JD Marshall Intern., Inc. v. Redstart, Inc.

• Decision Date: 24 February 1987
• Docket Number: No. 86 C 371.,86 C 371.
• Parties: J.D. MARSHALL INTERNATIONAL, INC., a corporation, Plaintiff, v. REDSTART, INC., a corporation; John Ewing, an individual; and Satish Mathur, an individual, Defendants.
• Court: U.S. District Court — Northern District of Illinois

656 F. Supp. 830

J.D. MARSHALL INTERNATIONAL, INC., a corporation, Plaintiff, v. REDSTART, INC., a corporation; John Ewing, an individual; and Satish Mathur, an individual, Defendants.

No. 86 C 371.

United States District Court, N.D. Illinois, E.D.

February 24, 1987.

Ralph A. Mantynband, Thomas Flannigan, Arvey, Hodes, Costello & Burman, Chicago, Ill., Daryl L. Williams, Boyd, Knowlton, Tate & Finlay, P.A., Columbia, S.C., for plaintiff.

Michael H. King, Jon K. Stromsta, Ross & Hardies, Chicago, Ill., for defendants.

MEMORANDUM AND ORDER

MORAN, District Judge.

This action originated as a cross-claim in a suit filed by the Utica Tool Company ("Utica Tool") against J.D. Marshall International, Inc. ("JDM") and Redstart, Inc. ("Redstart") in the United States District Court for the District of South Carolina. Utica Tool claimed it was owed some $129,000 for merchandise sold to JDM and/or Redstart. JDM denied owing Utica Tool anything and filed a cross-claim against Redstart and two of its corporate officers, John Ewing and Satish Mathur. In count I, JDM claims that Redstart violated an agreement under which JDM purchased from Redstart certain assets and the right to conduct business under the corporate name of J.D. Marshall International, Inc. In count II, JDM claims that Redstart, Ewing and Mathur violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 et seq. ("RICO").

The cross-claim was transferred to this court on Redstart's motion to dismiss or in the alternative to change venue under 28 U.S.C. § 1404(a). Defendants now move to dismiss or in the alternative to stay this action pending the outcome of arbitration. Both parties also have moved for sanctions. For the following reasons, defendants' motion to stay is granted but their motion for sanctions under Rule 11 of the Federal Rules of Civil Procedure is denied. JDM's motion for sanctions under Rule 37 is granted.

FACTS

The action pending here is one of several cases relating to JDM's purchase of Redstart's export management business on February 3, 1984. The pleadings now before this court provide few details concerning that transaction, but according to memoranda submitted by the parties JDM acquired certain assets from Redstart, including accounts receivable, other current assets and all property, plant and equipment. JDM also acquired agreements or other arrangements with suppliers, distributors, and other business representatives. JDM agreed to assume certain of Redstart's liabilities and acquired from Redstart the exclusive right to conduct business under Redstart's then corporate name, J.D. Marshall International, Inc.

After the transaction Redstart retained accounts receivable totaling some $8.4 million. From time to time Redstart was paid for accounts receivable owned by JDM and JDM was paid for accounts receivable retained by Redstart. The purchase agreement anticipated that this would happen and after closing JDM and Redstart established a procedure for exchanging these funds.

Redstart apparently learned in mid-1984 that JDM was failing to satisfy certain of the liabilities and obligations it had assumed and that JDM had converted certain letters of credit belonging to Redstart. Redstart's position was that JDM owed it a total of about $300,000. After representatives from Redstart and JDM unsuccessfully attempted to resolve their differences Redstart allegedly resorted to self-help. Their efforts to recover the money are the basis for JDM's RICO claim.

In this suit JDM alleges that Redstart violated RICO by committing mail and wire fraud in connection with several transactions:

1) Redstart received a check for approximately $2,200 from AMF Wyott, Inc. payable to J.D. Marshall International, Inc. Redstart endorsed the check J.D. Marshall International, Inc. and deposited it in Redstart's bank account ("the Wyott transaction");

2) Marshall International Trading Co., Inc., a company controlled by Ewing, held a letter of credit from Insanova S.A., a Venezuelan company, issued by the First National Bank of Chicago. JDM was to receive approximately $240,000 drawn on that letter of credit but Ewing diverted the funds to Redstart's bank account ("the Insanova transaction");

3) Niwa Shoji, a Japanese company, owed JDM approximately $7,000. Redstart sent a telex to Niwa Shoji causing it to transfer the money to Redstart's bank account instead of to JDM ("the Niwa Shoji transaction");

4) Redstart maintained a bank account at the First National Bank of Chicago under the name of J.D. Marshall International, Inc. without authorization. By doing so, Redstart was able to intercept two wire transfers from Alfred Kaut GMBH & Company of West Germany totaling approximately $20,000 that were intended for JDM ("the Kaut transaction");

5) Redstart received property from Utica Tool, deceiving Utica Tool into believing that it was dealing with JDM ("the Utica Tool transaction").

