Kevin Duff v. Central Sleep Diagnostics , 801 F.3d 833 ( 2015 )


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  •                                In the
    United States Court of Appeals
    For the Seventh Circuit
    ____________________
    No. 13-3837
    KEVIN B. DUFF, as Receiver for
    Central Sleep Diagnostics, LLC,
    Plaintiff-Appellee,
    v.
    CENTRAL SLEEP DIAGNOSTICS, LLC, et al.,
    Defendants.
    APPEAL OF: GOODMAN TOVROV HARDY & JOHNSON LLC
    ____________________
    Appeal from the United States District Court for the
    Northern District of Illinois, Eastern Division.
    No. 10 C 6162 — Rebecca R. Pallmeyer, Judge.
    ____________________
    ARGUED SEPTEMBER 15, 2014 — DECIDED SEPTEMBER 10, 2015
    ____________________
    Before FLAUM, KANNE, and SYKES, Circuit Judges.
    SYKES, Circuit Judge. At the request of defrauded investors
    and creditors, a district judge ordered Central Sleep Diag-
    nostics, LLC, into receivership in November 2010 and issued
    a stay against “all civil legal proceedings of any nature”
    involving Central Sleep, its promotor Kenneth Dachman, his
    2                                                No. 13-3837
    wife, and the other defendants in the underlying fraud case.
    The receivership was closed in December 2013, and the
    victims received pennies on the dollar for their claims.
    Adam Goodman was a former attorney for Central Sleep
    and one of its creditors based on an unpaid bill for legal
    services. Early in the federal proceedings, Goodman correct-
    ly anticipated that the receivership would be unable to pay
    claims in full, so he attempted to outmaneuver the receiver.
    He obtained a judgment for the unpaid fees and submitted a
    claim to the receiver. But he also filed a lien against the
    proceeds of a medical-malpractice lawsuit the Dachmans
    had filed in state court. Both the lawsuit and the lien fla-
    grantly violated the district judge’s stay order. Neither
    Goodman nor the Dachmans informed the receiver or the
    judge of these developments.
    That’s not all. The receiver eventually learned of the
    medical-malpractice suit and recovered the settlement
    proceeds for the receivership estate. When the receiver later
    proposed a plan of distribution, Goodman objected. He
    argued that his lien entitled him to be paid in full directly
    from the proceeds of the medical-malpractice suit, rather
    than pro rata from the receivership estate like the other
    creditors. The judge rejected this argument but offered
    Goodman the opportunity to post a supersedeas bond to
    delay distribution of the receivership estate pending appeal,
    should he wish to seek review of her decision. Goodman did
    not post a bond. The judge approved the receiver’s distribu-
    tion plan and the funds were distributed.
    With the receivership estate now fully distributed and
    the receivership closed, Goodman asks us to overturn the
    judge’s approval of the plan and reopen the receivership to
    No. 13-3837                                                   3
    permit him to recover the full amount of his claim. We
    decline this request, affirm the district court’s order, and
    grant the receiver’s motion for sanctions against Goodman
    and his law firm under Rule 38 of the Federal Rules of
    Appellate Procedure.
    I. Background
    On August 31, 2010, investors in Central Sleep filed suit
    in Cook County Circuit Court against the company; Kenneth
    Dachman, its promoter; Dachman’s wife, Katherine Lynn
    Dachman; and several others. The suit asserted claims for
    fraud, RICO violations, conversion, fraudulent conveyance,
    civil conspiracy, and securities fraud. Dachman was also
    criminally charged and convicted for his fraudulent conduct.
    See United States v. Dachman, 
    743 F.3d 254
    (7th Cir. 2014)
    (affirming a 120-month prison sentence against Kenneth
    Dachman for related wire-fraud convictions). He spent the
    funds he stole from investors on “a tattoo parlor; family
    vacations and cruises to Italy, Nevada, Florida, and Alaska; a
    new Land Rover; rare books; and to fund personal stock
    trading and gambling.” 
    Id. at 256.
        In the civil case, the investors requested equitable relief,
    including disgorgement of profits and the appointment of a
    receiver to marshal the company’s remaining assets, collect
    amounts owed to it, and distribute the proceeds. Goodman
    and his law firm, the adverse claimant-appellant in this case,
    represented the defendants and removed the case to federal
    4                                                     No. 13-3837
    court. 1 The defendants fired Goodman soon after, but not
    before racking up a $28,205.36 bill for legal services.
