LM Insurance Corp v. Spaulding Enterprise

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-2606
LM INSURANCE CORPORATION,
Plaintiff-Appellant,
v.
SPAULDING ENTERPRISES INCORPORATED,
SPAULDING MOVING AND STORAGE INCORPORATED,
SPAULDING TRUCKING INCORPORATED,
JOHN J. LALAGOS, JEAN P. LALAGOS,
LAURA ROSETTI, RALLY CAPITAL SERVICES, LLC, and
JEFFREY D. SAMUELS,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division
No. 07 C 1835—Samuel Der-Yeghiayan, Judge.
____________
ARGUED APRIL 3, 2008—DECIDED JULY 8, 2008
____________
Before FLAUM, MANION, and TINDER, Circuit Judges.
FLAUM, Circuit Judge. Plaintiff LM Insurance Corporation
(“LM”) brought an eight count suit against eight defen-
dants in the Northern District of Illinois under that
court’s federal diversity jurisdiction. The suit centered
around an outstanding judgment of $185,776 Defendant
Spaulding Enterprises Incorporated (“Spaulding Enter-
2 No. 07-2606
prises”) owed LM from a prior lawsuit, and Spaulding
Enterprises’s alleged efforts to shift its assets to various
sham corporations to avoid paying this debt. All defen-
dants challenged federal jurisdiction, claiming that the
amount in controversy requirement of $75,000 was not
satisfied. The district court agreed with Defendants,
finding that the pending suit was the improper vehicle
for pursuing the earlier judgment, and that any damages
stemming from the transfer of Spaulding Enterprises’s
assets were capped by the corporation’s assets at that
time, which the district court found to be below $75,000.
For the following reasons, we affirm in part and reverse
in part the district court’s grant of Defendants’ Motion to
Dismiss.
I. Background
This suit stems from an earlier lawsuit in which LM
was awarded damages of $218,667 from Spaulding Enter-
prises. A month after judgment was entered, in Octo-
ber 2006, LM brought a citation to discover assets,
which resulted in $21,691 of Spaulding Enterprises’s assets
being frozen and then turned over to LM, bringing
Spaulding Enterprises’s liability down to $196,976. At
this point, unbeknownst to LM, Spaulding Enterprises
began maintaining its same business operations, including
its incoming and outgoing payments, through Spaulding
Moving’s accounts.
Spaulding Enterprises and Spaulding Moving were
closely linked. They shared the same address and were
largely owned and operated by the same people, with
Spaulding Enterprises being equally owned by husband
and wife John (President of Spaulding Enterprises) and
No. 07-2606 3
Jean (Secretary of Spaulding Enterprises) Lalagos, and
Spaulding Moving being owned by John Lalagos, who
also served as the company’s President.
In December 2006, LM and John Lalagos settled upon an
agreement for repaying Spaulding Enterprises’s debt,
whereby the corporation would pay a discounted judg-
ment in monthly installments of $5,600. Only the first
two payments were made, however, leaving Spaulding
Enterprises’s outstanding liability at $185,776.
It was at this time that Spaulding Enterprises entered
into an Assignment for the Benefit of Creditors. On Febru-
ary 8, 2007, LM received a letter from Jeffrey D. Samuels
of Rally Capital Services, informing LM that he would be
serving as Spaulding Enterprises’s Trustee/Assignee in
its Assignment for the Benefit of Creditors. The letter
stated that the Assignment was occurring due to finan-
cial stress stemming from an outstanding legal judg-
ment owed by Spaulding Enterprises, and calculated the
corporation’s current assets at $150,000—the amount of
its accounts receivable. LM was informed in the letter
that Spaulding Enterprises had conveyed all its assets to
Samuels and that Samuels had already accepted a pur-
chase agreement from Spaulding Trucking Company
(“Spaulding Trucking”) to purchase Spaulding Enter-
prises’s assets for $5,000. The letter also stated, however,
that Samuels was required, per the Purchase Agreement,
“to solicit higher and better bids” for the assets, which
Samuels would do by posting a Notice of Sale in the
Chicago Tribune at a future date.
According to LM, notice was never posted in the Chicago
Tribune. Instead, at the time LM received the February 8
letter, Spaulding Enterprises’s assets had already been
conveyed to Spaulding Trucking, a new company incor-
4 No. 07-2606
porated on January 26, 2007 that shared the same address
as the other two “Spaulding” enterprises. The President
and owner of this new corporation was Laura Rosetti,
Jean Lalagos’s sister. John and Jean Lalagos also had
positions at Spaulding Trucking, with Jean serving as the
company’s Treasurer and John being an employee. On
January 31, Spaulding Enterprises and Spaulding
Trucking had entered into an Agreement for the Pur-
chase and Sale of Assets, with the Assignment for the
Benefit of Creditors and transfer of Spaulding Enter-
prises’s assets occurring on February 2. Rally’s fee for
serving as the Assignee in these transactions was $5,000,
the same amount paid by Spaulding Trucking to pur-
chase Spaulding Enterprises’s assets. The check to Rally
was signed by John Lalagos in his capacity as Spaulding
Trucking’s employee.
