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PECO Pallet, Inc. v. Northwest Pallet Supply Co.

United States District Court, N.D. Illinois, Eastern Division

September 28, 2016

PECO PALLET, INC., Plaintiff,
PECO PALLET, INC., Defendant.


          Andrea R. Wood, United States District Judge.

         PECO Pallet, Inc. (“PECO”) manufactures and supplies rented wood pallets. Northwest Pallet Supply Co. (“Northwest”) is a pallet recycling company that, since approximately October 2013, has been collecting PECO pallets leased to customers and returning them to PECO. In the past, PECO paid Northwest for those services pursuant to an asset recovery program (“ARP”) designed to enable PECO to recover its pallets more quickly. Recently, however, PECO advised Northwest that it would no longer pay Northwest under the terms of the ARP, instead offering a much lower rate of compensation going forward. PECO claims that, upon notification of the change, Northwest refused to return the PECO pallets then in its possession in exchange for the new rate, instead demanding payment pursuant to the terms of the ARP. As a result, PECO brought this lawsuit, claiming that Northwest has refused or failed to return certain of its pallets and that many of the pallets Northwest has returned have been physically damaged. PECO's five-count amended complaint asserts common law causes of action for replevin, conversion, detinue, trespass to chattels, and negligence.

         The same day that PECO filed suit, Northwest brought its own action against PECO, claiming that, since receiving notice of the change in payment terms, it has nonetheless continued to collect and return (or attempt to return) PECO's pallets, but PECO has refused to pay reasonable compensation for those services.[1] In addition, according to Northwest, on several occasions PECO has refused to retrieve its pallets from Northwest's facilities altogether. With its complaint, Northwest seeks a declaratory judgment that PECO has abandoned the PECO pallets collected by Northwest and thus has no ownership interest in them. Alternatively, Northwest seeks a declaration that it is entitled to reasonable compensation for the services it provides. Northwest's amended complaint also includes Illinois common law claims for unjust enrichment, promissory estoppel, tortious interference with contract, and tortious interference with business expectancy. Now before the Court are (1) Northwest's motion to dismiss PECO's amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6), 12(b)(7), and 12(f); and (2) PECO's motion to dismiss Northwest's amended complaint pursuant to Rule 12(b)(6).[2]For the reasons stated below, both motions are granted in part and denied in part.


         I. PECO's Allegations

         As set forth in PECO's amended complaint, commercial goods in the United States have traditionally been transported on what are known as white wood pallets.[3] (PECO Am. Compl. ¶ 7, Dkt. No. 39.) Product manufacturers purchase white wood pallets at costs ranging from $5 to $12 per pallet. (Id.) In recent years, however, a market has grown for rented wood pallets, which are leased rather than purchased and are made of a higher-quality wood than white wood pallets. (Id. ¶¶ 7-8.) While ownership of white wood pallets shifts as they are distributed, rented wood pallets remain the property of their owner (in this case, PECO) and are tracked by their owner throughout the distribution process. (Id. ¶ 9.) Manufacturers rent pallets from PECO for a fee; when retailers receive shipments from manufacturers, they unload the goods and return the pallets to PECO. (Id. ¶ 10.) Retailers are not charged for using PECO's pallets, but they must return the pallets or otherwise make them available to PECO. (Id. ¶ 11.) Some retailers return PECO's pallets for free, while others charge PECO a courtesy fee. (Id. ¶ 12.) Upon return, PECO repairs any damage to its pallets and then re-leases them. (Id. ¶ 10.)

         According to PECO, pallet recyclers collect all types of pallets-white wood and rented wood-from retailers' loading docks and then sort the pallets by type. (Id. ¶ 21.) Recyclers re-sell or otherwise recycle the white wood pallets and return the rented wood pallets to their owner. (Id. ¶¶ 21, 24-25.) PECO takes the position that when a retailer receives a shipment of goods on a rented wood pallet, the retailer becomes a bailee of the pallet. (Id. ¶ 26.) PECO further argues that pallet recyclers like Northwest voluntarily receive rented wood pallets for a purpose other than obtaining ownership, thereby forming a constructive bailment. (Id. ¶¶ 28, 30.) According to PECO, as a constructive bailee of its pallets, Northwest must preserve the pallets until they are returned to PECO “not for the sake of any benefit to [Northwest] or upon any expectation of compensation for [its] services, but solely to accommodate [PECO].” (Id. ¶ 28.)

