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

CHICAGO TITLE LAND TRUST COMPANY v. POTASH CORPORATION OF SASKATCHEWAN SALES LIMITED (December 27, 2011)

Potash Corporation of Saskatchewan Sales Limited signed a 10-year lease with Chicago Title Land Trust Co. in 1995 for space in a Skokie, Illinois office building. Several years later, Potash wanted significantly more space in the same building and so advised Chicago Title. When Chicago Title could not provide the space, Potash exercised what it thought was a contractual option to cancel. Chicago Title interpreted the lease differently and brought suit in state court against Potash and its parent for breach of lease. After years of litigation, Potash prevailed. While that suit was pending, Chicago Title brought a fraud suit against Potash's CEO and General Counsel. The suit was originally dismissed without prejudice with leave to re-plead but, after 2 1/2 years without repleading, was dismissed with prejudice. Undaunted, Chicago Title filed suit in federal court against Potash and its parent, again alleging breach of lease and fraud. Judge Bucklo (N.D. Ill.) dismissed on res judicata grounds, citing both state court cases.

In their opinion, Seventh Circuit Judges Manion, Williams, and Tinder affirmed. The Court applied Illinois res judicata law because the earlier cases were in state court. Illinois requires a final judgment on the merits in the earlier case and the same cause of action and parties. Applying that test, the Court agreed with the district court that the state court suit against the individuals barred the current suit. It was dismissed with prejudice for failure to state a claim, which is the equivalent of adjudication on the merits. The two cases plead the same cause of action under Illinois' transactional test, even though they plead different theories, because they arise from the same group of operative facts. Finally, the cases involve the same parties. As corporate officers, the CEO and General Counsel are in privity with Potash and are considered the same parties. The Court recognized that Chicago Title did not bring a breach of lease claim against the individual defendants and possibly could not have, since individuals are generally not liable on a corporation's lease. But that does not change the result. Chicago Title had one cause of action arising out of the same set of operative facts. It was its decision to split the cause of action and it must live with the consequences.

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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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RODRIGUEZ v. COOK COUNTY (December 15, 2011)

More than a decade ago, Angel Rodriguez was convicted of murder by a state court jury. An appellate court concluded that the evidence presented was insufficient to sustain the verdict and reversed. Rodriguez filed a federal civil rights suit against two officers involved in his arrest. He lost at the trial court level and the Seventh Circuit affirmed in 2006. Rodriguez obtained a "certificate of innocence" under Illinois state law in 2009. On the grounds that the certificate created a new cause of action, Rodriguez again filed suit in 2010 against the original defendants and three prosecutors. Judge Conlon (N.D. Ill.) dismissed the case against the original defendants on res judicata grounds and dismissed the case against the new defendants on statute of limitations grounds. She also dismissed the state law claims against the prosecutors on subject matter jurisdiction grounds, concluding that they were entitled to state immunity. Rodriguez appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Cudahy and Tinder affirmed. The Court addressed the Illinois law at issue. The statute, enacted in 2008, allows a person who has had a conviction set aside after serving prison time to obtain a certificate of innocence and file a petition in the Illinois Court of Claims for compensation. It does not, and could not, alter the effect of a federal court judgment nor does it, although it could, toll or extend the limitations period for a § 1983 suit. Rodriguez' claim accrued in 2000, when the Illinois appellate court reversed his conviction. His certificate of innocence does nothing to change that. The federal claims are time-barred. The Court did disagree with the district court's treatment of the state law claims against the prosecutors. It is not clear whether Rodriguez asserts his claim against the prosecutors in their official or personal capacities. But, if the former, the suit is really against the State and the prosecutors should be dismissed. If the latter (which the district court assumed), there is no jurisdictional barrier to the suit proceeding in federal court. The prosecutors could simply assert state law immunity as an affirmative defense. Nevertheless, since it was clear that the district court would have declined to exercise its supplemental jurisdiction over the state law claims, its error had no effect. The Court affirmed the dismissal without prejudice, as modified.

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PALKA v. CITY OF CHICAGO (October 18, 2011)

In early 2007, Assistant Deputy Superintendent Matthew Tobias recommended that Peter Palka be terminated from his position as a Chicago probationary police officer. Matthew's father, Tadeusz, himself a Cook County Deputy Sheriff, complained to Tobias and sought Peter’s reinstatement. Tobias refused. A few months later, an unidentified person placed a suspicious call to the school attended by Tobias' children. Tadeusz was accused of making the call. After an investigation concluded that he was responsible, he took early retirement. He later brought suit against the County and others alleging violations of his constitutional rights. The district court dismissed his complaint and the Seventh Circuit affirmed (opinion and intheiropinion). At about the same time, Peter filed a § 1983 suit against the City and Tobias, alleging discrimination based on his Polish ancestry. He sought reinstatement and back pay. The district court granted summary judgment to the City on the ground that Tobias was not a policymaker under a Monell analysis. Magistrate Judge Nolan (N.D. Ill.) then ruled that Peter was not entitled to reinstatement on the grounds that Tobias, the only defendant, lacked any authority to grant reinstatement. Peter moved for voluntary dismissal. The magistrate judge dismissed the City claims with prejudice and the Tobias claim without prejudice. Peter appealed. In the meantime, Tadeusz and Peter both received EEOC right to sue letters and filed yet a third case based on Title VII against the City (by Peter) and the Sheriff’s Department (by Tadeusz). Judge Kendall (N.D. Ill.) dismissed the claims on res judicata grounds. The Palkas appeal. The appeals were consolidated.

