Doherty v. Fed. Deposit Ins. Corp.
Decision Date | 06 August 2019 |
Docket Number | No. 18-3133,18-3133 |
Citation | 932 F.3d 978 |
Parties | Patrick J. DOHERTY, Plaintiff-Appellant, v. FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Washington Federal Bank for Savings, et al., Defendants-Appellees. |
Court | U.S. Court of Appeals — Seventh Circuit |
Patrick J. Doherty, Attorney, Pro Se.
John W. Guarisco, Attorney, Federal Deposit Insurance Corporation, Legal Division, Appellate Litigation Unit, Arlington, VA, Ronald Austin, Jr., Attorney, Grant Law, LLC, Chicago, IL, for Defendant-Appellee.
Before Flaum, Kanne, and Scudder, Circuit Judges.
Washington Federal Bank brought a default action against Patrick Doherty, John Farano, Jr., and Worth Conversion, LLC, for notes related to various real estate ventures. Doherty raised affirmative defenses on behalf of himself and Worth, but the bank dismissed Doherty and Worth from the action, without prejudice, after obtaining a default judgment against Farano. Doherty then attempted to bring this suit against the bank with claims founded on similar grounds as his previously-raised affirmative defenses. But the Cook County Circuit Court determined that Doherty’s claims were barred by res judicata thanks to the default judgment entered against Farano. Doherty appealed to the Illinois Appellate Court, but before his appeal was heard, Washington Federal was placed into the Federal Deposit Insurance Corporation’s receivership. The FDIC removed this action to the district court, which adopted the Illinois Circuit Court’s decision. Because res judicata does not bar Doherty’s claims, we vacate and remand for further proceedings.
Patrick Doherty and John Farano, Jr., formed Worth Conversion, LLC. In April 2006, Washington Federal Bank ("the bank") loaned Worth $400,000 in exchange for Worth’s promissory note and Doherty and Farano’s personal guaranties of the loan. Washington Federal extended the maturity date of the loan multiple times, but Worth eventually defaulted. The bank subsequently sued Worth, Farano, and Doherty in Cook County Circuit Court in March 2014 (the guaranty action). The twenty-seven count complaint also included counts related to other loans made to another entity affiliated with Farano and Doherty, F & D Services, Inc. But the bank eventually dismissed those counts and F & D Services from the suit.
Doherty is an attorney and he filed an appearance in the guaranty action on behalf of himself and Worth. In his answer to the bank’s complaint, Doherty raised affirmative defenses, including that the bank extended the maturity date of the loan without authorization, that the bank charged fees and an interest rate not agreed upon, and that the bank charged excessive fees.
Farano never appeared, however, and the trial court entered a default judgment for the loan balance against Farano for Count XXVI, which sought judgment on his personal guaranty of the loan, on August 27, 2014. The default judgment ordered:
1. [Washington Federal’s] Motion for Default and Judgment is granted; 2. [The bank] has proven the damages it incurred and reasonable attorney’s fees and costs; 3. Judgment is entered in favor of [the bank] and against Defendant John Farano Jr., in the TOTAL AMOUNT of $228,739.81 due under the Note; $2,804.50 due in attorney fees and $485.33 in legal costs; 4. There is no just reason to delay the enforcement of the judgment, appeal, or both.
On April 27, 2015, Doherty received a report from a forensic document examiner opining that his signature had been forged on loan extension paperwork in 2010. Doherty sent a copy of the report to the bank’s counsel, advising them that he intended to file a suit for fraud and other claims. Around that time, the bank moved the trial court to dismiss its claims against Worth and Doherty from the action without prejudice. The trial court dismissed the bank’s remaining counts (XXV—seeking judgment against Worth on default; and XXVII—seeking judgment against Doherty on his guaranty of the Worth loan) on June 15, 2015. Doherty did not object to this order.
Over a year later, on June 28, 2016, Doherty filed suit against the bank, its president, its corporate secretary, and its attorneys, alleging breach of contract, forgery, excessive fees, fraud, and legal malpractice against the bank’s law firm. He claimed that during the first trial (the guaranty action), he did not learn of the bank’s alleged forgery early enough to take action before being dismissed. His suit sought to recover damages for the fees he incurred defending the guaranty action. The trial court dismissed Doherty’s complaint, and he filed an amended complaint alleging the same facts and counts, but he alleged malicious prosecution instead of malpractice against the bank’s legal counsel.
The bank and its attorneys moved to dismiss Doherty’s amended complaint on the grounds of res judicata , lack of standing, and (on the malicious prosecution count) failure to state a claim. The trial court dismissed Doherty’s suit, holding that most of Doherty’s claims were barred by res judicata because he should have brought them in the guaranty action. The trial court also determined that he failed to state a claim for malicious prosecution. Doherty appealed to the Illinois Appellate Court. Before the court heard Doherty’s appeal, however, Washington Federal was placed into the FDIC’s receivership. The FDIC removed this action to the Northern District of Illinois under 12 U.S.C. § 1819(b)(2)(B).
