### In the



# United States Court of Appeals

For the Seventh Circuit

____________________

No. 14

‐ 2554

CFE G ROUP

, LLC, et al.

, Plaintiffs

‐ Appellants

,

v.

F IRST M ERIT B ANK

, N.A.,

Defendant

‐ Appellee

.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 C 8021

— William T. Hart

, Judge

.

____________________

S UBMITTED A UGUST 4, 2015

— D ECIDED D ECEMBER 31, 2015

____________________

Before P OSNER

, K ANNE

, and H AMILTON

, Circuit Judges

.

H AMILTON

, Circuit Judge

. The principal question in this

appeal is whether the district court correctly refused to en

‐ join a state court from adjudicating a case that the state

‐ court

plaintiff had voluntarily dismissed in an earlier incarnation

in federal court. In the earlier federal case, FirstMerit Bank

had sued CFE Group, LLC and related parties (for simplicity,

CFE) to enforce a promissory note and guaranties. CFE

moved to dismiss that complaint. The district court granted2 No. 14

‐ 2554

the motion and dismissed FirstMerit’s complaint without

prejudice, but with leave to amend. Rather than amend,

FirstMerit filed a notice of voluntary dismissal of the action

under Federal Rule of Civil Procedure 41(a)(1)(A)(i).

FirstMerit then filed a new complaint in an Illinois state

court asserting the same claims. CFE moved to dismiss the

new suit, arguing that the earlier federal dismissal meant

that FirstMerit’s claims were barred by claim preclusion (res

judicata). The state trial court denied the motion. CFE re

‐ sponded to that denial by filing this new federal action ask

‐ ing the district court to enjoin the state court under the relit

‐ igation exception to the federal Anti

‐ Injunction Act,

28 U.S.C. § 2283. The district court refused, ruling that the

dismissal of the first federal case was not a judgment on the

merits and therefore did not preclude the state action. The

district court dismissed this action with prejudice. CFE has

appealed.

We affirm. We agree with the district court ʹ s reasoning

and add that CFE’s request for an injunction was also barred

by the Full Faith and Credit Act, 28 U.S.C. § 1738. We affirm

the district court’s judgment dismissing the case. We also

find that the appeal is frivolous and that sanctions on CFE

are appropriate under Federal Rule of Appellate Proce

‐

dure 38.

I. Factual and Procedural Background

FirstMerit’s federal lawsuit was short

‐ lived. FirstMerit

sued CFE in federal court in November 2012 to enforce a

promissory note and guaranties executed by CFE.

See FirstMerit Bank, N.A. v. CFE Group, LLC

, No. 12 C 9510

(N.D. Ill. dismissed May 1, 2013). FirstMerit alleged that twoNo. 14

‐ 2554 3

years earlier CFE had become delinquent on loans with a

principal amount of $300,000. FirstMerit had acquired the

loans from the Federal Deposit Insurance Corporation,

which had been appointed receiver when the original lender

to CFE was closed by its Illinois regulator.

One of the CFE defendants moved to dismiss the com

‐ plaint, arguing that under Federal Deposit Ins. Corp. v. Elefant

,

790 F.2d 661, 666 (7th Cir. 1986), the FDIC’s relationship to

the suit divested the district court of diversity jurisdiction. A

week later, FirstMerit filed a memorandum responding to

the motion. That same day, the other CFE defendants joined

the first motion to dismiss and moved to dismiss on two

other grounds: failure to state a claim and failure to join the

FDIC as a necessary party.

Before FirstMerit could respond to the new grounds for

dismissal, the district court cancelled a scheduled hearing

and the case was assigned to another district judge. A week

later, and still without a response from FirstMerit to the ad

‐

ditional grounds for dismissal, the newly assigned judge

(Judge Castillo) dismissed the “present complaint” on all

three grounds “without prejudice.” The court allowed

FirstMerit 60 days to file an amended complaint.

The district court might have been right or might have

been wrong about the perceived defects in FirstMerit’s case,

but FirstMerit chose not to fight to stay in federal court. Five

days before the 60

‐ day deadline expired, FirstMerit filed a

notice under Rule 41(a)(1)(A)(i) stating that it “voluntarily

dismisses the above action, without prejudice

... .” Rule

41(a)(1)(B) provides that in such cases, with exceptions not

applicable here, “the dismissal is without prejudice.” The

next day the district court ordered: “This case is hereby dis

‐4 No. 14

‐ 2554

missed without prejudice pursuant to the Notice of Volun

‐

tary Dismissal Without Prejudice Pursuant to Rule

41(a)(1)(A)(i).”

Four days later, FirstMerit filed in Illinois state court a

substantively similar complaint, which remains pending.

