## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 11

- 1792 W I L L I A M G. N E L S ON, I V, Plai nt i f f

-Appe l l ant, v. D AVI D K. W EL CHa nd C RANE, H EY MAN, S I MO N , W EL CH & C LA R, D efend a nts-A pp ellees.

Appeal from the United States District Court fo r the N o rthernDi stricto f Illino is, Eas tern Div isi on. No . 1:07- cv-04825

—Robert W . G ettleman, Judge .
A RG UE D M AY 23, 2012

— D ECI DE D J UNE 29, 2012

Befo re E A S T E RB R OO K, C hief Ju dg e, an d R I PP LE a nd T INDER, C ircu it Judges. T INDER, C ircu it Judge. W i l l i a m G. Ne l s o n, a mi no r i ty sh ar eh o l dera nd maj or c r edi to r o fRe po si to r y Te ch

nol ogi es, Inc. ( “RTI” ) , bel i eve s that RTI ’ s m aj or i ty shar ehol ders and D avi d K

. W el ch an d h is l aw fi rm Crane, H eym an, Si m on, W elch & Clar (“ C H S W C ”), the law firm that hand l ed RTI’ s ba nkruptcy, u sed RTI ’ s ba nkruptcy2 N o. 11

- 1792 to l oo t RTI, m uch to hi s detr i m ent. N el son fi l ed a v ari ety of law su i ts t o r ec o ve r hi s l o ss es a nd mos t ha ve r un th eir cou rse. T h e su it at i ssu e in this ap p eal, N elson’s sui t a gainst W el ch and CH SW C, i s the l asto ne st anding. The t an g l ed hi st ory o fl i ti g at i o n b etwee n Nel so n a nd RTI, i ts m aj or i ty sh arehol ders, and i ts bankr up tcy l aw firm , C H SW C , i s d et aile d in a p re vio u s a p p ea l, In re R eposi tory Technolo gies, Inc. , 60 1 F
. 3d 710 ( 7th Ci r. 20 10) (“ R TI- 1 ”)
. The sho rtve rs i on, r ele va n t her e, i s a s fol l ows: I n 2 0 0 7, N e l s o n s u e d C HS WC ( a n d We l c h, b u tf o r s i mp licit y w e w ill re f e r t o th e d efe n d an ts co llec tiv ely as CH SW C) in sta te cour t al l eging tha t they ha d ( 1) co nspir ed w i th RTI ’ s m aj or i ty shar eh older s t o use RTI’s Chap ter11 bank ruptcy to enri ch them sel ves, ( 2) to rt i ousl y inter fer ed w i th RTI ’ s l oan contr act w i th N el son, and ( 3) abuse d the ba nkruptcy proce ss. Based on the abuse

- of

- proce ss c l ai m , the defe nd ants re m ove d to federa lcourt. In an at tem pt to ge t ba ck to sta te cour t, N elson a m en d ed his com p lai nt to om it the abu se-ofp rocess clai m . Th e tactic fail ed be cau se th e d istri ct cou rt ( J udg e Koc o r as ) c o nc l ude d tha t i t st i l lha d “ ar i singi n” j u r i s d i c t i o n : E v e n w i th o u th i s ab u s e - o f

- p r o c e s s c l a i m, a n d d e s p i t e th e i r s t a t e - l a w t i t l e s , N e l s o n ’ s c l a i ms “r ev olv e[d ] aro u n d h is a ss er tio n th at W elc h an d h is fi rm enga ged i n abuse ofbank ruptcy proce ss. ” R TI- 1 , 60 1 F.3 d at71 6 (q u ot in g t h e d ist ric t c ou rt ). T h e p osture ofthe case shi fted ag ai n w hen J ud ge K o c o r a s l e a r ne d tha t the b a nk r up t c y c o ur t s a i d that RTI’ s Chapter11 peti ti on was notfi l ed i n b ad f ai tha nd that the di str i ct c ourt(J ud ge St
. Eve) r epeate d that s tat e-N o. 11

