Int'l Finan Services v. Chromas Technologies , 356 F.3d 731 ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 02-4079 & 02-4188
INTERNATIONAL FINANCIAL SERVICES CORPORATION,
an Illinois corporation,
Plaintiff-Appellee,
Cross-Appellant,
v.
CHROMAS TECHNOLOGIES CANADA, INC.,
a Canadian Corporation,
Defendant-Appellant,
Cross-Appellee,
and
DIDDE CORPORATION, et al.,
Defendants,
Cross-Appellees.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 6433—David H. Coar, Judge.
____________
ARGUED SEPTEMBER 26, 2003—DECIDED JANUARY 23, 2004
____________
Before FLAUM, Chief Judge, and BAUER and MANION,
Circuit Judges.
2 Nos. 02-4079 & 02-4188
MANION, Circuit Judge. The International Financial
Services Corporation (International) finances printing
presses. It sued various defendants for breach of a contract
to produce a printing press and for fraud. A jury found that
defendant Chromas Technologies Canada, Incorporated
(Chromas), was the alter ego of defendant Didde Web Press
Corporation (Didde Web Press), that Chromas was liable for
breach of contract, and that Chromas was not liable for
fraud. The district court then entered judgment against
Chromas in the amount of $1,099,277.38. Chromas appeals
on the grounds that the district court, and not the jury,
should have decided whether to pierce the corporate veil
under an alter ego theory and that the damage award was
irrationally high. We vacate the judgment and remand so
that the district court may determine whether to disregard
the corporate entity and so that it may reconsider the
amount of the judgment.
I.
International finances printing presses for small to me-
dium-sized businesses. Over the years, International has
financed many presses, including the Aquaflex, Webtron,
and Zig Zag brand names. Although the companies that
made these presses had been independent competitors, by
1998 they were all owned by one company, the Didde
Corporation.
In its complaint, International alleged that it advanced
$949,649.60 for a printing press that was never built and
that, from September 1999 through February 2000, it was
misled into making payments to Didde Web Press, a man-
ufacturer of printing presses that was well on its way to
bankruptcy. All along, International thought it was really
doing business with Chromas, an entirely different manu-
facturer. Didde Web Press and Chromas were not strangers.
Both were then owned by the Didde Corporation. Interna-
tional sued Chromas and Didde Web Press in the district
Nos. 02-4079 & 02-4188 3
court for breach of contract and fraud, claiming $949,649.60
in damages, and it also brought action against various other
defendants. To succeed in its claim against Chromas,
International had to show that the separate corporate
status between Chromas and Didde Web Press was invalid.
The district court heard the case under its diversity
jurisdiction and applied the substantive law of Illinois.
Overruling the objection of Chromas’s counsel, the district
court submitted to the jury the issue of whether the corpo-
rate veil should be pierced. The jury found that (1) the
corporate veil should be pierced because Chromas was the
alter ego of Didde Web Press, (2) Chromas was liable for
breach of contract, and (3) Chromas was not liable for fraud.
The jury awarded International $1,099,277.38 plus “docu-
mented incurred legal fees,” which accounted for the
monetary award that exceeded by $149,627.78 the amount
that International actually claimed in damages. Interna-
tional, moreover, had not requested attorneys’ fees. The
district court then entered judgment against Chromas for
$1,099,277.38 and, despite Chromas’s motion under Fed. R.
Civ. P. 59 to adjust the award to no more than Interna-
tional had claimed in damages, later refused to alter that
judgment.
Because the only other remaining defendants were in
bankruptcy proceedings, the district court concluded that
there was no just reason to delay the appeal of that judg-
ment, and it certified the judgment against Chromas for
interlocutory appeal under Fed. R. Civ. P. 54(b). Chromas
then filed this appeal, arguing that the issue of whether to
pierce the corporate veil should not have been submitted to
the jury, that there must be a new trial on the issue of
damages because the jury’s award was excessive, and that
this court should enter summary judgment in its favor.
