Thomas M. Durkin, United States District Judge.
Plaintiffs Heung Baek ("Baek") and Hyun Baek-Lee ("Baek-Lee") (collectively,
A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g., Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir.2009). A complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with "fair notice" of the claim and the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This standard "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While "detailed factual allegations" are not required, "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. The complaint must "contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "`A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Mann v. Vogel, 707 F.3d 872, 877 (7th Cir.2013) (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Mann, 707 F.3d at 877.
As a preliminary matter, the Court notes that res judicata is an affirmative defense, pursuant to which dismissal under Rule 12(b)(6) is generally not appropriate. See U.S. Gypsum Co. v. Ind. Gas Co., 350 F.3d 623, 626 (7th Cir.2003); Fed.R.Civ.P. 8(c). Still, a plaintiff "may plead [him]self out of court by alleging (and thus admitting) the ingredients of a defense." U.S. Gypsum, 350 F.3d at 626. Thus, the doctrine of res judicata may properly be raised as a basis to dismiss a complaint pursuant to Rule 12(b)(6). Anderson v. Guaranteed Rate, Inc., No. 13 C 431, 2013 WL 2319138, at *3 (N.D.Ill. May 28, 2013).
Because such a defense often requires the court to consider matters outside the complaint, a motion raising it ordinarily must be treated as one for summary judgment. Arthur Anderson, LLP v. Fed. Ins. Co., No. 6 C 1824, 2007 WL 844632, at *1 (N.D.Ill. Mar. 16, 2007) (citing Gen. Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir.1997)). However, the Seventh Circuit has held that "the district court may also take judicial notice of matters of public record without converting a 12(b)(6) motion into a motion for summary judgment." Henson v. CSC Credit Servs., 29 F.3d 280, 284 (7th Cir.1994) (quoting United States v. Wood, 925 F.2d 1580, 1582 (7th Cir.1991)). Thus, "[w]hen a defendant raises res judicata as
The Baeks are spouses who came to the United States from Korea in 1999.
In 2006, Frank left Labe for NSCB. Id. ¶ 13. Frank told Baek that he "needed to produce" for NSCB. Id. Plaintiffs allege Frank promised them that NSCB could offer them construction loans at higher amounts with a lower interest rate. Id. Subsequently, in July 2006, Baek entered into a construction loan agreement with NSCB for $11,752,336. Id.
As part of the loan agreement with NSCB, C & L executed a Construction Loan Agreement, Construction Mortgage, and a Promissory Note and Baek executed a commercial guaranty (the "Guaranty"). Id. ¶ 14. At the closing, NSCB presented a guaranty document that required signatures from both Baeks. Id. Baek's counsel objected to the requirement that Baek-Lee sign because Baek-Lee had not agreed to be a guarantor. Id. As a result, Baek-Lee did not sign the Guaranty at closing. Id. ¶ 14. Baek-Lee does not recall ever signing the Guaranty Id.
In July 2007, NSCB claimed that the loan was "out of balance" by the amount of monthly interest, approximately $49,000 per month. Id. ¶ 17. Subsequently, NSCB demanded that Baek deposit more money in the construction loan account which he did for two months. Id. NSCB then required Baek to provide the title to his home as additional collateral instead of the $49,000 monthly payment. Id. ¶ 18. Although Baek provided the title, NSCB refused to disburse funds to C & L's contractors. Id. Then, NSCB required Baek to deposit $700,000 as additional collateral in return for which it would release the lien on his house. Id. Baek made the payment, however NSCB did not release the lien. Id. Defendant William Kivit, NSCB vice-president and Frank's boss, told Baek that he would extend the maturity date of the current construction loan and convert it to a long-term mortgage loan, but he did not. Id. NSCB resumed disbursing funds to Baek in February 2008, but did not convert the loan into a long-term mortgage or release the lien on Baek's house. Id. ¶ 19.
NSCB, C & L, and Baek subsequently entered into three loan modification agreements dated July 14, 2008; January 14, 2009; and December 14, 2009. Id. ¶ 15. Baek-Lee's signature appears on the loan modification agreements, but she does not remember signing them. Id. Baek-Lee asserts that she did not sign the third modification agreement and that her notarized signature was forged because she was not in the United States on December
The December 14, 2009 modification agreement authorized C & L to manage the operating account associated with the loan, however Kivit would not allow C & L or Baek to use the operating account until June 2010 when Baek complained to NSCB and Kivit that they were in violation of the terms of the third modification agreement. Id. ¶¶ 20, 21. NSCB also withdrew funds from the operating account as its attorney's fees. Id. ¶ 22.
