Fraud Suit Dismissed Where Prior Corporate Dissolution Claim Pending Between Parties – IL Court

Illinois courts aim to foster efficiency and finality in litigation. One way they accomplish this is by protecting people from repetitive lawsuits and requiring plaintiffs to bring all their claims in a single case.  Consolidation of claims is encouraged while piecemeal “claim splitting” is discouraged.

Code Section 2-619(a)(3) is a statutory attempt to streamline litigation. This section that allows for dismissal of a case where there is another action pending between the same parties for the same cause.

Schact v. Lome, 2016 IL App(1st) 141931 provides a recent case illustration of this section in the context of an aborted medical partnership.

The defendant originally filed suit in 2010 against two of his former medical partners to void their attempt to dissolve a medical corporation operated by them. The parties litigated that case for over three years before the plaintiffs (who were the defendants in the 2010 case) filed suit in 2013 for fraud.

The 2013 fraud action alleged the defendant fraudulently induced the plaintiffs to agree to a distribution of the medical corporation’s assets knowing that he (defendant) was going to challenge the corporate dissolution.

According to the plaintiffs, the defendant received almost $50,000 in cash on top of some corporate equipment based on his promise to end the 2010 litigation. Plaintiffs claimed the defendant hoodwinked them into agreeing to the money and property disbursements based on the defendant’s assurance he would dismiss the prior lawsuit.

The trial court dismissed the fraud action based on the same parties, same cause rule.  Affirming dismissal, the appeals court provided content to the “same cause” element of a Section 2-619 motion to dismiss.

  • Illinois Code Section 2-619(a)(3) is a procedural device aimed at avoiding duplicative litigation. It applies where there is a pending case involving the same parties for the same cause.
  • Lawsuits present the same cause when the relief sought is “based on substantially the same set of facts”;
  • The salient inquiry is whether both cases arise from the same transaction or occurrence, not whether the two lawsuits have identical causes of action or legal theories;
  • If the relief requested in each lawsuit relies on substantially the same facts, the “same cause” is met and can present grounds for dismissal.

(¶¶ 35-36)

In finding the same cause test met, the Court noted the 2010 dissolution action and the 2013 fraud suit were “inextricably intertwined.” Both cases involved a challenge to the plaintiffs’ earlier attempted breakup of the medical corporation.  Both cases also centered on the defendant’s conduct in agreeing to a distribution of the corporate assets while at the same time contesting those distributions.  Another commonality between the two suits was the damages claimed by the plaintiffs in the fraud action equaled the defense costs they incurred in the 2010 dissolution action. (¶ 37).

Since both lawsuits involved the same underlying facts, had similar issues and were based on the same conduct by the parties, the 2013 fraud action was properly dismissed since the 2010 dissolution action was still pending when the fraud case was filed.

Take-aways:

Once again, considerations of judicial economy win out over opposing claims that two lawsuits are different enough to proceed on separate tracks.

Schact gives a broad reading to a somewhat nebulous basis for dismissal.  The case stresses that the legal theories advanced in two lawsuits don’t have to be identical to trigger the same cause element of Section 2-619.

Schact’s lesson is clear: Where two lawsuits between the same parties share common issues and stem from substantially similar facts, a defendant will have a strong argument that the later-filed case should be dismissed under the same cause Code section.

No Claim-Splitting or Res Judicata Issue Where Bank Refiles Breach of Note Claim After Prior DWP – From the Illinois Archives

BankFinancial, FSB v. Tandon, 2013 IL App (1st) 113152 serves as fairly recent reminder of the possible pitfalls that await a plaintiff who chooses to voluntarily dismiss or non-suit certain complaint counts when other counts of the complaint are involuntarily dismissed – such as by a motion to dismiss filed by a defendant.

The strategic reasons for taking a voluntary dismissal are several.  A non-suit can be a time-buying device when you get to trial and you realize you need more time to secure witnesses and strengthen your case.  Having some chronological breathing room to further develop your case can pay psychological and financial dividends for both client and lawyer.  But as BankFinancial amply illustrates, the right to voluntarily dismiss a claim and later refile it has limits.

In this breach of contract and mortgage foreclosure case, Plaintiff filed a three-count complaint for mortgage foreclosure, breach of contract (the promissory note) and breach of guaranty in 2003.

In 2006, Plaintiff voluntarily dismissed the foreclosure count and in 2008 the remaining claims were dismissed for want of prosecution (“DWP”).  A few month later, in January 2009, the plaintiff filed a new lawsuit, repleading its breach of note and breach of guaranty claims.

The trial court dismissed the 2009 case based on res judicata and plaintiff appealed.

Held: reversed.

Q: Why?

A: Res judicata’s central purpose is to preclude parties from contesting matters they had a full and fair opportunity to litigate.  To further this purpose, a final judgment on the merits is required to trigger res judicata’s application.  A “final judgment” is one that terminates the litigation between the parties on the merits.

A voluntary dismissal of a case or a DWP is, by definition, NOT a final judgment since when a case is DWPd, the court doesn’t reach the merits of a case. 

