Star Insurance Company v. Risk Marketing Group Incorpora

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-1377
S TAR INSURANCE C OMPANY, a Michigan Corporation,
W ILLIAMSBURG N ATIONAL INSURANCE C OMPANY,
a California Corporation and A MERICAN INDEMNITY
INSURANCE C OMPANY, L IMITED, a Bermuda Corporation,
Plaintiffs-Appellees,
v.
R ISK M ARKETING G ROUP INCORPORATED ,
an Illinois Corporation and C EBCOR S ERVICE
C ORPORATION, an Illinois Corporation,
Defendants-Appellants.
A PPEAL OF:
C HARLES E. S TEVENSON, D ON A. M OORE,
E NCOMPASS F INANCIAL S OLUTIONS, LLC, et al.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 1:06-cv-01364—Elaine E. Bucklo, Judge.
A RGUED D ECEMBER 1, 2008—D ECIDED M ARCH 31, 2009
2 No. 08-1377
Before B AUER, R OVNER, and E VANS, Circuit Judges.
B AUER, Circuit Judge. The United States District Court
for the Eastern District of Michigan, Southern Division,
entered judgment in the amount of $2,436,290, plus inter-
est, in favor of Star Insurance Company, Williamsburg
National Insurance Company, and American Indemnity
Insurance Company, Ltd. (collectively, “Plaintiffs”) and
against Risk Marketing Group, Inc. and Cebcor Service
Corp. (collectively, “Defendants”). Plaintiffs registered
this judgment, pursuant to 28 U.S.C. § 1963, in the
District Court for the Northern District of Illinois and
instituted supplementary proceedings to enforce the
judgment, pursuant to Federal Rule of Civil Procedure 69
and 735 ILL. C OMP. S TAT. 5/2-1402 (2007).
In a separate suit, the plaintiffs sued to pierce the corpo-
rate veil of the defendant corporations in the same court.
Charles E. Stevenson, Don A. Moore, Employ America,
LLC, and Encompass Financial Solutions, LLC were also
named as defendants in the second suit, based on
their respective insider relationships with the corporate
defendants and for their failure to observe corporate
formalities.
In the collection suit, the plaintiffs filed four motions:
(1) to set aside fraudulent transfers; (2) for a preliminary
injunction to prevent the disposition of assets; (3) for
the appointment of a receiver; and (4) to dissolve the
corporate defendants. Defendants failed to respond to
these motions even after receiving two extensions of time.
Defendants instead filed a motion to consolidate the
collection case with the piercing case or, alternatively, to
No. 08-1377 3
transfer the collection case to the district court judge
presiding over the piercing case.
On August 31, 2007, the district court denied the
motion to consolidate; it also found that: (1) Defendants
fraudulently transferred certain assets to Charles E.
Stevenson, Don A. Moore, Employ America, LLC, and
Encompass Financial Solutions, LLC; (2) the transferees
were in possession of the defendants’ property; and
(3) ordered the transferees to return the assets within
21 days. The district court also enjoined further disposi-
tion of the transferred assets.
On September 21, 2007, the defendants filed a motion
requesting the court to reconsider the finding that the
transfers were fraudulent. The district court denied the
motion on October 1, 2007; it found that the defendants,
despite extensions, had not responded to the plaintiffs’
motion to set aside the fraudulent transfers and that the
motion for consolidation was not an adequate response.
Plaintiffs filed renewed motions for judicial dissolution
and for the appointment of a receiver. The district court
granted this motion on October 19, 2007; it held that the
judgment in the amount of $2,436,290 remained unsatis-
fied, and that the defendants were (and had admitted
to being) insolvent.
The defendants appealed the orders of October 1, 2007
and October 19, 2007. This court questioned whether
final and appealable judgments had been entered by the
district court and ordered the defendants to show cause
why the appeal should not be dismissed for want of
jurisdiction or to voluntarily dismiss the appeal. Defen-
4 No. 08-1377
dants then voluntarily dismissed the appeals pursuant
to Federal Rule of Appellate Procedure 42(b).
Plaintiffs then moved for the entry of the judgment of
$2,436,290 plus interest against the transferees for their
failure to return the fraudulently transferred assets as
ordered by the district court on August 31, 2007. On
January 23, 2008, the district court granted this motion
and denied the transferees’ motion to reconsider on
February 6, 2008.
