Federal District Court Opinions

DOLLIE’S PLAYHOUSE, INC. v. NABLE EXCAVATING, INC.,
(S.D.Ill. 2006) DOLLIE’S PLAYHOUSE, INC.,
Plaintiff/Appellant, v. NABLE EXCAVATING, INC.,
Defendant/Appellee. Cause No. 05-CV-385-WDS. United States
District Court, S.D. Illinois. March 29, 2006

MEMORANDUM & ORDER

WILLIAM STIEHL, Senior District Judge

This matter is before the Court on appeal from the United
States Bankruptcy Court for the Southern District of
Illinois. The Appellant, Dollie’s Playhouse, Inc.,
(Dollie’s Playhouse), alleges the Bankruptcy Court erred
when it entered a judgment as a matter of law on all
claims. Jurisdiction in this Court is proper pursuant to 28
U.S.C. § 158(a). The standard of review by this
Court of the Bankruptcy Courts’s decision is de novo.
Monarch Air Serv. v. Solow, 383 F.3d 663, 668 (7th Cir.
2004).

BACKGROUND

Dollie’s Playhouse, a Washington Park, Illinois
adult-entertainment nightclub, filed a petition in
Bankruptcy Court in September of 2004 requesting relief
under Chapter 11, Dollie’s Playhouse, Inc. No. 02-33217.
During this proceeding, Dollie’s Playhouse filed an
adversary complaint against Nable Excavating seeking to
recover damages. Dollie’s Playhouse, Inc. v. Nable
Excavating, Inc., Adversary No. 04-03104. Nable Excavating
is owned by Nathan Eggemeyer, owner of a minority interest
and officer of Dollie’s Playhouse. The two-count adversary
complaint seeks recovery against Nable Excavating, under a
theory of vicarious liability, for the actions of
Eggemeyer. The first count alleges Eggemeyer breached his
fiduciary Page 2 duty to Dollie’s Playhouse by depriving
Dollie’s Playhouse of an opportunity to purchase real
estate. The second count alleges Eggemeyer converted funds
from Dollie’s Playhouse from 1996 to 1997.

Nable Excavating asserted before the Bankruptcy Court that
the claims and issues raised in the adversary complaint
should have been raised in a 1998 contract dispute between
the parties which was before the Circuit Court of St. Clair
County, Illinois, Dollie’s Playhouse, Inc. v. Chicago Title
and Trust Company and Nable Excavating, Inc., Cause No.
99-MR-144 (“Chicago Title” action), and therefore were
barred by the principles of res judicata. The Bankruptcy
Court agreed with Nable Excavating and issued an oral order
finding for Nable Excavating as a matter of law on both
counts (See Tr. Jan. 26, 2005 hearing). Dollie’s Playhouse
filed this appeal seeking review of that finding.

ANALYSIS

The Illinois Supreme Court has held that res judicata
applies when a court of competent jurisdiction has rendered
a final judgment on the merits, there exists an identity of
cause of action, and there is an identity of parties or
their privies. River Park, Inc. v. City of Highland Park,
703 N.E.2d 883, 889 (Ill. 1998). Neither party disputes
that the Illinois trial court was a court of competent
jurisdiction. The parties disagree, however, as to whether
there was identity of cause of action as well as the
identity of parties.

The record reflects that the Bankruptcy judge held a
lengthy discussion regarding Count I, the breach of
fiduciary duty claim, with counsel for Dollie’s Playhouse.
The Bankruptcy Court focused its attention on the
appropriate test of res judicata under Illinois law and on
the test’s application to Count I. The court’s
determination reflects its findings that the breach of
fiduciary duty claim “comes out of the same transactional
occurrence and this is the sale or lease Page 3 of this
property.” (Tr. Jan. 26, 2005 at 28.)

The record does not reflect a similar consideration by the
Bankruptcy Court of Count II, Dollie’s Playhouse’s
conversion claim. The conversion claim is rooted in an
allegation of misappropriation of corporate assets, not
related to the physical property as in Count I. There was
no direct application of the res judicata principles to
Count II by the Bankruptcy judge. More critically, unlike
the Bankruptcy Court’s analysis of Count I, there was no
explicit determination that Count II arises out of the same
transactional occurrence.

1. Identity of Cause of Action

The record reveals that Stephen Masters owned 51% of
Dollie’s Playhouse and served as President. Nathan
Eggemeyer owned 49% and served as Secretary and Treasurer.
The real estate on which Dollie’s Playhouse stood was
purchased by Nable Excavating, a corporation owned by
Eggemeyer. Dollie’s Playhouse, by way of a $120,000 loan
from Nable Excavating, bought non-real estate assets from
the nightclub’s previous owners. Nable Excavating and
Dollie’s Playhouse entered into an oral commercial lease
agreement on August 24, 1995. The terms of the agreement
would later become the subject of the litigation in the
Chicago Title action.

Dollie’s Playhouse claimed the agreement was a lease-sale
agreement, requiring the night club to pay Nable Excavating
$5,000 a month for five years. At the end of this period,
Dollie’s Playhouse would own the land. In addition,
Dollie’s Playhouse also claimed it could forego the $5,000
monthly payment arrangement by simply paying one lump-sum
of $300,000. Nable Excavating claimed the $5,000 monthly
payment was, in essence, rent and that the agreement lasted
only two years (Appellee’s brief at 6).