After a DWP, Code Section 13-217 allows party one year to refile an action within one year and the DWP order doesn’t become final until the one year refilling period expires. (¶¶ 29-30).

Illinois also disallows the related doctrine of claim splitting. Claim splitting applies where a plaintiff tries to refile a claim that he previously voluntarily dismissed in an earlier proceeding AFTER another count of the complaint in that prior action was involuntarily dismissed.

So, if in Case No. 1, a plaintiff’s negligence claim is (involuntarily) dismissed on a defendant’s motion and then plaintiff voluntarily non-suits his remaining breach of contract claim, the plaintiff cannot later file the breach of contract claim in a new action.  This will be deemed impermissible claim splitting because it subverts the law’s desire for finality and efficiency.

Applying these rules, the court held that the plaintiff could properly refile its breach of note and guaranty claims. The voluntary dismissal of the foreclosure count wasn’t a final judgment nor was the DWP of the note and guaranty counts.  The DWP order didn’t become final until a year elapsed from the DWP order date.  Since the plaintiff refiled its note and guaranty counts within a year of the DWP, the refiled action was timely.  As a result, the plaintiff’s refiled suit wasn’t barred by res judicata or the claim splitting rule.

Afterwords:

This case crystallizes the proposition that if a plaintiff non-suits a complaint count or gets a claim(s) DWPd, he can refile the dismissed claims within one year and avoid any dismissal motion based on res judicata.

If a plaintiff non-suits one claim after a different complaint claim is involuntarily dismissed, he will likely be barred from refilling the non-suited claim in a second action under res judicata and claim-splitting rules.  In such a setting, the plaintiff should either litigate the remaining count(s) (the count(s) that isn’t (aren’t) dismissed) to judgment or ask the court for a finding that he can immediately appeal the order dismissing the involuntarily dismissed claim.

Other References:

Hudson v. City of Chicago, 228 Ill.2d 462 (2008)

Rein v. Noyes & Co., 172 Ill.2d 325 (1996)

 

Commercial Landlord’s Suit for Rent Damages Accruing After Possession Order Survives Tenant’s Res Judicata Defense

18th Street Property, LLC v. A-1 Citywide Towing & Recovery, Inc., 2015 IL App (1st) 142444-U examines the res judicata and collateral estoppel doctrines in a commercial lease dispute.

The plaintiff landlord obtained a possession order and judgment in late 2012 on a towing shop lease that expired March 31, 2013. 

About six months after the possession order, the lessor sued to recover rental damages through the lease’s March 2013 end date.  The defendant moved to dismiss on the basis of res judicata and collateral estoppel arguing that the landlord’s damage claim could have and should have been brought in the earlier eviction suit.  The trial court agreed, dismissed the suit and the lessor plaintiff appealed.

Held: Reversed.

Q: Why?

A:  Res judicata (claim preclusion) and collateral estoppel (issue preclusion) seek to foster finality and closure by requiring all claims to be brought in the same proceeding instead of filing scattered claims at different times.

Res judicata applies where there is a final judgment on the merits, the same parties are involved in the first and second case, and the same causes of action are involved in the cases.  

Res judicata bars the (later) litigation of claims that could have brought in an earlier case while collateral estoppel prevents a party from relitigating an issue of law or fact that was actually decided in an earlier case.  (¶¶ 20-21, 30)

In Illinois, a commercial landlord’s claim for past-due rent and for future rent on an abandoned lease are different claims under the res judicata test.

This is because the payment of future rent is not a present tenant obligation and a tenant’s breach of lease usually will not accelerate rent (i.e. require the tenant to immediately pay the remaining payments under the lease) unless the lease has a clear acceleration clause.  Each month of unpaid rent gives rise to fresh claims for purposes of res judicata.

The landlord’s remedy where a tenant breaches a lease is to (a) sue for rents as they become due, (b) sue for several accrued monthly installments in one suit, or (c) sue for the entire amount at the end of the lease.

The commercial lease here gave the landlord a wide range of remedies for the tenant’s breach including acceleration of rental payments. 

The tenant defendant argued that since the lessor failed to try to recover future rent payments in the earlier eviction case, it was barred from doing so in the second lawsuit.  The landlord claimed the opposite: that its claims for damages accruing after the possession order were separate and not barred by res judicata or collateral estoppel.

The court held that res judicata did not bar the lessor’s post-possession order damage suit.  It noted that while the lease contained an optional acceleration clause, it was one of many remedies the landlord had if the tenant breached.  The lease did not require the landlord to accelerate rents upon the tenant’s breach. 

The court also noted that the lease required the landlord to notify the tenant in writing if it (the landlord) was going to terminate the lease.  Since terminating the lease was a prerequisite to acceleration, the Court needed more evidence as to whether the lessor terminated the lease.  Without any termination proof, the trial court should not have dismissed the landlord’s suit.

Afterwords:

1/ If a lease does not contain an acceleration clause, a landlord can likely file a damages action after an earlier eviction case without risking a res judicata or collateral estoppel defense.

2/ If a lease contains mandatory acceleration language, the landlord likely must sue for all future damages coming due under the lease or else risk having its damages cut off on the possession order date.