Extra Equipamentos v. Case Corporation ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 03-2863
EXTRA EQUIPAMENTOS E EXPORTAÇÃO LTDA., et al.,
Plaintiffs-Appellants,
v.
CASE CORPORATION,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 8591—Blanche M. Manning, Judge.
____________
ARGUED JANUARY 9, 2004—DECIDED MARCH 15, 2004
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Before POSNER, RIPPLE, and ROVNER, Circuit Judges.
POSNER, Circuit Judge. Extra, a Brazilian company, sued
Case, a major U.S. manufacturer of farm and construc-
tion equipment, in the federal district court in Chicago,
charging fraud. (The co-plaintiff, Extra’s boss, can be ig-
nored.) Jurisdiction was based on 28 U.S.C. § 1332(a)(2),
because the suit was between a citizen of a state (Case) and
citizens of a foreign country (Extra and its boss). The district
judge dismissed the suit under Fed. R. Civ. P. 19(b) on the
2 No. 03-2863
ground that Case Brasil & Cia, Case’s wholly owned
Brazilian subsidiary, was an indispensable party to the suit.
Extra appeals.
Case Brasil had hired Extra to distribute Case products
in Brazil. In 1999, Extra sued Case Brasil in a Brazilian court,
claiming that corrupt employees of the subsidiary had
caused the subsidiary to overcharge Extra. Later that year,
a “settlement agreement” was negotiated and signed in
Illinois by representatives of Extra and Case. No official of
Case Brasil was present or signed the agreement, although
the Case executive who signed it purported to be acting on
behalf of both parent and subsidiary. The agreement ended
the Brazilian litigation and provided that Case Brasil would
continue to use Extra as a distributor and would seek no
more than $2 million in past-due payments that it claimed
Extra owed it under the distributorship contract. In ex-
change, Extra, besides dropping its suit against Case Brasil,
promised to give Case information about the corrupt
conduct of Case Brasil’s employees that would enable Case
to have them removed (thus avoiding possible trouble with
the Brazilian government) without the parent or subsidiary
incurring liability.
Extra filed the present suit in 2001, complaining that Case
had defrauded Extra by inducing it to enter into the settle-
ment agreement when Case knew that Case Brasil would
not be bound by the agreement and would not perform its
obligations under it. Case’s objective in committing the
fraud, Extra charged, was to get Extra’s Brazilian suit
against Case’s subsidiary dropped and obtain the informa-
tion about the corruption at the subsidiary without incur-
ring any of the costs of the agreement arising from the fact
that the agreement required Case Brasil to continue Extra as
a distributor and to limit its claims for past moneys due
from Extra to $2 million. But (according to Extra) Case
No. 03-2863 3
Brasil, claiming not to be bound by the agreement because
it had not authorized its parent to make it—indeed, con-
tending that it had had no wind of the negotiations or of the
signing of the agreement—terminated Extra’s distributor-
ship and refuses to recognize any limit on its money claims,
though Case was happy to receive the information about the
corrupt employees that Extra furnished it pursuant to
Extra’s obligations under the agreement. Case had thus
“manipulated the corporate distinction between itself and
Case Brasil” by falsely representing that the Case official
who signed the agreement was authorized to sign on behalf
of Case Brasil.
Case moved to dismiss the suit on the ground that since
Case Brasil was a party to the settlement agreement—the
Case executive who signed it having signed it on the subsid-
iary’s behalf as well as the parent’s—the subsidiary was an
indispensable party to the suit. After some discovery, the
district judge agreed and dismissed the suit. This was a
preliminary ruling, on jurisdiction, and not a ruling that
Extra has no fraud case against Case. And anyway the
essence of Extra’s case is not that Case Brasil was not bound
by the settlement agreement, but that Case schemed to make
sure that Extra would not benefit from the agreement.
Case had moved in the alternative for dismissal under the
doctrine of forum non conveniens, arguing that Brazil was
a more convenient locale for the litigation of the fraud claim
(there is no suggestion that Extra could not sue Case there).
Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). But the
district judge did not rule on the alternative ground.
