Susan Nelson v. Orlando Residence, Ltd ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 07-4050, 08-1044
O RLANDO R ESIDENCE, L TD.,
Plaintiff-Appellee/Cross-Appellant,
v.
GP C REDIT C O ., LLC, et al.,
Defendants-Appellants, Cross-Appellees.
No. 07-4051
S USAN B. N ELSON,
Plaintiff-Appellant,
v.
O RLANDO R ESIDENCE, L TD., et al.,
Defendants-Appellees.
Appeals from the United States District Court
for the Eastern District of Wisconsin.
Nos. 04-C-439, 07-C-436—Rudolph T. Randa, Chief Judge.
A RGUED D ECEMBER 10, 2008—D ECIDED JANUARY 22, 2009
2 Nos. 07-4050, 07-4051, 08-1044
Before P OSNER, K ANNE, and R OVNER, Circuit Judges.
P OSNER, Circuit Judge. For 22 years these parties and
their predecessors have been litigating, in numerous
lawsuits in different courts, a dispute over a piece of
property in Nashville. We were told at argument
without contradiction that the parties have expended
$3 million in legal fees, a figure that exceeds any rea-
sonable estimate of the amount in controversy. Yet
such behavior need not be irrational or a product of spite
or even of bad legal advice. A rational litigant, having
expended $X in unsuccessful efforts to prevail, yet
having additional litigation options that he can
pursue, will compare the cost of those options to the
expected benefit, disregarding the $X he has spent al-
ready. That is a sunk cost—a cost he cannot recover
by anything he does and therefore a cost that will not
influence his behavior (if he is rational). Still, from an
overall social standpoint, the money spent on this
litigation—which we cannot quite end today, much as
we would like to—is excessive. But our decision will
bring the end within sight.
In the early 1980s a dispute arose between Samuel
Hardige and Kenneth Nelson. The dispute was settled
by Hardige’s giving Nelson’s company, Nashville Resi-
dence Corporation (NRC), a hotel property in Nashville
in exchange for a promissory note of NRC secured by
the property and payable in October 1986 to one of
Hardige’s companies, Orlando Residence, Ltd. NRC
failed to pay the note when due and two months
later Orlando sued NRC on the note in federal district
Nos. 07-4050, 07-4051, 08-1044 3
court in Tennessee, basing federal jurisdiction on
diversity of citizenship. NRC responded by conveying
the property to Nashville Lodging Company (NLC),
another corporation controlled by Nelson, and NLC in
turn transferred the property to Metric Partners Growth
Suite Investors in 1989. The following year, the federal
district court entered judgment against NRC for the face
amount of the note, plus interest.
In 1992 Orlando brought suit in a Tennessee chancery
court against NRC, NLC, Nelson, and Metric, claiming
that the transfer of the property by NRC to NLC, and by
NLC to Metric, was a fraudulent effort to prevent Orlando
from collecting on the judgment that it had obtained
in federal court. In 1995, after a trial, the chancery
court entered judgment for Orlando of $501,934 in com-
pensatory damages and $850,000 in punitive damages.
The defendants appealed. One of the appellants’ argu-
ments was that Orlando did not have standing to sue.
There were two entities named Orlando Residence, Ltd.,
one of which was owned 98 percent by Hardige and the
other 100 percent, and the appellants claimed that the
Orlando entity that owned the promissory note on
which the suit was based was not the one that was the
plaintiff-appellee in the litigation and therefore had no
standing to sue. The Tennessee court of appeals rejected
the argument on the ground that Tennessee law is not
concerned with such trifles as distinguishing between
two commonly owned, identically named entities.
Orlando Residence, Ltd. v. Nashville Lodging Co., 1996 WL
724915, at *2 (Tenn. App. Dec. 18, 1996). They were as
Tweedledum and Tweedledee. But proceeding to the
4 Nos. 07-4050, 07-4051, 08-1044
merits the court found errors in the chancery court’s
decision and remanded for a new trial.
Shortly before the court of appeals’ decision, Orlando
had moved the chancery court to order the hotel property
sold to satisfy Orlando’s judgment, the court had ordered
the sale, and at the sale Orlando had purchased the
property for $100,000. When the court of appeals reversed
the judgment in the fraudulent conveyance suit, the
defendants asked the chancery court to set aside the
sale; they also renewed their argument that Orlando
lacked standing. The chancery court rejected both their
arguments. So the defendants again appealed. The court
of appeals, invoking the doctrine of law of the case,
refused to consider the defendants’ renewed argument
that Orlando lacked standing and went on to affirm
the chancery court’s decision refusing to set aside the
sale. Orlando Residence, Ltd. v. Nashville Lodging Co., 1999
WL 1040544, at *4 (Tenn. App. Nov. 17, 1999).