International cross-appeals, requesting that, if this court
were to remand for a new trial on the claim for breach of
contract, we also would require a new trial on the claim for
fraud.
4 Nos. 02-4079 & 02-4188
II.
We turn first to the question of whether International had
a right to a jury trial on the issue of piercing the corporate
veil. Our review of this issue of law is plenary, as is our
review of any issue of law. E.g., Amcast Indus. Corp. v.
Detrex Corp., 2 F.3d 746, 749-50 (7th Cir. 1993). Even
where, as here, a district court is applying the substantive
law of a state, federal procedural law controls the question
of whether there is a right to a jury trial. Simler v. Conner,
372 U.S. 221, 222 (1963). Under Fed. R. Civ. P. 38(a), there
is a right to a jury trial where either the Seventh
Amendment or an ordinary statute of the United States so
requires. Because International relies on no ordinary stat-
ute to support its assertion that it was entitled to a jury
trial, its claimed right to a jury trial depended upon the
Seventh Amendment. The Seventh Amendment limits the
right to a jury trial to “[s]uits at common law, where the
value in controversy shall exceed twenty dollars.” It is
therefore clear, and the parties do not dispute, that Interna-
tional was entitled to demand a jury trial on its breach of
contract claim: on that claim, International sought money
damages, and such a claim would have been brought as a
suit at common law. See, e.g., Senn v. United Dominion
Indus., Inc., 951 F.2d 806, 814 (7th Cir. 1992).
That observation, however, is not determinative of this
appeal. Even when a plaintiff is entitled to a jury trial on
his legal claims, the district court must nonetheless make
an independent judgment as to any equitable issue. Daven-
port v. DeRobertis, 844 F.2d 1310, 1314 (7th Cir. 1988)
(stating that “the district judge must make an independent
judgment on equitable issues insofar as they are not
identical to the legal issues” that the jury decided); Skinner
v. Total Petroleum, Inc., 859 F.2d 1439, 1443 (10th Cir.
1988) (stating that, where both equitable and legal issues
are present, “trial is both to the jury and to the court”); see
also Smith-Haynie v. District of Columbia, 155 F.3d 575,
Nos. 02-4079 & 02-4188 5
578 (D.C. Cir. 1998) (stating that, “[g]enerally speaking,
questions sounding in equity are for a judge to decide”).
This proposition is true even though the jury’s determina-
tion of factual issues common to both the legal and equita-
ble claims would bind the court. See Hunter v. Allis-
Chalmers Corp., 797 F.2d 1417, 1421 (7th Cir. 1986). The
dispositive question, therefore, is whether piercing the
corporate veil under the law of Illinois is, according to
federal procedural law, a form of equitable relief. See
GFTM, L.L.C. v. TKN Sales, Inc., 257 F.3d 235, 238-39 (2d
Cir. 2001) (stating that the right to a jury trial in federal
court hinges on federal procedural law); 9 Charles A.
Wright & Arthur R. Miller, Federal Practice and Procedure
§ 2303 (1995 & Supp. 2003).
When deciding whether a remedy is equitable or legal, we
engage in a two-pronged analysis. First, we must “compare
the . . . action to 18th-century actions brought in the courts
of England prior to the merger of the courts of law and
equity. Second, we examine the remedy sought and deter-
mine whether it is legal or equitable in nature.” Tull v.
United States, 481 U.S. 412, 417-18 (1987). The latter
inquiry is more important than the former. Granfinanciera
S.A. v. Nordberg, 492 U.S. 33, 42 (1989); Lebow v. American
Trans Air, Inc., 86 F.3d 661, 668 (7th Cir. 1996). At first
blush, it is not clear that the initial prong of inquiry, asking
whether piercing the corporate veil is comparable to an 18th
century action brought in the courts of England in law or in
equity, is relevant. Piercing the corporate veil, after all, is
not itself an action; it is merely a procedural means of
allowing liability on a substantive claim, here breach of
contract. Central States, SE and SW Areas Pen. Fund v.