- 1792 3

m ent in affi rm i ng the bank rup tcy cour t’ s j ud gm ent. Based on Ju d ge St
. Eve’ s a ffi rm ance, J ud ge K oco ra s concl ud ed that N el son’ s federa lcause of acti on ( w hatev er w as kee ping the s uiti n federa lco urt) was prec l ud ed and dism i ssed itwith pr ej ud i ce. CH SW C then m ove d to dism i ss N el son’ s e nti re co m pla i nt o n the m er i ts. D e s p i t e h i s e a r l i e r c o n c l u s i o n th a ta l lo fN e l s o n ’ s c l a i ms “r evo l ved ar ound” abuse ofthe b an kr up tcy proce ss, J ud ge K oco ra s deni ed the m oti on o n the theo rythat N el so n mi g hts ti l lha ve s ta te
- l aw c l ai m s o ut si de th e bankr up tcy conte xt. H e r em anded tho se cl aim s to sta te c o u r t
. C HS WC a p p e a l e d t h e r e ma n d a n d th a tb e c a me part ofthe appeal we’r e r efer ring to as R TI- 1
. RTI- 1 wa s a c o ns o l i da t e d a pp e a lfr o m RT I ’ s a dve rs ar y p ro c ee d in g ( w h ich so u gh t t o re c h ar ac te riz e N elso n’ s d e b ta s e q u i t y ) a n d th e d i s t r i c tc o u r t ’ s r e mand o r derin Nel so n’ s su it aga i ns t CH S W C. ( Again, f o r the fullst or y, se e R TI- 1 , 60 1 F
. 3d at 714- 17. ) Three r esul ts fr o m RTI

- 1 m att ernow. Fi rs t, bec ause RTI ha d no as set s an d h a d t e r mi n a t e d i t s b u s i n e s s , we c o n c l u d e d th a t th e advers ar y pr oc ee ding w as m oo t a nd vac ate d the j ud gm en ts be low

. Id. at7 18

- 19
. S ec o nd, we r ev er se d the d i s t r i c tc o u r t ’ s r e ma nd o fN e l s o n ’ s s t a t e - l a w c l a i ms . We too k thi s unusual st ep beca use even con stru ing th e com p lai nt in th e li gh t m ost favorabl e t o N el son, . . . al lo fthe a l l eg at i o ns s uppo r ting N el son’ s ci vi l conspi ra cy and t or ti ous i nter fer ence cl ai m s a re predi cate d on the defe nd ants’ part i ci pati on i n RTI’s b an kr up tcy case . Because these st ate
- l aw cl ai m s a re so enta ngl ed w i th N el son’ s federa labuse4 N o. 11

- 1792 of the ban krup tcy p rocess clai m , the d ist r ic t cou rt shoul d have r eta i ned supp l em entalj uri sd icti on ove r the e nti re l aw sui t. And ag ain: W e . . . ar e unabl e to di sc ern fr o m Nel so n’ s co m pl aint an y the ories ofl iab ili t y that do n ot rely on R T I ’s alle ge d ly im p ro p er ba n kr u p tc y filin g. Id. at72 7. T h ird, notwiths tandi ng the depend ence ofN el son’ s sta te
- l aw cl ai m s o n abuse ofthe bankrupt c y p ro cess , we hel d that di sm i ssa lwith pr ej ud i ce o f hi s abuse- of

- proce ss cl ai m di d not r equi re di sm i ssa lo f h is s ta te -law cla im s b ec au se “t h e d ist r i c t c ou rt ’s b as is f ordi sm i ssing the federa la b u se ofpro cess cl ai m was fl aw ed. ” Id. at 728. N el son, then, w as gi ven a nother opportunity t o prese nt hi s cl ai m s t o the di str i ct c ourt
. O n r e ma n d , c o n s i d e r i n gth e s a m e c o mpl a i n ta s we di d i n R TI- 1 , th e d ist ric t c ou rt(Ju d ge G et t l e m an , th is tim e) g ra n te d C H SW C ’s m ot ion to d ism iss . A s w e d id i n R TI- 1 , the dist ri ct c ourto b se rv ed thatN el son’ s s tat elaw clai m s are pred icated on his all eg a t io n th at R T I ’s b an k r upt c y fi l i n gwa s i mpr o p e ra n d h e r ej e c t e d , a s we did, N el son’ s ar gum ents that pre- an d p ost
- peti ti on conduct by CH SW C i nd epend entl y s up porthi s cl ai m s. Si m plyput, N elson’ s cl ai m s depend on the pla usibi l i ty ofhi s abuse- of