Case denies that it committed fraud. It contends that the
executive who signed the settlement agreement was indeed
authorized to do so on behalf of both parent and subsidiary
and therefore Case Brasil became bound by the settlement
agreement, and that it has never repudiated or, for that
4 No. 03-2863
matter, violated it, though it has terminated Extra’s distribu-
torship (but without, Case contends, violating the agree-
ment). Case points out that Extra has sued Case Brasil in
Brazil for damages arising from the termination and that the
suit is pending.
Two steps are involved in deciding whether someone is
indispensable to a suit, so that the suit must be dismissed if,
as in this case, he can’t be made a party. The diversity
jurisdiction does not extend to a suit in which there is a U.S.
citizen on only one side of the suit and foreign parties on
both sides, Karazanos v. Madison Two Associates, 147 F.3d 624,
627 (7th Cir. 1998); Israel Aircraft Industries Ltd. v. Sanwa
Business Credit Corp., 16 F.3d 198, 202 (7th Cir. 1994);
Allendale Mutual Ins. Co. v. Bull Data Systems, Inc., 10 F.3d
425, 428 (7th Cir. 1993); Universal Licensing Corp. v. Paola del
Lungo S.P.A., 293 F.3d 579, 580-81 (2d Cir. 2002), as there
would be if Case Brasil became a defendant. And the federal
courts’ supplemental jurisdiction cannot be used to leap this
jurisdictional hurdle. See 28 U.S.C. § 1367(b).
The first step in determining indispensability is to decide
whether if the person could be joined, he would have to be
joined. One of the circumstances in which he would have to
be joined (if he could be) would be if he “claims an interest
relating to the subject of the action and is so situated that
the disposition of the action in [his] absence may as a
practical matter impair or impede [his] ability to protect that
interest.” Fed. R. Civ. P. 19(a)(2)(i). The second step is to
determine, if he cannot be joined, “whether in equity and
good conscience the action should proceed among the
parties before [the court], or should be dismissed.” Fed. R.
Civ. P. 19(b). Rule 19(b) lists several factors as bearing on
this determination, of which the two most important in this
case are “to what extent a judgment rendered in the per-
son’s absence might be prejudicial to” him and “whether the
No. 03-2863 5
plaintiff will have an adequate remedy if the action is
dismissed for nonjoinder.”
Because of the looseness of the terms “equity and good
conscience” and because their applicability is to be deter-
mined in each case by weighing several factors with no
weights indicated, we agree with those courts (the majority)
that hold that appellate review of a determination of
indispensability is limited to deciding whether the district
judge has committed an abuse of discretion. E.g., National
Union Fire Ins. Co. v. Rite Aid of South Carolina, Inc., 210 F.3d
246, 250 n. 7 (4th Cir. 2000); Davis v. United States, 192 F.3d
951, 957 (10th Cir. 1999); Washington v. Daley, 173 F.3d 1158,
1165 (9th Cir. 1999); Jota v. Texaco Inc., 157 F.3d 153, 161 (2d
Cir. 1998). The more particularistic, and the less rule-bound
and therefore more discretionary, the required judgment
made by the trial court, the more limited the competence of
the appellate court. A judgment that is not governed by a
rule cannot be determined to be correct or incorrect by
comparing it to the language or purpose of a rule, because
there is none; there is just a medley of imponderables. All
the appellate court can do as a practical matter in such a
situation is to decide whether the trial court exercised
judgment in a reasonable manner.
The second factor that we quoted—whether the plaintiff
has an alternative if the suit is dismissed—supports the
district court’s ruling. Dismissal would not be a disaster
for Extra. It can bring its fraud claim against Case in a
Brazilian court or, if it prefers, in a state court in Wisconsin,
where Case is headquartered, or Illinois, where the settle-
ment agreement was negotiated and signed. Extra is a
Brazilian company and therefore should be especially
comfortable litigating in Brazil’s court system, and Case is
suable there—remember that it moved to have the case
transferred to Brazil, and we take this to be binding consent
6 No. 03-2863
to be sued there. Brazil seems in fact a natural venue for the
litigation, given the pendency there of the related litigation
between Extra and Case’s Brazilian subsidiary. We do not
say that Brazil is in fact a more convenient forum for the
fraud litigation; that is the issue raised by Case’s forum non
conveniens motion, which the district judge did not address.
