Mortell v. Mortell Co.

• Decision Date: 26 October 1989
• Docket Number: No. 89-1190,89-1190
• Citation: 887 F.2d 1322
• Parties: RICO Bus.Disp.Guide 7356 Donald E. MORTELL, et al., Plaintiffs-Appellants, v. MORTELL COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1322

887 F.2d 1322

RICO Bus.Disp.Guide 7356

Donald E. MORTELL, et al., Plaintiffs-Appellants, v. MORTELL COMPANY, et al., Defendants-Appellees.

No. 89-1190.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 26, 1989.

Decided Oct. 26, 1989.

Gill M. Garman, Sebat, Swanson, Banks, Garman & Townsley, Danville, Ill., Scott Swaim, Swaim & Swaim, Kankakee, Ill., for plaintiff-appellant Donald E. Mortell.

Stephen R. Swofford, Nancy G. Lischer, D. Kendall Griffith, Thomas S. Malciauskas, Douglas M. Reimer, Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, Ill., for defendants-appellees Mortell Co., James W. Mortell and Ramon J. Mortell.

Thomas J. McCarthy, Donald R. Harris, Jenner & Block, Michael L. McCluggage, Brian Rocca, Wildman, Harrold, Allen & Dixon, Chicago, Ill., Everett Laury, Danville, Ill., for defendant-appellee Addis E. Hull.

Before COFFEY and EASTERBROOK, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

EASTERBROOK, Circuit Judge.

The brothers Mortell (Donald, James, and Ramon) were equal owners of Mortell Company. Until 1981 Donald was the President and Chief Executive Officer, James was Chairman of the Board, and Ramon was Chief Operating Officer. Mortell Company has been profitable, and its wealth has severed familial bonds.

I

In 1981 Donald fell behind in paying off a loan, which he had secured by a pledge of some Mortell Company stock. The bank foreclosed and sold the stock to the firm and its pension plan. Donald tried to repurchase these shares but eventually executed an agreement by which he sold his remaining stock and severed ties to the firm. Mortell Company and several affiliates (a detail we disregard, treating the buyers as a single firm) bought all of Donald's remaining stock (and the stock held by his seven children, another detail we ignore) for $6,558,714. It promised to pay more in the event the firm was sold before December 31, 1987. The critical provisions calculated the sum this way:

A. (2) One-half ( 1/2) of 29.8347% of the sales price ... in excess of $15,895,116 if the [Company is] sold after December 31, 1984, and prior to December 31, 1987.

(3) The amount determined ... shall be reduced (but to not less than -0-) by $844.51 multiplied by the number of days between December 1, 1981, and the closing date of the sale....

* * *

B. In no event will the payment under this paragraph ... exceed the sum of $2,000,000.

* * *

G. The percentages set forth in subparagraph A ... have been computed on the basis that at the time of any sale ... James W. Mortell and his family will own 42.520695% of the equity ... and Ramon J. Mortell and his family will own 42.520695% of the equity.... Notwithstanding anything to the contrary in subparagraph A ..., it is understood and agreed among the parties that the purpose ... is to treat [Donald and his family] in an equal and equitable manner with [Ramon, James, and their families].... [T]he percentages set forth in subparagraph A ... shall be revised as may be appropriate for such percentages to reflect equal and equitable treatment of [Donald and his family], considering the actual percentage ownership ... by James W. Mortell and Ramon J. Mortell and their respective families.

In April 1986 another firm purchased all outstanding stock of Mortell Co. for $30.9 million. Mortell Co. concluded that it owed Donald $1.2 million after computing the sum due under paragraph A(2) and subtracting the amounts provided by paragraph A(3). Donald contended that because of the "equal and equitable manner" language of paragraph G he was entitled to one third of the $10.9 million, less what he had already received, plus another $1.9 million, representing one third of the distributions ($5.8 million) his brothers had received between 1981 and 1986. That came to a total of $5.1 million, almost $4 million more than he had been offered. James and Ramon replied that paragraph G came into play only if their stakes in the firm changed, and that Donald's payment was at all events subject to the $2 million cap set in paragraph B. Lucre has sundered many a family, and this $4 million difference of opinion exceeded the cohesion of the Mortell clan.

In June 1986 Donald filed suit in an Illinois court against his brothers and Mortell Co. The complaint alleged that the defendants broke the agreement. In March 1987 Donald filed a second suit, this time in federal court, naming as defendants his brothers, Mortell Co., and Addis E. Hull, a partner of Jenner & Block (the firm's corporate counsel). This complaint alleged that the course of conduct by which Mortell Co. obtained the stock and tendered so little in return violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-68. The only allegation in the complaint, as finally amended, adding to the facts we have recounted says:

... [T]he named defendants employed the United States Mail in filing reports, conducting negotiations, entering into various agreements, offering and receiving legal advice, as previously stated, so as to conceal their activities and intentions ..., all in violation of 18 U.S.C. Sec. 1341 [proscribing mail fraud].

