vy US, 440 U.S. 147, 153 (1979); See Blonder-Tongue Laboratories, Inc. v. Uni. Of Illinois
Found., 402 U.S. 313, 328-29 (1971). Precluding parties and their privies from contesting
matters they have had a full and fair opportunity to litigate protects their adversaries from the
expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters
reliance on judicial action by minimizing the possibility of inconsistent decisions. Montana, 440
USS. at 153, There is, however, a presumption that nonparties are not bound by a judgment,
which stems from due process concerns with the right to be heard and to have one’s own day in
court, See Tice v. American Airlines, Inc., 162 F.3d 966, 972-73 (7th Cir. 1988); 18 Charles
Alan Wright & Arthur R. Miller, Federal Practice and Procedure, §4449, at 418-19 (1981).

Federal law controls the res judicata questions in this case because the prior judgment
was rendered in a federal court on a federal law claim. See Hudson v. Hedge, 27 F.3d 274, 276
(7th Cir. 1994); Connor v. Reinhard, 847 F.2d 384, 394 (7th Cir. 1988); In the Matter of Energy
Coop., Inc., 814 F.2d 1226, 1230 (7th Cir. 1987). The requirements for res judicata under
federal law are: (1) a final judgment on the merits; (2) an identity of the causes of actions; and (3)
an identity of the parties or their privies. See Golden v. Barenborg, 53 F.3d 866, 869 (7th Cir.
1995); Energy Coop., Inc., 814 F.2d at 1230. There is no dispute that element one- a final
judgment on the merits has occurred; rather, the dispute centers around whether the remaining
two elements have been satisfied.

Turning to the identity of the causes of action, we find that they are indeed identical.
Building upon the notion of “same nucleus of operative facts,” the standard that determines when
two claims are so closely related that they constitute the same transaction for res judicata
purposes is “if they are based on the same or nearly the same factual allegations.” Herrmann v.
Cencom Cable Assoc. Inc., 999 F.2d 223, 226 (7th Cir. 1993). Here, the dispute surrounds
whether DII is, in some form, liable for the judgments entered against State Plumbing. This is
the same question that faced the United States District Court for the Eastern District of Michigan.

The factual allegations underlying Michigan Fund’s claim that DII is liable for State

Plumbing’s debt are, likewise, identical to Central State’s present claim. Both claims assert an


identical is a question of law.” £.B. Harper & Co. v. Nortek, Inc., 104 F.3d 913, 922 (7th Cir.
1997),

Preclusion also fails for want of privity. Central States was not sufficiently involved in
the conduct of the prior litigation to establish privity with Michigan Fund. See Kraushaar, 45
F.3d at 1050. Therefore, despite the fact that the underlying issue was fully and necessarily
litigated on the merits in a prior action, in order to avoid the “great potential” for due process

violations collateral estoppel does not apply. Kunzelman, 799 F.2d at 1178.

CONCLUSION
For the reasons set forth above, DII motion to dismiss for failure to state a claim upon
which relief may be granted is denied [Docket #8]. In connection with this ruling, Central States’

Motion to Strike a Portion of Defendant’s Reply Brief entered May 30, 2002, is hereby stricken

as moot.

SO ORDERED ENTERED:

HON. RONALD A. GUZ!
United States Judge Guy 29, Ava
I


F.3d at 971. The appropriateness of preclusion turns on how closely the two sets of interests
coincide and the role the absentees played in the prior litigation. Tice, 162 F.3d at 973. Ata
minimum, the issues on which preclusion is sought must be common to both cases, and the
claims or defenses of the two allegedly equivalent parties must be the same. Jd. In addition,
unless a formal kind of successor relationship is involved (e.g., subsequent landowner), there
should be some indication not only that the second party was aware that the first litigation was
going on and that the earlier litigation would resolve its claims, but also that the second party
either had participated or had a legal duty to participate. Jd. Finally, the due process rights of
absentees must be respected. Jd.

