IFC Credit Corp v. Magnetic Technologies, Ltd. ( 2006 )

SECOND DIVISION
FILED: November 14, 2006
No. 1-06-0426
IFC CREDIT CORPORATION, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. ) No. 04 M2 2637
)
MAGNETIC TECHNOLOGIES, LTD., ) Honorable
) Mary K. Rochford
Defendant-Appellee. ) Judge Presiding.
JUSTICE HOFFMAN delivered the opinion of the court:
IFC Credit Corporation (IFC) appeals from an order of the
circuit court dismissing the instant breach of contract action
pursuant to the doctrine of res judicata. For the reasons which
follow, we reverse the judgment of the circuit court and remand
this cause for further proceedings.
On October 10, 2003, NorVergence, Inc. (NorVergence) and IFC
entered into a Master Program Agreement, governing the assignment
of various equipment rental agreements from NorVergence to IFC.
According to the Master Program Agreement, when IFC agreed to
purchase a rental agreement, NorVergence would assign to IFC "all
its rights, title and interest in and to the Rental Agreement and
Equipment including all monies due and to become due under the
Rental Agreement, but none of its obligations under the Rental
Agreement."
On April 6, 2004, NorVergence and Magnetic Technologies, Ltd.
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(Magnetic) entered into a rental agreement for the lease of certain
telecommunications equipment known as a "Matrix." Under the
agreement, Magnetic was required to make sixty payments of $340.14.
The agreement also contained a provision authorizing NorVergence to
assign its rights under the contract. NorVergence assigned the
contract to IFC in that same month.
In June of 2004, NorVergence involuntarily entered bankruptcy.
While those bankruptcy proceedings were pending, in November of
2004, the Federal Trade Commission (FTC) filed a complaint against
NorVergence in the United States District Court for the District of
New Jersey. The FTC's complaint accused NorVergence of various
unfair and deceptive acts in violation of Section 5(a) of the
Federal Trade Commission Act (15 U.S.C. § 45(a) (2000)). Neither
NorVergence nor the trustee in bankruptcy defended the lawsuit, and
a default judgment was entered by the United States District Court
on June 29, 2005. In that judgment, the district court found,
inter alia, that NorVergence's rental agreements assigned after the
bankruptcy court rejected those agreements were void and
unenforceable. The district court also found that the rental
agreements in which NorVergence still retained any residual rights
were void and unenforceable.
In November of 2004, the Illinois Attorney General filed a
complaint against NorVergence in the Circuit Court of Sangamon
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County, alleging violations of the Illinois Consumer Fraud and
Deceptive Business Practice Act (815 ILCS 505/1 et seq. (West
2004)). On May 6, 2005, a default judgment was entered in that
case, declaring all of NorVergence's rental agreements void ab
initio and unenforceable. IFC was not a party to either the action
brought by FTC or the action brought by the Illinois Attorney
General.
The matter before us began when IFC filed a complaint against
Magnetic in the Circuit Court of Cook County. IFC's complaint
contained a single count for breach of contract, seeking damages
resulting from Magnetic's alleged failure to make the required
payments on its rental agreement with NorVergence. Magnetic filed
a motion to dismiss pursuant to section 2-619(a)(4) of the Code of
Civil Procedure (735 ILCS 5/2-619(a)(4) (West 2004)), arguing that
the judgments entered in the United States District Court and the
Circuit Court of Sangamon County, which declared NorVergence's
rental agreements void and unenforceable, acted as a bar to IFC's
current action. The circuit court granted Magnetic's motion,
finding that IFC's claim was barred under the doctrine of res
judicata. This appeal followed.
A section 2-619 motion to dismiss admits the legal sufficiency
of the complaint and raises defects, defenses, or other affirmative
matters that defeat the claim. Cohen v. McDonald's Corp., 347 Ill.
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App. 3d 627, 632, 808 N.E.2d 1 (2004). When reviewing a dismissal
pursuant to section 2-619, this court does not give deference to
the circuit court's judgment, but rather reviews the matter de
novo. Martin v. Illinois Farmers Insurance, 318 Ill. App. 3d 751,
757, 742 N.E.2d 848 (2000).
In urging the reversal of the circuit court's judgment, IFC
contends, inter alia, that it was neither a party to the actions
commenced against NorVergence by the FTC or the Illinois Attorney
General nor was it in privity with NorVergence for purposes of an
application of the doctrine of res judicata based on the judgments
entered in those cases. Consequently, IFC argues that the circuit
court erred in dismissing its action. We agree.