    On November 1, 2010, the district judge appointed
    James E. Sullivan as receiver for Central Sleep. Along with
    other creditors, Goodman received notice of the receiver-
    ship. Several months later, in March 2011, Goodman sued
    the defendants in Cook County Circuit Court for his unpaid
    legal fees. Kevin B. Duff, the appellee in this case, succeeded
    Sullivan as receiver.
    On June 16, 2011, the district judge entered an order stay-
    ing nunc pro tunc from October 18, 2010, “[a]ll civil legal
    proceedings of any nature, including, but not limited to …
    actions of any nature involving … (c) any of the
    [d]efendants.” Soon thereafter the judge entered summary
    judgment for the plaintiffs and awarded $2.5 million in
    damages.
    The defendants did not appear in Goodman’s state-court
    suit for unpaid legal fees, so on August 22, 2011, Goodman
    moved for default judgment. He then sought limited relief
    from the district court’s stay order, claiming that he had
    been unaware of it until after he filed the default-judgment
    motion when he was contacted by the receiver’s attorney.
    Goodman’s motion stated that he intended “to obtain judg-
    ment and begin garnishment proceedings” because
    “[p]resumably, some or all of the six individual defendants
    are gainfully employed.” The receiver and the plaintiffs’
    attorney both opposed the motion. On September 6, 2011,
    1 Goodman Law Offices LLC is now known as Goodman Tovrov
    Hardy & Johnson LLC. For simplicity, we refer to Goodman personally
    throughout this opinion.
    No. 13-3837                                                 5
    the judge entered an order granting limited relief from the
    stay: “Motion for limited relief from [the stay order] granted
    without prejudice to objections, if any, that may be asserted
    should movant succeed in recovering money from
    Mr. Dachman and his co-[d]efendants.”
    On September 11, 2011, Goodman obtained a default
    judgment against Central Sleep Diagnostics for $28,205.36,
    along with an assessment of $394 in costs. On March 14,
    2012, he obtained default judgments against the individual
    defendants for $28,205.36 plus $1,282.14 in costs (with an
    additional $2,100 against Katherine Dachman).
    In September 2012 Goodman filed a claim with the re-
    ceiver for these amounts plus postjudgment interest, along
    with a claim-verification form. The form, signed by Good-
    man, stated in part:
    Claimant/creditor acknowledges and agrees
    that by submitting this claim verification form,
    claimant/creditor subjects his/her/its claim to
    the jurisdiction of the U.S. District Court for
    the Northern District of Illinois, Eastern Divi-
    sion, which is administering the Receivership
    Estate (“Receivership Court”). Claimant/
    creditor further agrees that his/her/its claim
    shall be adjudicated, determined and paid as
    ordered by the Receivership Court. Claimant/
    creditor further consents to, and understands
    that the Receivership Court will determine:
    (i) his/her/its right to any money from the Re-
    ceivership Estate, if any is available; (ii) the
    priority of his/her/its claim; (iii) the scheduling
    and allocation of any assets to be distributed;
    6                                                           No. 13-3837
    and (iv) all objections and disputes regarding
    the allowance of his/her/its claim by the Re-
    ceiver, which shall be submitted to and subject
    to review by the Receivership Court for a final
    ruling without a jury.
    Around the same time, Goodman learned that the
    Dachmans had filed a medical-malpractice lawsuit in Cook
    County Circuit Court against a physician and his medical
    practice. That suit—captioned Dachman v. Buyer, 2012 L
    004568—was filed by a different law firm with no connection
    to Goodman (as far as we can tell). The receiver and the
    district judge were completely unaware that the Dachmans
    had filed this action, which was a flagrant violation of the
    stay order. Goodman didn’t tell them either.
    Instead, on November 5, 2012, Goodman filed a lien in
    the Buyer case against the Dachmans’ interest in any judg-
    ment proceeds. This too violated the district court’s stay
    order. After securing the lien, Goodman sought to improve
    his odds of recovery by asking another state judge to declare
    the judgment lien “spread of record.” 2 That order issued on
    December 4, 2012.
