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[33] Federal Civil Procedure 170A 2742.5
170A Federal Civil Procedure
[34] Corporations and Business Organizations 101 1090
101 Corporations and Business Organizations
101II Disregarding Corporate Entity; Piercing Corporate Veil
101k1079 Actions to Pierce Corporate Veil
[35] Corporations and Business Organizations 101 1090
101 Corporations and Business Organizations
101II Disregarding Corporate Entity; Piercing Corporate Veil
legal theories, and challenged fraudulent conveyance by corporation to entity controlled by insider was central to
firm's veil-piercing claim.
Christopher S. Griesmeyer (argued), Attorney, Greiman, Rome & Griesmeyer, Chicago, IL, for Plaintiff–Appellee.
cago, IL, for Defendants–Appellants.
Before MANION, TINDER, and HAMILTON, Circuit Judges.
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
TINDER, Circuit Judge.
To recoup about $1.9 million in margin debt from a group of businessmen once dubbed “The ‘Bad Boys' of
Chicago Arbitrage,” FN1 Wachovia Securities raised veil piercing and fraudulent transfer claims. That was shrewd
because this is a particularly compelling case for both given that the district court's generally undisputed findings—a
convoluted web of entities, insider transactions, and sham loans all designed to avoid financial responsibility—
soundly supported the claims.
FN1. See Greg Burns, The ‘Bad Boys' of Chicago Arbitrage, BusinessWeek, Aug. 5, 1996, available at
http:// www. businessweek. com/ 1996/ 32/ b 34876. htm.
I. Factual Background
Appellants Leon Greenblatt, Andrew Jahelka, and Richard Nichols embrace a “three men and a telephone”
A focus of this appeal is a $9.9 million line of credit Banco gave Loop on January 3, 2000. In exchange, Loop
gave Banco a blanket lien over Loop's assets (once totaling an estimated $32 million) at a 12% interest rate. A prom-
issory note and a security agreement documented this transaction. Greenblatt signed for Banco and Jahelka signed
for Loop. On the same day, a handful of Loop subsidiaries entered into a participation agreement on the line of cred-
it through which they (and other entities associated with the Loop owners) advanced $3 million to Loop. This ar-
(HRMI) on margin. Yet on May 22, 2001, the NASDAQ halted trading in HRMI.FN2 The value of Loop's HRMI
stock plunged prompting Wachovia to issue a margin call on Loop's account. Wachovia liquidated Loop's account,
but a $1,885,751 debt remained. The Banco–Loop line of credit also matured at the end of 2001 and Loop defaulted.
Instead of enforcing the loan's terms or attempting to collect, in 2002 Banco extended and expanded the line of cred-
it to Loop. Greenblatt testified that loaning Loop more money maximized “the value of Loop's assets.” Banco ad-
Meanwhile, Loop's debt to Wachovia went unpaid. Greenblatt did not let Loop use the Banco loan to repay Wa-
chovia, citing the loan's terms, but in reality, the terms were quite broad. Greenblatt testified that the loan's terms
covered buying HRMI stock but later claimed that its purchase was a “cost” and that the margin debt was “financ-
ing.” When given the note's language stating that the loan's purpose included “repayment of prior indebtedness ... or
other purpose approved by” Banco, Jahelka acknowledged that the terms did not require Banco's approval to use the
law, and that where it diverged, it didn't change the result. We agree and given the evidence supporting the
court's findings, we also do not see how the differences “change the outcome.” Int'l Adm'rs, 753 F.2d at
underlying claim if the corporate form “is used as a cloak or cover for fraud or illegality, to work an injustice, to
defend crime, or to defeat an overriding public policy, or where necessary to achieve equity.” 18 Am.Jur.2d Corpo-
rations § 57 (footnotes omitted). Illinois law permits veil piercing when two separate prongs are met: (1) “there must
be such unity of interest and ownership that the separate personalities of the corporation and the individual” no
longer exist; and (2) “circumstances must be such that adherence to the fiction of separate corporate existence would
extraordinary abuse of the corporate form but on an attempt to recharacterize various transactions and relationships
with Loop's related entities as somehow legitimate. They portray the court's findings as a misrepresentation of their
nontraditional, but admittedly relaxed corporate culture and structure, that functioned innocently and efficiently until
the Wachovia margin debt arose. Appellants' attempt to rehabilitate the legitimacy of the business practices underly-
ing the district court's veil piercing findings fails. The findings underlying the district court's decision to pierce
determine whether a unity of interest and ownership exists: inadequate capitalization; failing to issue stock; failing
to observe corporate formalities; failing to pay dividends; corporate insolvency; nonfunctioning corporate officers;
missing corporate records; commingling funds; diverting assets to an owner or other entity to creditor detriment;
failing to maintain an arm's-length relationship among related entities; and whether the corporation is a mere façade
for a dominant owner. Fontana, 298 Ill.Dec. 654, 840 N.E.2d at 778. No single factor is determinative. See In re
mere liability shield, rather than an independent entity capable of carrying on its own business.” Id. Adequate capi-
talization exists when a corporation has sufficient equity without considering loaned funds or encumbered assets.
