Matrix Iv v. Am. Nat'l Bank
| Decision Date | 28 July 2011 |
| Docket Number | Nos. 08–3917,09–1321.,s. 08–3917 |
| Citation | 649 F.3d 539,55 Bankr.Ct.Dec. 69 |
| Parties | MATRIX IV, INCORPORATED, an Illinois Corporation, Plaintiff–Appellant/Cross–Appellee,v.AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, an Illinois Banking Association, Defendant–Appellee,andGateway Park, an Illinois Limited Liability Company, Defendant–Appellee/Cross–Appellant. |
| Court | U.S. Court of Appeals — Seventh Circuit |
OPINION TEXT STARTS HERE
Anthony S. DiVincenzo, Attorney, DiVincenzo Schoenfield Swartzman, Robert W. Queeney (argued), Chicago, IL, for Plaintiff–Appellant/Cross–Appellee Matrix IV, Incorporated.Christopher K. Meyer, Melanie E. Walker (argued), Sidley Austin LLP, Chicago, IL, for Defendant–Appellee American National Bank and Trust Company of Chicago.Daniel J. Zollner (argued), Attorney, Dykema Gossett, Chicago, IL, for Defendant–Appellee/Cross–Appellant Gateway Park.Before BAUER and SYKES, Circuit Judges, and GRIESBACH, District Judge.*SYKES, Circuit Judge.
This appeal raises questions about the preclusive effect of judgments rendered by a bankruptcy court on later litigation between creditors and a company affiliated with the debtor. Matrix IV, Inc. (“Matrix”), a plastics manufacturer, sued American National Bank and Trust Company of Chicago (“ANB”) 1 and Gateway Park LLC (“Gateway”) alleging claims for violation of RICO and common-law fraud. The dispute traces its roots to Matrix's dealings with S.M. Acquisition Co., a plastic-container company that did business under the name “Stylemaster, Inc.” and filed for bankruptcy in 2002. The bankruptcy was lengthy and complex. Matrix filed a creditor's claim for more than $7 million, and during the course of the proceedings, lodged a strenuous objection to the proposed sale of Stylemaster's assets and was also to an adversary proceeding to resolve a lien-priority dispute with ANB. Matrix was one of Stylemaster's suppliers and had a lien on certain Stylemaster inventory in its possession; ANB was Stylemaster's primary lender, and Stylemaster had pledged all of its assets as security for a line of credit with ANB.
In opposing the proposed asset sale, Matrix alleged that Stylemaster (and by extension Gateway, a related company) had fraudulently induced it to produce plastic storage containers without any intention of paying for them. The object of this scheme, according to Matrix, was to build up Stylemaster's inventory so that a successor company led by Stylemaster insiders could purchase the company's assets at a firesale price in the bankruptcy. The lien-priority adversary proceeding centered on similar allegations; Matrix claimed that ANB's lien should be equitably subordinated to its own because ANB participated in the fraud by lending Stylemaster money and conspiring to destroy Matrix's lien.
Matrix's fraud allegations failed at all levels of the bankruptcy proceeding—in the bankruptcy court, the district court, and on appeal in our court. Matrix has now repackaged those failed allegations into this RICO and common-law fraud action. The district court dismissed the suit on grounds of res judicata and collateral estoppel, concluding that Matrix had litigated and lost the very same fraud claims in the bankruptcy proceeding. Gateway then moved for Rule 11 sanctions; the district court denied this motion. Matrix appealed the dismissal order, and Gateway has cross-appealed from the denial of its Rule 11 motion.
We affirm the district court's order of dismissal, although on narrower grounds. As we will explain, the res judicata argument exposes some tension in our caselaw and a lopsided circuit split on how claim preclusion applies in this context. The Supreme Court's recent decision in Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), suggests that resolving the conflict may be a bit more complicated than the caselaw presently admits. Because collateral estoppel—issue preclusion—blocks this new suit in its entirety, we affirm on this narrower ground of decision and leave the resolution of the conflict for a future case in which it will actually matter.
We also affirm the district court's denial of Rule 11 sanctions. Based on the conflict in our caselaw, we cannot say that Matrix's RICO and common-law fraud claims were frivolous or designed to harass.
