533 F.3d 542 (7th Cir. 2008), 07-2606, LM Ins. Corp. v. Spaulding Enterprises Inc.

Docket Nº:07-2606.
Citation:533 F.3d 542
Party Name:LM INSURANCE CORPORATION, Plaintiff-Appellant, v. SPAULDING ENTERPRISES INCORPORATED, Spaulding Moving and Storage Incorporated, Spaulding Trucking Incorporated, John J. Lalagos, Jean P. Lalagos, Laura Rosetti, Rally Capital Services, LLC, and Jeffrey D. Samuels, Defendants-Appellees.
Case Date:July 08, 2008
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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533 F.3d 542 (7th Cir. 2008)

LM INSURANCE CORPORATION, Plaintiff-Appellant,

v.

SPAULDING ENTERPRISES INCORPORATED, Spaulding Moving and Storage Incorporated, Spaulding Trucking Incorporated, John J. Lalagos, Jean P. Lalagos, Laura Rosetti, Rally Capital Services, LLC, and Jeffrey D. Samuels, Defendants-Appellees.

No. 07-2606.

United States Court of Appeals, Seventh Circuit.

July 8, 2008

Argued April 3, 2008.

Rehearing Denied July 30, 2008.

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[Copyrighted Material Omitted]

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James T. Barnes (argued), Chicago, IL, for Plaintiff-Appellant.

James D. Adducci (argued), Adducci, Dorf, Lehner, Mitchell & Blankenship, James K. Genden, Torshen, Slobig, Genden, Dragutinovich & Axel, Charles A. Valente (argued), Krasnow, Saunders, Cornblath, Chicago, IL, for Defendants-Appellees.

Before FLAUM, MANION, and TINDER, Circuit Judges.

FLAUM, Circuit Judge.

Plaintiff LM Insurance Corporation (“LM" ) brought an eight count suit against eight defendants in the Northern District

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of Illinois under that court's federal diversity jurisdiction. The suit centered around an outstanding judgment of $185,776 Defendant Spaulding Enterprises Incorporated (“Spaulding Enterprises" ) owed LM from a prior lawsuit, and Spaulding Enterprises's alleged efforts to shift its assets to various sham corporations to avoid paying this debt. All defendants challenged federal jurisdiction, claiming that the amount in controversy requirement of $75,000 was not satisfied. The district court agreed with Defendants, finding that the pending suit was the improper vehicle for pursuing the earlier judgment, and that any damages stemming from the transfer of Spaulding Enterprises's assets were capped by the corporation's assets at that time, which the district court found to be below $75,000. For the following reasons, we affirm in part and reverse in part the district court's grant of Defendants' Motion to Dismiss.

I. Background

This suit stems from an earlier lawsuit in which LM was awarded damages of $218,667 from Spaulding Enterprises. A month after judgment was entered, in October 2006, LM brought a citation to discover assets, which resulted in $21,691 of Spaulding Enterprises's assets being frozen and then turned over to LM, bringing Spaulding Enterprises's liability down to $196,976. At this point, unbeknownst to LM, Spaulding Enterprises began maintaining its same business operations, including its incoming and outgoing payments, through Spaulding Moving's accounts.

Spaulding Enterprises and Spaulding Moving were closely linked. They shared the same address and were largely owned and operated by the same people, with Spaulding Enterprises being equally owned by husband and wife John (President of Spaulding Enterprises) and Jean (Secretary of Spaulding Enterprises) Lalagos, and Spaulding Moving being owned by John Lalagos, who also served as the company's President.

In December 2006, LM and John Lalagos settled upon an agreement for repaying Spaulding Enterprises's debt, whereby the corporation would pay a discounted judgment in monthly installments of $5,600. Only the first two payments were made, however, leaving Spaulding Enterprises's outstanding liability at $185,776.

It was at this time that Spaulding Enterprises entered into an Assignment for the Benefit of Creditors. On February 8, 2007, LM received a letter from Jeffrey D. Samuels of Rally Capital Services, informing LM that he would be serving as Spaulding Enterprises's Trustee/Assignee in its Assignment for the Benefit of Creditors. The letter stated that the Assignment was occurring due to financial stress stemming from an outstanding legal judgment owed by Spaulding Enterprises, and calculated the corporation's current assets at $150,000-the amount of its accounts receivable. LM was informed in the letter that Spaulding Enterprises had conveyed all its assets to Samuels and that Samuels had already accepted a purchase agreement from Spaulding Trucking Company (“Spaulding Trucking" ) to purchase Spaulding Enterprises's assets for $5,000. The letter also stated, however, that Samuels was required, per the Purchase Agreement, “to solicit higher and better bids" for the assets, which Samuels would do by posting a Notice of Sale in the Chicago Tribune at a future date.

