Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

When the dude ranch owned by a closely held Wisconsin corporation was sold, the shareholders planned to liquidate, but the asset sale had produced a sizable capital ($1.8 million) gain and the corporation faced significant federal and state tax liability. Midcoast proposed an intricate tax-avoidance transaction that involved Midcoast purchasing shares for offset against bad debts and losses purchased from credit card companies, purportedly financing the purchases with a loan. The shareholders implemented the plan. The taxes were never paid. The IRS sought to hold the former shareholders responsible for the tax debt as transferees of the defunct corporation under 28 U.S.C. 6901 and Wisconsin law of fraudulent transfer and corporate dissolution. The tax court ruled in favor of the IRS. The Seventh Circuit affirmed, agreeing with the tax court that the substance of the transaction was a liquidation. Midcoast did not actually pay the shareholders for their stock; instead, each shareholder received a pro rata distribution of cash on hand— the proceeds of the asset sale—making them “transferees” as that term is broadly defined in section 6901(h). View "Dugan v. Comm'r of Internal Revenue" on Justia Law

Miller, an African-American male, worked as a cook for Hospitality’s Sparx Restaurant. Miller became assistant kitchen manager and was a satisfactory employee. On October 1, 2010, Miler discovered racially offensive pictures at the kitchen cooler. Miller lodged a complaint. Two employees admitted responsibility. The manager agreed that the posting was a termination-worthy offense, but one offender was given a warning and the other was not disciplined. Soon after Miller’s complaint, supervisors began to criticize Miller’s work performance. Sparx fired Miller on October 23, 2010. The EEOC filed suit on Miller’s behalf under Title VII, 42 U.S.C. 2000e-2(a), 3(a). Before trial, Sparx had closed and Hospitality had dissolved. The court concluded that successor corporations could be liable. The jury awarded $15,000 in compensatory damages on the retaliation claim. The EEOC sought additional remedies. The district court denied the front-pay request but awarded Miller $43,300.50 in back pay (and interest) plus $6,495.00 to offset impending taxes on the award; enjoined the companies from discharging employees in retaliation for complaints against racially offensive postings; and required them to adopt policies, investigative processes, and annual training consistent with Title VII. The Seventh Circuit affirmed with respect to both successor liability and the equitable remedies. View "Equal Emp't Opportunity Comm'n v. N. Star Hospitality, Inc" on Justia Law

The Everetts formerly operated a PDRI franchise. After that franchise was terminated, they violated a non-compete clause. Only Mr. Everett and the Everetts’ corporation actually signed the franchise agreement. PDRI sought to bind Ms. Everett to an arbitration award pursuant to the franchise agreement. Although Everett was a non-signatory to the franchise agreement, PDRI asserted she was subject to arbitration under the doctrine of direct benefits estoppel. The district court determined that the benefits Everett received were filtered through her ownership interest in their corporation or through her husband and were therefore indirect. The Seventh Circuit reversed, holding that Everett did receive a direct benefit. It is clear that the Everetts’ corporation was formed to gain the benefit of the franchise agreement and was used only to conduct the business of the franchise; Ms. Everett had a 50% ownership and played an active role in running the corporation.View "Everett v. Paul Davis Restoration, Inc." on Justia Law

Irwin, a holding company, entered bankruptcy when its two subsidiary banks failed. The FDIC closed both in 2009. Their asset portfolios were dominated by mortgage loans, whose value plunged in 2007-2008. Irwin’s trustee in bankruptcy sued its directors and officers (Managers). The FDIC intervened because whatever Irwin collects will be unavailable to satisfy FDIC claims. Under 12 U.S.C. 821(d)(2)(A)(i), when taking over a bank, the FDIC acquires “all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder, member, accountholder, depositor, officer, or director of such institution with respect to the institution and the assets of the institution.” The claims assert that the Managers violated fiduciary duties to Irwin by not implementing additional financial controls; allowing the banks to specialize in kinds of mortgages that were especially hard-hit; allowing Irwin to pay dividends (or repurchase stock) so that it was short of capital; “capitulating” to the FDIC and so that Irwin contributed millions of dollars in new capital to the banks. The district judge concluded that all claims belong to the FDIC and dismissed. The Seventh Circuit affirmed in part, but vacated with respect to claims that concern only what the Managers did at Irwin: supporting the financial distributions, informing Irwin about the banks’ loan portfolios, and causing Irwin to invest more money in the banks after they had failed. View "Levin v. Miller" on Justia Law

Massuda invested $4,000,000 in Concessions, Inc., which was part owner, with Tony Rezko, of a group of Panda Express restaurants. Rezko, who controlled several companies, hoped to expand the business. Rezko was indicted and convicted on federal fraud and bribery charges, for which he received a lengthy prison sentence in 2011. Rezko’s real estate ventures collapsed. Massuda filed suit against Rezko’s corporations and associated people, raising claims of unjust enrichment, fraud, and aiding and abetting a breach of fiduciary duty. The district court concluded that all of Massuda’s claims, except portions of her fraud claim, were derivative, and on that ground dismissed those counts with prejudice for failure to state a claim. Massuda declined to amend her fraud allegations, which were then dismissed. The Seventh Circuit affirmed, rejecting a claim that if the holder of a majority interest acts in a way that helps him and hurts the minority, there is a direct claim. A direct claim exists when a majority shareholder engages in wrongdoing in such a way as to dilute the voting power of the minority shareholders; a dilution of voting power is a direct harm to the shareholders that is not felt by the company. View "Massuda v. Panda Express Inc." on Justia Law