Laborers' Pension Fund, 580 F.3d at 612. “Shareholders are generally expected to invest some money ... if they
want the benefit of limited liability.” Id. We needn't dwell on this factor because appellants ignore that the district
court made an unfavorable evidentiary determination against them on this issue. Appellants staked their capitaliza-
findings' relevance. Yet the absence of formalities triggered the fraud or promotion of injustice we will discuss
shortly. See Sea–Land Servs., Inc. v. Pepper Source, 993 F.2d 1309, 1313 (7th Cir.1993). Loop's failure to conform
principle calling for resort to the law of the firm's place of incorporation”); 805 ILCS 5/13.05 (prohibiting Illinois
from regulating foreign corporations' internal affairs); Restatement (Second) of Conflict of Laws § 307 cmt. a (1971)
(shareholders expect to have the state of incorporation's law used to determine corporate liability). Even assuming
South Dakota corporations may operate with this degree of looseness, this doctrine doesn't provide appellants with a
defense because if Loop's owners actually relied on South Dakota law, we would expect them to raise choice of law
alone, went on to consider evidence of “fraud or injustice,” and found that “in spades.” Id.
[20][21] We will too in a moment, but there's more on the first prong. Jahelka and Nichols argue that they testi-
fied to their involvement in Loop and that they met regularly as shareholders. But nowhere do they show how they
meaningfully used their 50% stake in Loop or where the district court went wrong finding that “Greenblatt's control
over Loop's other officers and employees rendered them nonfunctioning.” Wachovia, 586 F.Supp.2d at 1003. They
fraud or injustice. On the other side of this issue, appellants fail to show where the district court clearly erred finding
that Greenblatt functioned as Loop's dominant shareholder. Greenblatt refused to allow Loop to use proceeds from
the Banco–Loop loan to pay Wachovia; at Greenblatt's direction, Loop's accountant falsely held himself out as
Loop's vice president and Banco's assistant vice president; and Greenblatt had Neuhauser trade HRMI stock on vari-
ous brokerage accounts.
“resulted in Loop contributing the funds (via its subsidiaries) that Banco would then turn around and lend back to
Loop.” Wachovia, 586 F.Supp.2d at 986. The mere existence of a legitimate tax basis or another justification for the
arrangement doesn't undercut the district court's finding that the Banco–Loop loan served as “a vehicle to avoid
Loop's creditors by ensuring that all of Loop's assets were fully encumbered by a blanket lien in favor of Greenblatt,
the dominant shareholder of both Banco and Loop.” Id. The district court was quite justified in highlighting this
cient evidence of both actual and constructive fraud under Illinois's Uniform Fraudulent Transfer Act (UFTA), 740
ILCS 160/5(a). Wachovia, 586 F.Supp.2d at 1015–16. Yet because Wachovia disclaimed making a case on anything
new funds Banco loaned Loop under the same line of credit. In targeting the 2002 transaction as fraudulent, Wa-
chovia claimed that Loop made the transfer “with the actual intent to defraud Wachovia and hinder or delay” its
collection of Loop's margin debt. The 2002 transfer by its terms subsumed the obligations from the 2000 transaction.
Cf. Schwinder v. Austin Bank of Chi., 348 Ill.App.3d 461, 284 Ill.Dec. 58, 809 N.E.2d 180, 189 (2004) (when a con-
tract is modified or amended by a later agreement, a suit to enforce the agreement “must be brought on the modified
in renewal of another note and not in payment, the renewal does not extinguish the original debt nor change the debt
except” to postpone repayment (internal quotation marks omitted)). Banco's 2002 transaction with Loop merely ex-
tended, under, as we shall see, quite suspicious circumstances, the same blanket lien over Loop's assets asserted in
2000.
