the amount of $3, 079, 200.00. See Am. Compl. Ex. D. The Letter of Credit had an expiration date of September 1, 2014. See id. On November 25, 2013, at the request of Ixmation, the amount in the Letter of Credit was reduced to $2, 858, 194.50, and the expiration date was extended to October 1, 2014. See id. Ex. E. As Ixmation made progress on the manufacture of the custom automation system, it drew on the Letter of Credit. The first draw occurred in October 2013 and the second in January 2014, with the draws totaling $1, 836, 097.80. See id. ¶ 11. The first draw was authorized after Ixmation completed its mechanical design review stage of production. See Pl.'s Mot. Prelim. Inj., Ludwig Aff. ¶ 7. The second draw was authorized after Ixmation completed a sub-system debug of the custom automation system. See id. ¶ 8. Consequently, $1, 022, 096.70 remained in the Letter of Credit. See Am. Compl. ¶ 11.
Ixmation would make no further draws. By early spring, a dispute between the parties arose. In March 2014, Ixmation was working on the FAT stage of production. During this time, Ixmation became concerned with Switch's actions and communications. On March 18, 2014, Ixmation's Senior Account Manager Randy Curtis met with Switch's Project Manager Myron Moreno in San Jose, California, to continue discussions of FAT. See Pl.'s Mot. Prel. Inj., Randy Curtis Aff. ¶ 9. During this meeting, Moreno told Curtis that VantagePoint Capital, a venture capital firm that funded Switch, had laid off more than half of Switch's employees, including employees who were working on the custom automation system and necessary to complete the FAT stage of production. See id. Despite this, Moreno indicated he would be coming to Ixmation's place of business in Roselle, Illinois, at the end of March for FAT. See id. The following day, however, on March 19, 2014, Moreno told Curtis that Switch was "trending towards liquidation" and would not be able to provide parts and personnel necessary for Ixmation to complete FAT. See id. ¶ 10. These representations were confirmed on March 20, 2014, in an email from Moreno to Curtis. See id. ¶ 11; see also Am. Compl. Ex. G.
The parties continued communications through the end of March 2014. See Pl.'s Mot. Prel. Inj., Curtis Aff. ¶¶ 12-13. For its part, Switch asserts that it was Ixmation that unilaterally ceased work on the custom automation system before reaching additional production milestones that were necessary to draw additional funds from the Letter of Credit. See Def.'s Mem. Opp. 2. An exchange of letters in late March captured the state of the parties' business relationship. By letter on March 27, 2014, Switch's Executive Vice President Ronald Rudolph notified Ixmation that on March 24, 2014, Switch had requested that Ixmation stop work on the custom automation system and that further financial assurances from Switch were not forthcoming because "[I]xmation insisted from the beginning that the full cost of the [custom automation system] be deposited into a bank under letter of credit with funds to be released upon [I]xmation's appropriate performance." See Pl.'s Mot. Prelim. Inj., Ludwig Aff. ¶ 11; id. Ex. 1. Ixmation's President Mick Macsek promptly responded to Switch on March 28, 2014, writing that it appeared the parties were in a contractual dispute and quoting a provision of the Proposal requiring the parties to put forth best efforts to resolve disputes. See id.; id. Ex. 2. Macsek's letter served as Ixmation's formal request for a meeting of the companies' senior executives. See id. Ex. 2.
Ixmation, now cognizant of an impending breakdown in the parties' relationship and Switch's apparently precarious financial state, sent four senior executives to attend the meeting on April 3, 2014, in San Jose, California. Pl.'s Mot. Prelim. Inj., Ludwig Aff. ¶ 12. According to Ixmation, this meeting proved fruitless; Switch provided no answers to questions concerning the reason for Switch's suspension of operations and apparent skeleton crew, and no satisfactory plan on how Switch intended to supply the parts and personnel necessary for Ixmation to perform FAT. See Pl.'s Mot. Prel. Inj., Curtis Aff. ¶¶ 12, 14.
B. Arbitration and Assignment for the Benefit of Creditors
Faced with its rapidly deteriorating business relationship with Switch, Ixmation filed for American Arbitration Association ("AAA") arbitration on April 16, 2014. See Amend. Compl. ¶ 19. The timeline of arbitration thereafter becomes hazy. Each party insists that, after the April 16, 2014, filing by Ixmation, it was the other party that delayed further progress in the arbitration. Ixmation represented to the Court at the October 20, 2014 hearing that, after it had filed for AAA arbitration, it did not move to expedite the process or take any other actions to advance the arbitration in the hope that Switch would eventually agree to resolve their dispute. Switch insists that is was Ixmation who delayed the arbitration. See generally Def.'s Second Supp. Mem. Opp'n. Pl.'s Mot. TRO 10-11.
Regardless, the next significant action in the arbitration proceedings was an email sent to Ixmation by Kelly Turner of the AAA on May 6, 2014. In the email, Turner informed Ixmation that it had to pay an administration fee by July 17, 2014, before the AAA would appoint an arbitrator so that the arbitration could proceed. See Pl.'s Supp. Memo. Ex. 2. The AAA required this "proceed fee" because Ixmation had chosen to file its request for arbitration under a flexible fee schedule. See id. The email notice also imposed a deadline of ...