The new trial that the court of appeals had ordered in
the first appeal was held in 2000, and the jury returned a
verdict in favor of Orlando for $797,615. The judge gave
the defendants a credit of $100,000, the amount that
Orlando had agreed to pay for the property (formerly
NLC’s) at the judicial sale. On appeal, the court of appeals
held that the judicial sale had been proper and so the
defendants were entitled to no more for their property
interest than Orlando had agreed to pay at the sale. The
court further ruled that NRC’s conveyance of the
property to NLC had indeed been fraudulent, but the
court remanded the case to the chancery court for an
Nos. 07-4050, 07-4051, 08-1044 5
evidentiary hearing on the defendants’ statute of limita-
tions defense. Orlando Residence, Ltd. v. Nashville Lodging
Co., 104 S.W.3d 848 (Tenn. App. 2002).
Back in 1999 NLC had granted a security interest in
its personal property to another entity controlled by
Kenneth Nelson, GP Credit Co., in exchange for a loan.
NLC’s personal property included a lawsuit against
Metric (to which, recall, NLC had conveyed the hotel
property in 1989) in Tennessee. In 2001, GP Credit fore-
closed its security interest in NLC’s personal property
and bought the property at the foreclosure sale, including
the suit against Metric. Orlando persuaded the chancery
court to appoint a receiver to hold any proceeds of the
Metric suit that NLC might obtain, to pay Orlando’s
judgment against NLC. GP Credit responded by filing
a diversity suit in a federal court in Wisconsin, GP Credit’s
domicile, to clear its title to the Metric suit. We upheld
the district judge’s judgment in favor of GP Credit,
ruling that GP Credit owned the suit free and clear of any
claim by Orlando. GP Credit Co., LLC v. Orlando Residence,
Ltd., 349 F.3d 976 (7th Cir. 2003).
In 2004, pursuant to the Tennessee court of appeals’
remand, Orlando’s fraudulent conveyance suit was
again retried, and again Orlando won—and again the
chancery court refused to reconsider the earlier rulings
on Orlando’s standing to sue. Because Kenneth Nelson
refused to put in a personal appearance at the trial, the
judge entered a default judgment in favor of Orlando,
and the court of appeals affirmed. Orlando Residence, Ltd. v.
Nashville Lodging Co., 213 S.W.3d 855 (Tenn. App. 2006).
6 Nos. 07-4050, 07-4051, 08-1044
Orlando at last had solid final judgments against NRC,
NLC, and Kenneth Nelson.
The challenge was to collect these judgments. To that
end Orlando had brought the present suit, originally in
the Tennessee chancery court, against NLC, GP Credit,
Kenneth Nelson and his wife Susan, and Hayvenhurst
Pension & Profit Sharing Plan, claiming that Kenneth
Nelson and NLC had made fraudulent conveyances to
the other defendants in an effort to prevent Orlando
from collecting its judgment. GP Credit counter-
claimed, claiming unjust enrichment (for which it sought
restitution), intentional interference with a business
relationship, and slander of title. (It later added an addi-
tional restitution claim.) The defendants removed the
suit to federal district court on the basis of diversity of
citizenship, and that court then transferred the case to a
federal district court in Wisconsin. The district judge
rejected both of Orlando’s claims and GP Credit’s counter-
claims, and both sides have appealed. Susan Nelson
filed a separate suit in the same district court to quiet title
to her property so that it cannot be seized to pay the
judgment against the defendants in Orlando’s suit. The
district judge dismissed that suit, and she appeals.
We begin with Orlando’s appeal. Two years after we
issued our decision in GP Credit’s quiet-title suit against
Orlando, Orlando obtained a default judgment from
the chancery court in Tennessee against GP Credit. Or-
lando claimed that GP Credit was an alter ego of Kenneth
Nelson and therefore liable on his debt to Orlando. GP
Credit argues that the chancery court did not have juris-
Nos. 07-4050, 07-4051, 08-1044 7
diction to issue the default judgment because it was a
judgment in rem—the res being the lawsuit against
Metric, which had been the property of NLC. As we
explained in our decision (see 349 F.3d at 981), the site of a
res that consists of a lawsuit is the owner’s domicile.
Because GP Credit was the owner of the lawsuit, its
domicile and therefore the site of the lawsuit were Wis-
consin. The district judge in the present case thought that
to allow Orlando to obtain the proceeds of the Metric
lawsuit would be inconsistent with our decision
holding that GP Credit owns the suit free and clear of
any claims by Orlando.
