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Wachovia Securities, LLC v. Neuhauser

November 29, 2007

WACHOVIA SECURITIES, LLC, PLAINTIFF,
v.
DAVID NEUHAUSER, ANDREW A. JAHELKA, RICHARD O. NICHOLS, LEON A. GREENBLATT IIII, BANCO PANAMERICANO, INC., LOOP CORP., LOOP PROPERTIES, INC., AND SCATTERED CORP., DEFENDANTS.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

Plaintiff, Wachovia Securities, LLC ("Wachovia") brings a ten-count Revised Second Amended Complaint against Defendants, David Neuhauser ("Neuhauser"), Andrew A. Jahelka ("Jahelka"), Richard O. Nichols ("Nichols"), Leon A Greenblatt, III ("Greenblatt") (collectively "the Individual Defendants"), Banco Panamericano ("Banco"), Loop Corp. ("Loop"), Loop Properties, Inc. ("Loop Properties"), and Scattered Corp. ("Scattered") (collectively "the Defendants") seeking damages for common law fraud, breach of contract and all remedies available under the Illinois Uniform Fraudulent Transfer Act ("UFTA"). Wachovia also seeks a declaratory judgment that Neuhauser, Jahelka, Nichols, and Greenblatt (the "Individual Defendants") are jointly and severally liable for the obligations of their alter egos, Loop and NOLA, LLC ("NOLA").

Wachovia moves for Partial Summary Judgment against Neuhauser and Greenblatt. Neuhauser and Greenblatt moves to strike several paragraphs and two exhibits associated with Wachovia's Motion for Partial Summary Judgment. Banco, Loop, Loop Properties, and Scattered (the "Corporate Defendants") and the Individual Defendants move for summary judgment against Wachovia on all counts of the Revised Second Amended Complaint.

For the reasons stated herein, Defendants' Motion to Strike Paragraphs 31-36 and 39-43 and Exhibits 9 and 12 of Wachovia's Amended Statement of Material Facts is granted. Plaintiff's Motion for Partial Summary Judgment is denied. The Individual Defendants' Motion for Summary Judgment as to Counts I and VI is granted. The Individual Defendants' Motion for Summary Judgment as to Counts II through V is denied as to Loop, Greenblatt, Jahelka, and Nichols, granted as to Loop and Neuhauser, and granted as to NOLA and the Individual Defendants. The Corporate Defendants' Motion for Summary Judgment as to Counts VII through X brought under the Illinois Uniform Fraudulent Transfer Act is denied. Additionally, the Individual Defendants' Motion to Bar Wachovia's New Fraud Claim is granted and the Corporate Defendants' Motion to Bar Alleged Fraudulent Conveyances not in the Complaint is denied.

I. Background

Wachovia is a lending and banking institution and a successor to Prudential Securities Incorporated*fn1 ("Prudential"). Prudential's customer debits became Wachovia's assets after a July 2003 merger. Pl. 56.1 Resp. ¶ 1.*fn2 Wachovia is a limited liability company and a voluntary contract creditor. Pl. Resp. Ind. 56.1 ¶ 31, 41. Neuhauser, at Greenblatt's direction, opened two trading accounts at Wachovia using two entities, Loop and NOLA. The Individual Defendants began acquiring HRMI stock through the Loop and NOLA accounts on margin, and in doing so, incurred a substantial margin debt. Subsequently, the NASDAQ halted trading of HRMI stock, the stock plummeted, and the Loop and NOLA margin accounts became due. After the margin call, Wachovia contends that the Individual Defendants looted Loop by transferring its assets to the Individual Defendants, insiders, and related entities making it impossible for Wachovia to collect on its $2,900,000 margin call. Wachovia contends that Loop and NOLA were shell corporations and that the Individual Defendants are liable for the unpaid margins either directly or as alter egos of the two entities.

