Based on the allegations in the Complaint, it cannot be determined, at this stage of the
litigation, that privity existed between IFC and NorVergence for purposes of res judicata.
Furthermore, based on these allegations, IFC may bea holder in due course, enabling IFC to enforce
the contract even if it is found to be void. Accordingly, dismissal at this time, based on the doctrine
of res judicata, is denied.

Defendants also argue that IFC’s claim is barred by the doctrine of collateral estoppel. The
doctrine of collateral estoppel bars the relitigation of issues. An issue may not be relitigated ift
(1) the issue to be precluded is the same issue that was involved in a prior action; (2) the issue was
actually litigated; (3) the determination of the issue was essential to the final judgment; and (4) the
party against whom preclusion is invoked was represented in the prior action. See Adair v. Sherman,
230 F.3d 890, 894 (7th Cir. 2000). Importantly, collateral estoppel does not apply because of another
party’s default judgment because the issue was not actually litigated. See United States v. Bailey,
957 F.2d 439, 443 (7th Cir. 1992) (Bailey).

Collateral estoppel does not apply to the instant case because the issues of the instant case
were not actually litigated by the default judgment in the FTC action. See Bailey, 957 F.2d at 443.

CONCLUSION

Based on the above, Defendants’ Motion to Dismiss is denied.

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relief could be granted under any set of facts that could be proved consistent with the allegations”
in the complaint. Cushing v. City of Chicago, 3 F.3d 1156, 1159 (7th Cir.1993).

Aliano’s motion to dismiss for failure to state a claim is based on the contention that the
judgment in the FTC action is both claim and issue preclusive. Aliano seeks to bar IFC from
relitigating the enforceability of the lease agreement that it was assigned from NorVergence based
on the default judgment in the FTC suit. IFC asserts that because they were not a party to the FTC
suit and IFC and NorVergence are not privies, to apply the FTC judgment to them would offend due
process.

Claim preclusion bars parties from litigating those claims that have previously been litigated
or could have been litigated previously. Federated Dep't Stores, Inc. v. Moitie, 452 U.S. 394, 398
(1981). The federal rules of claim preclusion apply because the preceding litigation was in federal
court on a federal cause of action. Central States, Southeast and Southwest Area Pension Fund v.
Hunt Truck Lines, Inc., 296 F.3d 624, 628 (7th Cir. 2002).

The federal law of claim preclusion bars a claim when there is: (1) identity of the parties or
privies, (2) a final judgment on the merits, and (3) identity of the cause of action. Brzostowski v.
Laidlaw Waste Sys., Inc., 49 F.3d 337, 338 (7th Cir.1995).

In general, privity exists between parties who adequately represent the same legal interests.
Inre L & S Industries, Inc., 989 F.2d 929, 932 (7th Cir.1993); People Who Care, et al. v. Rockford
Board of Ed., 68 F.3d 172, 177 (7th Cir.1995) (People Who Care). The question of whether privity
exists is a fact-intensive determination reviewed on a sliding scale. In re L & S Industries, Inc., 989

F.2d. at 933.


UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

IFC CREDIT CORPORATION, assignee of
NORVERGENCE, INC.,

Plaintiffs, No. 04 C 6504
v. Judge John W. Darrah
ALIANO BROTHERS GENERAL

CONTRACTORS, INC. and
MICHAEL ALIANO,

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Defendants. )

MEMORANDUM OPINION AND ORDER

Plaintiff, IFC Credit Corporation, filed a diversity suit against Defendants, Aliano Brothers

General Contractors, Inc. and Michael Aliano. Plaintiff, who is the assignee of a lease from

NorVergence, Inc., contends that Defendants have failed to make the required payments on the lease.

Currently before the Court is Defendants’ Motion to Dismiss for failure to state a claim upon which

relief can be granted, pursuant to Federal Rule of Civil Procedure 12(b)(6). The Defendants assert
that the action is based on both claim (res judicata) and issue (collateral estoppel) preclusion.