         In its amended complaint, PECO claims that from May to August of 2015, Northwest collected and wrongfully detained approximately 175, 000 PECO pallets, nearly 17, 000 of which were held at Northwest's headquarters in Belvidere, Illinois (Id. ¶ 31.) PECO demanded that Northwest return its pallets for $0.20 per pallet, which PECO asserts is a fair courtesy fee for the cost of sorting, loading, and returning the pallets. (Id. ¶ 35.) Northwest, however, demanded that PECO pay fees ranging from $1.25 to $2.15 per pallet (plus a storage fee) and threatened to dispose of the pallets if PECO refused to pay. (Id. ¶¶ 32, 34.)[4] On August 4, 2015, PECO brought this lawsuit to recover its pallets. (Id. ¶ 36.) The next day, PECO moved for entry of an order of replevin as to the approximately 17, 000 pallets being held at Northwest's Belvidere facility. (Id.) In response, Northwest returned those pallets, and PECO thereafter withdrew its motion. (Id. ¶ 46.)

         After returning the 17, 000 Belvidere pallets, Northwest claimed to have returned all of the remaining 158, 000 PECO pallets that it allegedly “held hostage” beginning in May 2015. (Id. ¶¶ 36, 48.) However, in October 2015, PECO was informed that approximately 7, 800 of its pallets were being held at a Target Corporation (“Target”) facility that is “handled” by Northwest. (Id. ¶ 52.) And at the end of October, PECO's web-based tracking system showed that Northwest still had not returned 31, 009 PECO pallets from its Target facilities alone. (Id. ¶ 55.) PECO claims that Northwest has disposed of, sold, or destroyed a number of the 31, 009 missing pallets. (Id. ¶ 57.) In addition, PECO claims that many of the pallets it has recovered from Northwest were physically damaged while in Northwest's possession. (Id. ¶ 58.) PECO seeks: (1) a declaration that PECO owns its pallets regardless of where they are in its distribution network; (2) a declaration that PECO is not required to pay anything to Northwest for the return of its pallets; (3) a permanent injunction prohibiting Northwest from purchasing, detaining, selling, or disposing of PECO's pallets in the future; (4) damages in the amount of the net rental value of PECO's pallets while wrongfully detained by Northwest and expenses incurred in recovering those pallets; (5) an order directing Northwest to turn over the 31, 009 missing pallets or to pay their replacement value; (6) compensatory damages for the physical damage to PECO's pallets caused by Northwest; and (7) punitive damages for Northwest's allegedly willful and wanton conduct.

         II. Northwest's Allegations

         The allegations in Northwest's amended complaint are unsurprisingly at odds with the facts alleged by PECO. While the parties appear to agree on the basic white wood (sale model) versus rented wood (lease model) structure of the pallet industry, Northwest disagrees with how PECO presents its business model. In particular, Northwest asserts that PECO does not require its lessee-customers to return its pallets but, instead, represents that it will take on the obligation of recovering them. (Northwest Am. Compl. ¶ 8, Dkt. No. 8.) In an effort to recover its pallets- which end up at retailers' distribution centers and ultimately with pallet recyclers-more quickly, PECO offered the ARP to pallet recyclers across the country, including Northwest. (Id. ¶ 9.) Under the ARP, which was rolled out in October 2013, PECO offered to pay pallet recyclers $2.25 per pallet returned to PECO or $1.25 per pallet picked up by PECO. (Id.) Specifically, PECO represented to participating pallet recyclers as follows:

If you receive a large number of PECO pallets and want to return them to our service center in your area, PECO will compensate you at the rate of $2.25 per pallet plus a Fuel Service Charge . . . If you only receive a small quantity of PECO pallets, our dedicated fleet is available to pick up the pallets from your facility. PECO will compensate you at the rate of $1.25 per pallet, loaded onto PECO's truck.