The judge was wrong. The basis on which Orlando
seeks to add GP Credit as a defendant is not that Orlando
owns the Metric lawsuit but that GP Credit is the alter ego
of Kenneth Nelson—which we didn’t know when we
issued our decision—so that property of GP Credit,
including therefore the Metric lawsuit, is available for
satisfaction of Orlando’s judgment against Nelson. The
default judgment established this, and, by suing GP Credit,
Orlando is simply trying to collect its judgment against
Nelson from Nelson’s alter ego. That is entirely proper,
and so its claim should not have been dismissed.
We turn to GP Credit’s counterclaims. The first is that it
is entitled to restitution of $3.3 million, its extravagant
estimate of the value of NLC’s property interest that
was extinguished at the judicial sale of the property to
Orlando for $100,000 lo these many years ago. Remember
that GP Credit acquired NLC’s personal property, which
includes legal claims such as the claim to the value of the
8 Nos. 07-4050, 07-4051, 08-1044
property. But remember too that the Tennessee court of
appeals held that the judicial sale was proper and that
NLC (and hence GP Credit) was entitled to only $100,000,
the proceeds of the sale. That ruling extinguished GP
Credit’s claim by operation of res judicata.
GP Credit contests this conclusion, arguing that the
chancery court never acquired jurisdiction of Orlando’s
suit against NLC because the wrong Orlando Residence,
Ltd. had sued, a mistake that under Tennessee law may
have deprived the court of subject-matter jurisdic-
tion—though we doubt it. Osborn v. Marr, 127 S.W.3d 737,
740 (Tenn. 2004), holds that standing to sue is a jurisdic-
tional prerequisite, but a confusion between alter egos
hardly rises to the level of an absence of standing. No
matter; the question of standing had been litigated, and
answered in Orlando’s favor by the chancery court and
the answer upheld by the Tennesee court of appeals, which
in a subsequent appeal refused to permit the issue to
be relitigated.
GP Credit argues that a decision by a court that lacks
subject-matter jurisdiction can always be attacked collater-
ally, but that is not true either; and anyway, if Tennessee
would not permit its judgment to be attacked collaterally,
the federal court would be bound. 28 U.S.C. § 1738;
Marrese v. American Academy of Orthopaedic Surgeons, 470
U.S. 373 (1985).
If a court of competent jurisdiction—a court authorized
to decide the kind of case in which the jurisdictional
question arises (which is true of the Tennessee chancery
Nos. 07-4050, 07-4051, 08-1044 9
court)—resolves a jurisdictional issue in a full and fair
hearing, that resolution is entitled to the same collateral
estoppel effect that a ruling on a substantive issue would
be entitled to. E.g., Underwriters National Assurance Co. v.
North Carolina Life & Accident & Health Ins. Guaranty Ass’n,
455 U.S. 691, 706-07 (1982); Durfee v. Duke, 375 U.S. 106,
111-15 (1963); Stoll v. Gottlieb, 305 U.S. 165, 171-72 (1938);
Tennessee ex rel. Sizemore v. Surety Bank, 200 F.3d 373, 381
(5th Cir. 2000) (Tennessee law); United States ex rel.
Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d
244, 250 (9th Cir. 1992). Otherwise there would be
nothing to prevent the incessant relitigation of the
same jurisdictional challenges by the same parties (or
parties in privity with them)—which is just what the
defendants are attempting. (For another attempt, and
another judicial rebuff, see GP Credit Co., LLC v. Orlando
Residence Ltd., No. 01-CV-2294, pp. 9-11 (S.D. Cal. Sept. 20,
2007).)
Many cases go further and hold that if a court of compe-
tent jurisdiction “decides a case on the merits after an
adversarial presentation, the judgment cannot be collater-
ally attacked” even if the parties failed “to
address jurisdiction fully or cogently.” United States v.
County of Cook, 167 F.3d 381, 388 (7th Cir. 1999). (But here
they did.) “A party that has had an opportunity to litigate
the question of subject-matter jurisdiction may
not . . . reopen that question in a collateral attack upon an
adverse judgment.” Insurance Corp. of Ireland, Ltd. v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 n. 9
(1982) (emphasis added); see Chicot County Drainage
District v. Baxter State Bank, 308 U.S. 371 (1940); Bell v.