On February 15, 2008, the various defendants and the
transferees appealed the district court’s orders of:
(1) August 31, 2007; (2) October 1, 2007; (3) October 19,
2007; and (4) January 23, 2008.
DISCUSSION
The defendants and the transferees argue that the
district court erred in denying the motion to consolidate
since the collection case and the piercing case involved
the same judgment and almost identical parties. They
also argue that the district court erred in entering judg-
ment against the transferees. Before we address the
merits, a threshold question arises over the scope of our
appellate jurisdiction and which of the appealed orders
are reviewable.
A. Appellate Jurisdiction
For purposes of appellate jurisdiction, our review of
whether there has been a final order is de novo. Trustees of
No. 08-1377 5
Pension, Welfare & Vacation Fringe Benefit Funds of IBEW
Local 701 v. Pyramid Electric, 223 F.3d 459, 463 (7th Cir.
2000). This court has jurisdiction over “appeals from
all final decisions of the district courts of the United
States . . . except where a direct review may be had in
the Supreme Court.” 28 U.S.C. § 1291. Generally, the
question of whether a decision is final for purposes of
§ 1291 depends on whether the district court’s decision
“ends the litigation on the merits and leaves nothing
for the court to do but execute the judgment.” Van
Cauwenberghe v. Biard, 486 U.S. 517, 521 (1988). Conversely,
orders that “specifically contemplate further activity in
the district court are generally not final.” Pyramid Electric,
223 F.3d at 463 (internal citations omitted). However, “if
an order contemplates only ministerial actions by the
court, finality may exist.” Id.
This final-decision rule postpones the appeal until the
final judgment, but in the context of the appeal before
us, we are reviewing orders after the entry of a final
judgment. Because the judgment against the defendants
was not executed—namely, their assets were neither
seized nor sold to pay the judgment—the district court
issued a series of orders in a post-judgment proceeding
to complete the execution of the judgment. Supple-
mentary proceedings to enforce a judgment are treated,
for the purposes of appeal, as separate, free-standing
lawsuits. Resolution Trust Corp. v. Ruggiero, 994 F.2d 1221,
1224-25 (7th Cir. 1993) (citing cases). We treat orders
in those proceedings as appealable, to the same extent as
in a regular lawsuit. Id.6 No. 08-1377
Leading off with the January 23, 2008 order, where the
district court entered judgment against the transferees,
no one disagrees that we have appellate jurisdiction to
review that order since the notice of appeal was filed on
February 15, 2008, see Fed. R. App. P. 4(a), and plaintiffs
argue that the orders dated August 31, 2007 and October 1,
2007 were final and immediately appealable when
entered, but because the defendants filed their notice
of appeal in February 2008, the appeals are untimely
and cannot be considered by this court.1
As to the August 31, 2007 order, the plaintiffs are correct
that certain aspects of this order were immediately
appealable and the appeal untimely. There are several
aspects to this order: (1) the grant of Plaintiff’s pre-
liminary injunction against the defendants; (2) the set
aside of fraudulent transfers and the order to the trans-
ferees to turn over those transfers; (3) the denial of Plain-
tiffs’ motions for appointment of a receiver and a judicial
dissolution of the defendants; and (4) the denial of the
defendants’ motion to consolidate the collection case
with the piercing case.
The plaintiffs argue that the entire August 31, 2007 order
was immediately reviewable because the preliminary
injunction contained therein was immediately reviewable,
28 U.S.C. § 1292(a)(1), and also because the turn-over
1
Although the February 15, 2008 notice of appeal indicates the
appeal of the appointment of a receiver and judicial dissolution
(October 19, 2007 order), it is not relevant and we need not
consider it.
No. 08-1377 7
order was immediately reviewable. Laborers’ Pension
Fund v. Dirty Work Unlimited, Inc., 919 F.2d 491, 493-94 (7th
Cir. 1990). But labeling the entire order as immediately
appealable ignores the discretionary, non-appealable
interlocutory order lying within. Here, there are separate
orders, derived from separate motions by the parties,
contained in one document. But for jurisdictional pur-
poses, what is really at issue is the discretionary denial
of the motion to consolidate, an interlocutory order
unappealable until final judgment.
