William Nelson, IV v. David Welch , 601 F.3d 710 ( 2010 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1342 & 08-1443
IN R E:
R EPOSITORY T ECHNOLOGIES, INC.,
Debtor-Appellee/Cross-Appellant.
A PPEAL OF:
W ILLIAM G. N ELSON, IV,
Appellant/Cross-Appellee.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 1857—Amy J. St. Eve, Judge.
No. 08-2164
W ILLIAM G. N ELSON, IV,
Plaintiff-Appellee,
v.
D AVID K. W ELCH AND C RANE, H EYMAN,
S IMON, W ELCH & C LAR,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 4825—Charles P. Kocoras, Judge.
A RGUED O CTOBER 30, 2008—D ECIDED A PRIL 12, 2010
2 Nos. 08-1342, 08-1443 & 08-2164
Before E ASTERBROOK, Chief Judge, and R IPPLE and
T INDER, Circuit Judges.
T INDER, Circuit Judge. This opinion addresses two
separate cases, each involving disputes surrounding the
bankruptcy of Repository Technologies, Inc. (“RTI”), a
now-defunct software company. The parties interested
in these disputes and their lawyers have been on a litiga-
tion death march since April 2006. They have passed
through a bankruptcy court, three federal district courts,
and two state courts (that we know of) before arriving
here. As one might expect from such a barrage of litiga-
tion, untangling and resolving the issues presented takes
some time and space, so bear with us.
Both cases require us to brave a hornet’s nest of juris-
dictional issues. In the In re RTI case, these issues turn out
to be dispositive, and we must dismiss this case as moot
based on the sale of RTI’s assets and termination of its
business. In contrast, federal jurisdiction exists over the
Nelson v. Welch & Crane, Heyman, Simon, Welch & Clar
(“CHSWC”) case, allowing us to address the merits of
whether the district court properly declined to exercise
supplemental jurisdiction over the state-law claims of
plaintiff William G. Nelson, IV following the dismissal of
Nelson’s only federal claim from the lawsuit. We con-
clude that Nelson’s federal and state-law claims are so
entangled that the district court should have retained
supplemental jurisdiction over the state-law claims. We
accordingly reverse and remand for the district court to
resolve Nelson’s entire lawsuit on the merits.
Nos. 08-1342, 08-1443 & 08-2164 3
I. Background
A. Facts
RTI marketed, supplied, and maintained software.
Unfortunately, RTI did not fare well in the midst of a
downturn in the software industry, reporting net losses
from 2000 to 2004. When it became clear that RTI’s ex-
isting credit line with its principal secured lender, West
Suburban Bank, was insufficient to meet its business
expenses, William G. Nelson, IV, a minority shareholder
and member of RTI’s Board since 1996, offered to finance
RTI’s operations. On August 30, 2002, RTI executed a
revolving credit note with Nelson providing for a maxi-
mum credit amount of $500,000, a 15% annual interest rate,
and monthly, interest-only payments until August 1, 2007,
when the entire balance was to become due. Nelson
simultaneously advanced $500,000 and obtained a
security interest in all of RTI’s assets, which he subordi-
nated to the Bank’s security interest. On December 19,
2003, RTI’s Board (with Nelson not participating) autho-
rized an increase in the Nelson credit line to $1.5 million.
The parties did not execute new loan documents or
security agreements in connection with this extension of
the credit line; however, RTI paid 15% interest on all of
Nelson’s additional advances in accordance with the
terms of the original note.
By May 28, 2004, Nelson had advanced approximately
$1.74 million to finance RTI’s operations. Nelson stopped
making advances at that time but also suspended RTI’s
obligations to pay interest, occasionally telling RTI’s
president, E. James Emerson, that he did not expect to
4 Nos. 08-1342, 08-1443 & 08-2164
be repaid until RTI “was no longer in trouble.” Ultimately,
however, Nelson took steps to call in his debt. On April 4,
2006, Nelson personally paid off the $126,484 balance
due on the Bank’s loan, elevating himself to RTI’s sole
secured creditor. On April 11, Nelson resigned as an RTI
director and sent Emerson a notice of default, which
demanded that RTI pay $509,687 in overdue interest
payments in order to avoid an “event of default.”
B. In re RTI, Nos. 08-1342 & 08-1443
RTI, unable to pay the interest due on Nelson’s loans and
hoping to delay a foreclosure action, filed for Chapter 11
reorganization on April 25, 2006. Nelson filed a proof of
a secured claim of $2.4 million, see 11 U.S.C. § 501(a),
representing the amount due on the loans made by
both Nelson and the Bank. RTI also filed an adversary
proceeding seeking to recharacterize Nelson’s debt as
equity and to subject Nelson’s interests in RTI to
equitable subordination, see id. § 510(c)(1).
The bankruptcy court conducted a trial and, on Feb-
ruary 13, 2007, entered a judgment in the adversary
proceeding that completely denied RTI’s claim for equita-
ble subordination of Nelson’s loans. The court did, how-
ever, recharacterize $240,000 of Nelson’s loans as equity,
$240,000 being the amount of Nelson’s $1.74 million in
total loans that exceeded the $1.5 million credit line
formally authorized by RTI’s Board. Taking into account
this partial recharacterization and subtracting the pay-
ments on Nelson’s loans already made by RTI, Nelson
was left with a secured claim of approximately
$1.8 million.
Nos. 08-1342, 08-1443 & 08-2164 5
In a separate order, the bankruptcy court dismissed the
bankruptcy case in light of RTI’s concession that, absent
full recharacterization and equitable subordination of
Nelson’s debt, RTI could not put forth a confirmable plan
for Chapter 11 reorganization. See id. § 1129(a)(7)(A)(ii)
(providing that the bankruptcy court may approve a
Chapter 11 reorganization plan only if “each holder of a
claim or interest [such as a secured creditor like Nelson] . . .
will receive or retain under the plan . . . property of a
value . . . that is not less than the amount that such
holder would so receive or retain” in a Chapter 7 liquida-
tion). That order, like the judgment in the adversary
proceeding, referred to the court’s “Findings of Fact and
Conclusions of Law,” in which the court rejected
Nelson’s argument to dismiss the bankruptcy case on
the alternative ground that RTI had filed in bad faith.
Specifically, the court determined that the “filing of this
bankruptcy was a rational reaction to Nelson’s actions,
and was partially successful. Therefore, the bankruptcy
filing cannot be held to be in bad faith.” In re Repository
Tech., Inc., 363 B.R. 868, 896 (Bankr. N.D. Ill. 2007).
