Notice: Seventh Circuit Rule 53(b)(2) States Unpublished Orders Shall Not Be Cited or Used As Precedent Except to Support a Claim of Res Judicata, Collateral Estoppel or Law of the Case in Any Federal Court Within the Circuit.in the Matter of Cldc Management Corporation, Debtor,appeal of Clarence O. Geschke and Irene M. Geschke, 956 F.2d 272 (7th Cir. 1992)

ORDER

Clarence and Irene Geschke, appearing pro se, appeal the district court's grant of summary judgment to LaSalle National Bancorp, Inc., dismissing Bancorp as a party to this action.¹  Bancorp was the parent corporation to another party in this suit, Union Realty Mortgage Company, Inc. (Union).²  The Geschkes amended their complaint to join Bancorp, alleging that Bancorp exercised control over Union, rendering Bancorp Union's alter ego. The Geschkes also seek to pierce the corporate veil because, they allege, Bancorp fraudulently liquidated Union in order to render Union judgment proof. Bancorp filed a motion for summary judgment, and the district court granted judgment to Bancorp, certifying the order for immediate appeal under Federal Rule of Civil Procedure 54(b).

Because of the complexity of the procedural background, we, as well as we are able, are setting forth an abridged version of the procedural history. Much of this had to be gleaned from the allegations made by the Geschkes. As these matters have not been resolved, we do not comment on the relative merit of the pending claims.

Clarence and Irene Geschke owned property in Woodstock, Illinois, and wished to construct a racquetball club on the land. The Geschkes procured a $375,000 loan from Union Realty Mortgage Company, Inc. As part of the agreement, the Geschkes deeded title to the property to Central National Bank as Trustee. The project, however, could not be completed for $375,000, and Union refused to lend any more money to the Geschkes to finish the construction. The Geschkes found a potential buyer for their interest in the land, and informed Union of this. Nevertheless, in 1978, Union initiated foreclosure proceedings against the Geschkes. The Geschkes sold their interest in the project to Crestwood Land Development Company Management Corporation (CLDC), the Geschkes allege, for a price well below its value.³  As part of the sale agreement, Union lent CLDC $144,000 for the completion of the project.

In 1979, a group of contractors who worked on the construction project obtained mechanics' lien notes to secure payment for their services. In September, 1979, two subcontractors filed lien foreclosure actions in state court against the trust, the Geschkes, Union and CLDC. The Geschkes filed counter-complaints against all the parties. The crux of the Geschkes' claims is that CLDC and Union, through certain of their directors and officers, fraudulently conspired to underfinance the project so the Geschkes would default on the loan and ownership would vest in either CLDC or Union.

In November, 1979, while the state court foreclosure actions were pending, CLDC filed a petition for voluntary reorganization under Chapter 11 of the Bankruptcy Code. The district court removed the pending state actions to federal court. In 1985, CLDC, claiming that it no longer had assets to reorganize, dismissed the bankruptcy petition. The Geschkes filed a motion for leave to amend their counter-claims, which was pending at the time the bankruptcy suit was dismissed. The district court allowed the Geschkes to amend their claims, adding several allegations of civil RICO violations. Thus, even though the bankruptcy action was no longer pending, the federal court retained jurisdiction over this suit.

CLDC and the Geschkes apparently settled their claims. (R. 7, p. 6) Union became the only real party in interest in the claims initiated by the Geschkes. In 1980, Union decided to stop operating. In 1989, the district court granted the Geschkes leave to amend their counter-complaint to join Bancorp, the parent corporation of Union, as a defendant to this action. The question presented by this appeal is whether the district court erred in granting summary judgment to the defendant, finding that Bancorp was not Union's alter ego and preventing the Geschkes from piercing the corporate veil. The appellants also challenge the district court's decisions concerning discovery.

