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Orlando Residence, Ltd. v. GP Creditco.

January 22, 2009

ORLANDO RESIDENCE, LTD., PLAINTIFF-APPELLEE/CROSS-APPELLANT,
v.
GP CREDITCO., LLC, ET AL., DEFENDANTS-APPELLANTS, CROSS-APPELLEES.
SUSAN B. NELSON, PLAINTIFF-APPELLANT,
v.
ORLANDORESIDENCE, LTD., ET AL., DEFENDANTS-APPELLEES.



Appeals from the United States District Court for the Eastern District of Wisconsin. Nos. 04-C-439, 07-C-436-Rudolph T. Randa, Chief Judge.

The opinion of the court was delivered by: Posner, Circuit Judge.

ARGUED DECEMBER 10, 2008

Before POSNER, KANNE, and ROVNER, Circuit Judges.

For 22 years these parties and their predecessors have been litigating, in numerous lawsuits in different courts, a dispute over a piece of property in Nashville. We were told at argument without contradiction that the parties have expended $3 million in legal fees, a figure that exceeds any reasonable estimate of the amount in controversy. Yet such behavior need not be irrational or a product of spite or even of bad legal advice. A rational litigant, having expended $X in unsuccessful efforts to prevail, yet having additional litigation options that he can pursue, will compare the cost of those options to the expected benefit, disregarding the $X he has spent al-ready. That is a sunk cost-a cost he cannot recover by anything he does and therefore a cost that will not influence his behavior (if he is rational). Still, from an overall social standpoint, the money spent on this litigation-which we cannot quite end today, much as we would like to-is excessive. But our decision will bring the end within sight.

In the early 1980s a dispute arose between Samuel Hardige and Kenneth Nelson. The dispute was settled by Hardige's giving Nelson's company, Nashville Residence Corporation (NRC), a hotel property in Nashville in exchange for a promissory note of NRC secured by the property and payable in October 1986 to one of Hardige's companies, Orlando Residence, Ltd. NRC failed to pay the note when due and two months later Orlando sued NRC on the note in federal district court in Tennessee, basing federal jurisdiction on diversity of citizenship. NRC responded by conveying the property to Nashville Lodging Company (NLC), another corporation controlled by Nelson, and NLC in turn transferred the property to Metric Partners Growth Suite Investors in 1989. The following year, the federal district court entered judgment against NRC for the face amount of the note, plus interest.

In 1992 Orlando brought suit in a Tennessee chancery court against NRC, NLC, Nelson, and Metric, claiming that the transfer of the property by NRC to NLC, and by NLC to Metric, was a fraudulent effort to prevent Orlando from collecting on the judgment that it had obtained in federal court. In 1995, after a trial, the chancery court entered judgment for Orlando of $501,934 in compensatory damages and $850,000 in punitive damages. The defendants appealed. One of the appellants' arguments was that Orlando did not have standing to sue. There were two entities named Orlando Residence, Ltd., one of which was owned 98 percent by Hardige and the other 100 percent, and the appellants claimed that the Orlando entity that owned the promissory note on which the suit was based was not the one that was the plaintiff-appellee in the litigation and therefore had no standing to sue. The Tennessee court of appeals rejected the argument on the ground that Tennessee law is not concerned with such trifles as distinguishing between two commonly owned, identically named entities. Orlando Residence, Ltd. v. Nashville Lodging Co., 1996 WL 724915, at *2 (Tenn. App. Dec. 18, 1996). They were as Tweedledum and Tweedledee. But proceeding to the merits the court found errors in the chancery court's decision and remanded for a new trial.

Shortly before the court of appeals' decision, Orlando had moved the chancery court to order the hotel property sold to satisfy Orlando's judgment, the court had ordered the sale, and at the sale Orlando had purchased the property for $100,000. When the court of appeals reversed the judgment in the fraudulent conveyance suit, the defendants asked the chancery court to set aside the sale; they also renewed their argument that Orlando lacked standing. The chancery court rejected both their arguments. So the defendants again appealed. The court of appeals, invoking the doctrine of law of the case, refused to consider the defendants' renewed argument that Orlando lacked standing and went on to affirm the chancery court's decision refusing to set aside the sale. Orlando Residence, Ltd. v. Nashville Lodging Co., 1999 WL 1040544, at *4 (Tenn. App. Nov. 17, 1999).