Brumm, 264 F. Supp. 2d 697, 700 n.3 (N.D. Ill. 2003); 1
William Meade Fletcher, Fletcher Cyclopedia of the Law of
Private Corporations § 41.28 (1999 & Supp. 2003) (hereinaf-
ter 1 Fletcher). Nonetheless, in these circumstances we
must ask “whether a modern legal right has a sufficient
6 Nos. 02-4079 & 02-4188
analogy to a right enforced by common law courts in the
eighteenth century.” Marseilles Hydro Power v. Marseilles
Land & Water, 299 F.3d 643, 649 (7th Cir. 2002) (emphasis
in original omitted).
Here, such an inquiry is inconclusive: as the Second
Circuit has explained in detail, the doctrine of piercing the
corporate veil has roots in both courts of law and equity. See
Wm. Passalacqua Builders v. Resnick Developers, 933 F.2d
131, 135-36 (2d Cir. 1991). This conclusion is unsurprising,
because most traditional issues have roots in both courts of
law and equity. Crocker v. Piedmont Aviation, Inc., 49 F.3d
735, 745 (D.C. Cir. 1995). As the historical inquiry is
indeterminate, the outcome of this appeal hinges on the
second half of our analysis, whether piercing the corporate
veil under Illinois law is legal or equitable in nature.
When considering whether a remedy is equitable or legal,
we look to the nature of the relief. State Farm Mut. Auto
Ins. Co. v. Mossey, 195 F.2d 56, 60 (7th Cir. 1952). Unfortu-
nately, there is no cut-and-dried rule that allows a court to
determine whether a remedy is legal or equitable in nature.
See 9 Charles A. Wright & Arthur R. Miller, Federal
Practice and Procedure § 2302. It is possible, nonetheless,
to draw general distinctions between the two forms of relief.
Legal remedies traditionally involve money damages. See
Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S.
204, 210 (2002); Pane v. RCA Corp., 868 F.2d 631, 636 (3d
Cir. 1989) . Equitable remedies, by contrast, are typically
coercive, and are enforceable directly on the person or thing
to which they are directed. See id.; 1 Dan B. Dobbs, Law of
Remedies § 1.2 (1993). Traditionally, “equitable relief is
discretionary,” whereas legal relief is not. Id. Typical
examples of equitable relief include an accounting or an
injunction. Jefferson Nat’l Bank v. Central Nat’l Bank in
Chicago, 700 F.2d 1143, 1150 (7th Cir. 1983). With those
distinctions in mind, we examine the remedy of piercing the
corporate veil on an alter ego theory under the law of
Illinois.
Nos. 02-4079 & 02-4188 7
Under the law of Illinois, a party seeking to disregard the
corporate entity because the targeted corporation is merely
the alter ego of the dominating personality “must show that
(1) there is such a unity of interest and ownership that the
separate personalities of the corporation and the individual
no longer exist; and (2) circumstances are such that adher-
ing to the fiction of a separate corporate existence would
promote injustice or inequity.” Melko v. Dionisio, 580 N.E.2d
586, 594 (Ill. Ct. App. 1991) (emphasis added). Whether to
pierce the corporate veil is a matter of the trial court’s
discretion. See Crum v. Krol, 425 N.E.2d 1081, 1089 (Ill. Ct.
App. 1981) (holding that “the trial court did not abuse its
discretion in allowing Crum and Thomas Crum & Associ-
ates to be treated as a single entity”).
