Heung K. Baek, et al., Plaintiffs-Appellants,
Patricia A. Clausen, et al., Defendants-Appellees.
September 27, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 1:14-cv-03928 -
Thomas M. Durkin, Judge.
Ripple, Sykes, and Hamilton, Circuit Judges.
Ripple, Circuit Judge.
& Leland Condominiums, LLC ("C & L"), and
its shareholders, Heung Baek and Hyun Baek-Lee (collectively
"the Baeks"), brought this action against Northside
Community Bank ("NCB") and several of its
employees, alleging violations of the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C.
§ 1964(c). The predicate acts set forth in the complaint
focus on the allegedly fraudulent and abusive acts committed
by NCB in the course of a lending relationship with the
RICO action is the last in a series of legal actions between
the parties: the first, a foreclosure action
("Foreclosure Action"), was brought by NCB in state
court in 2010; the second, an action on the loan guaranty
("Guaranty Action"), followed in 2012; and,
finally, a fraud and breach of contract action
("Parallel Action"), was brought by Mr. Baek and
Ms. Baek-Lee in 2014. The latter two actions were
consolidated in the Circuit Court of Cook County.
response to the RICO complaint, NCB initially moved to
dismiss, or in the alternative, to stay the proceeding under
Colorado River Water Conservation District v. United
States, 424 U.S. 800 (1976). After the state court
struck or dismissed all of the plaintiffs' claims and
granted summary judgment to NCB on its claims, NCB amended
its motion to assert an alternative ground for dismissal: res
judicata. The district court granted NCB's amended
reconsideration, the district court vacated its earlier
dismissal because it is not clear under Illinois law whether
an adjudication is final for purposes of res judicata if an
appeal is pending. The district court therefore stayed the
action pending the disposition of the plaintiffs' appeal
in state court. After the state appellate court affirmed the
judgment in favor of NCB, the district court reinstated its
dismissal with prejudice.
affirm. The district court correctly determined that res
judicata precludes the plaintiffs' present action. There
has been a final judgment on the merits, the same parties are
litigating here as in state court, and the claims arise from
a single group of operative facts. Moreover, given the nature
and extent of litigation that had taken place in the state
court, we perceive no abuse of discretion in the district
court's decision to stay the RICO action under
facts, as set forth in the plaintiffs' complaint, allege
the following events. The Baeks came to the United States from
Korea in 1999. Mr. Baek desired to develop real estate and,
to this end, purchased property through his limited liability
company, C & L. The property was financed by Labe Bank,
and Bill Frank was the loan officer who serviced the loan.
Frank later moved to NCB and asked Mr. Baek to switch his
business to NCB. Frank represented that NCB would provide Mr.
Baek a larger construction loan at a lower rate than Labe
Bank had provided. In July 2006, Mr. Baek entered a
construction loan with NCB for approximately $11, 750, 000.
Baek executed a construction loan agreement, construction
mortgage, promissory note, and commercial guaranty. NCB had
not indicated that it would require Ms. Baek-Lee to sign a
guaranty; however, at closing NCB presented a guaranty
document which had lines for both of their signatures. Ms.
Baek-Lee did not sign the guaranty at closing. She does not
recall ever signing a commercial guaranty; nevertheless NCB
maintains that, in January 2008, eighteen months after
closing, she did sign a guaranty.
& L, and Mr. Baek then entered into several loan
modification agreements. One of those loan modification
agreements bears Ms. Baek-Lee's signature. Ms. Baek-Lee
contends that her signature was forged and, in support, notes
that her passport reflects that she was out of the country on
the date the document purportedly was signed.
relationship between Mr. Baek and NCB was rocky almost from
the outset. In July 2007, NCB demanded that Mr. Baek deposit
more money in the construction loan account because the loan
was "out of balance"; although Mr. Baek disagreed with
this assessment, he nevertheless complied with this request.
NCB then began to demand additional collateral, including the
title to Mr. Baek's home. Even when Mr. Baek acquiesced,
however, NCB refused to disburse funds to C & L's
contractors. NCB also required Mr. Baek to sell other real
estate and to give up control of the construction operating
account. Although NCB would not release funds to Mr. Baek or
to C & L, NCB did withdraw its attorney's fees from
the account. As a result of these withdrawals, at least
one of C & L's checks was returned for insufficient
to the Baeks' federal complaint, NCB also frustrated Mr.
Baek's efforts to comply with its demands. For instance,
it required the Baeks to provide their 2009 income tax
returns, but refused to release statements concerning the
operating account which were necessary for the Baeks to
complete those returns.
October 15, 2010, NCB issued a default letter. Mr. Baek then
put a stop payment on his monthly payment to NCB, which
prompted NCB to institute foreclosure proceedings against C
State Court Proceedings
October 26, 2010, NCB filed the Foreclosure Action against C
& L in state court. Just a few days later, NCB filed the
Guaranty Action in the Circuit Court of Cook County against
the Baeks as guarantors on the loan. The Baeks filed several
affirmative defenses and a counterclaim.
