PSCE, LLC v. Associated Bank, N.A.

Filing 41

MEMORANDUM AND ORDER granting 28 Supplemental MOTION to Dismiss or in the Alternative MOTION for Summary Judgment filed by Associated Bank, N.A. Case dismissed with prejudice. Clerk of Court to enter judgment accordingly. Signed by Judge J. Phil Gilbert on 8/8/2011. (dka, )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
PSCE, LLC,
Plaintiff,
v.
ASSOCIATED BANK, N.A.,
Defendant.

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Case No.: 3:10-cv-882-JPG-SCW

MEMORANDUM AND ORDER
This matter comes before the Court on defendant Associated Bank, N.A.’s
(“Associated”) Supplemental Motion to Dismiss or, in the Alternative, for Summary
Judgment (Doc. 28). Plaintiff PSCE, LLC, has responded to the motion (Doc. 32), and
Associated has replied to that response (Doc. 34).
As a preliminary matter, the defendants’ motion to dismiss refers to matters
outside the pleadings. When such material is presented in connection with a Rule
12(b)(6) motion to dismiss, the Court may treat the motion to dismiss as a motion for
summary judgment or it may exclude the additional material from consideration. See
Fed. R. Civ. P. 12(d). There is an exception to this rule, however, when the additional
material is something of which the Court may take judicial notice. See Menominee Indian
Tribe of Wisc. v. Thompson, 161 F.3d 449, 456 (7th Cir. 1998). The Court may take judicial
notice of public records, see Pugh v. Tribune Co., 521 F.3d 686, 691 n. 2 (7th Cir. 2008)
(publicly reported stock price), including judicial proceedings, see Henson v. CSC Credit
Services, 29 F.3d 280, 284 (7th Cir. 1994). In this case, Associated attaches only publicly

filed documents from a prior state court action. The Court takes judicial notice of those
documents and accordingly considers this motion as a motion to dismiss under Federal
Rule of Civil Procedure 12(b)(6).
When reviewing a Rule 12(b)(6) motion to dismiss, the Court accepts as true all
allegations in the complaint. Erickson v. Pardus, 551 U.S. 89, 94 (2007) (citing Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 555 (2007)). To avoid dismissal under Rule 12(b)(6) for
failure to state a claim, a complaint must contain a “short and plain statement of the
claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).
I.

Alleged Facts
This dispute arose after PSCE secured a loan from Associated in June 2007. The

note associated with that mortgage (the “Note”) purported to provide an interest rate of
“7.750%” or “7.750% per annum.” The Note further stated:
The annual interest rate for this Note is computed on a 365/360 basis; that
is, by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding.
In essence, Associated calculated the daily interest rate as 1/360 of the annual rate and
applied it to all 365 (or 366 in leap years) days in a year. The upshot is that PSCE was
effectively charged an interest rate higher than 7.75%. This interest calculation method
is commonly referred to as the “365/360 method.”
PSCE filed this lawsuit claiming that using the 365/360 method to impose a
higher interest rate than the per annum rate stated in the Note violated the Illinois
Consumer Fraud Act, 815 ILCS 505/1 et seq. (Count I) and constitutes a breach of the

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Note (Count II) and of the oral contract to prepare the Note using agreed upon terms
(Count III). PSCE also seeks a declaration that Associated may not use the 365/360
method.
Associated now asks the Court to dismiss PSCE’s claims on the basis of res
judicata. It believes a state court default judgment rendered on December 2, 2010, by the
Circuit Court of the Third Judicial Circuit, Madison County, Illinois, precludes PSCE’s
current action. That judgment found, among other things, that PSCE had breached the
terms of the Note and owed Associated $247,559.94 in accrued and unpaid interest.
II.