    On July 22, 2013, the Buyer case settled for $305,000. The
    receiver learned of the suit and settlement about a week
    later, before any money was distributed to Goodman or the
    2 In Illinois this procedure allows a judgment-lien creditor to perfect a
    lien against a judgment. Having a judgment lien “spread of record” can
    obligate defendants to pay the judgment creditor directly for amounts
    the plaintiff owes the creditor, ahead of any payments to the plaintiffs
    under a judgment or settlement. See Podvinec v. Popov, 
    658 N.E.2d 433
    (Ill.
    1995).
    No. 13-3837                                                  7
    Dachmans. He filed an emergency request with the district
    court to freeze the settlement funds and impose a judicial
    lien. On July 30 the judge ordered a temporary freeze of the
    settlement proceeds. Two weeks later she granted the re-
    ceiver’s request to impose a lien and directed the Dachmans’
    medical-malpractice firm to place the $305,000 settlement
    proceeds in the receiver’s trust account. The firm complied,
    though it later received a portion of the settlement as legal
    fees.
    On September 6, 2013, the receiver filed a plan of distri-
    bution proposing a pro rata payout of the receivership
    estate, after legal and accounting fees. The plan included the
    Buyer settlement proceeds in the receivership estate; indeed,
    the settlement was the largest asset in the estate. As relevant
    to this appeal, the plan also excluded interest, court costs,
    and collection-related attorney’s fees from the claim calcula-
    tions. The claimants were identified by number in the public
    record to protect their privacy; the receiver submitted their
    names to the court in camera.
    Goodman opposed the receiver’s plan of distribution, ar-
    guing that his lien entitled him to recover his entire claim
    amount, plus court costs and interest, directly from the Buyer
    settlement, ahead of all other claimants. He also objected to
    keeping the identity of the other claimants confidential. The
    judge rejected these arguments, and on October 24, 2013,
    denied Goodman’s motion to hold back funds from the
    distribution pending an appeal. She set a supersedeas bond
    of $250,000 “[s]hould Mr. Goodman file an appeal.”
    Goodman never posted the $250,000 supersedeas bond.
    On November 19, 2013, the judge approved the receiver’s
    amended distribution plan, which listed a total receivership
    8                                                 No. 13-3837
    estate of $403,882.68. The judge explicitly found that the
    Buyer proceeds were properly part of the receivership estate
    and that Goodman had no greater right of recovery than any
    other creditor. In the weeks that followed, the estate was
    fully distributed. Goodman received his pro rata share:
    $1,733.50. In the meantime, he filed a notice of appeal. The
    receivership was formally terminated on December 31, 2013.
    II. Discussion
    Goodman argues that the district court erred (1) by dis-
    regarding his “perfected lien” against the Buyer settlement
    proceeds, and (2) by approving a distribution plan that
    “crammed down” his claim (that is, excluded postjudgment
    interest and costs) and omitted the names of the other claim-
    ants from the public record. The receiver responds that the
    distribution of the entirety of the receivership estate moots
    Goodman’s appeal and that, in any case, the appeal is frivo-
    lous. By separate motion he asks for sanctions against
    Goodman under Rule 38 of the Federal Rules of Appellate
    Procedure.
    A. Mootness
    The receiver argues that the distribution of all the receiv-
    ership assets moots Goodman’s appeal. The appeal is not
    moot in the constitutional sense. Goodman asks us to reverse
    the district court’s order approving the plan and to reopen
    the receivership. If we were to agree, Goodman might ask
    the district court to exercise “equitable powers to recover
    erroneous distributions.” In re Vlasek, 
    325 F.3d 955
    , 962 (7th
    Cir. 2003). The district court also would have the power
    No. 13-3837                                                   9
    (though certainly not the obligation) to allow Goodman to
    sue the receiver personally for making an illegal distribution.