10 Nos. 07-4050, 07-4051, 08-1044
Eastman Kodak Co., 214 F.3d 798, 801 (7th Cir. 2000) (“to
allow a ground that can be adequately presented in a
direct appeal to be made the basis of a collateral attack
would open the door to untimely appeals . . . . The
losing party could reserve the ground until he had pre-
sented it unsuccessfully to the district court in the form
of a Rule 60(b) motion. That is not permitted”); Sterling v.
United States, 85 F.3d 1225, 1230-31 (7th Cir. 1996) (concur-
ring opinion) (“this salutary approach exists because
there is a need for finality in the law, and finality would
be disserved if courts had to reexamine the jurisdictional
basis of every prior judgment before giving it preclusive
effect”).
These cases (and the Restatement (Second) of Judgments
§ 12 and comment a (1982)) relax the normal rule of
collateral estoppel—that the issue in question, the issue a
party wants to prevent being reopened, have been “actu-
ally litigated.” Id., § 27. They do this because an attempt
to invalidate a judgment is far more problematic than an
attempt merely to relitigate an issue that might have
been but was not litigated in a previous case the judg-
ment in which remains in force.
Against a veritable mountain of authority, GP Credit
cites Dunham v. Stitzberg, 201 P.2d 1000 (N.M. 1948), which
refused to give preclusive effect to a 20-year-old
decision by a probate court that had exceeded its juris-
diction by determining title to real estate. But that was an
example of a decision by a court that, unlike the
Tennessee chancery court, was not a court competent to
make such a determination. The opinion explained that “it
Nos. 07-4050, 07-4051, 08-1044 11
is a matter of common knowledge that [in New Mexico]
probate proceedings are usually ex parte; that probate
judges in this state are, with few exceptions, not lawyers,
and many are ignorant and not fitted for the office. Often
they sign prepared orders and decrees without reading; or
if read, then without understanding the import. If in fact
these courts had the jurisdiction asserted, it would be
exercised in most cases without any real trial to deter-
mine the fact of heirship.” Id. at 1014. (GP Credit neglected
to mention that Dunham has been overruled, In re Conley’s
Will, 276 P.2d 906, 909 (N.M. 1954). The ground was
that the probate court did have the jurisdiction that
Dunham held it did not have.)
It is true, as we noted earlier, citing section 1738 of the
Judicial Code and the Marrese decision, that a state is free
to decide how much or how little respect its judgments
should be given in subsequent cases, and other states
and the federal courts are bound to give those judgments
the same effect in their cases. The defendants insist that
the Tennessee courts place no limits at all on the
relitigation of issues of subject-matter jurisdiction, but no
cases support that insistence. Tennessee Dept. of Human
Services v. Gouvitsa, 735 S.W.2d 452, 457 (Tenn. App. 1987),
did deny preclusive effect to the decision of a court that
lacked subject-matter jurisdiction, but the opinion is
silent on whether the issue of jurisdiction had been or
could have been litigated in the earlier case. And the
opinion relied on an old decision by the Supreme Court
of Tennessee, Brown v. Brown, 281 S.W.2d 492 (Tenn. 1955),
which might well not be followed today, as it reflects
the old rather than the modern view of the appropriate
12 Nos. 07-4050, 07-4051, 08-1044
scope of collateral attacks on judgments. See Restatement,
supra, § 12, comment a. No matter; if the Supreme Court of
Tennessee would even today reject the Restatement rule,
there is no indication that it would go further and allow
the issue to be litigated over and over and over again, as
the defendants have tried to do. Tennessee ex rel. Sizemore
v. Surety Bank, supra, 200 F.3d at 381, is to the contrary; and
in Goeke v. Woods, 777 S.W.2d 347, 350 (Tenn. 1989), the
Supreme Court of Tennessee endorsed, albeit in dictum,
the application of collateral estoppel to questions of
jurisdiction: “Res judicata applies to questions of jurisdic-
tion, if jurisdiction is litigated or determined by the
court. The preclusive effect of a dismissal for lack of
jurisdiction is, however, limited to the matters actually
decided, and is not binding as to all matters which
could have been raised” (citation omitted).
