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Wachovia Securities, LLC v. Jahelka

October 22, 2008

WACHOVIA SECURITIES, LLC, PLAINTIFF,
v.
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

Defendant Loop Corp. ("Loop") traded stock on margin using an account at Prudential Securities Incorporated ("Prudential"). Stip. ¶ 2. Plaintiff, Wachovia Securities, LLC ("Wachovia") is Prudential's successor in interest.*fn1 Id. On May 22, 2001, the stock collapsed resulting in a $1.9 million debt. Wachovia subsequently obtained an NYSE Arbitration Award, which was reduced to judgment against Loop in the amount of $2,478,418.80. Stip. ¶ 17, 18; PTX 38. Seven years later, the debt remains unpaid and Wachovia contends that Defendants Andrew A. Jahelka ("Jahelka"), Richard O. Nichols ("Nichols"), and Leon A Greenblatt, III ("Greenblatt") looted Loop by transferring its assets to themselves, insiders, and related entities, which made it impossible for Wachovia to collect. Dk. 319 at 3. Wachovia now seeks to hold Jahelka, Nichols, and Greenblatt*fn2 jointly and severally liable for the obligations of Loop, as the alter ego of Loop, under the doctrine of piercing the corporate veil (Counts II and IV) and seeks all remedies available under the Illinois Uniform Fraudulent Transfer Act, 740 ILCS 160/5(a)(1) ("UFTA") against Loop, Banco Panamericano ("Banco"), Loop Properties, Inc. ("Loop Properties"), and Scattered Corp. ("Scattered")(Counts VII through X).*fn3 Wachovia also seeks actual costs and attorneys fees incurred since September 22, 2005 through the date of judgment.*fn4

PROCEDURAL HISTORY

On November 29, 2007, this Court denied Wachovia's Motion for Summary Judgment as to Neuhauser and Greenblatt with respect to Count I and granted summary judgment in favor of Neuhauser, Jahelka, Nichols, and Greenblatt with respect to Counts I and VI. Additionally, the Court granted in part and denied in part Neuhauser, Jahelka, Nichols, and Greenblatt's Motion for Summary Judgment as to Counts II through V. Specifically, the motion was denied as to Loop, Greenblatt, Jahelka, and Nichols; granted as to Loop and Neuhauser; and granted as to NOLA, LLC and Neuhauser, Jahelka, Nichols, and Greenblatt. Finally, the Court denied Banco, Loop Properties, and Scattered's Motion for Summary Judgment as to Counts VII through X brought under the Illinois Uniform Fraudulent Transfer Act.

From January 7, 2008 to January 16, 2008, the court conducted a bench trial to resolve the remaining claims. After listening to the testimony presented by both parties and reviewing the documents entered into evidence at trial, the following constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

I. Background

A. The Parties

Wachovia is a banking and financial lending institution. Stip. ¶ 2. Defendant Loop is a small, closely-held company owned by Defendants Greenblatt, Jahelka, and Nichols, or their respective family trusts or estate planning entities.*fn5 (Stip. ¶ 19). Loop's respective ownership interests are: Greenblatt (50%), Jahelka (30%), and Nichols (20%). Id. Jahelka is Loop's President, Nichols is it's Treasurer, and Greenblatt was the company's Secretary. Id.; Tr. Vol. 4-B, Pg. 168.

On September 28, 2000, Neuhauser, acting on behalf of Loop and at Greenblatt's direction, opened a margin account at Wachovia in the name of "Loop Corp." Stip. ¶ 13. Loop's account was used exclusively to acquire shares of stock in Health Risk Management, Inc. ("HRMI") on margin. Stip. ¶ 15; PTX 37. On May 22, 2001, the NASDAQ halted trading in HRMI and the value of the Loop account at Wachovia fell into a debit balance. Stip. ¶ 16. As a result, Defendants' Loop account incurred a margin debt of $1,885,751.44 resulting almost entirely from holdings in HRMI. Id.; Stip ¶ 17. Although Wachovia subsequently obtained an NYSE Arbitration Award which was reduced to a judgment against Loop in the amount of $2,478,418.80, Loop has not paid the judgment. Stip. ¶ 17, 18; PTX 38.

After the margin debt came due, Loop transferred over a million dollars in assets and made a number of payments to its shareholders and companies such as Banco, Resource Technology Corporation ("RTC"), H&M Partners, EZ Links, Scattered, 200 West Partners, Telegraph Properties, and Loop Telecom, LP. PTX 26.

B. The Companies

Greenblatt, Jahelka, and Nichols either own, operate, or have an interest in a web of corporate entities including Loop, Scattered, Banco, and Loop Properties and operate them out of a suite of interconnected offices on the seventh floor of a building located at 330 South Wells in Chicago (the "Wells Building").