    Cf. In re Linton, 
    136 F.3d 544
    , 545 (7th Cir. 1998) (upholding a
    bankruptcy judge’s denial of leave to sue a bankruptcy
    trustee, while recognizing that “[t]he trustee in bankruptcy
    is a statutory successor to the equity receiver, and it ha[s]
    long been established that a receiver could not be sued
    without leave of the court that appointed him”). In short,
    Goodman has a personal stake in the outcome and at least
    some arguably available remedial options to maintain a
    justiciable claim under Article III of the Constitution. See
    Genesis Healthcare Corp. v. Symczyk, 
    133 S. Ct. 1523
    , 1528
    (2013) (internal quotation marks omitted).
    The receiver also invokes another doctrine, sometimes
    confused with constitutional mootness, known as “equitable
    mootness.” This doctrine “essentially derives from the
    principle that in formulating equitable relief[,] a court must
    consider the effects of the relief on innocent third parties.”
    SEC v. Wealth Mgmt. LLC, 
    628 F.3d 323
    , 331 (7th Cir. 2010)
    (quotation marks omitted); accord United States v. Segal,
    
    432 F.3d 767
    , 773–74 (7th Cir. 2005); SEC v. Wozniak, 
    33 F.3d 13
    , 15 (7th Cir. 1994), overruled on other grounds by SEC v.
    Enter. Trust Co., 
    559 F.3d 649
    (7th Cir. 2009). An appellate
    court may properly refuse to decide the merits of a challenge
    to a bankruptcy or receivership plan where unwinding the
    plan (even if legally justifiable) would be difficult and
    inequitable in light of the complexity of the transactions and
    the reliance interests involved. This is not “real mootness”;
    the court has jurisdiction to alter the outcome, but equitable
    considerations make it unfair or impracticable to intervene.
    See In re UNR Indus., 
    20 F.3d 766
    , 769 (7th Cir. 1994) (distin-
    10                                                 No. 13-3837
    guishing the concept of equitable mootness from “real
    mootness”).
    In evaluating the receiver’s argument for equitable
    mootness, the two key factors are “(1) the legitimate expecta-
    tions engendered by the plan; and (2) the difficulty of revers-
    ing the consummated transactions.” Wealth 
    Mgmt., 628 F.3d at 332
    . This fact-intensive inquiry weighs “the virtues of
    finality, the passage of time, whether the plan has been
    implemented and whether it has been substantially con-
    summated, and whether there has been a comprehensive
    change in circumstances.” 
    Segal, 432 F.3d at 774
    (citing cases)
    (quotation marks omitted).
    The reliance interests of the other claimants in this case
    seem quite significant. We cannot say with certainty how
    significant because the extent of their reliance is partly a
    function of their current personal circumstances, which the
    record before us does not disclose. See, e.g., In re Envirodyne
    Indus., 
    29 F.3d 301
    , 304 (7th Cir. 1994) (noting an insufficient
    record on “whether modification of the plan … would bear
    unduly on the innocent”). We know that some of the claim-
    ants are elderly, and many were very badly harmed by
    Dachman’s fraud. They received about six cents for every
    dollar of their approved claims against Central Sleep. The
    investor with the greatest loss, whose claim of $625,000 was
    approved by the receiver, recovered only around $38,000
    from the estate. A clawback for Goodman would cost the
    others more than 10% of their already meager recovery.
    The other claimants also have a right to expect to keep
    what they received. The plan has been not only “substantial-
    ly consummated,” 
    Segal, 432 F.3d at 774
    , but fully consum-
    mated, and the receivership is now closed. The claimants
    No. 13-3837                                                    11
    know that Goodman never posted a supersedeas bond after
    his arguments failed and his request for a holdback was
    rejected by the district court. And as far as we can tell, the
    other claimants (unlike Goodman) did not try to impede the
    receivership. The “legitimate expectations engendered by
    the plan” weigh against our consideration of Goodman’s
    appeal. Wealth 
    Mgmt., 628 F.3d at 332
    .
    The difficulty of undoing the transaction is a closer call.
    In some respects this plan may be simpler to unwind than
    others this court has seen. Most importantly, this plan
    involved distribution of cash, which is easy to count and
    value, unlike stock distributions or asset sales. Cf. 
    Segal, 432 F.3d at 774
    (sale of a former business, with consequences
    for employees and competitors); In re Envirodyne 
    Indus., 29 F.3d at 304
    (distributions of stock, some of which were
    already sold); In re UNR 
    Indus., 20 F.3d at 769
    (stock sale).
