529 F.3d 371 (7th Cir. 2008), 07-1660, Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec

Docket Nº:07-1660, 07-2116.
Citation:529 F.3d 371
Party Name:JUDSON ATKINSON CANDIES, INC., Plaintiff-Appellant, v. LATINI-HOHBERGER DHIMANTEC et al., Defendants-Appellees.
Case Date:June 03, 2008
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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529 F.3d 371 (7th Cir. 2008)



LATINI-HOHBERGER DHIMANTEC et al., Defendants-Appellees.

Nos. 07-1660, 07-2116.

United States Court of Appeals, Seventh Circuit

June 3, 2008

Argued Nov. 9, 2007.

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Anthony S. Divincenzo , Divincenzo Schoenfield Swartzman, Chicago, IL, Sheldon M. Lustig , Lustig & Associates, Skokie, IL, Percy L. Isgitt (argued), Isgitt Dees & Turcotte, Houston, TX, for Plaintiff-Appellant.

Donald B. Garvey , Oakbrook Terrace, IL, Richard C. McSwain , Curry, McSwain & Associates, San Antonio, TX, John S. Delnero (argued), Bell, Boyd & Lloyd, Chicago, IL, Donna B. Wallace , Baldi & Associates, Chicago, IL, Christina M. Berish , David W. Ellis , Glen T. Keysor , Thompson Coburn Fagel Haber, Chicago, IL, William K. Carter , Clark Hill, Chicago, IL, for Defendants-Appellees.

Before EASTERBROOK , Chief Judge, and CUDAHY and RIPPLE , Circuit Judges.

CUDAHY , Circuit Judge.

This case reflects the efforts of Judson Atkinson Candies, Inc. (Judson Atkinson) to collect a judgment it obtained against LMC International, an Illinois company that is no longer in business. Unable to collect the money owed it, Judson Atkinson sued L Liquidation Company f/k/a LMC International (LMC), LMC's holding company and several of LMC's officers in an attempt to hold them liable for LMC's judgment debt. The district court granted summary judgment for the defendants. Judson Atkinson appeals. We vacate and remand for further explanation of the district court's entry of judgment for LMC and affirm the court's grant of summary judgment for the remaining defendants.

I. Background

LMC was an Illinois company that sold confectionary cooking and processing machines. LMC's outstanding shares were wholly owned throughout its existence by CIC, a Delaware holding company. The outstanding shares of CIC's stock were owned by Barry Carroll and a trust of which Carroll is the sole beneficiary. Carroll is also the President and Chairman of CIC and was the CEO and Chairman of LMC. Defendant James Elsen was the Vice President and Chief Operations Officer

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of CIC and the Secretary-Treasurer of LMC from 1991 to 2005. Defendant Roger Hohberger began working for LMC in 1996 after the company acquired the assets of his candy machinery manufacturing company. From 2001 to 2003 he was the Vice President of Sales at LMC.

In the fall of 2002, CIC began trying to sell LMC's assets. Elsen and LMC's President at that time, Peter Loveland, attended a candy machinery trade show in Germany. There they met Arminder Dhiman, the owner of Dhiman Industries. In October 2003, Dhiman paid $475,000 to acquire two of LMC's product groups, the Hohberger Products Group and the Latini Products Group. After the sale, Hohberger went to work for Dhiman Industries, which subsequently was named Latini-Hohberger Dhimantec, Inc. (Dhimantec). Hohberger also purchased 10 percent of Dhimantec's stock for $80,000, making him one of that company's two shareholders.

Some of LMC's remaining equipment was sold to Deister Products, a CIC subsidiary, for unknown consideration. Another CIC subsidiary, Carroll Manufacturing, also purchased some of LMC's equipment. In 2003, via an Assignment for the Benefit of Creditors, LMC assigned its remaining assets to James Lindeman for the purposes of liquidation and payment to its creditors. LMC is no longer in business.

In the context of these transactions, LMC was engaged in litigation with Judson Atkinson in federal court. Over the years LMC had sold several candy-making machines to Judson Atkinson. In 2002, Judson Atkinson filed suit against LMC in Texas claiming that one of the machines it had purchased from LMC was defective. LMC did not appear for the trial and in 2004, Judson Atkinson obtained a default judgment against LMC for breach of contract in the amount of almost $3,000,000. LMC never disclosed to Judson Atkinson prior to trial that it had ceased operations and conveyed its assets to other entities. Judson Atkinson subsequently filed the present lawsuit in the district court for the Western District of Texas to collect the underlying judgment. That court transferred the case to the Northern District of Illinois on forum non conveniens grounds. See 28 U.S.C. § 1404(a) . Judson Atkinson alleged that LMC had fraudulently transferred its assets to the defendants in order to avoid its judgment debt in violation of Texas's Uniform Fraudulent Transfer Act (UFTA). Judson Atkinson also asserted veil-piercing and breach of fiduciary duty theories of liability under which, it contended, CIC and the individual defendants should be found liable for LMC's judgment debt.

