Karum Holdings LLC et al v. Lowe's Companies, Inc. et al
MEMORANDUM Opinion and Order Signed by the Honorable John Z. Lee on 11/21/17.Mailed notice(ca, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
KARUM HOLDINGS LLC,
KARUM GROUP LLC, and
KARUM CARD SERVICES
S.A. DE C.V., SOFOM, E.N.R.,
LOWE’S COMPANIES, INC., and
LOWE’S COMPANIES MEXICO,
S. DE R.L. DE C.V.,
15 C 380
Judge John Z. Lee
MEMORANDUM OPINION AND ORDER
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  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  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  is granted, while Lowe’s motion  is denied.
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 dayto-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.
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
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
pursuant to Section 5.2 of the Funding Agreement.
Id. Lowe’s also stated that, to account for interest, it would provide a final tally of
damages at trial. Id.
“MXN” signifies “Mexican pesos,” and “USD” signifies “U.S. dollars.”
“RAY” is an acronym for “risk adjusted yield.”
The MXN-denominated debt funding and promissory notes were executed
between 2014 to 2015, after the parties had signed the Funding Agreement (“2014–
2015 notes”). Defs.’ Mem. at 2, ECF No. 209; Pls.’ Mem. at 7. Absent default, these
notes were scheduled to mature in 2019 and 2020. Pls.’ Mem. at 2, ECF No. 157;
Default Letter at 1–2; ECF No. 158; see generally 2014–2015 Promissory Notes,
ECF No. 158-7. The 2010 USD-denominated note in the amount of $200,000 (“2010
note”) was to “automatically mature” on “the later of the 61st day after the execution
hereof or the date on which [Lowe’s Mexico and KCS] execute the Profit Sharing
and Funding Agreement,” while the 2013 note for $180,000 (“2013 note”) appears to
have a maturity date sometime after December 2018 (although the exact date is
unclear from the record). See 2010 & 2013 Promissory Notes at 8, ECF No. 158-8.
On August 30, 2017, Lowe’s sent a letter notifying Karum that Lowe’s
believed that Karum had defaulted on the 2014–2015 notes and the 2013 note,
pursuant to Section 4(i) of the notes.
See Default Letter at 1–2; 2010 & 2013
Promissory Notes at 9; see generally 2014–2015 Promissory Notes. This provision
permitted Lowe’s to declare a default based on “[a] material adverse change . . . in
Borrower’s financial condition, or [if Lowe’s] believes the prospect of payment or
performance of this Promissory Note is impaired.” Id. Upon default, Lowe’s was
entitled to “declare the entire unpaid principal balance under this Promissory Note
and all accrued interest immediately due, and then Borrower will pay that amount.”
Id. The default letter also notified Karum that the 2010 note had matured in the
ordinary course and was immediately due and payable. Default Letter at 1. The
letter did not specify when the note had matured.
In total, Lowe’s demanded
immediate payment of USD $6,281,175. Id.
Karum has filed a motion in limine to exclude Lowe’s setoff affirmative
defense and any evidence that Lowe’s intends to offer to support it. For its part,
Lowe’s has filed a motion to convert the portion of its setoff affirmative defense
related to the 2014–2015 notes into a counterclaim under Rule 8(c)(2) or, in the
alternative, for leave, pursuant to Rule 13(e), to assert a new counterclaim with
respect to these notes.
In breach-of-contract cases, where a party seeks to assert a “setoff” or
“recoupment” that, if successful, will alter the net amount it owes to the opposing
party, the party must bring a counterclaim pursuant to Federal Rule of Civil
Procedure 13, rather than assert an affirmative defense. 3 See Coplay Cement Co. v.
Willis & Paul Grp., 983 F.2d 1435, 1440–41 (7th Cir. 1993) (explaining that
common-law setoff and recoupment have been supplanted by the counterclaim and
“survive[ ] as a distinctive doctrine . . . only in banking and in bankruptcy”); Cole
Energy Dev. Co. v. Ingersoll-Rand Co., 8 F.3d 607, 610 (7th Cir. 1993) (“[a] setoff is
for most purposes just a permissive counterclaim”); Valley Disposal Inc. v. Cent. Vt.