(Northwest Am. Compl. Ex. 1, Dkt. No. 8-1.) Northwest has historically partnered with large national retailers (e.g., Target) to recycle white wood pallets. (Northwest Am. Compl. ¶ 12, Dkt. No. 8.) However, relying on PECO's ARP, Northwest entered into agreements with several retailers to purchase at a fixed cost all pallets-white wood and rented wood-that accumulate at the retailers' facilities. (Id. ¶¶ 12-13.) Northwest then began collecting, sorting, and returning PECO's pallets, which are included in the pallets Northwest purchases in bulk from its retail partners, for the compensation offered in the ARP. (Id. ¶¶ 14-15, 39.) Until recently, PECO paid Northwest accordingly. (Id. ¶ 15.)

         Then, in a letter dated May 12, 2015, PECO informed Northwest that it would no longer pay for Northwest's services at the rate offered under the ARP. (Id. ¶ 16.) Instead, PECO offered to pay $0.20 for each pallet Northwest returned going forward. (Id.) Northwest objected to what it characterizes as an attempt by PECO to unilaterally change the payment terms of the ARP. (Id. ¶ 17.) But PECO insisted that Northwest return its pallets under the revised compensation arrangement or face costly and time-consuming litigation. (Id.) Despite their disagreement, Northwest has continued to collect, sort, and return (or attempt to return) PECO's pallets. (Id. ¶ 18.) PECO, however, in addition to refusing to pay Northwest for those services, has on several occasions refused to retrieve its pallets from Northwest's facilities. (Id.) Northwest alleges that this is an attempt by PECO to force Northwest to accept compensation that is significantly less than the cost and expense incurred in collecting and returning the pallets. (Id. ¶ 21.)

         Northwest further alleges that PECO has (1) accused Northwest's pallet recycling partners of wrongfully withholding PECO's pallets on behalf of Northwest; (2) harassed Northwest's pallet recycling partners and retailer customers by threatening to drag them into litigation if they continue doing business with Northwest; and (3) falsely informed several of Northwest's pallet recycling partners and retailer customers that Northwest is engaged in illegal activity. (Id. ¶¶ 21-23.) According to Northwest, PECO has made these threats and accusations through dozens of phone calls and emails as well as in-person visits. (Id. ¶ 23.) Northwest surmises that PECO's true intent is to usurp Northwest's customer relationships and drive Northwest and other recyclers out of business. (Id. ¶ 25.) In its amended complaint, Northwest seeks (1) a declaration that PECO has abandoned its pallets in the marketplace and therefore has no ownership interest in them or, alternatively, that PECO has unlawfully refused to pay Northwest just and reasonable compensation for its services; and (2) an award of money damages.


         “A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint for failure to state a claim upon which relief may be granted.” Autry v. Nw. Premium Servs., Inc., 144 F.3d 1037, 1039 (7th Cir. 1998). In its exercise of diversity jurisdiction, this Court applies the substantive law of Illinois to determine the elements the parties must plead to establish their claims. See Sabratek Liquidating LLC v. KPMG LLP, No. 01 C 9582, 2002 WL 774185, at *2 (N.D. Ill. Apr. 26, 2002) (citing Charter Oak Fire Ins. Co. v. Hedeen, 280 F.3d 730, 735 (7th Cir. 2002)). To determine the sufficiency of the parties' complaints, however, the Court looks to federal pleading standards. See id.

         Federal Rule of Civil Procedure 8(a) requires a complaint to contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). To survive a Rule 12(b)(6) motion to dismiss, a complaint must “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). While a complaint need not include detailed factual allegations, there “must be enough to raise a right to relief above the speculative level.” Id. at 555. The plaintiff must “‘plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'” McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 885 (7th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Id. (internal quotation marks omitted).

         In addition to its Rule 12(b)(6) challenge, Northwest has moved to dismiss PECO's complaint pursuant to Rules 12(b)(1), 12(b)(7), and 12(f). A Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction may be granted on mootness grounds. See St. John's United Church of Christ v. City of Chi., 502 F.3d 616, 625 (7th Cir. 2007). In other words, “[w]hen the issues presented are no longer live or the parties lack a legally cognizable interest in the outcome, the case is (or the claims are) moot and must be dismissed for lack of jurisdiction.” Id. at 626 (internal quotation marks omitted). Rule 12(b)(7), meanwhile, allows a defendant to seek dismissal of a claim for failure to join a party under Federal Rule of Civil Procedure 19. See Fed. R. Civ. P. 12(b)(7.) Finally, under Rule 12(f), a court may strike any redundant or immaterial matter from the pleadings. See Fed. R. Civ. P. 12(f).

