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. 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.
Nos. 07-1660 & 07-2116 3

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 sum-
4 Nos. 07-1660 & 07-2116

mary 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 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
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 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 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 veilpiercing 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., 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 corporation 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 Livestock, 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 interest” to justify disregarding the corporate form:

(1) inadequate capitalization; (2) failure to issue stock;

(3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or

directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation 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 stockholders.

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 observe 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, conducted 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 company did not hold formal shareholder or director meetings”).
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. Ultimately, 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 management 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 subsidiary for economy of expense and convenience of administration may be made without establishing the relationship 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 allegation that advances Carroll received from CIC were made

from funds belonging to LMC. Thus, the district court

correctly concluded that Judson Atkinson failed to present 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 officers. . . . 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 insufficient 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 common officers and directors is generally a prerequisite to

piercing the corporate veil, this factor is insufficient to
Nos. 07-1660 & 07-2116 11

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 enriched; 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 corporation 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.

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 outstanding 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 supporting Judson Atkinson’s veil-piercing claim against

Hohberger seems to consist of nothing more than the
12 Nos. 07-1660 & 07-2116

fact that Hohberger was employed by LMC and was

aware of the company’s financial difficulties. The evidence 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 determined 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 choiceof-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 summary 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

2 The district court also concluded that the exhibits represented 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...)

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 summarized 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
Nos. 07-1660 & 07-2116 15

2 (...continued)

1109. The district court was correct that by labeling the

charts “fraudulent transfers,” Judson Atkinson made an improper 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).

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 already 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 subsequent transferees: LMC made fraudulent transfers to CIC

and Dhimantec, who are first transferees. They, in turn,

made transfers to Carroll and Hohberger, who are subsequent 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
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 transfers 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 purchased 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 incorporation 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 forward 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 opportunity 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 reasonably 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 subsequently 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 judgment. 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 omitted). 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 judgment “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. Therefore, 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 conclusion of law; (3) the decision is based on clearly erroneous 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 contends that the district court’s findings that Judson Atkinson acted in bad faith and that the defendants were prejudiced were clearly erroneous. We disagree.

A court, under its inherent powers, may sanction conduct 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 subpoenas. 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 production 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 willfulness 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 applicable 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 information 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 subpoenas, 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 documents in October. Judson Atkinson’s blatant misrepresentation 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 prejudice to the defendants was negated by its offer to stipulate not to use some of the subpoenaed documents. But
24 Nos. 07-1660 & 07-2116

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.”).

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 sanctions 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
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 Northern 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 privileged, 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 privilege 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 memorandum 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) (quoting 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 anything 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 memorandum 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 determining 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 supported 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 process 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 inadvertent.

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 prevent 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 produced 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 contain 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 privilege. 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

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 whether 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 employees or agents. Carroll is the sole shareholder and CEO of

CIC. As such, the privileged nature of communications be-

(continued...)

Judson Atkinson again in December to ascertain the

source of the memorandum, asserting that the memorandum 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
Nos. 07-1660 & 07-2116 29

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

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.