On April 3, 2007, LM brought this lawsuit in the North-
ern District of Illinois pursuant to federal diversity juris-
diction.1 The Complaint included the following eight
counts:
• Count 1 Breach of Fiduciary Duty against Rally
Capital Services and Samuels with respect
to the Assignment for the Benefit of Credi-
tors
• Count 2 Inducement of a Breach of Fiduciary Duty
against John Lalagos, Jean Lalagos, and
1
As is required for federal jurisdiction to exist under 28 U.S.C.
§ 1332, complete diversity exists between the parties, see
Strawbridge v. Curtiss, 7 U.S. 267 (1806), with Plaintiff LM being
an Iowa corporation with its principal place of business in
Massachusetts, and all individual and corporate defendants
hailing from Illinois.
No. 07-2606 5
Spaulding Trucking for their involvement
with Samuels in the Assignment for the
Benefit of Creditors
• Count 3 Breach of Fiduciary Duty against John and
Jean Lalagos for diverting their assets to
Spaulding Moving and Spaulding Trucking
• Count 4 Fraudulent Conveyance against Spaulding
Moving and Spaulding Trucking
• Count 5 Successor Liability against Spaulding
Trucking
• Count 6 Alter Ego claim against all three
“Spaulding” corporations, as well as
John and Jean Lalagos
• Count 7 Conspiracy to Defraud against all defen-
dants, which included all parties already
named in the above counts, as well as
Rosetti, for conspiring to defraud LM of
its judgment against Spaulding Enterprises
• Count 8 Fraud against all defendants
With respect to the first three counts for breach of fidu-
ciary duty, LM sought damages “of at least $150,000,”
the value of Spaulding Enterprises’s accounts receivable
as listed on the February 8 letter regarding the Assign-
ment for the Benefit of Creditors, as well as punitive
damages. Counts 4, 5, and 6 all sought damages of
$185,776, the outstanding debt from the earlier lawsuit
Spaulding Enterprises owed LM. The amount of dam-
ages sought in Counts 7 and 8 was not specified, with
both claims seeking damages “in an amount to be deter-
mined at trial.”
6 No. 07-2606
After the parties had submitted a Jurisdictional Status
Report in accordance with an order by the district court,
all defendants joined in filing a Motion to Dismiss for
Lack of Subject Matter Jurisdiction, claiming that the
amount in controversy did not exceed $75,000 as is re-
quired for diversity jurisdiction to exist under 28 U.S.C.
§ 1332(a). Along with the motion, Defendants also sub-
mitted evidence that the February 8 letter had incorrectly
placed Spaulding Enterprises’s assets at $150,000, when
in fact, its accounts receivable had already been sold to a
bank. Instead, the evidence provided by Defendants
indicated that Spaulding Enterprises’s accounts receiv-
able, as of January 31, 2007, were $159,000, and that as of
that same date, the bank held $138,254 of that amount.
Thus, Defendants claimed that at best, Spaulding Enter-
prises’s assets at the time of the Assignment for the Bene-
fit of Creditors were approximately $20,000.
The district court, on June 27, 2007, granted Defendants’
Motion to Dismiss. With respect to those claims for the
outstanding judgment of $185,776, the court determined
that all of LM’s claims were solely related to the alleged
fraudulent hiding and assignment of Spaulding Enter-
prises’s assets, not to the outstanding judgment. More-
over, the district court stated that other supplemental
proceedings, such as a citation to discover assets, were
at LM’s disposal to attempt to claim the $185,776. The
district court then turned to the value of Spaulding Enter-
prises’s assets at the time of the Assignment for the Bene-
fit of Creditors, crediting Defendants’ uncontroverted
evidence that Spaulding Enterprises had sold all its
accounts receivable to the bank. Having found that only
“modest compensatory damages” were available, the
district court also determined that any punitive damages
awarded would be insufficient to satisfy the amount in
No. 07-2606 7
controversy requirement. Accordingly, the district court
granted Defendants’ Motion to Dismiss, and this appeal
followed
.
II. Discussion
The sole issue for this Court to address is whether LM
satisfied the amount in controversy requirement for
purposes of federal diversity jurisdiction. We review
the district court’s decision concerning subject matter
jurisdiction de novo, and review its jurisdictional factual
determinations for an abuse of discretion. Anthony v.
