Appeal from the Circuit Court of the 14th Judicial Circuit Whiteside County, Illinois No. 93-L-28 Honorable Dan A. Dunagan Judge, Presiding.
The opinion of the court was delivered by: Justice Lytton
Paul D. Young took out two promissory notes with Smith Trust and Savings Bank; his parents, Lauren and M. Jeanette Young (Youngs) co- signed the notes. When Paul and his wife (children) failed to repay the notes, the bank filed a complaint in state court. The children subsequently filed for bankruptcy and removed the bank's complaint to the bankruptcy court. The bankruptcy court remanded the cause of action against the Youngs to state court since it was not part of the "core" bankruptcy proceedings. The bank then consented to the dismissal of its claims against the children, but pursued its claim against the Youngs as co-signers. The Youngs filed a motion to dismiss in state court, claiming that the order dismissing the bank's complaint against the children was res judicata. The trial court granted the motion, and the bank appeals. We affirm.
Charles W. Brown, Jr. and Paul Young owned Erie Ag Service, a business partnership. The business was financed with individual lines of credit taken out by each partner at the bank; Paul's notes were co- signed by his parents. In 1989, Erie Ag Service filed for bankruptcy reorganization, and the court approved a reorganization plan. After the plan failed, creditors were allowed to pursue their claims in state court.
Peoples Bank filed a complaint based on the promissory notes, and confessions of judgment were taken against both partners in the business. The children and the Youngs opened the judgment and filed affirmative defenses.
The bank filed for foreclosure on Brown's property and attempted to join the children and the Youngs in the proceedings. However, the children and the Youngs refused to participate and filed a motion to dismiss, which was granted. The trial court later directed that the foreclosure proceeds be applied to Brown's debt since no other parties were involved in the case. The bank later filed a motion to bar the children and the Youngs from asserting any affirmative defenses in this case due to their refusal to participate in the foreclosure proceedings. The trial court denied the motion.
Later, the children filed for personal bankruptcy under Chapter 11 and requested that the bank's complaint against them and the Youngs be removed to the United States bankruptcy court. The bankruptcy court remanded the case against the Youngs to state court under the doctrines of mandatory and discretionary abstention because it lacked jurisdiction over "non-core" proceedings. The bank then consented to the dismissal of its case in the bankruptcy court, instead choosing to pursue its complaint solely against the Youngs in state court. It is undisputed that, under Federal Rule 41(b) (Fed. R. Civ. P. 41(b)), the order of dismissal acts as a judgment on the merits as to the bank's claims in the bankruptcy court.
The Youngs filed a motion to dismiss the state court action, alleging that the dismissal of the children by the bankruptcy court constituted res judicata. The trial court granted the motion. The bank's motion to reconsider was denied. We affirm.
This appeal presents us with the narrow issue of whether the dismissal of a cause of action on the merits by a bankruptcy court precludes the pursuit of the same cause in state court against an accommodation maker that was not a party to the bankruptcy action. Because a motion to dismiss presents a question of law, we review the trial court's ruling de novo. See Lucas v. Lakin, 175 Ill. 2d 166, 171, 676 N.E.2d 637, 640 (1997).
The bank argues that its complaint against the Youngs is not barred by res judicata because the limited scope of the bankruptcy court's jurisdiction does not reach non-core proceedings.
To support a finding of res judicata, there must be: (1) a final judgment on the merits by a court of competent jurisdiction; (2) identity of the causes of action; and (3) identity of the parties or their privies. See River Park v. City of Highland Park, 184 Ill. 2d 290, 302, 703 N.E.2d 883, 889 (1998). The issue presented to us involves only one element of res judicata: whether the bankruptcy court was a "court of competent jurisdiction."
It is well-established that bankruptcy courts do not possess the same powers as Article III courts. In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87, 73 L. Ed. 2d 598, 625, 102 S. Ct. 2858, ____ (1982), the United States Supreme Court held that the Bankruptcy Reform Act of 1978 was unconstitutional because it gave Article III powers to bankruptcy courts. Following this decision, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984, which gave federal district courts jurisdiction over bankruptcy matters. Pursuant to this act, district courts may refer cases "'arising under title 11 or arising in or related to a case under title 11'" to bankruptcy courts in that district. Sarno v. Thermen, 239 Ill. App. 3d 1034, 1045, 608 N.E.2d 11, 19 (1992) (quoting 28 U.S.C. §157(a) (1988)). However, this delegation of power is not unlimited; only certain types of cases can be finally decided by bankruptcy courts. "`[B]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, ***, and may enter appropriate orders and judgments ***.'" CoreStates Bank, N.A. v. Huls America, Inc., 176 F.3d 187, 195 (3rd Cir. 1999) (quoting 28 U.S.C. §157(b)(1) (1988)). A "core" proceeding affects the ultimate distribution of the assets of the debtor and either: (1) involves a substantive right granted by title 11 or (2) could only occur in the context of a bankruptcy. Sarno, 239 Ill. App. 3d at 1046, 608 N.E.2d at 19; CoreStates, 176 F.3d at 195.
Bankruptcy judges may also hear "non-core" proceedings that are "'otherwise related to a case under title 11.'" Sarno, 239 Ill. App. 3d at 1046, 608 N.E.2d at 19 (quoting 28 U.S.C. §157(c)(1) (1988)). A "non-core" proceeding is one which could have been brought in a federal or state trial court if a bankruptcy petition had not been filed. Sarno, 239 Ill. App. 3d at 1046, 608 N.E.2d at 19. However, when hearing non-core cases bankruptcy courts may not enter final judgments; they may only offer proposed findings of fact and recommendations of law to federal district court judges. CoreStates, 176 F.3d at 196. Because bankruptcy courts' non-core decisions lack finality, actions involving claims that could have been raised ...