The fact that some aspects of the August 31, 2007 order
were immediately appealable does not alter the inter-
locutory nature of the district court’s decision to deny
consolidation. See Helene Curtis Indus., Inc. v. Church &
Dwight Co., Inc., 560 F.2d 1325 (7th Cir. 1977) (although a
preliminary injunction was immediately appealable, an
incidental discretionary order was unreviewable as not
final for purposes of appellate jurisdiction). After the
final order dated January 23, 2008, the defendants
timely appealed.
Accordingly, we now have jurisdiction to review the
district court’s denial of consolidation.
B. Consolidation
The defendants argue that the district court in the
collection case erred when it denied the motion to con-
solidate the case with the piercing case or, alternatively,
transfer the collection case to the judge presiding over
the piercing case, since there were abundant similarities
8 No. 08-1377
between the actions. We review a district court’s deci-
sion granting or denying a motion to consolidate only
for an abuse of discretion. King v. General Elec. Co., 960
F.2d 617, 626 (7th Cir. 1992).
A district court may consolidate actions that involve a
common question of law or fact. Fed. R. Civ. P. 42(a)(2).
Local Rule 40.4(b) also allows for related cases to be
consolidated before the judge assigned to hear the earlier-
filed case, which here, would be the collection case.
N.D. Ill. Local R. 40.4.
Citing these rules, the defendants argue that the
district court abused its discretion because of the over-
whelming presence of common questions of law and
fact between the two cases. Defendants point out that:
(1) the transferees are involved in both cases; (2) the
plaintiffs are precisely the same; (3) both cases seek to
recover $2,436,290; and (4) the piercing case’s amended
complaint contained the same allegations as set out in
the plaintiffs’ motion to set aside transfers in the col-
lection case. Defendants argue that these similarities,
coupled with the policy behind Rule 42 of promoting
consistency and judicial efficiency, should require con-
solidation.
The fact that there are similarities between the collec-
tion case and the piercing case does not render the
district court’s denial of consolidation an abuse of dis-
cretion. Defendants’ motion during the collection case
was a supplementary proceeding and because “Rule 69
conforms collection proceedings to state law,” we have
previously held that Illinois courts likely would not
No. 08-1377 9
“permit veil-piercing in supplementary proceedings
under § 5/2-1402.” Matos v. Richard A. Nellis, Inc., 101 F.3d
1193, 1195 (7th Cir. 1996) (citing Pyshos v. Heart-Land Dev.
Co., 630 N.E.2d 1054, 1057-58 (Ill. App. Ct. 1994)); see also
Lange v. Misch, 598 N.E.2d 412, 415 (Ill. App. Ct. 1992)
(piercing the corporate veil in a supplementary pro-
ceeding is improper).
In Pyshos, 630 N.E2d at 1058, the court stated that “[q]uite
simply, what must be alleged to pierce the corporate veil
does not fall within the scope of what may be heard in a
supplementary proceeding.” The only relevant inquiries
in supplementary proceedings are: (1) whether the judg-
ment debtor is in possession of assets that should be
applied to satisfy the judgment; or (2) whether a third
party is holding assets of the judgment debtor that
should be applied to satisfy the judgment. Id. at 1057. In
contrast, “an action to pierce the corporate veil does not
require any allegations that assets of the judgment
debtor corporation are in the hands of third-party share-
holders or directors.” Id. at 1057-58. What is required is
that “(1) there must be such unity of interest and owner-
ship that the separate personalities of the corporation
and the individual no longer exist; and (2) circumstances
must be such that an adherence to the fiction of a
separate corporate existence would promote injustice or
inequitable consequences.” Id. at 1058 (citing McCracken
v. Olson Companies, Inc., 500 N.E.2d 487, 491 (Ill. App. Ct.
1986)).
In essence, the two proceedings seek different things
and seeking to consolidate them into one proceeding is
10 No. 08-1377
improper. Here, we also have an attempt to consolidate
a supplementary proceeding with an action to pierce
the corporate veil. Although there are similarities between
the actions, as in Pyshos, the respective inquires are dif-
ferent. The district court did not abuse its discretion
in denying the defendants’ motion to consolidate the
collection case with the piercing case.
