Circuit Court Rules that the District Court Properly Abstained Until Appellate Review of Earlier Actions Were Determined Before Ruling that Res Judicata Barred a Civil RICO Action

Beck v. Clausen, __ F.3d __, 2018 WL 1572689 (7th Cir. 2018)

Plaintiffs (an LLC and its shareholders) (collectively “the Baeks”), brought this action against Northside Community Bank (“NCB”) and several of its employees, alleging civil RICO violations which focus on the allegedly fraudulent and abusive acts committed by NCB in the course of a lending relationship with the plaintiffs. This RICO action is the last in a series of legal actions between the parties.

In response to the RICO complaint, NCB initially moved to dismiss, or in the alternative, to stay the proceeding under Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976). After the state court struck or dismissed all of the plaintiffs’ claims and granted summary judgment to NCB on its claims, NCB amended its motion to assert an alternative ground for dismissal: res judicata. The Plaintiffs argued that res judicata could not apply to their RICO claim because they never had filed a similar RICO claim in state court. Although they had attempted to amend their complaint to include such a claim, that motion had been denied. According to the Baeks, “a claim that was never filed could not be dismissed.”

The district court granted NCB’s amended motion. Applying Illinois’ law of res judicata, it determined that there had been a final judgment both in the previous actions, there was identity of the parties (or their privies) in the prior actions and the federal RICO action; and those causes of action were the same as the federal RICO claim because they all involved “a single group of operative facts.”

Plaintiff had also argued that that the Circuit Court’s adjudication was not final until an appeal had been resolved on earlier actions. Although this argument did not “rely on new law or new facts,” the district court noted that it did “raise an important argument not yet passed upon.” The district court therefore considered the argument on the merits, and waited until the state appellate court issued an order affirming the judgments rendered in the state court with respect to two other actions before ruling the current RICO suit was barred.

This Circuit Court ruled that the district court correctly determined that res judicata precluded the plaintiffs’ present action, and therefore the district court granted the defendants’ motion to dismiss the complaint with prejudice. The Court also found that the abstention by the district court under the Colorado River doctrine, which allows courts to conserve judicial resources by abstaining from accepting jurisdiction when there is a parallel proceeding elsewhere, was proper finding that it was sensible to stay proceedings until an earlier-filed state case has reached a conclusion, and then (but only then) to dismiss the suit outright on grounds of claim preclusion.

Ed Note: The rules governing Colorado River abstention and res judicata are complex, but commonly broadly interpreted to bar civil federal actions in federal court.

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