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Chicago Regional Council of Carpenters v. Willman Construction, Inc.

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

March 22, 2017

WILLMAN CONSTRUCTION, INC., et al., Defendants.


          Daniel G. Martin United States Magistrate Judge.

         This matter is before the Court on Defendants' motion to dismiss for lack of jurisdiction and for improper venue or, in the alternative, to transfer venue to the United States District Court for the Southern District of Iowa [23]. For the reasons stated below, Defendants' motion to dismiss is denied as to Tri-State and denied without prejudice to renewal upon the lifting of the stay as to Willman.


         Defendants Willman Construction, Inc. (“Willman”) and Tri-State Construction Services, Inc. (“Tri-State”) are Iowa construction firms. On March 16, 1993, Willman signed a Memorandum of Agreement with Plaintiffs Chicago Regional Council of Carpenters and Carpenters Union Local 4 (collectively referred to as the “Union”) through its predecessor Northwest Illinois & Eastern Iowa District Council of Carpenters, agreeing to be bound by the “Area Agreements negotiated between the Northwest Illinois & Eastern Iowa District Council of Carpenters and various Employer Associations.” (Doc. 17-1). The Union negotiated an Area Agreement with the Employer Associations on May 18, 2013 (the “CBA”). (Docs. 17-2, 17-3). The CBA is effective from May 18, 2013 through April 30, 2016. (Docs. 17-2 at 2). Among other things, Willman agreed to pay wages and fringe benefits payments as set forth in the CBA. Id. at 9. Article XVI of the CBA specified that any disputes other than jurisdictional claims regarding the meaning, interpretation, or violation of the agreement would be settled by arbitration. Id. at 17-18.

         By letter dated July 22, 2015, the Union submitted a grievance to Willman alleging a violation of the CBA by failing to pay wages, deductions and/or fringe benefits and also for subcontracting. (Docs. 17-4 at 2). On August 5, 2015, the Union informed Willman of its intent to arbitrate the grievance and to select a member of the arbitration panel pursuant to Article XVI of the CBA. (Doc. 17-6 at 2). The Union asked Willman to select its member of the arbitration panel. Id. Willman has refused to select its arbitrator and thus, prevented the Union from submitting the grievance to arbitration. (Doc. 17-7 at 2).

         The Union then brought this action against Willman to compel arbitration under the Labor Management Relations Act (“LMRA”). See 29 U.SC. 185. The parties consented to proceed before a United States Magistrate Judge, and the case was reassigned to this Court on December 16, 2015. (Doc. 14). On February 3, 2016, before Willman answered or otherwise plead to the complaint, the Union filed an amended complaint to compel arbitration against Willman and Tri-State. (Doc. 17). Tri-State is not a signatory to the Memorandum of Agreement or the CBA. (Doc. 17 at 10, && 32-33). There are five doctrines through which a non-signatory can be bound by arbitration agreements entered into by others: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference. Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682, 687 (7th Cir. 2005). The Union alleges that assumption, agency, and veil piercing theories are applicable in this case. (Doc. 17 at 10-15).

         Defendants filed a motion to dismiss for lack of jurisdiction and improper venue or, in the alternative, to transfer venue to the United States District Court for the Southern District of Iowa. (Doc. 23). This action was then stayed against Willman when it filed a Chapter 11 bankruptcy action in the Southern District of Iowa. (Docs. 27, 30). A briefing schedule was set on the motion to dismiss or to transfer venue, and counsel were directed to also address the issue of whether the bankruptcy stay as to Willman should be extended to Tri-State. (Docs. 34, 45).


         A. Bankruptcy Stay

         The Court begins with the parties' dispute as to whether the bankruptcy stay should be extended to non-debtor Defendant Tri-State. The Union argues that the stay should not be extended to Tri-State and the case should proceed against Tri-State. Tri-State argues that the action should be stayed as to it because “unusual circumstances” exist that justify the extension of the automatic stay to a non-debtor defendant.

