Res Judicata Bars Fraud in Inducement Claim Versus Lawyer Defendant

Eckert v. Levin, 2015 WL 859530 (N.D.Ill. 2015) examines claim preclusion (“res judicata”) in the context of an aborted settlement agreement reached in an earlier state court breach of contract case.

The plaintiff sued the attorney who represented the plaintiff’s adversary in the prior state court case (plaintiff in the Federal case was the defendant in the state case), for fraud in the inducement and legal malpractice.  While the defendant didn’t represent the plaintiff in the earlier state court suit, the plaintiff still sued the defendant for legal malpractice based on his hands-on involvement in crafting a settlement agreement in the state court lawsuit.

But the plaintiff breached the settlement agreement and after the defendant moved to enforce it, a million dollar judgment entered against the plaintiff in the state court action.

The plaintiff then sued in Federal court (there was diversity jurisdiction) on the theory that he was fraudulently induced to sign the settlement agreement that resolved the state court case.  The Northern District dismissed the plaintiff’s fraud in the inducement claim and provided a useful synopsis of the parameters of claim preclusion under Illinois law.

Res judicata or “claim preclusion” prevents the relitigation of claims or defenses that were or could have been brought in a prior case;

– The doctrine seeks to encourage finality in litigation that sometimes seems to drag on interminably.  

– The three requirements for res judicata are (1) a final judgment on the merits; (2) an identity of cause of action (between the first and second suits); and (3) an identity of parties or their privies;

– For element (2) – the identity of cause of action requirement – Illinois applies the “transactional test”, which looks at whether the first and second cases stem from a “single group of operative facts”;

– Drilling down further, this single group of operative facts test looks at whether the facts underlying the first and second cases are related in time, space, origin or motivation, whether it’s convenient to try the cases together, and whether trying the cases as a single unit is congruent with the parties’ expectations and established business practices;

– The person against whom res judicata is invoked must have had a “full and fair” chance to litigate the claim in the earlier case.

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The Northern District found all res judicata elements were met.  There was a final money judgment on the merits in the state court suit.  Additionally, there was an identity of parties between the two cases since the attorney defendant in the Federal case represented the plaintiff in the state court case and so was clearly in privity with plaintiff (the defendant attorney’s interests were clearly aligned with the state court plaintiff’s).

The closest call was the identity of cause of action prong.  The court found that since the plaintiff in the Federal case sought the same relief – invalidation of the settlement agreement – as he could have in the earlier state court case, there was sufficient congruity between the respective claims in the state and Federal suits.  According to the court, the plaintiff clearly could have asserted fraud in the inducement as grounds for invalidating the state court settlement but failed to.

Take-aways:

This case serves as a good reminder to assert all possible claims in litigation.  Otherwise, you run the risk of having your claim or defense barred in a later case.

The case also provides a good illustration of how vague and malleable the transactional test (for determining whether there is res judicata identity of cause of action between two cases) is.  A court will look to the nature of a claim, not its title, when determining when two differently named causes of action (e.g. negligence, breach of contract) are considered to derive from the same underlying facts and therefore meet the same cause of action test.

 

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PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.