When the construction on the Property was completed in January 2009, not all of the units were sold. Id. ¶ 25. Kivit proposed that Baek rent out all of the residential and commercial units at the Property, and told Baek that in return, NSCB would convert the construction loan to a long-term mortgage loan. Id. By May 2009, all of the residential and commercial units were rented out. Id. The tenants' security deposit on their leases were given to NSCB to be put in an escrow account. Id. C & L and Baek allege that NSCB had used the tenants' security deposits for payment of NSCB's loan interest although there were enough funds in the operating account to pay the interest. Id.
NSCB demanded that Baek and Baek-Lee provide it with their 2009 income tax returns. Id. ¶ 27. However, NSCB was in sole possession of the bank statements related to the operating account, which Baek and Baek-Lee evidently needed in order to prepare their income tax returns. Id. Baek asked Kivit to provide him with the bank statements and a copy of the checks that Kivit issued. Id. Kivit told Baek that NSCB could not find the documents because Frank, who was in charge of C & L and Baek's accounts, had left NSCB. Id.
On October 15, 2010, NSCB issued a default letter claiming that Plaintiffs were in default under the loan by failing to maintain an operating account with NSCB, failing to reimburse NSCB's attorney's fees, and failing to furnish their 2009 federal and state income tax returns. Id. ¶ 28. When C & L received the default letter from NSCB, Baek put a stop payment on his October 2010 payment to NSCB. Id. ¶ 29.
On October 26, 2010, NSCB filed a foreclosure action against C & L in the Circuit Court of Cook County, Case No. 10 CH 46613 (the "Foreclosure Action"). Id. ¶ 30. On February 7, 2012, the Circuit Court entered a judgment of foreclosure and sale of the property at issue. R. 5-1 at 1. On October 9, 2012, the Property was sold and a deficiency judgment was entered against C & L for $2,863,489.23. Id. at 3-5.
On October 29, 2010, a few days after filing the foreclosure action, NSCB filed a complaint against the Baeks as guarantors on the loan in Circuit Court, Case No.2010 L 51681 (the "Guaranty Action"). R. 1 ¶ 30. On July 6, 2011, NSCB filed an amended complaint in the Guaranty Action. Id. On June 12, 2012, the Baeks filed affirmative defenses and a counterclaim to the complaint against them in the Guaranty Action. R. 21-21. Following a bankruptcy filing by the Baeks, the Guaranty Action was renumbered as 2014 L 50452 (Case 50452). R. 5-3.
While the Guaranty Action was still pending, on June 29, 2012, Plaintiffs and Soo Corporation D/B/A Blue Ocean Contemporary
On November 28, 2012, the Plaintiffs and Soo Corp. filed a motion to amend their June 29, 2012 complaint. R. 5-7. The proposed amended complaint contained, among other new claims, a RICO claim at Count XI. Id. On October 13 and October 23, 2012, NSCB filed motions to strike and dismiss the Baeks' affirmative defenses and counterclaims in the Guaranty Action and to dismiss the Baeks and Soo Corp.'s complaint in the Parallel Action. R. 21-22, 23 & 24. In NSCB's motion to strike and dismiss the Baeks' affirmative defenses, NSCB argued that sixteen of the Baeks' defenses, including unjust enrichment, fraud in the inception, and failure to perform, were premised on a "legally flawed and misleading `Partnership-in-Fact'" theory. R. 21-22 at 3. NSCB also argued that many of the Baeks' other affirmative defenses were legally insufficient and failed to state claims. Id. NSCB argued that even if the affirmative defenses were sufficiently stated, they would belong to C & L, not the Baeks, who did not have standing. Id. at 10-11. NSCB contended that subsequently, any defenses in favor of C & L were barred by res judicata and collateral estoppel based on the foreclosure judgment. Id. at 11-13.Finally, NSCB argued that even if the affirmative defenses were sufficiently stated, the Guaranty and loan modifications contained enforceable clauses waiving defenses that barred the Baeks' affirmative defenses. Id. at 13-14.
In its motion to strike and dismiss the Baeks' counterclaims, NSCB argued that many of the Baeks' counterclaims — including "wrongful refusal to extend credit," breach of contract based on an alleged partnership-in-fact, fraud, breach of fiduciary duty — were insufficient as a matter of law. R. 21-23. NSCB also made the same standing, res judicata, collateral estoppel, and waiver arguments against the Baeks' counterclaims as it did against the Baeks' affirmative defenses. Id.
