CFE Group, LLC, et al v. FirstMerit Bank, N.A.
Filing
Filed opinion of the court by Judge Hamilton. The judgment of the district court is AFFIRMED and Rule 38 sanctions will be imposed under the schedule specified. Appellee FirstMerit Bank, N.A., may submit any affidavit and supporting papers within 28 days after issuance of this opinion specifying its damages from this frivolous appeal by CFE. CFE may file a written response no later than 28 days after FirstMerit files its submission. Richard A. Posner, Circuit Judge; Michael S. Kanne, Circuit Judge and David F. Hamilton, Circuit Judge. [6718243-1] [6718243] [14-2554]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14‐2554
CFE GROUP, LLC, et al.,
Plaintiffs‐Appellants,
v.
FIRSTMERIT BANK, N.A.,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13 C 8021 — William T. Hart, Judge.
____________________
SUBMITTED AUGUST 4, 2015 — DECIDED DECEMBER 31, 2015
____________________
Before POSNER, KANNE, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge. The principal question in this
appeal is whether the district court correctly refused to en‐
join a state court from adjudicating a case that the state‐court
plaintiff had voluntarily dismissed in an earlier incarnation
in federal court. In the earlier federal case, FirstMerit Bank
had sued CFE Group, LLC and related parties (for simplicity,
CFE) to enforce a promissory note and guaranties. CFE
moved to dismiss that complaint. The district court granted
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the motion and dismissed FirstMerit’s complaint without
prejudice, but with leave to amend. Rather than amend,
FirstMerit filed a notice of voluntary dismissal of the action
under Federal Rule of Civil Procedure 41(a)(1)(A)(i).
FirstMerit then filed a new complaint in an Illinois state
court asserting the same claims. CFE moved to dismiss the
new suit, arguing that the earlier federal dismissal meant
that FirstMerit’s claims were barred by claim preclusion (res
judicata). The state trial court denied the motion. CFE re‐
sponded to that denial by filing this new federal action ask‐
ing the district court to enjoin the state court under the relit‐
igation exception to the federal Anti‐Injunction Act,
28 U.S.C. § 2283. The district court refused, ruling that the
dismissal of the first federal case was not a judgment on the
merits and therefore did not preclude the state action. The
district court dismissed this action with prejudice. CFE has
appealed.
We affirm. We agree with the district courtʹs reasoning
and add that CFE’s request for an injunction was also barred
by the Full Faith and Credit Act, 28 U.S.C. § 1738. We affirm
the district court’s judgment dismissing the case. We also
find that the appeal is frivolous and that sanctions on CFE
are appropriate under Federal Rule of Appellate Proce‐
dure 38.
I. Factual and Procedural Background
FirstMerit’s federal lawsuit was short‐lived. FirstMerit
sued CFE in federal court in November 2012 to enforce a
promissory note and guaranties executed by CFE.
See FirstMerit Bank, N.A. v. CFE Group, LLC, No. 12 C 9510
(N.D. Ill. dismissed May 1, 2013). FirstMerit alleged that two
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years earlier CFE had become delinquent on loans with a
principal amount of $300,000. FirstMerit had acquired the
loans from the Federal Deposit Insurance Corporation,
which had been appointed receiver when the original lender
to CFE was closed by its Illinois regulator.
One of the CFE defendants moved to dismiss the com‐
plaint, arguing that under Federal Deposit Ins. Corp. v. Elefant,
790 F.2d 661, 666 (7th Cir. 1986), the FDIC’s relationship to
the suit divested the district court of diversity jurisdiction. A
week later, FirstMerit filed a memorandum responding to
the motion. That same day, the other CFE defendants joined
the first motion to dismiss and moved to dismiss on two
other grounds: failure to state a claim and failure to join the
FDIC as a necessary party.
Before FirstMerit could respond to the new grounds for
dismissal, the district court cancelled a scheduled hearing
and the case was assigned to another district judge. A week
later, and still without a response from FirstMerit to the ad‐
ditional grounds for dismissal, the newly assigned judge
(Judge Castillo) dismissed the “present complaint” on all
three grounds “without prejudice.” The court allowed
FirstMerit 60 days to file an amended complaint.
The district court might have been right or might have
been wrong about the perceived defects in FirstMerit’s case,
but FirstMerit chose not to fight to stay in federal court. Five
days before the 60‐day deadline expired, FirstMerit filed a
notice under Rule 41(a)(1)(A)(i) stating that it “voluntarily
dismisses the above action, without prejudice … .” Rule
41(a)(1)(B) provides that in such cases, with exceptions not
applicable here, “the dismissal is without prejudice.” The
next day the district court ordered: “This case is hereby dis‐
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missed without prejudice pursuant to the Notice of Volun‐
tary Dismissal Without Prejudice Pursuant to Rule
41(a)(1)(A)(i).”
