H.D. Smith Wholesale Drug Co. v. Crawford
Filing
71
OPINION (See Written Opinion): The Court does NOT dismiss Crawford's breach of contract counterclaim for failure to state a claim. However, the Court RECHARACTERIZES as a counterclaim Crawford's affirmative defense that challenges the amou nt owed to H.D. Smith and will treat the claim as if Crawford raised it as a counterclaim from the beginning of this case. This renders it redundant for Crawford to again challenge the amount he owes H.D. Smith in his counterclaim for breach of cont ract. Therefore, the Court STRIKES Crawford's counterclaim for breach of contract. Crawford need not file another Answer that includes a counterclaim that challenges the amount Crawford owes to H.D. Smith. H.D. Smith shall file all dispositiv e motions that address the newly characterized counterclaim by March 29, 2013. Crawford has until April 8, 2013 to file a response. Further, the Court GRANTS H.D. Smith's Motion to Dismiss Crawford's claim for fraud in Count II of the Counterclaim. Crawford has not sought and therefore will not receive leave to replead his fraud claim. Because Crawford's breach of contract and fraud claims have been disposed of on two separate grounds, the Court need not address H.D. Smith's argument to dismiss Crawford's Counterclaim with prejudice based on Crawford's failure to comply with Federal Rule of Civil Procedure 13(a)(1). IT IS SO ORDERED. Entered by Judge Sue E. Myerscough on 03/19/2013. (VM, ilcd)
E-FILED
Tuesday, 19 March, 2013 09:05:35 AM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
H.D. SMITH WHOLESALE DRUG )
CO., a Delaware Corporation,
Plaintiff,
v.
DENNIS CRAWFORD d/b/a
CRAWFORD PHARMACIES,
Defendant.
)
)
)
)
)
)
)
)
)
)
11-3448
OPINION
SUE E. MYERSCOUGH, U.S. District Judge:
This matter comes before the Court on Plaintiff/ Counterdefendant
H.D. Smith Wholesale Drug Co.’s (“H.D. Smith”) Motion to Dismiss
counterclaims for breach of contract (Count I) and fraud (Count II) alleged
by Defendant/Counterclaimant Dennis Crawford, doing business as
Crawford Pharmacies (“Crawford”) (d/e 33). Crawford’s breach of contract
claim is not dismissed for failure to state a claim. However, the Court
RECHARACTERIZES as a counterclaim Crawford’s affirmative defense
that challenges the amount owed to H.D. Smith and will treat the claim as if
Crawford raised it as a counterclaim in his Original Answer. This renders it
redundant for Crawford to again challenge the amount he owes H.D. Smith
in his counterclaim for breach of contract. Consequently, the Court
STRIKES Crawford’s counterclaim for breach of contract.
Further, the Court GRANTS H.D. Smith’s Motion to Dismiss
Crawford’s claim for fraud in Count II of the Counterclaim because
Crawford fails to state the basic elements of a fraud claim under Illinois
law. Crawford has not sought leave to replead his claim for fraud,
therefore, he is not given leave to do so. See d/e 59. Because Crawford’s
breach of contract and fraud claims have been disposed of on these
separate grounds, the Court need not address H.D. Smith’s argument to
dismiss Crawford’s Counterclaim with prejudice based on Crawford’s
failure to comply with Federal Rule of Civil Procedure 13.
I.
FACTUAL BACKGROUND
H.D. Smith is a nationwide wholesale pharmaceutical company
headquartered in Springfield, Illinois. See d/e 1, Ex. 2 at ¶ 1. Crawford
operates pharmacies in Mathis, Bandera, Lytle, Orange Grove, and Poteet,
Texas. See d/e 1, Ex. 2 at ¶ 1.
On or around August 1, 2011, Crawford duly executed and entered
into a Primary Vendor Agreement with H.D. Smith. See d/e 3 at ¶ 20. On
or about August 17, 2011 Crawford duly executed and entered into
Promissory Note Agreements with H.D. Smith in original principal
Page 2 of 17
amounts of $2,514,739.95 (“First Promissory Note”) and $474,972.04
(“Second Promissory Note”). See d/e 1, Ex. 2 at ¶¶ 3, 5, 6.
II.