Solid Waste Mgmt. Dist., 113 F.3d 357, 364 (2d Cir. 1997) (“Under the Federal
Rules of Civil Procedure, a defendant's claim of setoff against a plaintiff is to be
At common law, if such a counterclaim was compulsory, it was known as
“recoupment,” while if it was permissive, it was known as “setoff.” Coplay, 983 F.2d at
made by means of counterclaim in its answer to the complaint.”). Such a claim for
setoff or recoupment “is not an affirmative defense because it does not destroy the
plaintiff's right of action.” Ace Hardware Corp. v. Marn, Inc., 2008 WL 4286975, at
*8 (N.D. Ill. Sep. 16, 2008); see Tharp v. Catron Interior Sys., Inc., 2016 WL
7210940, at *3 (S.D. Ind. Dec. 12, 2016) (“[This] claim for a setoff is not an
affirmative defense that can destroy the Plaintiffs' right of action; rather, it may
reduce the amount of . . . liability to the Plaintiffs . . . . Therefore, . . . [it] is properly
characterized as a permissive counterclaim.”).
Pursuant to Rule 8(c)(2), “[if] a party mistakenly designates a . . .
counterclaim as a defense, the court must, if justice requires, treat the pleading as
though it were correctly designated, and may impose terms for doing so.” Reiter v.
Cooper, 507 U.S. 258, 263 (1993) (quoting Fed. R. Civ. P. 8(c)). Some courts have
held that the rule—at least in the early stages of litigation—“generally favors
defendants because courts will construe responsive pleadings liberally to maximize
the defendant’s available legal theories.”
AEL Fin., LLC v. Burns, 2010 WL
4313988, at *2 (N.D. Ill. Oct. 19, 2010) (citing Caldera v. Northrop Worldwide
Aircraft Servs., 192 F.3d 962, 970 (Fed. Cir. 1999)).
Where, however, a party does not merely mistakenly designate a
counterclaim as an affirmative defense, but also fails to provide notice of the basis
of the counterclaim in the body of the affirmative defense, the proper course is to
decline to convert the defense into a counterclaim and to consider, instead, whether
leave should be granted to add a new counterclaim.
See Gallagher’s NYC
Steakhouse Franchising, Inc. v. N.Y. Steakhouse of Tampa, Inc., 2011 WL 6034481,
at *9 (S.D.N.Y. Dec. 5, 2011) (declining to convert a setoff affirmative defense into a
counterclaim and declining to add a new counterclaim where “the affirmative
defense fail[ed] to set forth any facts that resemble in any way the proposed
counterclaims” and accordingly “fail[ed] to provide Plaintiff with any notice of the
proposed counterclaims, making Rule 8(c)(2) inapplicable”); Rocheux Int’l of N.J.,
Inc. v. U.S. Merchs. Fin. Grp, Inc., 741 F. Supp. 2d 651, 660 (D.N.J. 2010) (“The
question before the Court, then, is whether Defendants’ proposed modification
redresses a simple mistaken designation, for which Rule 8(c)(2) provides the
appropriate standard for relief, or whether Defendants' modification presents a new
claim . . . .”).
Although, as a general matter, leave to amend pleadings, including the
additional of new counterclaim, should be granted freely, it may be denied for, inter
alia, undue delay on the part of the proponent or prejudice to the opposing party by
virtue of allowance of the amendment. See Dubicz v. Commonwealth Edison Co.,
377 F.3d 787, 792 (7th Cir. 2004).
The 2014–2015 Notes
Lowe’s argues that its setoff affirmative defense as to the 2014–2015 notes
should be converted into a counterclaim, because the claim ripened into a claim only
when Karum defaulted on the notes in August 2017. Defs.’ Mem. at 9. In response,
Karum apparently understands Lowe’s motion as seeking only to add a new
counterclaim, rather than attempting to retroactively convert part of Lowe’s setoff
affirmative defense into a counterclaim and argues that Lowe’s has waived its
ability to add a new counterclaim because it was required to bring it as a
compulsory counterclaim in 2015.
Pls.’ Resp. at 8, ECF No. 217. Karum also
contends that, if the Court finds that the counterclaim is permissive, Karum would
be severely prejudiced if Lowe’s were granted leave to add the counterclaim now,
years into the litigation, after discovery has ended, and only weeks before trial. Id.
First, Lowe’s cannot rely upon Rule 8(c)(2) because, whatever claim it may
have now with respect to the 2014–2015 notes, the setoff affirmative defense that it
asserted in its 2015 answer did not provide Karum with sufficient notice of the basis
for this claim. After all, the affirmative defense was asserted in August 2015, while
the claim in question did not materialize until August 2017. See, e.g., Gallagher’s,
2011 WL 6034481, at *9.
This is no mere technicality, given that the facts underlying Lowe’s claim
with respect to the 2014–2015 notes appear to differ significantly from those that
form the basis of Karum’s original claims. Therefore, while justice may require
courts to construe incorrectly-pleaded affirmative defenses as counterclaims during
the early part of a case, see, e.g., AEL Fin., 2010 WL 4313988, at *2, justice requires
the opposite here, where fact and expert discovery closed months ago and trial is
but weeks away. Karum’s motion in limine is therefore granted with respect to the
2014–2015 notes, and Lowe’s motion to convert this portion of its affirmative
defense into a counterclaim is denied.