As the foregoing summary suggests, this dispute has a complicated factual and procedural history spanning many years. Because this appeal presents preclusion issues, we cannot avoid describing the history in some detail; we will simplify where we can. Stylemaster was and Matrix continues to be in the molded-plastics industry. Starting in 1994, Stylemaster bought plastic injection molds from an outside vendor and had them shipped directly to Matrix. Matrix fashioned the molds into plastic storage containers for Stylemaster (think the long plastic storage bins that slide under beds), which in turn distributed the containers to big-box retailers like Kmart and Target. Over time, Stylemaster had difficulty paying Matrix's invoices and the relationship soured. As of November 1997, Matrix claimed that Stylemaster owed it approximately $2.4 million. The two companies negotiated a solution whereby Matrix claimed a first-priority lien over the molds in its possession and promised to supply Stylemaster with storage containers in the upcoming years in exchange for Stylemaster's promise to pay Matrix's outstanding invoices. Stylemaster paid Matrix's pre-November 1997 invoices in 1999, and by 2002 had paid all invoices dated prior to July 2001. Whether this extinguished Matrix's lien would become a subject of debate in the bankruptcy.
Also in 1997 Stylemaster entered into a loan agreement with its primary lender ANB. To secure a credit line with the bank—something that it had trouble doing given its shaky finances—Stylemaster pledged all of its assets and property as security. ANB filed a Uniform Commercial Code financing statement with the Illinois Secretary of State on the same day the agreement was executed. The loan agreement was modified several times and in 2001 was amended to include Stylemaster's assets and property “wherever located.” In the bankruptcy court, Matrix claimed that this amendment was an attempt to usurp its lien over the Stylemaster molds in its possession.
In 1998 Stylemaster's principals formed Gateway Park LLC (“Gateway”), which negotiated with the City of Chicago to build an industrial park on the city's south-west side. Stylemaster told Matrix that after it moved into this new industrial space, it would need an even greater supply of plastics. Matrix dubs this the “Greater Gateway Scheme” and claims that Stylemaster sought to build up its inventory in order to increase its line of credit with ANB and then use the larger credit line to move its plastics manufacturing in-house. To carry out this scheme, Matrix says, Stylemaster delayed payment to suppliers and sought to destroy the suppliers' possessory liens over the plastic molds. The plan was for Stylemaster to file for bankruptcy, and thereafter its principals would form a successor company that would buy Stylemaster's assets at a firesale price. According to Matrix, ANB participated in this scheme by loaning Stylemaster money in exchange for a lien over the plastic molds in Matrix's possession.
Matrix claims that the fraud began in earnest in 2001, when Stylemaster allegedly placed a series of large, out-of-the-ordinary orders with Matrix. When Matrix inquired about the source of the orders, Stylemaster responded that it had plenty of storage space at its Gateway facility and that many of the orders were for big retailers like Kmart. Kmart apparently cancelled its orders with Stylemaster in December 2001, but Stylemaster demanded that Matrix continue to supply it on an expedited basis. Stylemaster again became delinquent in its payments, and Matrix extended it trade credit to fill the orders. In 2002 Matrix sued Stylemaster in Illinois state court for breach of contract based on the payment delinquencies.
Less than a month after this state-court contract action was filed, Stylemaster filed for bankruptcy under Chapter 11. Matrix submitted a claim contending that Stylemaster owed it approximately $7.2 million,2 and ANB claimed it was owed approximately $9.6 million. Shortly after the bankruptcy filing, the owners of Stylemaster formed a new company J.R. Plastics, which after full disclosure as an insider buyer, purchased Stylemaster's assets at a judicially approved bankruptcy sale under § 363 of the Bankruptcy Code. As part of the bankruptcy settlement, ANB agreed to assign its secured interest and lien over the molds in Matrix's possession to J.R. Plastics.
Before approving the sale, the bankruptcy court held a three-day evidentiary hearing to determine whether the sale should proceed. See 11 U.S.C. § 363(b) (). Matrix filed an objection to the sale on the ground that it had a lien on plastic molds in its possession that Stylemaster was claiming as assets and that its lien should have priority over ANB's lien. Matrix also filed a motion to dismiss the bankruptcy petition or convert the Chapter 11 case to a Chapter 7 case. The basis for the motion was that Stylemaster had engaged in “significant acts of fraud, dishonesty, incompetence and/or gross mismanagement” and “intentionally and fraudulently induced Matrix IV to produce and ship it goods with no intention of paying for those goods.” The motion also alleged that Stylemaster had misrepresented that the large, expedited orders were from Kmart when they actually went directly into Stylemaster's inventory.
Without ruling on the motion to dismiss, the bankruptcy court ordered the auction sale to proceed and set a date for filing written objections to the sale. Matrix filed another...
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