IFC Credit Corp v. Magnetic Technologies, Ltd.

Opinion

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. 1-06-0426

(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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