United States District Court, N.D. Illinois
April 21, 2004.
RICHARD L. FOGEL, Plaintiff,
GORDON & GLICKSON, GORDON & GLICKSON, P.C. L.L.C., MARK L. GORDON, SCOTT L. GLICKSON, PHILIP P. McGUIGAN, DIANA J.P. McKENZIE, MICHAEL E.C. MOSS, and STUART SMITH, Defendants
The opinion of the court was delivered by: JOAN H. LEFKOW, District Judge
MEMORANDUM OPINION AND ORDER
On February 10, 2004, this court granted defendants' motion to dismiss
the Second Amended Complaint and entered final judgment dismissing the
case with prejudice. The Second Amended Complaint alleged that defendants
defrauded plaintiff Richard L. Fogel ("Fogel") out of certain deferred
compensation payments owed to him from the 1997 Investment Pool created
by Gordon & Glickson P.C. (the "P.C."). On January 5, 2004, shortly
before the entry of final judgment, Fogel filed a Demand for Arbitration
with the American Arbitration Association ("the AAA") seeking a certain
remainder of deferred compensation from Gordon & Glickson L.L.C. (the
"L.L.C."), as well as remittance of Fogel's outstanding liquidated
ownership interest in the L.L.C. The L.L.C. filed a motion to stop the
arbitration, arguing that Fogel had waived his right to arbitration by
bringing the federal fraud suit. The court did not rule on the L.L.C.'s
motion to stop the arbitration, and Fogel continues to pursue the
arbitration. The L.L.C. has now moved for a new or amended judgment barring arbitration, incorporating their
previous argument that Fogel waived his right to arbitrate by commencing
this litigation and arguing in addition that the arbitration now is
barred by res judicata. For the reasons stated below, the court grants
Fogel practiced law with the P.C. until April 30, 1999, when the P.C.
reorganized and transferred general operations and certain assets and
liabilities to the L.L.C. Plaintiff was a party to the reorganization,
became a member of the L.L.C., and continued practicing law without
interruption. The P.C. continued to own and manage certain investment
pools for the benefit of the shareholders of the P.C., including Fogel,
but did not continue to engage in business. In connection with the
reorganization, Fogel entered into two written agreements, the P.C. Plan
and the L.L.C. Agreement. These agreements set forth, among other things,
the entitlement of each shareholder upon separation from the P.C. and the
L.L.C. Both of the agreements contain identical mandatory arbitration
clauses providing for arbitration of any "dispute claim, question or
disagreement" arising from the respective agreements.
On December 15, 1999, Fogel voluntarily resigned his position with the
law firm and ceased practicing law as a member of the firm as of January
14, 2000. Fogel filed this action against the P.C., the L.L.C., and
Michael E.C. Moss alleging that the defendants defrauded him out of
deferred compensation owed to him from the P.C.'s 1997 Investment Pool
upon withdrawal from the firm. Specifically, Fogel alleged that the
defendants, without informing Fogel, "effectively denuded the 1997
Investment Pool of any asset that could effectively provide funds to pay
Fogel his deferred compensation" owed to him under the P.C. Plan.
(Id. ¶ 23.) According to Fogel's Second Amended Complaint, the "firm" still owed
Fogel $290,669.19 in "outstanding deferred compensation" as of December
21, 2002. (Sec. Am. Compl. ¶ 28.) Fogel failed to point out that only
$252,957,16 of this "outstanding deferred compensation" was owed to him
from the 1997 Investment Pool. The remaining $37,711.43 was owed to him
by the L.L.C. pursuant to the L.L.C, Agreement.
Fogel's Demand for Arbitration asserts that the L.L.C. breached the
L.L.C. Agreement and seeks the $37,711.43 in deferred compensation owed
to him by the L.L.C., as well as $9,229.58 owed to Fogel as his
outstanding liquidated ownership interest in the L.L.C. The L.L.C.'s
motion to enjoin Fogel from pursuing the arbitration argues that Fogel is
attempting to litigate the same claim in two different forums. Fogel
opposes the motion, arguing that the arbitration proceedings involve
"wholly separate and distinct factual evidence" from the federal suit.
Fogel has continued to pursue the arbitration, and the AAA has advised
the parties that it will not terminate the arbitration proceedings absent
a court order requiring it to do so.
The L.L.C. continues to assert that the arbitration is barred by the
doctrine of waiver. The court need not decide the waiver issue, however,
because the arbitration is now barred by the doctrine of res judicata.
Res judicata bars successive suits raising the same cause of action.
Thus, if a litigant brings a second suit based on a previously raised
cause of action, res judicata bars all issues that were previously
litigated or could have been litigated in the earlier case. Brzostowski
v. Laidlaw Waste Systems, Inc., 49 F.3d 337, 338 (7th Cir. 1995)(emphasis
added). Fogel's breach of contract claim against the L.L.C. could have,
indeed should have, been litigated in its earlier suit. The Seventh Circuit has held that where the earlier action is brought
in federal court, federal, not state, rules of res judicata apply.