Such a motion, like a motion to dismiss for failure to join an
indispensable party, is addressed to the district judge’s
discretion, Piper Aircraft Co. v. Reyno, supra, 454 U.S. at 257;
In re Ford Motor Co., 344 F.3d 648, 651 (7th Cir. 2003), and it
is not for us to exercise that discretion in the judge’s place.
Our point is only that dismissal of this suit will not force
Extra to abandon its fraud claim; it has an alternative forum,
indeed alternative forums, in which to litigate it.
So this is a factor favoring indispensability. But the
first factor bearing on the issue—whether a judgment in this
suit would so harm Case Brasil that it would be inequitable
to allow the suit to proceed to judgment without its being a
party—is not as supportive of a finding of indispensability
as the judge thought. She termed Case Brasil a “primary or
active participant in the acts underlying the alleged fraudu-
lent conduct” and said that its presence in the litigation
would be “vital to this Court’s determination of whether
Case is liable.” The alleged fraud, to repeat, was Case’s
making Extra think that the settlement agreement gave
Extra the right to remain a distributor of Case Brasil and
capped its liability to Case Brasil. This allegation makes
Case Brasil, which has been sued for terminating Extra, an
intended beneficiary of the fraud but possibly an unwitting
one, so it is unclear whether it would be hurt by a judgment
against Case, as it would be if it were determined to be a
participant in the fraud. Freeman v. Northwest Acceptance
Corp., 754 F.2d 553, 559 (5th Cir. 1985). And while evidence
obtained from Case Brasil might well be vital to a determi-
nation of whether Case committed the alleged fraud—there
No. 03-2863 7
may have been no fraud if Case Brasil is, as Case claims,
bound by the settlement agreement—this would just make
Case Brasil an indispensable witness, and an indispensable
witness isn’t an indispensable party.
The judge added that “a judgment entered by this Court
would prejudice Case Brasil because it would impair its
ability to defend itself in subsequent actions which Extra
could file regarding its actions and obligations under the
[Settlement] Agreement.” Either in the pending litigation in
Brazil or in a new case there or in a U.S. state court, Extra
might be able to use findings underlying a judgment in its
favor in the suit in the Northern District of Illinois to further
its claims against Case Brasil. Suppose Extra proves that the
purpose of the agreement was to enable Case to obtain the
information that it wanted about the corrupt practices of its
subsidiary’s employees without preventing Case Brasil from
terminating Extra, by making Extra think that by agreeing
to turn over the information it would preserve its distribu-
torship, when all along Case Brasil was planning to repudi-
ate the agreement on the ground that it had never become
a party to it. Such a finding might help Extra prove in the
Brazilian litigation against Case Brasil that the termination
of the distributorship agreement was a breach for which
Case Brasil must pay damages. Or suppose that while Case
tried in the present litigation to show that there was no
fraud because its subsidiary performed all the subsidiary’s
obligations under the settlement agreement, the court found
the contrary. Such a finding too might be used against Case
Brasil in Brazil.
Under Illinois law, as under American law in general,
findings made after a full and fair hearing and essential to
the judgment entered on the basis of that hearing can be
used to preclude relitigation of the issues resolved by the
findings in another lawsuit between the same parties, or
8 No. 03-2863
parties in privity with them. Herzog v. Lexington Township,
657 N.E.2d 926, 929-30 (Ill. 1995); Brokaw v. Weaver, 305 F.3d
660, 669 (7th Cir. 2002) (Illinois law); Kalush v. Deluxe Corp.,
171 F.3d 489, 493 (7th Cir. 1999) (ditto). Although Extra
rather surprisingly does not contend that Case Brasil is
merely an alter ego of Case—that is, does not try to “pierce
the corporate veil” and thus treat the two corporations as
one—it does contend that Case Brasil was a tool used by its
parent to commit the fraud. It contends that the promise
that Case Brasil would not terminate Extra or seek payment
of more than $2 million was the bait dangled before Extra to
persuade it both to drop its suit against Case Brasil and give
Case the information about Case Brasil’s corrupt employees
that Case needed to clean up its subsidiary— and the tool
might well be thought to be in privity with the hand, as in
other agency settings. Moy v. County of Cook, 640 N.E.2d 926,
928 (Ill. 1994); Horwitz, Schakner & Associates, Inc. v. Schakner,
625 N.E.2d 670, 674 (Ill. App. 1993); Ellens v. Chicago Area
Office Federal Credit Union, 576 N.E.2d 263, 266 (Ill. App.