PROCEDURAL BACKGROUND
On November 23, 2011, H.D. Smith filed a five-count
Complaint in Sangamon County Circuit Court, Illinois. See d/e 1, Ex. 2.
Counts I through III allege that Crawford breached the terms of the First
Promissory Note (Count I), Second Promissory Note (Count II), and
Primary Vendor Agreement (Count III). Count IV seeks a Satisfaction of
Debt on Crawford’s unpaid account. Count V seeks relief in quantum
meruit. See d/e 1, Ex. 2 at 1-10. H.D. Smith seeks damages in excess of
$3,000,000. See d/e 1, Ex. 2 at 10.
On December 24, 2011, Crawford filed a Notice of Removal, a general
denial to H.D. Smith’s Complaint, and four affirmative defenses. See d/e 1,
Ex. 3 at 2-4. The affirmative defenses included duress, unclean hands,
fraud, and setoff. Crawford’s affirmative defense for setoff states:
Defendant is not liable to Plaintiff because all proper
setoffs have not been taken by Plaintiff. Defendant
acknowledges that he owes Plaintiff a sum of money, but
denies that the amount claimed by Plaintiff contains all proper
setoffs, discounts, and other deductions that Defendant is
entitled to.
See d/e 1, Ex. 3 at 3.
Page 3 of 17
Crawford filed his Original Answer on February 3, 2012 (d/e 3).
Rather than asserting a general denial, Crawford addressed each of the
allegations in H.D. Smith’s Complaint. Crawford also reasserted verbatim
his four affirmative defenses for duress, unclean hands, fraud, and setoff.
On May 11, 2012, H.D. Smith filed a Motion to Strike Defendant’s
Affirmative Defenses. See d/e 7. U.S. Magistrate Judge Byron G. Cudmore
struck Crawford’s duress and fraud defenses from Crawford’s Original
Answer, but allowed Crawford to proceed with his unclean hands and setoff
defenses. See d/e 15. With regard to the setoff defense, Judge Cudmore
stated, “H.D. Smith is technically correct that setoff may not be an
affirmative defense. . . . [However,] Crawford’s setoff defense furthers the
case by putting both H.D. Smith and the Court on notice that a setoff will be
an issue in this case.” See d/e 15 at 6.
On August 10, 2012, H.D. Smith sought leave to file an Amended
Complaint. See d/e 19. Judge Cudmore granted this Motion, and H.D.
Smith filed an Amended Complaint on August 13, 2012. See d/e 20.
On August 16, 2012 Crawford, for the first time, filed a Counterclaim
alleging claims against H.D. Smith for breach of contract under the Primary
Vendor Agreement (Count I) and fraud under the Promissory Notes (Count
Page 4 of 17
II). See d/e 21. Count I for breach of contract under the Primary Vendor
Agreement states:
H.D. Smith has breached the Primary Vendor
Agreement, among other things: (a) failing to provide
discounts to Crawford as agreed. As a consequence of H.D.
Smith’s default, Crawford was unable to pay H.D. Smith as
agreed and was ultimately sued by H.D. Smith in this Court.
Crawford has suffered damages as a direct and proximate
result of H.D. Smith’s breach of contract, which has now
subjected Crawford to liability in excess of $3,037,008.91.
See d/e 21 at 2.
Count II for fraud under the Promissory Notes states:
H.D. Smith has committed fraud by, among other things:
(a) inducing Crawford to sign the First and Second Promissory
Notes under duress, knowing that Crawford was at a
disadvantage as to the facts surrounding the terms of the notes
and was not represented by counsel; specifically that Crawford
was not given all of discounts under the terms of the
agreements entered into previously by the parties; (b) including
provisions in the First and Second Promissory Notes that H.D.
Smith knew Crawford would breach; specifically, H.D. Smith
included a bulk transfer provision knowing that Crawford was
selling the company and would have to perform a bulk transfer
of inventory within days of executing the promissory notes. As
a consequence of H.D. Smith’s fraud, Crawford was unable to
pay H.D. Smith as agreed and was ultimately sued by H.D.
Smith in this Court. Crawford has suffered damages as a direct
and proximate result of H.D. Smith’s breach of contract, which
has now subjected Crawford to liability in excess of
$3,037,008.91.
See d/e 21 at 2-3.