Also on February 13, 2007, after the bankruptcy court
dismissed RTI’s case, Nelson filed a complaint in federal
district court before Judge Coar, seeking damages and
injunctive relief for RTI’s breach of its loan contract with
Nelson. The following day, at 9:15 a.m., the court granted
Nelson’s motion for a temporary restraining order (“TRO”)
freezing all of RTI’s assets pending the resolution of
Nelson’s contract claims. Just prior to that time, however,
RTI transferred approximately $100,000 to the law firm
of Crane, Heyman, Simon, Welch & Clar (“CHSWC”),
6 Nos. 08-1342, 08-1443 & 08-2164
which had represented RTI in the bankruptcy case. The
court also granted Nelson’s motion to appoint a receiver
to operate RTI’s business in order to protect Nelson’s
interest in RTI’s assets. On March 20, Nelson conducted
a Uniform Commercial Code (“U.C.C.”) sale of RTI’s
assets to himself as the successful bidder for $475,000,
and the receiver transferred RTI’s assets to Nelson. On
June 7, the court approved the receiver’s final report on
the sale and liquidation of RTI’s assets and, on
Nelson’s motion, dismissed Nelson’s remaining contract
claims without prejudice.
Meanwhile, Nelson had also appealed the bankruptcy
court’s judgment in the adversary proceeding to the
district court before Judge St. Eve, see 28 U.S.C. § 158(a),
who, on January 15, 2008, affirmed all of the bankruptcy
court’s factual findings and legal conclusions. In re Reposi-
tory Tech., Inc., 381 B.R. 852 (N.D. Ill. 2008). In particular,
the court denied Nelson’s motion to strike as dictum the
bankruptcy court’s finding that RTI had not filed for
bankruptcy in bad faith.
Nelson has appealed the district court’s judgment in
the adversary proceeding to this court, see 28 U.S.C.
§ 158(d), arguing that the bankruptcy court erred in
partially recharacterizing his loans as equity. Nelson
also urges this court to strike as dictum the bankruptcy
court’s statement that RTI did not file for bankruptcy
in bad faith. RTI has cross-appealed, arguing that the
bankruptcy court should have recharacterized all of
Nelson’s loans and equitably subordinated Nelson’s
interests in RTI.
Nos. 08-1342, 08-1443 & 08-2164 7
C. Nelson v. Welch & CHSWC, No. 08-2164
On July 11, 2007, Nelson filed a complaint in the Illinois
Circuit Court of Cook County against David K. Welch
and CHSWC (“defendants”), alleging that the defendants
had (1) conspired with RTI’s majority shareholders, E.
James and Kathleen Emerson, to use RTI’s Chapter 11
bankruptcy case to enrich themselves, (2) tortiously
interfered with RTI’s loan contract with Nelson, and
(3) abused the bankruptcy process. Seizing on the
federal abuse of the bankruptcy process claim, the defen-
dants removed the case to federal district court before
Judge Kocoras. See 28 U.S.C. § 1334(b) (granting district
courts “original but not exclusive jurisdiction of all civil
proceedings arising under title 11, or arising in or
related to cases under title 11”); id. § 1452(a) (providing
for the removal of a claim over which the “district court
has jurisdiction . . . under section 1334 of this title”).
Preferring to stay out of federal court, Nelson amended
his complaint to remove the allegation that the defen-
dants “abused the process of the Bankruptcy Court,” but
the district court nonetheless denied Nelson’s motion
to remand to state court for lack of federal jurisdiction.
The court concluded that it still had “arising in” jurisdic-
tion over the case under § 1334(b) because, even after
the formal deletion of the abuse of process count from
the complaint, Nelson’s claims “revolve[d] around his
assertion that Welch and his firm engaged in abuse
of bankruptcy process.”
While Nelson’s suit against Welch and his firm was
pending before Judge Kocoras, back in the bankruptcy
8 Nos. 08-1342, 08-1443 & 08-2164
case, Judge St. Eve had affirmed the bankruptcy court’s
finding that RTI had not filed its Chapter 11 petition in
bad faith. On February 8, 2008, Judge Kocoras concluded
that Judge St. Eve’s decision precluded Nelson’s abuse
of process claim and dismissed that claim with prejudice.
The defendants then moved to dismiss Nelson’s entire
complaint on the merits, citing to Judge Kocoras’s earlier
jurisdictional analysis that the complaint was based on
an abuse of the bankruptcy process. Curiously, though,
the judge determined that Nelson retained “state law
claims” that stemmed “from events that happened
outside the bankruptcy context” and relinquished sup-
plemental jurisdiction over those claims to the Illinois
Circuit Court. See 28 U.S.C. § 1367(c)(3).
The defendants have appealed the remand of Nelson’s
supplemental claims to state court. They argue that,
because the district court’s dismissal of Nelson’s abuse
of the bankruptcy process claim was dispositive of his
state-law claims, the court should have retained supple-
mental jurisdiction over the state-law claims in order to
dismiss them on the merits.
In the discussion that follows, we will address sepa-
rately the appeals from RTI’s adversary proceeding and
Nelson’s lawsuit against Welch and his firm.
II. Analysis: In re RTI, Nos. 08-1342 & 08-1443
A. Subject Matter Jurisdiction and Mootness
In In re RTI (the adversary proceeding), we begin and
end with federal subject matter jurisdiction and, specifi-
Nos. 08-1342, 08-1443 & 08-2164 9
cally, the issue of mootness. Article III of the Constitution
restricts federal courts to hearing “cases or controversies,”
a restriction that subsists through all stages of review.
Davis v. Fed. Election Comm’n, 128 S. Ct. 2759, 2768 (2008).
In order to maintain federal jurisdiction during an
appeal, the parties must continue to have a “personal
stake in the outcome.” Lewis v. Cont’l Bank Corp., 494 U.S.
472, 478 (1990) (citation omitted). If, by virtue of an inter-
vening event, the appellate court cannot grant “any
effectual relief whatever” for the appellant, the court
must dismiss the case as moot. Calderon v. Moore, 518
U.S. 149, 150 (1996) (per curiam) (citation omitted).
We conclude that the sale of RTI’s business assets
following the dismissal of its bankruptcy proceeding
mooted any actual controversy in this case. The issue
in these appeals is whether the bankruptcy court should
have recharacterized Nelson’s $1.74 million in loans as
equity. That issue was only relevant, however, to RTI’s
ability to reorganize under Chapter 11. As detailed in
the reorganization plan that RTI filed with the bank-
ruptcy court, the complete recharacterization and equi-
table subordination of Nelson’s debt was necessary in
order for RTI to put forth a confirmable plan in which
none of the creditors’ claims were “impaired.” See 11
U.S.C. § 1129(a)(8). Consequently, after refusing to fully
subordinate Nelson’s loans, the bankruptcy court dis-
missed the bankruptcy case based on RTI’s inability to
effectuate a reorganization plan. Yet now that RTI has
lost all of its assets at Nelson’s U.C.C. sale, it cannot
effectuate a reorganization plan regardless of how much
(if any) of Nelson’s debt the bankruptcy court should have
10 Nos. 08-1342, 08-1443 & 08-2164
recharacterized; RTI no longer has any business to reorga-
nize. Since the recharacterization issue was so inter-
twined with RTI’s Chapter 11 reorganization, the impossi-
bility of reorganization following the sale of RTI’s assets
moots this case. See Bevan v. Socal Cmmc’ns Sites, LLC (In re
Bevan), 327 F.3d 994, 996 (9th Cir. 2003) (“[I]f an issue is
closely connected to the reorganization process itself, it
will be mooted when the proceeding is dismissed.”); cf.