Security Pacific Financial Services, Inc., 75 F.3d 311, 315
(7th Cir. 1996).
Under 28 U.S.C. § 1332, federal courts have jurisdiction
over civil suits between citizens of different states “where
the matter in controversy exceeds the sum or value of
$75,000, exclusive of interest and costs.” 28 U.S.C. § 1332(a).
This Court recently, in Meridian Security Insurance Co. v.
Sadowski, clarified the proper standard to be applied
when it is contested whether the amount in controversy
requirement has been satisfied:
[A] proponent of federal jurisdiction must, if material
factual allegations are contested, prove those juris-
dictional facts by a preponderance of the evidence.
Once the facts have been established, uncertainty about
whether the plaintiff can prove its substantive claim,
and whether damages (if the plaintiff prevails on the
merits) will exceed the threshold, does not justify
dismissal. Only if it is legally certain that the re-
covery (from plaintiff’s perspective) or cost of com-
plying with the judgment (from defendant’s) will be
8 No. 07-2606
less than the jurisdictional floor may the case be
dismissed.
441 F.3d 536, 543 (7th Cir. 2006) (internal citations and
quotations omitted) (retracting the often-misused phrase
coming from Shaw v. Dow Brands, Inc., 994 F.2d 364, 366
(7th Cir. 1993), that the proponent of federal jurisdiction
must show a “reasonable probability that jurisdiction
exists”). Thus, for LM’s counts claiming Spaulding En-
terprises’s assets at the time of the Assignment for the
Benefit of Creditors, LM had to prove by a preponder-
ance of the evidence that Spaulding Enterprises’s assets
exceeded $75,000. As for those counts claiming dam-
ages equaling the outstanding judgment of $185,776,
Defendants concede that figure represents the out-
standing judgment, but argue that it is a “legal certainty”
that the outstanding debt owed by Spaulding Enter-
prises prior to the Assignment for the Benefit of Cred-
itors is not a permissible remedy for those claims.
While Defendants challenged the amount in contro-
versy with respect to all counts, analyzing whether the
$75,000 is satisfied for each individual count is unneces-
sary, since “[i]t is the case, rather than the claim, to which
the $75,000 minimum applies.” Johnson v. Wattenbarger,
361 F.3d 991, 993 (7th Cir. 2004) (emphasis in original).
Therefore, so long as the amount in controversy require-
ment is satisfied with respect to one count (or the proper
aggregation of counts, see Exxon Mobil Corp. v. Allapattah
Servs., 545 U.S. 546, 585 (2005) (Ginsburg, J., dissenting)
(“[t]his Court has long held that, in determining
whether the amount-in-controversy requirement has
been satisfied, a single plaintiff may aggregate two or
more claims against a single defendant, even if the
claims are unrelated”) (citing Edwards v. Bates County,
No. 07-2606 9
163 U.S. 269, 273 1896))) for each defendant, our analysis
may stop.
Additionally, in this case, because there are multiple
defendants, the amount in controversy may be ag-
gregated among the different defendants in certain cir-
cumstances. This Court has established that, “when there
are two or more defendants, plaintiff may aggregate
the amount against the defendants to satisfy the amount
in controversy requirement only if the defendants are
jointly liable; however, if the defendants are severally
liable, plaintiff must satisfy the amount in controversy
requirement against each individual defendant.” Middle
Tennessee News Co. v. Charnel of Cincinnati, Inc., 250 F.3d
1077, 1081 (7th Cir. 2001). As will be discussed, under
these principles, it is clear that the amount in contro-
versy requirement was satisfied for LM’s alter ego claim,
as well as Counts 1-3 which claimed punitive damages
for breaches of fiduciary duty. This satisfies the amount
in controversy requirement for all defendants except
Rosetti, thus requiring this Court to analyze the two
counts in which she is named—Counts 7 and 8 con-
cerning fraud and a conspiracy to defraud.
A. Alter Ego
Of the eight defendants in LM’s suit, five of them were
named in Count 6, which alleged that Spaulding Moving,
Spaulding Trucking, and John and Jean Lalagos were all
alter egos of Spaulding Enterprises, and thus all five
defendants are liable for Spaulding Enterprises’s out-
standing debt of $185,776 owed to LM. Illinois law is
clear that a judgment creditor can bring a claim to pierce
the corporate veil of the debtor corporation in a new
10 No. 07-2606
cause of action. Peetoom v. Swanson, 778 N.E.2d 291, 296-
97 (Ill. App. Ct. 2002). The fact that it was not legally
impossible for LM to recover the $185,776 judgment from
the five defendants named in this Count is further con-
firmed by this Court’s decision in Sea-Land Services, Inc. v.
