Court Opinion

ID: 815267
Source: CourtListenerOpinion
Date Created: 2013-01-14 16:14:36+00
Date Added: 2024-06-11T08:07:29.753359
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

Nos. 12-1351, 12-1430

O N C OMMAND V IDEO C ORPORATION,
                                                    Plaintiff-Appellee,
                                  v.

S AMUEL J. R OTI,
                                               Defendant-Appellant.

            Appeals from the United States District Court
        for the Northern District of Illinois, Eastern Division.
            No. 09 C 03130—Robert W. Gettleman, Judge.

   A RGUED S EPTEMBER 14, 2012—D ECIDED JANUARY 14, 2013

  Before P OSNER, R OVNER, and W ILLIAMS, Circuit Judges.
  P OSNER, Circuit Judge. On Command Video (OCV)
supplies equipment and licenses software for in-room
entertainment in hotels, motels, and resorts. Its equipment
and software enable the guests to watch movies on de-
mand and to play games on the television set in their
room. OCV has obtained a judgment, in this diversity suit
governed by Illinois law, for $641,959.54 against Samuel
Roti, the owner of companies (now defunct) named
2                                   Nos. 12-1351, 12-1430

Markwell Hillside, LLC, and Markwell Properties, LLC;
they were the real owner and the pretend owner of a
hotel to which OCV provided video services. Roti
appeals, at the same time advising us that he thinks
we lack appellate jurisdiction.
  OCV has two claims against him. The first is that
he is personally liable for Markwell Properties’ debts
to OCV, particularly a $261,058.31 judgment debt for
breach of contract that OCV obtained by default against
Markwell Properties (which has no assets) in a 2007 state
court proceeding in Colorado—an amount to which the
district judge added $288,411.22 in post-judgment
interest at the 1.5 percent monthly rate specified in the
contract plus $92,490.01 in attorneys’ fees and costs, to
yield the $641,959.54 figure. OCV thus wants Markwell
Properties’ “corporate veil” “pierced” and the owner
made liable for his company’s debt to OCV. Although
Markwell Properties is not a corporation, a limited
liability company is similar and the parties assume that
the same standards for piercing the veil, or at least ap-
proximately the same standards (see, e.g., Charles W.
Murdock, “Liability Stemming from Piercing the Entity
Veil,” 7 Business Organizations § 5:11 (Illinois Practice
Series, 2012 Supp.)), apply to both types of enterprise.
  OCV’s second claim, related but distinct, is that Roti
fraudulently induced OCV to do business with the
assetless Markwell Properties. The relation lies in the
fact that the grounds for piercing a corporate veil are
fraud or kindred forms of wrongful conduct. In Hystro
Products, Inc. v. MNP Corp., 18 F.3d 1383, 1390 (7th Cir.
Nos. 12-1351, 12-1430                                     3

1994), we gave, as examples of such kindred forms, cases
in which failure to pierce the corporate veil would “un-
fairly enrich one of the parties; allow a parent corpora-
tion, that had created a subsidiary’s liabilities and was
the cause of the subsidiary’s inability to meet them, to
escape responsibility; allow former partners to ignore
obligations; or uphold a corporate arrangement to keep
assets in a liability-free corporation while placing
liabilities in an asset-free corporation.” But in this case,
as we’ll see, there is a fraud claim that is distinct from
the veil-piercing claim.
  The district judge granted summary judgment for
OCV on its first claim, thus allowing the company to
enforce against Roti the judgment it had obtained in
Colorado against Markwell Properties. The judge denied
OCV’s motion for summary judgment on the separate
fraud claim, however, noting that there were triable issues
concerning what was said during the contract negotia-
tions and whether OCV’s reliance on the alleged repre-
sentations was reasonable.
  Later the judge dismissed that claim with leave to
refile it if we reverse the judgment on the veil-piercing
claim. Because OCV seeks the same damages under
both claims, it has nothing to gain from pursuing the
separate fraud claim if its veil-piercing claim prevails
in this court. But that was no reason for the judge to
dismiss the fraud claim rather than let it pend until and
unless we affirm his ruling upholding the veil-piercing
claim. Dismissals with leave to refile are unexceptionable
when, for example, the dismissal is without prejudice
4                                      Nos. 12-1351, 12-1430