Belda v. Marshall, 416 F.3d 618, 620 (7th Cir. 2005) (finding
moot an appeal from the denial of a reorganization
plan based on the dismissal of the reorganization pro-
ceeding).
Even viewing the recharacterization issue presented by
this case apart from RTI’s reorganization proceeding, we
still conclude that the parties no longer retain the
required “personal interest” in the issue so as to avoid
mootness. Davis, 128 S. Ct. at 2768. In his appeal,
Nelson argues that the bankruptcy court erred in
recharacterizing $240,000 of his $1.74 million in loans as
equity. Given the results of Nelson’s U.C.C. sale of RTI’s
assets, this partial recharacterization was entirely inconse-
quential. After the sale of all of RTI’s assets, Nelson
recovered only $475,000, a fraction of his $1.8 million
secured debt claim against RTI recognized by the bank-
ruptcy court. Moreover, not only has RTI lost all of its
assets as a result of the sale, but it also has completely
terminated its business operations, meaning that RTI
has no prospects of future earnings that might further
satisfy Nelson’s debt. RTI’s corporate existence may be
intact, but it is a shell corporation with nothing but a
debt owed to Nelson to its name. Should RTI’s share-
Nos. 08-1342, 08-1443 & 08-2164 11
holders wish to reenter the software business, the likeli-
hood that they would do so through RTI is less than
remote, as their first nearly $1.8 million in new assets
would be subject to Nelson’s claim. Indeed, Nelson’s
counsel acknowledged at oral argument that RTI has no
“realistic possibility” of reconstituting its business,
making his case “economically moot.” The upshot is that
any opinion by this court addressing the bankruptcy
court’s $240,000 partial recharacterization of Nelson’s
debt would have no “practical impact.” Stotts v. Cmty. Unit
Sch. Dist. No. I, 230 F.3d 989, 991 (7th Cir. 2000).
RTI makes a slightly stronger effort than Nelson to
avoid mootness, asserting its interest in recovering the
business assets and customer contracts lost at Nelson’s
U.C.C. sale. RTI suggests that, if this court were to
reverse the bankruptcy court and completely wipe out
Nelson’s debt, RTI could retrieve the assets sold at Nel-
son’s U.C.C. sale and reinstate its business operations.
The problem with RTI’s suggested relief of undoing
Nelson’s sale is that we have no power to grant it. The
sale occurred during the district court proceedings
before Judge Coar, a separate case that RTI did not
appeal and that is therefore beyond our review. See York
Ctr. Park Dist. v. Krilich, 40 F.3d 205, 207 (7th Cir. 1994).
Further, nothing in the record indicates that RTI sought a
stay from the sale pending this appeal, and the failure
to obtain such a stay generally moots an appeal chal-
lenging a judicial sale. See FDIC v. Meyer, 781 F.2d 1260,
1264 (7th Cir. 1986). In light of the unstayed, unappealed
sale of RTI’s assets, our review of the bankruptcy court’s
recharacterization decision could not result in “any
12 Nos. 08-1342, 08-1443 & 08-2164
meaningful relief” for the parties. Dorel Juvenile Group, Inc.
v. DiMartinis, 495 F.3d 500, 503 (7th Cir. 2007). The inability
to provide such relief makes this case moot.
B. The Bankruptcy Court’s “Dictum”
We come, then, to what we view to be the real motiva-
tion for this appeal from the bankruptcy court’s decision.
Nelson challenges the court’s statement that RTI did not
file its Chapter 11 petition in bad faith. According to
Nelson, because the court dismissed the bankruptcy case
based on RTI’s inability to reorganize under Chapter 11,
rather than on a bad-faith petition, the court’s good-faith
statement was “dictum” that was not essential to the
outcome. See Tate v. Showboat Marina Casino P’ship, 431
F.3d 580, 582 (7th Cir. 2005). Nelson further urges us to
strike this dictum from the record, thereby hoping to
avoid the preclusive effect of the bankruptcy court’s
statement in yet another lawsuit against E. James and
Kathleen Emerson in Delaware state court. In that action,
the Delaware Chancery Court held that the bankruptcy
court’s good-faith finding, as affirmed by the district
court, precluded Nelson’s claim that the Emersons
breached their fiduciary duty to RTI by filing for bank-
ruptcy in bad faith. Nelson v. Emerson, C.A. No. 2937-VCS,
2008 WL 1961150, at *1-*2 (Del. Ch. May 6, 2008) (unpub-
lished).
Nelson is correct that the bankruptcy court’s statement
about RTI’s good faith was dictum. This language was
not “essential” to the outcome of dismissing RTI’s bank-
ruptcy case. Tate, 431 F.3d at 582. In fact, the court’s
Nos. 08-1342, 08-1443 & 08-2164 13
conclusion that RTI did not file for bankruptcy in bad
faith supports the exact opposite outcome, since a bad-
faith petition is one ground for dismissing a Chapter 11
case. See Fruehauf Corp. v. Jartran, Inc. (In re Jartran, Inc.),
886 F.2d 859, 867 (7th Cir. 1989).
Still, Nelson’s challenge to the bankruptcy court’s
dictum does not create a justiciable controversy because
“dicta are not appealable rulings.” Chathas v. Local 134
IBEW, 233 F.3d 508, 512 (2000); see also Abbs v. Sullivan, 963
F.2d 918, 924 (7th Cir. 1992) (“There is no known basis
for an appeal from a dictum.” (quotation omitted)). We
review “judgments,” not explanatory language in lower
court opinions. In re UAL Corp., 468 F.3d 444, 449
(7th Cir. 2006). The recharacterization and equitable sub-
ordination issues that were essential to the bankruptcy
court’s judgment are moot, and Nelson’s complaint
about the court’s good-faith dictum does not establish
federal jurisdiction. We will accordingly vacate the judg-
ment of the district court in the In re RTI adversary pro-
ceeding and remand with instructions to dismiss the
appeal from the bankruptcy court as moot.
III. Analysis: Nelson v. Welch & CHSWC, No. 08-2164
A. Jurisdiction
We now proceed to our discussion of the Nelson v.
Welch & CHSWC case. As with the In re RTI case, we
must first address the existence of federal jurisdiction. At
oral argument, we expressed concerns about both the
district court’s original jurisdiction and our appellate
14 Nos. 08-1342, 08-1443 & 08-2164
jurisdiction. We received supplemental briefing from
the parties, whose assistance we appreciate in resolving
these thorny jurisdictional issues.