- proce ss al l ega ti on . B ut J ud ge Gettl em an s a w t w o r e a s o n s N e l s o n c o u l d n o ta s s e r ts t a t e - l a w c l a i ms that de pe nd o n ab us e o fp r o c e s s . T he fi r s twa s J ud ge K ocoras’ d ism issal w ith p rej ud ice ofN elson’s abu se-ofp ro c es s c laim . A s Ju d ge G et tle m an ex p lain ed :N o. 11

- 1792 5 It is t ru e t h at Ju d ge K o c o r a s ’ co n c lu sio n w as p re d icat ed on the pre cl usi ve effect ofJ ud ge St
. Eve’ s no w vacat ed affi rm ance of the bank ruptcy cour t, wh i ch wo ul d n o r mal l y s ug g e s ttha tJ ud g e Ko c o r a s ’ di sm i ssa ls h ou ld al so be v acat ed.

. . . The S eve nth Ci r cui t di d no t va ca te the di smi ss al, ho w eve r ( pl ainti ffdi d not fi l e a cr oss - appeal ) , an d [N elso n] has no t as ke d th is c ou rtto va c at e t h e d ism iss al on rem an d

. N ev er th el es s, b ec au se i n RTI

- 1 we i ns truct ed th e di s t r i c tc o ur tt o i gno r e the b a nk r up t c y c o ur t ’ s g o o dfait h find in g, Ju d ge G e tt lem an as su m ed th e u n c h allenged dis m issal w ith p rej ud ice ofN elson’s abu se-ofproce ss cl ai m w asn’ t f atal to hi s sta te- l aw cla i m s. J u d g e G e t t l e ma n we n t o n t o d i s mi s s Ne l s o n ’ s c o mpl aintwi th o utr elyi ng o n the v ac at ed g o o d- f ai thdi ctum b y f o c us i ngo n RT I ’ s pa r t i a ls uc c e s s i n the a dver sar y a cti on. A cco rd in g t o the di str i ct c ourt, that parti alsucce ss supp or ted a goo d-f ai th fi nd i ng and, ther efor e, th e d ism iss al of N els on ’s s u it. Responding to N el son’s R ule 59 ( e) m oti on, J ud ge Gettl em an deni ed that he i m proper l y r el i ed on J ud ge St
. Eve’ s v acat ed or de r. The f act that J ud ge St
. Eve’ s o rderwas vaca te d , he sai d, did notal terthe f acts on w hich the ba nk rup tcy c o urt and the d istri ct cou rt base d thei r deci si ons. J ud ge Gettl em an t hen m ade fre sh fi nd i n gs base d on “undis pu ted f acts ” a nd co ncl ud ed that parti alr echaracte ri zati on o fN el son’ s debtas eq uity w as p rop er an d t h at, therefore, the ad versary proce edi ng was part i al l y s uccess ful and the ba nkr upt cywas no t fi l ed i n b ad f ai th

.6 N o. 11

- 1792 N e l s o n a pp e a l s . Ou r r e v i e w i s de no v o a nd w e m ay aff i r m o n an y g ro u n d su p p or te d by th e re c or d

. R em et Corp
. v. Ci ty of

Chi cago , 509 F.3d 816 , 817 (7th C ir. 2007). H as the r eco rd devel oped orhas anythi ng o fl ega l s i g n i fi c a n c e h a p p e n e d s i n c e th e l a s ta p p e a l ? We re m anded , the dist ri ct c ourtdi sm i sse d N el son’ s ca se re l yi ng o n vaca ted o rder s, r eco nsi dere d, m ade fre sh fi nd i ngs, and dis m i sse d N el son’ s ca se aga i n. I t was, h ow ev er , clea rly im p ro p er for th e d ist ric t c ou rtto rely on va c at ed ord er s a n d t o m ak e fin d in gs as th e b as is f ordi sm i ssing a com pla i nt under Rul e 1 2( b ) ( 6)
. S i nce i t s eem s a s though al lthathappened on re m and w as er r o r, s et tingtho se e r r o r s as i de, i t l o o k s l i k e no th i ng ha ppen ed o n r emand ata l l