Pepper Source, 941 F.2d 519 (7th Cir. 1991). Although that
case did not concern a dispute over the amount in con-
troversy requirement, it did involve a factual situation
very similar to the case at hand. There, the plaintiff had
been awarded a judgment against The Pepper Source in
earlier litigation. Id. at 520. The Pepper Source, however,
lacked any assets, so the plaintiff brought an alter ego claim
under Illinois law against The Pepper Source, its owner,
and four other corporations owned by the same individual.
Id. After initially remanding the district court’s grant of
summary judgment in the plaintiff’s favor, id. at 525, this
Court later affirmed the district court’s entry of judgment
against all the defendants in the amount of the outstanding
judgment, plus interest. Sea-Land Services, Inc. v. Pepper
Source, 993 F.2d 1309, 1310 (7th Cir. 1993). Thus, this case
makes clear that Spaulding Enterprises’s outstanding
judgment is an appropriate remedy for LM’s alter ego
claim.
While Sea-Land appears to settle that the amount in
controversy requirement was satisfied with respect to
Count 6 and accordingly, the five defendants named in
that claim, Defendants argue that LM waived this argu-
ment by not raising it below. Belom v. Nat’l Futures Ass’n,
284 F.3d 795, 799 (7th Cir. 2002) (“arguments not raised
in the district court are waived on appeal”). LM, how-
ever, properly preserved this issue for appeal. Although
LM’s argument below in its Response in Opposition to
Defendants’ Motion to Dismiss did not include the ful-
No. 07-2606 11
some discussion of prior case law presented to this
Court on appeal, LM did argue that its alter ego claim
alleged that the named defendants must answer for the
outstanding debt, which was $185,776, and that this
satisfied the amount in controversy requirement. This
was sufficient for LM to preserve this issue for presenta-
tion to this Court.
The other two arguments raised by Defendants with
respect to LM’s alter ego claim all concern the merits of
LM’s action to pierce the corporate veil. First, Defendants
claim that damages must be capped by the amount of
assets transferred by Spaulding Enterprises, not the
$185,776, because it is only the alleged improper transfer
of assets that “would likely produce an unjust or inequita-
ble result,” as required to pierce the corporate veil under
Illinois law. See Aps Sports Collectibles, Inc. v. Sports
Time, Inc., 299 F.3d 624, 631 (7th Cir. 2002) (A plaintiff,
to prevail on an alter ego claim, must show, in part “that
there exist circumstances such that an adherence to the
fiction of separate corporate existence would likely pro-
duce an unjust or inequitable result.”). Defendants
also argue that because piercing the corporate veil is
equitable in nature, given that it “is a matter of discre-
tion, not of right,” Int’l Fin. Servs. Corp. v. Chromas Techs.
Can., Inc., 356 F.3d 731, 737 (7th Cir. 2004) (“under Illi-
nois law, piercing the corporate veil is an equitable
remedy to be determined by the court”), the amount in
controversy requirement is not met because it would go
against fundamental principles of equity to allow a dis-
pute over Spaulding Enterprises’s limited assets of less
than $20,000 result in a judgment against the defendants
for $185,776. These are arguments on the merits, how-
ever, since they address the appropriate measure of
12 No. 07-2606
damages based on the substance of LM’s claims. Such
arguments are of no concern at this stage of the proceed-
ings, since “[i]f . . . the case as a whole does not entail at
the get-go a controversy exceeding $75,000, then the
court must not resolve any aspect of it on the merits.”
Johnson, 361 F.3d at 993. Accordingly, the alter ego claim
in Count 6 satisfied the amount in controversy require-
ment for Defendants Spaulding Enterprises, Spaulding
Moving, Spaulding Trucking, and John and Jean Lalagos.
Furthermore, because “[i]t is the case, rather than the
claim, to which the $75,000 minimum applies,” id. (empha-
sis in original), federal jurisdiction also extends to all of
LM’s other claims against these five defendants.
B. Breach of Fiduciary Duty
Defendants Rally Capital Services, Samuels, and Rosetti
were not named in LM’s alter ego claim, and thus it is
still necessary to determine whether the amount in con-
troversy requirement has been satisfied for these three
defendants. Two of these defendants, Rally Capital Services
and Samuels, were the parties named in Count 1 of LM’s
complaint. In this count, LM claimed that Samuels violated
the fiduciary duties it owed LM as the assignee/ trustee in
the Assignment for the Benefit of Creditors, and that Rally
Capital Services was also liable under the doctrine of
Respondeat Superior. LM’s claimed damages included the
actual value of Spaulding Enterprises, which LM asserted
would constitute at least the $150,000 in accounts receiv-
able Spaulding Enterprises was listed as having in
Samuels’s February 8 letter.
