CHS Acquisition Corp. v. Watson Coatings, Inc.

CHS ACQUISITION CORP., d/b/a CHICAGO HEIGHTS STEEL, Plaintiff, v. WATSON COATINGS, INC., Defendant/Third-Party Plaintiff, v. BASF CORPORATION and IMCD US, INC., Third-Party Defendants.

Case No. 17-cv-4993

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

August 20, 2018

Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Before the Court is (1) Defendant/Third-Party Plaintiff Watson Coatings, Inc.'s motion [29] to dismiss CHS Acquisition Corp.'s Complaint; (2) Third-Party Defendant BASF Corporation's motion [59] to dismiss Watson's Third-Party Complaint; (3) Third-Party Defendant IMCD US, LLC's motion [72] to dismiss Watson's Third-Party Complaint; and (4) Watson's request for leave to amend its Third-Party Complaint. For the reasons stated below, Watson's motion [29] is granted in part (as to Count II) and denied in part (as to Counts I, III, and IV). BASF's motion [59] is granted, and the claims in the Third-Party Complaint against BASF are dismissed with prejudice. IMCD's motion [72] is granted, and the claims in the Third-Party Complaint against IMCD are also dismissed with prejudice. Watson's request for leave to amend its Third-Party Complaint is denied. This case is set for further status on September 4, 2018 at 9:00 a.m.

I. Background

A. CHS's Complaint

Plaintiff CHS Acquisition Corp. ("CHS") filed its Complaint against Defendant/Third-Party Plaintiff Watson Coatings, Inc. ("Watson") in July 2017. [See 1.] For purposes of Watson's motion to dismiss, the Court accepts as true all of CHS's well-pleaded factual allegations and draws all reasonable inferences in CHS's favor. Killingsworth v. HSBC Bank Nev., N.A., 507 F.3d 614, 618 (7th Cir. 2007).

CHS is an Illinois corporation that manufactures specialty steel products, including steel posts for signs and fences. [1, ¶ 5.] CHS paints most of the products it manufactures with topping paint that is corrosion and weather resistant. [Id.] Watson is a Missouri corporation that manufactures specialty paints, including corrosion and weather resistant topping paints. [Id., ¶ 6.] Watson supplied CHS with such paints for several years prior to 2016. [Id., ¶ 7.] In the normal course of dealing between the parties, CHS would pre-approve formulations for the topping paints that it needed and issue purchase orders to Watson for these pre-approved paints. Watson would then manufacture the topping paints according to those pre-approved specifications. Watson invoiced CHS for these paints after delivery, and CHS remitted payment. [Id.] Watson satisfactorily supplied paints to CHS in this way for several years prior to 2016. [Id.]

In the course of this arrangement between the parties, in and before 2016, Watson represented to CHS that its specially formulated paints had excellent adhesion and exterior exposure characteristics and good corrosion resistance. These qualities made them particularly appropriate for use on CHS's products, and CHS relied on these representations in purchasing paints from Watson via the purchase order process described above. [Id., ¶ 8.]

However, in 2016 and continuing into early 2017, Watson supplied CHS with an incorrectly manufactured topping paint. In particular, the topping paint contained an unsuitable resin that did not conform to CHS's specifications, causing it to crack, peel, and separate from the steel posts to which CHS had applied it. [Id., ¶¶ 9-10.] CHS discovered the problem in February 2017 when its customers reported cracking and peeling paint. [Id., ¶ 10.] After CHS brought these failures to Watson's attention, Watson's president and manager acknowledged that the topping paint it supplied to CHS had been manufactured using the improper resin, making the paint unsuitable for its intended purpose. [Id., ¶ 11.] CHS thereafter discontinued using Watson's topping paint in its own steel products manufacturing process. [Id.]

At the time that it discovered the issues with Watson's topping paint and discontinued the use of it, CHS already had paid Watson for the defective product. CHS demanded reimbursement from Watson, as well as compensation for losses and damages proximately caused by the defective paint, but Watson refused these demands. [Id., ¶ 13.] CHS thereafter filed its Complaint against Watson, bringing claims for breach of express warranty (Count I); breach of implied warranty of fitness (Count II); breach of implied warranty of merchantability (Count III); and unjust enrichment (Count IV). Watson has moved to dismiss all of the claims against it. [See 29.]

