IN RE HEARTLAND FOOD AND DAIRY DISTRIBUTORS, INC.,, Bankruptcy No. 99-40832. Adversary No. 99-4122.

• Decision Date: 01 September 2000
• Docket Number: Bankruptcy No. 99-40832. Adversary No. 99-4122.
• Citation: 253 BR 32
• Parties: In re HEARTLAND FOOD AND DAIRY DISTRIBUTORS, INC., Debtors. Land-O-Sun Dairies, L.L.C., Plaintiffs, v. Heartland Food and Dairy Distributors, Inc., William E. Cross, and Tim A. Pribble, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Illinois

253 B.R. 32 (2000)

In re HEARTLAND FOOD AND DAIRY DISTRIBUTORS, INC., Debtors Land-O-Sun Dairies, L.L.C., Plaintiffs, v. Heartland Food and Dairy Distributors, Inc., William E. Cross, and Tim A. Pribble, Defendants.

Bankruptcy No. 99-40832. Adversary No. 99-4122.

United States Bankruptcy Court, S.D. Illinois.

September 1, 2000.

COPYRIGHT MATERIAL OMITTED

Bernard A. Reinert, John W. Rourke, Reiner & Rourke, P.C., St. Louis, MO, for plaintiff.

Pamela Lacey, Benton, IL, for defendant.

OPINION

KENNETH J. MEYERS, Bankruptcy Judge.

This case involves milk that soured and spoiled a business relationship. Plaintiff, a supplier of milk to defendant, Heartland Food and Dairy Distributors, Inc. ("Heartland"), filed suit in state court seeking damages for Heartland's alleged breach of the parties' contract. Heartland counterclaimed, alleging that the plaintiff supplied it with unfit milk that was distributed to Heartland's school customers, resulting in loss of Heartland's contracts with such customers.

The case was removed to this Court after two of the defendants, Heartland and William Cross ("Cross"), filed Chapter 7 bankruptcy petitions.¹ At the time of removal, a motion to reconsider was pending in which the defendants sought reconsideration of the state court's order denying their motion to dismiss the plaintiff's complaint under the doctrine of res judicata. Following removal, the defendants have asked this Court to rule on the motion to reconsider.

Given the convoluted facts of this case, the Court must outline them in detail. In October 1996, plaintiff, Land-O-Sun Dairies, L.L.C. ("L.L.C.") was formed as a Delaware limited liability company. Later that month, L.L.C. entered into a Capital Contribution and Assumption Agreement with Land-O-Sun Dairies, Inc. ("Inc.") in which Inc. transferred substantially all its assets to L.L.C. and L.L.C. assumed Inc.'s liabilities. As part of the transaction, Inc. became a member of L.L.C. and retained an ownership interest in it.

In mid-1997, Heartland and its principals, Cross and Pribble, entered into an agreement — presumably with L.L.C., although the facts are ambiguous on this point² — to purchase dairy products on credit for distribution to various schools. Subsequently, there was a breakdown of the parties' relationship, and L.L.C. hired an attorney to file suit against the defendants. In December 1997, the attorney filed an action naming Inc. as plaintiff, rather than L.L.C. This was unfortunate from L.L.C.'s perspective, not only because its own lawyer had misidentified the intended plaintiff, but also because, although Inc. was a going concern at the time, it was not a corporation in good standing to transact business in Illinois.

The defendants filed a motion to dismiss under 735 Ill.Comp.Stat. 5/2-619(a)(2) based on Inc.'s lack of legal capacity to bring suit.³ However, rather than voluntarily dismissing the complaint, L.L.C.'s attorney asserted that he had inadvertently used the wrong name for the plaintiff and attempted to amend the complaint to substitute L.L.C. as the party plaintiff. The state court judge denied the motion to amend and dismissed the complaint due to Inc.'s legal incapacity to sue in Illinois. The order of dismissal contained no qualifying language, as plaintiff's attorney did not prevail upon the state court judge to specify that L.L.C., the real party in interest, could file a new complaint in the correct name.

L.L.C. is now represented by counsel different from the attorney who represented it in state court. Current counsel argues in this Court that the state court judge commented that L.L.C. could file its own lawsuit following the dismissal of Inc.'s lawsuit. However, the written order is not so qualified and, despite being afforded an opportunity to do so by this Court, L.L.C. has provided no evidence to prove that this statement was made. L.L.C.'s current counsel lacks personal knowledge of the matter, and defendants' counsel, who was present for the earlier proceedings, indicates that she does not recall the state court judge advising the plaintiff how to conduct its case.

The order denying the motion to amend and dismissing the complaint was entered on March 6, 1998, and was not appealed by either Inc. or L.L.C. Instead, on March 9, 1998, L.L.C. filed a new complaint against the defendants in state court that, other than the plaintiff's name and its description, was virtually identical to the earlier dismissed complaint. The new complaint was assigned to a different judge than the one who had earlier dismissed Inc.'s complaint.

