Wachovia Sec., LLC v. Banco Panamericano, Inc.

• Citation: 674 F.3d 743
• Decision Date: 21 March 2012
• Docket Number: 10–1238.,10–1227,Nos. 10–1203,s. 10–1203
• Parties: WACHOVIA SECURITIES, LLC, Plaintiff–Appellee, v. BANCO PANAMERICANO, INC., et al, Defendants–Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

674 F.3d 743

WACHOVIA SECURITIES, LLC, Plaintiff–Appellee,

v.BANCO PANAMERICANO, INC., et al, Defendants–Appellants.

Nos. 10–1203

10–1227

10–1238.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 22, 2010.Decided March 21, 2012.

Christopher S. Griesmeyer (argued), Attorney, Greiman, Rome & Griesmeyer, Chicago, IL, for Plaintiff–Appellee.

Alan R. Dolinko, C. Philip Curley (argued), Attorneys, Robinson, Curley & Clayton, P.C., Chicago, IL, for Defendant–Appellant.

Louis D. Bernstein, Attorney, Bernstein Law Firm, Chicago, IL, for Defendant–Appellant.Mark F. Smolens (argued), Attorney, Inverness, IL, Gerald C. Willis, Attorney, McAndrews, Held & Malloy, Chicago, IL, for Defendants–Appellants.

Before MANION, TINDER, and HAMILTON, Circuit Judges.

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,” ¹ 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.

I. Factual Background

Appellants Leon Greenblatt, Andrew Jahelka, and Richard Nichols embrace a “three men and a telephone” business style. These purported business minimalists own Loop Corp. (also an appellant) as a closely-held corporation for their real estate holdings. Loop incorporated in South Dakota in 1997 with $1,000 in paid-in capital and maintains its principal place of business in Illinois. Greenblatt (Loop's corporate secretary) owns 50% of Loop. Jahelka (Loop's president) owns 30%. And Nichols (Loop's treasurer) owns 20%. Appellant Banco Panamericano, Inc. also incorporated in South Dakota and lists Illinois as its principal place of business. A Greenblatt family trust owns Banco. Greenblatt is Banco's sole officer, director, and employee.

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 promissory 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 credit through which they (and other entities associated with the Loop owners) advanced $3 million to Loop. This arrangement gave the subsidiaries senior secured creditor status over Loop's assets. Greenblatt signed for Banco and the participants and Jahelka signed for Loop. As Greenblatt admitted at trial, the now-creditor subsidiaries also functioned as collateral for the funds they loaned Loop.

Later that year, Greenblatt's clerk David Neuhauser, at his boss's direction, opened a Prudential Securities margin account in Loop's name. As Wachovia is Prudential's successor-in-interest, we will discuss this account as though it was always a Wachovia account. Loop used the account to buy shares in Health Risk Management, Inc. (HRMI) on margin. Yet on May 22, 2001, the NASDAQ halted trading in HRMI.² 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 credit to Loop. Greenblatt testified that loaning Loop more money maximized “the value of Loop's assets.” Banco advanced Loop money into 2004. The district court placed the current loan balance at $16 or $17 million and about $1 million in interest.

Meanwhile, Loop's debt to Wachovia went unpaid. Greenblatt did not let Loop use the Banco loan to repay Wachovia, 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 “financing.” 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 funds to repay debt. Loop also invested $518,338 in Internet-based golf tee time reservation company EZ Links. In addition, Loop moved its real estate assets to Loop Properties, of which Loop owns 10% with the remainder held by Scattered Corp. (owned by the Loop owners). Loop gave $386,550 to Banco, $20,000 to Resource Technology Corp. (owned by Rumpelstiltskin, which in turn was owned by the Loop owners), $2,000 to Scattered, $20,000 to Telegraph Properties (a Loop subsidiary), and $15,775 to Loop Telecom LP (an entity related to Loop). Appellants claimed these payments reduced Loop's debt to Banco on a dollar-for-dollar basis, but the district court rejected this claim when appellants failed to produce admissible or reliable evidence to support the theory. Loop paid Nichols and Jahelka $210,500 in “compensation” but never issued W–2 forms or otherwise reported the payments yet managed to issue W–2 forms to Loop's other employees. Loop originally dubbed payments to the Loop owners as a “return of equity,” but without explanation or documentation started calling the payments “compensation” after the HRMI stock collapse.

