Rathje v. Horlbeck Capital Management , 2014 IL App (2d) 140682 ( 2014 )

2014 IL App (2d) 140682
No. 2-14-0682
Opinion filed October 24, 2014
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
______________________________________________________________________________
S. LOUIS RATHJE, as Trustee of the ) Appeal from the Circuit Court
S. Louis Rathje Trust, Under Trust ) of Kane County.
Agreement dated February 24, 1984, )
)
Plaintiff-Appellee, )
)
v. ) No. 11-CH-3589
)
HORLBECK CAPITAL MANAGEMENT, )
LLC, TODD HORLBECK, and HCM L.P., )
)
Defendants )
) Honorable
(Cantella and Company, Inc., Defendant- ) James R. Murphy,
Appellant). ) Judge, Presiding.
______________________________________________________________________________
JUSTICE ZENOFF delivered the judgment of the court, with opinion.
Justices Schostok and Spence concurred in the judgment and opinion.
OPINION
¶1 Defendant, Cantella & Co., Inc. (Cantella), appeals the trial court’s order of June 12,
2014, asserting that the court improperly conditioned Cantella’s right to arbitrate upon
compliance with an outstanding discovery order. We affirm.
¶2 I. BACKGROUND
¶3 A. The Hedge Fund
2014 IL App (2d) 140682
¶4 In October 2002, plaintiff, S. Louis Rathje, as trustee of the S. Louis Rathje Trust,
invested in a hedge fund. The hedge fund was organized as a limited partnership, HCM L.P.,
with Horlbeck Capital Management, LLC, as the general partner. Todd Horlbeck of St.
Charles, Illinois, managed the hedge fund. Todd Horlbeck was also an independent registered
representative with Cantella, a securities broker/dealer. Under a subscription agreement
between plaintiff and HCM L.P., plaintiff was required to open an investor account at Cantella
and to deposit into that account an amount equal to his capital contribution to HCM L.P.
Cantella then transferred the funds in the account to the partnership. In connection with the
investor account at Cantella, plaintiff signed two “suitability update” forms that provided for
arbitration of any controversies between plaintiff and Cantella. Plaintiff’s total investment in
the hedge fund was $1.3 million.
¶5 Pursuant to an agreement between Todd Horlbeck and Cantella, the partnership was
obligated to use Cantella’s services as a broker/dealer with respect to all of the partnership’s
investments. The agreement between Todd Horlbeck and Cantella further provided that
Cantella would establish brokerage accounts with Bear, Stearns & Company (Bear Stearns).
From time to time, plaintiff received statements from the partnership purporting to value his
share of the partnership’s assets. Todd Horlbeck was responsible for calculating that value.
The December 31, 2008, statement valued plaintiff’s share of the partnership’s assets at
approximately $1.4 million. When the partnership was dissolved on April 29, 2009, plaintiff
learned that the actual value of his share of the partnership’s assets was $421,217.64.
¶6 B. The Lawsuit
¶7 On October 7, 2011, plaintiff filed suit against Horlbeck Capital Management, LLC,
Todd Horlbeck, and HCM L.P. (collectively the Horlbeck defendants). In the suit, plaintiff
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named Cantella a respondent in discovery pursuant to section 2-402 of the Code of Civil
Procedure (Code) (735 ILCS 5/2-402 (West 2010)). With respect to the Horlbeck defendants,
plaintiff alleged breach of contract, breach of fiduciary duty, fraudulent misrepresentation,
negligent misrepresentation, and violation of the Illinois Consumer Fraud and Deceptive
Business Practices Act (815 ILCS 505/1 et seq. (West 2010)). Plaintiff also asked for an
accounting. With respect to Cantella, plaintiff alleged that it had actual and constructive
possession of evidence that plaintiff needed to prove his claims and that would lead to the
discovery of other parties who should be named as defendants. Cantella was served on October
12, 2011. In addition to the complaint and summons in discovery, plaintiff served on Cantella a
notice of deposition, interrogatories, and a request for documents. Cantella’s response and
deposition were due in November 2011.
¶8 C. The Two-and-a-Half-Year Discovery Wrangle
¶9 According to an affidavit furnished by plaintiff’s counsel, shortly after Cantella was
served, Cantella’s attorney requested an extension of time in which to respond to discovery.
Plaintiff’s counsel agreed to a one-month extension. When Cantella had not provided any
discovery by mid-December 2011, plaintiff’s counsel contacted Cantella’s lawyer, who then
requested an additional extension. In an email dated January 4, 2012, Cantella’s counsel stated
that he would send “responses and objections and production” by the end of that week.
