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Baek v. Clausen

United States Court of Appeals, Seventh Circuit

April 2, 2018

Heung K. Baek, et al., Plaintiffs-Appellants,
v.
Patricia A. Clausen, et al., Defendants-Appellees.

          Argued September 27, 2017

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:14-cv-03928 - Thomas M. Durkin, Judge.

          Before Ripple, Sykes, and Hamilton, Circuit Judges.

          Ripple, Circuit Judge.

         Clark & 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 plaintiffs.

         This 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.

         In 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 motion.

         On 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.

         We now 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 Colorado River.[1]

         I

         BACKGROUND

         A. Facts

         The facts, as set forth in the plaintiffs' complaint, allege the following events.[2] 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.[3] 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.

          Mr. 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.

         NCB, C & 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.

         The 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";[4] 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.[5] As a result of these withdrawals, at least one of C & L's checks was returned for insufficient funds.

         According 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.

         On 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 & L.

         B. State Court Proceedings

         On 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.

         On January 29, 2012, while the Guaranty Action was pending, the Baeks and Soo Corporation d/b/a Blue Ocean Contemporary Sushi[6] 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 Action.

         On 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.

         Also in 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.

         On 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[7] and John Does.

         On May 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 Court.

         On 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 action.[8]

         On 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.

         On 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.

         On March 24, 2016, the state appellate court affirmed the summary judgment for NCB and the dismissal of the Baeks' claims.[9]

         B.

         On May 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.

         The underlying fraudulent acts alleged in the federal RICO claim include: (1) extortion of borrowers by NCB by claiming that loans were "out of balance";[10] (2) fraud in the execution of notarized documents (with respect to Ms. Baek-Lee's signature on the modification agreements);[11](3) manipulation of the construction loan agreement;[12] and (4) unauthorized withdrawal of funds from the operating account.[13] On July 31, 2014, NCB moved to dismiss the case, or in the alternative, to stay proceedings pursuant to the Colorado River doctrine.

         Before 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 judicata."[14]

         C & 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."[15] 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.[16]

         In its 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]."[17] The final disposition of the Circuit Court action, it continued, "cement[ed] the bar of res judicata."[18] Consequently, given that there had been a final judgment in the Circuit Court action, NCB did not address the merits of the plaintiffs' Colorado River argument.[19]

         On June 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;[20] there was identity of the parties (or their privies) in the Parallel and Guaranty Actions and the federal RICO action;[21] and those causes of action were the same as the federal RICO claim because they all involved "a single group of operative facts."[22] The district court therefore granted the defendants' motion to dismiss the complaint with prejudice.

         On July 15, 2015, the Baeks filed a motion to reconsider under Federal Rule of Civil Procedure 59(e).[23] Their motion reiterated several of the arguments included in their opposition to the motion to dismiss.[24] 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.[25] Consequently, they contended, the court "should not have dismissed the Plaintiffs' complaint with prejudice."[26] They reiterated that, applying the ten factors delineated in Colorado River, the district court should have allowed this case to proceed.[27] 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 case.[28]

         In its response, NCB maintained that the motion "fail[ed] to raise any of the four proper grounds for reconsideration under Rule 59(e)."[29] Instead, "all of the arguments raised could have been presented at the time of the original briefing on the Defendants' Motion to Dismiss."[30] 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.[31]

         The 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.[32] 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.[33] 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."[34] The district court therefore considered the argument on the merits.

         The 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."[35] 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.[36] The district court's stay order issued on January 25, 2016.

         Less 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.[37]

         The Baeks and C & L ...


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