Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

HESS v. KANOSKI & ASSOCIATES (February 2, 2012)

The Kanoski & Associates law firm hired Lawrence Hess in 2001 pursuant to a written employment agreement. Although the arrangement apparently worked well for years, Ronald Kanoski, the firm's president, fired Hess on February 14, 2007. The firm reassigned many of the cases Hess was working on to Kennith Blan, Jr., who worked as an independent contractor at the firm. Hess believed that he was owed compensation from the settlement of some of the cases on which he had been working when he left. The firm rejected his demands. Hess filed attorney's liens in state court on two cases that had been settled. Those claims were unsuccessful, as well, since he had no current attorney-client relationships. Hess brought suit in federal court, alleging state law contract fraud and conspiracy claims, among others. Chief Judge McCuskey (C.D. Ill.) granted summary judgment to the defendants on the ground that the state law proceedings collaterally estopped Hess. Hess appeals.

In their opinion, Seventh Circuit Judges Bauer, Wood, and Tinder reversed in part, affirmed in part, and remanded. The Court first addressed the Illinois Wage Payment and Collection Act and breach of contract claims and found that the district court erred in dismissing them. First, it concluded that Hess did not admit, as the district found, that he had been paid all that he was due. Second, the Court concluded that the state court decisions did not collaterally estop Hess. The issues in those cases were different from the issues Hess raises in the federal case. Third, on the merits, the Court concluded that the employment agreement, which promised "40% of all fee revenue generated," was susceptible of more than one meaning. Fees could be "generated" under the contract either when work was done or when monies were received. The Court remanded for the district court to interpret the contract, possibly with extrinsic evidence. The Court did note that Hess had a better claim to fees that were actually received by the firm within 30 days of his termination since he had a contractual right to 30-days notice. With respect to the tortious interference and inducement claims, the Court stated that they could not lie against the firm and its president since one cannot tortiously interfere with one's own contract and could not lie against Blan since there was no evidence that he was involved in the termination. Finally, the Court quickly disposed of the "ragtag" of remaining claims.

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VIRNICH v. VORWALD (December 20, 2011)

Daniel Virnich was a director of Communications Products Corporation. CPC had a banking relationship with American Trust and Savings Bank. When CPC was experiencing financial difficulties in the early 2000s, the Bank asked for additional collateral or repayment and sought personal guarantees. Virnich alleges that it was at this time that the Bank's loan officer concocted a plan to damage Virnich’s reputation. He alleges that the loan officer contacted other banks, tried to instigate an FBI investigation, and conspired with Michael Polsky to act as a receiver. In fact, the Bank brought an ex parte motion for a receiver and Polsky was appointed. CPC's owners agreed to sell its assets and released Polsky and the bank. They also sought permission from the receivership court to bring a derivative action on behalf of CPC against the Bank. But Polsky, as receiver, had already brought a lawsuit against Virnich and the co-owner for breach of fiduciary duty. A jury awarded CPC over $6 million in damages, which Polsky tried to collect from Virnich. The appellate court reversed the jury verdict. Meanwhile, Virnich filed suit in federal court against the Bank, the loan officer, and Polsky for tortious interference with contract, negligence, and a violation of a Wisconsin statute which prohibits conspiracies to maliciously injure the business of another. Judge Crabb (W.D. Wis.) dismissed most of the claims on the grounds that they were derivative and should have been brought by CPC and dismissed the Wisconsin statutory claim for failure to state a claim. Virnich appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Hamilton affirmed. Under Twombly, a complaint must state a claim that is "plausible on its face." The Wisconsin statute requires allegations that the defendants acted in concert, with a common purpose, to injure Virnich's reputation or business, maliciously, resulting in financial harm. The district court concluded that Virnich failed to allege a plausible conspiracy, given that Polsky was a professional receiver and that it was not plausible that he would engage in the alleged conspiracy, and failed to allege malice. The Court disagreed. Notwithstanding Polsky's role as a professional receiver, the Court concluded that Virnich adequately alleged conspiracy. Similarly, Virnich adequately alleged that the defendants irrationally wanted to cause him harm. Therefore, Virnich adequately alleged a statutory violation. Nevertheless, the Court affirmed the district court for a different reason. Every alleged action by Polsky was taken in his role as the court-appointed receiver. Virnich had an opportunity to contest Polsky's appointment in the receivership court and he did not. When he sought leave to file a derivative action against the Bank, the receivership court concluded that he had waived that right. Under principles of collateral estoppel, Virnich is precluded from relitigating issues already litigated in the receivership court. The Court also concluded that precluding Virnich's statutory claim would be consistent with fundamental fairness, which is a necessary finding for collateral estoppel in Wisconsin.