January 29, 2012, while the Guaranty Action was pending, the
Baeks and Soo Corporation d/b/a Blue Ocean Contemporary
Sushi filed the Parallel Action against NCB and
its vice-president, William Kivit. The plaintiffs alleged
seven claims against NCB and Mr. Kivit related to the
construction loan: bad faith breach of contract, breach of
fiduciary duty, constructive trust, fraud, accounting,
implied contract/unjust enrichment, and emotional distress.
This Parallel Action was consolidated with the Guaranty
February 7, 2012, the Circuit Court of Cook County entered a
judgment of foreclosure and sale of the property at issue.
The property was sold on October 9, 2012, and a deficiency
judgment was entered against C & L for $2, 863, 489. C
& L moved for reconsideration on numerous grounds,
including that NCB committed notary fraud; NCB was prohibited
from filing the foreclosure action; NCB's enforcement of
the loan documents constituted extortion, fraud,
misrepresentation, and violated RICO; and NCB took advantage
of non-English speakers. C & L's motion was denied.
October 2012, NCB filed motions to strike and to dismiss the
Baeks' affirmative defenses and counterclaims in the
Guaranty Action and to dismiss the Parallel Action. With
respect to the affirmative defenses, NCB argued that many of
the defenses-including unjust enrichment, fraud in the
inception, and failure to perform-were legally flawed. NCB
also argued that, to the extent there was any merit to the
affirmative defenses, only C & L, not the Baeks, had
standing to assert them. NCB further maintained that any
defenses in favor of C & L were barred by res judicata
and collateral estoppel based on the judgment in the
Foreclosure Action. NCB made similar arguments with respect
to the Baeks' counterclaims and to the claims raised by
the Baeks and Soo Corporation in the Parallel Action.
November 28, 2012, C & L, the Baeks, and Soo Corporation
moved to amend their complaint in the Parallel Action to
include, among other new allegations, a RICO claim. The RICO
claim alleged racketeering activity by means of extortionate
collections, fraudulent notarial acts, and bank fraud. It
named as defendants Mr. Kivit, Patricia Clausen, Belinda
Baier, Tasha Spencer and John Does.
30, 2013, the Circuit Court granted NCB's motion to
strike and to dismiss the Baeks' affirmative defenses and
counterclaims in the Guaranty Action. It also granted
NCB's motion to dismiss Counts I through VII of the
complaint in the Parallel Action. The court gave the Baeks
and Soo Corporation leave to replead Counts VIII through
XI-their proposed amendments in the Parallel Action-within
twentyeight days. The Baeks and Soo Corporation did not file
an amended complaint within the time allowed by the Circuit
August 19, 2013, NCB moved for summary judgment on the merits
of the Guaranty Action. On April 24, 2014, ten months after
the deadline for filing an amended complaint, the Baeks filed
a motion asking the Circuit Court to reconsider its May 30,
2013 order dismissing their affirmative defenses,
counterclaims, and Counts I through VII of the Parallel
Action; they also requested leave to file an amended
complaint, including a new RICO claim. The new RICO claim
differed from the one in their November 28, 2012 proposed
amended complaint, but mirrors the present federal RICO
September 11, 2014, the Circuit Court denied the Baeks'
motion to reconsider and for leave to file an amended
complaint. It also granted NCB's motion for summary
judgment in the Guaranty Action, which rendered the Baeks
jointly and severally liable for $2, 359, 743.55.
October 10, 2014, the Baeks and Soo Corporation filed a
post-judgment motion to vacate the Circuit Court's
summary judgment ruling and for leave to file amended
defenses and counterclaims. The court denied those motions on
October 30, 2014. The Baeks then appealed the judgment in the
Guaranty Action and the dismissal of their Parallel Action.
March 24, 2016, the state appellate court affirmed the
summary judgment for NCB and the dismissal of the Baeks'
28, 2014, the Baeks and C & L filed this federal RICO
action. To place the filing in historical context, it
occurred after the Circuit Court had dismissed the Baeks'
affirmative defenses and counterclaims in the Guaranty
Action, and Counts I through VII of the Parallel Action. It
also followed the Baeks' motion to reconsider that
dismissal order and their motion to amend the Parallel Action
to include a RICO claim. At the time of filing, however, the
Circuit Court had not yet ruled on NCB's motion for
summary judgment in the Guaranty Action.
underlying fraudulent acts alleged in the federal RICO claim
include: (1) extortion of borrowers by NCB by claiming that
loans were "out of balance"; (2) fraud in
the execution of notarized documents (with respect to Ms.