¶ 10 According to plaintiff’s counsel’s affidavit, “a few” days later, Cantella produced six
documents, all of which related to the arbitration agreement between plaintiff and Cantella. On
January 6, 2012, Cantella filed a “special and limited” appearance and a “motion to quash and
for protective order.” Cantella argued that all of plaintiff’s discovery requests should be
quashed because plaintiff had signed documents agreeing to arbitrate “all controversies that may
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arise between” plaintiff and Cantella. The trial court denied the motion on April 10, 2012, on
the ground that seeking discovery from Cantella was not a “controversy.” Cantella’s position
was that even service of a subpoena had to go through arbitration. However, Cantella did not
appeal the denial of its motion to quash the discovery requests.
¶ 11 On April 10, 2012, the court ordered Cantella to file objections to plaintiff’s discovery
requests by May 2, 2012. Cantella never filed any such objections. On May 9, 2012, the court
ordered Cantella to comply with written discovery within 14 days. Cantella did not comply.
Then, on May 22, 2012, Cantella’s counsel withdrew. On May 24, 2012, Cantella’s new
counsel filed a motion to stay enforcement of the May 9 order, on the basis that Cantella was
going to file a motion to certify a question for appeal pursuant to Illinois Supreme Court Rule
308 (eff. Feb. 26, 2010), relating to the arbitration agreement, and intended to file a motion to
impose limits on discovery. The court granted Cantella leave to file its motions by the end of
the business day on May 30, 2012. On June 12, 2012, the court denied Cantella’s request to
certify a question as well as its motions for a protective order and to stay discovery pending the
outcome of the Horlbeck defendants’ interlocutory appeal, in which the Horlbeck defendants
unsuccessfully asserted a right to arbitrate under the provision in the agreement between Cantella
and plaintiff. Rathje v. Horlbeck Capital Management, LLC, 2012 IL App (2d) 120510-U.
The court then ordered Cantella to comply with discovery by July 3, 2012.
¶ 12 According to plaintiff’s counsel’s affidavit, he and Cantella reached an agreement on July
2, 2012, to allow Cantella two additional weeks to produce its discovery responses. In
exchange, Cantella allegedly agreed to extend the period in which plaintiff would have to
convert Cantella to a party defendant. However, according to the affidavit, on July 10, 2012,
Cantella reneged on the agreement. Instead, Cantella proposed a “rolling” production of 50,000
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documents. The court ordered a rolling production, and Cantella produced 597 pages.
Cantella answered plaintiff’s interrogatories on July 17, 2012. Cantella did not thereafter
complete its rolling production.
¶ 13 On August 14, 2012, Cantella filed a motion to terminate its status as a respondent in
discovery, on the theory that the trial court lost jurisdiction over it when plaintiff did not timely
seek to convert it to a party defendant. On August 16, 2012, plaintiff filed a motion for
sanctions based on Cantella’s failure and refusal to comply with discovery. On September 6,
2012, the court denied Cantella’s motion to terminate and granted plaintiff’s motion for
sanctions. On September 14, 2012, Cantella agreed to a finding of contempt and appealed.
This court affirmed the sanctions as modified in our order. Rathje v. Horlbeck Capital
Management, LLC, 2013 IL App (2d) 121120-U, ¶ 24.
¶ 14 On June 25, 2013, Cantella filed a motion to refer the discovery dispute to arbitration.
The court treated this as a motion to reconsider the April 10, 2012, denial of the original motion
to quash the discovery requests and denied it. On July 19, 2013, the court ordered Cantella “to
make a full document production immediately, recognizing that such production was to have
been made by September 14, 2012.” The court further ordered that Cantella was to be fined
$250 per day for every day after July 19, 2013, that it failed to tender a complete production of
documents. Instead of producing documents, Cantella filed a motion to vacate the sanctions.
The motion was based on the dismissal of plaintiff’s second amended complaint against the
Horlbeck defendants. The court denied Cantella’s motion and allowed plaintiff to file a motion
to reconsider the dismissal. The court later granted plaintiff’s motion to reconsider in part.
On December 4, 2013, the court again sanctioned Cantella for its refusal to produce documents
and ordered production by December 19, 2013.
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¶ 15 On December 19, 2013, Cantella moved to convert itself to a party defendant. The court
granted the motion, and the written order provided that Cantella was to produce documents the
same day. Cantella complied and produced 33,000 heavily redacted pages.
¶ 16 On April 8, 2014, plaintiff filed a third amended complaint, this time naming Cantella as
a party defendant. Plaintiff asserted causes of action against Cantella for negligent supervision
of the Horlbeck defendants, constructive fraud, unjust enrichment, and breach of contract on the
theory that plaintiff was a third-party beneficiary of a contract between Todd Horlbeck and
Cantella. On May 1, 2014, plaintiff filed a motion to compel Cantella to produce unredacted
documents. On May 8, 2014, Cantella filed a motion to compel arbitration and stay
proceedings. The basis of the motion to compel arbitration was the shift in Cantella’s status
from a respondent in discovery to a party defendant. Now, Cantella asserted, a controversy
existed between it and plaintiff, and, under the arbitration agreement that plaintiff signed, all
controversies were to be arbitrated. The court heard both motions on June 12, 2014.
