Mir Iqbal v. Tejaskumar Patel , 780 F.3d 728 ( 2015 )

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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-‐‑1959
MIR S. IQBAL,
Plaintiff-‐‑Appellant,
v.
TEJASKUMAR M. PATEL, WARREN JOHNSON, and S-‐‑MART
PETROLEUM, INC.,
Defendants-‐‑Appellees.
____________________
Appeal from the United States District Court for the
Northern District of Indiana, Hammond Division.
No. 2:12 CV 56 — James T. Moody, Judge.
____________________
ARGUED FEBRUARY 24, 2015 — DECIDED MARCH 2, 2015
____________________
Before EASTERBROOK, ROVNER, and SYKES, Circuit Judges.
EASTERBROOK, Circuit Judge. Through a closely held cor-‐‑
poration, Mir Iqbal bought a gasoline service station. (He al-‐‑
so guaranteed its debts, so we need not mention the corpora-‐‑
tion again.) Iqbal contracted with S-‐‑Mart Petroleum for gaso-‐‑
line. Iqbal then hired Tejaskumar Patel to conduct the busi-‐‑
ness, ceding operational control to him. He chose Patel on
the recommendation of Warren Johnson, S-‐‑Mart’s president.
2 No. 14-‐‑1959
Patel ran the business but did not pay for the gasoline, lead-‐‑
ing S-‐‑Mart to sue on the contract in an Indiana court. The
court entered a judgment of more than $65,000 against Iqbal
as guarantor. He did not pay, and a settlement was reached.
Iqbal gave S-‐‑Mart a note, secured by a mortgage on the
business premises. When he still did not pay, a state court
entered a second judgment against him, and the property
was sold in a foreclosure auction.
Iqbal alleges in this federal suit that Patel and Johnson
acted in cahoots to defraud him out of his business. The
complaint accuses the defendants of racketeering and seeks
treble damages under

18 U.S.C. §1964

,  part  of  the  Racketeer
Influenced  and  Corrupt  Organizations  Act  (RICO).  The  dis-‐‑
trict   court   dismissed   the   complaint   for   want   of   jurisdiction,
however,  ruling  that  it  is  barred  by  the  Rooker-‐‑Feldman  doc-‐‑
trine  because  it  challenges  the  state  court’s  judgments.

2014 U.S. Dist. LEXIS 45385

  (N.D.  Ind.  Mar.  27,  2014).
Rooker   v.   Fidelity   Trust   Co.,

263 U.S. 413

   (1923),   and   Dis-‐‑
trict   of   Columbia   Court   of   Appeals   v.   Feldman,

460 U.S. 462

(1983),   after   which   the   doctrine   is   named,   hold   that   the   Su-‐‑
preme  Court  of  the  United  States  is  the  sole  federal  tribunal
authorized   to   review   the   judgments   of   state   courts   in   civil
litigation.   See   also,   e.g.,   Exxon   Mobil   Corp.   v.   Saudi   Basic   In-‐‑
dustries   Corp.,

544 U.S. 280

   (2005);   Lance   v.   Dennis,

546 U.S. 459

   (2006).   Iqbal   invited   trouble   by   asking   the   district   court
to  undo  the  foreclosure.
When   the   judge   directed   the   parties   to   address   whether
that   would   be   possible,   consistent   with   the   Rooker-‐‑Feldman
doctrine,  Iqbal  contended  that  it  does  not  apply  to  fraud  (ei-‐‑
ther  fraud  out  of  court  or  fraud  during  litigation).  As  the  dis-‐‑
trict  court  rightly  replied,  Kelley  v.  Med-‐‑1  Solutions,  LLC,  548
No.  14-‐‑1959

3 F.3d 600

   (7th   Cir.   2008),   and   other   decisions   in   this   circuit
foreclose   such   an   argument.   The   Rooker-‐‑Feldman   doctrine   is
concerned   not   with   why   a   state   court’s   judgment   might   be
mistaken   (fraud   is   one   such   reason;   there   are   many   others)
but   with   which   federal   court   is   authorized   to   intervene.   See
Harold  v.  Steel,

773 F.3d 884

,  886  (7th  Cir.  2014).  The  reason  a
litigant  gives  for  contesting  the  state  court’s  decision  cannot
endow   a   federal   district   court   with   authority;   that’s   what   it
means  to  say  that  the  Rooker-‐‑Feldman  doctrine  is  jurisdiction-‐‑
al.   So   although   we   recognize   that   other   circuits   disagree   on
this  issue,  or  at  least  that  language  in  their  precedential  deci-‐‑
sions  is  in  tension—compare  Reusser  v.  Wachovia  Bank,  N.A.,

525 F.3d 855

,   859   (9th   Cir.   2008),   with   Fielder   v.   Credit   Ac-‐‑
ceptance   Corp.,

188 F.3d 1031

   (8th   Cir.   1999)—we   shall   stick
with  Kelley.
Iqbal   maintains,   however,   that   we   abandoned   Kelley   in
Johnson  v.  Pushpin  Holdings,  LLC,

