Fliss v. Generation Capital I, LLC
| Docket Number | 22-1424 |
| Decision Date | 27 November 2023 |
| Parties | In Re: John Fliss, Debtor-Appellee, v. Generation Capital I, LLC, Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
ARGUED DECEMBER 7, 2022
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:19-cv-08187 - Franklin U. Valderrama, Judge.
Before FLAUM, KIRSCH, and JACKSON-AKIWUMI, Circuit Judges.
John Fliss and Larry Wojciak were once business partners. But their relationship soured when their jointly owned companies defaulted on a bank loan. After the bank obtained a consent judgment in state court, Wojciak used one of his companies Generation Capital I, LLC, to take over as the judgment creditor and attempt to enforce the judgment against Fliss. When Fliss filed for bankruptcy in federal court (because of his overall insolvency), Generation Capital I asserted a claim in the bankruptcy proceedings against Fliss in the amount of the consent judgment, plus interest. Fliss objected, and the bankruptcy court disallowed Generation Capital I's claim in its entirety.
This appeal asks us to decide whether the bankruptcy court violated the Rooker-Feldman doctrine by disallowing Generation Capital I's claim, or alternatively, whether the prior state court litigation precluded Fliss from objecting to Generation Capital I's claim in bankruptcy court. We hold that the bankruptcy court had subject matter jurisdiction to consider the claim objection-the Rooker-Feldman doctrine posed no obstacle-and that Fliss was not otherwise barred from objecting to the claim. We therefore affirm.
More than ten years ago, John Fliss, Larry Wojciak, and Mark Barr went into business together. They took out a $200, 000 secured loan from a bank as working capital for their two jointly owned companies. Each man personally guaranteed the loan, and a trust established in Sherry Wojciak's name (Larry's spouse), was the fourth guarantor. When the businesses failed and the borrowers defaulted on the loan the bank sought to recoup its losses in state court. In May 2011, the state court issued a consent judgment in the amount of $208, 639.95 against Fliss, Barr, Wojciak, their companies, and Sherry Wojciak's trust, and held the four guarantors jointly and severally liable.
What happened next was either a stroke of ingenuity or scheming depending on who you ask: Wojciak negotiated a deal with the bank that allowed him to step into the bank's shoes as a judgment creditor.[1] He then sought to enforce the entire amount of the debt against his former business partners, Fliss and Barr. The feat was accomplished in multiple steps, using three entities owned and operated by the Wojciaks: Generation Capital, Generation Capital I, and Generation Capital II.
Larry Wojciak's initial moves were as follows: on February 24, 2012, he entered into a sale and assignment agreement with the bank, through Generation Capital I, to purchase the promissory note and judgment debt for $240, 000. Two days later, he also entered into a settlement agreement with the bank under which he (and Sherry's trust) agreed to pay $240, 000 to settle the judgment debt and have the loan documents assigned to Generation Capital pursuant to the sale and assignment agreement. The next day, on February 27, Larry Wojciak had Generation Capital II wire $240, 000 to the bank. See Generation Cap. I, LLC v. Fliss (In re Fliss), 586 B.R. 21, 2324 (N.D. Ill. 2018). This transaction completed the first part of Wojciak's plan.
Wojciak then kicked off the second part of his plan: stepping into the bank's shoes in the state court proceedings. On May 8, 2012, the state court entered an order substituting Generation Capital I for the bank as the plaintiff. Wojciak next moved to enforce the judgment, through Generation Capital I, against Fliss and Barr by commencing a supplemental proceeding and seeking turnover of property in satisfaction of the judgment. Fliss and Barr filed a motion for determination in the main proceeding, arguing that the debt was extinguished when the Wojciaks paid $240, 000 to the bank in exchange for settling the judgment. The state court disagreed, found that the settlement agreement was not executed, and entered a determination order in May 2015 stating that the debt was still owed.