On July 5, 1990, Bancorp filed a motion for summary judgment. Two affidavits and 15 exhibits were appended to the motion. On July 24, 1990, the Geschkes responded to this motion. In their response, the Geschkes contended that Bancorp denied their requests for access to documents concerning the relationship between Bancorp and Union. The Geschkes, in their Local Rule 12(m) response to Bancorp's Local Rule 12(l) statements, often denied the facts alleged by Bancorp and stating that they did not have access to information which would enable them to form an opinion on the purported fact. These denials encompass two points: 1) that some of Bancorp's allegations of fact were not supported by documentation and 2) that the Geschkes did not have access to documents which would either support or disprove these claims.⁴ 

The district court orally granted summary judgment to Bancorp on October 4, 1990. The district court found that the Geschkes' denials, claiming insufficient information, did not rebut Bancorp's Rule 12(l) statement, specifically noting the Geschkes' failure to file a motion to compel discovery. On October 10, 1990, the court vacated its judgment, granting the Geschkes time to file a motion for reconsideration and a motion to request the discovery of specific documents. The Geschkes filed a motion for the production of documents on October 22, 1990. Bancorp challenged this request. After holding several hearings and considering the numerous motions filed by the parties in regard to discovery, the district court again entered judgment for Bancorp on April 12, 1991.⁵  The Geschkes appeal the district court's determination that Bancorp was entitled to summary judgment as a matter of law.

Our review of a grant of summary judgment is de novo. " [O]ur task is to examine the evidence for ourselves, apply the same standard as the district court, ... and determine whether there is no genuine issue of material fact" and whether the moving party is entitled to judgment as a matter of law. Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519, 521 (7th Cir. 1991). We "view the record and all inferences drawn from it in the light most favorable to the party opposing the motion." Rizzo v. Caterpillar, Inc., 914 F.2d 1003, 1006 (7th Cir. 1990) (citations omitted).

Illinois law determines the test for corporate veil-piercing. [F]irst, there must be such unity of interest and ownership that the separate personalities of the corporation and the individual [or other corporation] no longer exist; and second, circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.

Sea-Land Services, 941 F.2d at 520 (quoting Van Dorn Co. v. Future Chemical and Oil Corp., 753 F.2d 565, 569-70 (7th Cir. 1985)). See also Lumpkin v. Envirodyne Industries, Inc., 933 F.2d 449, 462 (7th Cir. 1991). The determination of whether a corporation is so controlled by another, justifying disregard of the separate identities, focuses on four factors: "(1) the failure to maintain adequate corporate records or to comply with corporate formalities, (2) the commingling of funds or assets, (3) undercapitalization, and (4) one corporation treating the assets of another corporation as its own." Sea-Land Services, 941 F.2d at 521 (quoting Van Dorn, 753 F.2d at 570).⁶ 

The Geschkes claim that the evidence submitted by Bancorp does not resolve all questions of material fact. The appellants argue that some of the statements made by Bancorp in their motion are not supported by the appended evidence. Thus, the Geschkes conclude that the district court's grant of summary judgment to Bancorp is error.⁷  A short summary of the undisputed facts will be helpful in analyzing the grant of summary judgment.

Bancorp is a bank holding company. In 1972, Bancorp acquired Union, a mortgage banking business, as a wholly-owned subsidiary. On July 14, 1977, Union and the Geschkes entered into the loan agreement for the construction of the racquetball club. In December of 1979, the underlying suit, in which the Geschkes filed the counter-complaint against Union, was initiated.

Union's Board of Director's held a meeting on September 29, 1980.⁸  The losses sustained by Union in the past year were discussed in the meeting. The Board then adopted a resolution which:

authorize [d] and direct [ed] the Chairman of the Company promptly to take such action as is reasonable or desirable in order to terminate the business of the Company and promptly as practicable to proceed with the liquidation of the Company's assets in an orderly manner.

Union began to liquidate all of its assets, and by December, 1982, it had transferred all of its assets to Bancorp, except the Izdebski loans and three Union subsidiaries. The three subsidiaries transferred all assets to Union, and Union forgave the debt of the subsidiaries. Union ceased operations following the transfer of assets. Before Union stopped its operations, its offices were located at an address different from that of Bancorp. After operations ceased, (although the exact date is unclear from the record) Union shared its address with the legal department of Bancorp at Bancorp's offices. "Bancorp desired to preserve the Union because it wished to use certain net operating loss carry forwards on its consolidated tax returns." (R. 154) On October 1, 1987, Union merged itself with its three subsidiaries, although the merger had no affect on Union's net worth.

