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Miner v. Faqshion Enterprises

July 15, 2003


Appeal from the Circuit Court of Cook County 98 M1 162633 Honorable John Joseph Hynes, Judge Presiding

The opinion of the court was delivered by: Presiding Justice McBRIDE


Plaintiff Judith Miner, as agent of the beneficiaries of Cosmopolitan National Bank as Trustee under Trust No. 23421 (trust), appeals from an order of the circuit court of Cook County dismissing the trust's five-count second amended complaint, on the basis of res judicata, the terms of a lease, and factual insufficiency. The trust contends the trial court erred in dismissing the complaint, because (1) res judicata does not bar a judgment creditor from bringing a new action to pierce the corporate veil of a judgment debtor, (2) res judicata does not bar a lessor from filing more than one action for damages after its lessee abandons the property, (3) the lease at issue did not relieve the lessee's parent corporation from liability for the lessee's judgment debt, and (4) the allegations of fraud in the negotiations and performance of the lease were factually sufficient to state a claim. The subsidiary corporation, judgment debtor Karen Lynn, Ltd. (Karen Lynn), is not a party to this action. The parent corporation, Fashion Enterprises, Inc. (Fashion Enterprises), and its shareholders, Sheldon Needelman and Gary Needelman, are defendants to this action and cross-appeal contending that the trial court abused its discretion when it declined to sanction the trust for its "false" allegations and a "baseless" motion seeking clarification of a court order.

The following pertinent facts are relevant to our discussion of the issues.

In 1988, the trust gave Karen Lynn a 10-year lease beginning on March 1, 1989, for retail space located at 4828-34 West Irving Park Road, Chicago. The stated purpose of the lease was the retail sale of ladies' apparel and accessories. Paragraph 13 provided that if the lessee vacated the premises for a period of 10 days, the lessee's right to possession would terminate. Paragraph 14 provided that if the lessee's right to possession was terminated, the lessor was not obligated to mitigate damages by accepting a new tenant, and the lessee would satisfy any deficiency. An attached rider specified that monthly rent was to be paid in advance on the first of each month and obligated Karen Lynn to pay a portion of the property's annual real estate taxes. Paragraph 2 of the rider, entitled "Assignment," provided that (a) in the event the lease was assigned, Karen Lynn "shall remain liable for the full covenants and conditions of the Lease," (b) Karen Lynn's parent corporation, Fashion Enterprises, "may occupy the leased premises and conduct a business herein," and (c) Fashion Enterprises "shall not be liable under any provisions of this Lease, regardless of the activity of such parent."

On September 3, 1996, the trust filed an action against Karen Lynn seeking $21,162, consisting of unpaid rent accruing to September 3, 1996, and unpaid 1995 real estate taxes. A default judgment was entered on November 21, 1996, in the amount of $22,162.

The trust indicates it initiated supplementary proceedings to enforce the default judgment and discovered that Karen Lynn had insufficient assets. The supplementary pleadings are not at issue and were not included in the record on appeal.

The record includes a transcript of a citation examination of Gary Needelman conducted by the trust on January 6, 1997. During the examination, Gary Needelman indicated the following. Gary Needelman and Eileen DiLorenzo are the vice presidents of Karen Lynn. Fashion Enterprises owns and has always owned 100% of Karen Lynn's stock. Gary Needelman's father, Sheldon Needelman, is the president of Karen Lynn and the president of Fashion Enterprises. Sheldon Needelman owns all of Fashion Enterprises' stock. Fashion Enterprises sells women's apparel and has five retail locations in the Chicago area. Karen Lynn was formed to sign the lease for the retail space at 4828 Irving Park Road, and Fashion Enterprises owns other corporations which signed the leases for its other retail locations. Other than signing the lease, Karen Lynn did nothing with the property. Karen Lynn did not sell women's apparel and it never had any inventory. Fashion Enterprises, not Karen Lynn, operated the business at the Irving Park location. Karen Lynn was capitalized with roughly $1,000. In mid 1995, Fashion Enterprises increased Karen Lynn's $1,000 bank account balance to $2,500 because Karen Lynn was being charged a maintenance fee. Each month Fashion Enterprises gave Karen Lynn the exact amount of money that Karen Lynn needed to pay the landlord for that month's rent. Karen Lynn received only one check per month and issued only one check per month, and did nothing else. Karen Lynn never had any bills, employees, tax returns, or financial statements, and its minute book did not contain any signed corporate resolutions. Fashion Enterprises liquidated its inventory at the Irving Park location and stopped doing business there during July of 1996. In August (before the trust sued for unpaid rent and taxes on September 3), Karen Lynn issued a check to its attorney for $1,012.50, and returned $1,487.50 to Fashion Enterprises. Karen Lynn was dissolved in 1996 by the Secretary of State.