Page 5 of 17
On August 24, 2012 Crawford filed an Amended Answer. See d/e 22.
This restated verbatim Crawford’s four original affirmative defenses for
duress, unclean hands, fraud, and setoff. Compare d/e 22 at 13 with d/e 3
at 10-11.
On September 6, 2012, H.D. Smith filed a Motion to Strike Crawford’s
duress and fraud affirmative defenses from Crawford’s Amended Answer.
See d/e 30. On that same day, H.D. Smith also filed the instant Motion to
Dismiss Crawford’s claims against H.D. Smith for breach of contract and
fraud. See d/e 33. H.D. Smith’s Motion seeks dismissal based on
Crawford’s failure to comply with Federal Rule of Civil Procedure 13 and
Crawford’s failure to state claims for breach of contract and fraud. See d/e
33.
On November 5, 2012, Crawford filed his Response to H.D. Smith’s
Motion to Dismiss Crawford’s Counterclaim. See d/e 59. Crawford,
however, did not address H.D. Smith’s Motion to Strike Defendant’s First
and Third Affirmative Defenses. See d/e 59. Therefore, the Court granted
H.D. Smith’s Motion to Strike Crawford’s duress and fraud defenses from
the Amended Answer. See Text Order of January 31, 2013.
H.D. Smith’s Motion to Dismiss Crawford’s Counterclaim is now
before this Court for decision.
Page 6 of 17
III. JURISDICTION AND VENUE
H.D. Smith is a Delaware Corporation with its principal place
of business in Springfield, Illinois. Dennis Crawford, a sole proprietor
doing business as Crawford Pharmacies, operates in Texas. Based on these
facts, the parties are considered citizens of different states for jurisdictional
purposes, and the amount in controversy in this matter exceeds
$75,000.00. Therefore, the Court has subject matter jurisdiction pursuant
to the Court’s diversity jurisdiction. See 28 U.S.C. § 1332.
Moreover, the parties agreed in the Promissory Notes and Primary
Vendor Agreement that Illinois law would apply and that this Court would
hear disputes arising under the Agreements. See d/e 20 at ¶¶ 19, 22, 29;
see also d/e 22 at ¶¶ 19, 22, 29. Therefore, venue is proper in this Court.
See e.g., Oakton Distributors, Inc. v. U-Line Corp, 2006 WL 2714695, at *4
(N.D. Ill. 2006) (applying choice of law and venue provisions in valid
contract).
IV.
LEGAL STANDARD
Under Rule 12(b)(6), dismissal is proper where a complaint or
counterclaim fails to state a claim upon which relief can be granted.
Fed.R.Civ.P. 12(b)(6). To state a claim upon which relief can be granted, a
complaint or counterclaim must provide a “short and plain statement of the
Page 7 of 17
claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2).
That statement must be sufficient to provide the opposing party with “fair
notice” of the claim and its basis. Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555 (2007); Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir.
2008). This means that (1) “the complaint [or counterclaim] must describe
the claim in sufficient detail to give the [opposing party] fair notice of what
the . . . claim is and the grounds upon which it rests” and (2) its allegations
must plausibly suggest that the claimant has a right to relief, raising that
possibility above a “speculative level.” EEOC v. Concentra Health Services,
Inc., 496 F.3d 773, 776 (7th Cir. 2007). While detailed factual allegations
are not needed, a “formulaic recitation of a cause of action's elements will
not do.” Twombly, 550 U.S. at 555. Conclusory allegations are “not
entitled to be assumed true.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct.
1937, 1950 (2009) (citing Twombly, 550 U.S. at 544-55). “In ruling on Rule
12(b)(6) motions, the court must treat all well-pleaded allegations as true
and draw all inferences in favor of the non-moving party.” In re
marchFIRST Inc., 589 F.3d 901, 904 (7th Cir. 2009) (citing Tamayo, 526
F.3d at 1081).
V.
ANALYSIS
Page 8 of 17
In the instant Motion, H.D. Smith contends that Crawford’s
Counterclaim fails to state claims under Illinois law for breach of contract
in Count I and fraud in Count II. H.D. Smith also argues for dismissal of
the Counterclaim based on Crawford’s alleged failure to comply with
Federal Rule of Civil Procedure 13(a)(1). Rule 13(a)(1) requires a
counterclaimant to allege all claims arising out of the transactions that form
the subject matter of a complaint in the answer to that complaint. See
Fed.R.Civ.P. 13(a)(1).
