Dan Arnold v. KJD Real Estate , 752 F.3d 700 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 12-1715 & 12-1894
DAN K. ARNOLD,
Plaintiff-Appellant,
v.
KJD REAL ESTATE, LLC,
Defendant-Appellee, Cross-Appellant,
v.
GEISSLER ROOFING CO., INC., and
D & D PROPERTY MANAGEMENT, INC.
Defendants-Appellees, Cross-Appellees.
____________________
Appeals from the United States District Court for the
Southern District of Illinois.
No. 10-913-GPM — G. Patrick Murphy, Judge.
____________________
ARGUED DECEMBER 11, 2013 — DECIDED MAY 20, 2014
____________________
Before WOOD, Chief Judge, and FLAUM and SYKES, Circuit
Judges.
WOOD, Chief Judge. The Rooker-Feldman doctrine rests on
the fact that only the Supreme Court of the United States has
2 Nos. 12-1715 & 12-1894
appellate jurisdiction over state court decisions (and its au-
thority extends only to federal questions, see 28 U.S.C.
§ 1257). In this case, a state court ordered Dan Arnold to de-
liver certain corporate stock to Geissler Roofing and D&D
Property Management (collectively, the Corporate Defend-
ants) pursuant to an earlier alleged settlement agreement.
The state court did not know that Arnold had already sold
the stock to a third party, KJD Real Estate (KJD). Arnold filed
an interpleader action in the district court under Federal
Rule of Civil Procedure 22 in which he asked the court to de-
cide to whom he should transfer the stock. The district court
dismissed the interpleader action under the Rooker-Feldman
doctrine and ordered Arnold to compensate KJD in cash. We
conclude that this was mistaken: the interpleader action does
not attack the state court judgment itself, and so further pro-
ceedings are necessary.
I
Arnold was a former officer of both Corporate Defend-
ants, and he held a significant amount of stock in each (38%
of Geissler’s shares and 50% of D&D’s). In 1999, Arnold sued
the Corporate Defendants in Illinois state court on claims of
shareholder oppression. That action remained pending for
seven years. In November 2006, the parties allegedly agreed
to settle the case. They never executed any settlement docu-
ments, however, and none of the defendants has ever paid
Arnold any of the $207,500 that the purported agreement
would have required. Nonetheless, relying on the alleged
settlement agreement, the Corporate Defendants moved to
dismiss the state case. While that motion was pending, Ar-
nold moved for a voluntary dismissal. The court granted
Nos. 12-1715 & 12-1894 3
Arnold’s motion and dismissed with prejudice without de-
ciding whether the case had been settled.
About a month later, Arnold agreed to sell his stock in
the Corporate Defendants to KJD for $290,000. KJD ad-
vanced $100,000 to Arnold as required by the written stock
purchase agreement, and Arnold represented that he had
good title to the stock and could transfer it. After the stock-
purchase agreement was finalized, KJD notified the Corpo-
rate Defendants that it had purchased the stock and wished
to inspect the corporate books. The Corporate Defendants
did not respond to KJD’s request.
Instead, they moved to vacate the dismissal of Arnold’s
original suit in state court, reiterating their view that the case
had been settled. Pursuant to that alleged settlement, they
contended, Arnold already had transferred his stock to the
two corporations. Taking a belt-and-suspenders approach,
the Corporate Defendants also filed a second action against
Arnold in Illinois state court before a different judge. Alt-
hough Arnold was properly served, he did not appear, and
so the second state court issued a default judgment ordering
Arnold to execute the settlement papers and comply with
that agreement. The Appellate Court of Illinois affirmed that
judgment. KJD was never joined as a party in the second
state court action despite the Corporate Defendants’
knowledge of KJD’s interest in the stock.
Meanwhile, back in the first state court proceeding, all
the parties here, including KJD, appeared in response to the
Corporate Defendants’ motion to vacate the dismissal of Ar-
nold’s shareholder suit. Without informing the court or Ar-
nold’s counsel of the default judgment then in existence, the
Corporate Defendants requested a continuance on the mo-
4 Nos. 12-1715 & 12-1894
tion to vacate. At a later hearing, the Corporate Defendants
informed the court of the default judgment, which by that
time had become final under Illinois law. The court stayed
further proceedings; to our knowledge, that action remains
pending.
After the Appellate Court’s decision was issued, Arnold
filed this Rule 22 interpleader action, naming both the Cor-
porate Defendants and KJD as defendants. Arnold’s com-
plaint specifically stated that he “makes no claim to contin-
ued ownership of the Geissler and D&D stock and stands
willing to transfer the stock to whichever Interpleader De-
fendant the Court determines has the superior right to the
stock.” Arnold asked to be “fully and finally released from
any and all liability to the Interpleader Defendants” once he
delivered the stock to whichever defendant the court speci-
fied. KJD asserted a cross-claim against the Corporate De-
fendants for a declaratory judgment that it owned the stock.