In their opinion, Seventh Circuit Judges Ripple, Kanne, and Sykes affirmed. The Court addressed Peter's appeal first. Normally, a dismissal without prejudice is not considered final and appealable. Here, however, the statute of limitations on Peter's § 1983 claim has expired. Since the case cannot be refiled, the judgment below is considered final. With respect to the judgment in favor of the City, the Court found no Monell liability and affirmed. It concluded that the two allegations of discrimination could not amount to a widespread pattern or practice and that Tobias was not a final policymaker, since his decisions were subject to review. Turning to the availability of a reinstatement remedy, the Court refused to consider Peter's argument. Since Peter requested and received dismissal of his claim against Tobias, he cannot complain about the earlier interlocutory order barring the reinstatement remedy. The Court next considered the Title VII claims dismissal. It found that the case was a "quintessential example of claim splitting." The cases involve the same parties and the same cause of action (albeit under different theories) and were litigated through final judgment. The Court rejected the Palkas' arguments to the contrary.

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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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ELLIS v. CCA OF TENNESSEE (June 9, 2011)

Harriett Ellis, Patricia Forrest, Shavon Jones, and Delores McNeil were all employed as nurses at the Marion County Jail II. They are all also African-American. CCA of Tennessee operates the jail pursuant to a contract with the Marion County Sheriff and employs its entire medical staff. Plaintiffs allege several instances of racial discrimination at the jail: a) a shift change directive that required nurses to rotate among shifts rather than work the same shift, as the plaintiff nurses had been doing, b) the health services administrator's possession of a management book excerpt that compared workplace problems to monkeys, c) a reference to monkeys over the intercom system, d) a coworker who wore clothing with a picture of the Confederate flag, and e) a doctor stating to one of the nurses that the first name of an inmate named Cole must be "black as." The plaintiffs all resigned in late 2006 or early 2007. They all claim they were constructively discharged because they complained about improper or unsafe work practices. They filed suit under Title VII and § 1981, alleging race discrimination and hostile work environment. They also alleged state law retaliatory discharge. Judge Barker (S.D. Ind.) granted summary judgment to the defendants. She also concluded that plaintiff Forrest's claims were precluded by res judicata. Plaintiffs appeal.

In their opinion, Circuit Judges Flaum and Williams and District Judge Herndon affirmed. The Court first addressed the hostile work environment claim. Such a claim must show that the environment was both objectively and subjectively offensive. Here, although the Court assumed that the plaintiffs found the management book offensive, they concluded that no reasonable person would find it so. The monkey in the book is clearly a metaphor for management problems, not people. There is also not enough in the record regarding the monkey comments on the intercom to establish a hostile work environment. Although the court found the Confederate flag and the doctor’s statement offensive, the limited number of incidents does not support a hostile work environment claim. The Court turned to the race discrimination claim. A race discrimination claim requires a material, adverse employment action. The Court rejected each of plaintiffs' three suggestions: a) the shift-change policy does not qualify because it did not include any particular hardship, b) plaintiff Ellis' three-day suspension does not qualify because she was unable to show that CCA's explanation was pretext, and c) they cannot show a constructive discharge since it requires more than hostile work environment. The Court then addressed the Indiana statutory whistleblower claim. In order for an employee to get the protection of the statute, she must report a violation of federal or state law, an ordinance violation, or the misuse of public resources. The reports at issue primarily addressed CCA safety practices. Since the plaintiffs have not identified any violation or misuse, they cannot prevail under the statute. The Court did find the district court's ruling on res judicata erroneous. One of the plaintiffs made similar allegations in an earlier lawsuit. The district court concluded that she should have amended her complaint in that suit to include incidents between its filing and the summary judgment motion. The court was wrong. Res judicata does not bar a second lawsuit based on facts that arose after the first complaint was filed.

