Judson Atkinson Cand v. Latini-Hohberger ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 07-1660 & 07-2116
JUDSON ATKINSON CANDIES, INC.,
Plaintiff-Appellant,
v.
LATINI-HOHBERGER DHIMANTEC ET AL.,
Defendants-Appellees.
____________
Appeals from the United States District Court for
the Northern District of Illinois, Eastern Division.
No. 05 C 2203—Ruben Castillo, Judge.
____________
ARGUED NOVEMBER 9, 2007—DECIDED JUNE 3, 2008
____________
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
2 Nos. 07-1660 & 07-2116
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 of CIC and
the Secretary-Treasurer of LMC from 1991 to 2005. Defen-
dant Roger Hohberger began working for LMC in 1996
after the company acquired the assets of his candy ma-
chinery 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 Indus-
tries. 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.
Nos. 07-1660 & 07-2116 3
Some of LMC’s remaining equipment was sold to
Deister Products, a CIC subsidiary, for unknown con-
sideration. Another CIC subsidiary, Carroll Manufac-
turing, 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 credi-
tors. 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 ma-
chines 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 Fraudu-
lent Transfer Act (UFTA). Judson Atkinson also asserted
veil-piercing and breach of fiduciary duty theories of
liability under which, it contended, CIC and the indi-
vidual defendants should be found liable for LMC’s
judgment debt.
After extensive discovery, Judson Atkinson, CIC, Elsen,
Carroll and Hohberger filed cross-motions for sum-
4 Nos. 07-1660 & 07-2116
mary judgment. Carroll also moved to strike exhibits
filed with Judson Atkinson’s motion for summary judg-
ment, including Exhibits 10 and 11. These exhibits
were lists that Judson Atkinson had prepared that sup-
posedly 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 im-
proper 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 sub-
poenas issued to two financial 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 sanc-
tions. 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
Nos. 07-1660 & 07-2116 5
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 judg-
ment 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 memo-
randum.
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 applica-
tion 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 Atkin-
son’s claims under the same substantive law as the dis-
6 Nos. 07-1660 & 07-2116
trict 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. Diversi-
fied 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 corpora-
tion’s debts and obligations.” Tower Investors, LLC v. 111 E.
Chestnut Consultants, Inc., 864 N.E.2d 927, 941 (Ill. App.
Ct. 2007). A corporation’s veil of limited liability will be
pierced only when there is “such unity of interest and
ownership that the separate personalities of the corpora-
tion and the individual [or other corporation] no longer
exist[,]” and when “adherence to the fiction of separate
corporate existence would sanction a fraud or promote
injustice.” Van Dorn Co. v. Future Chem. & Oil Corp., 753
F.2d 565, 569-70 (7th Cir. 1985) (quoting Macaluso v. Jenkins,
420 N.E.2d 251, 255 (Ill. App. Ct. 1981) (alteration in
original)). Piercing the corporate veil is not favored and in
general, courts are reluctant to do so. See In re KZK Live-
stock, Inc., 221 B.R. 471, 478 (Bankr. C.D. Ill. 1998) (citing C
Nos. 07-1660 & 07-2116 7
M Corp. v. Oberer Dev. Co., 631 F.2d 536 (7th Cir. 1980); In re
Kevin W. Emerick Farms, Inc., 201 B.R. 790 (Bankr. C.D. Ill.
1996)). Accordingly, a party bringing a veil-piercing claim
bears the burden of showing that the corporation is in fact
a “dummy or sham” for another person or entity. Jacobson
v. Buffalo Rock Shooters Supply, Inc., 664 N.E.2d 328, 331 (Ill.
App. Ct. 1996).
Illinois courts consider the following factors when
determining whether there is sufficient “unity of inter-
est” to justify disregarding the corporate form:
(1) inadequate capitalization; (2) failure to issue stock;
(3) failure to observe corporate formalities; (4) nonpay-
ment of dividends; (5) insolvency of the debtor corpo-
ration; (6) nonfunctioning of the other officers or
directors; (7) absence of corporate records; (8) commin-
gling of funds; (9) diversion of assets from the corpo-
ration by or to a stockholder or other person or
entity to the detriment of creditors; (10) failure to
maintain arm’s-length relationships among related
entities; and (11) whether, in fact, the corporation is a
mere facade for the operation of the dominant stock-
holders.
Fontana v. TLD Builders, Inc., 840 N.E.2d 767, 778 (Ill. App.
Ct. 2005). Judson Atkinson argues that several of these
factors are present: LMC was undercapitalized, LMC failed
to observe corporate formalities and LMC’s funds were
commingled with those of CIC and Carroll.
Judson Atkinson argues that because LMC was losing
money, it was undercapitalized. But a court will find a
corporation to be undercapitalized only when it “has ‘so
little money that it could not and did not actually
operate its nominal business as its own.’ ” Firstar Bank, N.A.
8 Nos. 07-1660 & 07-2116
v. Faul Chevrolet, Inc., 249 F. Supp. 2d 1029, 1041 (N.D. Ill.
2003) (quoting Browning-Ferris Indus. of Ill., Inc. v. Ter
Maat, 195 F.3d 953, 961 (7th Cir. 1999)). The fact that a
corporation is losing money does not show that it is
undercapitalized. See Firstar Bank, 249 F. Supp. 2d at 1042
(“[T]he evidence that the Dealership was losing money
has no probative value in showing that the corporation
was undercapitalized.”). Judson Atkinson provided no
evidence that LMC “maintained a lower capitalization
than the law required.” Browning-Ferris Indus. of Ill., 195
F.3d at 961.