With respect to appellate jurisdiction, we raised the
issue of whether 28 U.S.C. § 1447(d) bars appellate
review of a district court’s discretionary decision to
remand state-law claims under § 1367(c). The Supreme
Court has recently resolved this issue, holding that such
discretionary remands are not based on a “lack of subject
matter jurisdiction” within the meaning of § 1447(c), (d),
Carlsbad Tech., Inc. v. HIF Bio, Inc., 129 S. Ct. 1862, 1866
(2009), so our appellate jurisdiction is secure. The issues
of original subject matter jurisdiction, however, are more
complicated.
The defendants sought to remove Nelson’s action to
federal court on the alternative grounds that the action
(1) fell within the district court’s bankruptcy jurisdic-
tion under 28 U.S.C. § 1334(b); (2) fell within the court’s
diversity jurisdiction under 28 U.S.C. § 1332(a); and
(3) was completely preempted by the Bankruptcy Code. In
denying Nelson’s motion to remand to the Illinois state
court, the district court relied on the first ground, con-
cluding that Nelson’s case was one “arising in” bank-
ruptcy. 28 U.S.C. § 1334(b). In light of that conclusion, the
court did not address whether complete preemption
provided an alternative basis for removal. The court
also had no need to discuss diversity jurisdiction
because the defendants had conceded that, under the
“forum defendant rule” of 28 U.S.C. § 1441(b), removal
based on diversity was not available since Nelson had
Nos. 08-1342, 08-1443 & 08-2164 15
sued the defendants in the state of their own citizenship,
Illinois.
The parties do not challenge the district court’s finding
that it had original, “arising in” jurisdiction over
Nelson’s abuse of the bankruptcy process claim, but we
have an “independent obligation” to verify the court’s
subject matter jurisdiction. Smith v. Am. Gen. Life &
Accident Ins. Co., 337 F.3d 888, 892 (7th Cir. 2003).
District courts have “original but not exclusive juris-
diction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11.” 28 U.S.C.
§ 1334(b). Proceedings “arising in” bankruptcy are “ad-
ministrative matters that arise only in bankruptcy cases.”
CLC Creditors’ Grantor Trust v. Sonnenschein Nath &
Rosenthal LLP (In re Commercial Loan Corp.), 363 B.R. 559,
565 (Bankr. N.D. Ill. 2007) (quoting Wood v. Wood (In re
Wood), 825 F.2d 90, 97 (5th Cir. 1987)). Unlike claims
“arising under” title 11, which depend on a right “created
or determined by a statutory provision of title 11,” id.,claims “arising in” bankruptcy include “such things
as administrative matters, orders to turn over property
of the estate and determinations of the validity, extent,
or priority of liens,” 1 Collier on Bankruptcy ¶ 3.01[4][c][iv]
at 3-27 (15th ed. rev. 2008) (quotations omitted). A pro-
ceeding “arises in” bankruptcy only if it has “no existence
outside of the bankruptcy.” Stoe v. Flaherty, 436 F.3d
209, 216 (3d Cir. 2006).
In recognizing its jurisdiction over Nelson’s case, the
district court reasoned that Nelson’s amended com-
plaint, though based on state-law theories of civil con-
16 Nos. 08-1342, 08-1443 & 08-2164
spiracy and tortious interference with a contract, focused
on “the bankruptcy action and conduct within it.” The
court was unimpressed with Nelson’s attempt to avoid
federal jurisdiction by deleting the abuse of the bank-
ruptcy process count from his original complaint, since
even the civil conspiracy and tortious interference
counts left in Nelson’s amended complaint “revolve[d]
around his assertion that Welch and his firm engaged in
abuse of bankruptcy process.” Because Nelson’s claim of
“a fraudulent or abusive bankruptcy filing . . . can only
occur in the context of the bankruptcy case,” the court
concluded that the case fell within its “arising in” jurisdic-
tion.
Based on our review of the amended complaint, we
agree with the district court that Nelson’s lawsuit is
predicated on the defendants’ participation in RTI’s
bankruptcy proceeding. The complaint charges that
Welch and his law firm assisted RTI’s majority share-
holders, the Emersons, in breaching their fiduciary
duties to RTI’s shareholders and creditors by causing
RTI to file for bankruptcy. The defendants allegedly
knew that the bankruptcy case served the improper
purpose of enriching the Emersons at RTI’s expense, yet
still agreed to act as RTI’s bankruptcy counsel and file
a frivolous Chapter 11 reorganization plan. Part of the
damages that Nelson claimed were the legal fees incurred
in litigating RTI’s bankruptcy case. Nelson further alleged
that the defendants waited until the dismissal of the
bankruptcy case to transfer $100,000 in undeserved
legal fees from RTI to themselves, thereby “momentarily
evad[ing]” the bankruptcy court’s jurisdiction. This charge
Nos. 08-1342, 08-1443 & 08-2164 17
resembles a claim that RTI compensated its counsel with-
out the requisite approval from the bankruptcy court. See
11 U.S.C. § 330(a)(1)(A) (authorizing the award of “reason-
able compensation” to an attorney employed by a debtor-
in-possession); Fed. R. Bankr. P. 2016(a) (requiring an ap-
plication to the bankruptcy court before the award
of compensation); In re McDonald Bros. Constr., Inc., 114
B.R. 989, 993 (Bankr. N.D. Ill. 1990) (concluding that a pro-
ceeding “dealing with proper treatment of funds received
by debtor’s counsel ‘arises in’ the debtor’s bankruptcy
case”). These allegations make clear that Nelson’s claims
arise out of the defendants’ conduct in RTI’s bankruptcy
case. Because such claims could not “have been the
subject of a lawsuit absent the filing of a bankruptcy
case,” 1 Collier ¶ 3.01[4][c][iv] at 3-27, the district court
correctly recognized its “arising in” jurisdiction.
True, several of Nelson’s allegations concern the defen-
dants’ conduct before the official commencement of
RTI’s bankruptcy case. Rather than focusing on events
after RTI’s bankruptcy petition, these allegations main-
tain that Welch and his firm agreed beforehand to file
the petition for the unlawful purpose of enriching the
Emersons. This focus on the defendants’ pre-petition acts
distinguishes Nelson’s claims from charges of attorney
misconduct in handling an otherwise lawful bankruptcy
case. See Lowenbraun v. Canary (In re Lowenbraun), 453
F.3d 314, 319-21 (6th Cir. 2006) (finding jurisdiction over
a debtor’s wife’s state-law claims of slander, libel, and
abuse of process arising out of statements made by the
trustee’s attorney in moving to hold the wife in con-
tempt for violating a settlement agreement); Mourad v.
18 Nos. 08-1342, 08-1443 & 08-2164
Farrell (In re V & M Mgmt., Inc.), 321 F.3d 6, 7-8 (1st Cir.
