In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-3917 & 09-1321
M ATRIX IV, INCORPORATED ,
an Illinois Corporation,
Plaintiff-Appellant/
Cross-Appellee,
v.
A MERICAN N ATIONAL B ANK AND
T RUST C OMPANY OF C HICAGO,
an Illinois Banking Association,
Defendant-Appellee,
and
G ATEWAY P ARK , an Illinois
Limited Liability Company,
Defendant-Appellee/
Cross-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 C 1661—Charles R. Norgle, Sr., Judge.
A RGUED A PRIL 19, 2010—D ECIDED JULY 28, 2011
2 Nos. 08-3917 & 09-1321
Before B AUER and SYKES, Circuit Judges, and G RIESBACH,
District Judge.
S YKES, 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 bank-
ruptcy in 2002. The bankruptcy was lengthy and complex.
Matrix filed a creditor’s claim for more than $7 mil-
lion, and during the course of the proceedings, lodged
a strenuous objection to the proposed sale of Stylemaster’s
assets and was also party 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
The Honorable William C. Griesbach, United States District
Court for the Eastern District of Wisconsin, sitting by designa-
tion.
1
American National Bank and Trust Company of Chicago is
now part of JP Morgan Chase Bank, N.A. (“Chase”), and is
represented in this action by counsel for Chase. We follow
the district court’s lead in referring to this party as ANB.
Nos. 08-3917 & 09-1321 3
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 com-
pany) 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 bank-
ruptcy. 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 dis-
missed 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 pro-
ceeding. 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
4 Nos. 08-3917 & 09-1321
caselaw and a lopsided circuit split on how claim preclu-
sion applies in this context. The Supreme Court’s recent
decision in Stern v. Marshall, 131 S. Ct. 2594 (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.
I. Background
A. Origin of the Dispute
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 indus-
try. Starting in 1994, Stylemaster bought plastic injection
molds from an outside vendor and had them shipped
directly to Matrix. Matrix fashioned the molds into plas-
tic 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
Nos. 08-3917 & 09-1321 5
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 agree-
ment 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 bank-
ruptcy 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
6 Nos. 08-3917 & 09-1321
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 pay-
ment 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 Style-
master in December 2001, but Stylemaster demanded
that Matrix continue to supply it on an expedited ba-
sis. Stylemaster again became delinquent in its pay-
ments, 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 delin-
quencies.
Nos. 08-3917 & 09-1321 7
B. Bankruptcy Proceedings
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,1 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 settle-
ment, 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) (generally
requiring notice and a hearing prior to a sale in bank-
ruptcy of assets or property of the estate). 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
1
Shortly after Stylemaster’s bankruptcy filing, Matrix also
filed a complaint in district court against Stylemaster’s share-
holders alleging common-law fraud and RICO violations. See
Matrix v. Williams, No. 02 C 05609 (N.D. Ill. filed Aug. 7, 2002).
The factual allegations in that complaint are similar to the
schemes alleged in this case.
8 Nos. 08-3917 & 09-1321
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 mismanage-
ment” 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, expe-
dited orders were from Kmart when they actually went
directly into Stylemaster’s inventory.
Without ruling on the motion to dismiss, the bank-
ruptcy court ordered the auction sale to proceed and set
a date for filing written objections to the sale. Matrix
filed another objection, arguing that Stylemaster, by not
properly disclosing its assets, had discouraged potential
bidders and given an unfair advantage to J.R. Plastics, an
insider, in the bidding process. The bankruptcy court
issued an order approving the sale, permitting the debtor
to assign a lien to J.R. Plastics, and finding that J.R. Plastics
was a good-faith purchaser. This order also specified
that ANB held a first perfected priority lien on all of
Stylemaster’s assets except the lien contested by Matrix.
Matrix did not appeal this order but instead filed
a motion to reconsider. In this motion Matrix again
argued that Stylemaster and J.R. Plastics were “engaged
in an unlawful and fraudulent scheme whereby they
induced Matrix to deliver goods to Debtor even though
defendants had no intention of paying for the goods.”
Matrix alleged that Stylemaster’s principals planned to
stockpile inventory, put Stylemaster into bankruptcy, and
then purchase the inventory “under the guise of a new
Nos. 08-3917 & 09-1321 9
corporate entity (JR Plastics)” for a “fraction of market
value.”
The bankruptcy court held a hearing on the motion for
reconsideration, which the court construed as a request
for relief from judgment under Rule 60(b) of the Federal
Rules of Civil Procedure and its bankruptcy equivalent,
Rule 9024 of the Federal Rules of Bankruptcy Procedure.