CFE moved to dismiss the state action based on theories of

claim and issue preclusion. CFE argued that dismissal of the

first federal case barred FirstMerit’s claims in state court and

prohibited relitigation of whether the FDIC was a necessary

party. The state court rejected CFE’s preclusion defenses. But

it also ruled that FirstMerit had inadequately alleged that the

relevant loan documents had been transferred to FirstMerit.

It therefore granted FirstMerit leave to replead.

The state court’s refusal to dismiss based on claim preclu

‐

sion (res judicata) prompted CFE to file this new federal suit.

Under the All Writs Act, 28 U.S.C. § 1651(a), and the relitiga

‐

tion exception to the Anti

‐ Injunction Act, 28 U.S.C. § 2283,

CFE sought to enjoin FirstMerit’s suit in state court. The dis

‐

trict court denied that request and instead dismissed this

new case with prejudice, explaining: “The present action

fails because it is abundantly clear that there never was a

judgment on the merits” in the first federal case. The court

added: “The filing of the present case appears to be an un

‐

reasonable and vexatious multiplication of proceedings al

‐ ready pending in the state court.”

II. The Merits

The Anti

‐ Injunction Act, 28 U.S.C. § 2283, limits the pow

‐

er of federal courts to enjoin state

‐ court proceedings: “A

court of the United States may not grant an injunction to stay

proceedings in a State court except as expressly authorizedNo. 14

‐ 2554 5

by Act of Congress, or where necessary in aid of its jurisdic

‐

tion, or to protect or effectuate its judgments.” CFE argues

an injunction is needed here to give effect to the federal

court judgment dismissing FirstMerit’s earlier suit. Under

that exception to the Anti

‐ Injunction Act, often called the

“relitigation exception,” a party with a favorable federal

judgment may “protect that judgment by enjoining repeti

‐

tive state court proceedings instead of relying on a claim or

issue preclusion defense.” Ramsden v. Agribank, FCB

, 214 F.3d

865, 868 (7th Cir. 2000). A party seeking an injunction based

on this exception must show that “preclusion is clear beyond

peradventure.” Smith v. Bayer Corp.

, 564 U.S. 299, —, 131 S.

Ct. 2368, 2376 (2011).

Federal common law governs “the claim

‐ preclusive effect

of a dismissal by a federal court sitting in diversity.” Semtek

Int’l Inc. v. Lockheed Martin Corp.

, 531 U.S. 497, 508 (2001). As

a general rule, federal common law borrows the preclusion

principles of the laws of the state in which the federal court

that dismissed the diversity suit sat. Id. ; see also Allan Block

Corp. v. County Materials Corp.

, 512 F.3d 912, 915 (7th Cir.

2008). The parties do not dispute the application of this gen

‐

eral rule to the Anti

‐ Injunction Act. Cf. Smith

, 564 U.S. at

—

n.6, 131 S. Ct. at 2376 n.6 (declining to reach the issue). We

therefore apply Illinois law to decide the preclusive effect of

the dismissal of FirstMerit’s federal case, which was brought

in a federal court in Illinois under diversity jurisdiction.

The relitigation exception does not authorize an injunc

‐

tion here. Under Illinois law the dismissal of FirstMerit’s

federal case simply did not preclude a later suit because a

dismissal “without prejudice” is not final, DeLuna v. Treister

,

708 N.E.2d 340, 343 (Ill. 1999), and a non

‐ final decision is not6 No. 14

‐ 2554

subject to preclusion defenses. See City of Naperville v. Illinois

Fraternal Order of Police, Labor Council, F.O.P. Lodge No. 42

, 997

N.E.2d 296, 299 (Ill. App. 2013). If a court dismisses a com

‐ plaint without prejudice but with leave to amend, and then

allows the plaintiff to dismiss voluntarily without prejudice,

the dismissal has no res judicata or claim preclusive effect.

See Jackson v. Victory Mem’l Hosp.

, 900 N.E.2d 309, 318 (Ill.

App. 2008).