[28] A debtor makes a transfer or incurs an obligation that is fraudulent as to a creditor when done “with actual
Appellants argue that the “badges of fraud” used by the district court to give rise to an inference of actual fraud
were inapplicable or insufficient to raise the fraud presumption. See 740 ILCS 160/5(b). The district court found that
Wachovia proved five: (1) Loop incurred the obligation to Banco shortly before or after Loop incurred its substantial
debt to Wachovia; (2) the loan was between insiders; (3) Loop retained possession or control of the property; (4) the
at 1016. Banco argues that badge (4) does not apply because Loop's assets were not transferred; as just noted, appel-
lants argue that Loop remained the owner of the assets before and after the transaction. But a “transfer” under the
UFTA includes the “creation of a lien or other encumbrance.” 740 ILCS 160/2(l ). By increasing and extending
Loop's line of credit with Banco, the 2002 transaction allowed Banco to maintain and extend its lien on substantially
all of Loop's assets. Given these badges of fraud, along with the attendant circumstances, the district court had more
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
district court's findings show that this case rests on a rather extraordinary attempt to prevent creditors from collect-
ing on a debt, a circumvention of the principle that when a business fails, shareholders are paid last. E.g., Lasday v.
Weiner, 273 Ill.App.3d 461, 210 Ill.Dec. 222, 652 N.E.2d 1198, 1201 (1995) (share-holders “are last in line” in a
distribution from a dissolved corporation).
[29][30] Regarding the other transactions found fraudulent, the district judge stated near the end of trial that she
an adversary adequate opportunity to respond”).
C. Attorneys' Fees
[31][32] We give a district court's fee decision great deference because of the court's familiarity with the case.
Spegon v. Catholic Bishop of Chi., 175 F.3d 544, 551 (7th Cir.1999). In Illinois, a party who prevails on a veil-
to the other party to demonstrate the award's unreasonableness. Cf. Spegon, 175 F.3d at 554–55 (discussing hourly
rates). Appellants have not countered Wachovia's adequate showing. Appellants argue that the fee order contravenes
a district court order that they would only pay fees related to the veil piercing claim. Yet the district court also found
that common facts formed the basis of similar legal theories. Behavior raising fraudulent conveyance claims
prompts veil piercing claims, Robert Charles Clark, Corporate Law § 2.4 (1986), and this case is no exception. For
and the compensation payments to Jahelka and Nichols, and granting Wachovia's attorneys' fees and costs but VA-
CATE the voiding of Loop's payments to EZ Links.
C.A.7 (Ill.),2012.
Wachovia Securities, LLC v. Banco Panamericano, Inc.
674 F.3d 743
END OF DOCUMENT
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
TINDER, Circuit Judge.
To recoup about $1.9 million in margin debt from a group of businessmen once dubbed “The ‘Bad Boys' of
Chicago Arbitrage,” FN1 Wachovia Securities raised veil piercing and fraudulent transfer claims. That was shrewd
because this is a particularly compelling case for both given that the district court's generally undisputed findings—a
convoluted web of entities, insider transactions, and sham loans all designed to avoid financial responsibility—
soundly supported the claims.
FN1. See Greg Burns, The ‘Bad Boys' of Chicago Arbitrage, BusinessWeek, Aug. 5, 1996, available at
http:// www. businessweek. com/ 1996/ 32/ b 34876. htm.
I. Factual Background
Appellants Leon Greenblatt, Andrew Jahelka, and Richard Nichols embrace a “three men and a telephone”
A focus of this appeal is a $9.9 million line of credit Banco gave Loop on January 3, 2000. In exchange, Loop
gave Banco a blanket lien over Loop's assets (once totaling an estimated $32 million) at a 12% interest rate. A prom-
issory note and a security agreement documented this transaction. Greenblatt signed for Banco and Jahelka signed
for Loop. On the same day, a handful of Loop subsidiaries entered into a participation agreement on the line of cred-
it through which they (and other entities associated with the Loop owners) advanced $3 million to Loop. This ar-
(HRMI) on margin. Yet on May 22, 2001, the NASDAQ halted trading in HRMI.FN2 The value of Loop's HRMI
stock plunged prompting Wachovia to issue a margin call on Loop's account. Wachovia liquidated Loop's account,
but a $1,885,751 debt remained. The Banco–Loop line of credit also matured at the end of 2001 and Loop defaulted.