Matrix reiterated its fraud argument and noted that
the bankruptcy court had not made a specific finding of
fact that J.R. Plastics was a good-faith purchaser. The
bankruptcy judge explained that he had previously
given the parties an opportunity to offer evidence of
fraud at the original hearing and asked if Matrix was
seeking to offer new or additional evidence. Matrix said
it had no further evidence to offer. The bankruptcy
judge then recounted Matrix’s allegations in some detail
and found that there was no evidence to support the
claim of fraud or collusion in the sale process. The
court also entered a specific finding that J.R. Plastics
was a good-faith purchaser. The court concluded that
Matrix’s claim of fraud and collusion was “unwarranted
and frivolous” and did not have “one breath of merit.”
Matrix did not appeal this ruling to the district court.
Although the asset sale was approved, the lien-priority
dispute between Matrix and ANB remained. ANB com-
menced an adversary proceeding seeking a declara-
tion that its lien had priority over Matrix’s lien and cor-
10 Nos. 08-3917 & 09-1321
responding injunctive relief. 2 ANB eventually moved for
summary judgment, to which Matrix responded by
repeating its allegations of fraud, arguing that ANB’s lien
should be equitably subordinated to its own. Matrix
alleged that ANB had extended credit to Stylemaster
despite knowing that Stylemaster was insolvent; ANB
intentionally disregarded Matrix’s lien; ANB failed to
investigate and resolve Matrix’s potential lien; and ANB
conspired with Stylemaster to destroy Matrix’s lien. The
judge denied ANB’s motion for summary judgment.
Thereafter, ANB complained to the court that Matrix
had failed to properly plead its equitable-subordina-
tion defense. The judge then ordered Matrix to assert its
equitable-subordination claim as an affirmative defense.
Matrix complied with this order by submitting a
more definite statement of facts purporting to establish
its now-familiar claim of fraud: Stylemaster was not
paying Matrix for its orders; Stylemaster assured Matrix
of the superiority of its lien; ANB had knowledge of
Matrix’s lien or at least should have conducted a rea-
sonable investigation to discover the lien; and ANB and
Stylemaster conspired to amend their loan agreement to
include a lien on molds in Matrix’s possession but never
apprised Matrix of this change. After a full trial, the
2
Another adversary proceeding sought return of the molds
in Matrix’s possession, in addition to other inventory. In
response Matrix filed a counterclaim alleging that Stylemaster
was engaged in an “unlawful and fraudulent scheme” to
“induce[] Matrix into delivering goods to Stylemaster even
though defendants had no intention of paying for the Goods.”
Nos. 08-3917 & 09-1321 11
bankruptcy judge held in an oral ruling that ANB’s lien
had priority over Matrix’s lien. See In re S.M. Acquisition
Co., 296 B.R. 452 (Bankr. N.D. Ill. 2003). The judge found
that Stylemaster’s payments through 2001 had extin-
guished Matrix’s lien and that any post-2001 lien was
subordinate to ANB’s UCC lien. Id. at 470-71. On
appeal the district court affirmed, but remanded with
instructions to the bankruptcy court to issue a formal
order on Matrix’s equitable-subordination claim; al-
though it was implicit in its oral ruling, the bankruptcy
judge had never formally rejected Matrix’s equitable-
subordination affirmative defense.
On remand the bankruptcy court formally ruled on
the equitable-subordination defense, holding that Matrix
had insufficient evidence to support a finding of fraud.
In re S.M. Acquisition Co., 332 B.R. 346 (Bankr. N.D. Ill.
2005). The court rejected Matrix’s argument that ANB
had ignored Stylemaster’s financial problems and failed
to conduct reasonable due diligence to unearth Matrix’s
competing lien, and found that the evidence established
that ANB had only “ordinary business purposes” in its
relationship with Stylemaster. Id. at 356. Matrix appealed
this ruling, and the district court affirmed. In re S.M.
Acquisition Co., No. 05 C 7076, 2006 WL 2290990 (N.D. Ill.
Aug. 7, 2006). The district court held that Matrix’s
equitable-subordination defense was inadequate and
could not withstand a Rule 12(b)(6) challenge. Id. at *4.
The court said the fraud claim was “patently defective”
and that ANB’s conduct was not unfair or inequitable.
