H.A.L. NY HOLDINGS, LLC, Plaintiff-Appellant, v. JOSEPH MICHAEL GUINAN, JR., Defendant-Appellee.
No. 19-1942
United States Court of Appeals For the Seventh Circuit
ARGUED JANUARY 23, 2020 — DECIDED MAY 5, 2020
Before ROVNER, HAMILTON, and SCUDDER, Circuit Judges.
One might expect that to have been the end of the story. But H.A.L. did not actually pay the judgment it had offered. Instead, H.A.L. filed this new lawsuit against the CEO of Advantage claiming damages of more than $25 million arising from the same transactions. The Advantage CEO invoked the defense of res judicata based on the prior judgment. The district court agreed and dismissed this case. H.A.L. has appealed.
We affirm. Several features of this appeal also convince us that this is one of those unusual cases where we should impose sanctions under We state the facts as alleged in the complaint in this case and, to the extent not inconsistent with them, as alleged in the complaint and as revealed by the docket in the prior case, both proper subjects of judicial notice on a motion to dismiss. Watkins v. United States, 854 F.3d 947, 950 (7th Cir. 2017) (prior complaint); Fletcher v. Menard Corr. Ctr., 623 F.3d 1171, 1173 H.A.L. suffered trading losses and failed to respond promptly to margin calls by Advantage. Advantage then liquidated H.A.L.’s trading positions, which left H.A.L. with a negative account balance of $75,375.26. In September 2017 Advantage sued H.A.L. in the Northern District of Illinois for that amount. The district court had jurisdiction of the case under A few months after entry of judgment in Illinois, on March 14, 2018, H.A.L. filed this lawsuit, not against Advantage but against CEO Guinan, in the Southern District of New York, alleging that he breached common law and federal statutory duties, causing the demise of H.A.L’s account with Advantage to the tune of $25,500,000 in damages. The district court had jurisdiction of the case under On the merits, the question is whether the prior Rule 68 judgment should be given res judicata effect to bar H.A.L.’s claims in this lawsuit. H.A.L.’s opening brief is dedicated chiefly to arguing that Illinois law on this point either favors it or is so uncertain that, if we do not reverse, we should at least certify a question of state law to the Illinois Supreme Court under Circuit Rule 52. Guinan opposes certification and seeks sanctions under We review de novo the district court’s dismissal of the action for failure to state a claim. Benson v. Fannie May Confections Brands, Inc., 944 F.3d 639, 644 (7th Cir. 2019). The attentive reader will have noted that the district court did not actually rule H.A.L.’s complaint failed to state a claim; it reached the quite different conclusion that the lawsuit is barred by the affirmative defense of res judicata. “Federal law distinguishes between the two, and so too should the careful litigator.” Amy St. Eve & Michael A. Zuckerman, The Forgotten Pleading, 7 Fed. Cts. L. Rev. 152, 160 (2013). Strictly speaking, the correct vehicle for determining an affirmative defense on the pleadings is an answer and a motion for judgment on the pleadings under In this particular case, however, the factual foundation for the res judicata defense can be found in the records of the first district court case, the contents of which are subject to judicial notice. The choice between On the merits, the general rule is that the res judicata effect of a federal judgment is a matter of federal common law. Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507–08 (2001). As in this case, though, when the prior federal judgment was rendered as an exercise of a federal court’s diversity jurisdiction over state-law claims, federal common law refers to the res judicata (claim preclusion) law of the state in which the rendering court sits, unless applying that law would be “incompatible with federal interests.” Id. at 508–09. This rule is not dictated by the Rules of Decision Act, We apply state law “as it either has been determined by the highest court of the state or as it would be by that court if the present case were before it now.” Allstate Ins. Co. v. Menards, Inc., 285 F.3d 630, 637 (7th Cir. 2002). Contrary to H.A.L.’s arguments, we do not try to apply what we perceive to be a regional law within a state, such as might arise if a state The prior Rule 68 judgment was rendered in the Northern District of Illinois, so Semtek directs us to Illinois claim preclusion law. In Illinois, the defense of res