II. Statement of Facts

Relationships between the Individual and Corporate Defendants Greenblatt, Jahelka, and Nichols either own, operate, or have an interest in a web of corporate entities including Loop, Scattered, Banco, and Loop Properties. Loop is a small, closely-held company incorporated on September 12, 1997 and owned by Greenblatt, Jahelka, and Nichols. Neuhauser Resp. 56.1(b) ¶¶ 1, 6. Loop's shareholders are Greenblatt, Jahelka, and Nichols. Neuhauser Resp. 56.1(b) ¶¶ 1-2. Its officers are Greenblatt (Secretary), Jahelka (President), and Nichols (Treasurer). Neuhauser Resp. 56.1(b) ¶ 2; Pl. Resp. Ind. 56.1 ¶ 34. Loop is a "holding company" and until September 2002, it held ownership interests in limited partnerships which in turn, owned various parcels of commercial real estate in Chicago. Neuhauser Resp. 56.1(b) ¶ 8. Loop operates out of the 7th Floor of 330 South Wells, Chicago, Illinois (the "Wells building").

Neuhauser Resp. 56.1(b) ¶ 7. Neuhauser is Loop's "agent." Neuhauser Rep. 56.1(b) ¶ 28.

NOLA is a small, closely-held company that was organized on July 27, 1994. Neuhauser Resp. 56.1(b) ¶ 14. NOLA's "members" are Greenblatt's, Jahelka's, and Nichols's fathers. Pl. Resp. Ind. 56.1 ¶ 27. NOLA's manager is Teletech Systems, Inc. ("Teletech"). Pl. Resp. Ind. 56.1 ¶ 27; Neuhauser Resp. 56.1(b) ¶ 17. Teletech operates out of the Wells building. Neuhauser Resp. 56.1(b) ¶ 17. Teletech had the authority to manage NOLA's assets limited only by the provisions of the Limited Liability Company Act. Neuhauser Resp. 56.1(b) ¶ 16. Greenblatt was Teletech's sole officer and employee, and therefore, made day-to-day decisions on NOLA's behalf including whether NOLA would enter into trades. Neuhauser Resp. 56.1(b) ¶ 16, 18. Greenblatt, though never a shareholder of Teletech, acted at times as its Secretary during the relevant time period. Greenblatt became NOLA's registered agent on June 6, 2001. Id.

Scattered is owned by Greenblatt, Jahelka and Nichols and also operates out of the Wells building. Corp. Rep. 56.1 ¶ 26; Ind. Rep. 56.1 ¶ 13. Loop Properties is a wholly-owned subsidiary of Loop. Pl. Resp. Corp. 56.1 ¶ 20. Loop Properties' officers and directors are Greenblatt (Secretary), Jahelka (President), and Nichols (Treasurer). Corp. Rep. 56.1 ¶ 29. Banco is wholly owned by one of Greenblatt's family trusts. Neuhauser Resp. 56.1(b) ¶ 12. Greenblatt is solely responsible for running Banco's day-to-day operations. Corp. Rep. 56.1 ¶ 28. When Loop deals with Banco, it does so through Greenblatt. Id. Banco operates out of the Wells building and its only employee is Greenblatt. Neuhauser Resp. 56.1(b) ¶ 13; Ind. Rep. 56.1 ¶ 23.

Loop held an ownership interest in EZ Links Golf, Inc. ("EZ Links") when EZ Links was established. Corp. Rep. 56.1 ¶ 40. Greenblatt and Jahelka have an interest in EZ Links via their ownership of Loop. Ind. Rep. 56.1 ¶ 27.

Shared Office Space

Loop, Loop Properties, Banco, Scattered, Loop Telecom, Resource Technology Corporation ("RTC"), and EZ Links operate out of the Wells building. Ind. Rep. 56.1 ¶ 13, 18, 20. Greenblatt, Jahelka and Nichols worked out of the Wells building and each had only one phone number. Id. Neuhauser described the 7th Floor of the Wells building as "a little cluster of offices" that are all "basically connected." Ind. Rep. 56.1 ¶ 18. Scattered rented the 7th floor suites from 200 West Partners, LLP. The general partner of 200 West Partners is 200 West Properties, Inc. and the owner of 200 West Properties is Loop. Id. Jahelka signed Scattered's lease. Id. Scattered did not make rental payments from 1999 to 2003. Id. Loop may have also been on the 7th Floor lease, but assuming it was, Loop did not reimburse Scattered for using its space. Id.

