MATRIX IV, INC. v. AMERICAN NATIONAL BANK AND TRUST CO. OF CHICAGO (July 28, 2011)

Stylemaster and Matrix IV were both in the molded-plastics industry in the 1990s. In 1997, Stylemaster borrowed money from American National Bank and pledged all of its assets and property as security. In 2001, Stylemaster placed a number of larger-than-usual orders with Matrix. Stylemaster became delinquent on its payments. Matrix brought suit for breach of contract in 2002. Shortly thereafter, Stylemaster filed for bankruptcy. Matrix submitted a $7.2 million claim and American National submitted a $9.6 million claim. Stylemaster's owners formed a new company and purchased Stylemaster's assets at a bankruptcy sale. Matrix objected to the sale and also moved to dismiss the bankruptcy petition on the grounds of fraud. The bankruptcy court, after a hearing, approved the sale. Matrix filed further objections and a motion to reconsider, continuing to insert fraud on the part of Stylemaster and its owners. The bankruptcy court found no evidence of fraud or collusion and denied Matrix's motion. American National filed an adversary proceeding seeking a declaration that its lien had priority over Matrix's. Again, Matrix asserted its allegations of fraud in response. After a trial, the bankruptcy judge concluded that American National's lien had priority, again rejecting Matrix’s claims of fraud and collusion. The district court and the Seventh Circuit affirmed. Meanwhile, Matrix filed a separate suit against American National and Gateway, another company formed by Stylemaster's principals. The complaint alleged common law fraud and RICO violations and parroted Matrix's allegations of fraud and collusion made in the bankruptcy court. Judge Norgle (N.D. Ill.) entered judgment on the pleadings in favor of American National and Gateway, concluding that Matrix's claims were barred by both res judicata and collateral estoppel. The district court denied, however, Gateway's request for Rule 11 sanctions. Matrix appeals. Gateway cross-appeals -- and seeks frivolous appeal sanctions.

In their opinion, Seventh Circuit Judges Bauer and Sykes and District Judge Griesbach affirmed. The Court addressed the two concepts at issue. Res judicata (or claim preclusion) requires party identity, cause of action identity, and a final judgment on the merits. Here, the only disagreement is cause of action identity and final judgment. Collateral estoppel (or issue preclusion) is a narrower concept and requires that the issue be the same issue as in the prior litigation, that the issue was actually litigated, that a determination of the issue was essential to the final judgment, and that the party against whom the concept is used was fully represented. The Court first addressed res judicata. It concluded that Matrix's fraud allegations are the same basic allegations it made in the bankruptcy court and that there was a final judgments on the merits. Instead of concluding, however, that res judicata/claim preclusion barred the suit, the Court turned to its 1990 decision in Barnett. Barnett addressed a bankruptcy court's jurisdiction and the difference between "core" and "non-core" proceedings. There, the Court held that a later-filed RICO claim, because it was non-core, was not barred by res judicata even though the claims had been raised in an earlier bankruptcy proceeding. But Barnett is inconsistent with the Court's own pre-and post-Barnett jurisprudence as well as with other circuit’s decisions. Because the matter was not briefed and because a narrower ground existed on which to resolve the case, the Court did not resolve the conflict. Instead, it concluded that the elements of collateral estoppel were clearly present and that Matrix was thus barred from relitigating the issues it raised in the bankruptcy proceedings. The Court also affirmed the district court's denial of sanctions, concluding that Matrix's claims were at least colorable.