Id. The court went on to state:
12 Nos. 08-3917 & 09-1321
Although Matrix initially suggested in the summary
judgment briefing that the Bank participated in
Stylemaster’s fraud, the [more definite statement]
contains no allegation that the Bank acted unfairly or
used its insider status to deliberately mislead other
creditors about the financial position of Stylemaster
or its own security interests. Accordingly, Matrix
failed to allege inequitable conduct by the Bank that,
as a matter of law, could entitle it to the extra-
ordinary remedy of equitable subordination. Because
Matrix thus could not prove any set of facts in
support of its defense, the bankruptcy court did not
err in striking the equitable subordination defense.
Id. at *8.
Matrix ultimately filed consolidated appeals in this
court asking that all prior judgments be vacated. We
summarily affirmed. The bankruptcy plan was eventually
confirmed, and a final decree was entered.
C. The Present Suit
While the bankruptcy proceedings were still ongoing,
Matrix filed this suit against ANB and Gateway
alleging claims for violation of RICO and common-law
fraud. The complaint was initially dismissed on the
ground that Matrix had not pleaded any misrepresenta-
tions by ANB or Gateway and had failed to allege
activities that constituted a RICO enterprise. Matrix was
given leave to amend and did so. The allegations in
the amended complaint were again familiar: ANB and
Nos. 08-3917 & 09-1321 13
Gateway schemed to defraud Matrix by building up
Stylemaster’s inventory, refusing to pay Matrix’s invoices,
and ultimately allowing J.R. Plastics to buy Stylemaster’s
inventory at a firesale price; ANB and Stylemaster (and
by extension, Gateway) concealed the fact that ANB
had acquired a superior lien over Matrix’s molds;
Stylemaster falsely represented that Matrix’s lien would
be superior to any subsequent liens; ANB knew that
Stylemaster was insolvent but still gave Stylemaster a
line of credit; and ANB had knowledge of Matrix’s lien
and failed to conduct a reasonable investigation of out-
standing liens. For predicate racketeering acts, the
amended complaint pointed to letters ANB sent to Style-
master in servicing the loans and also identified certain
acts committed in the course of the bankruptcy litigation
that it alleged were a fraud on the court.
Gateway moved to dismiss the amended complaint,
relying on res judicata and collateral estoppel (among
other arguments). By this time the case had been trans-
ferred to a different district judge who denied the mo-
tion. Gateway filed a motion to reconsider, pointing
out that the court had not addressed the res judicata
and collateral-estoppel arguments. In the meantime
ANB moved for judgment on the pleadings, also in-
voking res judicata and collateral estoppel (among
other arguments). The district court granted the
motion to reconsider and ultimately entered judgment
on the pleadings dismissing the suit on both res
judicata and collateral-estoppel grounds. The court ex-
plained that Matrix’s RICO and common-law fraud
claims were compulsory counterclaims that could
14 Nos. 08-3917 & 09-1321
have and should have been brought in the bankruptcy
proceedings.
Gateway then moved for Rule 11 sanctions. Matrix
moved to strike the motion, alleging that Gateway had
not complied with the notice requirements of Federal
Rule of Civil Procedure 11(c)(2). Gateway filed a reply,
submitting a letter it sent to Matrix’s counsel less than
two weeks after the complaint was filed. In the letter
Gateway’s counsel advised Matrix that its claims
were barred by the final judgment in the bankruptcy pro-
ceedings and that Gateway would seek sanctions if
Matrix did not withdraw it and the suit was later dis-
missed. The district court denied the motion for sanctions.
Matrix appealed the court’s order of dismissal. Gateway
filed a cross-appeal from the denial of its Rule 11 motion.
In its brief Gateway asked for frivolous-appeal sanctions
under Rule 38 of the Federal Rules of Appellate Procedure.
II. Discussion
We review an order granting a Rule 12(c) motion for
judgment on the pleadings de novo, taking the facts
alleged in the complaint as true and drawing all rea-
sonable inferences in favor of the plaintiff. Buchanan-
Moore v. Cnty. of Milwaukee, 570 F.3d 824, 827 (7th Cir.
2009). The dismissal of this suit on res judicata and
collateral-estoppel grounds raises questions of law that
we review de novo. Tartt v. Nw. Cmty. Hosp., 453 F.3d
817, 822 (7th Cir. 2006).
Nos. 08-3917 & 09-1321 15
The doctrine of “[r]es judicata bars not only those
issues actually decided in the prior suit, but all other
issues which could have been brought.” Aaron v. Mahl,
550 F.3d 659, 664 (7th Cir. 2008). The principle underlying
res judicata—or claim preclusion—is to minimize “the
expense and vexation attending multiple lawsuits, con-
serve[] judicial resources, and foster[] reliance on
judicial action by minimizing the possibility of incon-
sistent decisions.” Montana v. United States, 440 U.S. 147,
153-54 (1979). Res judicata has three elements: “(1) an
identity of the parties or their privies; (2) [an] identity of
the cause of action; and (3) a final judgment on the merits.”