That is exactly what happened here. After dismissing the

complaint (not the case) without prejudice and with express

leave to file an amended complaint, the district court al

‐

lowed FirstMerit to dismiss its suit voluntarily and without

prejudice based on FirstMerit’s notice under Rule

41(a)(1)(A)(i). FirstMerit was therefore free to file its new suit

in state court. 1

CFE responds with two arguments, but neither has any

merit. CFE first argues that the dismissal of FirstMerit’s

complaint should be treated as preclusive because the com

‐

pany filed its notice of voluntary dismissal only after the dis

‐

trict court’s “adverse” ruling dismissing the complaint with

‐

out prejudice. For support, CFE quotes Muhammad v. Oliver

,

547 F.3d 874, 876 (7th Cir. 2008): “when a suit is abandoned

after an adverse ruling against the plaintiff, the judgment

ending the suit, whether or not it is with prejudice, will gen

‐ erally bar bringing a new suit that arises from the same facts

1 The risk of repetitive litigation and forum

‐ shopping is sharply lim

‐

ited by Rule 41(a)(1)(B), which provides that if the federal plaintiff “pre

‐ viously dismissed any federal

‐ or state

‐ court action based on or includ

‐ ing the same claim, a notice of dismissal operates as an adjudication on

the merits,” meaning that the dismissal would be with prejudice and

thus could cause claim preclusion.No. 14

‐ 2554 7

as the old one.” But Muhammad does not apply here because

FirstMerit received no “adverse” ruling. In Muhammad

, a

state court dismissed on the merits a contract claim against

one defendant. After the dismissal the plaintiff voluntarily

dismissed claims against another defendant without preju

‐

dice. Id. at 876. When the plaintiff later refiled against both

defendants, we held that the new suit was barred by claim

preclusion: “‘[A] plaintiff who splits his claims by voluntari

‐ ly dismissing and refiling part of an action after a final

judgment has been entered on another part of the case sub

‐ jects himself to a res judicata defense.’” Id. at 876–77, quoting

Hudson v. City of Chicago

, 889 N.E.2d 210, 217 (Ill. 2008). In

this case, however, there was no final judgment on any claim

by FirstMerit. The only ruling that preceded its voluntary

dismissal was expressly “without prejudice” to its ability to

file an amended complaint curing the problems the court

had perceived.

CFE next argues that the doctrine of “springing finality”

ended the first case on the merits. Under that doctrine, a

dismissal that “gives the plaintiff time to fix the problem that

led to dismissal” becomes final once the time to cure has

elapsed. E.g., Davis v. Advocate Health Ctr. Patient Care Ex

‐

press

, 523 F.3d 681, 683 (7th Cir. 2008); see also Otis v. City of

Chicago

, 29 F.3d 1159, 1166 (7th Cir. 1994). Because First

‐

Merit’s complaint was dismissed without prejudice and with

leave to amend within 60 days, CFE contends, the dismissal

ripened into a final dismissal on the merits when FirstMerit

did not file an amended complaint.

“Springing finality” is a less than optimal approach to

managing the disposition of a lawsuit in a federal district

court. Clear written final judgments under Federal Rule of8 No. 14

‐ 2554

Civil Procedure 58 are far preferable and minimize confu

‐

sion for parties and other courts. In any event, though, a

conditional dismissal ripens into a final order only when the

plaintiff fails to act within the specified time. See Davis

, 523

F.3d at 683. Here FirstMerit acted by filing a notice of volun

‐

tary dismissal under Rule 41(a)(1)(A) before the 60 days

elapsed. And because CFE had neither answered nor moved

for summary judgment, the effect under Rule 41(a)(1)(B) was

clear: “the dismissal is without prejudice.”

Further, the district court’s dismissal of this action by

CFE would have been correct even if the state court had been

wrong in denying CFE’s motion to dismiss (and we do not

believe it was). The relitigation exception to the Anti

‐ Injunction Act still would not authorize an injunction. That’s

because CFE took its claim

‐ preclusion argument to the state

court first. The state court ruled that preclusion does not ap

‐ ply to FirstMerit’s case, and federal courts must respect that

ruling.

In Parsons Steel, Inc. v. First Alabama Bank

, 474 U.S. 518

(1986), the Supreme Court examined the relitigation excep

‐

tion to the Anti

‐ Injunction Act in light of the Full Faith and

Credit Act, 28 U.S.C. § 1738. The Court held that when a

state court has rejected a claim preclusion or res judicata de

‐

fense based on a prior federal court judgment, then “the Full

Faith and Credit Act requires that federal courts give the

state

‐ court judgment, and particularly the state court’s reso

‐

lution of the res judicata issue, the same preclusive effect it

would have had in another court of the same State.” 474 U.S.

at 525.

In Ramsden

, this court applied Parsons Steel to interlocuto

‐

ry state

‐ court decisions like the one in this case. See 214 F.3dNo. 14

‐ 2554 9

at 870. We ruled that principles of comity confine a federal

court’s “discretion to enjoin state court proceedings once the

state court expressly and unambiguously decides a res judi

‐

cata defense, whether or not there has been a final judgment

on the entire claim in state court.” Id. In these circumstances,

“the interests in preventing possible relitigation

are

Y generally outweighed by the heightened comity con

‐

cerns except in the most extraordinary circumstances.” Id. at

871.