Bancorp maintains that Union independently complied with corporate formalities. In support of this contention, Bancorp offered the copy of minutes from September, 1980. Bancorp claims that Union still complies with these corporate formalities.⁹  Bancorp did not submit other corporate minutes which would prove consistent compliance with corporate formalities.¹⁰  Bancorp also claimed that while Union was an operating company, it prepared separate financial reports. In support of this statement, Bancorp provided certain pages from its 1978 and 1979 Form 10K Reports which listed Union as a subsidiary "for which separate financial statements are filed." Bancorp also provided cover letters from the auditing firm of Ernst & Ernst (later Ernst & Whinney). These letters verify that Union's financial statements fairly represent its financial position. In 1973-75, the letters were addressed to Union's Board of Directors. The cover letters for the years 1976, 1977, 1979 and 1981 are addressed to Bancorp. Finally, Bancorp presented a number of "Inter-Bank Correspondence" and accounting sheets documenting the transfer of assets from Union to Bancorp, with Bancorp immediately selling these assets to another subsidiary, Exchange National Bank. Bancorp explains that these assets were transferred as partial satisfaction of a $1,093,767 debt. Bancorp submitted a copy of an internal memorandum stating that the Comptroller of Currency ordered Union to pay this money to Exchange Bank for a tax benefit that was erroneously assigned to Union, but belonged to its sister corporation.¹¹  As the parent corporation, Bancorp claims that it was legally obligated to cover the debt.

Bancorp contends that there is no evidence that it commingled funds with Union. Bancorp did not, however, submit any evidence, such as either its or Union's accounting ledgers, to establish the absence of a such a financial relationship while Union was a going concern. In the absence of such evidence, it is difficult to determine whether any assets had been commingled or whether Bancorp used Union's assets as its own. The only evidence presented was the accounting summaries reporting the final transfer of assets from Union to Bancorp. As to Union's capitalization, Bancorp relies on the affidavit of Marvin Reynolds, who was Union's president from 1975 until August of 1978. Reynolds stated that in 1978, Union had a net worth of $4,956,00.¹²  Reynolds further asserted that the assets were not commingled. Bancorp also used Reynolds' affidavit to support its claim that Bancorp neither paid nor made hiring, firing or promotion decisions regarding Union employees. Finally, Bancorp claims that there is no evidence that it treated Union's assets as its own.¹³ 

The Geschkes maintain that the evidence of Bancorp's control over Union at least raises a genuine issue of material fact. The Geschkes claim that it was Bancorp, not Union, who decided to cease Union's operations. The Geschkes point to the fact that many of those present at the September 20, 1980 meeting were directors or officers of Bancorp. The Geschkes cite to the prospectus, dated September 29, 1982, provided by CNCC to Exchange International Corp. concerning the two corporations' proposed merger.¹⁴  The Geschkes also rely upon Bancorp's 1981 Form 10K Report which states that Bancorp "recognized a loss of $3,547,000 on September 30, 1980 as a result of its decision to discontinue" Union's operations. This report also classifies Union's assets and liabilities as those of Bancorp. Finally, the report stated that Union's "liquidation" was "largely completed by December 31, 1981." In addition, Bancorp placed $15,000 in Union's checking account in 1985 to cover an overdraft written on Union's checking account. Mr. Theodore Schultz testified in a 1988 deposition that this action was taken to ensure that Union would not go bankrupt, enabling Bancorp to continue to receive tax benefits based on Union's carry-over losses. The Geschkes also note that after CNCC and EIC merged, forming Bancorp, the entity set up a "litigation reserve." This reserve was originally placed only on Bancorp's books to cover the possible expenses of litigation involving any of its subsidiaries.

The appellants also challenge Bancorp's assertion that Union controlled its own personnel decisions. In an answer to a set of interrogatories, Union stated that in 1978, Robert Schroeder, who was an employee of Central National Bank, worked at Union on special assignment. Further, Steve Kannistra, testified in a deposition that he was transferred from Central National Bank in 1976 to Union after Central Bank dissolved its real estate department. Kannistra stated that Central Bank paid his salary. Kannistra received a termination notice from the legal department of Central Bank. Evidently, he was terminated for his involvement in the loans that gave rise to the underlying lawsuit. Finally, the Geschkes cite to the deposition testimony of Dennis Kaplan, who worked for Union until 1978:

because Central National Bank,¹⁵  was going to bring new people in to [sic] Union Realty.... (Q. So why did you leave?) Central National Bank had brought in a new Chairman and new President. I didn't feel comfortable with the change in management, to get used to new executives after I had been there six years. And I anticipated, and I did not know that the other executives there that I liked would probably feel the same way and be leaving. And as it happened, after I left about a month or two later, they had also left.