It also asserted, in the alternative, a counterclaim against Ar-
nold for rescission of the stock-purchase agreement and re-
turn of the $100,000 advance KJD paid under that agreement.
Invoking the Rooker-Feldman doctrine, the district court
dismissed Arnold’s interpleader action and KJD’s cross-claim
on the ground that “the injury complained of by both Arnold
and KJD clearly is the state court’s order directing Arnold to
execute the settlement agreement with [the Corporate De-
fendants] under the terms of which Arnold is required to
tender back to [the Corporate Defendants] his shares in the
companies in return for consideration in the amount of
$207,500.” The district court granted KJD’s counterclaim
against Arnold and ordered Arnold to return the $100,000
Nos. 12-1715 & 12-1894 5
advance payment. Both Arnold and KJD have appealed to
this court.
II
We begin with a brief word about the district court’s ju-
risdiction in this matter, wholly apart from the Rooker-
Feldman issue that lies at the center of this case. As we have
noted, Arnold relied on Rule 22 for his interpleader action.
Rule 22 provides that “[p]ersons with claims that may ex-
pose a plaintiff to double or multiple liability may be joined
as defendants and required to interplead.” FED. R. CIV. P.
22(a)(1). Unlike statutory interpleader actions under 28
U.S.C. § 1335, “[i]nterpleader actions under Rule 22 … must
be based upon the general jurisdiction statutes applicable to
civil actions in the federal courts.” 7 Charles Alan Wright,
Arthur R. Miller & Mary Kay Kane, FEDERAL PRACTICE AND
PROCEDURE § 1710 (3d ed. 1998 & Supp. 2010); see also
Comm’l Nat’l Bank of Chi. v. Demos, 18 F.3d 485, 488 (7th Cir.
1994) (“Rule 22[a] provides a procedural framework for in-
terpleader actions, but it does not confer subject-matter ju-
risdiction on federal courts.”). A plaintiff such as Arnold,
who is relying on the general diversity statute, 28 U.S.C.
§ 1332, must demonstrate complete diversity between the
plaintiff-stakeholder and the claimant-defendants. An inter-
pleader plaintiff need not show that each competing claim-
ant has a winning claim; a reasonable fear of double liability
is enough. Aaron v. Mahl, 550 F.3d 659, 663 (7th Cir. 2008).
In this case, the contest between the defendant-claimants,
both of which are citizens of Illinois, involves only a ques-
tion of Illinois law. Nevertheless, diversity jurisdiction is
proper because complete diversity is assessed by looking at
the plaintiff-stakeholder and the defendant-claimants. Ar-
6 Nos. 12-1715 & 12-1894
nold, a Florida citizen, is diverse from all parties claiming an
interest in the stock, and Arnold’s complaint asks the court
to relieve him of potential double liability to these claimants.
As our account of the facts already has shown, the amount in
controversy exceeds $75,000. Jurisdiction is therefore proper
under 28 U.S.C. § 1332(a).
III
We turn, then, to the heart of the case: the Rooker-Feldman
doctrine. As we noted at the outset, this doctrine reflects a
limitation on the subject-matter jurisdiction of lower federal
courts. Long v. Shorebank Dev. Corp., 182 F.3d 548, 555 (7th Cir.
1999). We review de novo the question whether, as the district
court thought, Rooker-Feldman applies here. Brokaw v. Weaver,
305 F.3d 660, 664 (7th Cir. 2002).
The Rooker-Feldman doctrine derives from two Supreme
Court cases in which plaintiffs “litigated and lost in state
court … [then] essentially invited federal courts of first in-
stance to review and reverse [the] unfavorable state court
judgments.” Exxon Mobil Corp. v. Saudi Basic Inds. Corp., 544
U.S. 280, 283 (2005), discussing Rooker v. Fidelity Trust Co., 263
U.S. 413 (1923) and D.C. Ct. of App. v. Feldman, 460 U.S. 462
(1983). Because Congress empowered only the Supreme
Court to exercise appellate authority to reverse and modify
state court judgments, see 28 U.S.C. § 1257, such suits were
declared “out of bounds, i.e., properly dismissed for want of
subject-matter jurisdiction.” Saudi Basic Inds., 544 U.S. at 283–
84. The doctrine is narrowly confined to “cases brought by
state-court losers complaining of injuries caused by state-
court judgments rendered before the district court proceed-
ings commenced and inviting district court review and rejec-
tion of those judgments.” Id. at 284.
Nos. 12-1715 & 12-1894 7
Like the due process claim in Long, 182 F.3d at 555–56,
cases requiring dismissal under Rooker-Feldman involve
plaintiffs who are “attacking the judgment itself” or the pro-
cedures used in obtaining that judgment. GASH Assocs. v.