A.
Crawford Puts H.D. Smith on Notice in His Affirmative
Defense for Setoff of Crawford’s Intent to Litigate the
Amount Crawford Actually Owes H.D. Smith
H.D. Smith argues first that Crawford fails to state a claim under
Illinois law for breach of contract in Count I of the Counterclaim. See d/e
34 at 6-7. H.D. Smith also notes that Crawford’s breach of contract claim
disputes how much Crawford owes H.D. Smith. This, H.D. Smith correctly
asserts, is the same issue raised by Crawford’s affirmative defense for setoff.
See d/e 34 at 5. Because Crawford’s setoff defense should have been
alleged as a counterclaim in Crawford’s Answer to the Complaint, it will be
recharacterized as such. This renders it redundant for Crawford to raise the
same issue in his breach of contract counterclaim.
Page 9 of 17
Crawford admits in his breach of contract claim that he “was unable
to pay H.D. Smith as agreed.” See d/e 21 at 2. Crawford argues, however,
that he did not receive discounts he was entitled to. See d/e 21 at 2. It
appears, then, as if Crawford’s breach of contract claim challenges the
amount he owes H.D. Smith.
Crawford’s setoff defense also challenges the amount Crawford owes
H.D. Smith. Specifically, Crawford stated as a defense in his Original
Answer that he “acknowledges [owing H.D. Smith] a sum of money, but
denies that the amount claimed by [H.D. Smith] contains all proper setoffs,
discounts, and other deductions that [Crawford] is entitled to.” See d/e 3 at
10-11; see also d/e 22 at 13.
Before the Federal Rules of Civil Procedure existed, the common law
equitable doctrines of “setoff” and “recoupment” provided the methods by
which a defendant could seek to reduce its liability by pleading that the
plaintiff owed it money. See Coplay Cement Co., Inc. v. Willis & Paul
Group, 983 F.2d 1435, 1440 (7th Cir. 1993).
In Coplay, the Seventh Circuit held that a claim for setoff or
recoupment is not an affirmative defense because it does not destroy the
plaintiff’s right of action. See id. at 1440. In fact, a claim for setoff or
recoupment is not technically a “defense” at all, but must be plead as a
Page 10 of 17
counterclaim pursuant to Rule 13. See id.; see also Ace Hardware Corp. v.
Marn, Inc., 2008 WL 4286975, at *8 (N.D. Ill. 2008).
Based on the reasoning in Coplay, Crawford’s claim that he owes less
than H.D. Smith alleges must be brought as a counterclaim; not as an
affirmative defense. See Coplay, 983 F.2d at 1440; see also Ace Hardware
Corp., 2008 WL 4286975, at *8. However, under Federal Rule of Civil
Procedure 8(c) “[i]f a party mistakenly designates . . . a counterclaim as a
defense, the court must, if justice requires, treat the pleading as though it
were correctly designated . . . .” Reiter v. Cooper, 507 U.S. 258, 263 (1993)
(quoting Fed.R.Civ.P. 8(c)).
H.D. Smith acknowledges that “[t]he alleged failure of Plaintiff to
apply discounts [is] a question of fact that is already at issue in this case by
virtue of Defendant’s” affirmative defense for setoff. See d/e 34 at 5. Judge
Cudmore also stated when he declined to strike Crawford’s setoff defense
that while setoff is not properly pleaded as an affirmative defense,
“Crawford’s setoff defense furthers the case by putting [the parties] on
notice that setoff will be an issue . . . .” See d/e 15 at 6.
Clearly, Crawford has disputed the amount he owes H.D. Smith since
the beginning of this case. Therefore, justice requires recharacterizing
Crawford’s setoff defense as a counterclaim and treating the defense as if
Page 11 of 17
Crawford alleged it as a counterclaim at the outset of this case. See
Fed.R.Civ.P. 8(c).
Further, recharacterizing the setoff defense renders it redundant for
Crawford to raise the same issue in his breach of contract counterclaim.