¶ 17 D. The June 12, 2014, Hearing and Order
¶ 18 On June 12, 2014, Cantella’s attorney explained to the court that Cantella had converted
itself from a respondent in discovery to a party defendant, which was permitted under the Code,
because doing so “could get [Cantella] where it needed to be *** such that a controversy would
be raised against it that would be arbitrable.” The attorney reminded the court that Cantella had
produced 33,000 pages such that “Cantella fulfilled largely its obligation to provide discovery in
this case.” Cantella acknowledged that it owed plaintiff unredacted copies of the documents it
had produced and stated that it would comply if the court denied the motion to compel
arbitration. In response, plaintiff argued that Cantella waived arbitration altogether by
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converting itself to a party defendant. “[Cantella] decided [it] wanted to be sued,” plaintiff
concluded.
¶ 19 Before ruling, the court heard the arguments on both parties’ motions—plaintiff’s motion
to compel production of unredacted documents and Cantella’s motion to compel arbitration and
stay proceedings. In its ruling, the court stated that Cantella waived arbitration to the extent of
“completing what [it] had to do as either respondents [sic] in discovery or voluntary defendants
[sic] in this case up to this point.” The court found waiver based on the “unique situation” in
which Cantella effectively said “make us [sic] a defendant” and “by the way, here’s 33,000
pages of documents.” The court granted plaintiff’s motion to compel production of unredacted
documents.
¶ 20 However, the court ruled that Cantella did not fully waive arbitration merely by
self-converting from a respondent in discovery to a party defendant. The court stated: “I think
that further proceedings against Cantella are arbitratable [sic] besides what I am going to retain
jurisdiction on.” The court further said: “I’m going to grant Cantella’s motion [to compel
arbitration] *** but on a delayed basis until [it has] complied with the discovery that [it owes] in
this case, and so I think under the circumstances that I have the jurisdiction to do that ***.”
The court reiterated that “any arbitration will be delayed until the compliance with previous
orders of this court” relating to discovery. The court doubted the need for all the redactions in
the 33,000 pages of documents and opined that Cantella had been using the arbitration agreement
as a litigation strategy to avoid discovery. To stem further use of the arbitration agreement as a
strategy to avoid disclosure, the court stated that it was “conditioning that arbitration for further
consideration if there is no compliance.” The court decided to wait “to see whether there is
compliance before fully sending this to arbitration and staying the proceedings against Cantella.”
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¶ 21 On June 12, 2014, the court entered a written order. Paragraph 1 of the court’s written
order required Cantella to produce unredacted copies of the previously produced 33,000
documents by July 10, 2014. Paragraph 2 stated: “Defendant Cantella’s motion to compel
arbitration is conditionally granted, subject to Cantella’s compliance with paragraph (1) above.”
Paragraph 3 related to the Horlbeck defendants. Paragraph 4 set July 16, 2014, for status on
Cantella’s compliance with discovery and for “entry of the order granting Cantella’s motion to
compel arbitrations [sic].” On July 10, 2014, Cantella filed a notice of interlocutory appeal.
¶ 22 II. ANALYSIS
¶ 23 We must first address our jurisdiction. In Cantella’s jurisdictional statement, it asserts
that jurisdiction is proper under Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010),
which allows interlocutory appeals from orders granting, modifying, refusing, dissolving, or
refusing to dissolve injunctions. Cantella maintains that the trial court in effect denied its
motion to stay proceedings when it ordered Cantella to produce further discovery. Plaintiff
argues that Cantella’s motion to compel arbitration and to stay the proceedings was a mislabeled
request for reconsideration of the court’s prior rulings denying arbitration, such that the ruling
was not an interlocutory order subject to appeal. Additionally, plaintiff contends that the June
12, 2014, order contemplated that an order concerning arbitration would be entered at a later date
so that there was no immediately appealable interlocutory order. As an alternative basis for
finding that we have jurisdiction, Cantella asserts that the order is appealable pursuant to the
Federal Arbitration Act (FAA) (9 U.S.C. § 1 et seq. (2006)).
¶ 24 We have no need to consider whether, or how, the FAA impacts our jurisdiction, because
we agree with Cantella that we have jurisdiction under Rule 307(a)(1). We disagree with
plaintiff that the motion to compel arbitration was a mislabeled motion to reconsider. The
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motion to compel arbitration plainly stated that it was based on Cantella’s changed status from a
respondent in discovery to a defendant.
¶ 25 To determine what constitutes an appealable order pursuant to Rule 307(a)(1), courts
look to the substance of the action and not the form. In re A Minor, 127 Ill. 2d 247, 260 (1989).