Judson Atkinson also alleges that LMC failed to ob-
serve corporate formalities. It is undisputed that LMC
was incorporated in Illinois, that it filed annual reports
with the Illinois Secretary of State and that it held annual
meetings. (R. 232, Pl’s Resp. To CIC’s Facts ¶ 16.) In
addition, LMC issued stock certificates to CIC, con-
ducted board meetings and entered into contracts in its
own name. The only evidence Judson Atkinson points to
as proof of LMC’s failure to observe corporate formalities
is the company’s failure to file tax returns since 1999. This
is not enough to justify treating LMC as a mere shell. See
Jacobson, 664 N.E.2d at 331 (“[M]erely missing one annual
meeting is not a sufficient showing of failure to observe
corporate formalities.”); People v. V & M Indus., Inc., 700
N.E.2d 746, 751-52 (Ill. App. Ct. 1998) (failure to hold
regular meetings, take minutes, maintain corporate records
showed failure to observe corporate formalities); Ted
Harrison Oil Co., Inc. v. Dokka, 617 N.E.2d 898, 902 (Ill.
App. Ct. 1993) (finding a “complete lack of corporate
formalities” where “[n]o records were kept and the com-
pany did not hold formal shareholder or director meet-
ings”).
Nos. 07-1660 & 07-2116 9
Finally, Judson Atkinson alleges that LMC’s funds
were commingled with those of CIC and Carroll, stating
that an outside consultant concluded that LMC did not
have a separate bank account, that transfers were made
between LMC and CIC and that proceeds of loans to
LMC were deposited into accounts owned by CIC. Ulti-
mately, Judson Atkinson’s intermingling argument is
based on CIC’s use of a cash management system. But the
use of a cash management system alone is not evidence that
funds are being improperly commingled. See Fletcher v.
Atex, Inc., 68 F.3d 1451, 1459 (2d Cir. 1995) (“Courts have
generally declined to find alter ego liability based on a
parent corporation’s use of a cash management system.”);
In re Acushnet River & New Bedford Harbor Proceedings, 675
F. Supp. 22, 34 (D. Mass. 1987) (“A centralized cash man-
agement system . . . where the accounting records always
reflect the indebtedness of one entity to another, is not
the equivalent of intermingling funds.”); Japan Petroleum
Co. (Nigeria) Ltd. v. Ashland Oil, Inc., 456 F. Supp. 831,
846 (D. Del. 1978) (“Arrangements by a parent and sub-
sidiary for economy of expense and convenience of ad-
ministration may be made without establishing the rela-
tionship of principal and agent.”). Judson Atkinson has
not cited any evidence to counter CIC’s assertions that
it maintained a strict accounting of each subsidiary’s
balance. In addition, Judson Atkinson does not point to
any evidence supporting its blanket assertions that
LMC’s funds were used to pay CIC’s expenses. Nor
does Judson Atkinson offer proof to support its allega-
tion that advances Carroll received from CIC were made
from funds belonging to LMC. Thus, the district court
correctly concluded that Judson Atkinson failed to pre-
sent sufficient proof that improper commingling occurred.
10 Nos. 07-1660 & 07-2116
Where Judson Atkinson has cited specific, verifiable
facts to support its veil-piercing argument, those facts do
not come close to making “a substantial showing that the
corporation is really a dummy or sham for a dominating
personality.” Rosier v. Cascade Mountain, Inc., 855 N.E.2d
243, 251 (Ill. App. Ct. 2006) (internal quotation marks and
citation omitted). Judson Atkinson argues that Carroll’s
control of both CIC and LMC weighs in favor of finding a
unity of interest. It points to CIC’s ownership of LMC’s
stock and Carroll’s ownership of CIC’s stock. But “[t]he
separate corporate entities of two corporations may not
be disregarded merely because one owns the stock of
another . . . .” Hornsby v. Hornsby’s Stores, Inc., 734 F. Supp.
302, 308 (N.D. Ill. 1990) (quoting Sumner Realty Co. v.
Willcott, 499 N.E.2d 554, 557 (Ill. App. Ct. 1986)). In Illinois,
the principle that “[a] corporation is a legal entity separate
and distinct from its shareholders, directors, and offi-
cers. . . . applies even where one corporation wholly owns
another and the two have mutual dealings.” Joiner v. Ryder
Sys. Inc., 966 F. Supp. 1478, 1483 (C.D. Ill. 1996) (internal
quotation marks and citation omitted) (alteration in
original). See also Plastic Film Corp. of Am., Inc. v. Unipac,
Inc., 128 F. Supp. 2d 1143, 1147 (N.D. Ill. 2001) (“[T]he
fact that a corporation has only one single shareholder
is not proof that the corporation is the ‘alter ego’ of that
shareholder.”); Melko v. Dionisio, 580 N.E.2d 586, 595
(Ill. App. Ct. 1991) (noting that “the mere allegation that
[defendant] was a dominant or sole shareholder is insuf-
ficient to enable a court to disregard the separate corporate
existence”). Judson Atkinson also points out that Carroll
was an officer of both CIC and LMC. While having com-
mon officers and directors is generally a prerequisite to
piercing the corporate veil, this factor is insufficient to
Nos. 07-1660 & 07-2116 11
justify disregarding the corporate form because it is a
“common business practice” that “exist[s] in most parent
and subsidiary relationships.” C M Corp., 631 F.2d at 539
(citation omitted). The fact that Carroll owned the out-
standing shares of CIC, LMC’s parent company, “only
shows that [he] may have had the opportunity to create a
unity of interest,” not that he actually did so. Firstar Bank,
249 F. Supp. 2d at 1040 n.3. Judson Atkinson has failed to
show that LMC is an alter ego of CIC or Carroll and thus,
the district court properly entered summary judgment for
those defendants.1
Judson Atkinson’s veil-piercing claims against Elsen
and Hohberger appear to be baseless. The evidence sup-
porting Judson Atkinson’s veil-piercing claim against
Hohberger seems to consist of nothing more than the
1
Even if Judson Atkinson had shown that LMC was a sham
corporation, it has failed to provide evidence that would
satisfy the second element of a successful veil-piercing claim
under Illinois law, i.e., showing that failure to pierce the
corporate veil “would sanction a fraud or promote injustice.”