because of a remediable omission from the complaint.
But the dismissal of OCV’s fraud claim was not of that
character, because it was not based on any deficiency in the
claim. Realistically the claim was dismissed not with
leave to refile but with leave to reinstate. Such dismissals
can create jurisdictional and statute of limitations prob-
lems, and so “we have repeatedly criticized the practice
of dismissing suits before they have been concluded,
with leave to reinstate the suit.” Goss Graphics Systems, Inc.
v. DEV Industries, Inc., 267 F.3d 624, 626 (7th Cir. 2001).
We reiterate that it is a practice to be avoided.
  Apparently the parties and the judge thought that by
dismissing the fraud claim the judge had made the
award of damages on the veil-piercing claim a final
judgment and therefore automatically appealable. Not
so; “a decision is not final for purposes of appellate juris-
diction if the court rendering it has dismissed one
or more of the plaintiff’s claims, or one or more of the
defendants, with leave to refile.” Arrow Gear Co. v. Downers
Grove Sanitary District, 629 F.3d 633, 636 (7th Cir. 2010). So
when Roti appealed from the damages award we dis-
missed the appeal and the district judge then re-issued
the award as a partial final judgment under Fed. R. Civ.
P. 54(b); such judgments are appealable immediately,
just as if they were completely final. But Roti argues that
the veil-piercing and fraud claims overlap so completely
that they can’t be regarded as separate claims, and a claim
must be separate for its disposition in a Rule 54(b) judg-
ment to count as a “final decision” and thus be appealable
under 28 U.S.C. § 1291. Indiana Harbor Belt R.R. Co. v.
American Cyanamid Co., 916 F.2d 1174, 1175 (7th Cir. 1990).
Nos. 12-1351, 12-1430                                       5

  The practical test for whether two claims are separate
so that an appealable final judgment can be entered on
one of them is the degree of factual overlap. If it were
very great in this case, then if we reversed and sent the
case back and OCV prevailed on its fraud claim and
Roti again appealed we would have to relearn the same
facts, maybe years later—a wasteful duplication of our
earlier efforts. Marseilles Hydro Power, LLC v. Marseilles
Land & Water Co., 518 F.3d 459, 463-65 (7th Cir. 2008);
Ty, Inc. v. Publications Int’l Ltd., 292 F.3d 512, 515-16 (7th
Cir. 2002); Jordan v. Pugh, 425 F.3d 820, 826-27 (10th Cir.
2005). But although the question is close, we think the
facts underlying the two claims in OCV’s suit are suffi-
ciently distinct to have authorized the district judge to
enter as he did a final, appealable judgment resolving
one of them. OCV’s other claim—the claim it will reactivate
in the district court should it strike out in this ap-
peal—turns on whether Roti made fraudulent representa-
tions during the contract negotiation to induce OCV
to sign the contract, whether OCV relied upon the repre-
sentations, and what damages it would be entitled to
(possibly including punitive damages) as a result of that
reliance. Those are not issues in this appeal.
  We come at last to the merits of the appeal. In 2002
Markwell Hillside bought a Holiday Inn near Chicago
(Holiday Inn Hillside, it is called) from a company named
4400 Frontage Road, LLC, which then dissolved. The
Holiday Inn had been a customer of OCV when owned by
4400 Frontage Road, LLC, and the new owner, Markwell
Hillside, continued the relationship. In 2004 OCV asked
the Holiday Inn for a new contract because OCV was
6                                   Nos. 12-1351, 12-1430

changing over to a new system for distributing its
videos that would require the installation of different
equipment. In preparation for signing the new contract
OCV checked a Dun & Bradstreet database to verify the
existence and state of incorporation of the counterparty,
but, apparently unaware that Markwell Hillside had
purchased the hotel from 4400 Frontage Road, LLC, ran
the check on the latter company and was unable to find
it in the database. OCV told the manager of the hotel
(not Roti himself, who was the owner of both Markwell
companies, but rather a subordinate of Roti) that there
was a problem, but didn’t say what it was. The manager
misunderstood OCV to mean that it didn’t want Markwell
Hillside to be its counterparty because that firm had poor
credit. So Markwell Properties, another company Roti
owned, was substituted for Markwell Hillside in the
contract. But though it is shown in the contract as
the owner of the hotel, ownership was never transferred
to it from Markwell Hillside, which also continued to
manage the hotel. So nothing had changed as far as
ownership and operation of the hotel were concerned.
   Markwell Properties’ only relation to the hotel before
its substitution into the OCV contract had been to lease
some vans for the hotel’s use. The reason for Roti’s
having placed the leases in a different entity from the
hotel owner, Markwell Hillside, had been to shield Mark-
well Hillside from liability should a van have an accident
resulting in a tort suit; Markwell Properties had no
assets to speak of.
  OCV accepted the substitution of Markwell Properties
for Markwell Hillside on the video-services contract
Nos. 12-1351, 12-1430                                      7