. And i fno th i ngs i g ni fi ca nt ha p p en ed , anot he r qu ick rem an d ( p e r h a p s to a differ en t j udg e) wou ld be a ppr o pr i at e. Butwe do n’ t th i nk that’ s the r i ght r esul t. O n e obvious w ay a case ad van ces is by a cou rt’s or ders, but that’ s no t the o nl y way, o fco urse . Cri ti cal he re (and also obviou s) i s tha t a pa rty’s conc ession or a party ’ s inacti on ca n change a ca se. A nd thati s what has happ en ed h ere. Consi der what N el son did notdo o n re m an d . N el son did notas k the di str i ct c ourtto vac ate J u d g e K o c o r a s ’ d i s mi s s a l o fh i s ab u s e - o f

- p r o c e s s c l a i m. N el son did notam end his co m p laint to al l ege so m ethingtha tdi d n o tde pe nd o n ab us e o fthe b a nkr upt cypr o ce ss . M o sti m po r tantl y, pe r ha ps, Nel so n c o nce des tha t hi s ab us e- of- p roce ss c l ai m i s g o ne a nd he concedes that if h is sta te- l aw cl ai m s turn o n abuse of th e b an kr u p tc y p r oc es s, th os e c laim s a re gon e t oo . W ell, w e h av e sai d that Nels on’ s s tat e- l aw cl ai m s ( unchangedN o. 11

- 1792 7 si nce R TI- 1 ) tur n on hi s abuse-of-p ro cess cl ai m s. W e’ ve sa i d i t r e pe a t e dl y ( a nd , f o r g o o d mea s ur e , s o di d J ud ge G e t t l e ma n )
. A n d th a tme a ns N e l s o n h a s n o g o o d c l a i ms a nd h i s c a s e mus tb e di s mi s s e d. I n R TI- 1 we concl ud ed that J ud ge K ocora s’ di sm i ssa l wi th p r ej u d i c e o fN e l s o n ’ s ab u s e - o f

- p r o c e s s c l a i m did not e n t a i ld i s mi s s a l ofNe l s o n ’ s s t a t e - l a w c l a i ms . No w w e thi nk i t doe s, but not because we’re r eve rs i ng o urse l ves. I t would have bee n i m p roper to dism i ss N el son’ s ca se inRTI-1 b ec au se i n RTI

- 1 w e m oo ted and vaca ted RTI’ s a dvers ar y c ase and, bydoi ng so , underm i ned J ud ge K oco ra s’ di sm i ssa lo fN el son’ s abuse- of

- proce ss claim

. A fter R TI-1, N el son coul d have m ove d t o vacat e t h a t d i s mi s s a l

. B u t h e d i d n ’ t a n d i t ’ s t o o l a t e n o w. I n s t e a d , Ne l s o n d o u b l e d

- d o wno n th e s a me c o mpl ai nt we s ai d de pen ded o n abuse ofpr o ce ss a nd ( ag ain) a r gue d tha t his st a t e - l a w c l a i ms t urn o n e v e nt s o ut s i de th e ba nk r upt cy. W e ex pl aine d i n g r ea t det ai li n R TI- 1 , 60 1 F
. 3d at725-2 7, why N el so n’ s pr e-a nd po st
- pet i ti o nconduct ar gum ent i s a l ose r and w e won’trep eat that disc ussi on her e. W h at ev er the basi s forJ ud ge K oco ra s’ di sm i ssa lo f N el son’ s abuse- of

- proce ss cl ai m , i ts precl usi ve effect has be com e a fi xed poi nt i n th i s ca se

—byNel so n’ s co nc es sio n s an d b y N els on ’s ina c tio n . N els on h as n o c l aim ag ains t CH S W C tha t d oes no t depe nd o n abus e o fthe ba nk r up tcy pr o ce ss . And tha t m ea ns Nel so n h as no go od cla im s a ga in st C H SW C
. A FFI RMED .
6- 29- 12