Sea-Land Servs., Inc. v. Pepper Source, 941 F.2d 519, 520 (7th Cir.
1991) (quoting Van Dorn Co. v. Future Chemical & Oil Corp.,
753 F.2d 565, 569-70 (7th Cir. 1985)). The injustice must be
more than the prospect of an unsatisfied judgment. Id. at 522.
A plaintiff must show that “a party would be unjustly en-
riched; a parent corporation that caused a sub’s liabilities and
its inability to pay for them would escape those liabilities; or
an intentional scheme to squirrel assets into a liability-free
corporation while heaping liabilities upon an asset-free cor-
poration would be successful.” Id. at 524. Judson Atkinson
has not pointed to evidence tending to show that any such
injustice would result from the district court’s refusal to
pierce LMC’s corporate veil.
12 Nos. 07-1660 & 07-2116
fact that Hohberger was employed by LMC and was
aware of the company’s financial difficulties. The evid-
ence Judson Atkinson offers against Elsen is that he was
an officer of LMC and CIC and had knowledge of the
corporations’ respective finances. Under Illinois law, it
is possible for a non-shareholder to be found personally
liable under a veil-piercing theory. See Fontana, 840
N.E.2d at 776. But Judson Atkinson has failed to provide
any evidence that either Elsen or Hohberger “exercise[d]
ownership control” over LMC “to such a degree that the
separate personalities of [LMC] and [the defendants] did
not exist, and that [LMC] was a business conduit of
[Elsen and Hohberger].” Macaluso v. Jenkins, 420 N.E.2d
at 256.
Finally, Judson Atkinson argues that the district court
erred in refusing to pierce CIC’s corporate veil to hold
Carroll and Elsen liable. Since Judson Atkinson has a
judgment against LMC alone, whether or not CIC’s veil
could ever be pierced to hold Carroll or Elsen liable for
an obligation owed by CIC is irrelevant. We have deter-
mined that Judson Atkinson did not show that LMC was an
alter ego of CIC. Since LMC’s veil cannot be pierced to hold
CIC liable for the default judgment, liability for the default
judgment cannot be imposed on Carroll or Elsen by
piercing CIC’s corporate veil.
B. Fraudulent transfer claims
Next we address Judson Atkinson’s argument that the
district court erred when it entered judgment in favor
of CIC, Carroll, Dhimantec and Hohberger with respect
to its fraudulent transfer claims. Judson Atkinson asserts
that Texas law applies to its fraudulent transfer claims and
Nos. 07-1660 & 07-2116 13
that the district court erred in applying Illinois law. Texas
courts apply the “most significant relationship” test to
decide choice-of-law issues. See Hughes Wood Prods., Inc. v.
Wagner, 18 S.W.3d 202, 205 (Tex. 2000); Gutierrez v. Collins,
583 S.W.2d 312, 318-19 (Tex. 1979). This is the same choice-
of-law rule used in Illinois. See Esser v. McIntyre, 661
N.E.2d 1138, 1141 (Ill. 1996). Therefore the district court’s
choice of law would have been the same if it had applied
Texas choice-of-law principles. Illinois has the most
significant relationship to the case and thus, Illinois law
should apply to Judson Atkinson’s fraudulent transfer
claims.
1. Exhibits 10 and 11
Because Judson Atkinson relies on Exhibits 10 and 11,
which the district court struck, to support its fraudulent
transfer claims, we address whether the court erred in
striking those exhibits before deciding whether there
was sufficient evidence for Judson Atkinson to have
moved forward on its fraudulent transfer claims. Exhibits
10 and 11 are charts that Judson Atkinson prepared
that summarize allegedly fraudulent transfers from LMC
and CIC to third parties. We review the district court’s
decision to strike Judson Atkinson’s exhibits for abuse
of discretion. Winfrey v. City of Chicago, 259 F.3d 610, 618-
19 (7th Cir. 2001). “Under the Local Rules of the Northern
District of Illinois, a party filing a motion for sum-
mary judgment under Fed. R. Civ. P. 56 must serve and
file ‘a statement of material facts as to which the moving
party contends there is no genuine issue and that
entitle the moving party to a judgment as a matter of
law.’ ” Koszola v. Bd. of Educ. of City of Chicago, 385 F.3d
14 Nos. 07-1660 & 07-2116
1104, 1107-08 (7th Cir. 2004) (quoting N.D. Ill. Local R.