After extensive discovery, Judson Atkinson, CIC, Elsen, Carroll and Hohberger filed cross-motions for summary judgment. Carroll also moved to strike exhibits filed with Judson Atkinson's motion for summary judgment, including Exhibits 10 and 11. These exhibits were lists that Judson Atkinson had prepared that supposedly summarized transfers from CIC's bank account to various individuals and entities. Judson Atkinson had labeled the transfers “fraudulent" on the theory that the funds transferred from CIC were actually LMC's funds that were distributed to the transferees to ensure that Judson Atkinson could not recover its judgment. Carroll argued that the exhibits lacked a proper foundation and had not been authenticated, and therefore were improper summaries, inadmissible under Federal Rule of Evidence 1006 . (R. 235 ¶¶ 22-30.) In addition, CIC and Elsen filed a motion for sanctions alleging that Judson Atkinson had violated Federal Rule of Civil Procedure 45 by failing to serve notice on the defendants of subpoenas issued to two financial

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institutions-MB Financial and Northern Trust Company-and failing to timely disclose the documents it received in response to the subpoenas. (R. 252.) CIC also filed a motion to compel the return of a memorandum prepared by its attorneys, Seyfarth Shaw L.L.P. (Seyfarth Shaw memorandum). It alleged that the memo, which was filed as an exhibit to one of Judson Atkinson's filings, had been produced inadvertently to Judson Atkinson and was covered by the attorney-client privilege.

The district court granted Carroll's motion to strike Exhibits 10 and 11 and the defendants' motion for sanctions. The court also granted CIC's motion to compel the return of the Seyfarth Shaw memorandum, concluding that CIC had not waived the attorney-client privilege. In addition, the court concluded that Judson Atkinson had not presented evidence supporting its veil-piercing argument or its fraudulent transfer claims. The district court granted the defendants' motions for summary judgment and ordered that judgment be entered in favor of all defendants, including Dhimantec and LMC, which had not filed motions for summary judgment.

Judson Atkinson appeals the entry of summary judgment in favor of Dhimantec, LMC, CIC, Hohberger, Elsen and Carroll, as well as the district court's grant of the defendants' motion to strike, motion for sanctions and motion to compel the return of the Seyfarth Shaw memorandum.

II. Discussion

Initially this lawsuit was filed in the United States District Court for the Western District of Texas. That court determined that it was not the most appropriate venue for resolution of the lawsuit and that venue was most appropriate in Illinois. Pursuant to 28 U.S.C. § 1404(a) , it transferred the lawsuit to the Northern District of Illinois, Eastern Division. The district court to which the case was transferred should have applied Texas choice-of-law rules. See Ferens v. John Deere Co., 494 U.S. 516, 523, 110 S.Ct. 1274, 108 L.Ed.2d 443 (1990) (“A transfer under § 1404(a) ... does not change the law applicable to a diversity case." ); Nelson v. Sandoz Pharm. Corp., 288 F.3d 954, 963 n. 7 (7th Cir.2002) ; Int'l Mktg., Ltd. v. Archer-Daniels-Midland Co., 192 F.3d 724, 729 (7th Cir.1999) . Ultimately, however, the district court's application of Illinois choice-of-law rules yielded the same results as the application of Texas choice-of-law rules would have produced. Thus, we analyze Judson Atkinson's claims under the same substantive law as the district court applied. We address each of Judson Atkinson's theories of liability in turn.

A. Veil-piercing claims

Texas has the same choice-of-law rule for veil-piercing claims as Illinois, namely that the law of the state of incorporation governs such claims. See Alberto v. Diversified Group, Inc., 55 F.3d 201, 203 (5th Cir.1995) (citing Tex. Bus. Corp. Act. Ann. art. 8.02 (West Supp.1994)). LMC was incorporated in Illinois and CIC in Delaware. Thus, the district court correctly applied the laws of Illinois and Delaware to Judson Atkinson's veil-piercing claims.

Judson Atkinson claims that LMC's corporate veil should be pierced to hold CIC, Carroll, Elsen and Hohberger liable for the 2004 default judgment. Under Illinois law, a corporation is presumed to be “separate and distinct from its officers, shareholders, and directors, and those parties will not be held personally liable for the corporation's debts and obligations." Tower Investors, LLC v. 111 E. Chestnut Consultants, Inc., 371 Ill.App.3d 1019, 309 Ill.Dec. 686, 864 N.E.2d 927, 941 (Ill.App.Ct.2007) . A corporation's veil of

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limited liability will be pierced only when there is “such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer...

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