At the conclusion of the citation examination, Karen Lynn's attorney stated, "And for the record, we've got the last two years of Cosmopolitan [National Bank's] records for Karen Lynn, the minute book, and a couple of manual reports." The trust's attorney responded, "Okay. Good."

The trust indicates that on October 14, 1997, during the supplementary proceedings, it filed a citation to discover the assets of Fashion Enterprises. Further, this citation was actually an attempt to pierce Karen Lynn's corporate veil in order to collect the 1996 judgment. However, after Fashion Enterprises argued it was improper to pierce the corporate veil in supplementary proceedings, the trust nonsuited the supplementary proceedings. Fashion Enterprises indicates that the supplementary proceedings judge remarked that the 1996 action against Karen Lynn would be res judicata as to a subsequent action against its parent, Fashion Enterprises.

On November 25, 1998, the trust initiated the instant lawsuit against Fashion Enterprises, Sheldon Needelman, and Gary Needelman. In count I of the new action, the trust alleged Fashion Enterprises was liable for the 1996 judgment because, "Fashion Enterprises formed Karen Lynn to defraud creditors; Karen Lynn had no assets; and corporate formalities were not followed with respect to Karen Lynn." In count II, the trust alleged the Needelmans were liable for the 1996 judgment because they "formed Karen Lynn solely to execute the subject lease and to defraud creditors, *** Karen Lynn had no assets; and corporate formalities were not followed with respect to Karen Lynn."

Fashion Enterprises and the Needelmans moved to dismiss the complaint pursuant to section 2-619(a)(4) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(4) (West 1998) ("the cause of action is barred by a prior judgment")), arguing that the 1996 action operated as res judicata. They also contended that the trust's "vexatious and harassing action without legal basis" warranted imposition of sanctions.

Judge Anne Houser entered an order granting the motion to dismiss the complaint "as to breach of lease on res judicata," and giving the trust leave to file a first amended complaint. The order does not indicate that the amended pleading was to be limited to any specific legal theory nor does it address the request for sanctions. The proceedings were not recorded by a court reporter.

The trust filed a two-count first amended complaint in which it specified that its claims were not based on breach of the lease. The trust indicated that its claim against Fashion Enterprises was an attempt to pierce Karen Lynn's corporate veil, while its claim against the Needelmans was an attempt to disregard a corporate entity which was merely an alter ego of a governing or dominating personality. The trust repeated the allegations of the original complaint, but in substantially more detail. Rather than alleging that "corporate formalities were not followed," the trust now alleged that "the formal legal requirements of Karen Lynn were not observed. There have been no meetings of the shareholders or directors of Karen Lynn and no corporate minutes have been maintained." The trust sought $223,805 in damages, consisting of unpaid rent accruing through the end of the lease on February 28, 1999, and unpaid 1995, 1996, and 1997 real estate taxes. It appears the $223,805 figure may have included rent and property taxes awarded in the 1996 judgment, because both claims encompass the 1995 taxes.

Fashion Enterprises and the Needelmans moved to dismiss the first amended complaint, pursuant to sections 2-619(a)(4) and 2-615 of the Code of Civil Procedure. 735 ILCS 5/2-615, 2-619(a)(4) (West 1998). Fashion Enterprises again characterized the count against it as one for breach of contract, which was barred by res judicata. Fashion Enterprises also contended that Judge Houser never gave the trust leave to plead a contract claim against the corporation and had only allowed the trust to plead a fraud as to the Needelmans. The Needelmans characterized the count against them as one for fraud and argued the claim was factually deficient and precluded by paragraph 2 of the rider.