Village of Rosemont, Ill., 995 F.2d 726, 728 (7th Cir. 1993). In
GASH, for example, the plaintiff alleged that the Village of
Rosemont committed an unconstitutional taking by maneu-
vering to purchase plaintiff’s property for a depressed price
at a foreclosure sale. Id. at 727. A state court had confirmed
the sale over plaintiff’s “vigorous objection.” Id. Because
plaintiff’s “injury came from the judgment confirming the
sale” rather than “an injury out of court,” Rooker-Feldman
barred the suit. Id. at 729. Similarly, in Leaf v. Supreme Court of
Wisconsin, the plaintiff sued the state high court for suspend-
ing her law license, alleging both that the suspension and the
ethics rule on which it was based were unconstitutional. 979
F.2d 589, 594 (7th Cir. 1992). Leaf’s claims were attacks on the
propriety of the judgment and therefore barred by Rooker-
Feldman. Id. at 598–600.
Rooker-Feldman thus comes into play only when the fed-
eral court assesses the propriety of a state court judgment.
“If a federal plaintiff presents some independent claim, albe-
it one that denies a legal conclusion that a state court has
reached,” then Rooker-Feldman does not bar the court’s juris-
diction. Saudi Basic Inds., 544 U.S. at 293, citing GASH, 995
F.2d at 728. In so ruling, the Court disapproved some more
expansive applications of the doctrine that had developed in
the lower courts.
With that message in mind, we have no trouble
concluding that Rooker-Feldman does not bar Arnold’s suit.
Indeed, Arnold’s interpleader action proceeds on the
8 Nos. 12-1715 & 12-1894
premise that the state court’s adjudication of the rights
between himself and the Corporate Defendants was a valid
and binding judgment. But it was a judgment that bound
only him; KJD was not a party to the suit. See Kamilewicz v.
Bank of Boston, 100 F.3d 1348, 1351 (7th Cir. 1996)
(Easterbrook, J., dissenting from denial of rehearing en banc)
(“[T]he Rooker-Feldman doctrine does not affect suits by or
against persons who were not parties to the initial case.”);
see also Downs v. Westphal, 87 F.3d 202, 203 (7th Cir. 1996)
(Rovner, J., concurring). It is one thing to resolve whether a
person has a binding contract or an interest in an item such
as corporate stock; it is quite another to resolve the question
whether A’s property right is superior to B’s, or vice versa.
Arnold’s interpleader action raises the second question,
which was never before the state court. In the course of
deciding that priority issue, Arnold asks the court to relieve
him of his exposure to double liability from his conflicting
obligations related to the stock. Although Arnold’s injury is
undoubtedly related to the state court judgment, his suit
does not “attack[] the judgment itself.” See GASH, 995 F.3d
at 728.
It does not, we clarify, unless the nature of the relief that
the state court ordered makes a difference. The Corporate
Defendants argued—and the district court agreed—that the
state court ordered specific performance with respect to Ar-
nold’s delivery of the stock. That was precisely what the
Corporate Defendants had requested. The state trial court’s
default judgment ordered Arnold to execute all settlement
documents that he had received. Only in denying Arnold’s
motion to vacate the default judgment did the court add that
Arnold was “ordered to execute settlement documents and
comply with the terms of the settlement agreement.” Order,
Nos. 12-1715 & 12-1894 9
No. 07-CH-1044 (St. Clair Co. Cir. Ct., Dec. 15, 2008) (empha-
sis added).
We conclude that this detail does not change our Rooker-
Feldman analysis. Arnold’s interpleader action merely com-
pels the Corporate Defendants and KJD to litigate ownership
of the stock among themselves. Each one has an asserted ba-
sis for a claim of right to the stock, one contractual and one
based on the state court judgment. If the federal court de-
cides that KJD’s claim to the stock is superior to that of the
Corporate Defendants, the court may skip the formalistic
step of Arnold’s transferring the stock to the Corporate De-
fendants (pursuant to the state court’s specific-performance
decree) only to have the Corporate Defendants immediately
transfer the stock to KJD (pursuant to the interpleader
court’s order). Because all concerned parties are participating
in the interpleader action, the court may order a direct trans-
fer from Arnold to whichever party prevails. See State Farm
Fire & Cas. Co. v. Tashire, 386 U.S. 523, 533 (1967) (discussing
the ways in which “[c]onsiderations of judicial administra-
tion” inform interpleader procedures).