Analysis
The doctrine of res judicata, also known as claim preclusion, prevents relitigation

of matters that were fully litigated in an earlier suit that resulted in a judgment on the
merits. Groesch v. City of Springfield, 635 F.3d 1020, 1029 (7th Cir. 2011). Because of the
Full Faith and Credit Act, 28 U.S.C. § 1738, federal courts must give a state court
judgment the same preclusive effect that the court rendering the judgment would give
it. Haber v. Biomet, Inc., 578 F.3d 553, 556 (7th Cir. 2009); Licari v. City of Chicago, 298
F.3d 664, 666 (7th Cir. 2002). Thus, when examining whether an Illinois court judgment
bars a federal lawsuit because of res judicata, the Court looks to the preclusive effect an
Illinois court would give the judgment in question. Groesch, 635 F.3d at 1029; Licari, 298
F.3d at 666.
Under Illinois law, res judicata applies if the prior decision (1) was a final
judgment on the merits rendered by a court of competent jurisdiction, (2) involved the
same parties or their privies, and (3) constituted the same cause of action as the current

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suit. Nowak v. St. Rita High Sch., 757 N.E.2d 471, 477 (Ill. 2001); People ex rel. Burris v.
Progressive Land Developers, Inc., 602 N.E.2d 820, 825 (Ill. 1992); Groesch, 635 F.3d at 1029.
In this case, PSCE challenge whether the prior state court litigation involved the same
cause of action as those in this case.
Illinois uses a transactional approach to determining whether different claims
constitute the same cause of action for res judicata purposes. River Park, Inc. v. City of
Highland Park, 703 N.E.2d 883, 893 (Ill. 1998); see Garcia v. Village of Mt. Prospect, 360 F.3d
630, 637 (7th Cir. 2004). Under the transactional approach, “separate claims will be
considered the same cause of action for purposes of res judicata if they arise from a
single group of operative facts, regardless of whether they assert different theories of
relief.” River Park, 703 N.E.2d at 891; accord Rodgers v. St. Mary’s Hosp., 597 N.E.2d 616,
621 (Ill. 1992) (res judicata bars suit if “the same facts were essential to maintain both
actions” or if “a single group of operative facts gives rise to the assertion of relief”). As
a corollary to this rule, Illinois observes the doctrine of merger and bar which precludes
the relitigation not only of claims that were actually litigated but also claims that could
have been litigated. People ex rel. Burris, 602 N.E.2d at 825; River Park, 703 N.E.2d at 889
see Garcia, 360 F.3d at 639.
The state court judgment on which Associated’s motion rests occurred in
Associated Bank, N.A. v. PSCE, LLC, in the Circuit Court of the Third Judicial Circuit,
Madison County, Illinois (Case No. 09-CH-1315). That case asserted claims for
foreclosure on the real estate secured by the Note and breach of the Note. It sought to
hold PSCE and its guarantors liable for damages arising from the breach, including

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accrued and unpaid interest. PSCE did not appear in the case, and the Circuit Court
entered a default judgment against it that included an award of interest in the amount
of $247,559.97.
The Circuit Court’s opinion in Associated Bank, N.A. v. PSCE, LLC bars the claims
in this case on the grounds of res judicata because the state judgment is final and
involved the same parties and the same claim at issue in this case. The parties do not
dispute the finality or the identical parties requirement. They focus on the same claim
requirement.
Under the transactional approach used by Illinois courts, PSCE’s claims in this
litigation and in the state court case are the same cause of action because both claims
arise from the same group of operative facts – calculation of interest under the terms of
the Note. In the state court case, Associated alleged that PSCE owed interest and had
failed to pay it. Necessary to the Circuit Court’s judgment was a determination of the
proper method to calculate the interest under the terms of the Note. Here, PSCE
disputes the same calculation. PSCE could have appeared in the state court case to
contest the method of calculating the interest by asserting the theories it raises in this
case, but it failed to do so. Thus, its current claims are barred by the doctrine of merger
and bar.
PSCE urges the Court to come to a different conclusion, citing Martino v.
McDonald’s System, Inc., 598 F.2d 1079, 1084 (7th Cir. 1979). PSCE cites Martino’s
statement of the general rule that “[w]hen facts form the basis of both a defense and a
counterclaim, the defendant’s failure to allege these facts as a defense or a counterclaim