LM contends that the district court erred in finding that
Spaulding Enterprises had far less than $150,000 in assets
No. 07-2606 13
at the time of the Assignment for the Benefit of Creditors,
thus bringing compensatory damages below the $75,000
threshold. LM first argues that it was improper for the
district court to even engage in this analysis, con-
tending that this amounted to weighing the evidence
and a decision on the merits, something improper at
this stage of the proceedings. This, however, is not the
case. With the alter ego claim, for example, the parties
did not dispute that the outstanding debt claimed by LM
as damages was $185,776; Defendants only contested
whether LM could obtain this full amount on the sub-
stance of its claim, which would, if decided, constitute
an inappropriate decision on the merits prior to ascer-
taining federal jurisdiction. Here, however, Defendants
contest the value of the assets claimed by LM as damages,
not LM’s likelihood of receiving the full value of those
assets based on its substantive claim. LM’s claim that
Spaulding Enterprises’s assets equaled $150,000 is a
jurisdictional fact, and this Court has held that “a propo-
nent of federal jurisdiction must, if material factual al-
legations are contested, prove those jurisdictional facts by
a preponderance of the evidence.” Meridan Security Insur-
ance Co., 441 F.3d at 543 (emphasis added).
LM also challenges, however, the district court’s find-
ing that the value of Spaulding Enterprises’s assets was
not $150,000. LM estimated Spaulding Enterprises’s
assets to be at least $150,000 on the basis of the February 8
letter it received from Samuels and Samuels’s own dep-
osition testimony, where he stated that the value of the
accounts receivable were “approximately, . . . at the time
of the assignment $150,000.” In its motion to dismiss for
lack of jurisdiction, however, Defendants brought forth
evidence showing that at the time of the Assignment for the
14 No. 07-2606
Benefit of Creditors, Spaulding Enterprises had sold its
accounts receivable to a bank. This evidence included
declarations by John Lalagos and Samuels to this effect, as
well as various bank statements and a copy of the Business
Manager Agreement selling Spaulding Enterprises’s
accounts receivable. Although it does not appear that LM
was trying to artfully plead itself into federal court by
claiming damages exceeding $75,000, the district court did
not abuse its discretion in finding that LM had not proven
the jurisdictional fact concerning the value of Spaulding
Enterprises’s assets by a preponderance of the evidence.2
Id. at 542-43.
The fact that Spaulding Enterprises’s assets were less
than $75,000, however, is not terminal to LM showing
that the amount in controversy requirement is satisfied
with respect to Samuels and Rally Capital Services,
since LM also claimed punitive damages. Cadek v. Great
2
We note that the original justification for allowing the
amount in controversy claimed by the proponent of federal
jurisdiction to be challenged was to ensure that the claim was
“made in good faith.” St. Paul Mercury Indemnity Co. v. Red Cab
Co., 303 U.S. 283, 288-89 (1938); see Meridian Security Insurance
Co., 441 F.3d at 539-41 (discussing early Supreme Court
rulings in this area). Here, it appears that LM acted in good
faith in claiming that Spaulding Enterprises’s assets equaled
$150,000, since it was relying on Samuels’s own assertions in
arriving at this figure. However, even though the controlling
standard “that a party that chooses federal court set out the
basis of federal jurisdiction and prove any contested factual
allegation,” Meridian Security Insurance Co., 441 F.3d at 540,
may be broader than necessary to satisfy the underlying
rationale for the rule, the burden rested with LM in this case
and is one it could not satisfy.
No. 07-2606 15
Lakes Dragaway, 58 F.3d 1209, 1211 (7th Cir. 1995) (“Where
both actual and punitive damages are recoverable under
a complaint each must be considered to the extent
claimed in determining the jurisdictional amount.”)
(quoting Bell v. Preferred Life Society, 320 U.S. 238, 240
(1943)). In cases such as this, where punitive damages are
relied upon to satisfy the amount in controversy require-
ment, the court must first determine whether punitive
damages are recoverable under state law. Del Vecchio v.
Conseco, Inc., 230 F.3d 974, 978 (7th Cir. 2000) (quoting
Cadek, 58 F.3d at 1211-12). If punitive damages are avail-
able, subject matter jurisdiction exists unless it is “legally
certain” that the plaintiff will be unable to recover the
requisite jurisdictional amount. Id.; Meridian Security
Insurance Co., 441 F.3d at 543.