         I. PECO's Claims Against Northwest

         A. Replevin

         Under Illinois law, whenever any goods or chattels are wrongfully detained, an action of replevin may be brought for the recovery of such goods or chattels by the owner or person entitled to their possession. 735 ILCS 5/19-101. The replevin statute provides a specific procedure for resolution of such claims. Once a replevin action has been initiated, the court holds a hearing on the entry of an order for replevin. 735 ILCS 5/19-107. If at that hearing the plaintiff establishes a prima facie case to a superior right to possession of the disputed property and also demonstrates the probability that he or she will ultimately prevail on the underlying claim to possession, the court enters an order for replevin. Id. Such an order requires that the disputed property be taken from the possession of the defendant and delivered to the plaintiff. 735 ILCS 5/19-109. If judgment is ultimately entered in favor of the plaintiff, he or she “shall recover damages for the detention of the property while the same was wrongfully detained by the defendant.” 735 ILCS 5/19-125. If, however, “the right of property is adjudged against the plaintiff, judgment shall be entered for a return of the property [to the defendant] . . . and damages for the use thereof from the time it was taken until a return thereof is made[.]” 735 ILCS 5/19-123.

         PECO's replevin claim relates specifically to the nearly 17, 000 pallets allegedly detained by Northwest at its Belvidere facility from May to September of 2015. PECO asserts that it is entitled to a judgment establishing that those pallets were wrongfully detained, as well as damages in the amount of the pallets' reasonable net rental value during the period of detention. Northwest, on the other hand, argues that because the Belvidere pallets were returned to PECO, the issue of recovery is moot, which deprives the Court of subject-matter jurisdiction to issue an order for replevin. Northwest further asserts that under the Illinois replevin statute, a judgment of replevin-allowing PECO to recover damages-cannot be entered without an order for replevin.

         It is undisputed that Northwest returned the 17, 000 Belvidere pallets to PECO. It is for that reason that PECO withdrew its motion for entry of an order for replevin to recover those pallets. Therefore, the remaining issue is whether a replevin claim for damages is proper when there has been no order for replevin because the disputed property was voluntarily returned to the plaintiff. The Illinois replevin statute simply states that, “[i]f judgment is entered in favor of the plaintiff in replevin, the plaintiff shall recover damages for the detention of the property while the same was wrongfully detained by the defendant.” 735 ILCS 5/19-125. The statute does not speak directly to the question of whether such a judgment may be entered where the court has not entered an order for replevin, and the cases cited by the parties are not directly on point. However, at least one court has dismissed as moot a replevin claim (along with a detinue claim) when it was undisputed that the plaintiff's property had been returned by the defendants. See Balboa Capital Corp. v. Graphic Pallet & Transp., Inc., No. 13 C 6503, 2015 WL 514987, at *4 (N.D. Ill. Feb. 6, 2015) (granting in part and striking as moot in part plaintiff's motion for summary judgment).

         The purpose of a replevin claim is to recover one's property. The Court thus finds that because PECO has already recovered the 17, 000 pallets at issue, its replevin claim is moot. Moreover, courts have advised that “[a]n action for replevin is ‘a strict statutory proceeding, and the statute must be followed precisely.'” WG Techs., Inc. v. Thompson, No. 1:13-cv-304, 2013 WL 1943310, at *2 (N.D. Ill. May 8, 2013) (quoting Carroll v. Curry, 912 N.E.2d 272, 275 (Ill.App.Ct. 2009)). Because PECO withdrew its motion for entry of an order for replevin, it cannot be said that the statute has been followed precisely in this case. Finally, as discussed further below, PECO can seek damages for Northwest's alleged detention of the 17, 000 Belvidere pallets through its trespass to chattels and negligence claims. PECO's replevin claim is therefore dismissed.

         B. ...

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