without running a credit check on Markwell Properties
or asking Roti or anyone else about its solvency. OCV
merely verified that Markwell Properties was indeed
the company listed under that name on the records of
the Illinois secretary of state. OCV continued sending
its invoices to the hotel rather than to either Markwell
Hillside or Markwell Properties, and the invoices contin-
ued to be paid by checks signed by Markwell Hillside
drawn on Markwell Hillside’s bank.
  But just a few days after the new contract was signed,
Markwell Hillside declared bankruptcy. OCV was on
notice of the bankruptcy when “D.I.P.” (debtor in posses-
sion) began appearing on Markwell Hillside’s checks to
OCV. But it was unfazed. Eventually a trustee in bank-
ruptcy was appointed, took over the operation of the
Holiday Inn from Markwell Hillside, and after some
months sold it. The trustee had paid OCV’s invoices
and the new owners of the hotel continued paying
them—until they had a falling out with OCV and refused
to assume its contract and OCV ceased dealing with the
hotel. That was in 2007, two years after the declaration
of bankruptcy. OCV never filed a claim in the bank-
ruptcy. It couldn’t have done so without a different kind
of veil piercing from what it has attempted, because it
had no contractual relation with Markwell Hillside.
  After the hotel was sold, OCV must have realized
that Markwell Hillside had never transferred ownership
of it to Markwell Properties. No one suggests that the
trustee in bankruptcy acted ultra vires in selling the hotel.
It had been owned by Markwell Hillside and he was
8                                       Nos. 12-1351, 12-1430

the trustee in bankruptcy of Markwell Hillside and so
controlled that company’s assets. Markwell Properties
had merely been the other party to OCV’s contract to
provide video services.
  It was when the new owners refused to assume
Markwell Properties’ contract with OCV that OCV sued
Markwell Properties in Colorado (pursuant to the con-
tract’s forum selection clause) for breach of contract and
obtained the default judgment for $261,058.31 that we
mentioned earlier. (That was the amount of the early-
termination fee promised in the contract plus other ex-
penses that OCV attributed to Markwell Properties’
breach of the contract.) The present suit, filed in the
federal district court in Chicago on the basis of diversity
jurisdiction, seeks to enforce the judgment that OCV
obtained in Colorado. But it seeks to enforce it against
Roti rather than against Markwell Properties since the
latter has no assets, and indeed has been dissolved. OCV
argues that by substituting the assetless Markwell Proper-
ties for Markwell Hillside, Roti unjustly shielded assets
from a creditor and received personal benefits, primarily
in the form of his salary as “sole manager” (as he
describes himself without contradiction by OCV) of
Markwell Hillside.
  The parties agree that Illinois law governs the substan-
tive issues in the appeal—veil-piercing claims are governed
by the law of the state of the corporation whose veil is
sought to be pierced, Wachovia Securities, LLC v. Banco
Panamericano, Inc., 674 F.3d 743, 751 (7th Cir. 2012) (Illinois
law); Fusion Capital Fund II, LLC v. Ham, 614 F.3d 698, 700
(7th Cir. 2010), and Markwell Properties is organized
Nos. 12-1351, 12-1430                                      9