In its motion to dismiss the Baeks' complaint, NSCB argued that the Baeks and Soo Corp. failed to plead facts supporting claims for breach of contract, breach of fiduciary duty, constructive trust, fraud, accounting, unjust enrichment, and emotional distress. R. 21-24. NSCB also argued that even if the claims were sufficiently stated, C & L — not the Baeks — would have standing to bring them. Id. NSCB also made the same res judicata, and collateral estoppel, and waiver arguments against the claims in the complaint as it did against the Baeks' affirmative defenses and counterclaims. Id.
On May 30, 2013, having reviewed the pleadings and having heard the arguments of counsel, the Circuit Court granted NSCB's motion to strike and dismiss the Baeks' affirmative defenses, counterclaims, and Counts I-VII of Plaintiffs' and Soo Corp.'s complaint with prejudice. R. 5-2.
On April 24, 2014, nearly a year after the Circuit Court dismissed their complaint, the Baeks and Soo Corp. filed a motion to reconsider the May 30, 2013 ruling and to file an amended complaint. R. 5-10. The proposed amended complaint included an identical RICO claim to the one at issue before this Court, but different from the RICO claim included in the November 28, 2012 proposed amended complaint. R. 5-10 at 46-51. On September 11, 2014, the Circuit Court, having reviewed the pleadings and having heard arguments of counsel, denied the Baeks and Soo Corp.'s motion to reconsider and for leave to file an amended complaint. R. 13-1. The Circuit Court also granted NSCB's motion for summary judgment in the Guaranty Action, rendering judgment in favor of NSCB against the individual plaintiffs jointly and severally in the amount of $2,359,743.55. Id.
On October 10, 2014, the Baeks and Soo Corp. filed a post-judgment motion to vacate the Circuit Court's summary judgment ruling and for leave to file amended defenses and counterclaims. R. 21-50. They filed a separate motion for leave to file the amended complaint. R. 21-49. On October 30, 2014, the Circuit Court denied those motions. R. 13-2.
On May 28, 2014, Plaintiffs filed the instant single count RICO action in this Court. R. 1. On July 31, 2014, Defendants moved to dismiss the case or in the alternative to stay pursuant to the Colorado River doctrine. R. 5. After further rulings in the state court cases, on November 2, 2014, Defendants moved to amend their motion to dismiss in this case to assert res judicata as the ground for dismissal. R. 13. The parties appeared before the Court on February 12, 2015 and submitted supplemental briefing regarding the state court proceedings. R. 20, 21 & 22. The Court asked for supplemental filings on details of the Circuit Court's September 11, 2014 order. R. 20. Defendants filed a supplemental brief and Plaintiffs declined to do so. R. 23.
Since an Illinois state court rendered the initial judgment, this Court must apply Illinois preclusion law to determine whether res judicata bars Plaintiffs' claims. Whitaker v. Ameritech Corp., 129 F.3d 952, 955-56 (7th Cir.1997) (citing 28 U.S.C. § 1738). "In Illinois, res judicata extends to all questions actually decided in a previous action as well as to all grounds of recovery and defenses which might have been presented in the prior litigation." Id. (citing La Salle Nat'l Bank v. Cnty. Bd. of Sch. Trustees, 61 Ill.2d 524, 337 N.E.2d 19, 22 (1975)). Res judicata bars a subsequent action if three requirements are met: "(1) there was a final judgment on the merits rendered by a court of competent jurisdiction; (2) there is an identity of cause of action; and (3) there is an identity of parties or their privies." Whitaker, 129 F.3d at 956 (quoting Downing v. Chi. Transit Auth., 162 Ill.2d 70, 204 Ill.Dec. 755, 642 N.E.2d 456, 458 (1994)).
Defendants contend that based on the disposition of the state court proceedings, Plaintiffs' complaint should be dismissed pursuant to the doctrine of res judicata. R. 13. Defendants rely on two alternative but related arguments. First, they argue that Plaintiffs already asserted the RICO claim before the Circuit Court by seeking leave to file an amended complaint containing the RICO claim and failing to amend
As their second argument, Defendants argue that irrespective of whether the RICO claim was raised in the state court actions, such a claim is still barred by res judicata because permitting Plaintiffs' RICO claim would allow them to relitigate matters that should have been raised in defense to the Foreclosure and Guaranty Actions and would nullify the prior state court judgments. R. 17 at 2-3. The Court will address this argument first.