While, as discussed above, there is commonality between the issues and claims presented
by Central States and Michigan Fund, they are not organized in a formal relationship (e.g.
guardian and ward or successor corporations); instead, they operate as separate entities
representing different interests. The Pension Fund, administered by Central States, pursuant to
the requirements of § 402(a)(1) of ERISA, is maintained by its own Trust Agreement as is the
Welfare Fund, controlled by Michigan Fund. 29 U.S.C. § 1102(a)(1) (1974). The Pension and
Welfare Funds are managed by separate boards of trustees, distribute different benefits and are
comprised of distinct memberships. The trustee’s duties for the particular fund may result in a
very different view of particular circumstances and require the pursuit of unique choices and
interests. Cf Pipe Fitters Welfare Fund, Local Union 597 v. Mosbeck Indus. Equip., 856 F.2d
837, 842-43 (7th Cir. 1988) (recognizing the distinct interests of multiemployer funds and
unions). DII’s argument that the Funds are merely arms of the Teamsters Union, linked by the
collective bargaining agreement, falls in the face of statutory authority vesting exclusive control
over the assets of employee-benefit trust funds in the trustees alone, and not the employer or the
union. 29 U.S.C. § 1103(a) (1974).

DIL also suggests that the presence of Howard McDougall, trustee, as a named plaintiff in
both the Michigan Fund and Central States’ suits creates sufficient identity between the parties to

establish privity. DII contends that Central States added additional plaintiffs in order to shield


implied assumption of State Plumbing’s debt by virtue of DII’s use of State Plumbing’s trade
name, customers and employees. Central States alter ego claim indicates that one purpose for the
formation of DII was to aid State Plumbing in avoiding its obligations under the collective
bargaining agreement, a contention expressed by Michigan Fund and addressed in the Magistrate
Judge’s recommendation. Moreover, the “transaction” at issue is comprised of the same
elements. Central States’ claim, like Michigan Fund’s, concerns State Plumbing’s collective
bargaining agreement, its settlement with Bank One, the details of DII’s formation and
composition, its purchase of State Plumbing’s assets and its behavior thereafter. Additionally,
the determination of DII’s relationship to State Plumbing carries the same ramifications for both
Michigan Fund and Central States, namely liability for delinquent contribution payments.
Therefore, Central States’ claim is based on the same or nearly the same operative facts as
Michigan Fund’s claim.

Further, Central States finds no relief in its contention that Michigan Fund mistakenly
proceeded under a state law successor liability theory instead of asserting a federal common law
theory pursuant to ERISA’s preemption of state law. See 29 U.S.C. §1144 (1974); Upholsters’
Int'l Pension Fund y. Artistic Furniture of Pontiac, Inc., 920 F.2d 1323, 1327 (7th Cir. 1990).
Indeed, res judicata operates not only as a bar to the further litigation of matters decided in a
prior action, but also to any issues which could have been raised. Golden, 53 F.3d at 870.
Michigan Fund, as an employee benefit plan deriving its authority from ERISA and as a party to
multiple suits regarding contribution payments, should have been knowledgeable about the
contours of federal law and asserted those theories in Michigan federal court.

Preclusion, then, hinges on whether Central States was in privity with Michigan Fund.
We find that the parties were not in privity for purposes of res judicata. Privity is a descriptive
term for designating those with a sufficiently close identity of interests. In the Matter of L & S
Industries, Inc., 989 F.2d 929, 932-33 (7th Cir. 1993); See also Wright supra, §4449 at 418-19
(noting the privity label simply expresses a conclusion that preclusion is proper). Privity requires

a functional analysis concerned with assuring each litigant his or her own day in court. Tice, 162