Four days later, FirstMerit filed in Illinois state court a
substantively similar complaint, which remains pending.
CFE moved to dismiss the state action based on theories of
claim and issue preclusion. CFE argued that dismissal of the
first federal case barred FirstMerit’s claims in state court and
prohibited relitigation of whether the FDIC was a necessary
party. The state court rejected CFE’s preclusion defenses. But
it also ruled that FirstMerit had inadequately alleged that the
relevant loan documents had been transferred to FirstMerit.
It therefore granted FirstMerit leave to replead.
The state court’s refusal to dismiss based on claim preclu‐
sion (res judicata) prompted CFE to file this new federal suit.
Under the All Writs Act, 28 U.S.C. § 1651(a), and the relitiga‐
tion exception to the Anti‐Injunction Act, 28 U.S.C. § 2283,
CFE sought to enjoin FirstMerit’s suit in state court. The dis‐
trict court denied that request and instead dismissed this
new case with prejudice, explaining: “The present action
fails because it is abundantly clear that there never was a
judgment on the merits” in the first federal case. The court
added: “The filing of the present case appears to be an un‐
reasonable and vexatious multiplication of proceedings al‐
ready pending in the state court.”
II. The Merits
The Anti‐Injunction Act, 28 U.S.C. § 2283, limits the pow‐
er of federal courts to enjoin state‐court proceedings: “A
court of the United States may not grant an injunction to stay
proceedings in a State court except as expressly authorized
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by Act of Congress, or where necessary in aid of its jurisdic‐
tion, or to protect or effectuate its judgments.” CFE argues
an injunction is needed here to give effect to the federal
court judgment dismissing FirstMerit’s earlier suit. Under
that exception to the Anti‐Injunction Act, often called the
“relitigation exception,” a party with a favorable federal
judgment may “protect that judgment by enjoining repeti‐
tive state court proceedings instead of relying on a claim or
issue preclusion defense.” Ramsden v. Agribank, FCB, 214 F.3d
865, 868 (7th Cir. 2000). A party seeking an injunction based
on this exception must show that “preclusion is clear beyond
peradventure.” Smith v. Bayer Corp., 564 U.S. 299, —, 131 S.
Ct. 2368, 2376 (2011).
Federal common law governs “the claim‐preclusive effect
of a dismissal by a federal court sitting in diversity.” Semtek
Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001). As
a general rule, federal common law borrows the preclusion
principles of the laws of the state in which the federal court
that dismissed the diversity suit sat. Id.; see also Allan Block
Corp. v. County Materials Corp., 512 F.3d 912, 915 (7th Cir.
2008). The parties do not dispute the application of this gen‐
eral rule to the Anti‐Injunction Act. Cf. Smith, 564 U.S. at —
n.6, 131 S. Ct. at 2376 n.6 (declining to reach the issue). We
therefore apply Illinois law to decide the preclusive effect of
the dismissal of FirstMerit’s federal case, which was brought
in a federal court in Illinois under diversity jurisdiction.
The relitigation exception does not authorize an injunc‐
tion here. Under Illinois law the dismissal of FirstMerit’s
federal case simply did not preclude a later suit because a
dismissal “without prejudice” is not final, DeLuna v. Treister,
708 N.E.2d 340, 343 (Ill. 1999), and a non‐final decision is not
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subject to preclusion defenses. See City of Naperville v. Illinois
Fraternal Order of Police, Labor Council, F.O.P. Lodge No. 42, 997
N.E.2d 296, 299 (Ill. App. 2013). If a court dismisses a com‐
plaint without prejudice but with leave to amend, and then
allows the plaintiff to dismiss voluntarily without prejudice,
the dismissal has no res judicata or claim preclusive effect.
See Jackson v. Victory Mem’l Hosp., 900 N.E.2d 309, 318 (Ill.
App. 2008).
That is exactly what happened here. After dismissing the
complaint (not the case) without prejudice and with express
leave to file an amended complaint, the district court al‐
lowed FirstMerit to dismiss its suit voluntarily and without
prejudice based on FirstMerit’s notice under Rule
41(a)(1)(A)(i). FirstMerit was therefore free to file its new suit
in state court.1
CFE responds with two arguments, but neither has any
merit. CFE first argues that the dismissal of FirstMerit’s
complaint should be treated as preclusive because the com‐
pany filed its notice of voluntary dismissal only after the dis‐
trict court’s “adverse” ruling dismissing the complaint with‐
out prejudice. For support, CFE quotes Muhammad v. Oliver,
547 F.3d 874, 876 (7th Cir. 2008): “when a suit is abandoned
after an adverse ruling against the plaintiff, the judgment
ending the suit, whether or not it is with prejudice, will gen‐
erally bar bringing a new suit that arises from the same facts
1 The risk of repetitive litigation and forum‐shopping is sharply lim‐
ited by Rule 41(a)(1)(B), which provides that if the federal plaintiff “pre‐
viously dismissed any federal‐ or state‐court action based on or includ‐
ing the same claim, a notice of dismissal operates as an adjudication on
the merits,” meaning that the dismissal would be with prejudice and
thus could cause claim preclusion.