The first part of this inquiry is satisfied, since Illinois
courts have made clear that punitive damages are avail-
able for breaches of fiduciary duty. See Franz v. Calaco
Development Corp., 818 N.E.2d 357, 375 (Ill. App. Ct. 2004)
(“Punitive damages are available as a matter of law for
a breach of fiduciary duty”); see also Martin v. Heinold
Commodities, 643 N.E.2d 734, 756-57 (Ill. 1994) (finding
punitive damages available for a claim of intentional
breach of fiduciary duty). As for the second part of this
inquiry, this Court has noted that in cases where the
amount in controversy is primarily composed of punitive
damages, such claims should be closely scrutinized.
Anthony, 75 F.3d at 315 (“When a claim for punitive
damages makes up the bulk of the amount in contro-
versy, and may even have been colorably asserted
solely to confer jurisdiction, we should scrutinize that claim
closely.”). Even when carefully scrutinized, however, it
cannot be said to a legal certainty that LM would be unable
16 No. 07-2606
to recover sufficient punitive damages to satisfy
the amount in controversy requirement. Under Illinois
law, “[p]unitive damages are permissible where a duty
based on a relationship of trust is violated, the fraud is
gross, or malice or willfulness are shown.” Martin, 643
N.E.2d at 757 (quoting In re Marriage of Pagano, 607
N.E.2d 1242, 1250 (Ill. 1992), superseded by statute as stated
in Brush v. Gilsdorf, 783 N.E.2d 77, 81-82 (Ill. App. Ct. 2002)
(punitive damages no longer available for legal malprac-
tice)). Here, the complaint alleged that the fiduciary duty,
or “relationship of trust” between Samuels and LM was
violated when Samuels failed to follow the assurances
made in the February 8 letter. Moreover, there are numer-
ous allegations in the complaint that these violations
were done willfully. For example, despite representa-
tions in the February 8 letter that Samuels, as assignee,
was in possession of all of Spaulding Enterprises’s assets,
the complaint alleges that Samuels in fact never held any
of Spaulding Enterprises’s assets. Furthermore, while the
letter stated that Samuels would solicit higher bids than
the $5,000 bid made by Spaulding Trucking, the com-
plaint alleges that, contrary to the letter’s assurances, no
bids were solicited, no postings were made in the Chicago
Tribune, and prior to the Assignment for the Benefit of
Creditors, a Bill of Sale had already been entered into
between Spaulding Enterprises and Spaulding Trucking.
Based on these allegations, it was not inappropriate for
LM to seek punitive damages.
It also cannot be said to a legal certainty that an award of
punitive damages sufficient to satisfy the amount in
controversy requirement in this case would violate due
process. The Supreme Court has stated that punitive
damage awards exceeding a single-digit ratio between
No. 07-2606 17
punitive and compensatory damages are unlikely to satisfy
due process, and more specifically, that a 4-to-1 ratio
“might be close to the line of constitutional impropriety.”
State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408,
425 (2003). Here, based on the district court’s factual
finding and Defendants’ concession, compensatory dam-
ages could at most equal $20,000. Thus, in order for the
amount in controversy requirement of $75,000.01 to be
satisfied, it must be legally possible for LM to recover
punitive damages exceeding $55,000, a ratio of 2.75-to-1.
This ratio is not only a single-digit ratio, but also falls
below the 4-to-1 threshold referenced by the Supreme
Court. Although the Supreme Court has opined that
when compensatory damages are substantial, due process
may only permit a punitive damages award equaling
compensatory damages, id., given that LM’s potential
compensatory damages award is insufficient on its own
to even satisfy the amount in controversy requirement,
it can hardly be said that such an award is substantial.
Accordingly, the amount in controversy requirement has
been satisfied for Count 1 against Samuels and Rally
Capital Services, and all claims against these two parties
may properly be heard in federal court.3
3
Counts 2 and 3 of LM’s complaint also sought punitive
damages related to a breach of fiduciary duty against John and
Jean Lalagos (Counts 2 and 3) and Spaulding Trucking (Count
2). For the same reasons just discussed, we have no reason to
believe that the amount in controversy requirement is not
similarly satisfied for those counts. A detailed analysis for
those counts, however, is unnecessary, because the amount in
controversy requirement has already been satisfied for those
defendants under LM’s alter ego claim.
18 No. 07-2606
C. Fraud and Conspiracy to Defraud Claims Against
Rosetti
As discussed above, because LM’s alter ego claim and
claims for punitive damages for a breach of fiduciary
duty all exceed the amount in controversy requirement,
all claims brought by LM against Rally Capital Services,
Samuels, the three Spaulding entities, and John and Jean
Lalagos are within the federal courts’ jurisdiction. Laura
Rosetti, however, the President of Spaulding Trucking,
was only named as a defendant in Counts 7 and 8 for
conspiracy to defraud and fraud. It is thus necessary to
determine whether the amount in controversy require-
ment has been satisfied as it relates to Rosetti for these
claims.