2003) (per curiam) (concluding that a debtor’s share-
holder’s claims of fraud, professional malpractice, and
breach of fiduciary duty against the debtor’s bankruptcy
counsel “wholly [arose] out of the trustee and counsel’s
performance of their duties . . . after the petition for
bankruptcy was filed” and therefore fell within the bank-
ruptcy court’s jurisdiction under § 1334(b)); Southmark
Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163
F.3d 925, 930-31 (5th Cir. 1999) (finding jurisdiction
over state-law malpractice claims against court-appointed
accountants in a Chapter 11 case); Lorence v. Does 1 Through
50 (In re Diversified Contract Servs.), 167 B.R. 591, 595 (Bankr.
N.D. Cal. 1994) (recognizing “arising in” jurisdiction
over claims brought by the trustee against the debtor’s
counsel for slander, libel, and tortious interference
based on counsel’s representations that the trustee was
abusing her position for personal gain).
Nevertheless, we do not think that these pre-petition
aspects of Nelson’s complaint deprive the district court of
“arising in” jurisdiction. The defendants in this case did
not play some incidental role in RTI’s bankruptcy; these
lawyers served as RTI’s bankruptcy counsel and fully
litigated the Chapter 11 proceedings. Cf. Commercial Loan
Corp., 363 B.R. at 564-65 (finding no jurisdiction over a
claim against the debtor’s outside, non-bankruptcy
counsel for assisting the debtor in unsavory loan transac-
tions that led to bankruptcy); Artra Group, Inc. v. Salomon
Bros. Holding Co. (In re Emerald Acquisition Corp.), 170 B.R.
632, 642-43 (Bankr. N.D. Ill. 1994) (remanding state-law
claims arising out of pre-bankruptcy transactions). And as
Nos. 08-1342, 08-1443 & 08-2164 19
our review of Nelson’s complaint makes clear, the defen-
dants’ pre-petition conduct is “inextricably bound to the
bankruptcy proceeding” and Nelson’s claim of abuse of the
bankruptcy process. Lowenbraun, 453 F.3d at 321. Because
Nelson’s lawsuit is based on the defendants’ role as
bankruptcy counsel, recognizing these lawyers’ right to
remove the case to federal court is consistent with Con-
gress’s broad grant of federal jurisdiction over bankruptcy
matters. Simmons v. Johnson, Curney & Fields, P.C. (In re
Simmons), 205 B.R. 834, 841 (Bankr. W.D. Tex. 1997) (recog-
nizing “arising in” jurisdiction over claims against the
debtor’s counsel for advice concerning the bankruptcy
case); see also Southmark, 163 F.3d at 931 (emphasizing
the need for bankruptcy courts to have the power to
police court-appointed professionals); cf. MSR Explora-
tion, Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 915 (9th Cir.
1996) (in addressing whether the Bankruptcy Code pre-
empted a state-law action against a creditor, stating that
“Congress wished to leave the regulation of parties before
the bankruptcy court in the hands of the federal courts”).
Having concluded that the district court had original,
“arising in” jurisdiction over Nelson’s abuse of the bank-
ruptcy process claim, the next question is whether the
court erred in remanding Nelson’s supplemental state-
law claims under 28 U.S.C. § 1367(c). But this question
comes with its own slew of jurisdictional obstacles. The
district court’s remand of Nelson’s claims not “arising
in” bankruptcy would be improper if the court had some
other basis of original jurisdiction over those claims. See
Baker v. Kingsley, 387 F.3d 649, 656-57 (7th Cir. 2004) (noting
that a district court would abuse its discretion under
20 Nos. 08-1342, 08-1443 & 08-2164
§ 1367(c) by remanding a state-law claim that was com-
pletely preempted by federal labor law and therefore
within the court’s original jurisdiction); Adkins v. Ill. Cent.
R.R. Co., 326 F.3d 828, 847 (7th Cir. 2003) (Ripple, J.,
dissenting) (“The power to remand [under § 1367(c)] . . .
does not extend to claims over which the district court
has original jurisdiction.”). In this case, the defendants’
notice of removal cited two such alternative bases of
original jurisdiction—diversity jurisdiction under 28
U.S.C. § 1332(a) and complete preemption.
As for diversity jurisdiction, Nelson correctly argued
to the district court that the “forum defendant rule” of
§ 1441(b) prevented the defendants from removing his
action to federal court based on diversity of citizenship.
Under that rule, unless the basis for original jurisdiction
is a claim “arising under” federal law, removal is possible
only if none of the defendants “is a citizen of the State
in which [the] action is brought.” 28 U.S.C. § 1441(b).
Because Nelson sued Welch and his firm in their home
state of Illinois, the defendants could not remove
Nelson’s state-law claims under § 1441 even though the
parties were diverse.
However, we have held that the forum defendant rule is
non-jurisdictional, meaning that the rule does not divest
the district court of jurisdiction over claims improperly
removed by a forum defendant so long as complete
diversity exists at the time of judgment. Hurley v. Motor
Coach Indus. Inc., 222 F.3d 377, 379-80 (7th Cir. 2000). Thus
this case raises the interesting question of whether the
forum defendant rule permits a district court to remand
Nos. 08-1342, 08-1443 & 08-2164 21
supplemental state-law claims under § 1367(c), notwith-
standing the existence of complete diversity, where (1) the
defendant properly removed the action based on a non-
diversity ground of original jurisdiction that has fallen
out of the case, and (2) the plaintiff has preserved his
objection to removal based on the forum defendant rule
(as has Nelson in this case). See Trask v. Kasenetz, 818
F. Supp. 39, 45 (E.D.N.Y. 1993) (remanding to state court
after the dismissal of federal claims based on the “under-
lying logic” of the forum defendant rule, which is to
protect the plaintiff’s choice of forum subject to pro-
tecting the defendant against the feared favoritism of the
plaintiff’s home state); cf. Woods v. Sw. Airlines, Co., 523 F.
Supp. 2d 812, 820 & n.2 (N.D. Ill. 2007) (retaining supple-
mental jurisdiction over a state-law claim on the ground
that a plaintiff forfeits the forum defendant rule by
failing to invoke it within thirty days of removal, as
required by 28 U.S.C. § 1447(c)).
We will not resolve this question today, since the defen-
dants never argued to the district court that the existence
of original, diversity jurisdiction prevented the court
from remanding Nelson’s state-law claims under § 1367(c).
Because “the party asserting a right to a federal forum
has the burden of proof,” Craig v. Ontario Corp., 543
F.3d 872, 876 (7th Cir. 2008), the defendants have forfeited
any benefit from the district court’s original diversity
jurisdiction.