Alvear-Velez v. Mukasey, 540 F.3d 672, 677 (7th Cir. 2008).
Here, Matrix only challenges the second and third ele-
ments; there is no dispute that the parties are the same.3
The second element—whether an “identity of the
cause of action” exists—depends on whether the claims
arise out of the same set of operative facts or the same
transaction. In re Energy Coop., Inc., 814 F.2d 1226, 1230
(7th Cir. 1987). This “transactional” inquiry focuses on
whether the claims comprise the same “core of operative
facts [that] give rise to a remedy.” Id. (quotation marks
omitted). Even if the two claims are based on different
legal theories, the “two claims are one for purposes of
3
Matrix and ANB participated as creditors in the bankruptcy
proceeding and were parties to the lien-priority adversary
proceeding within the bankruptcy. Everyone agrees that
Gateway was effectively a party as well, based on the identity
of its ownership with that of Stylemaster and J.R. Plastics.
16 Nos. 08-3917 & 09-1321
res judicata if they are based on the same, or nearly the
same, factual allegations.” Herrmann v. Cencom Cable
Assocs., 999 F.2d 223, 226 (7th Cir. 1993).
The doctrine of collateral estoppel—issue preclusion—is
narrower. For collateral estoppel to apply, “(1) the issue
sought to be precluded must be the same as that
involved in the prior litigation, (2) the issue must have
been actually litigated, (3) the determination of the
issue must have been essential to the final judgment,
and (4) the party against whom estoppel is invoked must
be fully represented in the prior action.” H-D Mich., Inc.
v. Top Quality Serv., Inc., 496 F.3d 755, 760 (7th Cir.
2007) (quotation marks omitted).
We start by noting our general agreement with the
district court that the claims Matrix advances in this
case are based on the same core of operative facts as
the claims it litigated and lost in the bankruptcy pro-
ceedings. It makes no difference that the earlier claims
took a different form—that is, an equitable-subordina-
tion defense in the lien-priority adversary proceeding and
an objection to the bankruptcy asset sale on the ground
that J.R. Plastics was not a good-faith purchaser. It’s
quite clear that the allegations of fraud Matrix asserted
in the Stylemaster bankruptcy are the same basic allega-
tions it makes here: (1) Stylemaster built up its inventory
with goods from Matrix that it had no intention of
paying for; (2) its principals formed a new corporate
entity, J.R. Plastics, to buy Stylemaster’s assets at a
reduced price in a bankruptcy sale; (3) Stylemaster ar-
ranged a line of credit with ANB secured by Style-
Nos. 08-3917 & 09-1321 17
master’s unpaid-for inventory; and (4) Stylemaster
and ANB conspired to establish the priority of ANB’s lien
over Matrix’s. Under well-established claim-preclusion
doctrine, this common nucleus of operative facts means
the claims are the same even though they involve
different legal theories. See Alvear-Velez, 540 F.3d at 677
(holding that a “claim” consists of the underlying factual
events rather than the legal theories advanced).
Matrix insists that the claims cannot be the same
because the alleged RICO conspiracy includes events
subsequent to Stylemaster’s bankruptcy filing. More
specifically, Matrix asserts that ANB committed a fraud
on the bankruptcy court by pursuing a claim for which
it did not have standing. A question relating to ANB’s
standing in the bankruptcy proceeding cannot form
the basis of an otherwise impermissible collateral attack
on the judgments rendered by the bankruptcy court. See
Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee,
456 U.S. 694, 702 n.9 (1982) (“A party that has had an
opportunity to litigate the question of subject-matter
jurisdiction may not . . . reopen that question in a
collateral attack upon an adverse judgment.”). Moreover,
only a few of the allegations in the amended complaint
pertain to events that occurred during the bankruptcy
proceeding; they do not suffice to destroy the essential
factual commonality of these claims. Nearly all the
facts comprising the alleged fraudulent scheme predate
Stylemaster’s bankruptcy filing; without the alleged
prebankruptcy scheme, Matrix has no RICO or common-
law fraud claim.
18 Nos. 08-3917 & 09-1321
Matrix also contends, quite implausibly, that it never
actually pleaded fraud in its opposition to the bank-
ruptcy sale or in the adversary proceeding. Matrix claims
that because it withdrew its motion to dismiss the bank-
ruptcy case and removed the mention of “fraud” from
its supplemental statement of facts in support of equi-
table subordination, the present allegations of conspiracy
to defraud were never put before the bankruptcy court.