CFE presented its preclusion defenses to the state court

and lost there. Under the Full Faith and Credit Act, Parsons

Steel

, and Ramsden, the district court thus correctly refused to

enjoin FirstMerit’s litigation in state court. Even if CFE were

correct that the state court should have accepted its preclu

‐

sion defenses, once CFE lost in the state court, it had no rea

‐

sonable grounds to seek an injunction in federal court. Its

proper remedy was to appeal the decision in the state court

system and, if necessary, to seek review by the Supreme

Court of the United States. See Ramsden

, 214 F.3d at 872,

quoting Parsons Steel

, 474 U.S. at 525. For this additional rea

‐

son, we also affirm the judgment of the district court.

III. Sanctions Under Rule 38

FirstMerit has moved for sanctions. Its motion, filed after

briefing on the merits, relies on Federal Rule of Civil Proce

‐

dure 11 as the basis for sanctions. That was not correct. Sanc

‐

tions on appeal are governed by Federal Rule of Appellate

Procedure 38, not Rule 11. Cooter & Gell v. Hartmax Corp.

, 496

U.S. 384, 406–07 (1990). But the mistaken label does not mat

‐

ter. Rule 38 requires either a separate motion by the appellee

or notice from the court, as well as a reasonable opportunity

to respond. CFE received both. It responded to FirstMerit’s10 No. 14

‐ 2554

motion. While it noted that Rule 11 did not apply, it also re

‐ sponded in full to the substance of the motion, which we

have considered. Because CFE was not prejudiced by First

‐

Merit’s labeling mistake, we construe FirstMerit’s motion as a

request for sanctions under Rule 38.

Rule 38 authorizes a United States Court of Appeals to

award damages and single or double costs to an appellee

when an appeal is frivolous. The rule is meant to compen

‐

sate an appellee for “the expense and delay of defending

against a meritless appeal” and to deter future such ap

‐ peals—“protect[ing] the appellate court’s docket for cases

worthy of consideration.” Harris N.A. v. Hershey

, 711 F.3d

794, 801 (7th Cir. 2013). An appeal is frivolous “when the re

‐

sult is obvious or when the appellant’s argument is wholly

without merit.” Harris

, 711 F.3d at 801–02 (internal quotation

marks and citations omitted); see also Wachovia Securities,

LLC v. Loop Corp.

, 726 F.3d 899, 909 (7th Cir. 2013).

As we explained in Harris

, we do not invoke Rule 38

lightly. 711 F.3d at 801. The law often allows for reasonable

disagreements about its application to particular cases, and

too

‐ ready resort to Rule 38 sanctions could discourage par

‐

ties from presenting reasonable and good faith arguments.

Even with that caution, however, this appeal is clearly

frivolous. Under federal preclusion law, which borrows Illi

‐

nois principles, the voluntary dismissal of FirstMerit’s feder

‐

al case expressly “without prejudice” did not bar FirstMerit

from filing its claims anew in state court. And even if CFE

were correct that it did, once the state court ruled against

CFE on preclusion, an injunction from a federal court still

would have been out of the question. CFE did not bother to

discuss Illinois preclusion law in its briefs, nor did it addressNo. 14

‐ 2554 11

the complete bar to an injunction established by the Full

Faith and Credit Act, Parsons Steel

, and Ramsden

. CFE has not

offered a reasonable and good faith argument to avoid af

‐

firmance. This appeal is frivolous. 2

“When an appeal is frivolous, Rule 38 sanctions are not

mandatory but are left to the sound discretion of the court of

appeals.” Harris

, 711 F.3d at 802. The district court warned

CFE that it considered this new federal case to be “an unrea

‐

sonable and vexatious multiplication of proceedings already

pending in the state court.” Yet CFE has persisted in continu

‐ ing to litigate its preclusion defenses simultaneously in both

federal and state courts. CFE’s conduct flaunts the principles

of comity and federalism that animate both the Full Faith

and Credit Act and the Anti

‐ Injunction Act. See Parsons

, 474

U.S. at 523; Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive

Eng’rs

, 398 U.S. 281, 286 (1970); Ramsden

, 214 F.3d at 869. We

conclude that sanctions are appropriate to protect the inter

‐

ests of the courts, FirstMerit, and other litigants.

Accordingly, appellee FirstMerit Bank, N.A., may submit

any affidavit and supporting papers within 28 days after is

‐

suance of this opinion specifying its damages from this frivo

‐

lous appeal by CFE. CFE may file a written response no later

than 28 days after FirstMerit files its submission.

2 Also, many of the arguments in CFE’s brief are misleading. For ex

‐ ample, according to CFE, Semtek held that a complaint dismissed without

prejudice can be refiled only in the same court. But the sentence in Semtek

immediately following the one cited by CFE actually contradicts that

assertion. It explains that a dismissal without prejudice “will also ordi

‐ narily (though not always) have the consequence of not barring the claim

from other courts

... .” Semtek

, 531 U.S. at 505.12 No. 14

‐ 2554

The judgment of the district court is AFFIRMED, and

Rule 38 sanctions will be imposed under the schedule speci

‐

fied.