Orders having the force and effect of injunctions are appealable even if they are called something
else. A Minor, 127 Ill. 2d at 260. For instance, a “stay” order is synonymous with an
injunction. Allianz Insurance Co. v. Guidant Corp., 355 Ill. App. 3d 721, 729 (2005).
Similarly, the denial of a motion to stay is treated as the denial of a request for a preliminary
injunction. Hastings Mutual Insurance Co. v. Ultimate Backyard, LLC, 2012 IL App (1st)
101751, ¶ 28. Here, Cantella moved to compel arbitration and to stay proceedings. While it is
true that the court set a future date for entry of an order granting arbitration, the immediate effect
of its order compelling further discovery was to deny the motion to stay proceedings. The court
even stated that it would not stay the proceedings as of June 12, 2014, and that the court
specifically retained jurisdiction under section 2-402 of the Code.
¶ 26 The next question is whether the order compelling Cantella to produce unredacted copies
of the 33,000 pages of documents that it produced in December 2013 involved pure discovery
matters that would not be appealable under Rule 307(a)(1). In Allianz, we recognized that
Illinois courts have rejected the notion that matters involving pure discovery issues are
appealable as injunctions. Allianz, 355 Ill. App. 3d at 729. Interlocutory ministerial or
administrative orders do not come within the realm of injunctive relief and cannot be appealed,
because they regulate only procedural details of the litigation before the court. Allianz, 355 Ill.
App. 3d at 729. For such orders to be appealable, they must also affect the parties’ relationship
in their everyday activity apart from the litigation. A Minor, 127 Ill. 2d at 262. Here, Cantella
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had previously produced the documents in question, albeit in redacted form. It would seem that
the order to produce unredacted copies of the same documents was ministerial or administrative.
However, the order to produce unredacted copies impinged on Cantella’s right to arbitration in
that it delayed arbitration. Arbitration is an activity apart from the litigation, because, where
parties have contracted to have disputes settled by arbitration, it is the arbitrators’ view of the
facts that they have agreed to accept. Griggsville-Perry Community Unit School District No. 4
v. Illinois Educational Labor Relations Board, 2013 IL 113721, ¶ 18. Consequently, the
discovery order affected the parties’ relationship apart from the litigation. Therefore, we hold
that we have jurisdiction under Rule 307(a)(1). We turn now to the merits.
¶ 27 A. Cantella’s Contentions
¶ 28 Cantella first contends that the trial court erred in conditioning arbitration on compliance
with the court’s order to produce unredacted copies of the documents it produced on December
19, 2013. Cantella argues that, once the trial court determined that the substantive dispute was
covered by the arbitration agreement, no further discovery was permitted. The record shows
that plaintiff opened an investor account with Cantella and deposited certain funds into that
account. The arbitration agreement was part of a document updating that investor account.
Section 2 of the FAA provides that a “written provision in any maritime transaction or a contract
evidencing a transaction involving commerce to settle by arbitration a controversy thereafter
arising out of such contract or transaction *** shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2
(2006). That the arbitration agreement between the parties was one evidencing a transaction
involving commerce is not disputed, although plaintiff denies that the parties’ dispute falls within
the scope of the arbitration agreement.
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¶ 29 Cantella maintains that, because the dispute is subject to the FAA, substantive federal law
and decisions of the federal courts are binding on state courts, citing Carr v. Gateway, Inc., 241
Ill. 2d 15, 21 (2011) (“This court has recognized that, in construing federal laws, decisions of the
federal courts are binding upon this court, to the end that such laws may be given uniform
application.”). Applying federal law, Cantella concludes that the trial court erred in requiring it
to engage in further discovery once the court decided that the matter was subject to arbitration,
because the federal courts have held that all pretrial proceedings must be stayed, including
discovery, when a dispute is subject to the FAA.
¶ 30 Section 3 of the FAA provides that, “[i]f 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 *** shall on application of one of the parties stay the trial of the
action until such arbitration has been had.” 9 U.S.C. § 3 (2006). “[T]he trial of the action”
has been understood to include pretrial proceedings, such as discovery, rather than being limited
to the trial phase of litigation. GEA Group AG v. Flex-N-Gate Corp., 740 F.3d 411, 415 (7th
Cir. 2014). From this, Cantella concludes that the trial court erred in conditioning arbitration on
Cantella’s compliance with discovery. Further, Cantella concludes, the respondent-in-
discovery statute must give way as it is merely a state procedural rule governing discovery and as
Cantella self-converted to a party defendant, thereby terminating the applicability of the
respondent-in-discovery statute. A trial court’s decisions concerning the course and conduct of
the discovery process are reviewed for abuse of discretion. In re Application of the County
Treasurer & ex officio County Collector, 2012 IL App (1st) 112897, ¶ 21. Here, however,
resolution of the issues that Cantella raises depends upon our construction of the
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respondent-in-discovery statute. Issues of statutory construction are questions of law, which are
reviewed de novo. People ex rel. Madigan v. Bertrand, 2012 IL App (1st) 111419, ¶ 20.