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as the old one.” But Muhammad does not apply here because
FirstMerit received no “adverse” ruling. In Muhammad, a
state court dismissed on the merits a contract claim against
one defendant. After the dismissal the plaintiff voluntarily
dismissed claims against another defendant without preju‐
dice. Id. at 876. When the plaintiff later refiled against both
defendants, we held that the new suit was barred by claim
preclusion: “‘[A] plaintiff who splits his claims by voluntari‐
ly dismissing and refiling part of an action after a final
judgment has been entered on another part of the case sub‐
jects himself to a res judicata defense.’” Id. at 876–77, quoting
Hudson v. City of Chicago, 889 N.E.2d 210, 217 (Ill. 2008). In
this case, however, there was no final judgment on any claim
by FirstMerit. The only ruling that preceded its voluntary
dismissal was expressly “without prejudice” to its ability to
file an amended complaint curing the problems the court
had perceived.
CFE next argues that the doctrine of “springing finality”
ended the first case on the merits. Under that doctrine, a
dismissal that “gives the plaintiff time to fix the problem that
led to dismissal” becomes final once the time to cure has
elapsed. E.g., Davis v. Advocate Health Ctr. Patient Care Ex‐
press, 523 F.3d 681, 683 (7th Cir. 2008); see also Otis v. City of
Chicago, 29 F.3d 1159, 1166 (7th Cir. 1994). Because First‐
Merit’s complaint was dismissed without prejudice and with
leave to amend within 60 days, CFE contends, the dismissal
ripened into a final dismissal on the merits when FirstMerit
did not file an amended complaint.
“Springing finality” is a less than optimal approach to
managing the disposition of a lawsuit in a federal district
court. Clear written final judgments under Federal Rule of
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Civil Procedure 58 are far preferable and minimize confu‐
sion for parties and other courts. In any event, though, a
conditional dismissal ripens into a final order only when the
plaintiff fails to act within the specified time. See Davis, 523
F.3d at 683. Here FirstMerit acted by filing a notice of volun‐
tary dismissal under Rule 41(a)(1)(A) before the 60 days
elapsed. And because CFE had neither answered nor moved
for summary judgment, the effect under Rule 41(a)(1)(B) was
clear: “the dismissal is without prejudice.”
Further, the district court’s dismissal of this action by
CFE would have been correct even if the state court had been
wrong in denying CFE’s motion to dismiss (and we do not
believe it was). The relitigation exception to the Anti‐
Injunction Act still would not authorize an injunction. That’s
because CFE took its claim‐preclusion argument to the state
court first. The state court ruled that preclusion does not ap‐
ply to FirstMerit’s case, and federal courts must respect that
ruling.
In Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518
(1986), the Supreme Court examined the relitigation excep‐
tion to the Anti‐Injunction Act in light of the Full Faith and
Credit Act, 28 U.S.C. § 1738. The Court held that when a
state court has rejected a claim preclusion or res judicata de‐
fense based on a prior federal court judgment, then “the Full
Faith and Credit Act requires that federal courts give the
state‐court judgment, and particularly the state court’s reso‐
lution of the res judicata issue, the same preclusive effect it
would have had in another court of the same State.” 474 U.S.
at 525.
In Ramsden, this court applied Parsons Steel to interlocuto‐
ry state‐court decisions like the one in this case. See 214 F.3d
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at 870. We ruled that principles of comity confine a federal
court’s “discretion to enjoin state court proceedings once the
state court expressly and unambiguously decides a res judi‐
cata defense, whether or not there has been a final judgment
on the entire claim in state court.” Id. In these circumstances,
“the interests in preventing possible relitigation
are Y generally outweighed by the heightened comity con‐
cerns except in the most extraordinary circumstances.” Id. at
871.