The district court adopted the Illinois trial court’s ruling as its own. We therefore review the Illinois trial court’s decision and analyze this appeal under Illinois law. Baek v. Clausen , 886 F.3d 652, 660 (7th Cir. 2018). On appeal, Doherty claims that the trial court erroneously dismissed his claims on the basis of res judicata . His main point seems to be that the bank’s use of Farano’s default judgment to defeat Doherty’s claims transformed res judicata from a shield into a sword. In other words, by holding that Doherty’s claims were barred, the district court effectively allowed the bank to kill Doherty’s fraud claims. The bank argues that the trial court correctly determined that res judicata barred Doherty’s claims, but even if it does not, Doherty’s claims should be alternatively dismissed for failure to state a claim.
"Whether a claim is barred by res judicata is a question of law that we review de novo ." Curtis v. Lofy , 394 Ill.App.3d 170, 333 Ill.Dec. 41, 914 N.E.2d 248, 254 (2009). "The party asserting res judicata as a preclusion to the second action bears the burden of showing with clarity and certainty what was determined by the prior judgment." BankFinancial, FSB v. Tandon , 2013 IL App (1st) 113152, ¶ 19, 370 Ill.Dec. 817, 989 N.E.2d 205.
A brief primer on Illinois civil procedure will help clarify the nature of Doherty’s argument. The Illinois rules provide that a "plaintiff may, at any time before trial or hearing begins, upon notice to each party who has appeared or each such party’s attorney, and upon payment of costs, dismiss his or her action or any part thereof as to any defendant, without prejudice, by order filed in the cause." 735 Ill. Comp. Stat. 5/2-1009(a). "[A] dismissal ‘without prejudice’ signals that there was no final decision on the merits and that the plaintiff is not barred from refiling the action." Richter v. Prairie Farms Dairy, Inc. , 2016 IL 119518, ¶ 24, 402 Ill.Dec. 870, 53 N.E.3d 1. The rule also stipulates that a plaintiff’s dismissal of its claims against a defendant "does not dismiss a pending counterclaim or third party complaint." 735 Ill. Comp. Stat. 5/2-1009(d). Illinois courts have held that a voluntary dismissal by the plaintiff is an appealable order. Dubina v. Mesirow Realty Dev., Inc., 178 Ill.2d 496, 227 Ill.Dec. 389, 687 N.E.2d 871, 874–75 (1997) ( ).
Doherty’s claims were styled as affirmative defenses, not as counterclaims. That was probably because, under Illinois civil procedure, a defendant must raise affirmative defenses in the answer or reply. See 735 Ill. Comp. Stat. 5/2-613(d). Conversely, counterclaims are permissive in Illinois and can be brought in their own action. See 735 Ill. Comp. Stat. 5/2-608. See Laue v. Leifheit , 105 Ill.2d 191, 85 Ill.Dec. 340, 473 N.E.2d 939, 943 (1984) ( ).
"The doctrine of res judicata bars the refiling of an action previously adjudicated on the merits when the action is directed against the same parties and involves the same claims." DeLuna v. Treister , 185 Ill.2d 565, 236 Ill.Dec. 754, 708 N.E.2d 340, 344 (1999) (citing Rein v. David A. Noyes & Co. , 172 Ill.2d 325, 216 Ill.Dec. 642, 665 N.E.2d 1199, 1204 (1996) ). "Res judicata promotes judicial economy by preventing repetitive litigation and [additionally] protects parties from being forced to bear the unjust burden of relitigating essentially the same case." Piagentini v. Ford Motor Co. , 387 Ill.App.3d 887, 327 Ill.Dec. 253, 901 N.E.2d 986, 990–91 (2009) (quoting Arvia v. Madigan, 209 Ill.2d 520, 283 Ill.Dec. 895, 809 N.E.2d 88, 97 (2004) (alteration in original)).
There are three requirements for res judicata in Illinois: "(1) a final judgment on the merits ... entered in the first lawsuit by a court of competent jurisdiction; (2) an identity of causes of action exists; (3) the parties or their privies are identical in both lawsuits." DeLuna , 236 Ill.Dec. 754, 708 N.E.2d at 344. "The requirement of a final order or judgment is a ‘critical’ component in showing the applicability of res judicata ." Richter , 2016 IL 119518 at ¶ 22, 402 Ill.Dec. 870, 53 N.E.3d 1 (citing Hernandez v. Pritikin , 2012 IL 113054, ¶ 41, 367 Ill.Dec. 253, 981 N.E.2d 981 ). And the...
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