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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.

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CARTER v. AMC (May 13, 2011)

Jackson Square Properties owns the Riverstone Apartments in Bolingbrook Illinois. AMC, LLC managed the building on its behalf. AMC brought suit in state court to evict tenant Geaneice Carter. Although AMC prevailed at the trial court level, the appellate court reversed on the ground that AMC failed to give proper notice. One judge on the panel also concluded that AMC violated the Fair Debt Collection Practices Act. Carter brought suit in federal court seeking damages for AMC's violation of the Act. Judge Gettleman (N.D. Ill.) dismissed the complaint on the ground that AMC was not a "debt collector" under the Act because it collected money owed to itself. Carter appeals.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Sykes affirmed. The Court rejected Carter's position that AMC's violation of the Act was established in state court. Not only is the opinion of one judge on a three-judge panel not enough to resolve an issue, but even the one judge who expressed an opinion acknowledged that the resolution of that issue was not necessary for the court's decision. Collateral estoppel applies only when an issue is necessarily decided. The Court then pointed out an incorrect factual assumption made by both the state court and the district court. Both assumed that AMC was the lessor. In fact, it is clear that Jackson Square Properties is the lessor and AMC is its agent. AMC can therefore not escape liability under the Act as the lessor. But AMC can also escape liability if it is attempting to collect a debt it "obtained" from another and the debt was not in default when AMC obtained it. The Court noted that several courts of appeals have concluded that a mortgage loan servicer "obtains" the bank's debt. Although no court of appeals has considered the lessor situation, many district courts have and have concluded that a lease servicer "obtains" the debt when the lease is signed. The FTC staff has also concluded, albeit not in a regulation or advisory opinion, that a lease servicer "obtains" the debt when it becomes the agent. The agent is not a debt collector under the Act unless the rent was in arrears at that time. The Court therefore concluded that AMC obtained the debt when it acquired the authority to collect the rent. Since Carter was not in arrears at that time, AMC is not a debt collector under the Act.

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REEVES v. DAVIS (March 14, 2011)

Linda Reeves hired Gerald Davis to help her with some home renovations. Although he represented himself to be licensed and insured, he was not. After she paid him almost $60,000, Davis left the job incomplete. A state court entered judgment in Reeves' favor, concluding that Davis violated the Indiana Home Improvements Contracts Act. The court specifically found that Davis committed a "deceptive act" under the statute. The court also made a factual finding that the contract covered the construction of a porch, although it did so by concluding that the contract lacked specificity and that any uncertainty should be resolved against Davis. Before Reeves collected any money, Davis petitioned for bankruptcy. Reeves filed an action asserting that the debt was non-dischargeable under § 523(a)(2)(A), which does not discharge a debt that is obtained by "false pretenses, a false representation, or actual fraud." The bankruptcy court rejected her collateral estoppel argument, held its own trial, found that the contract may not have included a porch, concluded that Davis did not have the requisite § 523 fraudulent intent, and ruled the debt discharged. Judge Magnus-Stinson (S.D. Ind.) affirmed. Reeves appeals.

In their opinion, Circuit Judges Flaum and Williams and District Judge Herndon affirmed. The Court stated that § 523 requires, among other things, a showing that Davis possessed an intent to deceive. Reeves argued that the state court's factual finding that the contract included the porch coupled with Davis' admission that he never intended to build one established that intent. The Court agreed with Reeves on the first point and concluded that the bankruptcy court should have deferred to the state court’s factual finding. But the state court did not make a finding regarding his intent. The Court noted that his own testimony that he never intended to build a porch must be taken in context with his testimony that he did not believe the contract called for one. The bankruptcy court did not clearly err when it concluded that Davis did not possess fraudulent intent.

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BROWN v. CITY OF CHICAGO (March 30, 2010)

Chicago police officers Blackman and Long were on a plain-clothes detail in a Chicago neighborhood when they observed what they believed was an illegal drug transaction. During their pursuit of the suspects, Blackman came across Arthur Brown. According to Blackman, Brown was holding a gun. When he failed to follow the officer's orders to drop it, Blackman shot him several times. According to Brown and another witness, he did not have a gun. Instead, Brown claims that Blackman shot him in the back and then planted a gun in his hand. Brown was charged and convicted of several counts of aggravated assault, aggravated unlawful use of a weapon, and unlawful possession of a weapon. His conviction was affirmed. Nevertheless, Brown brought a § 1983 complaint against Blackman, alleging that Blackman's conduct amounted to the excessive use of force in violation of the Constitution. The district court granted summary judgment to Blackman, concluding that the complaint was barred by collateral estoppel. Brown appeals.