Redundant material may be struck by a court. Fed.R.Civ.P. 12(f); Delta
Consulting Group, Inc. v. R. Randle Const., Inc., 554 F.3d 1133, 1141 (7th
Cir. 2009). Pursuant to this authority, the Court strikes Crawford’s breach
of contract claim.
B.
Crawford Fails to Allege the Elements Necessary to State a
Claim for Fraud Regarding the Promissory Notes in Count
II of the Counterclaim
H.D. Smith also argues that Crawford’s claim for fraud
lacks the basic elements required to state such a claim under Illinois law.
See d/e 34 at 7-10.
In Illinois, the elements required to state a claim for fraud include a
false statement of material fact; known or believed to be false by the person
making it; an intent to induce the other party to act; action by the other
party in reliance on the truth of the statement; and damage to the other
party resulting from such reliance. Hoseman v. Weinschneider, 322 F.3d
468, 476 (7th Cir. 2003) (citing Cotter v. Parrish, 166 Ill.App.3d 836, 117
Ill.Dec. 821, 520 N.E.2d 1172, 1175 (1988)). Claims for fraud must be plead
Page 12 of 17
with particularity. See Fed.R.Civ.P. 9(a). The claimant must state the who,
what, when, where, and how of the circumstances of the fraud. Tillman v.
U.S. Energy Sav. Corp., 2008 WL 2754813, at *3 (N.D. Ill. 2008).
Crawford appears to allege that he was induced, on or around August
17, 2011, by H.D. Smith to sign the Promissory Notes that require him to
pay more to H.D. Smith than Crawford actually owes. See d/e 21 at 1.
Crawford also alleges that H.D. Smith induced him to sign the Promissory
Notes that included a prohibition on bulk transfers provision even though
H.D. Smith knew Crawford intended to sell his business and would have to
perform a bulk transfer of inventory. See d/e 21 at 1-3.
Crawford’s allegations, however, do not include who made the alleged
fraudulent misstatements that induced him to sign the Promissory Notes,
what those alleged comments consisted of, or where the alleged comments
were made.
Furthermore, Crawford does not state that H.D. Smith’s fraudulent
conduct caused Crawford the damages he alleges in his Counterclaim.
Instead, Crawford states at the end of his fraud claim that “H.D. Smith’s
breach of contract . . . has now subjected Crawford to liability . . . .” See d/e
21 at ¶ 3. Because Crawford fails to state the basic elements of a fraud
Page 13 of 17
claim, his claim is dismissed. Further, Crawford has not sought leave to
replead. See d/e 59. Therefore, he will not be granted the right to do so.
Finally, Crawford’s breach of contract and fraud claims have been
disposed of on two separate grounds. Consequently, the Court need not
address H.D. Smith’s argument to dismiss Crawford’s Counterclaim with
prejudice based on Crawford’s failure to comply with Federal Rule of Civil
Procedure 13(a)(1).
VI.
CONCLUSION
The Court does NOT dismiss Crawford’s breach of contract
counterclaim for failure to state a claim. However, the Court
RECHARACTERIZES as a counterclaim Crawford’s affirmative defense
that challenges the amount owed to H.D. Smith and will treat the claim as if
Crawford raised it as a counterclaim from the beginning of this case. This
renders it redundant for Crawford to again challenge the amount he owes
H.D. Smith in his counterclaim for breach of contract. Therefore, the Court
STRIKES Crawford’s counterclaim for breach of contract. Crawford need
not file another Answer that includes a counterclaim that challenges the
amount Crawford owes to H.D. Smith. H.D. Smith shall file all dispositive
motions that address the newly characterized counterclaim by March 29,
2013. Crawford has until April 8, 2013 to file a response.
Page 14 of 17
Further, the Court GRANTS H.D. Smith’s Motion to Dismiss
Crawford’s claim for fraud in Count II of the Counterclaim. Crawford has
not sought and therefore will not receive leave to replead his fraud claim.
Because Crawford’s breach of contract and fraud claims have been disposed
of on two separate grounds, the Court need not address H.D. Smith’s
argument to dismiss Crawford’s Counterclaim with prejudice based on
Crawford’s failure to comply with Federal Rule of Civil Procedure 13(a)(1).
IT IS SO ORDERED.
ENTER: March 19, 2013
FOR THE COURT:
s/ Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATES DISTRICT JUDGE
Page 15 of 17
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?