Wachovia Securities, LLC v. Banco Panamericano, Inc.
674 F.3d 743
7th Cir.2012Background
- Wachovia seeks to recover about $1.9 million of margin debt from Loop and related parties through veil piercing and fraudulent transfer theories.
- Loop Corp. is a closely held South Dakota corporation owned by Greenblatt (50%), Jahelka (30%), and Nichols (20%); Loop's sister entities and Banco Panamericano, Inc. are interrelated through ownership and funding arrangements.
- Banco extended a $9.9 million line of credit to Loop with a blanket lien on Loop's assets (initially ~ $32 million) at 12% interest; Loop subsidiaries also loaned $3 million and became senior secured creditors.
- Prudential margin account in Loop’s name was used to buy HRMI on margin; HRMI later collapsed and Wachovia incurred a large margin debt when Loop’s stock was liquidated.
- Banco extended and expanded the line of credit in 2002; various payments and transfers among Loop and related entities occurred, including transfers to insiders, compensation to owners, and payments to EZ Links, and Loop’s assets were allegedly looted after the margin debt.
- District court found substantial abuse of the corporate form, pierced the veil, and voided Banco's lien and certain related transfers; Wachovia was awarded fees and costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Illinois veil-piercing standards were met. | Wachovia shows unity of interest and injustice. | Loop argues records show some independence. | Yes; veil pierced. |
| Whether Loop's control and asset transfers violate the first prong of veil piercing. | Unity of ownership/control shows dominance over Loop. | Record evidence insufficient for control. | District court findings supported unity of interest. |
| Whether adherence to Loop's separate corporate existence would sanction fraud or injustice. | Maintaining separate identities would enable fraud and hinder creditors. | Separate entities should stand unless fraud proven. | Yes; separate identity would sanction fraud. |
| Whether 2002 Banco-Loop lien constitutes a fraudulent transfer under UFTA actual fraud standard. | Transfer extended and encumbered assets to hinder Wachovia. | 2002 extension continued the prior lien; not a new transfer. | Yes; actual fraud established. |
| Whether Wachovia may recover attorneys’ fees for veil-piercing. | Contract permits fee shifting; prevailing party entitled. | Fees should be limited to veil-piercing issues only. | Fees awarded consistent with Illinois law; affirmed. |
Key Cases Cited
- Fontana v. TLD Builders, Inc., 298 Ill. Dec. 654, 840 N.E.2d 767 (Ill. App. 2005) (factors for unity of interest; capitalization and formalities considered in veil piercing)
- Laborers' Pension Fund v. Lay-Com, Inc., 580 F.3d 602 (7th Cir. 2009) (limits liability through veil where oppression of creditors occurs)
- Judson Atkinson Candies, Inc. v. Latini-Hohberger Dhimantec, 529 F.3d 371 (7th Cir. 2008) (limits on veil-piercing inquiry and need for unity of interest)
- Hystro Prods., Inc. v. MNP Corp., 18 F.3d 1384 (7th Cir. 1994) (two-prong test for veil piercing: unity of interest and injustice)
- Sea-Land Servs., Inc. v. Pepper Source, 993 F.2d 1309 (7th Cir. 1993) (policy supports piercing to avoid injustice and fraud)