¶ 31 We must determine the relationship between the respondent-in-discovery statute and
Cantella’s asserted contractual right to limit discovery to that provided for in the arbitration
agreement. We first examine the respondent-in-discovery statute. Section 2-402 of the Code
provides that a plaintiff in any civil action may designate as respondents in discovery individuals
or entities that the plaintiff believes have information essential to the determination of who
should properly be named as additional defendants. 735 ILCS 5/2-402 (West 2010). Section
2-402 is used to discover the identity of defendants other than a defendant named in the
underlying complaint. Hadley v. Subscriber Doe, 2014 IL App (2d) 130489, ¶ 65. Once a
person or entity has been named a respondent in discovery and service of process has been
properly executed, the court acquires in personam jurisdiction over the respondent in discovery
for all purposes (Allen v. Thorek Hospital, 275 Ill. App. 3d 695, 703 (1995)), and that jurisdiction
continues until all issues of fact and law are determined (Whitley v. Lutheran Hospital, 73 Ill.
App. 3d 763, 766 (1979)). Service on respondents in discovery permits courts to compel
discovery from those persons or entities so designated. Allen, 275 Ill. App. 3d at 703. A
person or entity named as a respondent in discovery is required to respond to the plaintiff’s
discovery in the same manner as are defendants. 735 ILCS 5/2-402 (West 2010). If the
evidence discloses probable cause to add a respondent in discovery as a party defendant, the
plaintiff may do so within six months from the time the respondent in discovery was named.
735 ILCS 5/2-402 (West 2010). The six-month period can be extended, as it was here, from
time to time, for a failure or refusal of the respondent in discovery to comply with timely filed
discovery requests. 735 ILCS 5/2-402 (West 2010). The statute further provides that a person
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or entity named as a respondent in discovery “may upon his or her own motion be made a
defendant in the action, in which case the provisions of this Section are no longer applicable to
that person.” 735 ILCS 5/2-402 (West 2010).
¶ 32 Here, Cantella was named a respondent in discovery on October 11, 2011, and it was
served on October 12, 2011. In January 2012, Cantella moved to quash plaintiff’s discovery
requests, on the basis of the arbitration agreement. The trial court resolved against Cantella the
issue of whether the agreement required arbitration of discovery matters, and it denied the
motion to quash. Although Cantella could have immediately appealed that interlocutory order
under Rule 307(a)(1) (see Grane v. Grane, 130 Ill. App. 3d 332, 334 (1985) (order denying
arbitration is appealable pursuant to Rule 307)), it was not required to do so. See In re Haley
D., 2011 IL 110886, ¶ 63 (party who wishes to challenge an interlocutory order that is appealable
as of right may wait until final judgment and challenge the order at that time). However,
having elected not to bring an interlocutory appeal, Cantella was bound to comply with the trial
court’s discovery orders. Pursuant to section 2-402, respondents in discovery “shall” be
required to respond to the plaintiff’s discovery in the same manner as are defendants. 735 ILCS
5/2-402 (West 2010).
¶ 33 By December 19, 2013, Cantella still had not produced the documents that plaintiff had
requested and that Cantella had at one point agreed to produce. The court’s written order of
December 19, 2013, reflects that Cantella’s “request to invoke the jurisdiction of the court and be
converted to a party defendant” was granted. Much has been written about the
respondent-in-discovery statute, but there is a paucity of judicial interpretation of the part of the
statute that allows respondents in discovery to convert themselves to party defendants. It
certainly was not necessary for Cantella to “invoke the jurisdiction of the court,” because the
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court had acquired jurisdiction over Cantella “for all purposes” when Cantella was served on
October 12, 2011. Allen, 275 Ill. App. 3d at 703. Its jurisdiction over Cantella continued,
uninterrupted, after Cantella self-converted to a party defendant, because, once a court acquires
in personam jurisdiction, that jurisdiction continues until all issues of fact and law are
determined. Whitley, 73 Ill. App. 3d at 766 (court retained jurisdiction over physician who was
converted to a defendant, because jurisdiction was acquired when the doctor had been served as a
respondent in discovery). 1 Thus, although section 2-402 provides that “the provisions of this
Section are no longer applicable to” a person or entity that self-converts to a party defendant, we
hold that the court retains the power to enforce its discovery orders that were entered when the
self-converted person or entity was a respondent in discovery.
¶ 34 If this were not true, the respondent-in-discovery statute could be rendered meaningless.