For Counts 7 and 8 against Rosetti, LM has failed to
meet its burden of showing the amount in controversy
requirement has been satisfied. We first note that LM’s
computation of damages for these claims has evolved
over the course of the proceedings. In its complaint for
Counts 7 and 8, LM requested damages “in an amount
to be determined at trial,” without specifying any par-
ticular dollar amount. The fact that LM’s request for
damages was general in nature is of no consequence so
long as it was not legally impossible, based on the com-
plaint as a whole, that LM could be awarded more than
$75,000 in damages against Rosetti. See RTC Commer. Assets
Trust 1995-NP3-1 v. Phoenix Bond & Indem. Co., 169 F.3d 448,
452 (7th Cir. 1999). However, when LM submitted its
Jurisdictional Status Report pursuant to the district court’s
order, LM stated, “[f]or the reasons set forth above, Plain-
tiff believes these damages would be at least $150,000.”
LM now argues that the “for the reasons set forth above”
language was a reference to its assertion when dis-
No. 07-2606 19
cussing Counts 4, 5, and 6 (which sought the out-
standing judgment of $185,776) “that this [outstanding]
judgment was fraudulently avoided by the Defendants.”
Defendants contend, however, and we find more persua-
sive, that the “for the reasons set forth above” phrase is a
reference to LM’s discussion in Counts 1, 2, and 3, of
why it sought damages “of at least $150,000,” which
LM had calculated as being “the minimum value of the
assets wrongfully transferred from Spaulding Enter-
prises, Inc. to Spaulding Trucking, Inc.” This latter inter-
pretation could be seen as a case of the plaintiff pleading
itself out of federal court, see Dakuras v. Edwards, 312
F.3d 256, 258 (7th Cir. 2002), since LM’s Jurisdictional
Status Report indicates that it is basing its damages for
Counts 7 and 8 on Spaulding Enterprises’s assets at the
time of the assets’ transfer to Spaulding Trucking, an
amount that was later determined to be at most $20,000.
In its Response to Defendants’ Motion to Dismiss for
lack of subject matter jurisdiction, however, LM assumed
the position it now advances on appeal, that it was not
legally impossible for Defendants to be held liable for
$185,776 on Counts 7 and 8. But even if this Court were
to disregard LM’s Jurisdictional Status Report and rely
solely on the position it first presented in response to the
Motion to Dismiss, LM has still failed to show that the
outstanding debt is an available remedy for its two fraud-
related claims against Rosetti. The cases LM relies upon to
show that the value of an outstanding judgment is an
available remedy for common law fraud and conspiracy
to defraud claims do not support that proposition. LM
first points to Sea-Land Services, Inc. v. The Pepper Source,
941 F.2d 519 (7th Cir. 1991), the same case relied upon to
show that the amount in controversy requirement was
satisfied with respect to LM’s alter ego claim. LM argues
20 No. 07-2606
that because one of the required elements for piercing
the corporate veil is showing that “adherence to the fic-
tion of separate corporate existence would sanction a
fraud or promote injustice,” id. at 520 (quoting Van Dorn
Co. v. Future Chemical and Oil Corp., 753 F.2d 565 569-70
(7th Cir. 1985) (emphasis added), a plaintiff bringing
independent claims of fraud or conspiracy to defraud
can recover the outstanding debt just as it would for an
alter ego claim. There would be no reason, however, for
Illinois to have a separate cause of action for piercing
the corporate veil if plaintiffs could recover outstanding
debts owed by a corporation from other entities through
a simple fraud claim.
