Agri-Best Holdings, LLC v. American Gold Label Foods, Inc.

Filing 29

MEMORANDUM OPINION signed by the Honorable Charles P. Kocoras on 5/11/2011.Mailed notice(sct, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
AGRI-BEST HOLDINGS, LLC, individually
and d/b/a Protein Solutions,
Plaintiff,
vs.
AMERICAN GOLD LABEL FOODS, INC.,
Defendant.

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10 C 7252

MEMORANDUM OPINION
CHARLES P. KOCORAS, District Judge:
This case comes before the Court on Plaintiff Agri-Best Holdings, LLC’s (“AgriBest”) motion to strike and/or dismiss Defendant American Gold Label Foods, Inc.’s
(“American Gold”) affirmative defenses and counterclaims, pursuant to Federal Rules
of Civil Procedure 12(b)(6) and 12(f) and 11 U.S.C. § 362(a). For the reasons stated
below, the motion is granted in part and denied in part.
BACKGROUND
In 2008, Agri-Best and American Gold entered into an agreement, whereby AgriBest agreed to provide beef to American Gold. As part of the agreement, Agri-Best
allegedly warranted the beef’s merchantability and good color and condition. Over
time, Agri-Best delivered beef but, in numerous instances, American Gold failed to pay
because Agri-Best allegedly failed to provide quality beef.

On October 5, 2010, Agri-Best filed for bankruptcy in the United States
Bankruptcy Court for the Northern District of Illinois. Agri-Best’s bankruptcy filing
triggered an automatic stay of all actions against Agri-Best. Wells Fargo National
Association (“Wells Fargo”) has a security interest in all of Agri-Best’s assets. On
November 10, 2010, Agri-Best filed a Complaint against American Gold seeking to
collect $900,326.50 for beef ordered by American Gold on various dates. Without
seeking relief from the automatic stay, on April 27, 2011, American Gold filed its
Second Amended Answer and asserted four affirmative defenses and three
counterclaims. Agri-Best filed a motion to strike and/or dismiss American Gold’s
affirmative defenses and counterclaims.
LEGAL STANDARD
A motion to dismiss tests the legal sufficiency of a pleading. In re HealthCare
Compare Corp. Sec. Litig., 75 F.3d 276, 279 (7th Cir. 1996). A court grants a motion
to dismiss when the counter-plaintiff alleges no set of facts entitling him or her to relief.
Id. In ruling on a motion to dismiss, a court must accept the well-pleaded allegations
of the counterclaim as true, construe the allegations in the light most favorable to the
counter-plaintiff, and draw all reasonable inferences in favor of the counter-plaintiff.
See Hentosh v. Herman M. Finch Univ. Of Health Scis./The Chicago Med. Sch., 167
F.3d 1170, 1173 (7th Cir. 1999). Further, a “court may strike from a pleading an
insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”
Fed. R. Civ. P. 12(f).
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DISCUSSION
I.

This Court Dismisses American Gold’s Counterclaims
Agri-Best argues that this Court must dismiss American Gold’s counterclaims

because the automatic stay bars claims against Agri-Best. American Gold responds that
its counterclaims do not violate the automatic stay because the counterclaims are an
allowable claim for recoupment.
Once a bankruptcy petition is filed, all entities are automatically stayed from
commencing judicial action against the debtor or from doing any act to recover a prepetition claim against the debtor. 11 U.S.C. §§ 362(a)(1), (6). The automatic stay,
however, does not bar a counterclaim for recoupment against the debtor.

In re

Chapman, 265 B.R. 796, 807 (Bankr. N.D. Ill. 2001). A recoupment counterclaim
exists where the alleged claims arise out of the same transaction or the claims are so
closely intertwined that the court cannot fairly determine one without resolving the
other. In re Clark Retail Enterprises, Inc., 2003 WL 21991624, at *11 (Bankr. N.D. Ill.
Aug. 18, 2003); Chapman, 265 B.R. at 807. Courts must narrowly construe the
recoupment doctrine because it alters the Bankruptcy Code’s policy favoring equal
treatment of creditors. Chapman, 265 B.R. at 807.
Agri-Best asserts claims against American Gold based on American Gold’s
numerous failures to pay for beef. American Gold asserts three counterclaims against
Agri-Best and argues that each counterclaim is a claim for recoupment. First, American

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Gold asserts a breach of contract counterclaim based on Agri-Best’s failure to deliver
quality food products and over-billing. American Gold seeks damages for the loss of
customers, the loss of its market position, and any amount incorrectly paid by American
Gold. A recoupment counterclaim is “essentially a defense.”

Clark, 2003 WL

21991624, at *9. American Gold does not argue that Agri-Best’s delivery of inferior
products merely excuses its obligation to pay the money allegedly owed to Agri-Best.
Rather, American Gold argues that Agri-Best’s delivery of inferior products caused
American Gold to lose customers and its market position.