E.E.O.C. v. Harris Chernin, Inc., 10 F.3d 1286, 1289 n.4 (7th Cir.
1993). Under federal res judicata rules, an action should be barred if
three elements exist: (1) judgment on the merits in an earlier action;
(2) identity of the parties or privies in the two suits; and (3) identity
of the cause of action between both suits. Brzostowski, 49 F.3d at 338.
Fogel does not deny that the first two elements are met but argues that
the third element, identity of cause of action between the two claims at
issue, is absent. He claims that "the claims arise from separate
transactions and do not share the same core of operative facts, . . . The
AAA breach of contract action is wholly unconnected to the P.C. Agreement
and Fogel's rights thereunder, wholly unconnected to the deferred
compensation owed by the P.C. from the 1997 Investment Pool, and wholly
unconnected to any allegations of fraud." (Pl. Resp., at 6-7.) The court
The Seventh Circuit employs the "transaction test" to determine whether
there is an identity between causes of action for res judicata purposes.
Andersen v. Chrysler Corp., 99 F.3d 846, 852 (7th Cir. 1996); Car
Carriers, Inc. v. Ford Motor Co., 789 F.2d 589, 593 (7th Cir. 1986).
Under this test, once "a transaction has caused injury, all claims
arising from that transaction must be brought in one suit or be lost."
Car Carriers, 789 F.2d at 593. As Judge Posner has pointed out, "the
standard for when two claims are so closely related that they constitute
the same transaction for purposes of res judicata is not as clear as it
might be." Herrmann v. Cencom Cable Associates, Inc., 999 F.2d 223, 226
(7th 1993). However, the Seventh Circuit has made it clear that the
transaction test "does not require an identity of legal theory or of
facts." Okoro v. Bohman, 164 F.3d 1059, 1062 (7th Cir. 1999). "It would not matter that
the prior suits charged different violations of law, alleged different
facts, and sought different relief. Under the federal common law of res
judicata, a subsequent suit is barred if the claim on which it is based
arises from the same incident, events, transaction, circumstances, or
other factual nebula as a prior suit that had gone to final judgment."
Id. Section 24(2) of the Restatement (Second) of Judgments provides some
guidance to courts in determining what "factual nebula" forms a single
transaction for purposes of the transaction test:
What factual grouping constitutes a `transaction' . .
.[is] to be determined pragmatically, giving weight to
such considerations as whether the facts are related
in time, space, origin, or motivation, whether they
form a convenient trial unit, and whether their
treatment as a unit conforms to the parties'
expectations or business understanding and usage.
Here, though Fogel's claims allege different violations of law, rely on
some different facts, and seek different relief, they are based on what
is in effect the same transaction: the "firm's" failure to pay Fogel the
deferred compensation he was due upon withdrawal. The firm's obligation
to pay Fogel deferred compensation arose from the same event, his
withdrawal from the firm. The contracts giving rise to that obligation
were signed on the same day and concerned the same subject, the parties'
entitlements to firm assets after reorganization. The injury to Fogel is
the same, insufficient compensation. Furthermore, in his Second Amended
Complaint, Fogel repeatedly treats the deferred compensation due to him
under the P.C. Plan and the L.L.C. Agreement as a single debt. He alleges
that at the time of his withdrawal from the firm in January 2000, "the
deferred compensation owed by the firm to Fogel was determined by the
firm to be $462,570.88." Fogel does not explain in the Second Amended
Complaint that this amount constitutes the total deferred compensation
due to him under both the P.C. Plan and the L.L.C. Agreement. Fogel also alleges that the "firm" still owed him $290,669.19
again representing compensation due under both agreements in
"outstanding deferred compensation" on December 31, 2002. In the Second
Amended Complaint, Fogel also discusses and attaches correspondence from
the L.L.C. informing Fogel that "all existing firm debt obligations would
be satisfied," (Sec. Am. Compl. ¶ 26, Ex. G.) Fogel attaches the same
correspondence in his Demand for Arbitration as support for his claim
that he was owed deferred compensation from the L.L.C. (Def. Mot. For
Determination of Waiver., Ex. A.) All this suggests that the treatment of
the two claims as a unit "conforms to the parties' expectations or
business understanding and usage." Restatement § 24(2). Thus, the court
holds that there is an identity of causes of action between Fogel's
federal fraud claim and his arbitration claim and therefore that res
judicata applies to the arbitration claim.
For the reasons stated above, the court grants Gordon & Glickson
L.L.C.'s Motion for a New or Amended Judgment Barring Arbitration [#26].
The court will issue an amended judgment enjoining Fogel from pursuing
his claim against Gordon & Glickson, L.L.C. in arbitration.
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