William Nelson, IV v. David Welch , 684 F.3d 684 ( 2012 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1792
W ILLIAM G. N ELSON, IV,
Plaintiff-Appellant,
v.
D AVID K. W ELCH and C RANE,
H EYMAN, S IMON, W ELCH & C LAR,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:07-cv-04825—Robert W. Gettleman, Judge.
A RGUED M AY 23, 2012—D ECIDED JUNE 29, 2012
Before E ASTERBROOK, Chief Judge, and R IPPLE and
T INDER, Circuit Judges.
T INDER, Circuit Judge. William G. Nelson, a minority
shareholder and major creditor of Repository Tech-
nologies, Inc. (“RTI”), believes that RTI’s majority share-
holders and David K. Welch and his law firm Crane,
Heyman, Simon, Welch & Clar (“CHSWC”), the law firm
that handled RTI’s bankruptcy, used RTI’s bankruptcy
2 No. 11-1792
to loot RTI, much to his detriment. Nelson filed a variety
of lawsuits to recover his losses and most have run
their course. The suit at issue in this appeal, Nelson’s
suit against Welch and CHSWC, is the last one standing.
The tangled history of litigation between Nelson and
RTI, its majority shareholders, and its bankruptcy law
firm, CHSWC, is detailed in a previous appeal, In re
Repository Technologies, Inc., 601 F.3d 710 (7th Cir. 2010)
(“RTI-1”). The short version, relevant here, is as follows:
In 2007, Nelson sued CHSWC (and Welch, but for sim-
plicity we will refer to the defendants collectively
as CHSWC) in state court alleging that they had
(1) conspired with RTI’s majority shareholders to use
RTI’s Chapter 11 bankruptcy to enrich themselves,
(2) tortiously interfered with RTI’s loan contract with
Nelson, and (3) abused the bankruptcy process. Based
on the abuse-of-process claim, the defendants removed
to federal court. In an attempt to get back to state court,
Nelson amended his complaint to omit the abuse-of-
process claim. The tactic failed because the district court
(Judge Kocoras) concluded that it still had “arising in”
jurisdiction: Even without his abuse-of-process claim,
and despite their state-law titles, Nelson’s claims
“revolve[d] around his assertion that Welch and his
firm engaged in abuse of bankruptcy process.” RTI-1, 601
F.3d at 716 (quoting the district court).
The posture of the case shifted again when Judge
Kocoras learned that the bankruptcy court said that
RTI’s Chapter 11 petition was not filed in bad faith and
that the district court (Judge St. Eve) repeated that state-
No. 11-1792 3
ment in affirming the bankruptcy court’s judgment.
Based on Judge St. Eve’s affirmance, Judge Kocoras
concluded that Nelson’s federal cause of action (whatever
was keeping the suit in federal court) was precluded
and dismissed it with prejudice. CHSWC then moved
to dismiss Nelson’s entire complaint on the merits.
Despite his earlier conclusion that all of Nelson’s claims
“revolved around” abuse of the bankruptcy process,
Judge Kocoras denied the motion on the theory that
Nelson might still have state-law claims outside the
bankruptcy context. He remanded those claims to state
court. CHSWC appealed the remand and that became
part of the appeal we’re referring to as RTI-1.
RTI-1 was a consolidated appeal from RTI’s ad-
versary proceeding (which sought to recharacterize Nel-
son’s debt as equity) and the district court’s remand
order in Nelson’s suit against CHSWC. (Again, for the
full story, see RTI-1, 601 F.3d at 714-17.) Three results
from RTI-1 matter now. First, because RTI had no assets
and had terminated its business, we concluded that the
adversary proceeding was moot and vacated the judg-
ments below. Id. at 718-19. Second, we reversed the
district court’s remand of Nelson’s state-law claims. We
took this unusual step because
even construing the complaint in the light most favor-
able to Nelson, . . . all of the allegations supporting
Nelson’s civil conspiracy and tortious interference
claims are predicated on the defendants’ participation
in RTI’s bankruptcy case. Because these state-law
claims are so entangled with Nelson’s federal abuse
4 No. 11-1792
of the bankruptcy process claim, the district court
should have retained supplemental jurisdiction
over the entire lawsuit.
And again:
We . . . are unable to discern from Nelson’s complaint
any theories of liability that do not rely on RTI’s
allegedly improper bankruptcy filing.
Id. at 727. Third, notwithstanding the dependence
of Nelson’s state-law claims on abuse of the bank-
ruptcy process, we held that dismissal with prejudice of
his abuse-of-process claim did not require dismissal of
his state-law claims because “the district court’s basis
for dismissing the federal abuse of process claim was
flawed.” Id. at 728. Nelson, then, was given another
opportunity to present his claims to the district court.
On remand, considering the same complaint as we
did in RTI-1, the district court (Judge Gettleman, this
time) granted CHSWC’s motion to dismiss. As we did
in RTI-1, the district court observed that Nelson’s state-
law claims are predicated on his allegation that RTI’s
bankruptcy filing was improper and he rejected, as we
did, Nelson’s arguments that pre- and post-petition
conduct by CHSWC independently support his claims.