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GROESCH v. CITY OF SPRINGFIELD (March 28, 2011)

Kevin Groesch, Greg Shaffer, and Scott Allin are all white males, were all police officers in the Springfield, Illinois Police Department, all voluntarily resigned from the department, all sought reemployment with the department, and all were ultimately rehired between 1989 and 1996 as entry-level officers pursuant to City policy. Donald Schluter, on the other hand, is African-American. He also was a Springfield police officer who sought reinstatement after a voluntary resignation. He was rehired in 2000 -- but he was given a retroactive leave of absence and he returned to the force with full credit for his prior years of service. The City policy had not changed but the City Council enacted a special ordinance allowing the exception. The police union challenged the ordinance in state court but it was upheld. The City ignored the white officers' request to be credited with their prior years of service. A state court dismissed, on statute of limitations grounds, the officers’ lawsuit alleging disparate treatment under the Illinois Constitution. The officers then filed race discrimination claims under Title VII in federal court in 2004. Judge Scott (C.D. Ill.) denied the City's motions for summary judgment in late 2006, relying on the "paycheck accrual" rule, under which each department paycheck amounted to a separate discriminatory act. Five months later, however, the Supreme Court decided Ledbetter and rejected the paycheck accrual rule. The district court reversed course and granted the City's motion. The court also ruled that the officers' § 1983 claims were barred by res judicata because they could have been brought in the state court action. The officers appeal.

In their opinion, Judges Bauer, Wood, and Hamilton affirmed in part, reversed in part, and remanded. The Court first noted that Congress enacted the Lilly Ledbetter Fair Pay Act of 2009 during the pendency of the appeal. In effect, the Act reinstated the paycheck accrual rule and also made the reinstatement retroactive to any claim pending on the day of the Supreme Court's decision or later. The City attempted to avoid application of the Act or distinguish the case -- but to no avail. The Court reversed the district court with respect to the Title VII claims relating to the time period after the state court dismissal. Next, although the Act only directly applies to Title VII actions, the Court concluded that the paycheck accrual rule applied to pay discrimination claims under § 1983, as well. Finally, the Court considered the impact of the earlier state court decision. Under Illinois law, res judicata requires a final judgment, an identity of causes of action, and an identity of parties. The district court correctly concluded that res judicata bars recovery for claims that arose before the date of the final judgment. But each individual paycheck after that final judgment supports a separate cause of action and triggers a new statute of limitations. They therefore do not share an identity of causes of action and are not barred by res judicata. The Court emphasized that the state court had never ruled on the merits, therefore not implicating collateral estoppel or issue preclusion.

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On April 13, 2011, the Court granted petitions for rehearing en banc with respect to the Tax Injunction Act issue. On July 8, the en banc Court, in a 5-3 vote, disagreed with the panel and affirmed the district court’s conclusion that the Tax Injunction Act applied.

EMPRESS CASINO JOLIET CORP. v. BLAGOJEVICH (March 2, 2011)

In 2006, Illinois Governor Rod Blagojevich signed into law the 2006 Horse Racing Act. The Act required the state's four highest grossing casinos to pay 3% of their adjusted gross revenue into a fund. The fund was kept separate from other state funds and was not available to any state agency or program. Instead, the money in the fund was paid to five horseracing tracks in Illinois. The purpose of the Act, according to legislative findings, was to assist the horseracing industry, which had suffered financially after casinos were allowed to operate in Illinois. The casinos challenged the Act in state court. The Illinois Supreme Court upheld the Act against state and federal constitutional challenges. A few months later, the United States brought political corruption charges against Blagojevich. In an affidavit attached to the criminal complaint, an FBI agent described conversations in which Blagojevich discussed receiving money in return for his support of the Horse Racing Act. The casinos returned to state court and sought post-judgment relief based on this information. The state court denied relief, concluding that the legislature's motive in passing the Act was irrelevant to its constitutionality. The casinos then brought suit in federal court against Blagojevich, the racetracks, and the owner of two of the racetracks. The complaint alleged a RICO conspiracy and sought a constructive trust to prevent the racetracks from receiving any money. Blagojevich moved to dismiss on legislative immunity grounds. One or more of the defendants also moved to dismiss the RICO claim on res judicata and for failure to state a claim and moved to dismiss the constructive trust claim on several grounds: that it was barred by the Tax Injunction Act, that it was premature, that there was no unjust enrichment, res judicata, and Colorado River abstention. Judge Kennelly (N.D. Ill.) rejected the legislative immunity claim and denied the motions to dismiss the RICO claim, but dismissed the constructive trust claim on the grounds that the Tax Injunction Act eliminated jurisdiction. Blagojevich appealed the legislative immunity ruling and the casinos appealed the constructive trust ruling.