under the laws of Illinois. Illinois allows the corporate
veil to be pierced—which is to say exposes the corpora-
tion’s owner to personal liability for the corporation’s
debts—if two conditions are satisfied: (1) The owner has
failed to operate it as a corporation, neglecting such
requisites of the corporate form as adequate capitaliza-
tion, election of directors and officers, and separation
of corporate from personal funds; and (2) refusing to
pierce the veil would “sanction a fraud or promote injus-
tice.” Wachovia Securities, LLC v. Banco Panamericano, Inc.,
supra, 674 F.3d at 751-57; Fontana v. TLD Builders, Inc., 840
N.E.2d 767, 775-76, 778, 781-82 (Ill. App. 2005). (The
examples from our Hystro opinion that we quoted earlier
were all examples of piercing the corporate veil under
Illinois law.)
   Only the second condition is at issue. The first unques-
tionably was satisfied. Markwell Properties was inade-
quately capitalized—it had only $1000 in capital, too
little to satisfy even a tort judgment resulting from a
minor accident involving one of its vans. It appears to
have commingled its revenue with that of Markwell
Hillside, which in addition paid Markwell Properties’
liabilities on both the van lease and the video-services
contract. Markwell Properties didn’t keep records
and doesn’t appear to have had corporate officers. See,
e.g., Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519,
521, 524-25 (7th Cir. 1991).
   Whether adherence to the fiction of Markwell Prop-
erties’ corporate separateness would “promote injustice”
is a vague test. But it is best understood as asking whether
there has been an abuse of limited liability, as when
10                                      Nos. 12-1351, 12-1430

the owner of a party to a contract strips the party of
assets so that if it breaks the contract the other party will
have no remedy. Wachovia Securities, LLC v. Banco
Panamericano, Inc., supra, 674 F.3d at 756; Hystro Products,
Inc. v. MNP Corp., supra, 18 F.3d at 1390; Fontana v. TLD
Builders, Inc., supra, 840 N.E.2d at 781-82; Fiumetto v. Garrett
Enterprises, Inc., 749 N.E.2d 992, 1005 (Ill. App. 2001);
Melko v. Dionisio, 580 N.E.2d 586, 595 (Ill. App. 1991). The
district judge thought piercing Markwell Properties’ veil
to reach Roti was proper because Roti had “used [Markwell
Properties] to avoid contractual responsibilities, specifi-
cally those in the Van Lease and [the video services
contract with OCV].”
  But by substituting assetless Markwell Properties
for Markwell Hillside on the contract Roti did not shield
his personal assets from OCV or other creditors; he
shielded Markwell Hillside’s assets. It was Markwell
Hillside that OCV should have sued, seeking to pierce
the veil between the two Markwell companies on the
theory that they were really a single business enterprise
whose assets were in one of the constituent companies
and whose liabilities were in the other. That is
a permissible form of piercing the veil (call it “sideways
piercing”—piercing to reach a sister company rather than
a parent or other owner). In re Xonics Photochemical, Inc.,
841 F.2d 198, 201 (7th Cir. 1988); Main Bank of Chicago v.
Baker, 427 N.E.2d 94, 102 (Ill. 1981); see also Eastern Trading
Co. v. Refco, Inc., 229 F.3d 617, 626 (7th Cir. 2000) (Illinois
law); NetJets Aviation, Inc. v. LHC Communications LLC,
537 F.3d 168, 176-77 (2d Cir. 2008); In re Ark-La-Tex Timber
Co., 482 F.3d 319, 335 (5th Cir. 2007); Gartner v. Snyder, 607
Nos. 12-1351, 12-1430                                         11
F.2d 582, 586-88 (2d Cir. 1979); 1 William M. Fletcher,
Cyclopedia of the Law of Corporations § 43 (2012); Stephen B.
Presser, Piercing the Corporate Veil § 1:9, pp. 69-71 (2011 ed.).
Had OCV obtained its breach of contract judgment
against Markwell Properties earlier, before Markwell
Hillside’s trustee had sold the hotel, it would have had
an especially compelling case for piercing the veil
between the two Markwell entities so that it could par-
ticipate in Markwell Hillside’s bankruptcy as a judgment
creditor.
  OCV’s unsecured claim against a bankrupt mightn’t
have been worth much (we’ll return to this point). But
without proof that Roti personally benefited by using
Markwell Properties to shield Markwell Hillside from
possible suit by OCV, there is no authority to hold him
personally liable for the Markwell entities’ debts.
Walkovsky v. Carlton, 223 N.E.2d 6, 8-9 (N.Y. 1966). Mark-
well Hillside paid Roti a salary—he ran the company.
But as the amount of the salary is not in the record, it
can hardly be assumed to have been excessive, in which
event part of it (the excessive part) would have been in
reality a dividend rather than salary. It’s unlikely that
Markwell Hillside overpaid Roti. The company was in
bankruptcy but was allowed to continue paying him
his salary until the hotel was sold. The creditors would
have complained about an excessive salary—complained
that it (or at least part of it) either was a dividend paid
to a shareholder or an unreasonable administrative ex-
pense. 11 U.S.C. § 503.
  Limiting liability, which is to say shielding the
personal assets of shareholders (or their equivalent,
12                                      Nos. 12-1351, 12-1430