This is hardly an accurate representation of the bank-
ruptcy proceedings. Even accepting the proposition
that the withdrawal of the motion to dismiss and the
recharacterization of the equitable-subordination de-
fense took some of the fraud allegations off the table, it
is abundantly clear that Matrix doggedly pursued its
claim of fraud throughout the bankruptcy proceedings.
Matrix’s objection to the asset sale and its equitable-
subordination defense in the lien-priority proceeding
turned entirely on allegations that a fraudulent scheme
was afoot. More fundamentally, Matrix’s argument
ignores that identity of claims for res judicata purposes
has nothing to do with legal theories; the key is that
the claims arise from the same core of operative facts.
Matrix’s equitable-subordination defense in the lien
priority proceeding rested on the same fraud allegations
Matrix raised and lost in its objection to the § 363 sale;
in turn, these same allegations form the basis of the
RICO and fraud claims asserted here.
Finally, there can be little doubt that the bankruptcy
court rendered final judgments on the merits. The bank-
ruptcy orders confirming the asset sale under § 363
and dismissing the equitable-subordination defense in
Nos. 08-3917 & 09-1321 19
the lien-priority adversary proceeding—orders affirmed
by the district court and this court—were final orders.
Matrix maintains that these orders did not dispose of
its fraud claim on the merits. We disagree. As we have
explained, the heart of Matrix’s request that the bank-
ruptcy court reconsider its approval of the asset sale was
a contention that Stylemaster and J.R. Plastics par-
ticipated in an inventory-buildup fraud, the purpose of
which was to permit J.R. Plastics to purchase Style-
master’s assets for a fraction of their value. The bank-
ruptcy court held a hearing on the motion, rejected
Matrix’s allegations of fraud, held that J.R. Plastics was
a good-faith purchaser, and permitted the sale to pro-
ceed. That was a merits determination.
And Matrix had another full airing of its fraud claim
when it raised—and lost—its equitable-subordina-
tion defense in the lien-priority adversary proceeding.
The bankruptcy court, first orally and in a later written
opinion, held that ANB had not engaged in any
inequitable or unfair conduct. See In re Kreisler, 546 F.3d
863, 866 (7th Cir. 2008) (“Equitable subordination allows
the bankruptcy court to reprioritize a claim if it deter-
mines that the claimant is guilty of misconduct that
injures other creditors or confers an unfair advantage on the
claimant.” (emphasis added)). The district court affirmed
this ruling after scouring the record for evidence of col-
lusive or unfair dealings and finding none. The lack of
evidence of fraud means that the defense was meritless,
not that it was never litigated on the merits.
So the elements of claim preclusion are established.
This conclusion finds direct support in our caselaw.
20 Nos. 08-3917 & 09-1321
We held in In re Met-L-Wood Corp., 861 F.2d 1012, 1018
(7th Cir. 1988), that a bankruptcy trustee was barred
from filing a RICO suit against the debtor and others
involved in a bankruptcy asset sale after the sale had
been confirmed; res judicata applied because the suit
was a “thinly disguised collateral attack on the [bank-
ruptcy court’s] judgment confirming the sale.” “RICO is
many things,” we explained, “but it is not an exception
to res judicata.” Id. at 1016. And in Crop-Maker Soil
Services v. Fairmount State Bank, 881 F.2d 436, 440 (7th Cir.
1989), we concluded that a fraud claim brought in
district court in connection with a lien over a tomato
crop was barred by res judicata because the plaintiff
had failed to raise the issue in earlier lien-priority pro-
ceedings in the bankruptcy court. We held that the plain-
tiff’s failure to raise the fraud arguments in bankruptcy
court, “whether strategic or inadvertent, will not enable
Crop-Maker to escape the res judicata net.” Id. at 439.
Normally we could conclude our opinion and affirm
the district court without further ado; the elements of
claim preclusion are established, and there is circuit
precedent for applying it here. But a pronounced conflict
in our caselaw on this issue gives us reason to pause. In
Barnett v. Stern, 909 F.2d 973 (7th Cir. 1990), a bankruptcy
trustee brought a RICO claim in district court based
on a fraudulent transaction that had been the subject of
an adversary action in the bankruptcy proceedings. In
an attempt to outmaneuver his creditors, the debtor had
formed a sham third-party trust, naming his son as
trustee. Id. at 975. The bankruptcy trustee filed an adver-
sary action to recover the assets held in the trust; he
Nos. 08-3917 & 09-1321 21
claimed the trust was the alter ego of the debtor and its
assets belonged to the bankruptcy estate. The bankruptcy
court agreed and ordered the bankruptcy trustee to take
control of the assets in the third-party trust. Id. The bank-
ruptcy trustee later filed a RICO suit in district court
against the debtor’s son for his part in the fraudulent
scheme. Id. at 975-76. The district court held that
the suit was barred by res judicata, but we reversed.