The defendants moved to dismiss L.L.C.'s complaint, arguing that the involuntary dismissal of the earlier complaint had res judicata effect. The state court judge newly assigned to the case denied the motion to dismiss, finding that there had been no prior adjudication on the merits.⁴ See Ord.Den.Mot.Dis., Frank. Co. Cir.Ct., Dec. 1, 1998. Subsequently, the state court denied the defendants' motion to reconsider. In its order, the court noted that its denial of the defendants' motion was based on consideration of "applicable case law" as well as statutory and procedural authority. See Ord.Den.Mot. Reconsid., Frank. Co. Cir.Ct., Jan. 21, 1999. The defendants then filed a second motion for reconsideration in which they asserted that two of the cases cited by plaintiff as showing that res judicata did not bar the present case had been reversed by the Illinois Supreme Court. In their motion, the defendants again sought dismissal of the plaintiff's complaint on res judicata grounds.

The defendants' motion for reconsideration is now before this Court by virtue of removal of the plaintiff's case. In ruling on this motion, the Court must determine whether, under applicable Illinois authority regarding the res judicata effect of plaintiff's previous dismissal, the present case may be said to be barred under the doctrine of res judicata.

The doctrine of res judicata precludes repetitive litigation of the same cause of action between the same parties. When applicable, it operates to bar relitigation of every matter that was actually determined in the prior suit, as well as every other matter that could have been raised and determined. Torcasso v. Standard Outdoor Sales, Inc., 157 Ill.2d 484, 193 Ill.Dec. 192, 626 N.E.2d 225, 228 (1993); In re Marriage of Mesecher, 272 Ill.App.3d 73, 208 Ill.Dec. 837, 650 N.E.2d 294, 296 (1995). For res judicata to apply, the party asserting the doctrine must prove three elements: (1) identity of the parties or their privies; (2) identity of the causes of action; and (3) an adjudication on the merits by a court of competent jurisdiction. Rein v. David A. Noyes & Co., 172 Ill.2d 325, 216 Ill.Dec. 642, 665 N.E.2d 1199, 1204 (1996). Here, the parties agree that the subject matter of the instant lawsuit is identical to the earlier, dismissed one, leaving the Court to decide only if the other two elements are met.

In order to prevail on the element of identity of parties, the party asserting it need not prove absolute identity of the parties. It is enough to show that the parties are in privity with each other because they adequately represent the same legal interests. See In re Marriage of Mesecher, 208 Ill.Dec. 837, 650 N.E.2d at 296. Moreover, it is the identity of interest that controls whether privity exists, rather than the nominal identity of the parties. Id.

In this case, the Court finds that the defendants have met their burden of showing that L.L.C. participated in the initial litigation and that it was in privity with the nominal plaintiff, Inc. The record reflects that plaintiff's former counsel was retained by, and represented the interests of, L.L.C. during the first lawsuit despite the fact that the nominal plaintiff was Inc., who was also represented by former counsel. L.L.C.'s present counsel stated on the record that former counsel was retained by L.L.C. to prosecute the original lawsuit and that his filing the complaint in Inc.'s name was an unauthorized mistake. The record indicates further that when former counsel realized the mistake, he filed pleadings in which the nominal plaintiff, Inc., sought to amend the complaint so the named plaintiff could be corrected to L.L.C. There is no doubt that former counsel was representing L.L.C.'s interests during these initial proceedings and that Inc. was serving as a proxy for L.L.C. Since L.L.C. was the real party in interest in the first lawsuit, the element of identity of parties for res judicata purposes has been met.⁵

In addition, the record reveals that L.L.C. and Inc., although separate entities in a technical sense, were not complying with the formalities necessary for each to maintain a separate business existence. This is reflected on numerous documents throughout the record — including the credit documents purportedly binding the defendants to L.L.C. — that show L.L.C. conducting business using Inc.'s letterhead. The suspension of business formalities was of sufficient degree that it caused even L.L.C.'s own counsel to be confused about which entity was his client. Such confusion is reflected in his correspondence to the defendants and in his filing the original complaint in Inc.'s name. Given the intertwining of their business practices, and the congruity of their interest in having L.L.C. substituted for Inc. in the original lawsuit, the Court finds that privity exists between the two entities.⁶

A more difficult question is whether there was an adjudication on the merits in the original action to preclude L.L.C. from proceeding against the defendants now. The answer to this question is found in Rule 273 of the Illinois Supreme Court. The Illinois Supreme Court adopted Rule 273 effective January 1, 1967, see People ex rel. Johnson v. City of Waukegan, 35 Ill.App.3d 713, 342 N.E.2d 480, 484 (1976), as a means "to curb the number of times a plaintiff can resurrect a dismissed action." DeLuna v....