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Doctor's Associates, Inc. v. Duree

March 14, 2001


The opinion of the court was delivered by: Justice Cerda

Appeal from the Circuit Court of Cook County. Honorable Sophia H. Hall, Judge Presiding.

In this case, defendant, David Duree, appeals the order of the circuit court refusing to set aside and vacate a Kansas state court judgment domesticated by plaintiffs, Doctor's Associates, Inc. and Subway Restaurants, Inc. (collectively referred to herein as "DAI/SRI"), under the Illinois version of the Uniform Enforcement of Foreign Judgment Act (Act) (735 ILCS 5.12-640 et seq. (West 1998)). The Kansas judgment represented an award of sanctions in favor of DAI and against Duree personally for costs incurred by DAI in defending a counterclaim determined to have been filed in bad faith by Duree as attorney for third-parties sued by DAI in Kansas state court. On appeal, Duree argues the circuit court erred in giving the Kansas judgment full faith and credit under the Act because: (1) the Kansas state court lacked subject matter jurisdiction; (2) the sanctions award was procured by extrinsic fraud; (3) he has been released by DAI from any obligation to pay the amount of the sanctions judgment; and (4) he was denied due process of law in the Kansas proceedings. Duree additionally contends he was entitled to relief from the Kansas judgment pursuant to section 2-1401 of the Code of Civil Procedure (Code) (735 ILCS 5/2-1401 (West 1998)). For the following reasons, we affirm.


A review of the pertinent facts on appeal reveals that DAI, a national franchiser of Subway sandwich shops, instituted litigation in 1990 in the state district court of Kansas against two of its franchise owners, Nancy Kessler and Dane Banks, to recover unpaid franchise royalties and arrearages on real estate and equipment leases. Duree, who was not licensed to practice law in Kansas, was admitted by the trial judge, Judge Janice Russell, pro hac vice on behalf of Kessler and Banks. Duree assumed the role of lead counsel for his clients and, during the course of litigation, he filed a series of counterclaims, culminating in a fifth-amended pleading, against DAI for its alleged fraudulent inducement of Kessler and Banks to purchase their Subway franchise.

Before filing the fifth-amended counterclaim, Duree decided as a matter of "trial strategy" to have an amended 1989 tax return prepared for the Kessler/Banks Subway shop. The original 1989 tax return for the store filed with the Internal Revenue Service reflected gross receipts of $139,369 and a profit of $20,143 during the first 8½ months of the store's operations.

Due to the mismanagement of the store's finances by Kessler and Banks, the store's bank statements did not accurately reflect the performance of the business. The most accurate materials indicative of true performance were found in the store's Weekly Inventory and Sales Reports (WISRs). The figures contained in these WISRs were used by Kessler and Banks to prepare the original tax return.

Duree retained the services of Robert Seiffert, a CPA from St. Louis and friend of Duree who had been engaged by Duree to assist in previous litigation brought against DAI. While knowing the existence, use and purpose of the store's WISRs, Seiffert prepared the amended tax return using only the store's bank records. Duree was similarly aware of the WISRs' existence and their use and purpose in determining the store's taxable income.

The 1989 amended tax return prepared by Seiffert reported an operating loss based on gross receipts of $71,543, which was substantially less than the gross receipts of $139,369 reported on the original return. Seiffert knew at the time he prepared the amended return that the bank deposits for the store undoubtedly understated gross receipts. Attached to the amended tax return upon its filing with the IRS was a disclaimer prepared by Seiffert that read he was unable to "determine whether [the] information supplied to [him in preparing the amended return was] complete and accurate."

Discovery on the Kessler/Banks counterclaim lasted two years, at which time DAI successfully moved for summary judgment upon Judge Russell's finding that the amended counterclaim completely lacked merit.