In their opinion, Judges Bauer, Posner (dissenting), and Sykes reversed both with respect to the legislative immunity claim and the constructive trust claim. With respect to legislative immunity, the Court cited Tenney for the proposition that state officials are absolutely immune from damages suits arising from their legislative activity. Although the Supreme Court has never applying that principle to a governor, the Court saw no reason that it would not apply and noted that other circuits have so extended the principle. The principle applies even when the legislative activity is illegal or improper. The Court rejected the casinos’ argument that Blagojevich’s immunity should be decided in reference to state law, relying on the Supreme Court's decision in Lake Country Estates. The Court also expressed its view that the Illinois Supreme Court's decision in Jorgensen (where it rejected Blagojevich’s claim of legislative immunity) would not control even if state law did apply. Jorgensen was not a damages case, but was a constitutional attack on Blagojevich's judicial pay raise veto. Therefore, Blagojevich is immune and the RICO claim should be dismissed. The Court moved on to consider the Tax Injunction Act argument. That Act prohibits a federal court from interfering with the collection of state taxes where there is a sufficient remedy in state court. The only real issue presented under the Act is whether the 3% casino surcharge is a tax. The Court concluded that it was not because it had none of the normal indicia of a tax. The Act never referred to as a tax, the only targets of the Act are four casinos, the only beneficiaries of the Act are five racetracks, the money is segregated from all state funds, the money is not available to any state program or agency, the Act has a regulatory purpose (protecting the racetracks from competition), and the Act was enacted under the state's police power, not its taxing power. Therefore, the Tax Injunction Act does not apply and the constructive trust claim can be considered. Given the Court's treatment of the Tax Injunction Act issue, it proceeded to consider the defendants’ alternate grounds to dismiss the constructive trust claim. First, it rejected the argument that the Illinois Supreme Court's decision on the casinos’ constitutional challenge had any preclusive effect on the case. Both the causes of action and the parties were different. Next, it rejected the argument that the state court’s denial of post-judgment relief had preclusive effect on the case. In fact, the state court denied relief because the allegations of corruption were unrelated to the constitutional challenge before the court. The Court rejected the collateral estoppel and Colorado River abstention arguments for much the same reason -- a constitutionality challenge is fundamentally different from a RICO claim. Finally, the Court rejected defendants' argument that their actions were not the proximate cause of the casinos' injuries.

Judge Posner dissented both with respect to the legislative immunity issue and the Tax injunction Act issue. With respect to immunity, he agreed that the general rule is that a state official is entitled to legislative immunity. But if Illinois grants its officials less than complete immunity, federal common law should do the same. There is no federal interest served in affording a state official more protection in federal court that he would enjoy in a state court. Because it was not clear in Jorgensen whether the Illinois Supreme Court would grant legislative immunity in a civil damages case, judge Posner would certify the question to that court. With respect to the Tax Injunction Act issue, Judge Posner agreed that the only question was whether the surcharge was a tax -- and he concluded that it was. He agreed that not every state receipt of money was a tax, but he distinguished between taxes and fees by asking whether the charge was based on a reasonable estimate of the cost of some service provided. The charge imposed on the casinos here is not a fee for a service but a subsidy for the racetracks. Therefore, it is a tax and the Tax Injunction Act applies.

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CZARNIECKI v. CITY OF CHICAGO (January 21, 2011)

For a few months in late 2006 in early 2007, Wojciech Czarniecki was a probationary police officer with the Chicago Police Department. He alleges that Assistant Deputy Superintendent Tobias made several negative references to his Polish ancestry in a discussion about Czarniecki's use of exam study guides. He alleges that his dismissal followed shortly thereafter and that another Polish probationary officer was dismissed at about the same time. He brought suit under § 1983 against the City and Tobias, alleging national origin discrimination in violation of the 14th Amendment. The district court granted summary judgment to the City. Shortly before trial, the court granted Czarniecki's motion to dismiss his claim against Tobias without prejudice - but conditioned the dismissal on a requirement that he seek her permission if he ever wanted to refile it. Czarniecki appealed that order because of its refiling condition, then sought permission to refile and appealed that order when the court denied permission on the grounds that his first appeal deprived her of jurisdiction. A few months later, Czarniecki filed a new complaint alleging national origin discrimination in violation of Title VII of the Civil Rights Act of 1964, naming only the City. Judge St. Eve (N.D. Ill.) dismissed the complaint on res judicata grounds. Czarniecki appeals.

In their opinion, Seventh Circuit Judges Bauer, Flaum, and Hamilton consolidated the three appeals, affirmed the res judicata dismissal, and dismissed the other appeals as moot. The Court noted the three familiar ingredients of federal res judicata (federal res judicata applies when the earlier judgment was in federal court): a final decision, a dispute arising out of the same operative facts, and the same parties. The Court found that the three requirements were met here. There is no dispute that the earlier decision against the City was final, the parties are the same (the fact that Tobias is not a defendant in the second suit is of no consequence), and the claim arises from the same operative facts. The fact that he sets forth a new theory of liability, even with different proof requirements, does not change the res judicata result. The Court also rejected Czarniecki's argument that res judicata should not apply because he lacked a "right to sue” letter at the time of his first complaint and could not have brought a Title VII claim. The Court concluded that Czarniecki had several ways in which he could have dealt with that situation -- splitting his claims was not one of them. Finally, the Court dismissed as moot Czarniecki's two other appeals since both only dealt with his ability to refile.