B. Watson's Third-Party Complaint

In addition to moving to dismiss CHS's complaint, Watson filed a Third-Party Complaint [37] against BASF Corporation ("BASF") and IMCD US, LLC ("IMCD").¹ In considering BASF's and IMCD's motions to dismiss, the Court accepts as true all of Watson's well-pleaded factual allegations and draws all reasonable inferences in Watson's favor. Killingsworth, 507 F.3d at 618.

In the Third-Party Complaint, Watson alleges that BASF is a Delaware corporation headquartered in New Jersey that develops, produces, and markets resins and other additives for incorporation into industrial paints and coatings. [37, ¶ 12.] IMCD is a Delaware corporation headquartered in Ohio that markets and distributes BASF's products to Watson. [Id., ¶ 13.]

In 2016, IMCD promoted a BASF-produced resin to Watson for inclusion in Watson's topping paint products. In discussions between representatives of Watson and IMCD, IMCD represented that this particular resin would be appropriate for inclusion in the topping paint and would perform according to Watson's specifications and requirements for such paint. [Id., ¶ 14.] Watson alleges that these representations by IMCD were made on behalf of both IMCD and BASF. [Id.] Based on these representations, Watson purchased the resin from IMCD and began to include it in the topping paint it manufactured for CHS. [Id., ¶ 15.]

However, despite IMCD's representations, the resin did not actually perform according to Watson's specifications and requirements, as evidenced by the topping paint failures experienced by CHS's customers. [Id., ¶¶ 16, 19.] After CHS brought this to Watson's attention in February 2017, Watson performed extensive testing on the topping paint and determined that the BASF-produced resin it had purchased from IMCD was the cause of the paint's failure. [Id., ¶¶ 16-17.] Watson notified both IMCD and BASF of the issues allegedly caused by the resin's inclusion in the topping paint that Watson produced and sold to CHS. [Id., ¶ 18.]

In the Third-Party Complaint, Watson brings claims against both BASF and IMCD based on these events for breach of express warranty (Count I); breach of implied warranty of fitness (Count II); and breach of implied warranty of merchantability (Count III). Both BASF and IMCD have moved to dismiss the Third-Party Complaint in its entirety. [See 59; 72.] Watson has also filed a request to amend its Third-Party Complaint in the event that the Court is inclined to dismissit. [See 95.] This request includes Watson's proposed amendments to its Third-Party Complaint—additional allegations regarding the relationship between BASF and IMCD and a proposed new claim against BASF and IMCD for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 ("ICFA"). [Id.] Both BASF and IMCD have opposed this request, arguing that this amendment would be futile.

II. Legal Standard

To survive a Federal Rule of Civil Procedure ("Rule") 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted, the complaint first must comply with Rule 8(a) by providing "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), such that the defendant is given "fair notice of what the * * * claim is and the grounds upon which it rests." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)) (alteration in original). Second, the factual allegations in the complaint must be sufficient to raise the possibility of relief above the "speculative level." E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Twombly, 550 U.S. at 555). "A pleading that offers 'labels and conclusions' or a 'formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 555). Dismissal for failure to state a claim under Rule 12(b)(6) is proper "when the allegations in a complaint, however true, could not raise a claim of entitlement to relief." Twombly, 550 U.S. at 558. In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts as true all of the plaintiff's well-pleaded factual allegations and draws all reasonable inferences in the plaintiff's favor. Killingsworth, 507 F.3d at 618.

III. Analysis

The Court begins by addressing Watson's motion [29] to dismiss CHS's Complaint. Because the Court concludes that CHS has stated valid claims against Watson, the Court then addresses BASF's and IMCD's motions [59; 72] to dismiss Watson's Third-Party Complaint, as well as Watson's request [95] for leave to amend its Third-Party Complaint.

A. Watson's Motion to Dismiss CHS's Complaint

Watson has moved to dismiss all of CHS's claims pursuant to Rule 12(b)(6) for failure to state a claim. Specifically, Watson argues that CHS has failed to allege sufficient facts to support any of its claims.

1. Breach of Express Warranty (Count I)

In Count I of the Complaint, CHS brings a claim against Watson for breach of express warranty. [See 1, ¶¶ 14-19.] Watson argues that this count fails to state a claim because CHS has not sufficiently stated the terms of the warranty that it claims was breached. [See 30, at 3-4.]

In Illinois,² an express warranty is created where "(1) the seller makes an affirmation of fact or promise; (2) that relates to the goods; and...