None of these additional factors are present nor are the requirements outlined in Tice,
relating to the second parties’ awareness of and participation in the litigation commenced by the
first party, satisfied. There is no evidence to suggest that Central States or McDougall were
aware of Michigan Fund’s efforts to join DII as a defendant. In fact, Central States claims, and
consistent with the FED R. Civ. P. 12(b)(6) standard we construe in their favor, that they did not
receive notice of Michigan Fund’s suit until July 2, 2001, after Magistrate Judge Scheer had
issued his recommendation. Additionally, there is no evidence that Central States in any way
controls the litigation efforts of Michigan Fund or that they acquiesced to having Michigan Fund
act as their agent in any matter regarding State Plumbing or DI. Further, whether Central States
should have intervened or otherwise participated in the prior suit is rendered moot by their
ignorance of the proceedings, and Michigan Fund’s conscious decision or omission to join them
pursuant to FED R. Civ. P, 19(a). Therefore, even though the parties’ share the underlying
interest in litigating DII’s liability for judgments rendered against State Plumbing, we conclude
that Michigan Fund does not stand as the virtual representative for Central States. Ultimately,
concerns for Central States’ due process rights to be heard and to have its day in court remain and
overcome DII’s arguments for privity.

Dil contends that in the absence of res judicata, Central States is collaterally estopped
from bringing the present action. Under collateral estoppel or issue preclusion, once an issue is
actually and necessarily determined by a court of competent jurisdiction, that determination is
conclusive in a subsequent suit based on a different cause of action involving a party (or their
privy) to the prior litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979);
Montana 440 U.S. at 153. The doctrine of collateral estoppel may be used to preclude
relitigation of issues in a subsequent proceeding when: “(1) the party against whom the doctrine
is asserted was a party to the earlier proceeding; (2) the issue was actually litigated and decided
on the merits; (3) the resolution of the particular issue was necessary to the result; and (4) the
issues are identical.” Kraushaar v. Flanigan, 45 F.3d 1040, 1050 (7th Cir. 1995) (quoting
Kunzelman v, Thompson, 799 F.2d 1172, 1176 (7th Cir. 1986)). “Whether the issues are


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Ni f Assigned Judi tin;
ror Magistrate Judge Ronald A. Guzman “than Assigned fudge
CASE NUMBER 1C 7824 DATE 7129/2002
CASE Central States et al vs. D Investments, Inc.
TITLE

[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.]

MOTION:

DOCKET ENTRY:

(1) oO Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motiondue_____-

(3) Oo Answer brief to motion due___. Reply to answer brief due___.

(4) oO Ruling/Hearingon__sset for at

(5) o Status hearing[held/continued to] [set for/re-set for]on__setfor___at

(6) oO Pretrial conference[held/continued to] [set for/re-set for]on__setfor___——sat__.
(7) 0 Trial{set for/re-set for]on___at

(8) oO [Bench/Jury trial] [Hearing] held/continued toa

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) (ClGeneralRule21 CIFRCP41(a)(1) OO FRCP41(a)(2).

ao wl [Other docket entry] Enter MEMORANDUM, OPINION AND ORDER: For the reasons set
forth above, DII motion to dismiss for failure to state a claim upon which relief may be granted [8-
1] is denied. In connection with this ruling, Central States’ motion to strike a portion of
defendant’s reply brief entered 5/30/2002, is hereby stricken as moot.

al) of {For further detail see order attached to the original minute order.]
No notices required, advised in open court.

No notices required.

umber of notices

Notices mailed by judge’s staff. F
Wu 3.9 Ae
Notified counsel by telephone.

date docketed

UY | Docketing to mail notices.