C. Third Party Liability
Lastly, the district court entered the underlying judg-
ment against the transferees, pursuant to Illinois law, for
failing to return the identified fraudulent transfers to
the corporate defendants, as directed by the district
court on August 31, 2007. Defendants argue that it was
improper for the district court to impose the judgment
on the non-party transferees because to pass judgment in
the collection case would require that the district court
pierce the corporate veil, which it has consistently held
that it cannot do in a supplementary proceeding.
To answer this question, we must first determine
whether the district court’s use of state law, rather than
federal law, in a supplementary proceeding was appro-
priate.
We have previously discussed Rule 69 in determining
whether, absent a federal statute, the Rule requires a
federal court to borrow the entire procedural law of the
state or the entire procedural law of the federal system.
Ruggiero, 994 F.2d at 1226. In Ruggiero, we stated that
because “[p]roceedings to enforce judgment are meant
No. 08-1377 11
to be swift, cheap, informal . . . [w]e do not think the
draftsmen of Rule 69 meant to put the judge into a pro-
cedural straightjacket whether of state or federal origin.”
Id. There, we particularly noted that the Federal Rules of
Civil Procedure are not strictly applicable to supplemen-
tary proceedings. Id. at 1227.
With this in mind, we re-mention that “Rule 69 conforms
collection proceedings to state law.” Matos, 101 F.3d at
1195. The Rule “governs collection proceedings in the
federal courts and adopts whatever procedures are fol-
lowed by the state courts in which the collection is
sought, . . . unless there is an applicable federal statute
expressly regulating the execution of judgments.” Maher
v. Harris Trust & Sav. Bank, 506 F.3d 560, 563 (7th Cir.
2007); Fed. R. Civ. P. 69(a). And because there appears to
be no federal statute on this issue, the district court was
correct in turning to state law in the post-judgment pro-
ceeding.
Dirty Work, 919 F.2d at 493, was a case where, seeking
recovery of a judgment, a district court ordered a non-
party to turn over money due to the judgment debtor
defendant, in an effort to effect a satisfaction of the
original judgment. When the non-party failed to comply
with the order, the district court found the non-party
in contempt using state law. Id. On appeal, we held that
the district court did not abuse its discretion as Rule 69
instructed the court to utilize the practice and procedure
of the state in which the district court is located for guid-
ance in the enforcement of a money judgment, in the
absence of a contrary federal statute. Id. at 494. So
12 No. 08-1377
applying Illinois law in the enforcement of the money
judgment was proper. See The Soc’y of Lloyd’s v. Ashenden,
233 F.3d 473, 475 (7th Cir. 2000) (although filing a previous
judgment prompts the federal court to collect, state law,
particularly “the Illinois citation statute, 735 ILCS 5/2-1402,
supplies the procedure for executing a federal-court
judgment.”).
Because the district court properly relied on Illinois law,
we inquire whether Illinois law allows a court to enter
judgment against a third party receiver of fraudulently
transferred assets, when the third party failed to return
the assets, when ordered, back to the judgment debtor
to satisfy its debt to the judgment creditor.
The district court properly inquired as to whether
third parties held assets of the defendants, the judgment
debtors, in the supplementary proceeding. See Pyshos, 630
N.E.2d at 1057-58. The district court found that certain
fraudulent transfers were made by the defendants to the
transferees and ordered the property returned. 735 ILCS
5/2-1402; see also Kennedy v. Four Boys Labor Services, Inc.,
664 N.E.2d 1088, 1091 (Ill. App. Ct. 1996) (once the judg-
ment creditor discovers assets in the hands of a third
party, the judge may order a third party to deliver up
those assets to satisfy the judgment).
The third party transferees failed to comply with the
August 31, 2007 order. In Illinois, the procedure to be
followed in supplemental proceedings appears to be left
largely to the judge’s discretion, and Illinois allows the
underlying judgment to be imposed on the violator of the
court order. Ruggiero, 994 F.2d at 1226. Illinois Supreme
No. 08-1377 13
Court Rule 277(h) provides that any person who fails to
obey an order to deliver up or convey any personal prop-
erty or its proceeds or value may be committed until the
order is obeyed. 134 Ill. 2d R. 277(h); Kennedy, 664
N.E.2d at 1094.