    Because there is nothing left of Central Sleep, there are no
    investors in a reorganized business whose interests would
    be negatively affected. So there is less risk that in future
    receivership proceedings similarly placed investors will
    underpay for receivership assets out of concern that further
    litigation may reduce asset value. Cf. In re UNR 
    Indus., 20 F.3d at 770
    .
    In addition, the number of claimants, the sum of money
    at stake, and the size of the distribution plan are all relatively
    small. Goodman would seek to claw back from the 50 other
    claimants approximately $30,000, minus the $1,700 he has
    already recovered. The claimants received total distributions
    that add up to about $243,000. Cf. Wealth 
    Mgmt., 628 F.3d at 332
    ($4.2 million was already distributed to 300 investor-
    claimants); In re Envirodyne 
    Indus., 29 F.3d at 303
    ($141
    12                                                  No. 13-3837
    million in stock was already distributed to noteholders); In re
    UNR 
    Indus., 20 F.3d at 769
    (15 million shares of stock traded
    in public markets were already distributed). If he were
    successful on appeal, Goodman could seek about $8,400 total
    from the two claimants with the largest distributions; the
    remaining $19,900 would have to come from everyone else—
    an average of around $400 per claimant.
    But when we consider the difficulty of unwinding the
    receivership distribution in an equitable sense, we are
    mindful of the cumulative practical costs this choice would
    impose on the participants in the plan. When recovery
    amounts get this small—an average of $400 each from most
    of the claimants—there is a real possibility that the net social
    value of a partial do-over would be negative. A claimant
    who prevails on appeal doesn’t internalize the costs that his
    efforts to claw back distributions would impose on everyone
    else, so we cannot simply rely on Goodman to stop collect-
    ing when the total costs exceed the remaining potential
    recovery. (This point is reinforced by Goodman’s litigation
    behavior to date.) So while in some cases smaller sums of
    money and fewer participants in a receivership plan could
    lessen the reviewing court’s practical concerns, here the
    difficulty of reversing this transaction—from equitable and
    practical perspectives—tips in favor of preserving the status
    quo.
    Because Goodman’s appeal is patently frivolous on the
    merits, however, we need not come to a firm conclusion
    about equitable mootness. See Wealth 
    Mgmt., 628 F.3d at 332
    (concluding that “we need not take the analysis any further”
    because the district court’s decision was being affirmed on
    the merits); 
    Segal, 432 F.3d at 774
    (deciding that the difficulty
    No. 13-3837                                                  13
    in “determin[ing] the precise effects” of trying to unwind the
    settlement “prevents us from conclusively holding … that it
    would be foolish for us to even consider reversing the deal”);
    In re Envirodyne 
    Indus., 29 F.3d at 304
    (stating that if there
    were doubts about the lack of merit to the appellant’s argu-
    ment, the court would remand the case to the district court
    to determine the effect of modifying the plan on the other
    participants). We therefore proceed to the merits of Good-
    man’s claims.
    B. The Merits
    1. The “Perfected Lien” Claim
    Because the district court has “broad equitable power in
    this area,” we review the court’s decision approving the
    distribution plan deferentially, for abuse of discretion.
    Wealth 
    Mgmt., 628 F.3d at 332
    . Goodman argues that the
    judge erred in rejecting his claim to preferential treatment
    based on his “perfected lien” against the settlement proceeds
    in the Dachmans’ medical-malpractice case. He boasts that
    he “found the medical malpractice case about nine months
    before Mr. Duff did, and perfected a security interest in it
    long before Mr. Duff was even aware that the case existed.”
    As legal support for this argument, Goodman relies
    largely on the Full Faith and Credit Act, which requires
    federal courts to give the judicial acts of the states “the same
    full faith and credit … as they have by law or usage in the
    courts of such State, Territory or Possession from which they
    are taken.” 28 U.S.C. § 1738. Goodman contends that the
    district court violated the Act by failing to recognize and
    accord priority to his state-court lien.