We are mindful that a statute should be construed insofar as possible so that no part of it is
rendered superfluous, meaningless, absurd, inconvenient, or unjust. People v. Single Story
House, 2012 IL App (5th) 110562, ¶ 10. It would be an absurd, inconvenient, and unjust result
to allow Cantella to waste over two years of the court’s time by hamstringing and stonewalling
and then avoid the repercussions of its actions simply by self-converting from a respondent in
discovery to a party defendant. Cantella self-converted to a party defendant not because it
wanted the court to resolve the dispute on the merits but because it wanted to avoid that result,
proceed to arbitration, and wash its hands of its obligations to obey court orders entered while it
was a respondent in discovery. In sum, Cantella attempted to use the rules to avoid playing by
1
Even an order compelling arbitration under the FAA does not divest the court, whether
state or federal, of jurisdiction. Frank v. American General Finance, Inc., 23 F. Supp. 2d 1346,
1350 (S.D. Ala. 1998).
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the rules. Nothing exemplifies this more than its production of 33,000 pages of redacted
documents after it self-converted to a party defendant and its subsequent denial of the court’s
right to order it to produce unredacted copies of those same documents.
¶ 35 It is an elementary principle of law that a court has the inherent power to enforce its
orders. Smithberg v. Illinois Municipal Retirement Fund, 192 Ill. 2d 291, 297 (2000). The
court ordered Cantella to comply with document production by December 19, 2013. The court
did not order the production of redacted documents where there was no apparent purpose for the
redactions. Therefore, the June 12, 2014, order requiring Cantella to produce unredacted copies
of the documents was in practicality an order enforcing its December 4, 2013, order to produce
the documents by December 19, 2013. The court had the right and the responsibility to monitor
compliance with the December 4, 2013, order, as a party’s purported compliance does not
discharge its responsibility unless the court finds the compliance acceptable. Anderson Dundee
53, L.L.C. v. Terzakis, 363 Ill. App. 3d 145, 157 (2005). In addition, the court has the inherent
authority to impose sanctions for the failure to comply with its orders. Cronin v. Kottke
Associates, LLC, 2012 IL App (1st) 111632, ¶ 39. The purpose of the inherent power to impose
sanctions is to vindicate and maintain the integrity of our court system. Sander v. Dow
Chemical Co., 166 Ill. 2d 48, 68 (1995).
¶ 36 Under these circumstances, the cases Cantella cites for the proposition that the trial court
must stay all discovery upon announcing its intention to grant the motion to compel arbitration
are inapplicable. In Suarez-Valdez v. Shearson Lehman/American Express, Inc., 858 F.2d 648
(11th Cir. 1988), the court of appeals held that the district court erred in failing to stay discovery
where the defendants moved to stay the action pending arbitration, but it is clear from the context
that the motion came before any discovery had been conducted. Suarez-Valdez, 858 F.2d at
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649-50. Similarly, in Lummus Co. v. Commonwealth Oil Refining Co., 273 F.2d 613, 614 (1st
Cir. 1959), the court stayed discovery pending arbitration where no discovery had been
undertaken. In Klepper v. SLI, Inc., 45 Fed. App’x 136, 139 (3d Cir. App’x 2002), an
unpublished decision, the court of appeals vacated the district’s court’s order requiring the
completion of discovery, which was entered without a prior ruling on the arbitrability of the
underlying stock-option issue. However, it is clear that the defendant sought arbitration before
any discovery had been ordered and then immediately appealed the district court’s order denying
arbitration and ordering discovery. Klepper, 45 Fed. App’x at 138.
¶ 37 Here, Cantella urges that federal law interpreting the FAA shifts to the arbitrators the
responsibility for conducting the limited discovery allowed in arbitration. By raising this
argument at this juncture, Cantella is doing nothing less than asking us to review the trial court’s
April 10, 2012, order denying its motion to quash discovery. We refuse to do so. Indeed,
none of Cantella’s arguments regarding whether the respondent-in-discovery statute applies
where there is an agreement to arbitrate are reviewable at this point. That horse has not yet left
the barn. As we indicated, Cantella did not seek interlocutory review of the April 10, 2012,
order denying the motion to quash, and the instant appeal is from the interlocutory order of June
12, 2014, not from a final judgment. To review the April 10, 2012, order now would go beyond
the scope of the instant appeal. An appeal pursuant to Rule 307 does not open the door to a
general review of all orders entered up to the date of the interlocutory order that is appealed.
Estate of Bass v. Katten, 375 Ill. App. 3d 62, 73 (2007). Furthermore, as we discuss fully
below, Cantella waived the right to arbitrate discovery matters.
¶ 38 We reiterate that the trial court had the authority to enforce its discovery orders that were
entered while Cantella was a respondent in discovery, for the reasons stated above. It follows
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that the court also had the authority to condition arbitration of the merits of the dispute on
compliance with its discovery orders. A court has the power to sanction pursuant to its inherent
authority to control its docket. Dolan v. O’Callaghan, 2012 IL App (1st) 111505, ¶ 65. The
recognition of this authority is necessary to prevent undue delays in the disposition of cases,
caused by abuses of procedural rules. Dolan, 2012 IL App (1st) 111505, ¶ 65. The instant
case presents a shocking abuse of the rules by Cantella. It spent 2½ years evading and
thwarting the court’s orders. Accordingly, we hold that, under these circumstances, the court
did not err in conditioning arbitration on compliance with the order to produce unredacted
documents.