judicata or claim preclusion requires proof of three elements: “(1) there was a final judgment on the merits rendered by a court of competent jurisdiction; (2) there was an identity of cause of action; and (3) there was an identity of parties or their privies.” Rein v. David A. Noyes & Co., 665 N.E.2d 1199, 1204 (Ill. 1996). The defense precludes not only relitigation of “what was actually decided in the original action,” but also litigation of any “matters which could have been decided in that suit.” Id. In this case, the second and third elements are admitted. H.A.L. challenges the first element, arguing that Illinois would not regard a Rule 68 judgment as “a final judgment on the merits” eligible for claim-preclusive effect. Illinois is one of the few American jurisdictions without a general offer-of-judgment rule analogous to H.A.L.’s contrary arguments on appeal were “foreordained to lose.” Jaworski v. Master Hand Contractors, Inc., 882 F.3d 686, 691 (7th Cir. 2018). First, H.A.L. never breathed a whisper of Illinois law in the district court. Instead, H.A.L.’s brief on the preclusion issue ignored Semtek and insisted that state law was irrelevant. On appeal, though, H.A.L. has shifted to an entirely new theory, based entirely on Illinois law. That entirely new theory was of course waived, and H.A.L. and its lawyer should have known that before pursuing this theory on appeal. Now on appeal, H.A.L. concedes that its arguments in the district court were “wrong.” It does not argue that Illinois law actually supports it. It argues instead that we should either apply what it says is the law of the Illinois Appellate Court’s First District or certify the question of state law to the Illinois Supreme Court. Clearer cases of waiver “in the truest sense” are hard to find. G & S Holdings LLC v. Cont’l Cas. Co., 697 F.3d 534, 538 (7th Cir. 2012). Second, putting aside the fatal waiver, even on its own terms H.A.L.’s position in the district court was wrong on the merits of federal law, without reference to state law. H.A.L. argued that federal law would not allow giving res judicata H.A.L. argued that the prior Rule 68 judgment was not a “final judgment on the merits” because it contained no admission of liability. This was and is a non-starter. See International Bldg. Co., 345 U.S. at 506 (“Certainly the [consent] judgments entered are res judicata of the tax claims … , whether or not the basis of the agreements on which they rest reached the merits.”). “The rule that a defendant’s judgment acts as a bar to a second action on the same claim is based largely on the ground that fairness to the defendant, and sound judicial administration, require that at some point litigation over the particular controversy come to an end.” Restatement (Second) of Judgments § 19 cmt. a (Am. Law Inst. 1982). What difference could it make for this purpose that the plaintiff previously insisted it did nothing wrong while agreeing in the same breath to pay money on pain of contempt against defendant’s claim of wrongdoing? See Fletcher v. City of Fort Wayne, 162 F.3d 975, Third, waiver notwithstanding, H.A.L.’s position on appeal is foreclosed as a matter of controlling circuit law applying Illinois claim-preclusion law. H.A.L.’s opening brief cited neither 4901 Corporation nor our other precedents on the preclusive effect accorded by Illinois to “equivalent” compromise judgments. See 4901 Corp., 220 F.3d at 529–30; see also Arlin Golf, LLC v. Village of Arlington Heights, 631 F.3d 818 (7th Cir. 2011) (voluntary dismissal with prejudice pursuant to settlement agreement was res judicata under Illinois law); Majeske v. Fraternal Order of Police, Local Lodge No. 7, 94 F.3d 307, 312–14 (7th Cir. 1996) (judgment incorporating settlement agreement, “rather than being the result of full litigation on the merits,” was res judicata under Illinois law); Torres v. Rebarchak, 814 F.2d 1219, 1223 (7th Cir. 1987) (under Illinois law, “res judicata applies even if the dismissal was the result of a settlement or compromise between the parties”) (cited once without discussion by H.A.L.). The precedential force of these decisions is not impaired by a handful of Illinois Appellate Court opinions arguably stating the law differently. Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2004). Empirically the “split” is thus largely illusory. It is wholly so when we trace the First District foundations for H.A.L.’s new appellate argument in Kandalepas v. Economou, 645 N.E.2d 543 (Ill. App. 1994), and Caporale v. Shannon Plumbing Co., 314 N.E.2d 540 (Ill. App. 1974). Kandelepas is commonly quoted to the effect that “an agreed order is not a judicial determination of the parties’ rights” but “a recordation of the agreement between the parties.” 645 N.E.2d at 548.1 A federal court is most certainly not “a recorder of contracts” but “an Caporale also does not help H.A.L. The case held that a defendant had waived its argument that a prior stipulated dismissal was res judicata by participating in subsequent litigation through a contested judgment. 314 N.E.2d at 542. In the alternative, a stipulated dismissal “as a matter of administrative convenience” (the two suits had been consolidated before the first was dismissed, id. at 541) estopped the defendant from raising the defense. Id. at 542. That Caporale does not hold that consent judgments cannot be res judicata is clear from the opinion of the concurring judge, who thought they could not be. See id. (Hallett, J., concurring). We see nothing in Kandalepas, Caporale, or the cases citing them that would persuade the Illinois Supreme Court to reject the weight of contrary authority from its own decisions, many other Illinois appellate decisions, and courts in other jurisdictions. As for H.A.L.’s motion to certify an issue of law to the Illinois Supreme Court under Circuit Rule 52, the “most important consideration” in deciding whether to certify is “whether the reviewing court finds itself genuinely uncertain about a question of state law that is vital to a correct disposition of the case.” State Farm Mut. Auto. Ins. Co. v. Pate, 275 F.3d 666, 671 (7th Cir. 2001). For the reasons just explained, we are not genuinely uncertain about Illinois law on this point. The motion to certify is denied. There remains only defendant Guinan’s motion for sanctions under H.A.L.’s appeal fits this bill. Its sole argument to the district court—that federal law applied and Rule 68 judgments could not support res judicata—was doomed. First, it was built on the admittedly flawed premise that state law was irrelevant. Second, it was doomed on its own terms by unanimous federal precedent. On appeal H.A.L. has conceded that its sole argument to the district court was “wrong,” which effectively concedes that its appeal cannot succeed. Most of its opening brief argued that Illinois law on claim preclusion was unsettled. The brief did not address our precedents applying that law, nor did it attempt to apply our well-settled predictive approach to determining its content as a matter of first principles. Finally, H.A.L.’s only substantive argument against claim preclusion is contained in three pages of its opening brief that repeated its position (no admission of liability equals no preclusion) without even addressing the controlling authority that the district court cited and followed. Failing to engage with a district court’s central reasons and authority is usually a reliable sign of a doomed appeal. E.g., Hackett v. City of South Bend, — F.3d —, — (7th Cir. 2020); Webster v. CDI Indiana, LLC, 917 F.3d 574, 578 (7th Cir. 2019); Klein v. O’Brien, 884 F.3d 754, 757 (7th Cir. 2018) “When an appeal is frivolous, Rule 38 sanctions are not mandatory but are left to the sound discretion of the court of appeals to decide whether sanctions are appropriate.” Harris, 711 F.3d at 802. “Typically the courts have looked for some indication of the appellant’s bad faith suggesting that the appeal was prosecuted with no reasonable expectation of altering the district court’s judgment and for purposes of delay or harassment or out of sheer obstinacy.” Reid v. United States, 715 F.2d 1148, 1155 (7th Cir. 1983), citing Ruderer v. Fines, 614 F.2d 1128, 1132 (7th Cir. 1980), and Roadway Express, Inc. v. Piper, 447 U.S. 752, 766 (1980) (discussing scope of bad faith). This appeal fits that description, for several reasons. After having made a Rule 68 offer of judgment that was accepted, H.A.L.’s unsuccessful attempt to litigate its case on its home turf, its continuing failure to pay the judgment it offered to Advantage, its appellate abandonment of its We close by emphasizing again that this court’s doors are always open to “disagreements brought to us in good faith,” Harris, 711 F.3d at 801, including good-faith arguments for modifying or reversing existing law. See I. Factual and Procedural Background
II. Analysis
A. Standard of Review
B. The Rule 68 Judgment
C. H.A.L.’s Counterarguments
IV. Motion for Sanctions