On January 6, 2000, Judge John Joseph Hynes granted the motion to dismiss and gave the trust leave to amend. On January 26, 2000, the trust filed a motion to reconsider the dismissal of the first amended complaint, arguing that Judge Hynes misinterpreted the extent of Judge Houser's order as to the original complaint. While the motion to reconsider was pending, the trust filed a motion to clarify Judge Houser's order dismissing the original complaint, due to Judge Hynes' reliance on the order. Judge Hynes transferred the motion to clarify for hearing before Judge Houser. However, Judge Houser declined to clarify her order and indicated the parties could prepare bystanders' reports if it became necessary. The parties then returned to Judge Hynes, who denied the trust's motion to reconsider the dismissal of its first amended complaint and gave the trust leave to file a second amended complaint as to "common law fraud."

Next, the trust filed a five-count second amended complaint, in which it incorporated its prior allegations in order to preserve the issues for appeal. It pled claims for the 1996 judgment and the subsequent rent in two separate counts against Fashion Enterprises, based on the corporate veil theory, or in the alternative, in two separate counts against the Needelmans. In the alternative, the trust asserted common law fraud had been perpetrated in the lease negotiations and performance by material misrepresentation or omission. Judge Hynes struck the fraud count as factually deficient and gave the trust leave to replead that count. After the trust indicated it wished to stand on the second amended complaint, Judge Hynes dismissed the pleading with prejudice, for the reasons previously stated.

Judge Hynes subsequently denied the defendants' petition for sanctions.

This appeal and cross-appeal followed.

The trust's first contention is that the trial court erred in granting the section 2-619(a)(4) motion to dismiss on res judicata grounds, because a judgment creditor may choose to file a new action to pierce the corporate veil in order to hold the corporation's individual shareholders and directors liable for the judgment against the corporation. Fashion Enterprises and the Needelmans respond that res judicata was triggered by the 1996 action.

A motion to dismiss a claim based on section 2-619 of the Code of Civil Procedure (735 ILCS 6/2-619 (West 1998)) admits the legal sufficiency of the plaintiff's allegations but asserts affirmative matter that avoids or defeats the claim stated. Peetoom v. Swanson, 334 Ill App. 3d 523, 526, 778 N.E.2d 291 (2002). The purpose of section 2-619 is to afford litigants a means of disposing of issues of law and easily proved issues of fact at the outset of a case, reserving disputed questions of fact for a trial. Zedella v. Gibson, 165 Ill. 2d 181, 185, 650 N.E.2d 1000 (1995). Therefore, when ruling on a section 2-619 argument, a trial court may consider pleadings, depositions, and affidavits. Zedella, 165 Ill. 2d at 185.

If a cause of action is dismissed pursuant to a section 2-619 argument, the questions on appeal are whether a genuine issue of material fact exists and whether the defendants are entitled to judgment as a matter of law. Zedella, 165 Ill. 2d at 185-86. The dismissal of a complaint under section 2-619 is subject to de novo review. Peetoom, 334 Ill App. 3d at 526.

Section 2-619(a)(4) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(4) (West 1998)) permits a trial court to dismiss a cause of action on the grounds that it "is barred by a prior judgment." Marvel of Illinois, Inc. v. Marvel Contaminant Control Industries, Inc., 318 Ill. App. 3d 856, 863, 744 N.E.2d 312 (2001). "Section 2-619(a)(4) incorporates the doctrine of res judicata, which has three essential elements: (1) a final judgment on the merits rendered by a court of competent jurisdiction; (2) an identity of cause of action; and (3) an identity of parties or their privies. Marvel of Illinois, 318 Ill. App. 3d at 863. "If all three elements are met, then the prior action is conclusive as to all issues that were, or properly might have been, raised in that action." Marvel of Illinois, 318 Ill. App. 3d at 863.

The trust relies primarily on Pyshos v. Heart-Land Development Co., 258 Ill. App. 3d 618, 630 N.E.2d 1054 (1994), in which the plaintiff also initiated supplementary proceedings in order to collect a money judgment. The judge presiding over the supplementary proceedings pierced the corporate veil and entered judgment against ...

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