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ARLIN-GOLF v. VILLAGE OF ARLINGTON HEIGHTS (January 21, 2011)

Ronald Popp and Victor Valenti purchased the Arlin-Golf Shopping Center in the Village of Arlington Heights, Illinois in 2001. Within a year, the Village implemented a Tax Increment Financing District and announced that the Center would be demolished and the property redeveloped within months. The Village never followed through with its plan, however. The owners claim that they did encourage Center tenants to leave, discouraged prospective tenants from renting, and generally continued to announce falsely that the property would be condemned and redeveloped. The owners sued the Village in state court challenging the ordinance itself and alleging that the Village's actions constituted a taking under Illinois' Constitution. In 2008, the owners and the Village settled their lawsuit. Under the terms of the settlement, the owners dismissed the suit with prejudice and the Village purchased the property for $1.6 million. A few weeks after the sale closed, the owners brought suit in federal court against the Village, several Village officials, a brokerage firm that had assisted the owners in trying to sell the property before the settlement, a local bank, and the bank's chairman. Their complaint included allegations of violations of the Equal Protection, Due Process, and Takings Clauses, among others. Essentially, their claim was that the defendants' actions resulted in significant financial losses in connection with their ownership of the Center. Judge Coar (N.D. Ill.) dismissed the complaint on res judicata grounds. The owners appeal.

In their opinion, Judges Cudahy, Flaum, and Kanne affirmed. The Court noted the three res judicata requirements: a) a final judgment, b) identity of cause of action, and c) the identity of the parties. Under Illinois law, identity of cause of action exists if the claims arise from the same operative facts, even if they assert totally different theories of relief. The Court found that test met here. Both suits arise from the Village's implementation of its ordinance and the conduct of the defendants that allegedly led to the owners’ financial losses. The federal suit does not allege any material facts that occurred after the state court settlement. The Court also found no error in the district court's refusal to allow the owners to amend their pleadings, noting that the owners did not submit a proposed amended complaint to the district court in order to show that an amendment would not be futile.

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ARROW GEAR CO. v. DOWNERS GROVE SANITARY DISTRICT (December 10, 2010)

A number of residents of Downers Grove, Illinois brought a class action in 2004 against Arrow Gear Company and others for damages. The suit alleged that Arrow and the others contaminated the local groundwater with industrial solvents. The parties settled the suit in 2006 for approximately $16 million. The defendants allocated the settlement amount amongst themselves in a series of agreements. As part of the settlement, each defendant released every other defendant from a future claim for contribution. Although the release was broad, it provided that it did not release any claims other than those specified and did not release claims that "may arise in other litigation or in other contexts." The court then dismissed the case with prejudice. A few years later, Arrow brought CERCLA contribution suits for costs it had incurred against those same defendants. Judge Darrah (N.D. Ill.) dismissed the suit as barred by res judicata. Arrow appeals.

In their opinion, Seventh Circuit Judges Posner, Kanne, and Sykes reversed. The Court first addressed its appellate jurisdiction, since the district court did not dismiss the suit against all defendants. Arrow took a voluntary dismissal without prejudice with respect to two of the defendants. A decision is not final, and appellate jurisdiction does not exist, if the plaintiff has the opportunity to refile against some defendants. That was the case here. However, as the Court has done before on more than one occasion, it provided Arrow's lawyer an opportunity at oral argument to convert the without prejudice dismissal to a with prejudice dismissal. Arrow's lawyer accepted the invitation and satisfied the Court of its appellate jurisdiction. The Court also briefly addressed the district court's jurisdiction. This is a case that involves enforcement of a settlement agreement -- and the general rule is that a district court does not have jurisdiction of such a claim without an independent basis for its jurisdiction. But here, Arrow's claim does have such an independent basis. The claim is based on CERCLA. The fact that the defendants interposed a settlement agreement as the basis for its res judicata defense does not strip the court of its federal question jurisdiction. On the merits, the Court seemed to have little difficulty concluding that res judicata did not bar the suit. The agreements between the defendants in the earlier class action was limited to the allocation of the $16 million in damages paid to the private plaintiffs. The current suit seeks contribution for an additional $5 million that Arrow has incurred as a result of an EPA investigation. The settlements in the earlier suit did not release Arrow's claims in the current one.

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STUART v. RECH (May 5, 2010)

Federal officers executed a search warrant at a company owned by James Stuart. Stuart filed a pro se motion seeking the return of property seized during the execution of the warrant. The matter was assigned to the magistrate judge who issued the warrant. The judge denied the motion, which he had treated as a Rule 41(g) motion for the return of property. A few months later, Stuart filed a second pleading naming only the agent who had applied for the warrant. In that pleading, Stuart sought damages for what he alleged was the unconstitutional seizure of chemical formulas worth millions of dollars. The district court denied the request on the ground that it was the equivalent of the earlier pleading. Stuart appeals.

In their opinion, Judges Bauer, Posner, and Evans affirmed. The Court began, as an aside, by noting that the magistrate judge who denied the original pleading likely had no authority to do so. The appeal, however, related only to the denial of the second pleading. The Court concluded that the district court erred in treating that pleading as an equivalent to the 41(g) motion. The second pleading is nothing more or less than a common law action for damages against a federal officer who is alleged to have violated the Constitution -- more commonly known as a Bivens action. The complaint should not have been dismissed on res judicata grounds. Notwithstanding the lower court’s mistake, the Court affirmed the dismissal on other grounds. The only basis for Stuart’s claim of unconstitutionality is the “frivolous squared” theory that the federal government has no authority outside of federal property. It has no possible merit.