“members” of a limited liability company) from the
creditors of their corporation, provides an important
incentive for making equity investments. But it is also
important for creditors to be able to evaluate the risk of
nonpayment by their debtors. And so a corporation
that misrepresents the assets available to repay its
creditors opens the door to the creditors to go against the
corporation’s shareholders, Frank H. Easterbrook & Daniel
R. Fischel, “Limited Liability and the Corporation” 52 U.
Chi. L. Rev. 89, 112 (1985), or against a corporate affiliate
that is holding assets that appeared to be owned by
the corporation that had signed the contract. What
makes OCV’s attempt to pierce the veil a non-starter is
that the defendant is not holding assets that OCV
expected to be available to pay the hotel’s debt to it.
   Apart from OCV’s having gone after the wrong party’s
assets there is a question whether it was justified in
relying on Markwell Properties’ having assets. There is
no fraud or injustice, hence no basis for piercing a corpo-
rate veil, without reliance by the would-be piercer. See,
e.g., In re Rehabilitation of Centaur Ins. Co., 632 N.E.2d 1015,
1018 (Ill. 1994); Semande v. Estes, 871 N.E.2d 268, 271
(Ill. App. 2007). A creditor will not be heard to
complain about having extended credit to an assetless
corporation if he knew or should have known it was
assetless. Main Bank of Chicago v. Baker, supra, 427 N.E.2d at
102; Fusion Capital Fund II, LLC v. Ham, supra, 614 F.3d at
701. OCV could have run a credit check on Markwell
Properties, could have required submission of the com-
pany’s balance sheet certified by a reputable accountant,
could have insisted that Markwell Hillside, or for that
Nos. 12-1351, 12-1430                                   13

matter Samuel Roti, guarantee any debts to OCV that
Markwell Properties might owe it. It did none of these
things. And when it discovered shortly after signing the
contract that Markwell Hillside, which was continuing to
pay OCV’s invoices, was in bankruptcy (for remember
that Markwell Hillside’s checks to OCV were now
marked “debtor in possession”), it made no effort to
protect itself from the possible consequences. It can
hardly have thought the bankruptcy irrelevant even if it
had thought Markwell Hillside was no longer the owner
of the Holiday Inn—it was still being paid by Markwell
Hillside. More important, the premise of the bank-
ruptcy had to be that Markwell Hillside, not Markwell
Properties, owned the Holiday Inn, for if Markwell
Hillside was the debtor in possession of the hotel it
must own it, and the trustee in Markwell Hillside’s bank-
ruptcy could not have sold the Holiday Inn unless Mark-
well Hillside owned it.
  OCV is a very large company. It sells its video services
to thousands of hotels, motels, and resorts. One or more of
them must go broke from time to time. But OCV would
have no reason to fear disastrous consequences when
that happened, given the number of customers over
which such a risk is spread. It had no large fixed invest-
ment in the Holiday Inn Hillside that might have been
impaired in a bankruptcy. Apparently the risk of a cus-
tomer’s bankruptcy was not sufficiently ominous to
motivate OCV to make the slightest effort to determine
how the risk of a default would change as a result of
the substitution in the contract of Markwell Properties
for 4400 Frontage Road, LLC (effectively, for Markwell
Hillside).
14                                      Nos. 12-1351, 12-1430

