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Karum Holdings LLC v. Lowe's Companies, Inc.

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

November 21, 2017

KARUM HOLDINGS LLC, KARUM GROUP LLC, and KARUM CARD SERVICES S.A. DE C.V., SOFOM, E.N.R., Plaintiffs,
v.
LOWE'S COMPANIES, INC., and LOWE'S COMPANIES MEXICO, S. DE R.L. DE C.V., Defendants.

          MEMORANDUM OPINION AND ORDER

          JOHN Z. LEE, UNITED STATES DISTRICT JUDGE.

         Lowe's Companies, Inc. (“Lowe's Inc.”) is a corporation that operates home improvement stores in North America. Around 2007, Lowe's Inc. decided to create a program to provide private label credit cards to customers of Lowe's Mexico. To that end, Lowe's Companies Mexico, S. de R.L. de C.V. (“Lowe's Mexico”) entered into two agreements with Karum Holdings LLC (“Karum Holdings”), Karum Group LLC (“Karum Group”), and Karum Card Services S.A. de C.V., SOFOM, E.N.R. (“KCS”) to implement the private label credit card program. In 2015, Karum Holdings, Karum Group, and KCS (collectively “Karum”) commenced this lawsuit against Lowe's Inc. and Lowe's Mexico (collectively “Lowe's”) for purportedly breaching the parties' agreements.

         In anticipation of trial scheduled for December 11, 2017, Karum filed a motion in limine [157] to exclude Lowe's affirmative defense of setoff that Lowe's had asserted with its answer and to preclude the introduction of evidence supporting that defense at trial. Among other things, Lowe's contends that Karum has defaulted recently on several promissory notes related to the agreements at issue here and that Lowe's is entitled to receive damages as a result. And so, in October 2017, Lowe's filed a motion [207] requesting leave under Fed.R.Civ.P. 8(c)(2) to convert to a counterclaim the portion of its setoff affirmative defense related to these alleged defaults. In the alternative, Lowe's seeks leave to bring this claim as a new counterclaim under Rule 13(e).

         For the reasons stated below, the Court finds that Lowe's claims and purported affirmative defense of setoff are not appropriately brought in this action, and therefore Karum's motion [157] is granted, while Lowe's motion [207] is denied.

         Background

         In February 2010, Lowe's Mexico entered into a Private Label Credit Card Program Agreement (“Program Agreement”) with Karum Holdings and KCS for the provision of private label credit cards for Lowe's Mexico's customers. Am. Compl. ¶ 9, ECF No. 50; id., Ex. 1, Program Agreement at 1. In April 2014, Lowe's Mexico then entered into a Profit Sharing and Funding Agreement (“Funding Agreement”) with Karum Group, Karum Holdings, and KCS, which governed funding and profit percentages with respect to KCS's operations. See Id. ¶ 11; id., Ex. 2, Funding Agreement at 2. Karum asserts that Lowe's Inc. acted as the alter ego of Lowe's Mexico for purposes of both the Program Agreement and the Funding Agreement (together, “the Agreements”). Am. Compl. ¶ 13.

         In August 2014, Lowe's Inc.'s Senior Vice-President of International Operations, Doug Robinson, spoke on the phone with Karum's Chairman and CEO, Peter Johnson. Defs.' LR 56.1(a)(3) Stmt. ¶ 13, ECF No. 87. The parties dispute what Robinson said to Johnson during this phone call. According to Lowe's, Robinson merely told Johnson that Defendants “desire[d] to end [their] relationship” with Plaintiffs. Id. But according to Karum, Robinson told Johnson more definitively that Lowe's “had determined to terminate the Agreements.” Pls.' LR 56.1(b)(3) Stmt. ¶ 13, ECF No. 100.

         Karum filed this lawsuit in January 2015, alleging breach of the Agreements. In particular, Karum claims that Lowe's breached the Agreements by (1) terminating the Agreements, (2) awarding contracts to third parties for services related to the Agreements, (3) refusing to work cooperatively with Plaintiffs on day-to-day business issues, and (4) refusing to cure deficiencies in the performance of their duties under the Agreements. Am. Compl. ¶¶ 32-36.

         Lowe's filed its answer to Lowe's amended complaint in August 2015. As relevant here, Lowe's asserted in its answer an affirmative defense that Lowe's denominated “Setoff.” Am. Answer at 19, ECF No. 54.

Lowe's is entitled to a setoff against any relief sought by Karum based upon monies Lowe's provided to Karum and/or monies that Karum owes Lowe's. Lowe's provided the funding to KCS to provide the various credit services under the Program Agreement and Funding Agreement. Lowe's provided that funding in the form of debt, including promissory notes executed by KCS and Karum Group. There remains an outstanding balance owed to Lowe's (the exact amount to be proven at trial), and these payments and loans made to Karum should be set off from any damages that Karum might obtain.

Id.

         During discovery, Karum served an interrogatory requesting, inter alia, a description of any damages Lowe's sought from Karum as part of its setoff affirmative defense. In June 2016, Lowe's disclosed that it would seek the following “monies loaned or otherwise paid to Karum during the course of the parties' relationship.” Defs.' Objections & Supplemental Resp. Pls.' Interrogatory Nos. 2 & 4 (“Second Response Interrogatory No. 2”) at 9, ECF No. 158-5; Defs.' Objections & Third Supplemental Resp. Pls.' Interrogatory No. 2 (“Third Response Interrogatory No. 2”) at 9, ECF No. 158-6.

• MXN[1] $96, 492, 760.97, plus interest, in debt funding and promissory notes provided to Karum by Lowe's under the Funding Agreements;
• USD $280, 000, plus interest, in two promissory notes provided to Karum by Lowe's in 2010 and 2013, collectively;
• MXN $8, 982, 048, plus interest, in RAY[2] true-up monies provided to Karum by Lowe's after May 28, 2015, which cannot be attributed to the use of Lowe's requested promotional programs pursuant to Section 5.2 of the Funding Agreement; and
• MXN $17, 970, 921, plus interest, in RAY true-up monies provided to Karum by Lowe's for alleged bad debt reserves, which cannot be attributed to the use of Lowe's requested promotional programs ...

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