The new trial that the court of appeals had ordered in the first appeal was held in 2000, and the jury returned a verdict in favor of Orlando for $797,615. The judge gave the defendants a credit of $100,000, the amount that Orlando had agreed to pay for the property (formerly NLC's) at the judicial sale. On appeal, the court of appeals held that the judicial sale had been proper and so the defendants were entitled to no more for their property interest than Orlando had agreed to pay at the sale. The court further ruled that NRC's conveyance of the property to NLC had indeed been fraudulent, but the court remanded the case to the chancery court for an evidentiary hearing on the defendants' statute of limitations defense. Orlando Residence, Ltd. v. Nashville Lodging Co., 104 S.W.3d 848 (Tenn. App. 2002).

Back in 1999 NLC had granted a security interest in its personal property to another entity controlled by Kenneth Nelson, GP Credit Co., in exchange for a loan. NLC's personal property included a lawsuit against Metric (to which, recall, NLC had conveyed the hotel property in 1989) in Tennessee. In 2001, GP Credit fore-closed its security interest in NLC's personal property and bought the property at the foreclosure sale, including the suit against Metric. Orlando persuaded the chancery court to appoint a receiver to hold any proceeds of the Metric suit that NLC might obtain, to pay Orlando's judgment against NLC. GP Credit responded by filing a diversity suit in a federal court in Wisconsin, GP Credit's domicile, to clear its title to the Metric suit. We upheld the district judge's judgment in favor of GP Credit, ruling that GP Credit owned the suit free and clear of any claim by Orlando. GP Credit Co., LLC v. Orlando Residence, Ltd., 349 F.3d 976 (7th Cir. 2003).

In 2004, pursuant to the Tennessee court of appeals' remand, Orlando's fraudulent conveyance suit was again retried, and again Orlando won-and again the chancery court refused to reconsider the earlier rulings on Orlando's standing to sue. Because Kenneth Nelson refused to put in a personal appearance at the trial, the judge entered a default judgment in favor of Orlando, and the court of appeals affirmed. Orlando Residence, Ltd. v. Nashville Lodging Co., 213 S.W.3d 855 (Tenn. App. 2006).

Orlando at last had solid final judgments against NRC, NLC, and Kenneth Nelson.

The challenge was to collect these judgments. To that end Orlando had brought the present suit, originally in the Tennessee chancery court, against NLC, GP Credit, Kenneth Nelson and his wife Susan, and Hayvenhurst Pension & Profit Sharing Plan, claiming that Kenneth Nelson and NLC had made fraudulent conveyances to the other defendants in an effort to prevent Orlando from collecting its judgment. GP Credit counter-claimed, claiming unjust enrichment (for which it sought restitution), intentional interference with a business relationship, and slander of title. (It later added an additional restitution claim.) The defendants removed the suit to federal district court on the basis of diversity of citizenship, and that court then transferred the case to a federal district court in Wisconsin. The district judge rejected both of Orlando's claims and GP Credit's counter-claims, and both sides have appealed. Susan Nelson filed a separate suit in the same district court to quiet title to her property so that it cannot be seized to pay the judgment against the defendants in Orlando's suit. The district judge dismissed that suit, and she appeals.

We begin with Orlando's appeal. Two years after we issued our decision in GP Credit's quiet-title suit against Orlando, Orlando obtained a default judgment from the chancery court in Tennessee against GP Credit. Orlando claimed that GP Credit was an alter ego of Kenneth Nelson and therefore liable on his debt to Orlando. GP Credit argues that the chancery court did not have juris diction to issue the default judgment because it was a judgment in rem-the res being the lawsuit against Metric, which had been the property of NLC. As we explained in our decision (see 349 F.3d at 981), the site of a res that consists of a lawsuit is the owner's domicile. Because GP Credit was the owner of the lawsuit, its domicile and therefore the site of the lawsuit were Wisconsin. The district judge in the present case thought that to allow Orlando to obtain the proceeds of the Metric lawsuit would be inconsistent with our decision holding that GP Credit owns the suit free and clear of any claims by Orlando.

The judge was wrong. The basis on which Orlando seeks to add GP Credit as a defendant is not that Orlando owns the Metric lawsuit but that GP Credit is the alter ego of Kenneth Nelson-which we didn't know when we issued our decision-so that property of GP Credit, including therefore the Metric lawsuit, is available for satisfaction of Orlando's judgment against Nelson. The default judgment established this, and, by suing GP Credit, Orlando is simply trying to collect its ...


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