Mail AO 450 form, qunbo Lap'sia’s'n
Copy to judge/magistrate judge. YM tg

courtroom = SG fo HY CEU 20 date mailed notice
TSA deputy’s
initials chee
tT UE EE" pateltime received in
central Clerk’s Office mailing deputy initials

t


the suit from same-party status. Normally, however, “A party appearing in an action in one
capacity, individual or representative, is not thereby bound by or entitled to the benefits of res
judicata in a subsequent action in which he appears in another capacity.” Federal Savings &
Loan Ins. Corp. v. Dir. of Illinois Dept. of Revenue, 650 F.Supp. 1217, 1225 (N.D. Ill. 1986)
(quoting Restatement (Second) of Judgments § 26(2) (1982)). Mr. McDougall appears in distinct
capacities; as a trustee for the Welfare Fund in the prior action and in the instant action as a
trustee for the Pension Fund. The fiduciary provisions of ERISA were designed specifically to
prevent dual loyalties or conflicts of interest on the part of trustees and to encourage behavior
exclusively for the benefit of the individual plan’s participants. Pipe Fitters Welfare Fund, 856
F.2d at 842, Further, there is no evidence suggesting, and some to the contrary, that Mr.
McDougall participated in litigation decisions generally or with regard to State Plumbing or DII
specifically, on behalf of either fund. Therefore, the appropriate conclusion for the court is that
he appears in different capacities and is not bound by principles of res judicata.

Still, under the federal law of res judicata, a person, not a party, may be bound by a
judgment if one of the parties to the suit is so closely aligned with his interests so as to be his
virtual representative. Tice, 162 F.3d at 970. However, the 7th Circuit takes a dim view of
virtual representation, in suits other than class actions, noting that it “has cast more shadows than
light on the problem,” and that no published opinion by the court has found privity on this basis.
DeBraska v. City of Milwaukee, 189 F.3d 650, 653 (7th Cir. 1999); Tice, 162 F.3d at 970. But
see Pferdes v. International Sporthouse Registry, Inc., 1999 WL 1206640 1, 9-12 (N.D. Ill. 1999)
(finding privity through virtual representation where party to the second suit had direct
involvement with and control over party to the prior suit as well as sufficient opportunity to be
heard and interest in the outcome). As one treatise observes, “[AJHl of the cases that in fact
preclude relitigation by a nonparty have involved several factors in addition to apparently
adequate litigation by a party holding parallel interests.” Wright supra §4457 at 420 (1998
Supp.) (examples include control or participation in the earlier litigation, acquiescence, and

deliberate maneuvering to avoid the effects of the first case).


fraudulent conveyance, to satisfy its 1999 judgment. Following a two-day evidentiary hearing,
Magistrate Judge Donald A. Scheer, treating the issue as a complicated collection action and
therefore applying Michigan state law, found no express or implied assumption of State
Plumbing’s liability by DII and recommended denying Michigan Fund’s FED. R. Civ. P. 25(C)
motion. Judge Paul V. Gadola, accepted this recommendation, in effect ruling that DiI could not
be held liable for the judgment obtained against State Plumbing for monies due the Welfare
Fund.

On October 10, 2001, seeking to satisfy its 1998 judgment against State Plumbing,
Central States commenced this action alleging that DII is the federal common law successor to
and alter ego of, State Plumbing. On March 28, 2002, in separate litigation in the United States
District Court for the Northern District of Illinois, Judge Wayne A. Andersen entered Judgment
for Central States and against State Plumbing for withdrawal liability. This Judgment was then
made part of Central States’ Amended Complaint, which also added Central States’ additional
trustees as parties. On May 1, 2002, DII initiated a motion to dismiss pursuant to FED R. Civ. P.
12(b)(6), contending that the principles of res judicata and collateral estoppel preclude judgment

for Central States.

DISCUSSION

“{A] Rule 12(b)(6) motion requires the court to accept as true all well-pleaded facts in the
complaint, drawing all reasonable inferences in favor of the opposing party.” Doherty v. City of
Chicago, 75 F.3d 318, 322 (7th Cir. 1996). A complaint should not be dismissed unless “it
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which
would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 46 (1957); Thomason v. Nachtrieb,
888 F.2d 1202, 1204 (7th Cir. 1989).