Instead of enforcing the loan's terms or attempting to collect, in 2002 Banco extended and expanded the line of cred-
it to Loop. Greenblatt testified that loaning Loop more money maximized “the value of Loop's assets.” Banco ad-
Meanwhile, Loop's debt to Wachovia went unpaid. Greenblatt did not let Loop use the Banco loan to repay Wa-
chovia, citing the loan's terms, but in reality, the terms were quite broad. Greenblatt testified that the loan's terms
covered buying HRMI stock but later claimed that its purchase was a “cost” and that the margin debt was “financ-
ing.” When given the note's language stating that the loan's purpose included “repayment of prior indebtedness ... or
other purpose approved by” Banco, Jahelka acknowledged that the terms did not require Banco's approval to use the
law, and that where it diverged, it didn't change the result. We agree and given the evidence supporting the
court's findings, we also do not see how the differences “change the outcome.” Int'l Adm'rs, 753 F.2d at
underlying claim if the corporate form “is used as a cloak or cover for fraud or illegality, to work an injustice, to
defend crime, or to defeat an overriding public policy, or where necessary to achieve equity.” 18 Am.Jur.2d Corpo-
rations § 57 (footnotes omitted). Illinois law permits veil piercing when two separate prongs are met: (1) “there must
be such unity of interest and ownership that the separate personalities of the corporation and the individual” no
longer exist; and (2) “circumstances must be such that adherence to the fiction of separate corporate existence would
extraordinary abuse of the corporate form but on an attempt to recharacterize various transactions and relationships
with Loop's related entities as somehow legitimate. They portray the court's findings as a misrepresentation of their
nontraditional, but admittedly relaxed corporate culture and structure, that functioned innocently and efficiently until
the Wachovia margin debt arose. Appellants' attempt to rehabilitate the legitimacy of the business practices underly-
ing the district court's veil piercing findings fails. The findings underlying the district court's decision to pierce
determine whether a unity of interest and ownership exists: inadequate capitalization; failing to issue stock; failing
to observe corporate formalities; failing to pay dividends; corporate insolvency; nonfunctioning corporate officers;
missing corporate records; commingling funds; diverting assets to an owner or other entity to creditor detriment;
failing to maintain an arm's-length relationship among related entities; and whether the corporation is a mere façade
for a dominant owner. Fontana, 298 Ill.Dec. 654, 840 N.E.2d at 778. No single factor is determinative. See In re
mere liability shield, rather than an independent entity capable of carrying on its own business.” Id. Adequate capi-
talization exists when a corporation has sufficient equity without considering loaned funds or encumbered assets.
Laborers' Pension Fund, 580 F.3d at 612. “Shareholders are generally expected to invest some money ... if they
want the benefit of limited liability.” Id. We needn't dwell on this factor because appellants ignore that the district
court made an unfavorable evidentiary determination against them on this issue. Appellants staked their capitaliza-
findings' relevance. Yet the absence of formalities triggered the fraud or promotion of injustice we will discuss
shortly. See Sea–Land Servs., Inc. v. Pepper Source, 993 F.2d 1309, 1313 (7th Cir.1993). Loop's failure to conform
principle calling for resort to the law of the firm's place of incorporation”); 805 ILCS 5/13.05 (prohibiting Illinois
from regulating foreign corporations' internal affairs); Restatement (Second) of Conflict of Laws § 307 cmt. a (1971)
(shareholders expect to have the state of incorporation's law used to determine corporate liability). Even assuming
South Dakota corporations may operate with this degree of looseness, this doctrine doesn't provide appellants with a
defense because if Loop's owners actually relied on South Dakota law, we would expect them to raise choice of law
alone, went on to consider evidence of “fraud or injustice,” and found that “in spades.” Id.
[20][21] We will too in a moment, but there's more on the first prong. Jahelka and Nichols argue that they testi-
fied to their involvement in Loop and that they met regularly as shareholders. But nowhere do they show how they
meaningfully used their 50% stake in Loop or where the district court went wrong finding that “Greenblatt's control
over Loop's other officers and employees rendered them nonfunctioning.” Wachovia, 586 F.Supp.2d at 1003. They
fraud or injustice. On the other side of this issue, appellants fail to show where the district court clearly erred finding
that Greenblatt functioned as Loop's dominant shareholder. Greenblatt refused to allow Loop to use proceeds from
the Banco–Loop loan to pay Wachovia; at Greenblatt's direction, Loop's accountant falsely held himself out as
Loop's vice president and Banco's assistant vice president; and Greenblatt had Neuhauser trade HRMI stock on vari-
ous brokerage accounts.