Under Illinois law, piercing of the corporate veil on an
alter ego theory is available only where failing to provide
such relief would promote injustice or inequity. It follows
that veil-piercing must be an exercise of equitable power. It
is also significant that veil-piercing under Illinois law is a
matter of discretion, not of right, and that the remedy of
piercing the corporate veil does not itself result in money
damages. Each of those observations militates toward the
conclusion that veil-piercing is an equitable power. At least
within the context of Illinois law, “[s]ince the doctrine of
piercing the corporate veil is an equitable one that is
particularly within the province of the trial court, the right
to a jury trial on the issue of piercing the corporate veil does
not exist.” 1 Fletcher, § 41.29; see also Bangor Punta
Operations v. Bangor & A.R. Co., 417 U.S. 703, 713 (1974)
(stating that “courts of equity” decide whether to pierce the
corporate veil); Koch Refining v. Farmers Union Cent.
Exchange, Inc., 831 F.2d 1339, 1345 (7th Cir. 1987) (stating
that “disregard of the corporate entity is essentially an
equitable doctrine”); In re Air Crash Disaster, 720 F. Supp.
1467, 1484 (D. Colo. 1989) (stating that “the ultimate
decision of whether to disregard the corporate form . . . lies
8 Nos. 02-4079 & 02-4188
in equity”); United States v. Golden Acres, Inc., 684 F. Supp.
96, 103 (D. Del. 1988) (concluding that, under the law of
Delaware, piercing the corporate veil is equitable relief for
which a federal jury trial is unavailable).
Although we conclude that, under Illinois law, piercing
the corporate veil is an equitable remedy to be determined
by the court, this conclusion might not be reached under the
law of another state. International cites Wm. Passalacqua
Builders v. Resnick Developers, in which the Second Circuit,
applying the law of New York, held that the issue of
whether to pierce the corporate veil was properly submitted
to the jury. 933 F.2d at 136. Because the law regarding
piercing the corporate veil varies from state to state, United
States v. Pisani, 646 F.2d 83, 87 (3d Cir. 1981), the Second
Circuit’s application of New York law does not strictly apply
here.
Although obviously not precedential, Wm. Passalacqua
Builders has similarities to the case at hand. As stated
above, we agree with our colleagues in the Second Circuit
that the doctrine of piercing the corporate veil has roots in
both law and equity. But we take issue with the conclusion
that, because a plaintiff pursues a legal remedy (a money
judgment), he is entitled to a jury trial not only on the
merits but also on whether the corporate entity should
disregarded. A jury trial does not have to include all or
nothing. See ABM Marking, Inc. v. Zanasi Fratelli, S.R.I.
___ F.3d ___, 2003 WL 22999282, at *2 (7th Cir. Dec. 23,
2003) (noting that, “[i]n the second trial, the issue of
accounting was severed from the other issues considered by
the jury”).
It is certainly possible for a district court both to allow a
jury trial on the substantive legal issues and to decide
independently the equitable question of whether to disre-
gard the corporate entity. For example, a district court
could entertain, under Fed. R. Civ. P. 69(a), a post-judg-
Nos. 02-4079 & 02-4188 9
ment motion to pierce the corporate veil. See Aioi Seiki, Inc.
v. JIT Automation, Inc., 11 F. Supp. 2d 950, 954 (E.D. Mich.
1998); MCI Telecomms. v. O’Brien Mktg., Inc., 913 F. Supp.
1536, 1539-44 (S.D. Fla. 1995); Flip Side Prods. v. J.A.M.
Prods., Ltd., 125 F.R.D. 144, 146 (N.D. Ill. 1989); 4 Robert
L. Haig, Business and Commercial Litigation § 51.2 (1998
& Supp. 2002). A district court could also treat the jury’s
ultimate decision regarding whether to pierce the corporate
veil as advisory1 and then decide, in the exercise of its
equitable powers, whether veil-piercing would be appropri-
ate.2 11 Charles A. Wright, et al., Federal Practice and
Procedure § 2887 (1995 & Supp. 2003). Thus, contrary to
the Second Circuit’s tacit assumption, a district court could
both safeguard a plaintiff’s Seventh Amendment right to a
jury trial on legal claims for money damages and separately
decide, in the exercise of its equitable powers, whether to
pierce the corporate veil.