  It’s not as if Markwell Properties made representations
or insinuations concerning its solvency that might have
dispelled any concerns that OCV might have about the
substitution, as in such cases as In re Kaiser, 791 F.2d 73, 75-
76 (7th Cir. 1986); see also Browning-Ferris Industries v. Ter
Maat, 195 F.3d 953, 959-60 (7th Cir. 1999) (Illinois law).
(Whether there were such representations by Roti is an
issue in OCV’s other claim, the one not before us.) A
person who hails a taxi, or takes a Holiday Inn van to the
airport, is not in a position to determine whether he is
dealing with a solvent entity. But a person who signs a
contract after months of negotiation is in a position to
determine whether his counterparty is solvent, and if he
makes no effort to do so, though not deflected from
doing so by representations by the party he’s negotiating
with, he’s on weak ground complaining if the other
party turns out to be insolvent. True, OCV thought
Markwell Properties had at least one asset—the hotel—but
it made no inquiry concerning the liabilities it might
have. In fact the hotel’s liabilities overwhelmed its
assets, for remember that when Markwell Properties
signed the contract with OCV, the hotel’s true owner
(Markwell Hillside) was only days away from bankruptcy.
  Whether, had Roti told OCV that Markwell Properties
was solvent, OCV would have been justified in relying on
the truth of the statement without conducting any investi-
gation is an interesting question. See, e.g., BPI Energy
Holdings, Inc. v. IEC (Montgomery), LLC, 664 F.3d 131, 138-39
(7th Cir. 2011) (Illinois law); Mayer v. Spanel Int’l Ltd., 51
F.3d 670, 675-76 (7th Cir. 1995) (ditto); AMPAT/Midwest,
Inc. v. Illinois Tool Works Inc., 896 F.2d 1035, 1042 (7th
Nos. 12-1351, 12-1430                                     15

Cir. 1990) (ditto). But it is a question in the proceeding in
the district court on OCV’s separate fraud claim. A differ-
ent question, the question we’ve just been discussing,
is whether in the absence of any such statement OCV
could rely on Markwell Properties’ being solvent without
making any inquiry. We are skeptical, but needn’t
decide definitively. We’ve explained that OCV failed to
make a case for piercing the veil that separated the two
Markwell companies from the defendant.
  We add for completeness that it is merely conjecture
that OCV was harmed by the substitution of Markwell
Properties for Markwell Hillside in the contract. OCV’s
ability to collect the $261,058.31 in damages for breach of
contract may not have been affected at all. The payments
to it would have stopped at the same time and its loss
would have been identical. The only difference is that it
could have filed a claim in the Markwell Hillside bank-
ruptcy for damages as an unsecured creditor. But there
is no indication of how unsecured creditors fared in
that bankruptcy—often of course unsecured creditors
fare very badly in bankruptcy. And there is no sugges-
tion that Roti bears any responsibility for Markwell Hill-
side’s bankruptcy or did anything to diminish the
assets available to creditors.
  So we reverse the judgment in favor of OCV on its veil-
piercing claim and direct the district judge to dismiss
the claim with prejudice because OCV does not contend
that Roti was personally enriched by his failure to
observe proper corporate formalities. He received a
salary from Markwell Hillside but there is no indication
16                                  Nos. 12-1351, 12-1430

that it was excessive or that it prompted Roti’s decision
to substitute Markwell Properties for Markwell Hillside
in OCV’s video-services contract.
  Roti, however, complains not only about the judgment
in favor of OCV that we are reversing but also about
the dismissal of his “personal counterclaim” (and associ-
ated affirmative defenses to OCV’s veil-piercing claim)
for fraud. He claims that OCV induced him to sign the
video-services contract as the representative of Markwell
Properties by promising not to seek to hold him
personally liable on the contract. The district judge dis-
missed the counterclaim on the ground that it was a
compulsory counterclaim that Markwell Properties was
required to have filed in OCV’s suit in Colorado. But
Roti wasn’t a party to that suit. And anyway it’s not
really a counterclaim. It is a defense to OCV’s suit
against him, and a superfluous defense so far as piercing
the veil is concerned, since we are ordering that claim
dismissed on another ground. What bearing the dis-
missal of the “counterclaim” and affirmative defenses
may have on OCV’s fraud claim, which remains pending
in the district court, is outside the scope of this appeal
  Roti also asks that we direct that the case be assigned
to another judge, pursuant to Circuit Rule 36. That too is
an inappropriate request. We are not remanding the case,
and we have no jurisdiction over the part of the case
that remains pending in the district court.
                                               R EVERSED.

                          1-14-13