1991).
That, however, is so under Illinois’s law of collateral
estoppel, and we are given no indication of what Brazil’s
law on the matter is; it may be quite different. See Antonio
Gidi, “Class Actions in Brazil—A Model for Civil Law
Countries,” 51 Am. J. Comp. L. 311, 384-86 and n. 233 (2003).
Nor whether, though under federal law Illinois’s law of
collateral estoppel would determine the preclusive effect of
a federal judgment rendered in a diversity case governed by
Illinois substantive law, see Semtek Int’l Inc. v. Lockheed
Martin Corp., 531 U.S. 497, 508-09 (2001); Matosantos Com-
mercial Corp. v. Applebee’s Int’l, Inc., 245 F.3d 1203, 1207-
08 (10th Cir. 2001); Marshall v. Inn on Madeline Island, 631
N.W.2d 113, 120-21 (Minn. App. 2001); In re Armstrong, 294
B.R. 344, 357-58 (10th Cir. BAP 2003), Brazil has a similar
rule. If it does not, or if, as Professor Gidi suggests, Brazil
No. 03-2863 9
does not have a doctrine of collateral estoppel, Case Brasil
may have little to fear from the outcome of the present
litigation.
There is another point that the district judge did not
address, and that is the significance of the fact that Case
Brasil is a wholly owned subsidiary of Case. Even so,
because Extra does not argue that Case Brasil is an alter ego
of Case, it will be treated by the law for most purposes as an
independent entity. But it doesn’t follow that its relation to
Case is irrelevant to determining indispensability. If Case
and Case Brasil were separately owned, Case Brasil could
not rely on Case to protect its interests fully in the Northern
District litigation if Case Brasil were not (as it cannot be) a
party. But given the complete identity of interests by virtue
of Case’s being the sole owner of Case Brasil, we find it hard
to see how Case Brasil can be harmed by not being made a
party to the suit in Chicago. Suppose that a judgment
against Case in the Northern District would be given
preclusive effect, or at least (as may be likelier, Rudolf B.
Schlesinger et al., Comparative Law 481-84 (6th ed. 1998))
considerable weight, in the Brazilian litigation and result in
a cost to Case Brasil of $10 million. Since Case owns all of
Case Brasil, the judgment would cost Case the same
amount, so it would have the identical incentive to defend
Case Brasil’s interests in Chicago as Case Brasil would have
if it could be joined as a party. North Shore Gas Co. v. Salomon
Inc., 152 F.3d 642, 648 (7th Cir. 1998); In re Cambridge Biotech
Corp., 186 F.3d 1356, 1373 (Fed. Cir. 1999); Dainippon Screen
Mfg. Co., Ltd. v. CFMT, Inc., 142 F.3d 1266, 1272 (Fed. Cir.
1998); Pujol v. Shearson/American Express, Inc., 877 F.2d 132,
135 (1st Cir. 1989); but see Freeman v. Northwest Acceptance
Corp., supra, 754 F.2d at 555, 559. Indeed, we have great
difficulty seeing how a 100 percent subsidiary could ever be
an indispensable party; the cases that we have cited, while
refusing to treat 100 percent ownership as an absolute bar
10 No. 03-2863
to a finding of indispensability, do not indicate any factors
that would justify finding a 100 percent subsidiary to be
indispensable. But maybe there is a wrinkle in the corporate
structure of Case and Case Brasil that is eluding us which
would require a different conclusion.
The weight a Brazilian court would give a U.S. judgment
in Extra’s favor and the significance of Case’s sole own-
ership of Case Brasil are conspicuous loose ends in the
district judge’s analysis of indispensability. We repeat that
her ruling is reviewable only for an abuse of discretion. But
before the issue of abuse is even reached, the appellate court
must be satisfied that the judge has exercised her discretion
responsibly by considering all the salient factors that would
enter into a responsible exercise. That was not done here
and the judgment must therefore be vacated and the case
remanded for further consideration of the issue, consistent
with the guidance provided by this opinion.
VACATED AND REMANDED.
No. 03-2863 11
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-15-04