American Gold’s

counterclaim for damages for the loss of customers and the loss of its market position
goes far beyond a defensive claim for recoupment and improperly seeks affirmative
recovery from Agri-Best.1 Further, American Gold’s claim for over-billing is not a
claim for recoupment, because the counterclaim arises out of different transactions than
Agri-Best’s claims. Specifically, American Gold’s over-billing counterclaim relates to
transactions for which American Gold has already paid Agri-Best, whereas Agri-Best’s
claims relate to transactions for which American Gold has not paid. Whether American
Gold overpaid Agri-Best for beef in other transactions is a separate and distinct issue
1

Courts also construe the recoupment doctrine narrowly where counterclaims are asserted
against the United States. See Olson v. United States, 2010 WL 3023440, at *2 (N.D. Ill. July 30,
2010). Specifically, a defendant cannot seek relief in excess of, or different from, the relief sought
against the defendant. Id. In Olson, the United States claimed that defendant failed to pay taxes and
defendant counterclaimed that it, in fact, overpaid taxes and sought to recoup the overpayments. Id.
at *3. The court found that defendant properly asserted a counterclaim for recoupment because both
claims arose out of defendant’s payment, or non-payment, of taxes. Id. This Court finds the
reasoning in Olson persuasive and similarly prohibits American Gold from seeking relief different
from the relief sought by Agri-Best.
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from whether American Gold failed to pay for beef in the transactions alleged in AgriBest’s Complaint. Moreover, allowing American Gold’s counterclaim to proceed
would improperly give American Gold priority over the secured creditor, Wells Fargo,
as well as any unsecured creditors. Clark, 2003 WL 21991624, at *11 (noting that
equitable reasons must exist before a creditor attains priority over other creditors by
recoupment and recoupment must comport with the Bankruptcy Code’s notion that all
unsecured creditors share equally in the debtor’s estate). Given this Court’s obligation
to narrowly construe the recoupment doctrine in the bankruptcy context, American
Gold’s counterclaim does not constitute a claim for recoupment. Accordingly, this
Court dismisses American Gold’s first counterclaim.
Second, American Gold asserts a breach of warranty counterclaim based on AgriBest’s failure to delivery quality food products. Again, American Gold seeks damages
for the loss of customers and the loss of its market position. As stated above, such a
request for relief is not a claim for recoupment because American Gold improperly
seeks affirmative relief and the claims are not so closely intertwined that this Court
cannot fairly determine the amount of Agri-Best’s claim without determining the other.
Thus, this Court dismisses American Gold’s second counterclaim.
Finally, American Gold asserts a counterclaim for tortious interference with a
business relationship based on Agri-Best’s solicitation of American Gold’s customer.

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American Gold’s counterclaim is entirely unrelated to its failure to pay for beef.
Accordingly, this Court dismisses American Gold’s third counterclaim.
II.

This Court Strikes American Gold’s Fourth Affirmative Defense
Agri-Best also asks this Court to strike and/or dismiss American Gold’s first,

second, and fourth affirmative defenses because they are improperly plead or redundant.
American Gold’s opposition to Agri-Best’s motion to strike or dismiss does not address
the affirmative defenses. American Gold’s first affirmative defense is seemingly based
on Agri-Best’s breach of an express warranty relating to the beef’s merchantability and
good color and condition. Under the Illinois Uniform Commercial Code, “[a]ny
affirmation of fact or promise made by the seller to the buyer which relates to the goods
and becomes part of the basis of the bargain creates an express warranty that the goods
shall conform to the affirmation or promise.” 810 Ill. Comp. Stat. § 5/2-313(1)(a).
Here, American Gold alleges that Agri-Best agreed to provide goods of a certain quality
and Agri-Best knew that the goods, if not delivered as represented, would be useless to
American Gold. Because American Gold properly pleads this affirmative defense, this
Court denies Agri-Best’s motion to strike and/or dismiss American Gold’s first
affirmative defense.2

2

Neither party addressed whether 810 Illinois Compiled Statutes section 5/2-607(3)(a)
applies, so that American Gold had an obligation to notify Agri-Best that it breached the express
warranty. For purposes of this motion, this Court assumes American Gold had no obligation to
notify Agri-Best of the alleged breach of the express warranty.
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American Gold premises its second and fourth affirmative defenses on the fact
that Agri-Best breached the contract first by failing to provide beef of good color and
condition. American Gold alleges that Agri-Best’s prior breach excused American
Gold’s obligation to pay. American Gold properly alleges an affirmative defense based
on Agri-Best’s prior breach of the contract. However, this Court strikes American
Gold’s fourth affirmative defense because it is redundant and merely re-states the
second affirmative defense.
For these reasons, this Court strikes American Gold’s fourth affirmative defense
and denies Agri-Best’s motion to strike and/or dismiss the first and second affirmative
defenses.
CONCLUSION
For the foregoing reasons, this Court dismisses American Gold’s counterclaims
and strikes American Gold’s fourth affirmative defense.

Charles P. Kocoras
United States District Judge
Dated:

May 11, 2011

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