Shared Employees and Expenses

Michael May ("May") was Loop's in-house accountant from 1999 through 2002. Corp. Rep. 56.1 ¶ 27. May's office was located in the Wells building. Ind. Rep. 56.1 ¶ 13, 18. May did not keep records of this time when he was employed by Loop. Ind. Rep. 56.1 ¶ 31. Although he was a Loop employee, May prepared Greenblatt's individual tax returns without receiving additional compensation. Ind. Rep. 56.1 ¶ 30. Additionally, May worked with other companies such as RTC, EZ Links, Loop Telecom, and Banco. Ind. Rep. 56.1 ¶ 31. While working for Loop, May received medical benefits from RTC and then through EZ Links. Ind. Rep. 56.1 ¶ 33. The parties dispute whether Greenblatt owned and controlled RTC. Corp. Rep. 56.1 ¶ 49. May did not know what benefits RTC received in exchange for providing employment benefits to Loop's employees. Id.

In 2002, Jahelka, Loop's President, advised May that his employment at Loop was terminated and that he would now be a Loop Properties employee. Ind. Rep. 56.1 ¶ 29. When May changed positions from Loop to Loop Properties, his salary, day-to-day obligations, office, business cards, phone and fax numbers, and office equipment did not change. Ind. Rep. 56.1 ¶ 29. Subsequently, Jahelka told May that he was a Scattered employee. Id.

Elizabeth Sharp ("Sharp") initially served as Loop's in-house counsel. Ind. Rep. 56.1 ¶ 15. Sharp worked in the Wells building. While working for Loop, Sharp performed legal services for other limited partnerships such as 200 West Properties and RTC, and viewed those entities as "clients." Ind. Rep. 56.1 ¶ 15. Sharp does not know if other entities, such as 200 West Properties, reimbursed Loop for her time. Id. Sharp did not record her time while working for Loop and received healthcare benefits from RTC. Id.

In 2002, Sharp changed positions from Loop's in-house counsel to Loop Properties' in-house counsel at Jahelka's request. Ind. Rep. 56.1 ¶ 17. No one replaced Sharp as Loop's in-house counsel. Id. When Sharp moved to Loop Properties, she continued to represent the same clients that she represented while at Loop, did not move offices, did not change her phone number, and did not change her e-mail address. Id. In 2005, Sharp changed positions from Loop Properties' in-house counsel to Scattered's in-house counsel at Jahelka's request. Id. When Sharp moved to Scattered, she continued to represent the same clients that she represented while at Loop, did not move offices, did not change her phone number, and did not change her e-mail address. Id.

While Jahelka served as Loop's President, he worked for a number of different entities in which Loop's owners had an interest. Ind. Rep. 56.1 ¶ 10. Jahelka could not recall a situation where one of the entities under Loop reimbursed Loop for Jahelka's time. Id.

Although Defendants claim it exists, they have not produced an expense sharing agreement Loop had with several related entities. Sharp heard of the existence of an oral fee sharing agreement between various Greenblatt controlled entities, but was unfamiliar with the specifics of the agreement. Ind. Rep. 56.1 ¶ 16. She did not know whether the agreement was followed. Id. There are no records reflecting payments from other related entities to Loop to reimburse Loop for its expenses. Pl. Resp. Ind. 56.1 ¶ 41.

Capitalization, payments, and shareholder's meetings In 2000, Loop opened a line of credit with Banco which was secured by a blanket lien against all of Loop's assets. Neuhauser Resp. 56.1(b) ¶¶ 9, 11. Over the next several years, Banco loaned Loop $16-$17 million dollars despite the fact that Loop was in default on Banco's loan in 2001 or 2002. Id.; Greenblatt. Dep. Tr. pp. 61-62. Banco has not foreclosed on its loan to Loop even though Loop is in default. Corp. Rep. 56.1 ¶ 33. The parties dispute whether Loop had significant capitalization. Ind. Rep. 56.1 ¶ 34. May believes that as of December 31, 2000, Loop had additional paid-in capital of more than $9.8 million as reflected in Loop's 2000 and 2001 tax returns. Id. Jahelka does not know why Loop's annual reports showed $1,000 paid-in-capital despite Loop's claims that it was capitalized with a $10 million investment. Ind. Rep. 56.1 ¶ 11. The parties dispute whether paid-in-capital reflects the actual capitalization of a corporation. Id.