Finally, the Geschkes point out that Union decided to cease operation shortly after their suit was filed. They argue that this action constituted a continuation of Union's fraud, as alleged in the underlying lawsuit, and that Bancorp, its parent, decided to cease Union's operations in order to make Union judgment-proof.

We hold that the grant of summary judgment to Bancorp was inappropriate. The lack of evidence concerning Bancorp's relationship with Union while Union was still a going-concern is the most disturbing.¹⁶  There is little or no evidence presented as to Union's accounts which would either prove or disprove such necessary features as the commingling of assets or the observance of corporate formalities. Indeed, after the transfer of assets, which appear to be properly transferred, Union became little more than a tax write-off for Bancorp. There is no competent evidence that Union still adheres to corporate formality. Instead, the Geschkes presented evidence that such formality no longer exists. The Geschkes also presented evidence suggesting that either Bancorp or Union's sister corporation had a great deal of control over Union's executives while Union was a going concern. We lack sufficient evidence to make a determination as to Union's status before Union began winding down its operations. Following the cessation of business, Union begins to look like an alter ego of Bancorp. In short, Bancorp did not provide enough evidence to meet its burden as the party moving for summary judgment. The Geschkes, on the other hand, identify genuine issues of material fact.

A great deal of time was spent by the parties filing motions concerning discovery. Again, a somewhat detailed discussion of the proceedings surrounding the discovery motions is helpful in framing the discovery issues. "Our standard of review for the district court's decision not to allow additional pre-trial discovery is abuse of discretion." Olive Can Co., Inc. v. Martin, 906 F.2d 1147, 1152 (7th Cir. 1990).

The entire discovery question is complicated by the fact that it is unclear from the record what the district court judge intended when he allowed the Geschkes to file the request for production of documents after vacating the grant of summary judgment to Bancorp. At times it appears that the district court allowed the Geschkes to file the request so that they could re-open discovery to obtain any and all evidence relevant to the corporate veil-piercing issue.¹⁷  At other times, the court appeared to limit the discovery question to whether Bancorp (or Union, because Bancorp was not a defendant at the time) turned over all documents that had been requested by the Geschkes' former counsel.¹⁸  The court never directly addressed the Geschkes' contentions that due to former counsel's failure to request some of the pertinent documents, counsel's withdrawal and the subsequent addition of Bancorp as a defendant, they should be allowed to undertake discovery on the veil-piercing issue. Nor did the district court discuss the potential procedural problems, such as the filing of the request after summary judgment was granted or whether the Geschkes' response, in which they repeatedly stated that they could not reply due to lack of discovery, could be treated as complying with Rule 56(f).

It is clear from the record, that the Geschkes' counsel made a request and a supplemental request for documents in March, 1980. These requests dealt only with the underlying dispute. Counsel made another request on May 5, 1988.¹⁹  On February 9, 1989, Geschkes filed a Rule 34 request for production of document, which the district court treated a motion to compel. Bancorp challenged the motion contending that discovery had already closed. The district court referred the matter to Magistrate Judge Thomas Rosemond, Jr., who found the request to be untimely as discovery was scheduled to end on May 31, 1988. The Magistrate stated that former counsel must have been satisfied with the document production, for they filed no motions to compel. Finally, the Magistrate found certain requests to be irrelevant, because " [r]elevance is gauged by the violations alleged in the complaint and an assessment of the evidence useful in establishing those allegations." Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221, 226 (7th Cir. 1978) (R. 99, p. 6 n. 14)²⁰ 

To attempt to resolve this discovery dilemma, the district court held a number of hearings. At a hearing on January 9, 1991, one of the Geschkes' former attorneys, Alan Lapidus, testified. The court asked Mr. Lapidus whether the attorneys considered adding Bancorp to the suit, which would affect the document requests made by the attorneys. Mr. Lapidus testified: " [I]t was my view at the time ... that we could postpone consideration of that issue." (TR Vol. 29, p. 12) Mr. Lapidus was of the opinion that the Geschkes could first obtain the judgment against Union, and then go after Bancorp. The attorneys for Bancorp (who are also the attorneys for Union) stated that they believed Bancorp would be added as a defendant. Therefore, in 1988, Attorney Steve Diamond sought to get "every document that shows this relationship [between Bancorp and the Union] ... and that's what I produced." (TR Vol. 29, p. 36) The documents that Bancorp believed to be pertinent fit into nine boxes. In 1990, however, when preparing the motion for summary judgment, Mr. Diamond apparently realized that he needed additional documents, which were neither contained in the nine boxes nor previously produced, to support his motion for summary judgment. Some of these documents were only turned over when the motion for summary judgment was filed, as they were appended to the motion. Senior Vice-President of Exchange National Bank, Mark Nystuen also testified at this hearing. The crux of his testimony is that Bancorp has over 50,000 boxes in storage relating to the finances of Bancorp and its affiliates. Of these boxes, 184 related to Union. (TR 29, p. 43).²¹ 

