572 B.R. 690
Bankr. N.D. Ill.2017Background
- LB Steel (Debtor) subcontracted into a project at O’Hare; extensive multi‑party state litigation (2005–2015) culminated in a Circuit Court Judgment Order awarding competing money judgments and directing the release of two deposits held by the Clerk: $1,554,654 (City Deposit) and $1,812,696 (Cal Testing Deposit) (the "Deposited Funds").
- Debtor filed Chapter 11 on October 18, 2015, four days after entry of the Judgment Order; the Deposited Funds remained with the state court clerk and a state‑court appeal of the Judgment Order was pending.
- First adversary (Dec. 2015) sought declaratory judgment that Deposited Funds were estate property and turnover; the bankruptcy court dismissed that complaint with prejudice in March 2016, holding the state court had effectuated a pre‑petition setoff.
- Debtor filed the Second Adversary (Dec. 2016) asserting four counts: avoidable setoff under 11 U.S.C. § 553(b), alternatively preference (§ 547(b)) and fraudulent transfer (§ 548(a)), and relief under § 502(d) to recover the funds.
- Walsh moved to dismiss the Second Adversary under Fed. R. Civ. P. 12(b)(1), 12(b)(6) and 41(b), chiefly arguing res judicata/claim‑splitting barred the claims because they could have been raised in the First Adversary; Walsh alternatively sought abstention.
- The bankruptcy court denied dismissal, held res judicata did not bar the Second Adversary under the Restatement §26 statutory‑scheme exception (allowing splitting avoidance and turnover claims), but exercised permissive abstention and stayed further proceedings pending resolution of the state‑court appeal of the Judgment Order.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rooker‑Feldman deprives federal jurisdiction | Debtor: not attacking Judgment Order; seeks federal remedies and may pursue state appeal | Walsh: Debtor’s attack would require reviewing state judgment, invoking Rooker‑Feldman | Court: Rooker‑Feldman not applicable; no 12(b)(1) dismissal |
| Whether res judicata/claim‑splitting bars the Second Adversary | Debtor: statutory scheme permits splitting turnover (§543) and avoidance claims; exceptions apply | Walsh: prior dismissal with prejudice and identical operative facts preclude relitigation | Court: res judicata elements met but statutory‑scheme exception applies; res judicata does not bar suit |
| Whether the complaint fails to state avoidance/setoff claims (12(b)(6)) | Debtor: alleges alternate theories (setoff, preference, fraudulent transfer); pleadings give fair notice | Walsh: setoff not avoidable because effectuated by court; setoff is not a “transfer” under §§547/548 | Court: denied 12(b)(6) dismissal at this stage; factual development unnecessary now |
| Whether the bankruptcy court should abstain in favor of state court | Debtor: federal forum appropriate for avoidance issues | Walsh: issues are intertwined with pending state appeal and state law issues predominate | Court: permissive abstention appropriate; stayed adversary pending state appellate decision |
Key Cases Cited
- Lance v. Dennis, 546 U.S. 459 (U.S. 2006) (Rooker‑Feldman doctrine prevents lower federal review of final state judgments)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard: accept well‑pleaded facts and assess plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must allege facts raising entitlement to relief above speculative level)
- Matrix IV, Inc. v. Am. Nat'l Bank & Trust Co. of Chi., 649 F.3d 539 (7th Cir. 2011) (res judicata elements and claim‑splitting principles)
- Car Carriers, Inc. v. Ford Motor Co., 789 F.2d 589 (7th Cir. 1986) (transactional test for identity of claims)
- Begier v. IRS, 496 U.S. 53 (U.S. 1990) (Bankruptcy Code policy: equality of distribution among creditors)
- Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (U.S. 1976) (factors for abstention and deference to concurrent state proceedings)
- Link v. Wabash R.R. Co., 370 U.S. 626 (U.S. 1962) (court's inherent power to manage docket and dismiss for failure to prosecute)