    14                                                   No. 13-3837
    The first obvious problem with Goodman’s argument is
    that the Full Faith and Credit Act does not apply when the
    claim or issue before a federal court was never actually
    decided in state court. Applying the Full Faith and Credit
    Act requires “tak[ing] up the question: What matters did the
    [state-court judgment] legitimately conclude?” Baker by
    Thomas v. Gen. Motors Corp., 
    522 U.S. 222
    , 237 (1998). Here,
    there is no state-court judgment addressing the relative
    priority of Goodman’s claim to the Buyer settlement pro-
    ceeds as against the receiver’s. The state court’s order
    spreading the lien of record meant only that Goodman
    should have priority over the plaintiffs in the case—that is,
    the Dachmans. The state court never considered, much less
    decided, whether Goodman or the receiver would have
    priority. How could it? Goodman never informed the state
    judge of the receivership, nor did he give the receiver notice
    of the state proceedings.
    The district judge therefore had no need to address the
    validity of Goodman’s lien when deciding that the Buyer
    proceeds belonged to the receivership estate; it was suffi-
    cient that the receiver had a superior claim. And the receiv-
    er’s claim was properly prioritized over Goodman’s later
    “perfected lien.” Receivers can displace even prior security
    interests in receivership property in some circumstances. See,
    e.g., Gaskill v. Gordon, 
    27 F.3d 248
    , 251 (7th Cir. 1994) (priori-
    tizing a receiver’s lien for fees over a preexisting mortgage
    where the mortgagee acquiesced in the receivership). A
    receivership court can certainly use its equitable powers to
    give the receiver’s judgment priority over a state-court lien
    obtained by a claimant subsequent to that judgment.
    No. 13-3837                                                    15
    In any event, because Goodman obtained the lien in vio-
    lation of the district court’s order, the judge could simply
    disregard the lien. This is the second glaring problem with
    Goodman’s argument. In her September 2011 order, the
    judge lifted the stay for a narrowly limited purpose. Good-
    man was permitted to obtain a state-court judgment and
    perhaps garnish the defendants’ wages, subject to objections
    by the receiver. Because Goodman’s motion to lift the stay did
    not request permission to pursue any collection actions
    beyond this, the federal stay remained in effect with respect
    to other potential sources of recovery, including the pro-
    ceeds of the Buyer case. And the September 2011 order
    partially lifting the stay was specifically conditioned on the
    receiver’s right to object to Goodman’s efforts in state court;
    under no reading of that order was Goodman authorized to
    perfect a lien against the Buyer proceeds without giving the
    receiver notice and an opportunity to object.
    The Full Faith and Credit Act directs courts to apply the
    “law or usage in the courts” of the rendering state in analyz-
    ing the preclusive effect of state-court judgments. 28 U.S.C.
    § 1738; see also Marrese v. Am. Acad. of Orthopaedic Surgeons,
    
    470 U.S. 373
    , 380 (1985); Czarniecki v. City of Chicago, 
    633 F.3d 545
    , 548 n.3 (7th Cir. 2011). Illinois courts do not enforce
    liens obtained in violation of a federal stay. See, e.g., Cohen v.
    Salata, 
    709 N.E.2d 668
    , 672 (Ill. App. Ct. 1999) (vacating a
    lower-court order after deciding that a bankruptcy automat-
    ic stay order had deprived the state court of subject-matter
    jurisdiction over the claim in the first place). Goodman does
    not argue otherwise; instead he maintains that he never
    violated the stay in obtaining or perfecting the lien. For the
    reasons we’ve already explained, that claim cannot be taken
    seriously.
    16                                                No. 13-3837
    Goodman also altogether ignores the fact that the mal-
    practice case itself was from beginning to end conducted by
    the Dachmans in violation of the federal stay. We could
    easily affirm on this basis too. A state-court action that
    violates a federal stay order is voidable in federal court, if
    not void ab initio. See Middle Tenn. News Co. v. Charnel of
    Cincinnati, Inc., 
    250 F.3d 1077
    , 1082 n.6 (7th Cir. 2001) (ac-
    knowledging debate between circuits over whether actions
    taken in violation of a bankruptcy automatic stay order “are
    void or merely voidable”); accord Kimbrell v. Brown, 
    651 F.3d 752
    , 755 (7th Cir. 2011). Irrespective of Goodman’s own
    violation of the stay order, the Dachmans’ violation of the
    stay brought the proceeds of that action properly within the
    discretion of the receivership court.