56.1(a)(3)). The evidence supporting a factual assertion
must represent admissible evidence. Malec v. Sanford, 191
F.R.D. 581, 585 (N.D. Ill. 2000). Judson Atkinson’s argument
that the exhibits were admissible summaries under Federal
Rule of Evidence 1006 is unavailing. “The admission of a
summary under Fed. R. Evid. 1006 requires ‘a proper
foundation as to the admissibility of the material that is
summarized and . . . [a showing] that the summary is
accurate . . . .’ ” United States v. Briscoe, 896 F.2d 1476, 1495
(7th Cir. 1990) (quoting United States v. Driver, 798 F.2d
248, 253 (7th Cir. 1986)) (alteration in original). Judson
Atkinson did not address these requirements. It did not
establish the admissibility of the records on which the
summaries were allegedly based or authenticate the
summaries in any way. See Needham v. White Laboratories,
Inc., 639 F.2d 394, 403 (7th Cir. 1981) (“Before a summary
is admitted, the proponent must lay a proper foundation
as to the admissibility of the material that is sum-
marized and show that the summary is accurate.”). Because
Judson Atkinson failed to properly authenticate the
summaries in Exhibits 10 and 11, the district court acted
within its discretion by striking them.2
2
The district court also concluded that the exhibits repre-
sented improper legal argument. Local Rule 56.1 requires that
statements of facts concerning summary judgment motions
identify the evidence supporting a party’s factual assertions.
Malec, 191 F.R.D. at 585. It is inappropriate to make legal
arguments in a Rule 56.1 statement of facts. Id. See also Thomas
v. Sheahan, 499 F. Supp. 2d 1062, 1072 (N.D. Ill. 2007). We have
held that a district court has broad discretion to require
strict compliance with Local Rule 56.1. See Koszola, 385 F.3d at
(continued...)
Nos. 07-1660 & 07-2116 15
2. Fraudulent transfer claims
Under Illinois law, a fraudulent transfer claim requires
a debtor/creditor relationship. See APS Sports Collectibles,
Inc. v. Sports Time, Inc., 299 F.3d 624, 629 (7th Cir. 2002)
(citing A.P. Properties, Inc. v. Goshinsky, 714 N.E.2d 519,
522 (Ill. 1999)). LMC is the debtor in this case. Judson
Atkinson argues that Carroll, acting through LMC and CIC
(allegedly his alter egos), made fraudulent transfers in
violation of the UFTA. Because, as we have al-
ready determined, Judson Atkinson cannot pierce LMC’s
corporate veil, it cannot maintain its fraudulent transfer
claim against Carroll based on the theory that Carroll is
LMC’s alter ego and therefore is a debtor under the UFTA.
Judson Atkinson argues on appeal that its fraudulent
transfer claims do not depend on accepting an alter ego
theory of liability and it offers a theory of liability based
on the defendants’ status as first transferees and sub-
sequent transferees: LMC made fraudulent transfers to CIC
and Dhimantec, who are first transferees. They, in turn,
made transfers to Carroll and Hohberger, who are sub-
sequent transferees. To support its fraudulent transfer
claims, Judson Atkinson cites CIC’s use of a sweep account
system, which we have already stated is not evidence
of commingling or fraud. Judson Atkinson makes blanket
2
(...continued)
1109. The district court was correct that by labeling the
charts “fraudulent transfers,” Judson Atkinson made an im-
proper legal argument since whether or not any transfers
were fraudulent is a legal conclusion. In striking the exhibits,
the court acted within its discretion in interpreting its own local
rules. See Midwest Imports, Ltd. v. Coval, 71 F.3d 1311, 1316
(7th Cir. 1995).
16 Nos. 07-1660 & 07-2116
assertions that LMC’s funds were used to pay bills for
other entities without citing any evidence in the record
supporting these charges. It asserts that CIC made trans-
fers to insiders without providing any proof showing
that the funds allegedly transferred by CIC belonged to
LMC. Judson Atkinson further claims that the alleged
transfers from LMC to CIC and from CIC to various
individuals were made without receiving reasonably
equivalent value but again, cites no evidence to support
this claim. The only evidence Judson Atkinson offers to
support its fraudulent transfer claims against Dhimantec
and Hohberger is the fact that CIC sold some of LMC’s
assets to Dhimantec for $475,000. But Judson Atkinson
fails to provide any evidence suggesting that the assets
were more valuable than the price that was paid, making
only the curious argument that because Hohberger pur-
chased 10 percent of Dhimantec’s stock for $80,000
after Dhimantec bought assets from LMC, the assets
LMC sold Dhimantec must have been worth at least
$800,000. If Dhimantec had not had any assets at all
before the sale, this argument might hold water. But Judson
Atkinson has not offered any evidence of Dhimantec’s
value prior to the transaction and there is no indication that
it was not an operating company with assets of its own
prior to buying assets from LMC. In light of Judson
Atkinson’s failure to show that any particular transfers
were in fact fraudulent, the district court properly granted
the defendants’ motions for summary judgment with
respect to these claims.
C. Breach of fiduciary duty
Under Texas choice-of-law rules, the state of incorpora-
tion governs claims for breaches of fiduciary duties. See
Nos. 07-1660 & 07-2116 17
King v. Douglass, 973 F. Supp. 707, 723 (S.D. Tex. 1996).