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IN RE: REPOSITORY TECHNOLOGIES, INC. (April 12, 2010)

Repository Technologies, Inc. ("RTI") was a software supplier. When it needed additional financing, William Nelson, a minority shareholder, offered to help. He eventually loaned almost $2 million to RTI. Once he sent a notice of default, however, RTI filed for Chapter 11 reorganization. In the bankruptcy proceeding, RTI attempted, unsuccessfully, to recharacterize the entire Nelson debt as equity. Although the bankruptcy court refused to dismiss the case on the ground it was filed in bad faith, it did dismiss it on the ground that RTI was unable to reorganize. The district court affirmed the bankruptcy court and denied Nelson's request to strike, as dictum, the finding that the case had not been filed in bad faith. Nelson appeals -- RTI cross appeals. (Meanwhile, Nelson also filed a complaint in federal court seeking damages for the breach of the loan agreement. The district court froze RTI's assets pending resolution of the case, but not before RTI paid $100,000 to its bankruptcy lawyers. The court also appointed a receiver who transferred all of RTI's assets to Nelson as the successful bidder at a UCC sale. The court approved the sale and dismissed the claims without prejudice.)

Nelson also brought suit, in state court, against RTI's lawyers. He alleged that the lawyers conspired with RTI to file the bankruptcy case to enrich themselves, that they tortiously interfered with his loan agreement with RTI, and that they abused the bankruptcy process. The defendants removed. The district court denied remand, even after Nelson withdrew his "abuse of the bankruptcy process" count. The court then, relying on the district court’s finding in the bankruptcy case that the bankruptcy case was not filed in bad faith, dismissed the abuse of process claim with prejudice. The defendants moved to dismiss the rest of the complaint on the grounds that the entirety of the complaint was based on an abuse of the bankruptcy process. The district court, however, concluded that some state claims remained and remanded to state court. The defendants appeal.

In their opinion, Chief Judge Easterbrook and Judges Ripple and Tinder vacated and remanded with instructions to dismiss in the bankruptcy court appeal and reversed and remanded in the district court appeal. First addressing the appeal of the bankruptcy court decision, the Court concluded that the case was moot. The district court, in an order not appealed, approved the sale of all of RTI's assets. An appellate review of the bankruptcy court's decision could therefore not provide any meaningful relief. Although the Court agreed with Nelson that the bankruptcy court's statement about the good faith filing was dictum, it declined to entertain the argument since one cannot appeal dictum. The Court therefore vacated the judgment of the district court and remanded with instructions to dismiss the appeal from the bankruptcy court as moot.

With respect to the appeal of the district court case, the Court also began with a discussion of its jurisdiction. The defendants had removed on three alternate grounds: bankruptcy jurisdiction, diversity jurisdiction, and complete preemption. The district court relied on its bankruptcy jurisdiction to keep the case. The Court noted that district courts have original jurisdiction of proceedings "arising in or related to" cases under title 11. The Court agreed with the district court that the claims in the case were predicated on the lawyers' participation in the bankruptcy case and therefore met the "arising in" jurisdiction. Even the pre-petition conduct alleged in the complaint was related to the claims of abuse of process. Before reaching the merits of the remand, however, the Court concluded that it also had to address the existence of jurisdiction under the alternate grounds argued -- diversity jurisdiction and complete preemption – since the existence of any federal jurisdiction ground would prohibit a remand. As to the former, the defendants earlier conceded that diversity jurisdiction could not be a basis for the original removal because of the "forum defendant rule." The defendants did not preserve the argument that diversity jurisdiction could be used to keep the case in federal court, notwithstanding the “forum defendant rule, since the original removal was on other, proper grounds that have now been eliminated. The court therefore did not reach that "interesting question." With respect to complete preemption, the Court noted that complete preemption requires the existence of a federal cause of action that can substitute for the state action and provide recovery. Here, the lack of a federal claim that could substitute for Nelson's civil conspiracy and tortious interference claims illustrates the absence of complete preemption. The district court therefore did not have an independent ground of federal jurisdiction and had discretion to remand the supplemental state claims. On the merits of the remand, the Court recognized the usual practice to dismiss supplemental state claims if federal claims are dismissed before trial and conceded that it rarely interferes with a district court's discretion in this area. However, the discretion is not absolute. Here, the state claims are based on the defendants' participation in the bankruptcy case and are inseparable from the dismissed federal claims. When state claims are so entangled with the dismissed federal claims, the district court should retain supplemental jurisdiction. The fact that the claims are so interrelated and entangled might suggest that the state law claims should be dismissed as well. Although conceding the logic of that point, the Court added that the district court's reliance on the bankruptcy court's dictum in dismissing the federal claim was flawed. Dictum has no preclusive effect. The state claims should be resolved, said the Court, without reference to that dictum.