The Circuit Court's May 30, 2013, order granted NSCB's motion to dismiss Plaintiffs' complaint in the Parallel Action with prejudice. R. 5-2. Illinois Supreme Court Rule 273 provides that "[u]nless the order of dismissal or a statute of this State otherwise specifies, an involuntary dismissal of an action, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join an indispensable party, operates as an adjudication upon the merits." Hock v. Vill. of Bloomingdale, 504 Fed.Appx. 516, 517-18 (7th Cir.2013). The Circuit Court's order does not provide (nor do Plaintiffs claim) that Plaintiffs' complaint was involuntarily dismissed for any of the reasons listed in Rule 273. Thus, the ruling constitutes "a final judgment on the merits."
Second, the same parties or their privies were involved in the Parallel Action and are involved in the instant action. Plaintiffs in the Parallel Action were C & L, Soo Corp., Baek, and Baek-Lee. R. 5-6; R. 21-37 ¶ A. They filed that claim against NSCB, William Kivit, and unknown John Does. Id. C & L, Baek and Baek-Lee are plaintiffs in the instant lawsuit, as well. R. 1 at 1-2. Besides NSCB and Kivit, individual NSCB employees are named as defendants in this case. Id. However, "Illinois law clearly establishes that employees, attorneys, and officers of a defendant entity in a prior suit are in privity with the defendant for purposes of res judicata." Guerriero v. Merit Lincoln Park, LLC, No. 08 C 2388, 2008 WL 4696070, at *3 (N.D.Ill. Oct. 22, 2008) (citing Henry v. Farmer City State Bank, 808 F.2d 1228, 1235 n. 6 (7th Cir.1986)). Since all defendants in this action are current or former employees of NSBC, each individual defendant is in privity with NSBC with respect to the Parallel Action. See, e.g., Ross Adver., Inc. v. Heartland Bank & Trust Co., 360 Ill.Dec. 921, 969 N.E.2d 966, 976-77 (Ill.App.Ct. 3rd Dist.2012) (noting the parties named in the complaint were the same as, or in privity with, the parties in prior case and that the addition of an employee as a defendant did not undermine the identity of the parties or otherwise defeat the application of res judicata).
Finally, with respect to the last element of res judicata, the "identity of the cause of action," Illinois employs the "transactional" test, which provides that "separate claims will be considered the same cause of action for purposes of res judicata if they arise from a single group of operative facts." Amari Co., Inc. v. Burgess, 955 F.Supp.2d 868, 881 (N.D.Ill. 2013) (quoting River Park, Inc. v. City of Highland Park, 184 Ill.2d 290, 234 Ill.Dec. 783, 703 N.E.2d 883, 893 (1998)). This is a broad standard: two causes of action with
Applying this test and comparing Plaintiffs' claims before this Court with their claims in Counts I-VII as pled and dismissed in the Parallel Action, it is clear that the RICO claims arise out of the same group of operative facts as the claims in the Parallel Action. R. 5-6; R. 1; R. 5-2. Both arise out of Plaintiffs' alleged breach of the loan agreement. Plaintiffs' state court complaint charged that the construction loan and its modifications were arbitrary and ambiguous with respect to provisions about events of default and fees, giving NSCB unilateral control over those issues. R. 5-6 at 4. Plaintiffs claimed that NSCB failed to provide them with statements, demanded they pay unwarranted attorneys' fees, and caused them to transfer the C & L operating account to another bank, all of which NSCB declared as defaults of the loan. Id. at 1-12. Like their state law claims, Plaintiffs' federal RICO predicate claims pertain to NSCB's alleged improper declaration of Plaintiffs' default on the loan, improper determination that the loan was out of balance, unwarranted deduction of attorneys' fees from deposit accounts related to the loan, fraud in the execution of the loan documents and notarizations, and claims of misconduct relating to the enforceability of the underlying note and guaranties. R. 1. ¶¶ 27, 28, 51, 53, 55, 58, 60. While the claims asserted are different, these predicate RICO acts alleged in Plaintiffs' instant complaint mirror the fraudulent conduct that Plaintiffs alleged as part of their claims for breach of contract and fiduciary duty, fraud, unjust enrichment, and emotional distress in their state court complaint in Counts I, II, IV, VI-VII. See R. 5-6 at 1-13; see also Amari Co., Inc., 955 F.Supp.2d at 881 (noting that the predicate RICO acts in the federal claim mirrored the fraudulent conduct that defendants had alleged as affirmative defenses to the state court contract claims) (citations omitted). The two suits are based on different legal theories — the first one on state law and the second on a federal (RICO) statute — but both arise out of the same facts, namely the Defendants' conduct surrounding Plaintiffs' alleged default on the loan. See River Park, 234 Ill.Dec. 783, 703 N.E.2d at 894 ("Perhaps the most telling indication of identity of cause of action in this case, however, is the parallels between the factual allegations of plaintiffs' state complaint and their federal complaint.")). The transactional analysis reveals an identity of the causes of action for res judicata purposes. As a result, the claims are barred. See, e.g., Muhammad v. Oliver, 547 F.3d 874, 876-77 (7th Cir.2008) (noting that, where two suits were "based on different legal theories — the first on state contract law, the second on a federal civil rights statute — but both arose out of the same facts . . . namely conduct by the defendants... the judgment ending the suit, whether or not it is with prejudice, will generally bar bringing a new suit that arises from the same facts as the old one.").