Because the complaint failed to plead fraud with "particularity"--indeed to identify any fraud--it could have been dismissed forthwith under Fed.R.Civ.P. 9(b). Skycom Corp. v. Telstar Corp., 813 F.2d 810, 818 (7th Cir.1987); see Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333, 1337 (7th Cir.1989) ("to break a promise is not to commit fraud").

In October 1988 the state court granted the defendants' motion for summary judgment. Mortell v. Mortell, No. 86-L-125 (21st Cir. Kankakee Cnty. Oct. 13, 1988). Judge Gould concluded that the contract is unambiguous and that under its terms Donald was entitled to only $1.2 million. Moreover, the judge concluded, James and Ramon could not have been liable in any event because they were not parties to the contract. James signed only in his capacity as an officer of Mortell Co., and Ramon did not sign at all. Because Donald had not established any ground for piercing the corporate veil, James and Ramon could not have been personally responsible for the corporation's obligations.

Back in federal court, the defendants moved for summary judgment on the ground of claim preclusion (res judicata). Donald could have pleaded fraud in the state case but neglected to do so. Because judgments are preclusive on all arguments arising out of a single claim that were or could have been raised, Cromwell v. County of Sac, 94 U.S. (4 Otto) 351, 24 L.Ed. 195 (1877); Housing Authority v. YMCA, 101 Ill.2d 246, 251-52, 78 Ill.Dec. 125, 128, 461 N.E.2d 959, 962 (1984), Donald's omission was fatal to the federal case. Chief Judge Baker accepted this argument, adding that although Hull had not been party to the state case, he was a privy of Mortell Co. and thus could plead the state judgment as a bar.

Donald could have raised in state court the same claim of fraud that underpins his RICO action. Fraud and breach of contract are alternative legal theories for redress of the same wrong. Under Illinois law, which governs here, 28 U.S.C. Sec. 1738, failure to plead fraud in the first suit bars a second litigation. Although proof of fraud would entail different facts from proof of breach of contract, and although some Illinois cases use identity of facts as the trigger for claim preclusion, we decided long ago that the dominant line of cases in Illinois adopts the "nucleus of operative facts" approach rather than the "identity of facts" approach. See Lee v. City of Peoria, 685 F.2d 196, 199-200 (7th Cir.1982); Hagee v. City of Evanston, 729 F.2d 510, 513-14 (7th Cir.1984); Frier v. City of Vandalia, 770 F.2d 699, 701-02 (7th Cir.1985); Durhan v. Neopolitan, 875 F.2d 91 (7th Cir.1989). One series of related transactions is a single "nucleus of operative facts". All theories of liability concerning the same transaction or series of acts should be litigated in the same suit to conserve everyone's time and energy and minimize the prospect of inconsistent judgments. Donald's hurt came from the inadequacy of the payment (as he sees things) after the acquisition, coupled with the possibility that his brothers intended all along to gyp him after he handed over the reins. He does not claim to be the victim of an unrelated fraud. One full and fair adjudication is enough; Donald has had his.

Donald contends that RICO actions are different, because RICO provides (he says) for exclusive federal jurisdiction. This creates the possibility that Illinois would not deem a judgment preclusive in a later RICO action because the first court lacked jurisdiction over the subject matter. Cf. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). We have not decided whether federal courts have exclusive jurisdiction of RICO cases, a subject that has divided the courts of appeals. Compare Chivas Products Ltd. v. Owen, 864 F.2d 1280 (6th Cir.1988) (exclusive federal jurisdiction), with Tafflin v. Levitt, 865 F.2d 595, 600 (4th Cir.), cert. granted, --- U.S. ----, 109 S.Ct. 2428, 104 L.Ed.2d 985 (1989) (state courts may entertain RICO actions). Because one Illinois court has refused to decide a RICO action, Washington Courte Condominium Ass'n v. Washington-Golf Corp., 150 Ill.App.3d 681, 690-91, 103 Ill.Dec. 752, 758-59, 501 N.E.2d 1290, 1296-97 (1st Dist.1986), Donald believes that the state courts would permit him to litigate contract and RICO claims sequentially.

Unfortunately for Donald, we rejected this very argument in a case involving a judgment from Illinois. Henry v. Farmer City State Bank, 808 F.2d 1228, 1234-35 (7th Cir.1986). RICO is a compound offense. The plaintiff must show the predicate crime (Donald chose mail fraud) and then establish a pattern involving an enterprise. Even if federal courts have exclusive jurisdiction over this assemblage of...