Jahelka was unable to explain why Loop's shareholders received payments in different amounts at different times. Ind. Rep. 56.1 ¶ 12. Nichols could not explain why the Individual Defendants were compensated for their work one year and not the next and why one shareholder would receive a payment on one day when another would not. For example, Greenblatt paid himself $175,000 in January 2001 and $100,000 in February 2001 but Jahelka received nothing in January and February 2001. Id. Jahelka could not say whether any payments made to the shareholders were based upon any pre-determined salaries. Id. Greenblatt could not recall why Loop paid him $125,000 in April 2000. Ind. Rep. 56.1 ¶ 25.

Jahelka could not recall any formal shareholders meetings for Loop, did not recall seeing meeting minutes, did not know if Loop kept a minute book, and testified that if Loop had corporate resolutions, they were not "in one place." Ind. Rep. 56.1 ¶ 14. Jahelka claims that Loop's officers met on a daily basis and believes that their meetings were memorialized "as necessary." Id. Loop's resolutions, if they exist, were not a part of the record. Greenblatt could not recall whether Loop had meetings of its board of directors nor could he recall whether Loop had directors at all. Ind. Rep. 56.1 ¶ 24. Greenblatt testified that minutes of annual shareholders' meetings were recorded and kept, but when Loop's officers met, minutes were not kept. Id.

May did not know if Loop held annual shareholder meetings or if Loop held regular board of directors' meetings. Ind. Rep. 56.1 ¶ 32. May has never seen a minute book and did not know if Loop paid rent for its office space even though he was responsible for recording rental payments. Id.

Neuhauser Opens the Loop and NOLA Accounts and Loop and NOLA Acquire HRMI Stock

On May 19, 2000, Greenblatt, Banco, Chiplease, Inc. ("Chiplease"), and Leslie Jabine entered into a Standstill Agreement with HRMI wherein they represented they had no plans or intentions of acquiring additional HRMI shares in excess of 40% of the outstanding shares of the company. Ind. Rep. 56.1 ¶ 7. On August 8, 2000, Greenblatt filed a 13D publicly disclosing ownership of a sufficient percentage of HRMI to constitute a controlling interest. Pl. Resp. Ind. 56.1 ¶ 23.

Two months later, on October 16, 2000, Neuhauser, Loop's agent, opened a securities account at Wachovia under the name of Loop Corp. at Greenblatt's direction. Pl. 56.1 Resp. ¶ 13; Neuhauser Resp. 56.1(b) ¶¶ 28-30. Neuhauser was a day trader and held an individual trading account at Wachovia as well as a business account in the name of his company, Loren Holdings, Inc. Neuhauser Resp. 56.1(b) ¶ 24. Neuhauser's broker at Wachovia, Kris Stelzner ("Stelzer"), described Neuhauser as "a very sophisticated trader' who was "knowledgeable about equities, bonds, [and] commodities." Neuhauser Resp. 56.1(b) ¶ 25. Neuhauser would never have opened the Loop account without authorization from Greenblatt. Ind. Rep. 56.1 ¶ 19. Wachovia knew that Loop was a corporation when it entered into a commercial relationship with Loop. Pl. Resp. Ind. 56.1 ¶ 40.

When Neuhauser opened the Loop account, Wachovia prepared a client intake form. The form has questions regarding a prospective client's investment experience and financial status. Neuhauser Resp. 56.1(b) ¶ 31. Loop's account intake form states that Loop has at least 10 years of investment experience in equities, bonds, options, futures, and mutual funds, net earnings of between $10,000,000 and $24,999,999, a net worth between $10,000,000 and $24,999,999, and a liquid net worth between $10,000,000 and $24,999,999. Neuhauser Resp. 56.1(b) ¶ 36. Although Wachovia claims that the information handwritten on the client intake forms is typically provided by the customer and recorded by a Wachovia representative, the parties dispute whether Neuhauser provided the information on the Loop intake form and dispute whether the information was accurate. Neuhauser Rep. 56.1(b) ¶ 24; Neuhauser Resp. 56.1(b) ¶ 34. The parties agree that Wachovia relies on the accuracy of information provided by customers when accounts are opened, but dispute whether Wachovia actually relied upon the information on the Loop intake form when it decided to open the account. Neuhauser Resp. 56.1(b) ¶ 32, 43.