    Because Goodman has given us no nonfrivolous argu-
    ment to support his claim that the district court erred in
    disregarding his “perfected lien,” we will not disturb the
    court’s reasonable inclusion of the entire Buyer settlement in
    the receivership estate without regard to the lien.
    2. Other Challenges to the Plan of Distribution
    Goodman raises two additional challenges to the judge’s
    approval of the receiver’s distribution plan. First, he argues
    that the judge erred in approving a plan that “crammed
    down” his claim by excluding postjudgment interest and
    court costs. Second, he argues that the decision to keep the
    claimants’ identities out of the public record was improper.
    These claims are equally flimsy.
    Goodman asserts that because his state-court default
    judgment against Central Sleep awarded court costs and
    No. 13-3837                                                  17
    Illinois law allows postjudgment interest, 735 ILL. COMP.
    STAT. 5/2-1303, those amounts must be recognized as part of
    his claim in the receivership proceedings. Again he relies on
    the Full Faith and Credit Act, but he makes a number of
    obvious errors in his analysis. For starters, the district judge
    never questioned either the validity of the state-court judg-
    ment or its amount. And Goodman continues to overlook
    the fact that his ability to execute on his state-court judgment
    was strictly limited by the terms of the district judge’s
    September 2011 order granting relief from the stay and his
    consent to the equitable jurisdiction of the receivership
    court. To repeat: the judge’s order granted Goodman limited
    relief from the stay subject to objections by the receiver. The
    receiver’s proposed plan of distribution disallowed, as a
    matter of equity, Goodman’s claim of entitlement to court
    costs and postjudgment interest, something other claimants
    could not receive. The judge was entitled to agree.
    Goodman hasn’t explained how the judge otherwise
    abused her discretion. His inability to do so is no surprise;
    the judge’s approval of the plan was clearly correct. The
    exclusion of this small portion of Goodman’s claim was
    entirely appropriate because many claimants were prevent-
    ed by the district court’s stay order from filing state-court
    actions. Other claimants had filed the receivership action in
    the first place and also could not separately pursue their
    claims in state court. To treat the claimants equally across
    the board, the final distribution plan reasonably excluded
    claim amounts attributable to penalties, interest, and attor-
    ney’s fees.
    Goodman’s argument with respect to the confidentiality
    of claimants’ identities fares no better. A district court’s
    18                                                No. 13-3837
    decision to keep a litigant’s name confidential is reviewed for
    abuse of discretion. Doe v. Elmbrook Sch. Dist., 
    658 F.3d 710
    ,
    721–24 (7th Cir. 2011), reversed on other grounds en banc,
    
    687 F.3d 840
    , 842–43 (7th Cir. 2012) (adopting the panel’s
    analysis on anonymity). We are at least as deferential to a
    decision to keep other aspects of the record under seal.
    Goodman mounts only a feeble challenge to the judge’s
    decision, citing a single case, Mueller v. Raemisch, 
    740 F.3d 1128
    (7th Cir. 2014), and relying on generalized references to
    bankruptcy-court practice. Neither Mueller nor general
    bankruptcy practice helps him here.
    While secrecy in judicial proceedings is generally disfa-
    vored (as we made clear in Mueller, 
    see 740 F.3d at 1135
    –36),
    Goodman makes no effort to explain why the limited confi-
    dentiality allowed here is not appropriate in the context of
    this receivership. Indeed, the litigants’ names are public.
    Goodman insists that the names of all the other claimants—
    the victims of Dachman’s fraud—be made public. To the
    extent that this argument relies on Mueller, that case is not
    even remotely analogous. In Mueller we criticized a decision
    to allow sex-offender plaintiffs to litigate anonymously in a
    constitutional challenge to a state sex-offender registration
    law. Our criticism was largely premised on the fact that their
    status as sex offenders was already a matter of public record;
    we also noted they were perpetrators, not victims. See 
    id. It should
    be self-evident that this reasoning does not apply
    here.
    Goodman also seeks support from general bankruptcy
    practice, but the Bankruptcy Code specifically provides that
    “a paper filed in a case under this title … [is a] public rec-
    ord” subject to limited exceptions. 11 U.S.C. § 107(a). A
    No. 13-3837                                                    19
    federal receivership is not governed by the Bankruptcy
    Code. Goodman has not explained why a receivership
    court’s broad discretion does not include the discretion to
    treat as confidential the names of the claimants. Nor has he
    given us any reason to think that the judge abused her
    discretion here.