According to LM, notice was never posted in the Chicago Tribune. Instead, at the time LM received the February 8 letter, Spaulding Enterprises's assets had already been conveyed to Spaulding Trucking, a new company incorporated on January 26,

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2007 that shared the same address as the other two “Spaulding" enterprises. The President and owner of this new corporation was Laura Rosetti, Jean Lalagos's sister. John and Jean Lalagos also had positions at Spaulding Trucking, with Jean serving as the company's Treasurer and John being an employee. On January 31, Spaulding Enterprises and Spaulding Trucking had entered into an Agreement for the Purchase and Sale of Assets, with the Assignment for the Benefit of Creditors and transfer of Spaulding Enterprises's assets occurring on February 2. Rally's fee for serving as the Assignee in these transactions was $5,000, the same amount paid by Spaulding Trucking to purchase Spaulding Enterprises's assets. The check to Rally was signed by John Lalagos in his capacity as Spaulding Trucking's employee.

On April 3, 2007, LM brought this lawsuit in the Northern District of Illinois pursuant to federal diversity jurisdiction.1 The Complaint included the following eight counts:

Count 1 Breach of Fiduciary Duty against Rally Capital Services and Samuels with respect to the Assignment for the Benefit of Creditors

Count 2 Inducement of a Breach of Fiduciary Duty against John Lalagos, Jean Lalagos, and Spaulding Trucking for their involvement with Samuels in the Assignment for the Benefit of Creditors

Count 3 Breach of Fiduciary Duty against John and Jean Lalagos for diverting their assets to Spaulding Moving and Spaulding Trucking

Count 4 Fraudulent Conveyance against Spaulding Moving and Spaulding Trucking

Count 5 Successor Liability against Spaulding Trucking

Count 6 Alter Ego claim against all three “Spaulding" corporations, as well as John and Jean Lalagos

Count 7 Conspiracy to Defraud against all defendants, which included all parties already named in the above counts, as well as Rosetti, for conspiring to defraud LM of its judgment against Spaulding Enterprises

Count 8 Fraud against all defendants

With respect to the first three counts for breach of fiduciary duty, LM sought damages “of at least $150,000," the value of Spaulding Enterprises's accounts receivable as listed on the February 8 letter regarding the Assignment for the Benefit of Creditors, as well as punitive damages. Counts 4, 5, and 6 all sought damages of $185,776, the outstanding debt from the earlier lawsuit Spaulding Enterprises owed LM. The amount of damages sought in Counts 7 and 8 was not specified, with both claims seeking damages “in an amount to be determined at trial."

After the parties had submitted a Jurisdictional Status Report in accordance with an order by the district court, all defendants joined in filing a Motion to Dismiss for Lack of Subject Matter Jurisdiction, claiming that the amount in controversy did not exceed $75,000 as is required for diversity jurisdiction to exist under 28 U.S.C. § 1332(a). Along with the motion, Defendants also submitted evidence that the February 8 letter had incorrectly placed Spaulding Enterprises's assets at $150,000, when in fact, its accounts receivable

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had already been sold to a bank. Instead, the evidence provided by Defendants indicated that Spaulding Enterprises's accounts receivable, as of January 31, 2007, were $159,000, and that as of that same date, the bank held $138,254 of that amount. Thus, Defendants claimed that at best, Spaulding Enterprises's assets at the time of the Assignment for the Benefit of Creditors were approximately $20,000.

The district court, on June 27, 2007, granted Defendants' Motion to Dismiss. With respect to those claims for the outstanding judgment of $185,776, the court determined that all of LM's claims were solely related to the alleged fraudulent hiding and assignment of Spaulding Enterprises's assets, not to the outstanding judgment. Moreover, the district court stated that other supplemental proceedings, such as a citation to discover assets, were at LM's disposal to attempt to claim the $185,776. The district court then turned to the value of Spaulding Enterprises's assets at the time of the Assignment for the Benefit of Creditors, crediting Defendants' uncontroverted evidence that Spaulding Enterprises had sold all its accounts receivable to the bank. Having found that only “modest compensatory damages" were available, the district court also determined that any punitive damages awarded would be insufficient to satisfy the amount in controversy requirement. Accordingly, the district court granted Defendants' Motion to Dismiss, and this appeal followed.

II. Discussion

The sole issue for this Court to address is whether LM satisfied the amount in controversy requirement for purposes of federal diversity jurisdiction. We review the district court's decision concerning subject matter jurisdiction de novo, and review its jurisdictional factual determinations for an abuse of discretion. Anthony v. Security Pacific Financial Services, Inc., 75 F.3d 311, 315 (7th Cir.1996).

Under 28 U.S.C. § 1332, federal courts have jurisdiction over civil suits between citizens of different states “where the matter in controversy exceeds...

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