Baek-Lee's signature on the modification
agreements);(3) manipulation of the construction loan
agreement; and (4) unauthorized withdrawal of funds
from the operating account. On July 31, 2014, NCB moved to
dismiss the case, or in the alternative, to stay proceedings
pursuant to the Colorado River doctrine.
the plaintiffs responded to the motion to dismiss, the
Circuit Court entered its September 11, 2014 order denying
the Baeks' motion to reconsider, denying them leave to
file an amended complaint, and granting summary judgment to
NCB in the Guaranty Action. Consequently, on November 4,
2014, NCB moved to amend its motion "so as to assert an
alternative ground for dismissal based upon res
L and the Baeks then filed their response to all pending
motions in the federal RICO action. They argued that res
judicata could not apply to their RICO claim because they
never had filed a similar RICO claim in state court. Although
they had attempted to amend their complaint to include such a
claim, that motion had been denied. According to the Baeks,
"a claim that was never filed could not be
dismissed." The Baeks did not argue that a
dismissal on res judicata grounds would be premature because,
at that time, there was no final judgment. The Baeks also
maintained that the defendants' Colorado River
doctrine analysis was incomplete and that a correct
application of the doctrine required the court to exercise
jurisdiction in the present case.
reply in support of its motion to dismiss, NCB noted that
"the Colorado River doctrine has been mooted by
subsequent developments in the Circuit Court of Cook County
dismissing the Plaintiffs' claims in their entirety and
entering judgment in favor of [NCB]." The final
disposition of the Circuit Court action, it continued,
"cement[ed] the bar of res
judicata." Consequently, given that there had been
a final judgment in the Circuit Court action, NCB did not
address the merits of the plaintiffs' Colorado
17, 2015, the district court entered a memorandum and order
dismissing the plaintiffs' federal RICO complaint with
prejudice on res judicata grounds. Applying Illinois law of
res judicata, it determined that there had been a final
judgment both in the Parallel Action and in the Guaranty
Action; there was identity of the parties (or
their privies) in the Parallel and Guaranty Actions and the
federal RICO action; and those causes of action were the same
as the federal RICO claim because they all involved "a
single group of operative facts." The district
court therefore granted the defendants' motion to dismiss
the complaint with prejudice.
15, 2015, the Baeks filed a motion to reconsider under
Federal Rule of Civil Procedure 59(e). Their motion
reiterated several of the arguments included in their
opposition to the motion to dismiss. The Baeks and C & L,
however, also argued for the first time that the state
court's adjudication of their claims was not final
because the state appeal was still pending. Consequently,
they contended, the court "should not have dismissed the
Plaintiffs' complaint with prejudice." They
reiterated that, applying the ten factors delineated in
Colorado River, the district court should have
allowed this case to proceed. Finally, they requested that
the district court vacate the order dismissing the complaint
with prejudice and apply the Colorado River doctrine
to determine whether it should proceed with the case or
abstain until the outcome of the appeal of the state
response, NCB maintained that the motion "fail[ed] to
raise any of the four proper grounds for reconsideration
under Rule 59(e)." Instead, "all of the arguments
raised could have been presented at the time of the original
briefing on the Defendants' Motion to
Dismiss." NCB maintained that, putting aside the
procedural infirmities of the motion, the district court had
not erred in granting the motion to dismiss because, even if
there were not a final decision in the Guaranty or Parallel
Action, there had been a final judgment in the state
Foreclosure Action, which served as an independent bar to the
federal RICO cause of action. Finally, NCB submitted that the
authority on which the plaintiffs were relying for their
Colorado River argument, Huon v. Johnson &
Bell, Ltd., 657 F.3d 641 (7th Cir. 2011) ("Huon
I"), was "wholly misplaced" given our
subsequent decision in Huon v. Johnson & Bell,
Ltd., 757 F.3d 556 (7th Cir. 2014) ("Huon
II"), in which we affirmed the dismissal of the
federal action based on claim preclusion.
district court granted in part and denied in part the Rule
59(e) motion. It noted that it previously had considered and
rejected two of the plaintiffs' arguments. The
plaintiffs' third argument-that the Circuit Court's
adjudication was not final until the appeal had been
resolved-had not been brought to the district court's
attention in the underlying motion to dismiss. Although this
argument did not "rely on new law or new facts, "
the district court noted that it did "raise an important
argument not yet passed upon." The district court
therefore considered the argument on the merits.
district court observed that the Supreme Court of Illinois
had held that, "[f]or purposes of applying the doctrine
of collateral estoppel, finality requires that the potential
for appellate review must have been
exhausted." Although there was some question whether
this principle was equally applicable to res judicata, the
district court followed the course we had suggested in
Rogers v. Desiderio, 58 F.3d 299, 302 (7th Cir.
1995): it erred on the side of caution, reinstated the
plaintiffs' action, and stayed all further proceedings
pending the outcome of the state court appeal. The district
court's stay order issued on January 25, 2016.
than two months later, the state appellate court issued an
order affirming the judgment rendered in the Circuit Court
with respect to both the Guaranty Action and the Parallel
Action. At that point, the district court granted NCB's
motion to dismiss with prejudice.
Baeks and C & L ...