Id. at 978-82.
Barnett’s holding was grounded on an analysis of the
interplay between claim-preclusion principles and the
bankruptcy court’s authority to render final judgments.
To explain Barnett thus requires a short detour into the
bankruptcy court’s jurisdiction. The Bankruptcy Code
provides that “[b]ankruptcy judges may hear and enter
final judgments in ‘all core proceedings arising under
title 11, or arising in a case under title 11.’ ” Stern, 131 S. Ct.
at 2604 (quoting 28 U.S.C. § 157(b)(1)). Section 157(b)(2)
provides a nonexhaustive list of “core” proceedings; as
relevant here, these include “determinations of the
validity, extent, or priority of liens” and “orders ap-
proving the sale of property.” See 28 U.S.C. § 157(b)(2)(K),
(N). Bankruptcy courts may also hear actions that are
“related to” core proceedings but cannot resolve these
“noncore” proceedings unless all parties consent. Id.
§ 157(c)(1), (2). Absent the parties’ consent, in noncore
proceedings the bankruptcy court is limited to making
proposed findings of fact and conclusions of law to the
district court, and the district court may enter a final
judgment after considering those findings and conclu-
sions de novo. Id. § 157(c)(1).
22 Nos. 08-3917 & 09-1321
Barnett relied heavily on Howell Hydrocarbons, Inc. v.
Adams, 897 F.2d 183 (5th Cir. 1990), in which the Fifth
Circuit reasoned that because a bankruptcy court could
not by itself adjudicate a noncore claim to finality under
§ 157(c)(1), a party to a noncore proceeding would not
have a “full and fair” opportunity to litigate the claim
for purposes of res judicata. 909 F.2d at 978-80. Barnett
adopted the Fifth Circuit’s reasoning and held that a
bankruptcy court’s resolution of a core claim will not
have res judicata effect on a noncore claim that could
have been brought, but wasn’t, under the court’s “re-
lated” jurisdiction. Id. at 981-82. Barnett further held that
the trustee’s RICO claim was a noncore proceeding, and
the bankruptcy court’s adjudication of the adversary
proceeding to recover the assets in the sham trust—
a core proceeding—did not have res judicata effect on
the later noncore RICO claim. Id. at 980-82. This was so
even though the claims arose out of the same trans-
action and operative facts. Id.
It’s hard to distinguish Barnett from this case. Like the
alter-ego adversary proceeding in Barnett, the asset-sale
confirmation and lien-priority adversary proceedings
were core bankruptcy proceedings. Barnett holds that a
later-filed RICO claim is noncore and therefore not
barred by res judicata. Curiously, Barnett did not mention
Met-L-Wood or Crop-Maker, even though its holding
would have dictated a different result in Met-L-Wood and
possibly Crop-Maker as well if it was determined that the
fraud claim in that case would have been a noncore
proceeding in the bankruptcy. Moreover, since Barnett our
circuit has continued to apply res judicata in the bank-
Nos. 08-3917 & 09-1321 23
ruptcy context without reference to the core/noncore dis-
tinction. See, e.g., ITOFCA, Inc. v. MegaTrans Logistics,
Inc., 322 F.3d 928, 930-31 (7th Cir. 2003) (barring subse-
quent copyright-infringement claim for debtor’s failure
to raise claim in bankruptcy proceeding); Adair v. Sherman,
230 F.3d 890, 894 (7th Cir. 2000) (remarking without
mention of Barnett or noncore claims that as a “general
rule” bankruptcy orders are res judicata in subsequent
proceedings); La Preferida, Inc. v. Cerveceria Modelo, S.A. de
C.V., 914 F.2d 900, 908-09 (7th Cir. 1990) (finding tort
and contract claims to be barred by prior bankruptcy
judgment sale, without reference to Barnett’s core/noncore
distinction). Only one of our cases discusses Barnett at
all, and it held that the Barnett core/noncore argument
had been waived and also distinguished the decision on
its facts. See In re Kroner, 953 F.2d 317, 320 (7th Cir.