The defendants have, however, preserved their argu-
ment that the district court had original jurisdiction over
all of Nelson’s claims based on the Bankruptcy Code’s
22 Nos. 08-1342, 08-1443 & 08-2164
complete preemption of those claims. The district court,
after determining that it had “arising in” jurisdiction over
Nelson’s abuse of process claim, declined to consider
the defendants’ complete preemption argument. But as
we have explained, remanding Nelson’s state-law
claims not “arising in” bankruptcy would be error if the
doctrine of complete preemption gave the court original
jurisdiction over those claims. See Baker, 387 F.3d at 656-57.
Complete preemption “confers exclusive federal juris-
diction in certain instances where Congress intended the
scope of a federal law to be so broad as to entirely replace
any state-law claim.” Franciscan Skemp Healthcare, Inc. v.
Cent. States Joint Bd. Health & Welfare Trust Fund, 538
F.3d 594, 596 (7th Cir. 2008). Under this jurisdictional
doctrine, certain federal statutes have such “extraordinary
pre-emptive power” that they “convert[ ] an ordinary
state common law complaint into one stating a federal
claim.” Id. (quoting Aetna Health Inc. v. Davila, 542 U.S. 200,
209 (2004)). Complete preemption, therefore, creates an
exception to the rule that courts look only to the plain-
tiff’s well-pleaded complaint to determine whether
federal jurisdiction exists. If the complaint pleads a state-
law claim that is completely preempted by federal law,
the claim is removable to federal court. Id. at 596-97.
The Supreme Court has recognized only three federal
statutes that completely preempt analogous state-law
actions: § 301 of the Labor Management Relations Act,
§ 502(a) of the Employee Retirement Income Security
Act, and §§ 85-86 of the National Bank Act. See Beneficial
Nat’l Bank v. Anderson, 539 U.S. 1, 7-11 (2003). We have
Nos. 08-1342, 08-1443 & 08-2164 23
likewise recognized the narrowness of the doctrine,
applying complete preemption only where “Congress
clearly intended completely to replace state law with
federal law and create a federal forum.” Adkins, 326 F.3d at
835 (quotation omitted). A prerequisite to complete
preemption is identifying a federal cause of action that
“includes the same ingredients as the state claim and
provides some recovery.” Id. (quotation omitted).
Examining the interplay between the Bankruptcy Code
and Nelson’s state-law claims of civil conspiracy and
tortious interference, we cannot identify any Code provi-
sion that provides an “exclusive cause of action” for
the defendants’ alleged filing for bankruptcy for the
unlawful purpose of enriching themselves. Beneficial Nat’l
Bank, 539 U.S. at 8. This lack of an express federal
remedy indicates that Nelson’s state-law claims are not
completely preempted. See Nelson v. Stewart, 422 F.3d 463,
474 (7th Cir. 2005) (finding that a Code provision that
designated a representative for the debtor’s retirees in
Chapter 11 proceedings, but that did not “purport to
provide any federal cause of action for inadequate repre-
sentation,” did not completely preempt the retirees’ state-
law claims for unfair representation); Adkins, 326 F.3d
at 835 (noting the absence of a federal cause of action
under the Locomotive Inspection Act that would com-
pletely preempt the state tort claims of victims of a train
collision).
We do not deny that the bankruptcy statutes have
significant preemptive force. As explained by the Ninth
Circuit, “the complex, detailed, and comprehensive
24 Nos. 08-1342, 08-1443 & 08-2164
provisions of the lengthy Bankruptcy Code . . . demon-
strate[ ] Congress’s intent to create a whole system under
federal control which is designed to bring together and
adjust all of the rights and duties of creditors and embar-
rassed debtors alike.” MSR, 74 F.3d at 914. If this case
were tried in state court, the defendants might argue
that Nelson’s state-law claims are preempted by “the
number of remedies” provided by the Code “to preclude
the misuse of the bankruptcy process.” Id. at 915 (con-
cluding that a state-law action for malicious prosecution
arising out of a creditor’s filing of claims was preempted);
see also Knox v. Sunstar Acceptance Corp. (In re Knox), 237
B.R. 687, 702 (Bankr. N.D. Ill. 1999) (finding preemption
of state-law claims based on “violations of the Bank-
ruptcy Code for which the Code itself and Rules provide
other remedies”). Such a “conflict preemption” argument,
however, is merely a federal defense that the defendants
may present to the state courts in favor of dismissal.
Franciscan Skemp, 538 F.3d at 601; see also Nelson, 422 F.3d at
475 (commenting that, while a bankruptcy statute’s
preemptive force was not so powerful to completely
preempt the area, “viable defenses based on federal law,
including [the statute], may well preempt otherwise valid
state-law based causes of action”). Absent complete
preemption, a defense that relies on “the pre-emptive
effect of a federal statute” does not provide a basis for
removal. Beneficial Nat’l Bank, 539 U.S. at 6. Because Nel-
son’s civil conspiracy and tortious interference claims
are not completely preempted by any bankruptcy law, the
district court did not have original jurisdiction over
those claims and, accordingly, had discretion to remand
the claims under § 1367(c).
Nos. 08-1342, 08-1443 & 08-2164 25
We acknowledge Miles v. Okun (In re Miles), 430 F.3d
1083, 1086 (9th Cir. 2005), in which the Ninth Circuit held
that state-law abuse of process claims arising out of credi-
tors’ filing of bad-faith, involuntary bankruptcy petitions
were completely preempted and therefore removable to
federal court. Cf. MSR, 74 F.3d at 916 (holding that a
malicious prosecution action originally filed in federal
court was “completely preempted by the structure and
purpose of the Bankruptcy Code”). Relying on the
rationale of MSR, the court in Miles reasoned that Congress
intended 11 U.S.C. § 303(i), which authorizes damages
against creditors who file involuntary petitions in bad
faith, to be the “exclusive cause of action for damages
predicated upon the filing of an involuntary bankruptcy
petition.” Miles, 430 F.3d at 1091.
Even if we were to agree with the Ninth Circuit’s rea-
soning in Miles, the differences between the claims in
that case and Nelson’s claims illustrate that the Ninth
Circuit’s complete preemption analysis does not apply.
Because the state-law claims in Miles were based on
improper involuntary petitions, the court looked to
§ 303(i), which the court described as “comprehensive in
that it specifically addresses the full range of remedies,
from costs and attorneys’ fees for dismissed involuntary
petitions to compensatory and punitive damages for
involuntary petitions filed in bad faith.” Id. at 1090. The
Code does not provide such comprehensive, express
remedies for a creditor like Nelson allegedly harmed by
a debtor’s abusive, voluntary bankruptcy petition. On
the contrary, 11 U.S.C. § 301, which authorizes debtors
to commence a “voluntary case” by filing a petition,
26 Nos. 08-1342, 08-1443 & 08-2164
contains no damages provision analogous to that provided
by § 303(i) for involuntary cases.