CFE presented its preclusion defenses to the state court
and lost there. Under the Full Faith and Credit Act, Parsons
Steel, and Ramsden, the district court thus correctly refused to
enjoin FirstMerit’s litigation in state court. Even if CFE were
correct that the state court should have accepted its preclu‐
sion defenses, once CFE lost in the state court, it had no rea‐
sonable grounds to seek an injunction in federal court. Its
proper remedy was to appeal the decision in the state court
system and, if necessary, to seek review by the Supreme
Court of the United States. See Ramsden, 214 F.3d at 872,
quoting Parsons Steel, 474 U.S. at 525. For this additional rea‐
son, we also affirm the judgment of the district court.
III. Sanctions Under Rule 38
FirstMerit has moved for sanctions. Its motion, filed after
briefing on the merits, relies on Federal Rule of Civil Proce‐
dure 11 as the basis for sanctions. That was not correct. Sanc‐
tions on appeal are governed by Federal Rule of Appellate
Procedure 38, not Rule 11. Cooter & Gell v. Hartmax Corp., 496
U.S. 384, 406–07 (1990). But the mistaken label does not mat‐
ter. Rule 38 requires either a separate motion by the appellee
or notice from the court, as well as a reasonable opportunity
to respond. CFE received both. It responded to FirstMerit’s
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motion. While it noted that Rule 11 did not apply, it also re‐
sponded in full to the substance of the motion, which we
have considered. Because CFE was not prejudiced by First‐
Merit’s labeling mistake, we construe FirstMerit’s motion as a
request for sanctions under Rule 38.
Rule 38 authorizes a United States Court of Appeals to
award damages and single or double costs to an appellee
when an appeal is frivolous. The rule is meant to compen‐
sate an appellee for “the expense and delay of defending
against a meritless appeal” and to deter future such ap‐
peals—“protect[ing] the appellate court’s docket for cases
worthy of consideration.” Harris N.A. v. Hershey, 711 F.3d
794, 801 (7th Cir. 2013). An appeal is frivolous “when the re‐
sult is obvious or when the appellant’s argument is wholly
without merit.” Harris, 711 F.3d at 801–02 (internal quotation
marks and citations omitted); see also Wachovia Securities,
LLC v. Loop Corp., 726 F.3d 899, 909 (7th Cir. 2013).
As we explained in Harris, we do not invoke Rule 38
lightly. 711 F.3d at 801. The law often allows for reasonable
disagreements about its application to particular cases, and
too‐ready resort to Rule 38 sanctions could discourage par‐
ties from presenting reasonable and good faith arguments.
Even with that caution, however, this appeal is clearly
frivolous. Under federal preclusion law, which borrows Illi‐
nois principles, the voluntary dismissal of FirstMerit’s feder‐
al case expressly “without prejudice” did not bar FirstMerit
from filing its claims anew in state court. And even if CFE
were correct that it did, once the state court ruled against
CFE on preclusion, an injunction from a federal court still
would have been out of the question. CFE did not bother to
discuss Illinois preclusion law in its briefs, nor did it address
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the complete bar to an injunction established by the Full
Faith and Credit Act, Parsons Steel, and Ramsden. CFE has not
offered a reasonable and good faith argument to avoid af‐
firmance. This appeal is frivolous.2
“When an appeal is frivolous, Rule 38 sanctions are not
mandatory but are left to the sound discretion of the court of
appeals.” Harris, 711 F.3d at 802. The district court warned
CFE that it considered this new federal case to be “an unrea‐
sonable and vexatious multiplication of proceedings already
pending in the state court.” Yet CFE has persisted in continu‐
ing to litigate its preclusion defenses simultaneously in both
federal and state courts. CFE’s conduct flaunts the principles
of comity and federalism that animate both the Full Faith
and Credit Act and the Anti‐Injunction Act. See Parsons, 474
U.S. at 523; Atlantic Coast Line R.R. Co. v. Bhd. of Locomotive
Eng’rs, 398 U.S. 281, 286 (1970); Ramsden, 214 F.3d at 869. We
conclude that sanctions are appropriate to protect the inter‐
ests of the courts, FirstMerit, and other litigants.
Accordingly, appellee FirstMerit Bank, N.A., may submit
any affidavit and supporting papers within 28 days after is‐
suance of this opinion specifying its damages from this frivo‐
lous appeal by CFE. CFE may file a written response no later
than 28 days after FirstMerit files its submission.
2 Also, many of the arguments in CFE’s brief are misleading. For ex‐
ample, according to CFE, Semtek held that a complaint dismissed without
prejudice can be refiled only in the same court. But the sentence in Semtek
immediately following the one cited by CFE actually contradicts that
assertion. It explains that a dismissal without prejudice “will also ordi‐
narily (though not always) have the consequence of not barring the claim
from other courts … .” Semtek, 531 U.S. at 505.
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The judgment of the district court is AFFIRMED, and
Rule 38 sanctions will be imposed under the schedule speci‐
fied.
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