1992). Despite Met-L-Wood and Crop-Maker, our opinion
in Kroner said Barnett neither “created new law” nor
“purported to overturn prior precedent.” Id. at 319.
Finally, we note as well that every other circuit to
have addressed this issue since Barnett has rejected the
core/noncore distinction for purposes of deciding the
claim-preclusive effect of judgments entered in bank-
ruptcy proceedings. See Plotner v. AT & T Corp., 224
F.3d 1161, 1173-74 (10th Cir. 2000); CoreStates Bank, N.A.
v. Huls Am., Inc., 176 F.3d 187 (3d Cir. 1999); In re Int’l
Nutronics, Inc., 28 F.3d 965, 969-70 (9th Cir. 1994);
Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973
F.2d 474 (6th Cir. 1992); Sure-Snap Corp. v. State St. Bank
& Trust Co., 948 F.2d 869 (2d Cir. 1991). Even the Fifth
24 Nos. 08-3917 & 09-1321
Circuit, whose decision in Howell Hydrocarbons formed
the basis of the reasoning in Barnett, has cast doubt on
the continuing vitality of the distinction. See Matter of
Baudoin, 981 F.2d 736, 741 n.10 (5th Cir. 1993) (remarking
in dictum that it was not certain that “bankruptcy juris-
diction must always be core in order to be ‘competent’
for res judicata purposes”).
The existence of both an intra- and inter-circuit
conflict provides reason to revisit Barnett’s conclusion
that the distinction between core and noncore pro-
ceedings makes a dispositive difference in claim-preclu-
sion analysis. The jurisdictional point under § 157(b) and
(c) is clear, but the allocation of jurisdiction between
the bankruptcy and district courts does not speak to a
party’s ability to receive a final judgment in a bank-
ruptcy proceeding; rather, it stipulates which court has
the authority to render the judgment. The Supreme
Court’s recent decision in Stern explains the statutory
and constitutional dimensions of the jurisdiction-alloca-
tion question. 131 S. Ct. at 2608-11.
The question before the Court in Stern was whether
Article III permits the bankruptcy courts to hear and
finally decide a particular type of core proceeding.
Under § 157(b)(2)(C), “counterclaims by the estate
against persons filing claims against the estate” are spe-
cifically denominated as core proceedings. The counter-
claim at issue in Stern was a state common-law tort claim
by the estate for intentional interference with a testa-
mentary gift. Id. at 2601-02. The Court held that although
Congress had, in § 157(b)(2)(c), designated this kind
of claim as “core,” Article III did not permit the bank-
Nos. 08-3917 & 09-1321 25
ruptcy court to hear and finally decide it. Id. at 2608. That
is, Congress could not delegate to a non-Article III
court the judicial power “to enter a final judgment on
a state law counterclaim that is not resolved in the
process of ruling on a creditor’s proof of claim.” Id. at 2620.
As we have noted, Barnett keyed the claim-preclusive
effect of bankruptcy-court orders to the core/noncore
distinction, but the parties have not submitted Rule 28(j)
letters on the effect of Stern on our reasoning in Barnett.
As a general rule, resolving a conflict in circuit caselaw
ought to be attempted only on full briefing and in a
case in which the outcome depends on it. Because a
narrower ground exists on which to resolve this case,
we leave the resolution of the conflict for another day.
By its terms, Barnett does not apply to collateral estop-
pel, 909 F.2d at 978 n.5, and here, the elements of
collateral estoppel have plainly been satisfied. For the
reasons we have already explained, the fraud allegations
at issue in this case are the same as those that were
actually litigated in the § 363 hearing and in the lien-
priority adversary proceeding. The bankruptcy court
was required to and did address them before entering
its orders in those proceedings. Finally, Matrix was
fully represented in the bankruptcy proceedings. Ac-
cordingly, Matrix is collaterally estopped from reliti-
gating the very same issues here.
C. Sanctions
Gateway appealed the district court’s denial of its
motion for sanctions pursuant to Rule 11, a decision that
26 Nos. 08-3917 & 09-1321
we review for abuse of discretion. Nemsky v. ConocoPhillips
Co., 574 F.3d 859, 868 (7th Cir. 2009). Before taking up
the merits of Gateway’s argument for sanctions, we
address certain concerns raised below and reiterated
here that the motion for sanctions was procedurally
defective. Rule 11(c)(2) provides that a motion for sanc-
tions must be served on the opposing party, but that
it cannot be filed with the court until 21 days have
passed from the date of service of the motion. This 21-day
window gives the offending party a “safe harbor” within
which to withdraw or correct the offending pleading.
