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Smith Trust & Savings Bank v. Young, No. 3-98-0758

3rd District, 4 April 2000

JUSTICE LYTTON delivered the opinion of the court:

Paul D. Young took out two promissory notes with Smith Trust and Savings Bank; his parents, Lauren and M. JeanetteYoung (Youngs) co-signed the notes. When Paul and his wife (children) failed to repay the notes, the bank filed a complaintin state court. The children subsequently filed for bankruptcy and removed the bank's complaint to the bankruptcy court.The bankruptcy court remanded the cause of action against the Youngs to state court since it was not part of the "core"bankruptcy proceedings. The bank then consented to the dismissal of its claims against the children, but pursued its claimagainst the Youngs as co-signers. The Youngs filed a motion to dismiss in state court, claiming that the order dismissing thebank's complaint against the children was res judicata. The trial court granted the motion, and the bank appeals. We affirm.

FACTS

Charles W. Brown, Jr. and Paul Young owned Erie Ag Service, a business partnership. The business was financed withindividual lines of credit taken out by each partner at the bank; Paul's notes were co-signed by his parents. In 1989, Erie AgService filed for bankruptcy reorganization, and the court approved a reorganization plan. After the plan failed, creditorswere allowed to pursue their claims in state court.

Peoples Bank filed a complaint based on the promissory notes, and confessions of judgment were taken against bothpartners in the business. The children and the Youngs opened the judgment and filed affirmative defenses.

The bank filed for foreclosure on Brown's property and attempted to join the children and the Youngs in the proceedings.However, the children and the Youngs refused to participate and filed a motion to dismiss, which was granted. The trialcourt later directed that the foreclosure proceeds be applied to Brown's debt since no other parties were involved in thecase. The bank later filed a motion to bar the children and the Youngs from asserting any affirmative defenses in this casedue to their refusal to participate in the foreclosure proceedings. The trial court denied the motion.

Later, the children filed for personal bankruptcy under Chapter 11 and requested that the bank's complaint against them andthe Youngs be removed to the United States bankruptcy court. The bankruptcy court remanded the case against the Youngsto state court under the doctrines of mandatory and discretionary abstention because it lacked jurisdiction over "non-core"proceedings. The bank then consented to the dismissal of its case in the bankruptcy court, instead choosing to pursue itscomplaint solely against the Youngs in state court. It is undisputed that, under Federal Rule 41(b) (Fed. R. Civ. P. 41(b)),the order of dismissal acts as a judgment on the merits as to the bank's claims in the bankruptcy court.

The Youngs filed a motion to dismiss the state court action, alleging that the dismissal of the children by the bankruptcycourt constituted res judicata. The trial court granted the motion. The bank's motion to reconsider was denied. We affirm.

DISCUSSION

This appeal presents us with the narrow issue of whether the dismissal of a cause of action on the merits by a bankruptcycourt precludes the pursuit of the same cause in state court against an accommodation maker that was not a party to thebankruptcy action. Because a motion to dismiss presents a question of law, we review the trial court's ruling de novo. SeeLucas v. Lakin, 175 Ill. 2d 166, 171, 676 N.E.2d 637, 640 (1997).

The bank argues that its complaint against the Youngs is not barred by res judicata because the limited scope of thebankruptcy court's jurisdiction does not reach non-core proceedings.

To support a finding of res judicata, there must be: (1) a final judgment on the merits by a court of competent jurisdiction;(2) identity of the causes of action; and (3) identity of the parties or their privies. See River Park v. City of Highland Park,184 Ill. 2d 290, 302, 703 N.E.2d 883, 889 (1998). The issue presented to us involves only one element of res judicata:whether the bankruptcy court was a "court of competent jurisdiction."

It is well-established that bankruptcy courts do not possess the same powers as Article III courts. In Northern PipelineConstruction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87, 73 L. Ed. 2d 598, 625, 102 S. Ct. 2858, ____ (1982), theUnited States Supreme Court held that the Bankruptcy Reform Act of 1978 was unconstitutional because it gave Article IIIpowers to bankruptcy courts. Following this decision, Congress passed the Bankruptcy Amendments and Federal JudgeshipAct of 1984, which gave federal district courts jurisdiction over bankruptcy matters. Pursuant to this act, district courts mayrefer cases "'arising under title 11 or arising in or related to a case under title 11'" to bankruptcy courts in that district. Sarnov. Thermen, 239 Ill. App. 3d 1034, 1045, 608 N.E.2d 11, 19 (1992) (quoting 28 U.S.C.