         Section 362 of the Bankruptcy Code forbids “commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title.” 11 U.S.C. § 362(a)(1). “Although this automatic stay provision prevents on-going litigation against a debtor, the general rule in this circuit is that plaintiffs are free to pursue the debtor's codefendants regardless of the automatic stay.” Celtic Bank Corp. v. Executive Title, Inc., 2015 WL 5951844, at * (N.D. Ill. Oc. 13, 2015). (internal quotation marks and citations omitted); Pitts v. Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir. 1983) (“The clear language of Section 362(a)(1) … extends the automatic stay provision only to the debtor filing bankruptcy proceedings and not to non-bankrupt co-defendants.”). The automatic stay provision was “intended to protect the assets of the debtor for the benefit of creditors, ” not to “afford collateral benefits to non-debtor parties involved in the litigation with the debtor as party defendants or as co-defendants.” Lee v. RCN Corp., 2004 WL 2108577, at *1 (N.D. Ill. Sept. 20, 2004).

         There are two exceptions in unusual circumstances where a court may stay proceedings against non-bankrupt co-defendants. Lee, 2004 WL 2108577, at *1. First, a suit may not proceed against non-debtor co-defendants where “there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.” In re Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir. 1991). “An Illustration of such a situation would be a suit against a third-party who is entitled to absolute indemnity by the debtor on account of any judgment that might result against them in the case.” A. H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986). The second exception operates when “the pending litigation, though not brought against the debtor, would cause the debtor, the bankruptcy estate, or the reorganization plan ‘irreparable harm.'” In re Fernstrom Storage & Van Co., 938 F.2d at 736.

         Tri-State argues that both exceptions apply here, but the Court disagrees. Tri-State asserts that the first exception applies because Willman and Tri-State are small family-owned and staffed businesses that work together to accomplish mutual goals. Tri-State claims that any judgment entered against Tri-State would directly and immediately affect Willman and its ability to reorganize. Tri-State points out that Willman is leasing equipment from Tri-State and if the equipment were levied upon to enforce a judgment, Willman's ability to operate and reorganize would be materially impaired. Finally, Tri-State argues that all resources ultimately emanate from Mr. and Mrs. Willman and any action affecting Tri-State would necessarily affect Willman.

         The first exception applies “where there is sufficient identity between the debtor and nondebtor such that the litigation against the nondebtor threatens property of the estate.” In re Kmart Corp., 285 B.R. 679, 688 (N.D. Ill. 2002). Although the amended complaint alleges that Willman and Tri-State are not separate corporate entities and are operated as one in the same, a judgment in favor of the Union in this action to compel arbitration will not automatically threaten the property of the estate. In this case, the Union is not seeking a money judgment for the unpaid wages and benefits and the Union does not seek to recover property from Tri-State that may be property of the bankruptcy estate of Willman. Rather, the amended complaint seeks to compel Tri-State to proceed to arbitration on the Union's claim for unpaid wages and fringe benefits. The Court will not be ruling on the merits of the underlying claim for unpaid wages and benefits, and Tri-State's equipment will not be levied upon by a judgment in this action. If the Union is successful in piercing the corporate veil of Willman, then Tri-State will be bound by Willman's arbitration agreement. A successful veil piercing claim in this case would have no impact on the bankruptcy estate, and judgment against Tri-State would have no impact on Willman's estate or resources. There is also no claim that Tri-State is entitled to indemnification by Willman that would create an identity of interests. Because the Union's veil-piercing claim against Tri-State will not involve or threaten property of the estate, the first exception does not apply and justify extending the automatic stay to Tri-State.

         As to the second exception, Tri-State relies on cases which have recognized that a stay is appropriate where the continuation of proceedings against a non-debtor could cause irreparable harm to the debtor by diverting resources needed for its reorganization. In Re KMart Corp., 285 B.R. at 689 (stating “[a]nother exception is illustrated by cases where the debtor's key personnel are diverted from the reorganization by the demands of discovery related to the third-party suit.”); In re Continental Airlines, 177 B.R 475, 481 (D. Del. 1993). Tri-State makes the conclusory statement that the “demands of discovery in this litigation will no doubt be a tremendous drain on the time of both Mr. and Mrs. Willman in their corporate roles for both entities.” (Doc. 52 at 4). Tri-State contends that “because of the close relationship of the two corporate defendants, irreparable harm could result to Willman when its resources could, and almost certainly would, be consumed in defense of Tri-State.” Id. at 5. The Court understands Tri-State's personnel concerns, but Tri-State has provided no evidence to substantiate that it is unable to access resources necessary to defend this litigation. Tri-State has presented no evidence supporting its contention that ...

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