B. Remand Under § 1367(c)
We reach, at last, the merits of the defendants’ challenge
to the district court’s discretionary remand of Nelson’s
supplemental claims. The supplemental jurisdiction
statute provides that a district court “may” decline to
exercise jurisdiction over supplemental state-law claims
for several enumerated reasons, including where “the
district court has dismissed all claims over which it
has original jurisdiction.” 28 U.S.C. § 1367(c)(3). The
statute codifies the judicially developed discretionary
approach for remanding state-law claims after the
federal claims drop out of the lawsuit. See Carnegie-
Mellon Univ. v. Cohill, 484 U.S. 343, 350 & n.7 (1988).
Correspondingly, we review the district court’s refusal
to exercise supplemental jurisdiction for an abuse of
discretion. Montaño v. City of Chicago, 375 F.3d 593, 601
(7th Cir. 2004) (citing Groce v. Eli Lilly & Co., 193 F.3d
496, 499-500 (7th Cir. 1999)). We ordinarily will not
disturb the district court’s remand of supplemental
claims if the court explains that it is relying on one of
the factors enumerated in § 1367(c). Cf. id. (finding an
abuse of discretion where the district court “offered
no explanation” for its remand order). In addition to
those statutory factors, the court “should consider and
weigh in each case, and at every stage of the litigation, the
values of judicial economy, convenience, fairness, and
comity.” City of Chicago v. Int’l Coll. of Surgeons, 522 U.S.
Nos. 08-1342, 08-1443 & 08-2164 27
156, 173 (1997) (quoting Cohill, 484 U.S. at 350). Based on
these values, in cases such as this one where the
district court disposes of the federal claims before trial,
we will reverse the court’s decision to relinquish sup-
plemental jurisdiction over state-law claims “only in
extraordinary circumstances.” Contreras v. Suncast Corp.,
237 F.3d 756, 766 (7th Cir. 2001); see also Groce, 193 F.3d
at 501 (“[I]t is the well-established law of this circuit
that the usual practice is to dismiss without prejudice
state supplemental claims whenever all federal claims
have been dismissed prior to trial.”).
However, even where the district court has dismissed
all of the federal claims over which it has original juris-
diction, the court’s discretion to remand supplemental
state-law claims is not absolute. We have stated that if a
district court’s pre-trial disposition of a federal claim
would have “preclusive effect” on the supplemental state-
law claims, Miller Aviation v. Milwaukee County Bd. of
Supervisors, 273 F.3d 722, 731 (7th Cir. 2001), or if the
supplemental and federal claims “are so entangled” that
“the rejection of the latter probably entails rejection of the
former,” Coe v. County of Cook, 162 F.3d 491, 496 (7th Cir.
1998), the court should retain supplemental jurisdiction.
That is because “when a state-law claim is clearly without
merit, it invades no state interest—on the contrary, it
spares overburdened state courts additional work that
they do not want or need—for the federal court to
dismiss the claim on the merits rather than invite a
further, and futile, round of litigation in the state
courts.” Id.28 Nos. 08-1342, 08-1443 & 08-2164
The “entanglement” between Nelson’s state-law claims
and the dismissed abuse of the bankruptcy process
claim is substantial. As discussed above in our jurisdic-
tional analysis, Nelson’s amended complaint, though
based on state-law theories of civil conspiracy and
tortious interference with a contract, focused on the de-
fendants’ alleged abuse of the bankruptcy process. The
complaint alleges that the Emersons, “acting in concert”
with Welch and CHSWC, breached their fiduciary duties
as RTI’s directors by filing a Chapter 11 case that they
knew would diminish RTI’s value. The complaint contin-
ues that Welch and CHSWC “acted as RTI’s general
bankruptcy counsel” and agreed with the Emersons to
file for Chapter 11 “for an unlawful purpose.” In charging
civil conspiracy, the complaint alleges that the defendants
knew that the bankruptcy filing was “improper” and “a
means to achieve an unlawful goal, being the enrich-
ment of the Emersons and CHSWC at the expense of
RTI.” In charging tortious interference, the complaint
accuses the defendants of entering into the same civil
conspiracy to “achieve the unlawful goal of inducing RTI
to breach its loan contract with Nelson.”
In denying Nelson’s motion to remand the case to the
Illinois Circuit Court for lack of subject matter jurisdic-
tion, Judge Kocoras apparently recognized this entangle-
ment between Nelson’s state-law claims and his abuse
of process claim. Although Nelson had dropped the
specific abuse of process claim from his original com-
plaint, the judge reasoned that the civil conspiracy and
tortious interference claims left in Nelson’s amended
Nos. 08-1342, 08-1443 & 08-2164 29
complaint “revolve[d] around his assertion that Welch
and his firm engaged in abuse of bankruptcy process.”
Given this observation about the overlap between
Nelson’s federal and state-law claims, we might expect
that the judge would favor resolving all of Nelson’s
claims in federal court. However, after dismissing
Nelson’s abuse of process claim based on Judge St. Eve’s
finding that RTI filed for bankruptcy in good faith,
Judge Kocoras purported to remand to the Illinois Circuit
Court Nelson’s remaining claims that “stem from events
that happened outside the bankruptcy context.”
We are uncertain what specific “claims” outside the
bankruptcy context the judge thought remained viable
following the dismissal of Nelson’s abuse of process
claim. Based on our review of the amended complaint,
all of the allegations supporting Nelson’s theories of
civil conspiracy and tortious interference are predicated
on the defendants’ participation in RTI’s bankruptcy case.
Civil conspiracy consists of an agreement to accomplish
an unlawful purpose and “an overt act in furtherance
of the conspiracy” that is “tortious or unlawful in charac-
ter.” Adcock v. Brakegate, Ltd., 645 N.E.2d 888, 894 (Ill.
1994). Here, the defendants’ alleged “overt acts” in further-
ance of the conspiracy to enrich themselves at RTI’s
expense include meeting with the Emersons and dis-
cussing RTI’s finances, filing an adversary proceeding
against Nelson in the Chapter 11 case, filing a frivolous
plan of reorganization, and diverting unearned funds to
Welch and his firm. We do not see how these acts are
separable from the bankruptcy context.
30 Nos. 08-1342, 08-1443 & 08-2164
As for the tortious interference claim, that count of
Nelson’s amended complaint relies on the allegation
that the defendants entered into the “hereinbefore alleged”
civil conspiracy to achieve “the unlawful goal of inducing
RTI to breach its loan contract with Nelson.” But as we
have discussed, the alleged civil conspiracy depends on
acts associated with preparing and litigating RTI’s bank-
ruptcy case. Again, this claim is inextricably bound to
Nelson’s claim that Welch and his law firm abused the
bankruptcy process.
Nelson insists that his complaint spells out viable
claims based on conduct outside the bankruptcy context.