Illinois law thus governs Judson Atkinson’s claim that
LMC’s officers breached their fiduciary duties. Judson
Atkinson contends that Carroll, Elsen and Hohberger,
as officers of LMC, owed fiduciary duties to Judson
Atkinson because Judson Atkinson is a creditor of LMC
and that they breached those duties. The defendants
assert that Judson Atkinson lacks standing to bring
such a claim. In general, the officers and directors of a
corporation do not owe fiduciary duties to creditors of
the corporation. See Macaluso, 420 N.E.2d at 257. But in
special circumstances, such as insolvency, directors do
owe a duty to creditors. See Technic Eng’g, Ltd. v. Basic
Envirotech, Inc., 53 F. Supp. 2d 1007, 1011 (N.D. Ill. 1999).
Some courts have found that the special circumstance
fiduciary duty “runs to all creditors as a group, and not
to any individual creditor,” and therefore that “only
the corporation or its representative in bankruptcy
can maintain a claim for an alleged breach of this duty.”
Prime Leasing, Inc. v. Kendig, 773 N.E.2d 84, 97 (Ill. App. Ct.
2002) (applying Delaware law). See also North Am. Catholic
Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92,
103 (Del. 2007) (“The creditors of a Delaware corporation
that is either insolvent or in the zone of insolvency have no
right, as a matter of law, to assert direct claims for breach
of fiduciary duty against its directors.”). Although the
Illinois Supreme Court has not addressed whether a
corporation’s creditor may bring a direct claim for breach
of special circumstance fiduciary duty, several courts have
found that under Illinois law, creditors can sue for such
a breach. See Technic Eng’g, Ltd., 53 F. Supp. 2d at 1010-
12; O’Connell v. Pharmaco, Inc., 493 N.E.2d 1175, 1182
(Ill. App. Ct. 1986); Circle Sec. Agency, Inc. v. Ross, 425
18 Nos. 07-1660 & 07-2116
N.E.2d 1283, 1286 (Ill. App. Ct. 1981). Even if we were to
assume that Judson Atkinson has standing to sue for a
breach of special circumstance fiduciary duty, however,
Judson Atkinson’s breach of fiduciary duty argument is
mainly a rehashing of its veil-piercing argument. Judson
Atkinson does not cite the elements of a breach of fiduciary
duty claim or show how any evidence in the record
tends to support such a claim. As a result, it has waived
this argument. See United States v. Dunkel, 927 F.2d 955,
956 (7th Cir. 1991) (“A skeletal ‘argument’, really nothing
more than an assertion, does not preserve a claim.”)
(citation omitted).
D. The district court’s grant of summary judgment sua
sponte in favor of Dhimantec and LMC
Judson Atkinson contends that the district court erred
in granting summary judgment in favor of LMC and
Dhimantec, with respect to its alter ego and fraudulent
conveyance claims, because neither of them filed a
motion for summary judgment. District courts have the
authority to enter summary judgment sua sponte “so long as
the losing party was on notice that she had to come for-
ward with all of her evidence.” Celotex Corp. v. Catrett, 477
U.S. 317, 326, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). In
addition, we have held that if a district court grants one
defendant’s motion for summary judgment, it may sua
sponte enter summary judgment in favor of non-moving
defendants if granting the motion would bar the claim
against those non-moving defendants. Malak v. Associated
Physicians, Inc., 784 F.2d 277, 280 (7th Cir. 1986). See also
Acequia, Inc. v. Prudential Ins. Co. of Am., 226 F.3d 798,
807 (7th Cir. 2000) (sua sponte grant of summary judg-
Nos. 07-1660 & 07-2116 19
ment appropriate “where one defendant succeeds in
winning summary judgment on a ground common to
several defendants, if the plaintiff had an adequate op-
portunity to argue in opposition”).
In order to show that Dhimantec is an alter ego of
LMC, Judson Atkinson would have had to show that
LMC is a sham corporation by considering such factors
as whether LMC observed corporate formalities,
was adequately capitalized or maintained corporate
records. In short, it would have to show the same things
it would have to establish in order to pursue its alter
ego/veil-piercing claims against CIC and Carroll. Having
found that Judson Atkinson failed to present evidence
sufficient to justify disregarding LMC’s corporate form,
the district court properly entered summary judgment in
favor of all defendants with respect to Judson Atkinson’s
alter ego claims. Judson Atkinson was also on notice that
it had to come forward with evidence establishing
LMC’s fraudulent conveyance of its assets to Dhimantec
because the legitimacy of that sale was asserted in the
summary judgment motions of Carroll, CIC and
Hohberger. In its responses to those motions, Judson
Atkinson failed to provide any evidence showing that
the sale of LMC assets to Dhimantec was not for reason-
ably equivalent value. Thus, we affirm the district court’s
sua sponte grant of summary judgment in favor of
Dhimantec.
Judson Atkinson also argues that the district court
erred in entering summary judgment sua sponte in favor
of LMC. LMC did not appear and the district court
entered a default against it. The district court subse-
quently entered summary judgment for LMC when it
granted the other defendants’ motions for summary
20 Nos. 07-1660 & 07-2116
judgment. Although the district court entered a
default against LMC, it did not enter a default judg-
ment. See United States v. Hanson, 795 F.2d 35, 37 (7th Cir.