“resulted in Loop contributing the funds (via its subsidiaries) that Banco would then turn around and lend back to
Loop.” Wachovia, 586 F.Supp.2d at 986. The mere existence of a legitimate tax basis or another justification for the
arrangement doesn't undercut the district court's finding that the Banco–Loop loan served as “a vehicle to avoid
Loop's creditors by ensuring that all of Loop's assets were fully encumbered by a blanket lien in favor of Greenblatt,
the dominant shareholder of both Banco and Loop.” Id. The district court was quite justified in highlighting this
cient evidence of both actual and constructive fraud under Illinois's Uniform Fraudulent Transfer Act (UFTA), 740
ILCS 160/5(a). Wachovia, 586 F.Supp.2d at 1015–16. Yet because Wachovia disclaimed making a case on anything
new funds Banco loaned Loop under the same line of credit. In targeting the 2002 transaction as fraudulent, Wa-
chovia claimed that Loop made the transfer “with the actual intent to defraud Wachovia and hinder or delay” its
collection of Loop's margin debt. The 2002 transfer by its terms subsumed the obligations from the 2000 transaction.
Cf. Schwinder v. Austin Bank of Chi., 348 Ill.App.3d 461, 284 Ill.Dec. 58, 809 N.E.2d 180, 189 (2004) (when a con-
tract is modified or amended by a later agreement, a suit to enforce the agreement “must be brought on the modified
in renewal of another note and not in payment, the renewal does not extinguish the original debt nor change the debt
except” to postpone repayment (internal quotation marks omitted)). Banco's 2002 transaction with Loop merely ex-
tended, under, as we shall see, quite suspicious circumstances, the same blanket lien over Loop's assets asserted in
2000.
[28] A debtor makes a transfer or incurs an obligation that is fraudulent as to a creditor when done “with actual
Appellants argue that the “badges of fraud” used by the district court to give rise to an inference of actual fraud
were inapplicable or insufficient to raise the fraud presumption. See 740 ILCS 160/5(b). The district court found that
Wachovia proved five: (1) Loop incurred the obligation to Banco shortly before or after Loop incurred its substantial
debt to Wachovia; (2) the loan was between insiders; (3) Loop retained possession or control of the property; (4) the
at 1016. Banco argues that badge (4) does not apply because Loop's assets were not transferred; as just noted, appel-
lants argue that Loop remained the owner of the assets before and after the transaction. But a “transfer” under the
UFTA includes the “creation of a lien or other encumbrance.” 740 ILCS 160/2(l ). By increasing and extending
Loop's line of credit with Banco, the 2002 transaction allowed Banco to maintain and extend its lien on substantially
all of Loop's assets. Given these badges of fraud, along with the attendant circumstances, the district court had more
© 2012 Thomson Reuters. No Claim to Orig. US Gov. Works.
district court's findings show that this case rests on a rather extraordinary attempt to prevent creditors from collect-
ing on a debt, a circumvention of the principle that when a business fails, shareholders are paid last. E.g., Lasday v.
Weiner, 273 Ill.App.3d 461, 210 Ill.Dec. 222, 652 N.E.2d 1198, 1201 (1995) (share-holders “are last in line” in a
distribution from a dissolved corporation).
[29][30] Regarding the other transactions found fraudulent, the district judge stated near the end of trial that she
an adversary adequate opportunity to respond”).
C. Attorneys' Fees
[31][32] We give a district court's fee decision great deference because of the court's familiarity with the case.
Spegon v. Catholic Bishop of Chi., 175 F.3d 544, 551 (7th Cir.1999). In Illinois, a party who prevails on a veil-
to the other party to demonstrate the award's unreasonableness. Cf. Spegon, 175 F.3d at 554–55 (discussing hourly
rates). Appellants have not countered Wachovia's adequate showing. Appellants argue that the fee order contravenes
a district court order that they would only pay fees related to the veil piercing claim. Yet the district court also found
that common facts formed the basis of similar legal theories. Behavior raising fraudulent conveyance claims
prompts veil piercing claims, Robert Charles Clark, Corporate Law § 2.4 (1986), and this case is no exception. For
and the compensation payments to Jahelka and Nichols, and granting Wachovia's attorneys' fees and costs but VA-
CATE the voiding of Loop's payments to EZ Links.
C.A.7 (Ill.),2012.
Wachovia Securities, LLC v. Banco Panamericano, Inc.
674 F.3d 743
END OF DOCUMENT
