H.A.L. NY Holdings, LLC v. Guinan, 19-1942

• Decision Date: 05 May 2020
• Docket Number: No. 19-1942,19-1942
• Citation: 958 F.3d 627
• Parties: H.A.L. NY HOLDINGS, LLC, Plaintiff-Appellant, v. Joseph Michael GUINAN, Jr., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

958 F.3d 627

H.A.L. NY HOLDINGS, LLC, Plaintiff-Appellant,

v.Joseph Michael GUINAN, Jr., Defendant-Appellee.

No. 19-1942

United States Court of Appeals, Seventh Circuit.

Argued January 23, 2020

Decided May 5, 2020

Leslie A. Blau, Attorney, Blau & Malmfeldt, Chicago, IL, for Plaintiff - Appellant.

Shannon Gross, Attorney, Brian J. Poronsky, Attorney, Sheehan H. Band, Katten Muchin Rosenman LLP, Chicago, IL, for Defendant - Appellee.

Before Rovner, Hamilton, and Scudder, Circuit Judges.

Hamilton, Circuit Judge.

Plaintiff H.A.L. NY Holdings, LLC is in the business of trading securities. It set up a brokerage account with Advantage Futures, LLC in Chicago. H.A.L.’s trading losses led Advantage to issue margin calls, which H.A.L. failed to meet. Advantage then liquidated H.A.L.’s account, leaving a negative balance of more than $75,000. When H.A.L. failed to pay, Advantage sued in federal court in Chicago. H.A.L. responded with an offer of judgment under Federal Rule of Civil Procedure 68 for the entire amount in dispute, plus attorney fees and costs. Advantage accepted and judgment was entered.

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 Federal Rule of Appellate Procedure 38. H.A.L. admits that its solitary argument to the district court was wrong and offers in its place an entirely new argument on appeal. Both are meritless. And after telling the district court that state law is irrelevant, H.A.L. now insists that if we do not reverse, only certification to the state supreme court can resolve this case. This appeal is an exercise in unacceptable gamesmanship, without a reasonable and good-faith basis. Hence the Rule 38 sanctions.

I. Factual and Procedural Background

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 (7th Cir. 2010) (prior case docket). Plaintiff H.A.L. NY Holdings, LLC is a New York company whose business is trading stock index futures and options. In September 2015, H.A.L. set up a brokerage account to trade through Advantage Futures, LLC, an Illinois company and registered futures commission merchant. Defendant Joseph Michael Guinan, Jr., is Advantage's chairman and chief executive.

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 28 U.S.C. § 1332. On November 14, 2017 H.A.L. made an offer of judgment under Federal Rule of Civil Procedure 68 for the full amount of the claim plus prejudgment interest, attorney fees, and costs. Advantage accepted the offer one week later, and the district court entered the judgment in Advantage's favor. The parties agreed at oral argument before this court that the judgment had not been paid as of January 23, 2020.

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 28 U.S.C. §§ 1331 and 1367. On Guinan's motion, the case was transferred to the Northern District of Illinois under 28 U.S.C. § 1404(a).

Guinan moved to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), arguing that the prior Rule 68 judgment between Advantage and H.A.L. was res judicata barring the new suit by H.A.L. against Guinan. The district court agreed, granted Guinan's motion, and entered final judgment in his favor. H.A.L. has appealed.

II. Analysis

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 Federal Rule of Appellate Procedure 38 for taking a frivolous appeal.

A. Standard of Review

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 Rule 12(c). Benson , 944 F.3d at 645, and the cases cited. Observing the distinction is necessary to allocate correctly the burdens of pleading and proof, and can thus be critical to the proper application of the Rule 12 standards.

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 Rule 12(b)(6) and Rule 12(c) has no practical effect here, and our review is plenary either way. See Doe v. GTE Corp. , 347 F.3d 655, 657 (7th Cir. 2003).

B. The Rule 68 Judgment

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, 121 S.Ct. 1021, 149 L.Ed.2d 32 (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, 121 S.Ct. 1021. This rule is not dictated by the Rules of Decision Act, 28 U.S.C. § 1652, so that Erie Railroad Co. v. Tompkins , 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), does not apply by its terms. Semtek shares Erie ’s concerns, however, see 531 U.S. at 504, 508–09, 121 S.Ct. 1021, so we turn to Erie for guidance in determining state law.

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 has intermediate courts with geographic divisions that have disagreed on the relevant content of state law. See id. at 634, 636.

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. , 172 Ill.2d 325, 216 Ill.Dec. 642, 665 N.E.2d 1199, 1204 (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 Federal Rule of Civil Procedure 68. See 735 Ill. Comp. Stat. 5/2-101 to 2-2301 (code of civil procedure); Laura T. Kidwell, State Offer of Judgment Rule—Construction, Operation, and Effect of Acceptance and Resulting Judgment , 120 A.L.R. 5th 559 (2004 & supp. 2012). That does not matter. Illinois courts are familiar with consent judgments more generally. See, e.g., U.S. Bank N.A. v. Johnston , 404 Ill.Dec. 268, 55 N.E.3d 742, 746 (Ill. App. 2016). That's what a Rule 68 judgment is. See, e.g., Downey v. State Farm Fire & Cas. Co. , 266 F.3d 675, 682–83 (7th Cir. 2001). The special feature of Rule 68—its wager of costs after an unaccepted offer in subsection 68(d)—is not material to the res judicata effect of an accepted offer. And we have held repeatedly that Illinois gives consent judgments claim-preclusive effect if preclusion otherwise applies. For example, in 4901 Corp. v. Town of Cicero , 220 F.3d 522, 529–30 (7th Cir. 2000), we...