The parties’ inability to reach a resolution on this
issue, combined with other unsettled Page 4 differences,
led Dollie’s Playhouse to file the Chicago Title action,
which alleged breach of contract by Nable Excavating and
sought declaratory judgment, transferring title to the
property once Dollie’s Playhouse had paid $5,000 over five
years or the $300,000 lump-sum. Nable Excavating filed a
counter-claim alleging Dollie’s Playhouse owed it $105,000
back rent. Nable Excavating also alleged Dollie’s Playhouse
owed $120,000 from a loan between the businesses to
purchase non-real estate assets. (Appellee’s brief at 7).
The trial court found for Nable Excavating finding it to be
the owner of the real estate. As part of the St. Clair
County Court’s order, Dollie’s Playhouse had to repay the
back rent and the loan. See, Chicago Title, slip op. at 2
(July 2, 2002).

Dollie’s Playhouse argued before the Bankruptcy Court that
the St. Clair County Circuit Court only considered the
breach of contract claim and loan dispute, and did not
consider the fiduciary duty claim. Count I of the adversary
action asserts that Eggemeyer breached a fiduciary duty to
Dollie’s Playhouse by purchasing the real estate for Nable
Excavating rather than for Dollie’s Playhouse. Dollie’s
Playhouse, therefore argued that the fiduciary duty claim
is a wholly unrelated transaction to the ownership, rent
and loan issues resolved by the trial court and therefore
should not be precluded under res judicata.

The Illinois Supreme Court has adopted a “transactional”
test for determining whether causes of action are
identical. The court adopted and applied the Second
Restatement of Judgments to further define the
transactional test. River Park, Inc, 703 N.E.2d at 889 (See
also Garcia v. Village of Mount Prospect, 360 F.3d 630, 635
(7th Cir. 2004)).

What factual grouping constitutes a “transaction”, and
what groupings constitute a “series”, are to be determined
pragmatically, giving weight to such considerations as
whether the facts are related in time, space, origin, or
Page 5 motivation, whether they form a convenient trial
unit, and whether their treatment as a unit conforms to
the parties’ expectations or business understanding or
usage.

River Park, Inc, 703 N.E.2d at 889 (citing Restatement
(Second) of Judgments § 24 (1982)). In addition to
defining the determinative factors in which causes of
action arise under the same “operative facts,” the Illinois
Supreme Court has also stated that causes of actions are
estopped if they contain the same facts but are presented
under different theories of relief. “[S]eparate claims will
be considered the same cause of action for purposes of res
judicata if they arise from a single group of operative
facts, regardless of whether they assert different theories
of relief.” River Park, Inc, 703 N.E.2d at 889.

A review of the claim in Count I of the adversary complaint
and the St. Clair County action, indicates they are related
in time, space, and origin, and therefore the events
constitute the same core of “operative facts.” The facts in
both disputes stem from the business’ startup, focusing
upon the relationship between the parties at the start of
the business, and their relationship to the real estate.
Thus, the contract and fiduciary relationships disputes
have the same origins.

Moreover, the purchase and lease are closely related in
time; occurring within two months of each of other.
Finally, both disputes center on the same piece of real
estate, thus making them spatially related. Therefore,
Dollie’s Playhouse breach of fiduciary duty argument, while
potentially meritorious, should have been litigated with
the breach of contract dispute in the St. Clair County
action. Illinois case law explicitly commands a plaintiff
cannot re-litigate a claim because the plaintiff has
created a new theory of the case. River Park, Inc, 703
N.E.2d at 895. Page 6

2. Identity of Parties

The parties also dispute whether Nable Excavating should
be considered identical even though the company is named in
both suits. Dollie’s Playhouse argues Nable Excavating
should be considered a different party because Nable
Excavating was sued in different capacities. In the St.
Clair County contract dispute, Nable Excavating was sued as
a business entity. In the bankruptcy adversary complaint,
Nable Excavating was sued as a beneficiary, via vicarious
liability, for the actions of Eggemeyer.

In Illinois law:

There is no generally prevailing definition of “privity”
that we can apply to all cases for the purpose of res
judicata. Rather, determining privity requires careful
consideration of the circumstances of each case. “Privity
expresses `the idea that as to certain matters and in
certain circumstances persons who are not parties to an
action but who are connected with it in their interests
are affected by the judgment with reference to interests
involved in the action, as if they were parties.'”

Hayes v. State Teacher Certification Bd. 835 N.E.2d 146,
156-57 (Ill.App.Ct. 2005) (quoting Purmal v. Robert N.
Wadington & Assocs., 820 N.E.2d 86, 95 (Ill.App.Ct. 2004)).

Since the claim in Count I and the state court action both
requested a transfer of title to the land or damages equal
to the value of the real estate, Nable Excavating’s
interest are not changed. Therefore, the parties are
identical under Illinois res judicata analysis.

CONCLUSION

Upon review of the record, the Court FINDS that the
Bankruptcy Court correctly held that the claim in Count I
was barred under the principles of res judicata, and
AFFIRMS that decision. However, because neither the record
nor the oral order reflect any direct consideration by the
Court of Count II, or the applications of the principles of
res judicata to that claim, the Page 7 Court FINDS that
it is appropriate to remand this matter for a determination
on Count II of whether the conversion claim is also barred
under the rules of res judicata. Accordingly, the Court
AFFIRMS the holding of the Bankruptcy Court that the claim
in Count I of the adversarial proceeding is barred by the
doctrine of res judicata. The Court REMANDS the issues in
Count II of the adversarial action for further findings in
accordance with this opinion.

IT IS SO ORDERED. Page 1