Under the doctrine of res judicata, a final judgment rendered
on the merits is conclusive as to the rights of the parties and
their privies, and constitutes an absolute bar to a subsequent
action involving the same claim, demand, or cause of action. Board
of Education of Sunset Ridge School District No. 29 v. Village of
Northbrook, 295 Ill. App. 3d 909, 915, 692 N.E.2d 1278 (1998). The
doctrine only applies, however, to subsequent actions involving the
same parties or their privies. Yorulmazoglu v. Lake Forest
Hospital, 359 Ill. App. 3d 554, 559, 834 N.E.2d 468 (2005).
IFC was not a party to the actions against NorVergence brought
by the FTC and the Illinois Attorney General. Consequently,
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application of the doctrine of res judicata rests on the question
of whether IFC is considered to be in privity with NorVergence.
Magnetic alleges that privity arose from the long-standing and
intertwined relationship between IFC and NorVergence regarding the
assignment of various rental agreements. However, the only
evidence Magnetic submitted in support of its motion to dismiss was
the default judgments entered in the United States District Court
and the Circuit Court of Sangamon County, the Master Purchase
Agreement between NorVergence and IFC, and the rental agreement
between NorVergence and Magnetic. There is no evidence of IFC's
participation in a common scheme with NorVergence. Based solely on
the record before us, the only relationship between NorVergence and
IFC is that of assignor and assignee.
Generally, where an assignment occurs after the commencement
of a suit against an assignor, the assignee is considered to be in
privity with the assignor and is, therefore, bound by any judgment
against the assignor. See Sweeting v. Campbell, 2 Ill. 2d 491,
497, 119 N.E.2d 237 (1954); Gairdner Realty Investors, Ltd. v.
Dovenmuehle, Inc., 94 Ill. App. 3d 1036, 1040, 419 N.E.2d 514
(1981). However, where the assignee's interest is acquired before
the institution of a suit against the assignor, there is no privity
between the assignor and assignee for the purposes of the
application of the doctrine of res judicata, and, consequently, the
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doctrine does not act as bar to a subsequent action by the assignee
on the same claim. See Sweeting, 2 Ill. 2d at 497; Gairdner Realty
Investors, Ltd., 94 Ill. App. 3d at 1040. The rationale for this
rule is the proposition that an assignor who has transferred its
rights before a lawsuit is instituted no longer has a significant
interest in the matter and, thus, has no incentive to vigorously
defend the suit. See Diversified Financial Services, Inc. v. Boyd,
286 Ill. App. 3d 911, 916, 678 N.E.2d 308 (1997).
Regardless of whether IFC was aware of the suits commenced
against NorVergence and could have intervened, the doctrine of res
judicata does not bar this action. See Sweeting, 2 Ill. 2d at 497-
98. "'The right to intervene in an action does not, in the absence
of its exercise, subject one possessing it to the risk of being
bound by the result of the litigation, under the doctrine of res
judicata.'" Sweeting, 2 Ill. 2d at 498, quoting 30 Am. Jur.,
Judgments, sec. 220.
The parties acknowledge in their briefs that NorVergence
assigned its interest in Magnetic's rental agreement to IFC in
April of 2004. However, the FTC and the Illinois Attorney General
did not file their complaints against NorVergence until seven
months later, in November of 2004. Because IFC's interest was
acquired before the commencement of the actions brought by the FTC
and the Illinois Attorney General, IFC was not in privity with
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NorVergence for the purposes of the application of the doctrine of
res judicata, and, thus, the default judgments entered against
NorVergence will not act as bar to IFC's current action. See
Sweeting, 2 Ill. 2d at 497; Gairdner Realty Investors, Ltd, 94 Ill.
App. 3d at 1040.
IFC also argues that, because Magnetic's rental agreement is
not included within the class of contracts declared void by the
United States District Court in the action brought by the FTC, the
judgment entered in that case can not be the basis for a dismissal
of this action pursuant to the doctrine of res judicata. However,
our foregoing analysis makes it unnecessary to address IFC's
argument in this regard.
In its appellate brief, Magnetic also asserts that rental
agreements assigned from NorVergence to IFC have recently been
found unenforceable in final judgments entered in the County Court
of Dallas County and the United States District Court for the
Northern District of Illinois. We note, however, that Magnetic
never raised the defense of collateral estoppel in its motion to
dismiss but, rather, relied solely upon the doctrine of res
judicata predicated on the judgments entered in the United States
District Court for the District of New Jersey and the Circuit Court
of Sangamon County. Arguments cannot be raised for the first time
on appeal, (Hansen v. Baxter Healthcare Corp., 198 Ill. 2d 420,
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429, 764 N.E.2d 35 (2002)), and, as a consequence, we will not
consider Magnetic's arguments based upon these newly entered
judgments.
For the reasons stated, we reverse the judgment of the circuit
court dismissing IFC's complaint and remand this cause to the
circuit court for further proceedings.
Reversed and remanded.
WOLFSON, P.J., and HALL, J., concur.
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