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‘does not preclude him from relying on those facts in an action subsequently brought by
him against the plaintiff.’” Id. at 1084 (quoting Restatement (Second) of Judgments §
56.1(1) cmt b (Tent. Draft No. 1, 1973)). PSCE argues that this general rule allows it to
bring the case at bar despite the default judgment entered by the Circuit Court.
However, PSCE neglects to cite the exception to that general rule stated in Martino only
a few sentences later: “The rule is not absolute, however. Both precedent and policy
require that res judicata bar a counterclaim when its prosecution would nullify rights
established by the prior action.” Id. at 1085 (citing Chicot Cnty. Drainage Dist. v. Baxter
State Bank, 308 U.S. 371, 375 (1940) (res judicata bars later challenge to constitutionality of
statute on which prior judgment was based); compare Virginia-Carolina Chem. Co. v.
Kirven, 215 U.S. 252, (1909) (res judicata did not bar later suit where prior claim was not
crucial to result of second case but where second claim merely provided possible setoff)). The case at bar falls squarely into the exception to the general rule stated in
Martino; success on the current claim would nullify the interest award from the prior
litigation because it would necessarily imply the invalidity of Circuit Court’s interest
calculation.1
PSCE also points to Buford v. Palisades Collection, LLC, 552 F. Supp. 2d 800 (N.D.
Ill. 2008) and Whitaker v. Ameritech Corp., 129 F.3d 952 (7th Cir. 1997), in support of its
position. Neither of those cases causes the Court to change its conclusion. The

1 PSCE also relies on Martino to argue that his claim is not precluded by the compulsory and
permissive counterclaim pleading rules in Federal Rule of Civil Procedure 13. However,
Associated is not invoking Rule 13; it is relying on res judicata under Illinois law. PSCE’s
argument is off the mark.
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plaintiffs in Buford sued defendant debt collectors under the Fair Debt Collection
Practices Act (“FDCPA”), 15 U.S.C. § 1692 et seq. Buford, 552 F. Supp. 2d at 802. The
defendants argued the claims were barred by res judicata based on default judgments in
prior suits they had filed to collect the outstanding debts. Id. at 806-07. The Buford
court concluded that the FDCPA and the prior collection action did not arise out of the
same transaction; the FDCPA claim arose out of billing and collection activities but the
collection actions arose out of the plaintiffs’ incurring debt. Id. at 808. The Buford court
noted that the FDCPA was designed to protect consumers from used unscrupulous
debt collection measures regardless of whether a valid debt exists. Id. Consequently,
“successful prosecution of the FDCPA action would not nullify the judgment entered in
the state court litigation.” Id. Whitaker presented a virtually identical situation with the
same result. Whitaker, 129 F.3d at 958.
The case at bar is not like the Buford and Whitaker FDCPA claims, though. It
does not involve distinct groups of facts giving rise to independent claims. On the
contrary, the situation is more like the Whitaker plaintiff’s claim under the Racketeer
Influenced and Corrupt Organizations Act (“RICO”) in which she alleged that the bills
she received were fraudulent and misleading. There, the Court of Appeals held that the
RICO claim challenged the prior default judgment in the collection action and was
therefore barred by res judicata. Id. at 957. The Court of Appeals noted, “Allegations of
fraud go to the heart of what was decided in the state court -- that Whitaker legitimately
owes Ameritech a sum of money.” Id. Likewise, in this case, PSCE’s current allegations

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go to the heart of what was decided by the Circuit Court, and its current case is
therefore barred by res judicata.
III.

Conclusion
For the foregoing reasons, the Court GRANTS Associated Bank, N.A.’s

Supplemental Motion to Dismiss or, in the Alternative, for Summary Judgment (Doc.
28), DISMISSES this case with prejudice and DIRECTS the Clerk of Court to enter
judgment accordingly.

SO ORDERED this 8th day of August, 2011.
s/J. Phil Gilbert
HONORABLE J. PHIL GILBERT
U.S. District Judge

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