DAI followed by moving for sanctions against Duree under Kansas statutes 60-2007 (K.S.A. § 60-2007) (repealed) and 60-211 (K.S.A. § 60- 211) for costs and expenses incurred in defending the fifth amended counterclaim. After a full evidentiary hearing, Judge Russell concluded that Duree presented the Kessler/Banks counterclaim in bad faith and without a reasonable basis in fact and, on those grounds, awarded DAI $408,445.25 in fees and costs. Judge Russell specifically determined that the 1989 amended tax return was deliberately falsified and manufactured for the sole purpose of supporting the counterclaim. Judge Russell entered a formal written journal entry of judgment reflecting her decision, which was prepared by DAI's attorney, on July 19, 1996.

Duree responded by filing a post-judgment motion to alter or amend Judge Russell's order. Prior to a hearing on that motion, Judge Russell recused herself, citing concerns about her continuing objectivity in light of an ex parte conversation she had with a long-time friend and colleague, John Gerstle. Gerstle visited Judge Russell in her chambers on May 24, 1996, while the judge was in the process of completing the memorandum decision on DAI's sanctions motion. During the visit, Judge Russell and Gerstle discussed, inter alia, Gerstle's then representation of Kessler in an unrelated criminal matter and DAI's sanctions action that was pending against Duree. Judge Russell removed herself upon doubts she would be able to rule fairly on the matters raised in Duree's post-judgment motions.

The matter was reassigned to Judge Lawrence Sheppard. Following the presentation of evidence, including the testimony of Judge Russell in which she explained that her conversation with Gerstle had no influence on her decision and that she had already decided the sanction case before Gerstle's visit, Judge Sheppard found that Judge Russell had not acted with bias against Duree and, accordingly, denied Duree's requests for post-judgment relief.

Duree pursued the matter on review and, on December 18, 1998, the Kansas Supreme Court affirmed both Judge Russell's imposition of sanctions against Duree and Judge Sheppard's denial of Duree's post- trial motion. Subway Restaurants, Inc. v. Kessler, 970 P.2d 526, 528 (Kan. 1998). The court initially reviewed Judge Sheppard's ruling and addressed Duree's contention that Judge Russell's failure to recuse herself immediately after her ex parte communication with Gerstle denied him due process of law because that conversation adversely affected Judge Russell's ability to rule objectively and "unquestionably influenced" her decision to grant DAI's motion. The court found Duree's claim without merit, finding that the evidentiary record unequivocally demonstrated that the Judge Russell acted impartially in rendering her decision. Subway, 970 P.2d at 532. The court further stressed that Duree was afforded notice and a hearing at every stage of the sanctions proceeding. Subway, 970 P.2d at 533.

The court next considered and rejected Duree's claim that Judge Russell's decision was not sufficiently supported by the evidence. *fn1 The court, relying on Judge Russell's summary judgment opinion, first concluded that the Kessler/Banks counterclaim lacked any reasonable factual basis. The court noted that of the multitude of uncontroverted facts cited by DAI in its summary judgment motion, there was a good faith controversy as to only four facts and, even then, those facts were not material to the counterclaim. Subway, 970 P.2d at 534. The court also cited the numerous gaps and deficiencies in the proofs submitted by Duree as highlighted by Judge Russell in making her ruling. Subway, 970 P.2d at 534. According to the court, Judge Russell's findings demonstrated that "the fraud claims in the fifth amended counterclaim were brought without a reasonable basis in fact." Subway, 970 P.2d at 534.

The court additionally concluded that the evidence overwhelmingly established that Duree neither asserted nor pursued the fraud claims in good faith. The court found the evidence sufficient to show that the 1989 amended tax return prepared by Seiffert was indeed false and deliberately prepared for the purpose of bolstering the counterclaims asserted by Kessler and Banks. Subway, 970 P.2d at 535. The court further focused on Duree's conduct in opposing DAI's motion for summary judgment, noting that Duree was in violation of Kansas supreme court rules governing motion practice by denying uncontroverted facts on behalf of his clients without any basis in the record and that, pursuant to the observation of Judge Russell, he had sought to divert the court's attention from the true facts of the case by attempting to make the court angry at DAI and its attorneys. Subway, 970 P.2d at 535. These circumstances, according to the court, demonstrated ...

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