¶ 39 Next, Cantella argues that the trial court erred in finding that it waived arbitration.
Under section 3 of the FAA, the court must stay the proceedings pending arbitration upon the
application of a party if the issue involved is referable to arbitration under a written agreement,
provided that the applicant for the stay has not defaulted in proceeding with arbitration. 9
U.S.C. § 3 (2006); Envirex, Inc. v. K.H. Schussler Fur Umwelttechnik GMBH, 832 F. Supp.
1293, 1295 (E.D. Wis. 1993). Consequently, the threshold question is whether the applicant for
the stay has defaulted by waiving its right to arbitration. Envirex, 832 F. Supp. at 1295.
Federal courts have developed a strong presumption in favor of arbitration and do not lightly find
waiver. Envirex, 832 F. Supp. at 1295. For that reason, the party opposing the stay bears a
heavy burden of showing that the applicant has waived its right to arbitration by acting in a
manner inconsistent with the right to arbitration. Envirex, 832 F. Supp. at 1295. For example,
a party can waive its right to arbitrate by actively participating in a lawsuit. Parler v. KFC
Corp., 529 F. Supp. 2d 1009, 1012 (D. Minn. 2008).
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¶ 40 It is not true that, as Cantella argues, the trial court found waiver of the right to arbitrate
solely because of Cantella’s self-conversion to a party defendant. However, even if the court
had so found, it is at least arguable that the court would have been correct. See Cabinetree of
Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995) (party’s election
to proceed before a nonarbitral tribunal for resolution of a dispute is a presumptive waiver of the
right to arbitrate). Rather, the court found waiver based upon the production of 33,000 pages of
documents upon Cantella’s self-conversion to a party defendant. The court stated that, because
of “the unique situation” where “Cantella said make us [sic] a defendant and figure out what
your cause of action is going to be[,] and by the way here’s 33,000 pages of documents that we
[sic] owed when we were [sic] a respondent in discovery,” Cantella waived its right to arbitrate
discovery matters. Whether Cantella waived its right to arbitration is a legal question, which
we review de novo. Household Finance Corp. III v. Buber, 351 Ill. App. 3d 550, 553 (2004).
¶ 41 Cantella attempts to inject ambiguity into the sequence of events on December 19, 2013,
by suggesting that its document production preceded its self-conversion to a party defendant.
There is no report of proceedings for that date, but the written order makes clear what occurred
relating to the production of the documents. First, the court granted Cantella’s request to be
converted to a party defendant. Second, the court granted plaintiff leave to file an amended
complaint against all “defendants.” Third, the court entered and continued plaintiff’s request to
lift the stay on sanctions against Cantella “in the event full document production” was not made
by December 19, 2013. 2 Had Cantella already produced the documents, there would have been
2
The order says “12/19/14,” which is obviously a scrivener’s error as the status date for
monitoring Cantella’s compliance was January 2, 2014. The parties agree that Cantella made the
document production on December 19, 2013, although there is nothing in the record to so reflect.
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no need to continue the matter to monitor its compliance. At the hearing on June 12, 2014,
Cantella’s counsel made clear that Cantella had produced the documents upon its self-conversion
to a party defendant so that plaintiff could decide whether to sue Cantella or dismiss it from the
action.
¶ 42 In producing 33,000 pages of documents, which Cantella’s attorney described as largely
fulfilling Cantella’s discovery obligation as a respondent in discovery, Cantella undermined its
own strategy to pursue its right to limited discovery under the arbitration agreement. Cantella’s
voluntary production of 33,000 pages of documents was so inconsistent with its asserted right
either to arbitrate all discovery matters or to limit the scope of discovery to what was outlined in
the arbitration agreement that it waived such rights. Cantella’s production was voluntary in the
sense that it was purposeful toward Cantella’s own goal of being sued so that a “controversy”
would exist. The history of this litigation indicates that Cantella knew how to defy discovery
orders and accept being held in contempt when doing so suited its own ends.
¶ 43 The entire course of Cantella’s conduct demonstrates behavior inconsistent with its
asserted right to arbitrate discovery matters. Cantella repeatedly filed delaying motions in its
two-year campaign to thwart the court’s discovery orders. Cantella argues that it diligently
pursued its right to arbitration by asserting it on several occasions. However, Cantella’s motion
to refer the discovery dispute to arbitration, brought on June 25, 2013, was based on nothing
new, and the motion was brought more than a year after the court had denied the motion to quash
discovery. The timing of the motion to refer the discovery dispute to arbitration suggests that it
was more a ploy to avoid the severe monetary sanctions this court had recently affirmed (Rathje,
2013 IL App (2d) 121120-U, ¶ 23) than a sincere effort to obtain arbitration, especially where
Cantella’s next motion was another attempt to vacate the sanctions. Cantella’s third motion
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addressing arbitration was made a month after plaintiff filed his third amended complaint.