1
However, as noted above, if the jury resolved an issue of fact
that was the same for both the legal and equitable issue, that
factual finding would be binding on the court.
2
International argues in the alternative that the district court
actually did treat the jury’s findings as advisory. After Chromas
objected to sending the issue of veil-piercing to the jury, the dis-
trict court stated that “[a]lternatively, I’ll send it to the jury for an
advisory verdict.” Had the district court followed through on this
promise, there would have been no error. But International does
not point to a part of the record showing that the district court
ever explicitly adopted the jury’s findings, or that the district
court ever explained its thought process as to why it agreed with
the jury that piercing the corporate veil was appropriate. It is
therefore impossible for us to ascertain the district court’s “chain
of reasoning,” and we must reverse and remand for further
proceedings. Mautz & Oren v. Teamsters Local No. 279, 882 F.2d
1117, 1125 (7th Cir. 1989).
10 Nos. 02-4079 & 02-4188
As the Wm. Passalacqua court noted, determinations of
fact are important in deciding whether to disregard the
corporate entity. Under Illinois law, as mentioned above,
determining whether there is such a “unity of interest and
ownership that the separate personalities of the corporation
and the individual no longer exist” is essentially a question
of fact. Deciding this question of fact depends on whether
there was inadequate capitalization, a failure to observe
corporate formalities, commingling of funds, an absence of
corporate records, etc., Melko, 580 N.E.2d. at 595, and a
jury is arguably capable of resolving such issues. However,
the balance of the veil-piercing analysis— deciding whether
adhering to the fiction of a separate corporate existence
would promote injustice or inequity—is the type of equita-
ble determination that a jury is not to decide. We therefore
conclude that, although the doctrine of piercing the corpo-
rate veil under Illinois law involves important findings of
fact, it is still, as we said in Koch Refining, 831 F.2d at
1345, “essentially an equitable doctrine” and therefore is
not amenable to determination by a jury.
We must also deal with a case that neither party cited,
FMC Fin. Corp. v. Murphree, 632 F.2d 413 (5th Cir. 1980),
that addresses precisely the issue before us. In FMC, the
Fifth Circuit held, in a diversity case applying the law of
Illinois, that the issue of piercing the corporate veil is a
matter for the jury to decide. Id. at 421 n.5. The Fifth
Circuit reached this conclusion without analysis, relying
mainly on two cases holding that, under other states’ laws,
a jury could decide whether to disregard the corporate
entity. Id. Specifically, the Fifth Circuit relied on
Delchamps, Inc. v. Borkin, 429 F.2d 417 (5th Cir. 1970), a
per curiam opinion in which the court, without citation to
any supporting authority, held that, in light of the facts
presented, the veil-piercing issue was properly before the
jury. Id. at 419. Also, the court cited Continental Cas. Co. v.
United States, 308 F.2d 846 (5th Cir. 1962), in which the
Nos. 02-4079 & 02-4188 11
court held, again without citing any supporting authority,
that it was proper for a jury to decide whether to disregard
the corporate entity. Id. at 848.3 Thus, although FMC Fin.
Corp. is on point, its holding is not supported by analysis or
appropriate authority. We do not find that opinion persua-
sive and decline to follow it.4
We conclude that, because piercing the corporate veil
under Illinois law is, according to federal procedural law, an
equitable doctrine, International was not entitled to a jury
trial on that issue. Insofar as the jury provided the equita-
ble relief of piercing the corporate veil, that relief was
invalid as a matter of law. Dombeck v. Milwaukee Valve Co.,
40 F.3d 230, 236-37 (7th Cir. 1994) (holding that the jury’s
decision to provide an injunction was invalid as a matter of
law). Because it is not apparent that the decision to disre-
gard the corporate entity was the only reasonable conclu-
sion under the circumstances, we must therefore remand
this case to the district court to resolve whether the corpo-
rate entity should be disregarded. See id. at 237.