DII’s argument that res judicata bars Central States complaint is ultimately insufficient as
a matter of law. Under the doctrine of res judicata or claim preclusion a final judgment on the

merits bars further claims by parties or their privies based on the same cause of action. Montana


i
Bank. As part of the loan, Bank One took a security interest in all of State Plumbing’s ass¢ff ~~
including its inventory, equipment and name. State Plumbing experienced financial difficulties
and by December 1997 defaulted on its loan. Bank One then sought to foreclose on its security
interest. In May 1998, State Plumbing stopped payments to both the Welfare and Pension funds.

In November 1998, Central States, a multi-employer pension fund providing retirement
benefits, brought suit against State Plumbing in the Federal District Court for the Northern
District of Illinois under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29
U.S.C. §1001 ef seq., seeking contributions owed the Pension Fund pursuant to the collective
bargaining agreement for the period following April 1998. On January 19, 1999, after State
Plumbing failed to appear, default judgment was entered in favor of Central States.

On June 11, 1999, Trustees for the Michigan Conference of Teamster Welfare Fund
(“Michigan Fund”), an employee benefit plan, brought an ERISA action against State Plumbing
in the United States District Court for the Eastern District of Michigan seeking payments owed to
the Welfare Fund for the period from June 1998 to February 1999, pursuant to the collective
bargaining agreement. On August 17, 1999, default judgment was again entered against State
Plumbing after it failed to file an answer.

On August 23, 1999, Deena Canvasser incorporated DII for the purpose of employing her
husband, Lenard Canvasser, who had served as State Plumbing’s President. On October 4, 1999,
Michigan Fund attempted to execute its judgment but was unsuccessful as all of State
Plumbing’s assets were encumbered by Bank One’s security interest.

On November 17, 1999, State Plumbing and Bank One reached a settlement agreement
whereby State Plumbing surrendered all of its assets to Bank One in full satisfaction of its debt.
In a contemporaneous transaction, Bank One sold these assets to DIL. DI, under Lenard’s
direction, hired State Plumbing’s employees, assumed its customers and conducted business
under its trade name.

Having received notice that DII had purchased all of State Plumbing’s assets, Michigan

Fund then sought to add DII as defendants, on grounds of successor liability, alter ego and


UNITED STATES DISTRICT COURT MUL 3 uctdZ
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

CENTRAL STATES, SOUTHEAST AND
SOUTHWEST AREAS PENSION FUND;
HOWARD MCDOUGALL, Trustee;

RAY CASH, Trustee; JERRY YOUNGER,
Trustee, GEORGE WESTLEY, Trustee;
PHILLIP E. YOUNG, Trustee; CHARLES A.
WHOBREY, Trustee; ARTHUR H.

BUNTE, JR., Trustee; TOM J. VENTURA,
Trustee; DANIEL J. BRUTTO, Trustee and
GARY F. CALDWELL, Trustee,

Jui 8g ABE

Plaintiff,

v. Case No. 01 C 7824

D INVESTMENTS, INC., Judge Ronald A. Guzman

a Michigan corporation,

eee

Defendant,

MEMORANDUM OPINION AND ORDER.
Pending is Defendant D Investments, Inc.’s (“DII”) motion to dismiss the Amended
Complaint of Plaintiff Central States, Southeast and Southwest Areas Pension Fund and Howard
McDougall, trustee et al. (“Central States”) pursuant to FED R. Civ. P. 12(b)(6). For the reasons

set forth below, this motion is denied.

BACKGROUND

State Plumbing and Heating Supplies, Inc. (“State Plumbing”) incorporated in June 1931,
as a wholesale distributor and shop for plumbing, heating and industrial piping supplies with its
principal place of business in Detroit, Michigan. On April 2, 1992, State Plumbing entered into a
collective bargaining agreement with Teamsters Local 247. The terms of the agreement provided
that State Plumbing would make timely contribution payments to both the Pension Fund and the
Welfare Fund (hereinafter “Pension Fund” and “Welfare Fund”); though separate Trust
Agreements formally established these obligations.

In 1996, State Plumbing borrowed $750,000 from Bank One, formerly known as NBD

1S