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

BANK OF AMERICA v. VELUCHAMY (June 16, 2011)

Pethinaidu and Parameswari Veluchamy owed Bank of America $39 million. When they defaulted, the Bank brought suit and obtained a judgment. The Bank began post-judgment proceedings to locate assets to satisfy the judgment. The Veluchamys were not very cooperative during those proceedings. They were slow in providing some information and refused to provide other information, asserting a Fifth Amendment privilege. Meanwhile, mostly through other sources, the Bank learned that the Veluchamys had transferred almost $20 million out of U.S. banks and into Indian banks. The Bank sought an emergency order requiring the Veluchamys to produce the transferred funds and to surrender their passports until they did so. Judge Shadur (N.D. Ill.) granted the Bank's request and ordered the Veluchamys to relinquish their passports. The Veluchamys appeal.

In their opinion, Judges Posner, Kanne, and Tinder affirmed. The Court first addressed its jurisdiction since the order obviously was not a final judgment. The Court concluded that it met the requirements for the collateral order exception -- it conclusively determined a question, the question is separate from the merits, and the decision would be unreviewable after a final judgment. A district court's powers in a post-judgment proceeding are governed by state law. Illinois law provides a number of tools, including the power to compel a party to produce funds under its control. The Court concluded that the power to compel a party to produce funds implied a power over the party itself. The Court emphasized that the such power is minimal and should be exercised only when necessary. Here, the Veluchamys had transferred most of their funds out of the country, they seemed to have significant assets in India and elsewhere, and they were reluctant to provide information about their assets. The Court concluded that this was the rare case where an order to surrender passports was warranted.

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JONES v. CLARK (January 14, 2011)

Early one August morning, Christina Jones had begun her job reading meters for Commonwealth Edison. Jones is African-American. On this particular day, her job took her to Braidwood, Illinois. Braidwood, a small town about 50 miles southwest of Chicago, has an almost exclusively white population. Apparently, a "concerned citizen" thought that she was something other than a meter reader and called the police. [According to her complaint:] Officer Clark was the first to arrive and question her. Although she wore numerous articles of clothing with her employer's logo and provided two separate pieces of identification, Clark would not let her go. When he asked for her date of birth, she stepped away and started to call her supervisor on her cell phone. At that point, Officer Kaminski arrived. He screamed at her, knocked the phone out of her hand, cuffed her hands behind her back, threw her against the car, and arrested her. She was charged with obstructing a peace officer and released on bond. The charges were later terminated in her favor. Jones brought suit, alleging Fourth Amendment violations. Judge Andersen (N.D. Ill.) concluded that disputed issues of fact precluded resolution either of the merits or defendants' request for qualified immunity. Defendants appeal.

In their opinion, Judges Wood, Evans, and Sykes affirmed. The Court first addressed its appellate jurisdiction. Although the "collateral orders" exception to the finality rule does apply to the appeal of qualified immunity denials, it does so only in so far as the appeal raises an issue of law. Even in a case, like this, where there are disputed issues of fact, defendants can (and these defendants have) get their appeal if they limit it to plaintiffs version of the facts. Comfortable with its jurisdiction, the Court turned to the merits. Qualified immunity has two prongs: was there a constitutional deprivation and were the constitutional rights at issue clearly established. With respect to the second prong, the constitutional right at issue here -- the right to be free from an arrest without probable cause -- was certainly clearly established. Therefore, the only question for the Court on the merits is whether Clark and Kaminski violated Jones' rights. The Court appeared to have little difficulty in answering that question affirmatively (again, on Jones' version of the facts). The Court noted that there was nothing in the record that would provide reasonable suspicion that she was engaged in unlawful activity. Their initial detention of her was therefore a constitutional deprivation. In addition, her actual arrest was a constitutional violation. Since the officers had no reason to detain her in the first place, anything supporting probable cause to arrest her must have occurred after her detention. Her post-detention conduct does not support probable cause either for disorderly conduct or for obstructing a peace officer. With respect to the former, she acted professionally at all times. With respect to the latter, the offense requires a physical act rather than just an argument with a policeman. The officers are therefore not entitled to qualified immunity on this record.

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SECURITIES AND EXCHANGE COMMISSION v. WEALTH MANAGEMENT LLC (December 1, 2010)

As of mid-2009, investment firm Wealth Management LLC of Appleton, Wisconsin managed over $130 million in almost 450 client accounts. Until 2003, most of that money was held in low risk investments appropriate for Wealth Management's clients. Wealth Management's approach changed drastically that year. It began investing its client's funds in illiquid and risky ventures through six unregistered investment pools it established. By 2009, over 75% of its managed money was in these risky investments. Investors in one of the investment pools were informed in early 2008 that redemptions would be limited to 2% per quarter. Later in 2008, two of Wealth Management's offers officers admitted receiving kickbacks, the SEC began an investigation, and the company suspended redemptions and begin to liquidate. The SEC brought an enforcement action in 2009. The court froze the firm's assets and appointed a receiver. The receiver conducted an accounting of the company's funds and proposed a distribution plan. The accounting concluded that only $6.3 million was available for distribution. The receiver proposed a pro rata distribution with any redemptions after May 2008 (i.e., after the SEC investigation became public) offset against an investor's total distribution. Judge Griesbach (E.D. Wis.) approved the proposal over objection. Two of the objectors, Dr. Edwin Wilson and the James and Sandra Verhoeven Revocable Trust, appeal.