Arnold, a former officer of two corporate defendants, held significant stock in each. In 1999, Arnold sued both in Illinois state court, claiming shareholder oppression. In 2006, the parties allegedly agreed to settle, but never executed settlement documents. The defendants have not paid any of the $207,500 purportedly required. The court dismissed without deciding whether the case had been settled. A month later, Arnold agreed to sell his stock to KJD for $290,000. KJD advanced $100,000; Arnold represented that he had good title. KJD notified the defendants that it had purchased the stock and wished to inspect the corporate books. They did not respond, but moved to vacate the dismissal, alleging that, under the alleged settlement, Arnold had transferred his stock to the corporations. They also filed suit before a different judge, resulting in a default judgment ordering Arnold to execute settlement papers and comply with the agreement. The Appellate Court affirmed. KJD was never joined as a party. The court stayed proceedings in the original action. Arnold filed a FRCP Rule 22 interpleader action, naming the corporations and KJD, stating that he made no claim to continued ownership and was willing to transfer the stock to whichever defendant the court determined to have superior right. Invoking the Rooker-Feldman doctrine, the district court dismissed, but ordered Arnold to return the $100,000 advance payment. The Seventh Circuit vacated and remanded, reasoning that the interpleader action does not attack the state court judgment itself, so further proceedings are necessary.View "Arnold v. KJD Real Estate, LLC" on Justia Law

Brothers Patrick and Thomas each owned one‐third of the stock of Commercial Light, a Chicago electrical contractor. Between 1982 and the 2008 sale of the company, Thomas was the CEO, board chairman, and president. The other officers were the company’s treasurer, and its executive vice‐president. The board of directors had only two members: Thomas and a lawyer. Patrick took no part in the company’s management. Patrick sued, claiming that when Morris became executive vice‐president in 1992, he, with Thomas’s approval, started jacking up the salaries and bonuses paid so that the compensation of the three officers soared, totaling $22 million between 1993 and 2000, and that the lawyer on the board rubber‐stamped Thomas’s compensation decisions. The Seventh Circuit affirmed a jury verdict finding breach of fiduciary duty. The jury did not have to find that the compensation was excessive in order to find a breach of fiduciary duty by concealment. Illinois allows as a remedy for breach of fiduciary duty a forfeiture of all the fiduciary’s earnings during the period of breach. The court speculated on why the highly-educated Patrick did not discover the concealment until several years after the sale, but noted that the appeal only concerned jury instructions. View "Halperin v. Halperin" on Justia Law

Baxter’s Colleague Infusion Pump, an electronic device used to deliver intravenous fluids to patients, was known to have a range of defects. The FDA sent Baxter warning letters. Baxter’s response was not satisfactory. In 2005 the FDA sought forfeiture of all Baxter‐owned Pumps. In 2006, Baxter entered into a Consent Decree to stop manufacturing and distributing all models of the Pump within the U.S., and committed to bringing the approximately 200,000 Pumps in the hands of health care professionals into compliance with the FDA Act. Baxter devoted significant resources to fixing the Pumps, but the FDA was not satisfied and ordered a product recall. In a derivative suit, plaintiffs alleged that that Baxter’s directors and officers breached fiduciary duties by consciously disregarding their responsibility to bring about compliance with the Consent Decree, causing Baxter to lose more than $550 million. Plaintiffs did not first ask Baxter’s board of directors to pursue those claims, but alleged futility. The district court dismissed, finding that Westmoreland failed adequately to plead demand futility, as required by FRCP 23.1(b)(3) and Delaware substantive law. The Seventh Circuit reversed, stating that particularized facts furnished by plaintiffs cast a reasonable doubt that the defendants’ conduct was the product of a valid exercise of business judgment. View "Westmoreland Cnty. Emps. Retirement Sys. v. Parkinson" on Justia Law

Greenblatt, the “bad boy of Chicago arbitrage” became involved in litigation concerning use of his “web of corporations,” including Loop Corporation and Banco. In 2000, Banco extended a $9.9 million line of credit in exchange for a blanket lien over Loop’s assets. Loop defaulted; nevertheless, Banco expanded the line of credit by several million dollars in 2002 and continued lending Loop money until 2004. Banco lost senior creditor status when the district court voided the lien in an earlier case. In 2001 Loop purchased millions of shares of EZ Links stock from Golf Venture, giving a promissory note. Loop defaulted; Golf Venture won a judgment of $1.2 million. Also in 2001, a failed margin transaction left Loop indebted to its brokerage firm, Wachovia, in the amount of $1,885,751. Wachovia took Loop to arbitration and won a $2,349,000 award in 2005. Wachovia is still trying to collect. Loop had transferred almost all of its valuable assets to another Greenblatt company, leaving only the EZ Links stock, in possession of Banco, and Banco claimed to have creditor priority over Wachovia. The district vourt pierced Loop’s corporate veil, allowing Wachovia to reach Greenblatt’s assets, and voiding Banco’s lien, and ordered the sale of Loop’s only asset, EZ Links stock. Banco attempted to contest the d decisions. The Seventh Circuit dismissed Banco’s appeal for lack of standing. View "Wachovia Sec., LLC v. Loop Corp." on Justia Law

Bank of America lost approximately $34 million when the Knight companies went bankrupt. BOA sued, claiming that Knight’s directors and managers looted the firm and that its accountants failed to detect the embezzlement. The district court dismissed. The accountants invoked the protection of Illinois law, 225 ILCS 450/30.1, which provides that an accountant is liable only to its clients unless the accountant itself committed fraud (not alleged in this case) or “was aware that a primary intent of the client was for the professional services to benefit or influence the particular person bringing the action” The court found that BOA did not plausibly allege that the accountants knew that Knight’s “primary intent” was to benefit the Bank in alleging that the accountants knew that Knight would furnish copies of the financial statements to lenders. The Seventh Circuit affirmed, noting BOA’s choice not to pursue its claims in the bankruptcy process. View "Bank of America, N.A. v. Knight" on Justia Law