BACKGROUND

On October 10, 2003, NorVergence and IFC entered into a Master Program Agreement,

governing the assignment of NorVergence’s equipment rental agreements to IFC. Under the Master

Program Agreement, IFC decided which agreements to purchase. Additionally, NorVergence was

required to repurchase any assigned rental agreements if the first payment of the rental became due

and was not paid within 30 days by customers.


NorVergence and Aliano Brothers General Contractors entered into a contract on
April 15, 2004, for the lease of telecommunications equipment. Michael Aliano guaranteed the
contract for Aliano Brothers General Contractors. Under the contract, NorVergence was required
to provide a matrix box and telecommunication services. Aliano Brothers General Contractors was
to pay sixty payments of $1,710.74.

The contract authorizes NorVergence to assign the contract. Immediately after Aliano
Brothers General Contractors signed the contract, NorVergence assigned it to IFC. IFC is an Illinois
corporation and has been assigned numerous NorVergence contracts. NorVergence has not provided
the telecommunication services since August 2004. Aliano stopped making payments on the lease.

NorVergence entered bankruptcy, involuntarily, on June 30, 2004. Prior to NorVergence’s
entering bankruptcy, IFC requested that NorVergence repurchase agreements that IFC determined
had entered default. Aliano was among those agreements that IFC determined had defaulted.
Because of the impending bankruptcy, NorVergence was not able to repurchase the agreements. In
lieu of repurchase, NorVergence offered IFC a security interest in NorVergence’s rights, title, and
interest in all equipment rental agreements not yet assigned and all monies due and to become due
under such agreements as collateral to secure NorVergence’s repurchase obligation. IFC accepted.

In October 2004, while NorVergence was in bankruptcy, IFC filed the instant lawsuit,
alleging breach of the equipment lease and breach of contract of guaranty and seeking possession
of the equipment.

IFC also attempted to have the automatic stay of the bankruptcy court lifted so that they
could recover and foreclose upon the rental agreements in which they held a security interest. A

ruling was never issued because IFC withdrew its request to have the stay lifted.


In November 2004, while NorVergence was still in bankruptcy, the Federal Trade
Commission (“FTC”) filed suit against NorVergence in the District Court of New Jersey. The FTC
accused NorVergence of unfair and deceptive acts or practices in violation of Section 5(a) of the
Federal Trade Commission Act (“FTCA”), 15 U.S.C. § 45(a). At issue were approximately 1,600
un-assigned NorVergence equipment lease agreements. NorVergence had no assets, and debtor’s
counsel was unwilling to represent it. Therefore, NorVergence was unable to defend the FTC suit.

The district court of New Jersey entered a default judgment against NorVergence on
June 29, 2005. The court found that NorVergence caused nearly $200 million dollars in injury to
consumers. Furthermore, the FTC found that the lease rental agreements were void and
unenforceable. See Federal Trade Commission v. NorVergence, Inc., CIV 04-5414 (D.N.J. 2005).
The FTC judgment invalidated leases that were retained by NorVergence and not assigned to leasing
companies. Accordingly, the FTC judgment was not directed at the lease at issue in the instant case.

This is the Defendants’ second motion to dismiss. Initially, Aliano moved to dismiss for lack
of personal jurisdiction on grounds that the forum selection clause contained in the contract was
unenforceable. This Court granted the motion, but the Seventh Circuit Court of Appeals reversed.
IFC Credit Corp. v. Aliano Brother General Contractors, Inc., 437 F.3d 606 (7th Cir. 2006).

ANALYSIS

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the
sufficiency of the complaint for failure to state a claim upon which relief may be granted. Castellano
v. Chicago P.D., 129 F. Supp. 2d 1184, 1188 (N.D. Ill. 2001). In reviewing a motion to dismiss, the
court may consider matters of public record outside the pleadings. See Henson v. CSC Credit Serv.,

29 F.3d 280, 284 (7th Cir.1994). Dismissal under this provision is proper only if “it is clear that no