1986) (“[A]n order of default is not a final judgment,
though a default judgment is.”); United States v. Borchardt,
470 F.2d 257, 260 (7th Cir. 1972) (“[A]lthough a default
may serve as the basis for a default judgment . . . , the
entry does not of itself determine rights.”) (citation omit-
ted). Federal Rule of Civil Procedure 55(c) allows a
court to set aside an entry of default for good cause and
to set aside a default judgment under Rule 60(b), which
states that a court may relieve a party from a final judg-
ment “on motion.” While relief from a default judgment
is usually granted on a motion filed by the defaulting
party, a majority of circuits to have considered the power
of a district court to vacate a judgment under Rule 60(b)
have concluded that district courts have the discretion to
grant such relief sua sponte. See Pierson v. Dormire, 484
F.3d 486, 491-92 (8th Cir. 2007), vacated in part on rehearing
on other grounds by 2008 WL 1946857 (8th Cir. 2008);
Golden Blount, Inc. v. Robert H. Peterson Co., 438 F.3d 1354,
1359 n.1 (Fed. Cir. 2006); Fort Knox Music Inc. v. Baptiste,
257 F.3d 108, 111 (2d Cir. 2001) (noting that while relief
from judgment is usually sought by motion of a party,
“nothing forbids the court to grant such relief sua sponte”);
Kingvision Pay-Per-View Ltd. v. Lake Alice Bar, 168 F.3d
347, 351-52 (9th Cir. 1999); McDowell v. Celebrezze, 310 F.2d
43, 44 (5th Cir. 1962); United States v. Jacobs, 298 F.2d
469, 472 (4th Cir. 1961). But see United States v. Pauley, 321
F.3d 578, 581 (6th Cir. 2003) (reasoning that “because Rule
60(b) explicitly requires relief under the rule to occur ‘on
motion,’ courts may not grant such relief except upon ‘a
motion from the affected party’ ”) (citation omitted); Dow
v. Baird, 389 F.2d 882, 884-85 (10th Cir. 1968). Unlike Rule
Nos. 07-1660 & 07-2116 21
60(b), Rule 55(c) does not refer to a motion but simply
states that a “court may set aside an entry of default for
good cause.” In addition, we believe that a district court
that has entered a default against a party retains “the
power to act in the interest of justice in an unusual case
in which its attention has been directed to the necessity
of relief by means other than a motion,” Pierson, 484 F.3d
at 491 (quoting Kingvision Pay-Per-View, 168 F.3d at
351), particularly since Rule 55(c) does not require a
motion. Without deciding whether a district court could
set aside a default judgment sua sponte, we believe that
the district court had the authority to set aside sua sponte
an entry of default against LMC for good cause. In the
present case, it seems that the district court did just that
when it granted summary judgment for LMC. However,
the district court did not make clear that it was setting
aside the entry of default for good cause or explain its
decision to grant summary judgment for LMC. There-
fore, we vacate and remand to the district court for an
explanation of its decision.
E. The district court’s imposition of sanctions
We review a district court’s imposition of sanctions
for abuse of discretion. Cleveland Hair Clinic, Inc. v. Puig,
200 F.3d 1063, 1066 (7th Cir. 2000). We will only reverse
a district court’s imposition of sanctions if one or more of
the following is true: “(1) the record contains no evidence
upon which the court could have rationally based its
decision; (2) the decision is based on an erroneous con-
clusion of law; (3) the decision is based on clearly errone-
ous factual findings; or (4) the decision clearly appears
arbitrary.” Gile v. United Airlines, Inc., 95 F.3d 492, 495
(7th Cir. 1996) (citing Haworth, Inc. v. Herman Miller, Inc.,
22 Nos. 07-1660 & 07-2116
998 F.2d 975, 977 (Fed. Cir. 1993)). Judson Atkinson con-
tends that the district court’s findings that Judson Atkin-
son acted in bad faith and that the defendants were preju-
diced were clearly erroneous. We disagree.
A court, under its inherent powers, may sanction con-
duct that it finds to be an abuse of the judicial process.
Chambers v. NASCO, Inc., 501 U.S. 32, 43-44, 111 S. Ct. 2123,
115 L. Ed. 2d 27 (1991). In order to impose sanctions
pursuant to its inherent power, a court must find that
the party “ ’acted in bad faith, vexatiously, wantonly, or
for oppressive reasons . . . .’ ” Methode Elecs., Inc. v. Adam
Techs., Inc., 371 F.3d 923, 928 (7th Cir. 2004) (quoting
Chambers, 501 U.S. at 45, 111 S. Ct. 2123)). Rule 45 of the
Federal Rules of Civil Procedure governs the use of sub-
poenas. A party must serve each party with prior notice if
the subpoena commands the production of documents.
Fed. R. Civ. P. 45(b). Prior notice is required in order “to
afford other parties an opportunity to object to the produc-
tion or inspection, or to serve a demand for additional
documents or things.” Fed. R. Civ. P. 45 committee note,
1991 amendments. The requirements of Rule 45 are clear.
Equally clear is the fact that Judson Atkinson violated these
requirements.
We have stated that a district court deciding whether
to impose sanctions for discovery violations should
consider:
(1) the prejudice or surprise to the party against
whom the evidence is being offered; (2) the ability of
the party to cure the prejudice; (3) the likelihood of
disruption to the trial; and (4) the bad faith or will-
fulness involved in not disclosing the evidence at an
earlier date.
Nos. 07-1660 & 07-2116 23
David v. Caterpillar, Inc., 324 F.3d 851, 857 (7th Cir. 2003).