According to Nelson, he has properly alleged that the
defendants assisted the Emersons in using RTI’s funds
for their personal enrichment through methods that
included, but were not limited to, an improper bank-
ruptcy filing. However, our review of the complaint
indicates that even those allegations describing conduct
that occurred outside the official time frame of RTI’s
bankruptcy case are predicated on the defendants’ role
as bankruptcy counsel.
The complaint alleges that the first period of association
between the Emersons and the defendants was April 11 to
April 25, 2006, which were the two dates when Nelson
served RTI with a notice of default and RTI filed for
bankruptcy, respectively. During this two-week pre-
petition time period, any bankruptcy counsel would
review the debtor’s finances in preparation for a
Chapter 11 proceeding. Thus the complaint’s suggestion
that the defendants’ correspondence with Nelson in
Nos. 08-1342, 08-1443 & 08-2164 31
“April 2006” was “well prior to the filing of the Chapter 11
case” is incredible.
The complaint also alleges that, both before and after
the Chapter 11 case, the defendants entered into agree-
ments with the Emersons to receive RTI funds that they
did not deserve “inasmuch as Welch and CHSWC pro-
vided no legal representation to RTI,” but rather “under-
took to represent the interests of the Emersons.” How-
ever, those agreements would be unlawful only if
Welch and his firm used the bankruptcy purpose for the
improper purpose of self-enrichment, rather than the
proper purpose of advancing RTI’s interests. The defen-
dants’ alleged misconduct is inseparable from the bank-
ruptcy context.
Finally, the complaint charges that, immediately after
the dismissal of the bankruptcy case, the Emersons,
“acting in concert” with the defendants, caused RTI to
transfer $100,000 to Welch and his law firm—money that
was undeserved because the defendants had not repre-
sented RTI’s interests in the bankruptcy proceeding. The
complaint further alleges that the defendants seized on
the one-hour banking period between the dismissal of
the bankruptcy case and the entry of the TRO in
Nelson’s subsequent breach of contract action to
effectuate the transfer. Paying bankruptcy counsel upon
the dismissal of the case is hardly conduct that occurs
outside the bankruptcy context. And while the com-
plaint suggests that the transfer was inconsistent with
the spirit of the TRO, there is no allegation that the defen-
dants actually violated any court order.
32 Nos. 08-1342, 08-1443 & 08-2164
In sum, even construing the complaint in the light most
favorable to Nelson, see Tamayo v. Blagojevich, 526 F.3d
1074, 1081 (7th Cir. 2008), all of the allegations sup-
porting Nelson’s civil conspiracy and tortious inter-
ference claims are predicated on the defendants’ participa-
tion in RTI’s bankruptcy case. Because these state-law
claims are so entangled with Nelson’s federal abuse of
the bankruptcy process claim, the district court should
have retained supplemental jurisdiction over the entire
lawsuit. See Coe, 162 F.3d at 496.
We acknowledge the general rule, rooted in concerns
of judicial economy and comity, that “when all fed-
eral-law claims are dismissed before trial, the pendent
claims should be left to the state courts.” Wright v. Associ-
ated Ins. Cos., 29 F.3d 1244, 1252 (7th Cir. 1994). That rule
would seem to apply in this case, since the district court
dismissed Nelson’s abuse of process claim just six
months after removal, before the court had addressed the
defendants’ motion to dismiss or made any other
dispositive ruling. However, although this particular
federal case captioned Nelson v. Welch & CHSWC never
advanced beyond the pleading stage, we believe that a
complete analysis of judicial economy requires us to
consider the totality of the federal-court litigation
arising out of RTI’s bankruptcy. As detailed in this
opinion, the Nelson litigation has already engaged one
bankruptcy judge, three district court judges, and now,
an appellate panel of this court. Because each of these
courts has parsed the relatively voluminous record of
these proceedings and evaluated numerous claims by
Nos. 08-1342, 08-1443 & 08-2164 33
and against Nelson, this case is not one involving “very
little federal judicial investment.” Id. at 1251.
We also find few comity concerns in retaining supple-
mental jurisdiction over Nelson’s civil conspiracy and
tortious interference claims. State courts have no interest
in spending their limited time addressing claims that
are hopelessly entangled with a federal claim. Coe, 162
F.3d at 496. In fact, we show greater respect to our col-
leagues in the Illinois judiciary by not punting to them
the tasks of, first, reviewing the ever-expanding record
in these proceedings in order to evaluate Nelson’s
claims, and, second, trying to determine what claims
that “stem from events that happened outside the bank-
ruptcy context” the district court felt remained viable
after the dismissal of Nelson’s abuse of process claim.
We have already undertaken these tasks and are unable
to discern from Nelson’s complaint any theories of
liability that do not rely on RTI’s allegedly improper
bankruptcy filing. We doubt that the Illinois courts have
a significant interest in repeating our analysis, especially
since Nelson’s claims of civil conspiracy and tortious
interference neither raise “novel or complex issues of
state law” nor “predominate” over federal issues. See
Montaño, 375 F.3d at 601-02.
Mindful of the district court’s general discretion to
decline supplemental jurisdiction under § 1367(c), we
nevertheless conclude, based on the entanglement
between Nelson’s federal and state-law claims and the
federal-court investment in this litigation, that the court
“crossed over the line” by remanding this case to the
Illinois Circuit Court. Id. at 602.
34 Nos. 08-1342, 08-1443 & 08-2164
Although we conclude that Nelson’s federal and state-
law claims are so entangled that the entire lawsuit
should be resolved in federal court, it does not follow
that the defendants necessarily prevail on the merits.
True, the district court dismissed Nelson’s federal abuse
of process claim, and our discussion of the entangle-
ment between that claim and Nelson’s state-law claims
might suggest that Nelson’s entire complaint should
be dismissed as well. But the district court’s basis for
dismissing the federal abuse of process claim was flawed.
Judge Kocoras concluded that the bankruptcy court’s
statement that RTI filed for bankruptcy in good faith, as
affirmed by Judge St. Eve, precluded Nelson’s abuse of
process claim. As we explained in our discussion of
the In re RTI case, the bankruptcy court’s good-faith
language was dictum, and “[d]icta have no preclusive
effect . . . only judgments do.” Abbs v. Sullivan, 963 F.2d
918, 924 (7th Cir. 1992). So the district court should not
have relied on the bankruptcy court’s dictum to dismiss
Nelson’s abuse of process claim, and, on remand, the court
should resolve Nelson’s remaining state-law claims
without regard to this dictum.
IV. Conclusion
In In re RTI, Nos. 08-1342 & 08-1443, we V ACATE the
judgment of the district court and R EMAND with instruc-
tions to dismiss the appeal from the bankruptcy court
as moot. In Nelson v. Welch & CHSWC, No. 08-2164, we
R EVERSE the district court’s decision declining to
Nos. 08-1342, 08-1443 & 08-2164 35
exercise supplemental jurisdiction over Nelson’s state-
law claims and R EMAND for further proceedings con-
sistent with this opinion.
4-12-10