Wachovia initiated arbitration (pursuant to the terms of the brokerage agreement) against Loop in 2003 and also named Neuhauser, Jahelka, Nichols, and Greenblatt (in addition to Loop) as individual respondents who, in turn, sued Wachovia in Illinois state court to enjoin the arbitration against them individually. Wachovia removed this suit to federal court on a diversity jurisdictional basis, answered the complaint, and filed counter-claims. Wachovia dropped the individual respondents from the arbitration proceeding and the district court realigned the parties with Wachovia as plaintiff and the Loop-related parties as defendants. In 2005, Wachovia obtained an arbitration award against Loop, which was reduced to a $2,478,418 judgment. The district court granted defendants summary judgment on some of Wachovia's claims, Wachovia Secs., LLC v. Neuhauser, 528 F.Supp.2d 834 (N.D.Ill.2007), and held a bench trial in January 2008 on the remainder of Wachovia's claims that resulted in the court piercing Loop's corporate veil and finding Greenblatt, Nichols, and Jahelka personally liable on the judgment. The court also voided as fraudulent transfers Banco's lien over Loop's assets, Loop's “compensation” payments to Jahelka and Nichols, and certain Loop payments to EZ Links, and ordered appellants to pay Wachovia's fees and costs. Wachovia, 586 F.Supp.2d at 1025–26.³

II. Analysis

Because the district court held a bench trial, Fed.R.Civ.P. 52(a)(6) requires us to leave findings of fact untouched “unless clearly erroneous.” We review legal conclusions de novo. See Cerros v. Steel Techs., Inc., 288 F.3d 1040, 1044 (7th Cir.2002).

A. Veil Piercing

In diversity cases, we look to the substantive law of the state in which the district court sits, Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), including choice of law rules, Klaxon Co. v. Stentor Elec. Mfg., 313 U.S. 487, 496–97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Illinois applies the law of the state of incorporation for veil piercing claims. E.g., Retzler v. Pratt & Whitney Co., 309 Ill.App.3d 906, 243 Ill.Dec. 313, 723 N.E.2d 345, 354 (1999); see also Judson Atkinson Candies, Inc. v. Latini–Hohberger Dhimantec, 529 F.3d 371, 378 (7th Cir.2008). Yet appellants did not address choice of law until appearing for trial after four years of litigating this case. By waiting all that time while asserting Illinois law in their briefs to the district court, appellants acquiesced to Illinois law. See Lott v. Levitt, 556 F.3d 564, 568 (7th Cir.2009) (waiver prevents this “very type of gamesmanship” of seeking a “free peek at how” a dispute shakes out); Muslin v. Frelinghuysen Livestock Managers, Inc., 777 F.2d 1230, 1231 n. 1 (7th Cir.1985) (waiting until “a late point in” the litigation waived objecting to choice of law); Int'l Adm'rs, Inc. v. Life Ins. Co., 753 F.2d 1373, 1378 (7th Cir.1985) (finding it “manifestly unfair and inappropriate, absent compelling reasons ... to disapprove” of a court's choice of law when neither party objected); Casio, Inc. v. S.M. & R. Co., 755 F.2d 528, 530–31 (7th Cir.1985) (parties functionally stipulated to the law by not objecting); Restatement (Second) of Conflicts of Law § 136(2) cmt. h (when neither party refers to foreign law “in the pre-trial stages,” the court “will usually decide the case” under local law). As the time to press the choice of law issue passed long before the start of trial, appellants waived objecting to the district court's application of Illinois law.⁴

Corporations exist separately from their owners. Laborers' Pension Fund v. Lay–Com, Inc., 580 F.3d 602, 610 (7th Cir.2009) (citing Fontana v. TLD Builders, Inc., 362 Ill.App.3d 491, 298 Ill.Dec. 654, 840 N.E.2d 767, 775 (2005)). The corporate veil allows an entity's investors to limit their liability and thus encourage investment. Id. Yet courts may pierce a corporation's veil and hold the individual investors personally liable for the 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 Corporations § 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...