When Neuhauser opened the Loop account, Neuhauser entered into margin agreement (the "Loop Margin Agreement") on Loop's behalf wherein Neuhauser expressly represented that he, as well as Loop and its principals, would conduct trading in the account "in accordance with all applicable law or requirements as well as the rules and practices of any market or clearing house through which my trades may be executed or processed." Ind. Rep. 56.1 ¶ 5. On October 27, 2000, Greenblatt filed a 13D publicly disclosing a 21.09% ownership interest in HRMI. Pl. Resp. Ind. 56.1 ¶ 23.

On February 28, 2001, Neuhauser opened the NOLA, LLC account at Greenblatt's direction.

Pl. Resp. Ind. 56.1 ¶ 13; Neuhauser 56.1(b) ¶ 29-30, 38, 39. NOLA is an Illinois Limited Liability Company. Pl. Resp. 56.1 ¶ 13. NOLA was dissolved when Neuhauser opened the account and was not reinstated until May 31, 2001. Pl. Resp. Ind. 56.1 ¶ 27. Although the account was opened under the name NOLA LLC, Neuhauser entered into a Partnership Account Agreement (the "PAA") that states:

"We, the undersigned, request you to open a partnership account in the name of NOLA, LLC, a duly organized partnership, or which each of us is a general partner and of which the undersigned are the sole partners."

Pl. Resp. Ind. 56.1 ¶ 30; Ind. Rep. 56.1 ¶ 27, 38; Group Ex. 17. The parties dispute whether Neuhauser told Wachovia that NOLA was a partnership and that Neuhauser was its general and sole partner. The parties further dispute that by signing the PAA, Neuhauser represented that NOLA was a partnership as opposed to a limited liability company. Ind. Rep. 56.1 ¶ 38.

When Wachovia opened the NOLA account, Wachovia prepared a client intake form similar to Loop's. Neuhauser Rep. 56.1(b) ¶ 40. The form states that NOLA had at least 15 years of experience in equities, bonds, options, futures, and mutual funds, net earnings of between $10,000,000 and $24,999,999, a net worth in excess of $25,000,000, and a liquid net worth in excess of $25,000,000. Neuhauser Resp. 56.1(b) ¶ 42. The parties dispute whether Neuhauser supplied the information on the NOLA client intake form and whether Wachovia relied upon the accuracy of the information in the NOLA intake form when it decided to open the account. Neuhauser 56.1(b) ¶ 29-30, 43.

The parties dispute whether Neuhauser represented to Stelzer that the Individual Defendants had a net worth of more than $50 million and would meet any margin calls which came due. Pl. Resp. Ind. 56.1 ¶ 21. Wachovia did not seek personal guarantees for the Loop or NOLA accounts from the Individual Defendants or anyone else at the time the accounts were opened, nor did it seek guarantees when the margin loans were extended. Pl. Resp. 56.1 ¶ 15.

On March 20, 2001, Greenblatt filed a 13D publicly disclosing a 24.58% ownership interest in HRMI. Pl. Resp. Ind. 56.1 ¶ 23. On April 3, 2001, HRMI publicized Greenblatt's holdings in a press release stating "Greenblatt and his affiliated companies own approximately 25% of HRMI's outstanding stock" and that HRMI also agreed at that time to an increase in the percentage to 39.9%. Id. On April 5 and April 12, 2001, Greenblatt filed 13D's publicly disclosing a 29.56% ownership interest and a 38.7% ownership interest, respectively. Pl. Resp. 56.1 ¶ 23. HRMI also disclosed the 38.7% ownership interest in its 2000 Form 10-k. Id.

The parties dispute whether Greenblatt's 13D disclosures accurately reflect his ownership interest in HRMI because they do not disclose NOLA's holdings. Pl. Resp. Ind. 56.1 ΒΆ 23. No one at Wachovia looked the 13D and 10k disclosures or any other filing with the SEC concerning HRMI even though such filings could ...


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