The opinion of the court was delivered by: Stiehl, 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).
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 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.
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 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 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 ...