Although David dealt with the imposition of sanctions
for a violation of Rule 26 those factors are equally ap-
plicable to considering the imposition of sanctions for a
violation of Rule 45. The facts strongly suggest that Judson
Atkinson was less than forthright in its use of third-party
subpoenas. First, defense counsel was not provided
with copies of the subpoenas. Then, although Judson
Atkinson began receiving documents in response to the
subpoenas in October, it did not provide copies to the
defendants until November 15, 2006, ten days after the
last installment was received. See Murphy v. Bd. of Educ.
of Rochester City Sch. Dist., 196 F.R.D. 220, 226 (W.D.N.Y.
2000) (where attorney issued third-party subpoenas
without notifying opposing party, failure to share infor-
mation obtained pursuant to subpoena weighed in favor
of imposing sanctions). When defense counsel finally
received the documents and contacted counsel for
Judson Atkinson to protest the fact that Judson Atkinson
failed to provide the defendants with copies of the sub-
poenas, Judson Atkinson misrepresented the time that
it had received responses to the subpoenas, stating that
no documents were received from either bank until after
the close of discovery on November 3rd. This was
simply untrue. Judson Atkinson received some docu-
ments in October. Judson Atkinson’s blatant misrepresenta-
tion supports the district court’s finding that it was not
acting in good faith.
In addition, Judson Atkinson’s violation of Rule 45
deprived the defendants of the opportunity to object to
the subpoenas. Judson Atkinson contends that any preju-
dice to the defendants was negated by its offer to stip-
ulate not to use some of the subpoenaed documents. But
24 Nos. 07-1660 & 07-2116
a party may not ignore Rule 45’s requirements and
then, when caught, dictate the terms under which the
subpoenaed materials will be used. Rather, it is within the
court’s inherent powers to assess the appropriate sanc-
tions for violations of discovery rules. Chambers, 501 U.S. at
43-44, 111 S. Ct. 2123. Judson Atkinson’s argument that
the subpoenaed documents had been produced in the
underlying litigation does not cure the prejudice to the
defendants since they were not parties to the breach of
contract lawsuit between Judson Atkinson and LMC. The
district court did not clearly err in finding evidence of
bad faith and prejudice to the defendants and hence, we
affirm its imposition of sanctions.3
F. Seyfarth Shaw memorandum
Judson Atkinson’s final challenge is to the district court’s
determination that the Seyfarth Shaw memorandum is
covered by the attorney-client privilege. We review
a district court’s findings of fact regarding claims of
attorney-client privilege for clear error. See Bland v. Fiatallis
N. Am., Inc., 401 F.3d 779, 787 (7th Cir. 2005). “We shall
reverse only if, on review of the entire evidence, we are ‘left
with the definite and firm conviction that a mistake has
3
Judson Atkinson asserts that the amount of the sanctions
was unreasonable, but does not go beyond this bare assertion.
Given that the amount of the sanctions was close to (actually,
slightly less than) the amount sought by the defendants,
which they supported with billing records, we will not disturb
the district court’s determination. See Cleveland Hair Clinic,
200 F.3d at 1066 (“This court rarely will disturb a district
judge’s reasoned decision to choose a particular level of
sanctions.”).
Nos. 07-1660 & 07-2116 25
been committed’ in the application of the law to the facts.”
Jenkins v. Bartlett, 487 F.3d 482, 491 (7th Cir. 2007), cert.
denied, 128 S. Ct. 654 (2007) (quoting Malachinski v. Comm’r,
268 F.3d 497, 505 (7th Cir. 2001)).
When reviewing claims of privilege, courts in the North-
ern District of Illinois:
undertake[ ] a three-part inquiry. As a threshold
matter, the court must determine whether the disputed
document is indeed [privileged]. If the document is not
privileged, the inquiry ends. If the document is privi-
leged, the court must then determine if the disclosure
was inadvertent. Lastly, even if the document is
found to be [privileged] and inadvertently produced,
the court must, nonetheless, determine whether privi-
lege was waived.
Sanner v. Bd. of Trade, 181 F.R.D. 374, 376 (N.D. Ill. 1998)
(quoting Harmony Gold U.S.A., Inc. v. FASA Corp., 169
F.R.D. 113 (N.D. Ill. 1996)).
“Communications from attorney to client are privileged
only if they constitute legal advice, or tend directly or
indirectly to reveal the substance of a client confidence.”
United States v. Defazio, 899 F.2d 626, 635 (7th Cir. 1990).
The Seyfarth Shaw memorandum is between two of
CIC’s attorneys, is printed on Seyfarth Shaw letterhead
and is labeled “ATTORNEY CLIENT PRIVILEGED” on
every page. Judson Atkinson contends that the memo-
randum is not covered by the attorney-client privilege
because it is subject to the crime-fraud exception, under
which “the ‘privilege is [ ] forfeited if the attorney is
assisting his client to commit a crime or a fraud.’ ” United
States v. Al-Shahin, 474 F.3d 941, 946 (7th Cir. 2007) (quot-
ing Mattenson v. Baxter Healthcare Corp., 438 F.3d 763,
26 Nos. 07-1660 & 07-2116
769 (7th Cir. 2006)). There is simply no merit to Judson
Atkinson’s assertion that the memorandum contains
advice as to the perpetration of a fraud. Judson Atkinson
has failed to show that the memorandum describes any-
thing other than a perfectly legal strategy of filing for
bankruptcy to minimize losses. Therefore we conclude
that the district court did not err in finding that the memo-
randum is privileged.
The next step in our analysis is to determine whether
the disclosure of the memorandum was inadvertent.