748 F.3d 769

(7th Cir. 2014),
without so much as citing it. That’s not how precedent
works. In this circuit it takes a circulation to the full court
under Circuit Rule 40(e) for one panel to overrule another.
But the panel in Johnson did not disagree with Kelley. It made
a different point, which we now quote:
The [Rooker-‐‑Feldman doctrine] does not bar a federal suit that
seeks damages for a fraud that resulted in a judgment adverse to
the plaintiff. Such a suit does not seek to disturb the judgment of
the state court, but to obtain damages for the unlawful conduct
that misled the court into issuing the judgment. It’s true that the
plaintiff is also asking that the default judgments be vacated, and
that is relief that would violate the Rooker-‐‑Feldman rule; but that
claim can be rejected without affecting the damages claim.
Johnson, 748 F.3d at 773 (citations omitted). Like the district
judge in our case, Johnson concludes that fraud (no matter
4 No. 14-‐‑1959
how described) does not permit a federal district court to set
aside a state court’s judgment in a civil suit.
What Johnson adds—what the defendants in this suit
have failed to appreciate—is that federal courts retain juris-‐‑
diction to award damages for fraud that imposes extra-‐‑
judicial injury. The Supreme Court drew that very line in
Exxon Mobil:
Nor does [the doctrine] stop a district court from exercising sub-‐‑
ject-‐‑matter jurisdiction simply because a party attempts to liti-‐‑
gate in federal court a matter previously litigated in state court.
If a federal plaintiff “present[s] some independent claim, albeit
one that denies a legal conclusion that a state court has reached
in a case to which he was a party … , then there is jurisdiction
and state law determines whether the defendant prevails under
principles of preclusion.” GASH Assocs. v. Rosemont,

995 F. 2d 726

,  728  (7th  Cir.  1993);  accord  Noel  v.  Hall,

341 F. 3d 1148

,  1163–
1164  (9th  Cir.  2003).

544 U.S. at 293

.   In   other   words,   if   a   plaintiff   contends   that
out-‐‑of-‐‑court   events   have   caused   injury   that   the   state   judici-‐‑
ary  failed  to  detect  and  repair,  then  a  district  court  has  juris-‐‑
diction—but   only   to   the   extent   of   dealing   with   that   injury.
As  we  wrote  in  Johnson,  the  federal  court  cannot  set  aside  the
state  court’s  judgment.
Iqbal   alleges   that   the   defendants   conducted   a   racketeer-‐‑
ing   enterprise   that   predates   the   state   court’s   judgments.   He
cannot  have  those  judgments  annulled  but  can  contend  that
he   was   injured,   out   of   court,   by   being   “set   up”   by   Patel   and
Johnson   so   that   they   could   take   over   his   business   and   reap
the   profits   he   anticipated.   The   district   court   believed   that
any  pre-‐‑litigation  fraud  is  “intertwined”  with  the  state  court
judgments   and   therefore   forecloses   federal   litigation,   but
Exxon   Mobil   shows   that   the   Rooker-‐‑Feldman   doctrine   asks
No.  14-‐‑1959                                                                  5
what  injury  the  plaintiff  asks  the  federal  court  to  redress,  not
whether  the  injury  is  “intertwined”  with  something  else.  See

544 U.S. at 291

;  see  also  Richardson  v.  Koch  Law  Firm,  P.C.,

768 F.3d 732

,   734   (7th   Cir.   2014)   (deprecating   any   inquiry   into
what  is  intertwined  with  what).
Because  Iqbal  seeks  damages  for  activity  that  (he  alleges)
predates  the  state  litigation  and  caused  injury  independently
of  it,  the  Rooker-‐‑Feldman  doctrine  does  not  block  this  suit.  It
must  be  reinstated.
Logically   the   district   court’s   next   inquiry   is   whether   the
doctrine   of   claim   preclusion   (res   judicata)   applies.   (Exxon
Mobil  observes,

544 U.S. 293

,  that  preclusion  differs  from  the
Rooker-‐‑Feldman  doctrine  and  comes  to  the  fore  once  the  fed-‐‑
eral   court   concludes   that   it   has   subject-‐‑matter   jurisdiction.)
At   least   two   decisions   by   intermediate   appellate   courts   in
Indiana  hold  that  fraud  causing  nonpayment  is  a  compulso-‐‑
ry   counterclaim   in   a   debt-‐‑collection   suit.   Ratcliff   v.   Citizens
Bank,

768 N.E.2d 964

,   967–69   (Ind.   App.   2002);   Broadhurst   v.
Moenning,

633 N.E.2d 326

,  331–32  (Ind.  App.  1994).  Cf.  Fox  v.
Maulding,

112 F.3d 453

   (10th   Cir.   1997)   (similar   conclusion
under  Oklahoma  law).  State  law  determines  the  rules  of  pre-‐‑
clusion,  see

28 U.S.C. §1738

,  so  the  district  court  will  need  to
decide   whether   the   Supreme   Court   of   Indiana   is   likely   to
agree  with  these  decisions,  and  if  so  whether  there  is  any  ex-‐‑
ception  to  the  rules  of  preclusion.  The  court  also  will  need  to
consider   whether   Patel   and   Johnson   receive   the   benefits   of
any   compulsory-‐‑counterclaim   requirement,   given   that   S-‐‑
Mart  Petroleum  was  the  sole  plaintiff  in  the  state  actions.
The   judgment   is   reversed,   and   the   case   is   remanded   for
further  proceedings  consistent  with  this  opinion.