In August 2015, Fliss filed a voluntary Chapter 13 petition in bankruptcy court. Chapter 13 allows an individual debtor who cannot fulfill his financial obligations to submit to the bankruptcy court "a plan for paying his creditors as much as possible over a period of years, upon completion of which he is given a discharge of his remaining dischargeable debts." In re Crawford, 324 F.3d 539, 541 (7th Cir. 2003). The Bankruptcy Code requires creditors to file a proof of claim. FED. R. BANKR. P. 3002(a). Thus, in December 2015, Wojciak had Generation Capital I file a secured claim in bankruptcy court seeking to enforce the entire state court judgment, now $359, 967.69 including post-judgment interest, against Fliss. Fliss objected to the claim.
The bankruptcy court disallowed Generation Capital I's claim in its entirety and approved the Chapter 13 plan proposed by Fliss. The bankruptcy court found that Wojciak used Generation Capital I as his alter ego and, as a result, became both the creditor and debtor of the state court judgment. This merger of interests extinguished the debt. As relevant on appeal, the bankruptcy court further held that the doctrines of Rooker-Feldman, res judicata, and collateral estoppel did not bar it from deciding whether the claim should be allowed or disallowed.
Generation Capital I appealed to the district court, which affirmed the bankruptcy court's ruling. We now consider these issues.
We review the bankruptcy court's factual findings for clear error and the legal conclusions of both the bankruptcy court and the district court de novo. In re Kempff, 847 F.3d 444, 448 (7th Cir. 2017). Our review of the district court's application of the Rooker-Feldman doctrine is de novo. Andrade v. City of Hammond, 9 F.4th 947, 949 (7th Cir. 2021).
Generation Capital I advances two arguments on appeal. First, it asserts that, under the Rooker-Feldman doctrine, the bankruptcy court lacked subject matter jurisdiction to consider the claim objection filed by Fliss. Alternatively Generation Capital I argues that the doctrines of res judicata and collateral estoppel bar the claim objection. We consider the Rooker-Feldman issue first because it is jurisdictional.
The Rooker-Feldman doctrine is a creature of two Supreme Court decisions, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983). It "is a principle of jurisdiction that precludes the lower federal courts from applying appellate review to state court decisions." Epps v. Creditnet, Inc., 320 F.3d 756, 759 (7th Cir. 2003). "An action in federal court that alleges an injury 'inextricably intertwined' with a state court decision, such that success in the federal court would require overturning the state court decision, is barred by the Rooker-Feldman doctrine." Id.
The Rooker-Feldman doctrine is inapplicable here for at least two reasons. First, Fliss did not file a federal suit seeking, as a cause of action or prayer for relief, to set aside a state court judgment. See id. at 759 (federal court jurisdiction barred by Rooker-Feldman where the plaintiffs' "prayer for relief ask[ed] the district court to set aside the [state court] judgment . . . and 'refund' . . . the damages assessed by the state court"). Instead, Fliss petitioned for bankruptcy court protection under Chapter 13 of the Bankruptcy Code because his income and assets were not enough to meet his liabilities. The issue of the state court judgment was only raised after Generation Capital I (not Fliss) filed a claim asserting a $359, 967.69 secured debt and Fliss objected to that claim pursuant to federal bankruptcy law and procedures.
Second, the state court never decided (nor could it) the key issue facing the bankruptcy court in Fliss's and Wojciak's dispute: whether Generation Capital I's bankruptcy claim should be allowed or disallowed under federal bankruptcy law. GASH As-socs. v. Village of Rosemont, 995 F.2d 726, 728 (7th Cir. 1993). The state court judgment and the bankruptcy court's disallowance of Generation Capital I's claim simply "are not two sides of the same coin." Remer v. Burlington Area Sch. Dist., 205 F.3d 990, 997 (7th Cir. 2000); see also Brokaw v. Weaver, 305 F.3d 660, 668 (7th Cir. 2002) (); Zurich Am. Ins. Co. v. Super. Ct of Cal., 326 F.3d 816, 822 (7th Cir. 2003) (Rooker-Feldman did not bar jurisdiction because federal claim arose under federal law and existed irrespective of state court's handling of state law issues).
Generation Capital I argues that we can glean Fliss's intent to attack the state court judgment because Fliss wrote in his briefs before our court, the district court, and the bankruptcy court that the state court "got it wrong." But those statements alone do not make Rooker-Feldman applicable. Zurich Am Ins. Co., 326 F.3d at 823-24 (...
To continue reading
Request your trial