“Courts have not established a bright-line rule for deter-
mining whether a document was inadvertently produced;
instead, courts look at the circumstances surrounding
the disclosure.” Harmony Gold, 169 F.R.D. at 116. “Where
discovery is extensive, mistakes are inevitable and
claims of inadvertence are properly honored so long as
appropriate precautions are taken.” In re Sulfuric Acid
Antitrust Litigation, 235 F.R.D. 407, 417 (N.D. Ill. 2006). See
also Golden Valley Microwave Foods, Inc. v. Weaver Popcorn
Co., Inc., 132 F.R.D. 204, 207 (N.D. Ind. 1990) (finding
the fact that 14,000 documents had been produced sup-
ported finding that disclosure was inadvertent). Carroll’s
attorney produced over 25,000 pages to Judson Atkinson
in connection with this litigation. See Harmony Gold, 169
F.R.D. at 116 (where 25,000 pages had been produced,
disclosures were found to be inadvertent). In determining
that the production was inadvertent, the district court
had before it a description of the document review pro-
cess in the form of an affidavit from the attorney who
supervised the document production. There is nothing
clearly inadequate about the process described. The
fact that one memorandum slipped through does not
indicate that the precautionary measures taken by
Nos. 07-1660 & 07-2116 27
Carroll’s counsel were so deficient that the court clearly
erred in finding the document’s production was inadver-
tent.
Finally, we conclude that the district court did not err
in determining that the privilege was not waived. The
district court followed the “balancing approach” to
waiver described in Harmony Gold. Under the balancing
approach, a court considers: “(1) the reasonableness of
the precautions taken to prevent disclosure; (2) the time
taken to rectify the error; (3) the scope of the discovery;
(4) the extent of the disclosure; and (5) the overriding
issue of fairness.” Harmony Gold, 169 F.R.D. at 116-17 (citing
Golden Valley Microwave Foods, Inc., 132 F.R.D. at 208). As
we have already noted, the court did not err in finding
the precautions taken by Carroll’s counsel to be adequate.
See, e.g., Golden Valley Microwave Foods, Inc., 132 F.R.D. at
209 (party failed to show it took adequate measures to
protect the privilege where “court [was] left to speculate
what specific precautions were taken by counsel to pre-
vent this disclosure”). Nor did it err in finding the scope
of discovery in this case to weigh against finding
waiver, given that 30-40 boxes of documents were pro-
duced on the date the memorandum was produced. Nor
does the fairness prong weigh in Judson Atkinson’s
favor, since the memorandum does not appear to con-
tain any evidence of a crime or fraud.
Judson Atkinson asserts that CIC did not act quickly
enough to rectify the error, and thus it waived the privi-
lege. Judson Atkinson filed a copy of the memorandum
on November 17, 2006 as an exhibit to its response to
Elsen’s statement of facts. CIC’s counsel sent an email to
Judson Atkinson’s counsel on November 20th asking for
an explanation as to how Judson Atkinson came into
possession of the document. CIC’s lawyers contacted
28 Nos. 07-1660 & 07-2116
Judson Atkinson again in December to ascertain the
source of the memorandum, asserting that the memoran-
dum is covered by the attorney-client privilege. It appears
counsel for CIC took steps to rectify the error immediately
upon learning of the disclosure. See Harmony Gold, 169
F.R.D. at 117 (finding that two weeks between learning of
disclosure of document and sending letter requesting
its return was a “lax” attempt to rectify the error). Since
the memorandum was filed with the court, the extent of
disclosure may weigh in Judson Atkinson’s favor. See, e.g.,
id. at 117-18; Parkway Gallery Furniture, Inc. v. Kittinger/
Pennsylvania House Group, Inc., 116 F.R.D. 46, 51-52 (M.D.
N.C. 1987). However, given that the other factors weigh
against finding waiver, the court did not clearly err in
finding that the privilege was not waived in this case.4
4
Judson Atkinson argues that CIC lacks standing to assert the
privilege because the memorandum was produced by Carroll’s
attorneys. It asserts that the defendants are trying to have it
both ways by simultaneously arguing that Carroll is not CIC’s
alter ego but is an agent for the purposes of considering wheth-
er the memorandum is covered by the attorney-client privilege.
But Judson Atkinson’s position—that an individual cannot be
an agent of a corporation without being its alter ego—is baseless.
It is well-established that corporations enjoy the protection of
the attorney-client privilege. See Commodity Futures Trading
Com’n v. Weintraub, 471 U.S. 343, 348, 105 S. Ct. 1986, 85 L. Ed. 2d
372 (1985); Upjohn Co. v. United States, 449 U.S. 383, 390, 101
S. Ct. 677, 66 L. Ed. 2d 584 (1981). Corporations, being “artificial
creature[s] of the law,” must act through individuals. Upjohn,
449 U.S. at 389, 101 S. Ct. 677. This includes communicating
with their attorneys, which must be done via individual em-
ployees or agents. Carroll is the sole shareholder and CEO of
CIC. As such, the privileged nature of communications be-
(continued...)
Nos. 07-1660 & 07-2116 29
III. Conclusion
For the foregoing reasons, the judgment of the district
court is AFFIRMED in part, VACATED and REMANDED in part.
The appellant shall bear the costs of the appeals.
4
(...continued)
tween CIC and its attorneys remains intact when Carroll is
privy to those communications. See Commodity Futures Trading
Com’n, 471 U.S. at 348, 105 S. Ct. 1986.
USCA-02-C-0072—6-3-08