The Illinois Code of Civil Procedure (735 ILCS 5/2-1402)
also allows the holder of a judgment to command the
debtor to turn over to the judgment creditor as many of
the seizable assets as may be necessary to satisfy the
judgment. Ashenden, 233 F.3d at 475-76. Its provisions “are
to be liberally construed and the statute gives courts
broad powers to compel the application of discovered
assets or income to satisfy a judgment.” Kennedy, 664
N.E.2d at 1091. Section 2-1402(a) provides that a “judgment
creditor . . . is entitled to prosecute supplementary pro-
ceedings for the purpose of examining the judgment
creditor or any other person to discover assets or income
of the debtor . . . and of compelling the application of
[such] assets or income discovered toward the payment of
the amount due under the judgment.” 735 ILCS 5/2-1402(a).
Section 2-1402(c) further provides that when assets of
the judgment debtor are discovered, the court “may
authorize the judgment creditor to maintain an action
against any person or corporation that, it appears upon
proof satisfactory to the court, is indebted to the judg-
ment debtor, for recovery of the debt.” 735 ILCS 5/2-
1402(c)(6).
So, it was proper for the plaintiffs to seek enforcement of
the underlying judgment against the transferees. The
district court ordered the transferees to return the assets
14 No. 08-1377
within 21 days; more than three months after the expira-
tion of that period, the fraudulent transfers had yet to
be returned. Under Rule 227, the court had the discretion
as to the nature of the sanction to impose for violating
the order. Kennedy, 664 N.E.2d at 1094. Therefore, pursuant
to Illinois law, the district court granted the plaintiffs’
motion and entered judgment (for the underlying
amount of $2,436,290) against the transferees.2 In
Kennedy, 664 N.E.2d at 1090, after a judgment against
the defendant corporation, a supplementary proceeding
was initiated to recover certain assets transferred by the
corporation’s sole director (after the state involuntarily
dissolved the corporation) to third parties. The trial court
held that the transfers were fraudulent and ordered the
sole director to turn over the proceeds received from
the fraudulent transfers. Id. When the director did not
comply with this order, the trial court, pursuant to
Rule 277, entered judgment against the director. Id. The
Illinois Appellate Court held that the trial court did not
abuse its discretion in entering a judgment for the
entire amount of the underlying judgment against the
director for non-compliance with the turn-over order. Id.
at 1094.
Lastly, the defendants assert that the district court
erred in failing to hold an evidentiary hearing prior to
entering the full amount of the underlying judgment
2
Although imposing the underlying judgment against the
third party transferees was a sanction, there was no need for
a contempt finding under Rule 277(h).
No. 08-1377 15
against Stevenson and Moore. Defendants argue that if
these two transferees were liable, it should not have
been for the full amount of the underlying judgment,
but rather for $536,302.21, the amount received.
Defendants are correct that Plaintiffs only presented
evidence that on October 11, 2004, the defendants con-
verted a $536,302.21 loan receivable owed by their
insiders, Stevenson and Moore, into compensation for
work on which they had already received significant
compensation. Although they argue that they can only
be liable for failing to return what they received, this
argument was never made before the district court and
is not before us. Karazanos v. Madison Two Assocs., 147
F.3d 624, 629 (7th Cir. 1998). After the plaintiffs moved
to have the underlying judgment imposed on the trans-
ferees, the defendants argued only that the transfers
were not actual transfers of tangible assets but rather non-
cash accounting entries. The district court noted that it
had heard this argument before and granted the plain-
tiffs’ motion. Even in their motion to reconsider the
January 23, 2008 order, Defendants never raised the
argument that Stevenson and Moore could only be liable
for $536,302.21; rather, they argued that the transferees
did not receive actual money.
Contrary to the defendants’ argument, the district court
did not pierce any veil and therefore, did not need to
hear evidence on compliance with corporate formalities;
rather, the district court simply did not tolerate the
failure to comply with its August 31, 2007 order and
entered a sanction against the transferees in the amount
16 No. 08-1377
of the underlying judgment. Such an action was not an
abuse of discretion.
CONCLUSION
We conclude that the district court’s decisions to deny
consolidation and to impose the judgment on the trans-
ferees did not amount to an abuse of discretion. Accord-
ingly, we A FFIRM the district court.
3-31-09