Matrix argues that Gateway failed to comply with the
safe-harbor provision by not providing sufficient notice
of its motion for sanctions. It also claims that motions
for Rule 11 sanctions filed after a final judgment, like
the one at issue here, are not permissible. Matrix is incor-
rect on both points. Gateway put Matrix on notice of its
intent to seek sanctions by a letter sent two weeks after
Matrix filed its initial complaint. In this letter Gateway
noted that “[i]n light of the judgment in the bankruptcy
matter and the failure to allege any involvement
by Gateway Park, LLC,” filing the new claims was
sanctionable under Rule 11. Gateway told Matrix it
would seek sanctions if Matrix did not voluntarily
dismiss the complaint and that the letter served “as
notice of [its] intention to seek sanctions if and when
the counts against Gateway Park, LLC are dismissed.” 4
4
We have said that the notice of Rule 11 sanctions must
“describe the specific conduct that is alleged to violate
(continued...)
Nos. 08-3917 & 09-1321 27
More than two years later, the district court dismissed
the case, and as promised, Gateway filed for Rule 11
sanctions 23 days after the dismissal.
The 21-day window specified in Rule 11 is a floor, not
a ceiling, as Matrix seems to suggest. That Matrix had
much more “safe harbor” time before the Rule 11 motion
was filed only underscores the fact that it had sufficient
opportunity to decide whether to dismiss its suit in
response to Gateway’s notice. Moreover, we have held
that a letter informing the opposing party of the intent
to seek sanctions and the basis for the imposition of
sanctions—like the one Gateway sent in this case—is
sufficient for Rule 11 purposes. See, e.g., Fabriko Acquisi-
tion Corp. v. Prokos, 536 F.3d 605, 610 (7th Cir. 2008)
(finding a letter informing offending party of sanctions
to be adequate); Nisenbaum v. Milwaukee Cnty., 333 F.3d
804, 808 (7th Cir. 2003) (same). That Gateway filed
its motion for sanctions 23 days after the district court
dismissed the suit—and more than two years after the
Rule 11 notice letter was sent—does not mean that the
4
(...continued)
Rule 11(b).” Corley v. Rosewood Care Ctr., Inc., 388 F.3d 990, 1012
(7th Cir. 2004). In determining whether this standard has
been satisfied, we do not disregard context. Gateway’s letter
did not mention res judicata or claim preclusion explicitly,
but the phrase “[i]n light of the judgment in the bankruptcy
matter” makes it clear that Gateway would argue preclusion.
This inference is reinforced by the fact that Matrix’s attor-
neys had already been fighting Gateway’s preclusion defenses
in the shareholder litigation.
28 Nos. 08-3917 & 09-1321
requirements of Rule 11 have not been satisfied.
Postjudgment motions for sanctions are permissible so
long as the moving party substantially complies with
Rule 11’s safe-harbor requirement, as Gateway did here.
See Divane v. Krull Elec. Co., 200 F.3d 1020, 1025 (7th Cir.
1999). Finally, we have recognized that the “outer para-
meters” for filing motions for sanctions after final judg-
ment is 90 days. Sullivan v. Hunt, 350 F.3d 664, 666 (7th
Cir. 2003). Gateway’s motion, filed within 23 days of
entry of judgment, was comfortably within this post-
judgment window.
Having cleared the procedural hurdles, however, we
have little trouble agreeing with the district court that
sanctions are unwarranted. The district court remarked
that “it was not so clear cut that res judicata and
collateral estoppel applied as to RICO and fraudulent
concealment.” We add only that the district court
reached this conclusion without grappling with Barnett.
When the Barnett complication is added to the equa-
tion, Matrix had a colorable argument that its RICO
claim was not barred by the judgments in the bank-
ruptcy proceedings. Accordingly, the district court prop-
erly denied the motion for sanctions because the claims
in this suit were neither frivolous nor designed to
harass or abuse.
It follows that sanctions under Federal Rule of
Appellate Procedure 38 are also unwarranted. In
addition, however, we note a procedural irregularity
in Gateway’s request for frivolous-appeal sanctions.
“Before awarding such sanctions, Rule 38 requires that
Nos. 08-3917 & 09-1321 29
either a separate motion for sanctions be filed or that we
give notice that sanctions are being considered.” Greviskes
v. Univs. Research Ass’n, Inc., 417 F.3d 752, 761 (7th Cir.
2005). Gateway asked for Rule 38 sanctions in its
appellate brief, not by a separate motion.
A FFIRMED.
7-28-11