    C. Rule 38 Sanctions
    Rule 38 of the Federal Rules of Appellate Procedure al-
    lows us to “award just damages and single or double costs”
    when an appeal is frivolous. Rule 38 sanctions compensate
    the aggrieved party and deter future frivolous appeals.
    McCoy v. Iberdrola Renewables, Inc., 
    769 F.3d 535
    , 536–37 (7th
    Cir. 2014). An appeal is frivolous “when the result is obvious
    or when the appellant’s argument is wholly without merit.”
    
    Id. at 538.
    Sanctions may also be appropriate if an appeal is
    filed for an inappropriate purpose, In re Hendrix, 
    986 F.2d 195
    , 201 (7th Cir. 1993), or if the arguments made are merely
    cursory, Clark v. Runyon, 
    116 F.3d 275
    , 279 (7th Cir. 1997). We
    do not impose Rule 38 sanctions lightly, however. Reasona-
    ble lawyers often disagree, and “this court’s doors are open
    to consider those disagreements brought to us in good
    faith.” Harris N.A. v. Hershey, 
    711 F.3d 794
    , 801 (7th Cir. 2013).
    Rule 38 requires either notice from the court or a separate
    motion by the appellee, and a reasonable opportunity to
    respond. The receiver filed a separate Rule 38 motion and
    Goodman has responded. In light of the record and Good-
    man’s oral argument, we conclude that the appeal is both
    frivolous and deserving of sanction.
    20                                                   No. 13-3837
    As we’ve explained, much of Goodman’s briefing is
    based on his obvious misunderstanding of the Full Faith and
    Credit Act. We’re particularly troubled, however, by Good-
    man’s inexplicable insistence that he owed no duty to keep
    the district judge or the receiver informed of his activities in
    state court. We emphasize again that the judge granted only
    limited relief from the stay for Goodman to obtain a judg-
    ment and garnish wages, and this limited relief was explicit-
    ly conditioned on the receiver’s right to object. As an officer
    of the court, Goodman surely understood his obligation to
    respect this order. Instead he ignored it, and he advances an
    argument that would have us treat its limitations as mean-
    ingless.
    Goodman’s challenge to the confidentiality of the claim-
    ants’ identities is just as problematic. He argued in his
    principal brief that the receiver implemented a “secret
    claims-handling process” in which even the district judge
    herself was denied access to the claimants’ identities. That is
    false. If he had simply read the receiver’s explanation of the
    distribution plan, he would have known that the receiver
    submitted the claimants’ identities to the district court in
    camera. The receiver noted Goodman’s error in his response
    brief. To his credit, in his reply brief Goodman retracted this
    wild and unfounded argument. But that doesn’t make up for
    his lack of care in the first place. And as we’ve noted, his
    legal authority for this claim is woefully inadequate.
    These are indications that Goodman’s appeal was not on-
    ly frivolous but egregiously so. There are compelling indica-
    tions of lack of diligence or, just as likely, outright bad faith.
    Goodman’s failure to post a supersedeas bond pursuant to
    the district court’s order ensured that the receivership funds
    No. 13-3837                                               21
    were fully distributed by the time the case reached us.
    Goodman’s insistence on pursuing this appeal thus put the
    receiver to needless personal expense. Because the receiver-
    ship estate no longer contains any assets, Duff’s counsel was
    forced to defend the appeal pro bono.
    This discussion leaves little doubt that Goodman’s appeal
    is frivolous and sanctionable under Rule 38. The receiver
    may submit, within 28 days of the issuance of this opinion,
    an affidavit and supporting papers specifying his damages
    from this frivolous appeal. Goodman may file a response not
    later than 28 days of the receiver’s submission.
    AFFIRMED; SANCTIONS ORDERED.
    

Document Info

Docket Number: 13-3837

Citation Numbers: 801 F.3d 833

Judges: Sykes

Filed Date: 9/10/2015

Precedential Status: Precedential

Modified Date: 1/12/2023

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