GP Credit’s next counterclaim, which charges Orlando
with tortious interference with an advantageous business
relationship, grows out of our previous decision. After we
confirmed GP Credit’s title to the lawsuit against Metric
free of Orlando’s claims, Metric offered to settle the suit
for $650,000 if Orlando would dissolve the receivership
that the chancery court in Tennessee had created to hold
the proceeds of the suit, in which Orlando asserted an
interest. Orlando refused, the suit was settled for only
$150,000, and GP Credit seeks the difference from Or-
lando. The claim is frivolous, even if one assumes (and
why not?) that a settlement between commercial enter-
prises could be deemed a business relationship for pur-
poses of the tort. It is hardly tortious conduct merely to
refuse to incur the expense of dissolving a receivership; the
Nos. 07-4050, 07-4051, 08-1044 13
benefit of dissolution would have been entirely to GP
Credit, so it should have sought the dissolution. There is
no evidence that Orlando even knew about Metric’s
settlement offer to GP Credit and the condition attached
to it. And it would not have been in Orlando’s interest
to block the settlement. It has a judgment that GP Credit is
an alter ego of Kenneth Nelson, against whom it has a
money judgment; the more GP Credit obtained from
Metric in a settlement, the larger the potential pool of
assets out of which Orlando could satisfy its judgment
against GP Credit. Anyway Orlando had a valid interest
in the maintenance of the receivership. We had ordered it
dissolved because Orlando had no interest in the Metric
suit. But we were not aware that GP Credit was an alter
ego of Nelson—which Orlando gave a legitimate interest
in any settlement that Metric made with GP Credit.
GP Credit’s slander of title counterclaim fails for the
same reason: Orlando had a valid reason to question GP
Credit’s right to keep the proceeds of a settlement with
Metric.
GP Credit’s last counterclaim seeks restitution of a
$150,000 bond that NLC had been required to post in the
Metric lawsuit. NLC deposited the money in the
Tennesee chancery court, and the court gave the money
to Orlando after the default judgment that determined
that GP Credit is an alter ego of Kenneth Nelson. GP Credit
contends that the bond belongs to it by virtue of our
decision upholding its quiet-title action, and that the
chancery court did not have jurisdiction to issue the
default judgment because it was a judgment in rem (the
14 Nos. 07-4050, 07-4051, 08-1044
bond being the res) and the site of a res that consists of a
lawsuit is, as we know, the owner’s domicile. GP Credit
was the owner of the lawsuit, and hence of the bond that
it posted in the suit, and its domicile is Wisconsin. But
this reasoning overlooks the fact that the bond had been
deposited in the Tennessee court; the res was thus in
Tennessee, not Wisconsin. As we explained, the basis on
which Orlando was given the bond money was not that
Orlando owned the Metric lawsuit but that GP Credit is
the alter ego of Kenneth Nelson, so that any property of
GP Credit is fair game for satisfying Orlando’s judg-
ment against Nelson.
We turn last to Susan Nelson’s suit. As part of its efforts
to collect its judgment, Orlando brought a suit in a Wiscon-
sin state court to establish that property that Mrs. Nelson
claims to be her own is actually property owned jointly
with her husband and thus is available to pay a judg-
ment against him. Wis. Stat. § 803.045(3); Courtyard Condo-
minium Ass’n, Inc. v. Draper, 629 N.W.2d 38, 42 (Wis. App.
2001). That suit is pending. After it was filed, Mrs. Nelson
brought her present suit to quiet title to her property—that
is, to establish that it really is her property rather than
being jointly owned with her husband. The district
judge dismissed the suit because when two in rem suits
involving the same res are pending in different courts the
court in which the second suit was filed must dismiss its
suit. Penn General Casualty Co. v. Commonwealth of Pennsyl-
vania ex rel. Schnader, 294 U.S. 189, 195-96 (1935); Kline v.
Burke Construction Co., 260 U.S. 226, 229 (1922); United
States v. $506,231 in U.S. Currency, 125 F.3d 442, 447-48 (7th
Nos. 07-4050, 07-4051, 08-1044 15
Cir. 1997). We are given no reason to depart from that
sensible rule.
To summarize, the judgment of the district court is
reversed insofar as it rejected Orlando’s alter ego claim
against GP Credit but in all other respects is affirmed.
The time has come to put an end to the defendants’
stubborn efforts to prevent Orlando from obtaining the
relief to which it is entitled. The district judge should give
consideration to enjoining the defendants from further
maneuvers to evade the judgments that Orlando has
obtained against them. The authority for issuing such an
injunction (a “bill of peace,” as it is called) is well estab-
lished. See, e.g., Allendale Mutual Ins. Co. v. Bull Data
Systems, Inc., 10 F.3d 425, 431 (7th Cir. 1993); Newby v.
Enron Corp., 542 F.3d 463, 472-73 (5th Cir. 2008); Safir v. U.S.
Lines, Inc., 792 F.2d 19, 24 (2d Cir. 1986); Molski v. Evergreen
Dynasty Corp., 500 F.3d 1047, 1056-59 (9th Cir. 2007) (per
curiam).
A FFIRMED IN P ART, R EVERSED IN P ART,
AND R EMANDED W ITH D IRECTIONS.
1-22-09