Plaintiffs do not dispute that they could have raised their current RICO arguments in the state court proceeding for
The Court has reviewed the briefing in the Guaranty Action. While there is no written ruling or oral transcript of the Circuit Court's grant of summary judgment in that action, Plaintiffs do not argue (and there is no suggestion identified in any of the Circuit Court briefing provided) that the decision was anything other than a final judgment on the merits, i.e., one that is decided on statute of limitations grounds. R. 21-38, 44, 45, 48 & 49. The Court thus considers the Circuit Court's summary judgment ruling to be a final judgment on the merits.
The Guaranty Action involved the same parties or their privies as the instant action. NSCB filed the Guaranty Action against Baek and Baek-Lee as defendants. R. 21-20. As noted, NSCB's employees (additional defendants in the instant action) are in privity with NSCB, which was state court plaintiff in the Guaranty Action. See Guerriero, 2008 WL 4696070, at *3. Likewise, C & L (Baek's LLC), the plaintiff in the instant action, is in privity with Baek and Baek-Lee as state court defendants. See id. Baek's status as the manager and sole member of C & L further supports a finding for C & L's privity. See, e.g., Kramer v. Stelter, 588 F.Supp.2d 862, 867 (N.D.Ill.2008) ("In light of [plaintiff's] self-created total control over both [LLCs] . . . it would represent the height of artificiality . . . to view the [LLC's] as anything other than in privity with [plaintiff] as an individual.") (citations omitted).
As noted, under the transactional anaylsis, "separate claims will be considered the same cause of action for purposes of res judicata if they arise from a single group of operative facts, regardless of whether they assert different theories of relief." Amari Co., Inc., 955 F.Supp.2d at 881 (quoting River Park, 234 Ill.Dec. 783, 703 N.E.2d at 893). Moreover, "the transactional test permits claims to be considered part of the same cause of action even if there is not a substantial overlap of evidence, so long as they arise from the same transaction." Id.
Applying this test, and in particular, comparing the Plaintiffs' claims in the instant case with their fraud-related affirmative defenses and counterclaims as pled in the Guaranty Action, it is clear that the RICO claims arise out of the same group of operative facts. See Amari Co., Inc., 955 F.Supp.2d at 881 (citing Carr v. Tillery, 591 F.3d 909, 913-14 (7th Cir.2010)) (finding identical claim despite new legal theory). As discussed, the alleged predicate
"[T]his is no less true because the `identical claim' would have been a defense or a counterclaim in state court, whereas it is an affirmative claim for relief in this action." Amari, 955 F.Supp.2d at 881 (citations omitted). Res judicata "bars suits based on facts that would have constituted a counterclaim or defense in the earlier proceeding where successful prosecution of the later action would either nullify the earlier judgment or impair the rights established in the earlier action." Kosydor v. Am. Express Centurion Servs. Corp., 365 Ill.Dec. 757, 979 N.E.2d 123, 128 (Ill.App.Ct. 5th Dist.2012) (citation omitted); see also Olague v. Vill. of Bensenville, No. 96 C 6854, 1997 WL 337199, at *6 (N.D.Ill. June 13, 1997) (quoting Henry, 808 F.2d at 1234 ("[plaintiffs] may not relitigate a defense, which was available but not raised in a prior action, by making it the basis of a claim in a subsequent action against the original plaintiff which if successful would nullify the initial judgment.")). Clearly, successful prosecution of Plaintiffs' RICO claim alleging fraud in the execution of and notarization of the loan documents, including the Guaranty, and manipulation of the loan agreement and its modification agreements would "either nullify the earlier judgment or impair the rights established in the earlier action" where the Circuit Court, in granting summary judgment for NSCB, found that the Baeks breached the Guaranty for the loan. Because the Parallel Action and the Guaranty Action bar Plaintiffs' claim under the doctrine of res judicata, the Court does not reach Defendants' claim that the foreclosure proceeding does the same.
For the foregoing reasons, Defendants' motion to dismiss Plaintiffs' complaint, R. 13, is granted and the complaint is dismissed with prejudice.