For the same reasons, the Court finds that Lowe’s counterclaim is permissive,
rather than compulsory. Karum argues that, because the facts upon which Lowe’s
based its 2017 declaration of default existed at the time Karum filed this lawsuit,
Lowe’s had the same “right” to declare a default in 2015 and, thus, was required to
bring the claim as a compulsory counterclaim at that time. Pls.’ Resp. at 1–2, 4–6,
8, 13. But, it is evident from Lowe’s August 2017 letter that the purported default
took place well after the events giving rise to Karum’s claims.
counterclaim is permissive, not compulsory. See, e.g., Oak Park Trust and Sav.
Bank v. Therkildsen, 209 F.3d 648, 651 (7th Cir. 2000) (stating that, according to
Rule 13, a permissive counterclaim arises from events other than those leading to a
Finally, Lowe’s request for leave to assert a new counterclaim is denied. It is
apparent from the briefs that the parties have significant disagreements with
regard to the scope and viability of this claim, requiring additional discovery into
these matters. Accordingly, the Court finds that allowing Lowe’s to add a new
counterclaim at this late date would be highly prejudicial to Karum.
Gallagher’s, 2011 WL 6034481, at *9.
Moreover, the Court declines to stay
litigation of the proposed counterclaim until after the trial because, as discussed
above, the counterclaim does not arise from the same operative facts as this
litigation. As such, there would be no judicial efficiency in hearing Lowe’s eleventh-
hour claim as part of this lawsuit, particularly where the claim is capable of being
litigated in a separate lawsuit. See In re Ameritech Corp., 188 F.R.D. 280, 284–85
(N.D. Ill. 1999) (denying leave to add a permissive counterclaim where, inter alia,
the issues were new and would require reopening discovery); Cipa Mfg. Corp. v.
Allied Golf Corp., 1995 WL 337022, at *3 (N.D. Ill. June 1, 1994) (denying leave to
file an amended affirmative defense that the court would be required to treat as a
counterclaim where, inter alia, it would prejudice the other party, significantly
delay adjudication of the other’s party’s claim, require extending discovery, and
jeopardize the upcoming trial date).
The 2013 and 2010 Notes
Lowe’s does not seek leave to convert its setoff affirmative defense or add new
counterclaims with regard to the 2013 or 2010 notes. Defs.’ Mem. at 2, n.1; Pls.’
Mem. at 1; Default Letter at 1. Lowe’s instead seeks to assert the claims as part of
its setoff affirmative defense. Id. However, as with the 2014–2015 notes, Lowe’s
cannot plead its claims arising from the 2013 and 2010 notes as an affirmative
defense. See Coplay, 983 F.2d at 1440; Ace Hardware, 2008 WL 4286975, at *8;
Tharp, 2016 WL 7210940, at *3.
Therefore, the Court must consider whether
justice requires salvaging these claims as properly pleaded counterclaims.
Reiter, 507 U.S. at 263.
As to the 2013 note, Lowe’s informed Karum that it considered Karum be in
default in the August 2017 letter. Default Letter at 1. Therefore, for the same
reasons given with regard to the 2014–2015 notes, the Court finds that Lowe’s
affirmative defense did not provide sufficient notice of this claim. Furthermore,
although Lowe’s has not requested that the Court convert this claim into a
counterclaim or leave to assert it as a new counterclaim, because the claim would
require the Court to reopen discovery, Karum would be unduly prejudiced if Lowe’s
were allowed to pursue this claim as a counterclaim at this late date. Karum’s
motion in limine with respect to the 2013 note is therefore granted.
The 2010 note requires more discussion. Unlike the rest of the notes at issue,
Lowe’s August 2017 letter did not declare an event of default with regard to the
2010 note, but merely informed Karum that the note had already matured (on some
unspecified date). Default Letter at 1. Karum’s motion in limine addresses the
2010 note in a single footnote, arguing, without citation to authority, that the 2010
note (and 2013 note) should be excluded because there are “factual disputes as to
whether these debts even exist.” See Pls.’ Mem. at 7 n.1; Pls.’ Reply at 7. Lowe’s
does not respond to this argument, nor does it address the 2010 note independently
of the other notes. And, as with the 2013 note, Lowe’s did not include the 2010 note
in its motion to convert its setoff defense into a counterclaim, despite recognizing
that it may be required to do so. See Defs.’ Resp. at 14 n.1. Moreover, the parties
have not indicated to the Court when the 2010 note was due to mature, nor is it
apparent from the note itself.