We next consider Chromas’s contention that the jury
award was excessive and that a new trial on the issue of
3
The Fifth Circuit also cited Byrd v. Blue Ridge R.E.C., Inc., 356
U.S. 525 (1958), for the proposition that federal policy favors jury
decisions of disputed fact in diversity cases and Berlinger’s, Inc.
v. Beef ’s Finest, Inc., 372 N.E.2d 1043 (Ill. Ct. App. 1978), for the
proposition that, when the corporate entity is disregarded, the
court is left with an aggregate person in both law and equity.
FMC Fin. Corp., 632 F.2d at 421 n.5. We have no quarrel with ei-
ther of those ideas, but neither is dispositive of, or even particu-
larly helpful in deciding, whether piercing the corporate veil under
Illinois law is an equitable remedy.
4
Because this opinion creates a split between circuits, we cir-
culated it in advance of publication to the judges of the court in
regular active service, pursuant to Seventh Circuit Rule 40(e). No
judge voted to hear the case en banc.
12 Nos. 02-4079 & 02-4188
damages is in order. As noted above, the jury awarded
International $1,099,277.38 in damages on the claim for
breach of contract. This award was $149,627.78 more than
the $949,649.60 International actually claimed it had
suffered in damages. Pursuant to Fed. R. Civ. P. 59,
Chromas timely moved for the district court to reduce the
damages award, but the district court denied the motion,
without comment, in a minute order.
Federal courts sitting in diversity jurisdiction must apply
a federal standard when determining whether a jury verdict
is excessive. Pincus v. Pabst Brewing, Co., 893 F.2d 1544,
1554 (7th Cir. 1990). Under that standard, where an award
is not rationally connected to the evidence, both the district
court and this court have the authority (1) to order a
remittitur, if the plaintiff is willing to accept that remedy,
or (2) to order a new trial limited to damages, if the plaintiff
is not willing to accept a remittitur. See id. at 1556. Be-
cause International has eschewed any interest in the latter
option, we would simply order a remittitur if we were to
find the damages award to be excessive.
This is one of the rare instances in which we can deter-
mine that the award of damages has no rational basis in the
evidence presented. International only claimed that
Chromas had caused it $949,649.60 in damages by breach-
ing its contract. It was therefore irrational for the jury to
have awarded more than $949,649.60 on the claim for
breach of contract. Thus, assuming that the district court
decides to pierce the corporate veil on remand, it must then
enter an award of damages in the amount of $949,649.60.
Chromas’s next argument is that we should enter sum-
mary judgment in its favor. “Federal Courts of Appeals
have the authority under 28 U.S.C. § 2106 to provide that
relief when so doing would be just under the circum-
stances.” Turner v. J.V.D.B. Assocs., Inc., 330 F.3d 991, 998
(7th Cir. 2003) (internal quotation omitted). “In most
Nos. 02-4079 & 02-4188 13
instances, however, such a decision is best made by the
district court; we would rarely find it appropriate to direct
the entry of summary judgment.” Id. This case is no ex-
ception to the rule. Whether veil-piercing is appropriate
depends on a host of considerations that this court is ill-
positioned to weigh as a matter of first impression.
Finally, we consider International’s cross-appeal, in which
it argues that, if this court were to order a new trial on the
claim for breach of contract, the claim for fraud should also
be tried anew. Because we do not remand this case for a
new trial on the claim for breach of contract, we deny
International’s requested relief as moot.
III.
Chromas can be liable only if the corporate veil is pierced.
Whether to pierce the corporate veil under Illinois law is,
according to federal procedural law, a question of equity.
Therefore, International had no Seventh Amendment right
to a jury trial on that question. We thus vacate the judg-
ment against Chromas and remand this case for a determi-
nation of whether to pierce the corporate veil. If the district
court decides to disregard the corporate form, it must then
enter an award of damages in the amount of $949,649.60.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—1-23-04