Similarly unavailing is LM’s reliance upon Lincoln
National Life Ins. Co. v. Nicklau, Inc., No. 98 C 2453, 2000
U.S. Dist. LEXIS 6936 (N.D. Ill. May 17, 2000). As an
unpublished opinion from the Northern District of Illi-
nois, this case of course has no precedential value before
this Court. Moreover, even if this Court were to use
Lincoln National as persuasive authority, it does not
stand for the proposition LM asserts. The facts of Lincoln
National are very similar to those in this case. There, the
plaintiff had obtained an earlier judgment against a
restaurant named Pasteur. This first restaurant was dis-
solved, and the wife of one of the two brothers who co-
owned this first restaurant then opened a new restau-
rant under the same name at a new location, with the
two brothers working as employees. Id. at *2-5. The plain-
tiff sued the second Pasteur restaurant and the two broth-
ers for the outstanding judgment under claims for suc-
cessor liability and intentional and constructive fraud,
among others. Id. at *1-2. Although, as noted by LM,
the district court did find that “a fraudulent transfer
No. 07-2606 21
occurred,” id. at *18, this does not support LM’s assertion
that it can obtain the outstanding debt it is owed from
Rosetti through claims for fraud and conspiracy to
defraud. The district court’s discussion of fraudulent
transfer in Lincoln National was done within the context
of the plaintiff’s successor liability claim, not its claims
for intentional and constructive fraud. Moreover, the
district court made clear in its judgment that only the
second Pasteur corporation was liable for the outstanding
debt, not the two brothers individually named as defen-
dants. Id. at *19-21. Accordingly, Lincoln National does not
support LM’s assertion that Rosetti can be found liable
in the amount of the outstanding judgment for fraud or
conspiracy to defraud.
Instead, as Defendants point out, damage awards for
fraud are based upon the plaintiff’s loss (rather than the
defendant’s gain), Martin v. Allstate Ins. Co., 416 N.E.2d
347, 352 (Ill. App. Ct. 1981), and as a general matter,
provide damages of “such an amount as will compen-
sate the plaintiff for the loss occasioned by the fraud or
the amount which plaintiff is actually out of pocket by
reason of the transaction.” Brown v. Broadway Perryville
Lumber Co., 508 N.E.2d 1170, 1176 (Ill. App. Ct. 1987). Based
on LM’s complaint and arguments to this Court, “LM’s
fraud claims center on the allegations that a new roll-
over company, Spaulding Trucking, was created to
obtain all of the assets of Spaulding Enterprises, and
thereby continue Spaulding Enterprises’s income produc-
ing business operations.” Appellant’s Reply Br. at 11.
Accordingly, LM’s “loss occasioned by the fraud” was the
value of Spaulding Enterprises’s assets that were fraudu-
lently transferred pursuant to the Assignment for the
Benefit of Creditors, which for reasons discussed, could
22 No. 07-2606
not have exceeded $20,000. Despite LM’s summary asser-
tion that it is legally possible for it to recover the out-
standing judgment as the remedy for these claims, LM
has been unable to point to any case where a plaintiff
recovered an outstanding judgment through a common
law fraud or conspiracy to defraud claim. While such a
remedy may exist for a claim of fraudulent conveyance
brought under the Uniform Fraudulent Transfer Act, 740
ILL. COMP. STAT. 160/8, or, as discussed, through an alter
ego or successor liability cause of action, those are not the
claims raised in Counts 7 and 8.4 Accordingly, the amount
in controversy requirement has not been satisfied as it
relates to Rosetti, and federal jurisdiction does not exist
over the claims against her.5 Federal jurisdiction does
4
We note that our damages discussion with respect to the
fraud counts against Rosetti is distinct from our damages
discussion concerning LM’s alter ego claim. Defendants’
arguments for the alter ego claim concerned the likelihood of
LM prevailing on the merits of its claim and how a district
court should exercise its equitable discretion in awarding
damages. Both of these arguments spoke to the merits of LM’s
claim and did not reflect that it was “legally certain” the
recovery would be for less than $75,000. In contrast, for the
fraud claims against Rosetti, our discussion does not address
the likelihood of LM prevailing on the Counts, but instead
focuses upon the maximum amount of damages LM could
recover under Illinois law and whether there is any legal
precedent for an outstanding judgment being awarded on a
common law fraud or conspiracy to defraud claim.
5
We also note that supplemental jurisdiction could not be
exercised over LM’s claims against Rosetti, because doing so
would require that she be joined as a defendant pursuant to
(continued...)
No. 07-2606 23
exist, however, for Counts 7 and 8 against all other defen-
dants, since the amount in controversy requirement has
already been satisfied for those defendants for reasons
already discussed.
III. Conclusion
For the foregoing reasons, we AFFIRM the district court’s
grant of Defendants’ Motion to Dismiss as it relates to
Counts 7 and 8 against Rosetti, and REVERSE the Motion
to Dismiss with respect to all other claims against all
other defendants. Accordingly, we REMAND this matter
to the district court with instructions to reinstate LM’s
Complaint consistent with this opinion. Circuit Rule 36
will apply on remand.
5
(...continued)
FED. R. CIV. P. 20, something explicitly forbidden by 28 U.S.C.
§ 1367(b) when doing so “would be inconsistent with” the
requirements for diversity jurisdiction under 28 U.S.C. § 1332,
which includes the amount in controversy requirement.
See Exxon Mobil Corp., 545 U.S. at 564-66.
USCA-02-C-0072—7-8-08