IV
Although the state court judgment does not foreclose Ar-
nold’s federal suit, it may preclude some of the relief Arnold
seeks. Courts often confuse Rooker-Feldman cases with cases
involving ordinary claim or issue preclusion. See Saudi Basic
Inds., 544 U.S. at 283 (criticizing lower courts for “supersed-
ing the ordinary application of preclusion law” in favor of
Rooker-Feldman). “In contrast to the Rooker-Feldman doctrine
… res judicata constitutes an affirmative defense and is de-
pendent upon the Full Faith and Credit statute, 28 U.S.C.
§ 1738, which requires federal courts to give a state court
10 Nos. 12-1715 & 12-1894
judgment the same preclusive effect it would have in state
court.” Long, 182 F.3d at 560.
Arnold’s goal in this litigation is to obtain a declaratory
judgment that he is not liable to whichever claimant loses in
the interpleader dispute. This potentially sweeps more
broadly than a request to decide only which party is entitled
to the stock. We already have explained why, if the district
court on remand determines that KJD has the superior claim
to the stock, it can order Arnold to transfer the stock to KJD.
Such a ruling would not disturb the state court’s judgment,
nor would it fail to give that judgment full faith and credit,
because the question of liability implicates more than the
disposition of the shares. The state court’s judgment might
entitle the Corporate Defendants to some other remedy
against Arnold. If the interpleader court concludes that the
Corporate Defendants have the superior claim to the stock,
then it could either stop there or proceed to decide the relat-
ed question whether Arnold remains liable to KJD in some
way. It would be premature for us to rule on those questions
at this stage, since anything we might say would be based on
speculation about the outcome of the interpleader dispute.
In addition, as we now point out, the interpleader court
might wish to abstain on some or all of these issues.
V
The Corporate Defendants have argued that even if Rook-
er-Feldman does not bar the suit, abstention is appropriate
under the doctrine of Brillhart v. Excess Ins. Co. of Amer., 316
U.S. 491 (1942) and Wilton v. Seven Falls Co., 515 U.S. 277
(1995). Wilton-Brillhart abstention applies when ”a federal
court [is called upon] to proceed in a declaratory judgment
suit where another suit is pending in state court presenting
Nos. 12-1715 & 12-1894 11
the same issues, not governed by federal law, between the
same parties.” Brillhart, 316 U.S. at 495. In such a case, “the
question for [the] district court … is ‘whether the questions
in controversy between the parties to the federal suit … can
better be settled in the proceeding pending in the state
court.’” Wilton, 515 U.S. at 282, quoting Brillhart. A concern
for comity underlies this doctrine. As the Court put it in Wil-
ton, “where another suit involving the same parties and pre-
senting opportunity for ventilation of the same state law is-
sues is pending in state court, a district court might be in-
dulging in gratuitous interference if it permitted the federal
declaratory action to proceed.” Id. at 283 (quotation omitted).
Wilton-Brillhart abstention is possible because of the fed-
eral court’s “unique and substantial discretion in deciding
whether to declare the rights of litigants.” Id. at 286; see also
28 U.S.C. § 2201(a) (providing that the court “may declare the
rights and other legal relations of any interested party seek-
ing such declaration”) (emphasis added). The Declaratory
Judgment Act is “an enabling Act, which confers a discretion
upon the courts rather than an absolute right upon the liti-
gant.” Id. at 287, quoting Pub. Serv. Comm’n of Utah v. Wycoff
Co., 344 U.S. 237, 241 (1952). “[T]he propriety of declaratory
relief in a particular case will depend upon a circumspect
sense of its fitness informed by the teachings and experience
concerning the functions and extent of federal judicial pow-
er.” Wycoff, 344 U.S. at 243. In contrast to most other actions,
“there is nothing automatic or obligatory about the assump-
tion of jurisdiction by a federal court to hear a declaratory
judgment action.” Wilton, 515 U.S. at 288 (quotation omit-
ted).
12 Nos. 12-1715 & 12-1894
Several factors guide the court’s discretion, including
“the scope of the pending state court proceeding” and
“whether the claims of all parties in interest can satisfactorily
be adjudicated in that proceeding.” Brillhart, 316 U.S. at 495.
This is an inherently discretionary call for the district court,
“because facts bearing on the usefulness of the declaratory
judgment remedy, and the fitness of the case for resolution,
are peculiarly within [its] grasp.” Wilton, 515 U.S. at 289; see
also Miller v. Fenton, 474 U.S. 104, 114 (1985).
Although the district court briefly addressed the issue be-
fore, Wilton-Brillhart abstention should be reconsidered on
remand. The underlying dispute concerns a matter of Illinois
law entirely between Illinois parties. That dispute is current-
ly pending in the stayed state court lawsuit, which involves
all the interested parties. This is a question that the district
court should address anew.
VI
Rooker-Feldman does not bar Arnold’s interpleader action.
We VACATE the district court’s judgment dismissing on that
basis and REMAND for further proceedings consistent with
this opinion.