In their opinion, Seventh Circuit Judges Ripple, Kanne, and Sykes affirmed. The Court first addressed its jurisdiction. The order below is not appealable as a final order. If it is appealable, it is under the collateral order doctrine -- a question of first impression in the Circuit, although the Fifth and Six Circuits have allowed an appeal from a receiver's distribution plan. The Court concurred with its sister circuits, concluding that the appeal satisfied the collateral order doctrine's requirements: the order conclusively determined a disputed question, it resolved an important issue separate from the merits, and it was effectively unreviewable after final judgment. Addressing another minor procedural issue, the Court held that the appellants satisfied Federal Rule of Appellate Procedure 3(c), even though the Verhoevens objected below as individuals and appealed as the Verhoeven Trust. On the merits of the appellant's' challenge to the distribution plan, the Court noted that the district court has broad discretion in ensuring that the plan is fair and reasonable. Here, the plan treated all investors equally, an approach routinely endorsed by courts as fair and reasonable. The Court considered the claims of investors who tried to redeem their equity that their interest was different but ultimately concluded that the claims were the same as those who did not try to redeem. The Court rejected the appellants' claim that they were entitled to be treated differently under either federal or state law. With respect to the offset date challenge, the Court noted that the district court had several options: offset all redemptions, offset no redemptions, offset some redemptions based on a cutoff date, or offset some redemptions based upon an individual analysis of each redemption request. The individual analysis approach may have resulted in a more accurate distribution, but it would have been expensive and time-consuming. Each of the other approaches would penalize a different subset of investors. The district court did not abuse its discretion in selecting the cutoff date approach or in selecting the cutoff date.

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AMERICAN BANK v. CITY OF MENASHA (November 29, 2010)

The City of Menasha, Wisconsin financed a power plant conversion by issuing bonds. Unfortunately, the project ended up over-budget and the city defaulted on the bonds. Several bondholders, including American Bank, filed a class action against the City. The suit alleged violations of federal securities law. A few weeks after filing suit, the Bank submitted a public records request to the City pursuant to state law. When Menasha refused to produce the requested records, the Bank obtained an order from a state court ordering compliance. Instead of complying, Menasha sought a stay from the district court in which the class action was pending. Judge Springmann (N.D. Ind.) granted the motion and issued a stay under the Private Securities Litigation Reform Act, as amended by the Securities Litigation Uniform Standards Act. The Act requires that discovery be stayed while a motion to dismiss is pending and authorizes a district court to stay state court discovery proceedings when necessary. The Bank appeals.

In their opinion, Seventh Circuit Judges Posner, Flaum, and Sykes reversed. The Court first addressed its jurisdiction. Although discovery orders are usually not appealable, there are exceptions – plus, this may not be a discovery order. The Court concluded that jurisdiction was inseparable from the merits. If the Bank is right on the merits, it is not a discovery order but an appealable injunction. If the City is right on the merits, it is a discovery order and unappealable unless it fits within an exception. The Court sided with the Bank. First of all, discovery is a well defined word in federal civil procedure and does not generally include the entirety of a party's investigation. Second, if the Act meant to use it in a different way, there must be a reason based on statute or policy. The policy behind the discovery stay is to prevent one party from using discovery to impose exorbitant costs on the other for the purpose of inducing a settlement. That concern does not exist here, since the cost of complying with the public records request can be charged to the Bank. Menasha concedes that it couldn't refuse a newspaper's request for the same records, nor could it have refused the Bank's request if it made the request a few weeks before filing the complaint rather than a few weeks after. The City not only does not convince the Court to adopt a broad definition of "discovery" in the Act -- it convinces the Court that their interpretation is futile, would create a “precedent of unmanageable scope,” and would hold the law “out to ridicule.”

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WILSON v. O'BRIEN (September 3, 2010)

Robert Wilson was convicted of attempted murder in state court. After that conviction was set aside, Wilson brought suit against the City of Chicago and others pursuant to § 1983. During discovery, the defendants attempted to depose Tyler Nims. While a law student, Nims had assisted Wilson with his defense. Nims asserted the attorney work-product privilege and refused to answer questions. After the district court ordered Nims to answer, he complied. Wilson (the party) and Nims (the nonparty) both appeal.

In their opinion, Chief Judge Easterbrook and Judges Kanne and Hamilton dismissed for lack of jurisdiction. The appeal raised interesting issues under the Cohen collateral-order doctrine in light of Mohawk Industries. After a short discussion of those issues, the Court tabled them. A necessary premise in considering an interlocutory appeal from an order concerning the disclosure of privileged information is that the person ordered to disclose has refused to so. Here, Nims complied with the district court's order -- his matter is moot. Likewise, with respect to Wilson, there is nothing the Court can do to protect the confidentiality of the already disclosed information. Wilson's opportunity to challenge the district court's decision will come after a final decision in the district court.

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SHERWOOD v. MARQUETTE TRANSPORTATION CO. (November 23, 2009)

Bluegrass Marine employs Michael Sherwood as a deckhand on one of its Mississippi River vessels. Sherwood alleged that he was injured during his employment. He brought suit under the Jones Act. Bluegrass sought a stay in favor of arbitration, invoking a clause in Sherwood's employment contract that required all disputes to be arbitrated under the Illinois Uniform Arbitration Act. The court denied the stay, concluding that the Federal Arbitration Act (which does not apply to seamen) preempted the Illinois Act. Bluegrass appealed.

In their opinion, Chief Judge Easterbrook and Judges Evans and Williams dismissed for want of jurisdiction. The Court noted that Bluegrass relied on § 16 of the FAA, which authorizes interlocutory review of a refusal to stay an action under § 3 of the FAA. The Court concluded that § 16 could not provide a basis for jurisdiction since the FAA does not apply to seamen and because Bluegrass never sought or was denied a stay under § 3 of the Act. The Court also rejected Bluegrass' reliance on both the collateral order doctrine and § 1292 (as the denial of an injunction) as bases for an appeal. Although the Court denied the appeal, it did express its doubt regarding the correctness of the district court's preemption conclusion.

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