Simply put, Nelson’s claims depend on the plausibility
of his abuse-of-process allegation. But Judge Gettleman
saw two reasons Nelson could not assert state-law claims
that depend on abuse of process. The first was Judge
Kocoras’ dismissal with prejudice of Nelson’s abuse-of-
process claim. As Judge Gettleman explained:
No. 11-1792 5
It is true that Judge Kocoras’ conclusion was predi-
cated on the preclusive effect of Judge St. Eve’s now
vacated affirmance of the bankruptcy court, which
would normally suggest that Judge Kocoras’ dis-
missal should also be vacated. . . . The Seventh
Circuit did not vacate the dismissal, however (plain-
tiff did not file a cross-appeal), and [Nelson] has not
asked this court to vacate the dismissal on remand.
Nevertheless, because in RTI-1 we instructed the
district court to ignore the bankruptcy court’s good-
faith finding, Judge Gettleman assumed the unchal-
lenged dismissal with prejudice of Nelson’s abuse-of-
process claim wasn’t fatal to his state-law claims.
Judge Gettleman went on to dismiss Nelson’s com-
plaint without relying on the vacated good-faith dictum
by focusing on RTI’s partial success in the ad-
versary action. According to the district court, that
partial success supported a good-faith finding and, there-
fore, the dismissal of Nelson’s suit.
Responding to Nelson’s Rule 59(e) motion, Judge
Gettleman denied that he improperly relied on Judge
St. Eve’s vacated order. The fact that Judge St.
Eve’s order was vacated, he said, did not alter the facts
on which the bankruptcy court and the district court
based their decisions. Judge Gettleman then made fresh
findings based on “undisputed facts” and concluded
that partial recharacterization of Nelson’s debt as
equity was proper and that, therefore, the adversary
proceeding was partially successful and the bank-
ruptcy was not filed in bad faith.
6 No. 11-1792
Nelson appeals. Our review is de novo and we may
affirm on any ground supported by the record. Remet
Corp. v. City of Chicago, 509 F.3d 816, 817 (7th Cir. 2007).
Has the record developed or has anything of legal
significance happened since the last appeal? We
remanded, the district court dismissed Nelson’s case
relying on vacated orders, reconsidered, made fresh
findings, and dismissed Nelson’s case again. It was,
however, clearly improper for the district court to rely
on vacated orders and to make findings as the basis
for dismissing a complaint under Rule 12(b)(6). Since
it seems as though all that happened on remand was
error, setting those errors aside, it looks like nothing
happened on remand at all. And if nothing significant
happened, another quick remand (perhaps to a dif-
ferent judge) would be appropriate. But we don’t think
that’s the right result.
One obvious way a case advances is by a court’s
orders, but that’s not the only way, of course. Critical
here (and also obvious) is that a party’s concession or a
party’s inaction can change a case. And that is what has
happened here. Consider what Nelson did not do on
remand. Nelson did not ask the district court to vacate
Judge Kocoras’ dismissal of his abuse-of-process claim.
Nelson did not amend his complaint to allege some-
thing that did not depend on abuse of the bank-
ruptcy process. Most importantly, perhaps, Nelson con-
cedes that his abuse-of-process claim is gone and he
concedes that if his state-law claims turn on abuse of
the bankruptcy process, those claims are gone too. Well,
we have said that Nelson’s state-law claims (unchanged
No. 11-1792 7
since RTI-1) turn on his abuse-of-process claims. We’ve
said it repeatedly (and, for good measure, so did Judge
Gettleman). And that means Nelson has no good claims
and his case must be dismissed.
In RTI-1 we concluded that Judge Kocoras’ dismissal
with prejudice of Nelson’s abuse-of-process claim did
not entail dismissal of Nelson’s state-law claims. Now we
think it does, but not because we’re reversing ourselves.
It would have been improper to dismiss Nelson’s case
in RTI-1 because in RTI-1 we mooted and vacated
RTI’s adversary case and, by doing so, undermined
Judge Kocoras’ dismissal of Nelson’s abuse-of-process
claim. After RTI-1, Nelson could have moved to vacate
that dismissal. But he didn’t and it’s too late now.
Instead, Nelson doubled-down on the same complaint
we said depended on abuse of process and (again)
argued that his state-law claims turn on events outside
the bankruptcy. We explained in great detail in RTI-1,
601 F.3d at 725-27, why Nelson’s pre- and post-petition-
conduct argument is a loser and we won’t repeat that
discussion here.
Whatever the basis for Judge Kocoras’ dismissal of
Nelson’s abuse-of-process claim, its preclusive effect
has become a fixed point in this case—by Nelson’s con-
cessions and by Nelson’s inaction. Nelson has no claim
against CHSWC that does not depend on abuse of the
bankruptcy process. And that means Nelson has no
good claims against CHSWC.
A FFIRMED.
6-29-12