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CARR v. TILLERY (January 12, 2010)

Rex Carr was a lawyer in southern Illinois. He and his partners had several agreements concerning the allocation of fees earned by the firm. The agreements continued in effect after the dissolution of the firm in 2003. Significant disputes arose, and a host of lawsuits were filed, with respect to those fees. A Memorandum of Understanding (MOU) was agreed to in 2004. It was meant to control the distribution of all fees, past and future, among the partners. Notwithstanding an agreement to dismiss all pending cases, Carr actually amended a counterclaim in one of the pending actions to assert that he had been fraudulently induced to enter into the MOU. The claim was eventually dismissed and the dismissal was affirmed. While the appeal was pending, Carr brought four separate suits in state court, then brought this federal case, and then voluntarily dismissed the state cases. He brought the federal case under RICO, repeating many of the allegations of the earlier suits, including the fraudulent inducement claim. The district court dismissed the suit for failure to state a claim. Carr appeals. The defendants cross-appeal from the court's denial of their motion for sanctions.

In their opinion, Judges Posner, Ripple, and Wood affirmed in part and vacated and remanded in part. On the merits, the Court disagreed with the court below that all the claims were barred by the doctrine of res judicata. The complaint contains at least one claim that postdates the earlier dismissal. The Court held that the claims were barred, however, by Illinois' "one refiling" rule. Under that rule, a plaintiff who voluntarily dismisses a complaint may start a new action within one year or the remaining period of limitations. Illinois courts have held the rule to mean that a plaintiff may commence only one new action after a voluntary dismissal. Here, Carr filed four lawsuits in Illinois before he filed the federal lawsuit. He dismissed all of the state court suits soon after he filed a federal suit. Although each of the state court suits was based on a different theory of liability or sought different relief, they all arose from the same events. That is true even for the claim postdating the earlier dismissal, a claim that the defendants violated the MOU. The Court next considered whether the RICO claim, on which federal jurisdiction was based, was so weak so as to not support jurisdiction. Such a conclusion would lead the Court to dismiss for lack of jurisdiction rather than on the merits. Although the Court termed the claimant a "complete nonstarter," since it was so on the basis of an affirmative defense, the Court concluded that a dismissal on the merits with prejudice was more appropriate. On the cross-appeal, the Court found the denial of sanctions erroneous. Although the defendants based their motion on § 1927, which does not apply to misconduct prior to the filing of the federal complaint, the Court saw no reason why the district court could not invoke its inherent, common law power to punish attorney misconduct. The filing of multiple lawsuits, including the present frivolous one, was ground enough for the Court to direct the district court to assess a proper sanction and consider enjoining Carr from conducting further related litigation.

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HABER v. BIOMET, INC. (August 20, 2009)

Biomet produces artificial joints. It contracted with Paul Haber to be its distributor in parts of Florida. Their relationship was governed by two contracts -- one made in 1995 and one made in 1999. The 1995 contract contained a forum selection clause favoring an Indiana court. The 1999 contract contained a clause requiring arbitration in Chicago. Biomet came to believe that Haber was in breach of the contracts and brought an action in Indiana state court. In response, Haber filed a complaint in the local federal court to compel arbitration. The federal court dismissed the complaint, concluding that venue for such an action was proper only in Chicago, the selected forum of the arbitration. Haber also moved to compel arbitration in the state court action. The state court compelled arbitration only on claims that arose under the 1999 agreement and ordered Biomet to identify which of its claims arose under that agreement. Haber did not appeal the state court decision -- Haber did appeal the federal court decision.

In their opinion, Judges Posner, Kanne and Wood affirmed. Before addressing the venue issue, the Court addressed res judicata. The Indiana court, although not resolving all matters, concluded that claims under the 1995 agreement were not arbitrable. The Court had to decide whether that ruling was of sufficient finality to be afforded res judicata effect. Indiana requires finality for issue preclusion. The factors a court should look at are whether: the parties were fully heard, the decision was rendered in a reasoned opinion, the order was appealable, and the order was appealed. The Court concluded that the state court’s order was final. The issue was before the court, was decided in a reasoned opinion and was appealable (though not appealed). Having found finality, the Court easily concluded that the order met the next four elements barring relitigation: a court of competent jurisdiction, an issue actually determined, identical parties, and a decision on the merits. The state court ruling was entitled to preclusive effect. The Court also briefly addressed the venue issue. Section 4 of the Federal Arbitration Act requires that, if an arbitration clause selects a forum for arbitration, a motion to compel the arbitration must be brought in a court in the forum selected. The venue decision was thus proper.

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FRIENDS OF MILWAUKEE’S RIVERS v. MILWAUKEE METROPOLITAN SEWERAGE DISTRICT (February 13, 2009)

Friends of Milwaukee’s Rivers (“FMR”) filed a citizen suit under the Clean Water Act (“CWA”) against the Milwaukee Metropolitan Sewerage District (“MMSD”). FMR alleged that MMSD sewer overflows violated the CWA and MMSD’s permit. Wisconsin sued the MMSD the very same day. MMSD and Wisconsin settled their case soon thereafter. The settlement provided that MMSD would spend over $900 million in upgrades to its sewer system. On MMSD’s motion, the court dismissed FMR’s suit on two bases: the CWA itself and res judicata. On appeal, the Seventh Circuit reversed and remanded. The Court held that the CWA did not bar the suit because FMR filed first. With respect to res judicata, the Court held that the privity requirement depended on whether the settlement constituted “diligent prosecution,” defined as whether it was “calculated to result in compliance.” The Court remanded to the district court for that determination. After an evidentiary hearing and briefing, the district court found for the MMSD and dismissed the complaint on res judicata grounds. FMR appeals.

