Key Points

  • The Seventh Circuit reversed the dismissal of a suit challenging Blue Island, Illinois's denial of a bakery business license and remanded the case for further proceedings.
  • The panel held that the Rooker-Feldman doctrine did not apply because the plaintiffs' injury came from the city hearing officer's decision, not from the state-court judgment dismissing their petition for administrative review.
  • Applying the en banc Gilbank test, the panel found the third element, injury caused by the state-court judgment, absent, relying on Andrade v. City of Hammond and Durgins v. City of East St. Louis.
  • The panel declined to decide whether claim preclusion bars the suit, citing the party presentation principle, and left any such defense to the district court if the city raises it.

A federal appeals court on Monday revived a lawsuit accusing the City of Blue Island, Illinois, of violating a would-be bakery owner's constitutional rights when it denied her a business license. The court held that her earlier defeat in Illinois state court did not strip the federal courts of power to hear the case.

Circuit Judge Rovner, writing for a Seventh Circuit panel that also included Judges Pryor and Kolar, held that the alleged injury came from a city hearing officer's decision, not from the state courts that declined to review it. The panel reversed U.S. District Judge John Robert Blakey of the Northern District of Illinois, who had dismissed the case for lack of jurisdiction, and remanded it.

The ruling turns on the Rooker-Feldman doctrine, named for Supreme Court decisions from 1923 and 1983, which the opinion says "forecloses a challenge to state-court decisions in any federal court other than the Supreme Court." "The bar to this suit, if any, is claim preclusion, an issue the parties have not presented," Rovner wrote.

Mary Jane Sweet Spot LLC and its principal, Ashley McCoy, applied in 2021 for a license to run a small bakery in Blue Island that would host "themed days." According to McCoy, city inspections went well and she was told orally that the license would be granted. The city denied it on Nov. 12, 2021.

In a letter explaining the denial, the city said the still-unlicensed business had held an Oct. 20 event with comedians, "infused" treats and a $10 cover charge, which McCoy told police was a baby shower for a family member. The city also cited an advertised "Bring your own Booz[e]" Halloween costume party with hookah smoking. "Your behavior shows a lack of respect for the City, its residents, and its laws," the city wrote.

A hearing officer designated by the city recommended that the City Council sustain the denial. The plaintiffs skipped the council review that the municipal code allowed and petitioned the Circuit Court of Cook County, which dismissed the petition in May 2022 for failure to exhaust administrative remedies and for filing one day late. The Illinois Appellate Court affirmed on the exhaustion ground in December 2023.

While that appeal was pending, the plaintiffs sued in federal court in November 2022 under 42 U.S.C. Sections 1981 and 1983. Their complaint alleges that the city denied them due process and equal protection and engaged in conspiracy, discrimination and tortious interference.

In July 2024, Judge Blakey ordered the plaintiffs to show cause why Rooker-Feldman did not bar the suit. The plaintiffs responded that they were challenging an administrative decision, not a state-court ruling. Judge Blakey disagreed, noting that their state petition had already alleged a due process violation. "This court thus cannot reach the merits of Plaintiffs' claims without effectively overturning the Circuit Court's judgment," he wrote, and he later denied reconsideration.

Rovner applied the four-part test the Seventh Circuit adopted in Gilbank v. Wood County Department of Human Services, a 2024 decision of the full court. Under that test, Rooker-Feldman blocks jurisdiction only when the federal plaintiff lost in state court, the state judgment became final before the federal case began, the judgment caused the alleged injury, and the suit invites the federal court to review and reject that judgment. The third element decided the appeal.

"The state-court judgment here is not the source of the plaintiffs' injury," Rovner wrote. "Rather, it is the Blue Island administrative hearing officer's decision sustaining the denial/revocation of the plaintiffs' business license that has caused the plaintiff's injury."

The panel relied on two earlier Seventh Circuit decisions. In Andrade v. City of Hammond, a 2021 case, the court revived a building owner's due process suit after Indiana courts upheld a city board's repair-or-vacate order, because his federal claims could exist without any state-court judgment. In Durgins v. City of East St. Louis, a 2001 case, the court placed a fired police officer's suit "on the preclusion side of the line" because her injury came from her discharge.

Applying those cases, Rovner wrote that the bakery's injury predated the state litigation. "The most that can be said of the litigation in state court was that it failed to correct the alleged wrong done by the hearing officer," the opinion said.

Citing a 1987 decision, Button v. Harden, the panel explained that a plaintiff challenging an Illinois administrative ruling on constitutional grounds may sue in federal court right away or seek state judicial review, and that the second route risks claim preclusion later. "Having availed themselves of a state-court forum, they now seek a second bite at the apple in federal court," Rovner wrote.

The panel declined to decide whether claim preclusion bars the suit, because the city had not raised the defense. Rovner wrote that the party presentation principle kept the panel from taking it up on its own.

The plaintiffs' counsel had suggested that a dismissal for failure to exhaust is not a final judgment on the merits under Illinois law, and the opinion cited an Illinois appellate decision holding as much. "We express no opinion on the matter," the panel wrote.

In a footnote, the panel said the Supreme Court's 2026 decision in T.M. v. University of Maryland Medical System Corp. clarified that a state-court judgment may count as final for Rooker-Feldman purposes even while further state appeals remain available.

The case now returns to the district court. "It is for the defendants to assess the potential merits of a claim preclusion defense and to decide whether to pursue it," Rovner wrote, adding that if the city raises the defense, the district court must resolve it in the first instance.