These transactions are currently at issue in several related proceedings between the parties. The agreement under which JDM acquired Redstart's export management business ("the purchase agreement") provided that either party could elect to arbitrate disputes arising from the agreement. On December 20, 1984, JDM filed a complaint in arbitration against Redstart before the American Arbitration Association in Chicago, Illinois. (J.D. Marshall International, Inc. v. Redstart, Inc., No. 51 T 199 0016 85 S). The original complaint sought to recover funds diverted to Redstart in the Insanova transaction. On October 31, 1985, JDM amended its complaint adding claims based on the Kaut transaction, the Wyott transaction and the Niwa Shoji transaction. JDM also sought an emergency order from the arbitrators to stop Redstart from using the name J.D. Marshall International, Inc. Redstart filed an answer and counterclaim in the arbitration proceeding. Ewing and Mathur were not parties to the purchase agreement and they are not parties to the arbitration proceeding.

In addition, JDM filed suit in May 1985 against the First National Bank of Chicago ("the bank") in the Circuit Court of Cook County, Illinois, (J.D. Marshall International, Inc. v. First National Bank of Chicago, No. 85 CH 4286), alleging that the bank and Redstart conspired with Redstart to defraud JDM in the Insanova transaction and the Kaut transaction. None of the defendants here are parties to that suit. U.S. Leasing Corporation also sued JDM and Redstart in the District Court for the Northern District of Illinois, alleging that one or both of them defaulted on an agreement to lease word processing equipment (U.S. Leasing Corp. v. Redstart, Inc., No. 85 C 2128). In that case Judge Will denied JDM's motion for leave to file a cross-claim against Redstart, holding that the issue of liability on the lease as between JDM and Redstart was a matter to be arbitrated. Finally, the Utica Tool litigation is presumably still proceeding in the District of South Carolina.

DISCUSSION

Defendants advance two arguments in support of their pending motions. First, defendants argue that JDM's complaint fails to state a RICO claim because it fails to allege an enterprise. Second, defendants argue that because identical issues are pending in other proceedings, the action here should be dismissed or stayed, Rule 11 sanctions should be imposed on JDM and Rule 37 sanctions should not be assessed against them because Ewing and Mathur failed to answer questions at their depositions. Because we are persuaded that the proceedings here should be stayed pending the outcome of arbitration, we decline to rule on Redstart's first argument, although we note in passing that JDM's RICO claim may well be in need of repleading. See generally H.G. Gallimore, Inc. v. Abdula, 652 F.Supp. 437, (N.D.Ill.1987).

I. Motion to Stay

JDM and Redstart agree that either of them may elect to arbitrate any alleged breach of the purchase agreement or any dispute relating to its terms. Under the Federal Arbitration Act, 9 U.S.C. §§ 1-14, arbitration agreements "in any ... contract evidencing a transaction involving commerce" are "valid, irrevocable and enforceable," except in circumstances not relevant here. See 9 U.S.C. § 2. Both parties have submitted the disputes underlying this lawsuit for arbitration, according to the terms of the purchase agreement. The applicability of the Federal Arbitration Act is not in question nor is there any doubt that the arbitration must proceed. The issue on this motion is whether this case must proceed at the same time.

Section 3 of the Arbitration Act provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement. ...

9 U.S.C. § 3. Count I of JDM's cross-claim appears to fall squarely within this provision. In that count JDM seeks to recover damages from Redstart resulting from Redstart's allegedly wrongful use of the name J.D. Marshall International, Inc. mainly in connection with maintaining certain bank accounts and receiving money intended for JDM. Count I raises breach of contract issues and JDM appears to have properly raised the same issues in the arbitration as provided by the purchase agreement. Although the parties have devoted scant attention to count I, § 3 of the Federal Arbitration Act requires that proceedings on that count be stayed pending the outcome of arbitration.¹

In count II JDM alleges that defendants violated RICO by committing several predicate acts of mail fraud and wire fraud. The parties have argued at length over the arbitrability of RICO claims, but...