In their opinion, Judges Bauer, Cudahy and Wood affirmed. FMR’s main argument on appeal was that the lower court failed to give adequate weight to post-settlement evidence. Principally, FMR argued that massive sewer overflows in 2004 were evidence that the 2002 settlement terms did not result in compliance. The Court first looked at the “central” evidence – i.e., the evidence that existed at the time of the settlement. When the parties act in good faith and address all the known problems and foreseeable consequences, diligent prosecution exists without regard to later events. Turning its attention to post-settlement evidence, the Court found little authority and identified several problems with the consideration of post-settlement evidence. However, it also recognized that post-settlement evidence could be particularly probative of the adequacy of an agreement. The Court rejected the notion that it was wholly irrelevant, but refused to identify any bright-line test for its use. The admissibility and weight of post-settlement evidence will depend on the circumstances of a case. The Court determined that the district court did give adequate consideration to the post-settlement overflows. The district court merely believed the evidence presented by the MMSD that the overflows would not have been violations and that the settlement improvements would have prevented the overflows. The Court also determined that the lower court gave adequate consideration to the post-settlement enforcement activities of Wisconsin.

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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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MUHAMMAD v. OLIVER (November 10, 2008)

The Dennis Muhammad Community and Economic Development Corporation (“MDC”) is a Chicago-based minority business enterprise. It entered into a joint venture agreement with CDA Management (“CDAM”). The purpose of the venture was to bid on a contract to install air conditioners in Chicago Housing Authority (“CHA”) buildings. Their bid was successful but the relationship quickly soured. In 2002, MDC sued CDAM and the related non-profit Chicago Dwellings Association (“CDA”). MDC alleged, in a state court action, that the defendants breached the joint venture agreement by not allowing MDC to do the work it had agreed to do. The court granted CDA’s motion to dismiss on the ground that CDA was not a party to the agreement. Later, on MDC’s own motion, the court dismissed MDC’s complaint against CDAM without prejudice. In 2007, MDC brought suit in federal court against CDA, CDAM, and Christine Oliver. Oliver was the CEO of both CDA and CDAM. MDC repeated the same allegations it had made in the earlier state court suit. It added an allegation under § 1981 that the defendants had used MDC as a “minority front” to increase their chances of success on the bid for the CHA contract. The district court dismissed CDA and CDAM on res judicata grounds and dismissed Oliver because she was not a party to the joint venture. MDC appeals.

In their opinion, Judges Cudahy, Posner, and Rovner affirmed. The Court observed that, although the two complaints relied to some extent on different legal theories, they did both arise out of the same facts. When a prior case arising out of the same facts is abandoned after an adverse ruling, as the Court concluded the state court suit was, the judgment generally bars a later suit. When there are multiple defendants, as is here, the bar against one operates as a bar against all, if they arose out of the same facts. The Court found that all three defendants were alleged to be in violation of § 1981 for the identical conduct. The Court concluded that the earlier suit barred the federal complaint against all defendants. The Court also rejected MDC’s argument that there had been a stipulation to reserve all rights upon dismissal. The Court concluded that there was no evidence, or even allegation in the complaint, of such an agreement. Finally, the Court rejected MDC’s claim that the lower court erred by dismissing on res judicata grounds when a) the defendants never raised it and b) it is not one of the FRCP 12(b) defenses that are allowed to be raised by motion . The Court held that the dismissal was proper. The application of res judicata eliminates unnecessary lawsuits. It can be raised by the court on its own motion. Also, when an affirmative defense like res judicata is shown on the face of the complaint, it can be dismissed on motion.

The Court did conclude that the court below erred in dismissing Oliver on the grounds that she was not a party to the joint venture agreement. A claim of tortious interference with contractual rights on account of race does state a cause of action under § 1981. Nevertheless, Oliver is still entitled to dismissal. First, the Court pointed to its prior discussion of res judicata. The dismissal of the state court complaint barred a cause of action against any defendant arising out of the same facts. Oliver’s does. Second, when liability rests on the doctrine of respondeat superior, as it does here, the plaintiff cannot bring an action against the “servant” (Oliver) when judgment has already been entered for the “master” (CDA, CDAM). Third, and most significantly, the Court concluded that the complaint did not actually allege tortious interference on account of race. The Court stated that the allegation that the defendants included MDC to gain a bidding advantage, and then cheated them out of that advantage, did not allege racial discrimination. The Court observed that it was greed, not discrimination, that drove the defendants’ decision. The district court’s result was correct. 

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