Bancorp argues that the district court only allowed the Geschkes to amend their counter-complaint with the understanding that no further discovery would be conducted. Discovery was one of Judge Grady's concerns when ruling on the Geschkes' motion to file a fourth amended counter-complaint. The Geschkes sought to amend their complaint on several grounds. First, the Geschkes sought to add two more fraud claims, relating to two other loans from Union for two tracts of land upon which the Geschkes planned to construct buildings. Because these claims would require " [e]xtensive additional discovery," to be undertaken by Union, the court denied leave to amend. (R. 118, p. 16) The district court viewed the addition of Bancorp as a different situation. "Further, there is no undue prejudice here because the new counter-defendants have documents within their possession showing their relationship to Union." (R. 118, P. 20) The district court did not suggest that the documents within Bancorp's possession could not be discovered by the Geschkes.

On March 26, 1991, the district court reinstated its grant of Bancorp's motion for summary judgment, and certified the case for immediate appeal pursuant to Fed. R. Civ. P. 54(b). In regard to the discovery issues Judge Grady stated: " [T]he court vacated the Rule 54(b) finding and direction, so that the counter-plaintiff would have an opportunity to conduct discovery concerning the allegations of their motion to vacate the summary judgment. At the conclusion of that discovery, counter-plaintiffs have, in the opinion of the court, been unable to show that Bancorp failed to produce documents that had been requested by counter-plaintiffs or their counsel in discovery and which would have materially assisted counter-plaintiffs in their opposition to the summary judgment motion."

There are problems with the district court's handling of these discovery matters. First, as already noted, the district court did not identify the parameters of the discovery proceedings. We cannot discern from the record whether the district court denied the Geschkes' request for further discovery or whether the district court believed that the Geschkes had been granted access to and given all the evidence which was arguably relevant to the corporate veil-piercing issue. The district court seemed to accept Bancorp's assertion that all documents relevant to this issue had been turned over. Yet, the district court failed to recognize that these statements were based upon what Bancorp alone deemed relevant. Bancorp never responded to the document production request filed by the Geschkes following the district court's vacation of judgment in its favor, even though the district court specifically advised Bancorp to respond.²²  Because we cannot determine the basis for the district court's decision on these discovery matters, we must find an abuse of discretion.²³ 

CONCLUSION

This case has had a confused and complex procedural history. Our review leads us to conclude that Bancorp failed to produce sufficient evidence to prove their entitlement to summary judgment on the corporate veil-piercing issue. Most conspicuously absent from the record are Union's or Bancorp's accounting sheets, dated before Union ceased operations, which would most clearly demonstrate the type of relationship between Union and Bancorp. In addition, remand is necessary so that the district court can clarify its position and reasoning on the discovery issues. Our holding does not suggest that Bancorp can never prove entitlement to summary judgment. We only conclude that such an entitlement cannot be shown on this record.

We also note that the appellants have been litigating on a pro se basis since July 1988, when their previous counsel withdrew. Oral argument on their behalf in the court was delivered by Irene M. Geschke. When it was pointed out to her during argument that the case was a complex one and involved a search of numerous records, a task ill-suited to litigants with no legal background, she responded that she had tried to find legal counsel who would represent them on a contingency basis and had made contact with twenty-eight law firms, none of whom were willing to take on the task of representation. This is understandable as this is a case, as it now stands, in which success is not easy to predict, unlike many in which there are sufficient indicia of success that the resulting judgment is concerned primarily with the amount thereof. It appears to the court that the appellants would be well advised to continue their efforts to secure legal counsel.

For these reasons, the decision of the district court is REVERSED and REMANDED for further proceedings in accordance with this order.