In the end, the burden was on Lowe’s to establish that its claim related to the
2010 note should be converted from an affirmative defense to a counterclaim under
Rule 8(c)(2), or that leave should be granted to assert the claim as a new
counterclaim under Rule 13(e). It has done neither, and, in any event, allowing
Lowe’s to assert this new counterclaim would prejudice Karum for the same reasons
Accordingly, Karum’s motion in limine to exclude Lowe’s setoff
affirmative defense with respect to the 2010 note is also granted.
The RAY True-Ups
Lowe’s also contends that it is owed damages arising from the RAY True-Up
payments (“RAY payments”) that it made to Karum during the course of their
business relationship. However, like Lowe’s other claims, because this claim would
only alter the amount of monetary liability between the parties, rather than nullify
Karum’s claim, it is not a proper affirmative defense. See Coplay, 983 F.2d at 1440;
Ace Hardware, 2008 WL 4286975, at *8; Tharp, 2016 WL 7210940, at *3. The
question, then, is whether this claim should be converted to a counterclaim under
Rule 8(c)(2) or whether Lowe’s should be permitted to assert it as a new
counterclaim under Rule 13(e). The answer to both questions is in the negative.
Karum argues that the RAY payments claim should be excluded because
Lowe’s has provided no breakdown of the amounts and no explanation as to why
Karum should pay back certain amounts to Lowe’s.
Pls.’ Mem. at 5.
responds to Karum’s RAY payment arguments with little more than a single
footnote. Defs.’ Resp. at 13 n.2. In it, Lowe’s contends that it disclosed “the nature
and amount of these setoff amounts in [Lowe’s] discovery responses.” Id. If this
was insufficient, Lowe’s argues, Karum should have responded with a deficiency
letter and could have deposed Lowe’s witnesses to clear up any confusion. Id. And,
if Karum seeks more certainty, Lowe’s “remains willing to meet and confer . . . to
see what, if any, additional information [Lowe’s] can provide.” Id. But the fact is
that Lowe’s has provided no explanation in its answer or supplemental
interrogatory responses as to why it is entitled to recovery of these payments.
In its third supplemental response to Karum’s interrogatory no. 2, Lowe’s
Karum’s failure to meet its contractual obligations caused Lowe’s to be
damaged (such as damages in the form of lost profits, a diminution in
the value of the portfolio of Lowe’s credit receivables, and the out-ofpocket costs of transitioning to a more reliable credit service provider
(including transition payments made to Karum)), but Lowe’s is not
seeking these damages in this lawsuit. However, Lowe’s is seeking to
recover the following monies loaned or otherwise paid to Karum during
the course of the parties’ relationship: . . .
Lowe’s then went on to list the amounts it seeks to recover for the notes and RAY
payments. Third Response Interrogatory No. 2 at 8–9. But this is little more than
a top-line calculation of the RAY payments that Lowe’s believes it is owed, and
allowing this claim would necessitate reopening of discovery. Given that the 2015
affirmative defense did not sufficiently apprise Karum of this claim, and because
Lowe’s has not provide a sufficient explanation of the claim with only weeks
remaining before trial, the Court finds that Karum would be substantially
prejudiced if the Court were to convert this claim from a generic affirmative defense
to a counterclaim at this time. Karum’s motion in limine is therefore granted with
respect to Lowe’s RAY payments claims. 4
Because the factual basis for Lowe’s RAY payments claim remains unclear, the
Court is unable to determine whether such a counterclaim would be permissive or
compulsory. It may be that the events allegedly giving rise to the RAY payment claims
For the reasons stated herein, Karum’s motion  to exclude Lowe’s
affirmative defense of setoff and evidence supporting that defense is granted.
Lowe’s’ motion  to convert into a counterclaim a portion of its setoff affirmative
defense or, in the alternative, to file a new counterclaim is denied.
IT IS SO ORDERED.
John Z. Lee
United States District Judge
arose well after the filing of this lawsuit, or it may be that they arose out of the same
transactions or occurrence that form the subject of Karum’s claims. Whatever the case, this
is a question for another day.
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