In their opinion, Chief Judge Easterbrook and Judges Manion and Tinder affirmed. The Court noted that Brown conceded that the elements of collateral estoppel existed in the case. Instead, he argued that two exceptions to the rule applied: that he was denied a fair hearing and that new evidence made the rule’s application unfair. The Court agreed that Brown's exceptions to the application of collateral estoppel were recognized in Illinois. However, the Court rejected their application in this case. First, with respect to the fair hearing exception, the Court concluded that the two evidentiary issue rulings at his criminal trial did not deny Brown a fair hearing. The third ground on which he based his “fair hearing” argument was the accusation by the prosecutor that Brown and his attorney made up a theory of conspiracy by police officers in order to “cash in” in a civil action against the City. The state appellate court found the remarks improper but did not reverse the conviction. Likewise, the Court found that the remarks, though improper, did not amount to the deprivation of a fair hearing. Second, with respect to the new evidence exception, the Court concluded that any discrepancy between a witness’ testimony in Brown's criminal trial and his deposition testimony in the § 1983 case was not significant enough to create the type of injustice that would bar the application of collateral estoppel.

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ORLANDO RESIDENCE v. GP CREDIT (January 22, 2009)

Twenty-two years and $3 million in legal fees and this dispute continues. Samuel Hardige and Kenneth Nelson settled a dispute in the early 1980s. Hardige gave some property to Nashville Residence Corporation (“NRC”), a company belonging to Nelson, in exchange for a promissory note secured by the property and payable to Orlando Residence, Ltd. (“OR”). NRC failed to pay the note when due. OR sued NRC on the note and obtained a judgment. But NRC had already conveyed the property to Nashville Lodging Company (“NLC”), which in turn conveyed it to Metric Partners. In 1992, OR sued Nelson and several companies controlled by him, including NRC, in Tennessee state court. Fourteen years, three trials, three appeals, and two remands later, OR had final judgments against Nelson and his companies. Meanwhile, OR purchased the subject property at a judicial sale for $100,000 – which amount was deducted from his judgment. On another track, GP Credit bought NLC’s personal property at a foreclosure sale. The personal property included a lawsuit against Metric Partners. Although OR tried to reach the proceeds of that lawsuit, GP Credit prevailed in an action to clear its title (which was affirmed by the Seventh Circuit). After GP Credit cleared its title, OR obtained a default judgment against GP Credit on the theory that it was the alter ego of Nelson.

OR brought a suit in Tennessee state court to collect on its judgment. It named Nelson and his wife, a pension plan, NLC, and GP Credit. GP Credit counterclaimed for restitution, intentional interference, slander of title, and unjust enrichment. The case was removed and transferred to Wisconsin federal court. Susan Nelson brought a separate suit in the same court to quiet title to her property. The district court rejected all claims in both suits. Susan Nelson and all parties to the transferred suit appeal.

In their opinion, Judges Posner, Kanne and Rovner affirmed in part, reversed in part and remanded. The Court first addressed OR’s appeal. The district court had dismissed OR’s claim against GP Credit because it thought it conflicted with the Court’s earlier ruling on GP Credit’s appeal. The Court disagreed. The basis of OR’s earlier attempts to get the proceeds of the lawsuit was its claim against NLC. The current claim is a direct claim against GP Credit, as alter ego, to collect the judgment against Nelson. The Court saw no conflict with the earlier ruling. The Court next addressed GP Credit’s counterclaims. Its first is for the value of the property sold at the judicial sale. GP Credit claims it is worth more than the $100,000 it brought. The Court held that the Tennessee appellate court’s approval of the sale is res judicata. It specifically rejected GP Credit’s claim that the decision could be attacked collaterally because the lower court in Tennessee never had subject-matter jurisdiction. If a court authorized to decide the kind of case in which the issue arises decides a jurisdictional issue in a full and fair hearing, it is entitled to collateral estoppel effect. GP Credit’s second counterclaim arises out of Metric Partners’ offer to settle the very lawsuit to which GP Credit successfully cleared its title. Metric Partners conditioned an offer to settle on OR dissolving its receivership. When OR refused, the case settled for much less. The Court found GP Credit’s claim for the difference frivolous. OR had no obligation to dissolve the receivership solely for the benefit of GP Credit. The Court also rejected GP Credit’s slander of title and restitution claims for the same reasons it rejected the first two counterclaims. Finally, on Susan Nelson’s appeal of her action to quiet title, the Court noted that OR had filed an earlier suit in state court in an effort to reach Mrs. Nelson’s property. When two in rem suits regarding the same res are pending in different courts, the court of the later-filed suit should dismiss.

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