Under ordinary circumstances, the delay of a month might not raise eyebrows, but in the present
case it was simply more of Cantella’s obstreperous behavior, as was its attempt to obtain a
certified question after it had decided not to perfect an appeal when it had the opportunity to do
so.
¶ 44 Perhaps the best example of Cantella’s conduct that was inconsistent with the assertion of
its right to arbitrate discovery matters was Cantella’s admission to the court, in a document on
June 11, 2012, that it could choose to convert itself right then to a party defendant, thereby
terminating the application of section 2-402. However, for its own strategic reasons at that
time, Cantella chose to remain a respondent in discovery for another year and a half, thus
prolonging the process and delaying its ability to seek arbitration.
¶ 45 For these reasons, Cantella’s reliance on Jenkins v. Trinity Evangelical Lutheran Church,
356 Ill. App. 3d 504 (2005), is misplaced. In Jenkins, the court held that the defendants did not
waive their right to arbitrate where they raised the issue within a reasonable period after the
filing of the complaint and then had “little choice but to participate in the litigation and file
pleadings” after the court denied their motion for summary judgment. Jenkins, 356 Ill. App. 3d
at 508. Here, in contrast, Cantella recognized, at least as of June 2012, that it could choose not
to participate any longer as a respondent in discovery. So, while Cantella initially raised the
issue of arbitration as soon as it entered the case, unlike the defendants in Jenkins it could have
chosen not to participate in the litigation, by promptly terminating its status as a respondent in
discovery.
¶ 46 We next examine whether plaintiff was prejudiced. In deciding whether a party has
waived its arbitration rights, the court also considers whether the opposing party has been
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prejudiced as a result of the acts purportedly constituting waiver. Envirex, 832 F. Supp. at
1296. While the trial court made no specific finding that plaintiff was prejudiced, that finding
is implicit in its ruling that a partial waiver of arbitration occurred. Cantella contends that
plaintiff could have avoided any alleged prejudice from having to draft a complaint by initiating
arbitration, as Cantella argues he was obliged to do. According to Cantella, the time and
resources that plaintiff expended in preparing the third amended complaint would have been
necessary regardless of whether the dispute pended in court or in arbitration. Even if that were
true, had Cantella cooperated with its obligations as a respondent in discovery once the trial court
denied its motion to quash plaintiff’s discovery requests and it chose not to appeal, or had it
immediately appealed the April 2012 denial of arbitration, instead of foot-dragging for over two
years, plaintiff would not have incurred the enormous fees he did.
¶ 47 Moreover, Cantella’s constant delaying tactics resulted in an unnecessary delay in filing
its motion to compel arbitration as a party defendant. Prejudice by reason of delay in making
an arbitration demand may rise to the level of a default so as to require denial of a stay of
proceedings in favor of arbitration. In re Mercury Construction Corp. v. Moses H. Cone
Memorial Hospital, 656 F.2d 933, 939 (4th Cir. 1981). Had Cantella converted to a party
defendant in June 2012, when it first noted its right to do so, it could have filed its motion to
compel arbitration a year and a half earlier than it did. Instead, it carried on with its crusade to
flout the court’s orders. Even when Cantella finally decided that it was in its interest to produce
33,000 pages of documents, they were so heavily redacted as to make the production useless to
plaintiff. Instead of defending the redactions, Cantella admitted at the June 12, 2014, hearing
that it owed plaintiff unredacted copies and would produce them if the motion to compel
arbitration was denied. Under these facts, and considering that plaintiff never obtained the
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documents he was entitled to, we hold that plaintiff was prejudiced. Accordingly, the court did
not err in finding that Cantella waived its right to immediate arbitration.
¶ 48 B. Plaintiff’s Contention
¶ 49 Plaintiff contends that the trial court erred in finding that Cantella’s waiver of arbitration
was only partial. It is plaintiff’s position that Cantella’s self-conversion to a party defendant
waived its right to arbitration altogether, as Cantella requested to be sued. In essence, plaintiff
claims that the order of June 12, 2014, was adverse to him. A notice of cross-appeal is
mandatory for review of a judgment adverse to the appellee. Greco v. Coleman, 176 Ill. App.
3d 394, 401 (1988). Here, because plaintiff did not file a notice of cross-appeal, we are not
authorized to examine or decide this issue.
¶ 50 III. CONCLUSION
¶ 51 For the foregoing reasons, the judgment of the circuit court of Kane County is affirmed.
¶ 52 Affirmed.
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