Loop was incorporated in South Dakota on September 12, 1997 as a wholly-owned subsidiary of Rumpelstiltskin USA, Corp. ("Rumpelstiltskin"). Tr. Vol. 4-B, Pg. 170; PTX 1. Loop maintains its registered office in Suite 711 of the Wells Building. Stip. ¶ 20. Loop was "spun off" from Rumpelstiltskin to Greenblatt, Nichols and Jahelka with the same 50%, 30%, and 20% ownership structure. Tr. Vol. 4-B, Pg. 171; Tr. Vol. 5B, Pg. 147-149. The "spin off" documents were purportedly a part of Loop's corporate records-records that Greenblatt was responsible for maintaining as Loop's Secretary. Tr. Vol. 4-B, Pgs. 168, 171-173.

Defendant Banco is a South Dakota corporation with its principal place of business in adjoining Suite 718 of the Wells Building. Stip. ¶ 32. Banco is wholly-owned by one of Mr. Greenblatt's family trusts. Id.; Tr. Vol. 4-B, Pg. 188. Greenblatt is the sole officer, director and employee of Banco. Id. Defendant Scattered was also incorporated under South Dakota law and operates out of Suite 711 (the same Suite as Loop) of the Wells Building. Stip. ¶ 9. Like Loop, Scattered's owners are Greenblatt (50%), Jahelka (30%), and Nichols (20%). Stip. ¶ 54; Tr. Vol. 4-B, Pg. 186. Greenblatt's 50% share of Scattered is held by the same family trust that owns Banco and the trustee of that trust is Defendant Nichols. Tr. Vol. 4-B, Pg. 186. Defendant Loop Properties is an Illinois corporation operating out of Suite 711 of the Wells Building. Stip. ¶ 8. Loop Properties is owned 90% by Scattered and 10% by Loop. Tr. Vol. 4-B, pg. 185.

In addition to Loop, Greenblatt owns and controls a number of related companies, and operates them out of the seventh floor of the Wells Building. RTC is owned 100% by Rumpelstiltskin. Tr. Vol. 4B, pg. 190. RTC's address is "c/o Scattered Corp." Id. Rumpelstiltskin, in turn, is owned by Greenblatt (50%), Jahelka and Nichols (collectively 50%). Tr. Vol. 4-B, Pg. 191. Rumpelstiltskin's address is "c/o Elizabeth Sharp," who was employed as the in-house counsel for Loop before she became the in-house counsel for Loop Properties and then finally (and currently) the in-house counsel of Scattered. Id. Even though Elizabeth Sharp ("Sharp") is currently employed as in-house counsel for Scattered, she is also Rumpelstiltskin's attorney. Tr. Vol. 4B, pg. 192. Chiplease, Inc. ("Chiplease") is 100% owned by one of Greenblatt's family trusts-the same trust that owns Banco-and according to Greenblatt, the address of Chiplease is "wherever you [i.e., Greenblatt] happen to be." Tr. Vol. 4B, pg. 192. Repurchase Corp. ("Repurchase") is 100% owned by another one of Greenblatt's family trusts, and Greenblatt is solely responsible for the day-to-day operations of that company. Tr. Vol. 4B, pg. 192.

South Beach Securities, Inc. ("South Beach") operates out of Suite 718 of the Wells Building. (PTX 50). South Beach is wholly owned by NOLA, LLC ("NOLA"). Tr. Vol. 5-A, Pg. 53. According to NOLA's bankruptcy filings, the address of South Beach is "300 South Wacker, Suite 1700," which is the address of the Robinson, Curley & Clayton law firm, defense counsel for Banco and Scattered in this litigation. PTX 48.

NOLA operates out of Suites 711 and 718 of the Wells Building. PTX 44, 45, 46; PTX 75, pg. 2. NOLA's members are the Individual Defendants' fathers. Tr. Vol. 5-A, Pg. 53. NOLA's manager was Teletech Systems. Id. Teletech operates out of Suite 711 of the Wells Building and its lone officer and employee is Greenblatt. Tr. Vol. 5-A, Pg. 53; PTX 70.

EZ Links is owned, at least partially, by Loop. PTX 26. According to Michael May ("May"), Loop's former in-house accountant who is now employed by Scattered, EZ Links is providing the health care benefits for Scattered's employees. Stip. ¶ 29.

Because many of the Court's findings of fact and conclusions of law pertaining to the piercing issues concern Greenblatt's credibility and Banco's loans to Loop, the Court will address these matters prior to discussing the factors under the piercing claims.

II. The Court's Findings Regarding Defendant Leon Greenblatt and the Banco-Loop Loans

A. Banco's Loan to Loop

On January 3, 2000, Loop obtained a $9.9 million line of credit from Banco. Stip. 33; PTX 19-20. Loop executed a promissory note payable to Banco and entered into a security agreement with Banco as part of the loan. Id. Greenblatt signed the agreement on behalf of the lender (Banco) and Jahelka signed on behalf of the borrower (Loop). Id. The Banco loan was secured by a lien against all of Loop's assets. Id. Although Loop's by-laws state that the Board of Directors must authorize such a loan by a written resolution, Jahelka did not recall ever seeing a written resolution and no such resolution was produced in this case. PTX 2, Art. V, § 2; Tr. Vol. 3A, pg. 5; Tr. Vol. 5A, pgs. 18-19.

1. The terms of the Banco-Loop loan were designed to shield Loop from its creditors.

i. Greenblatt's dual status as lender and borrower Greenblatt's dual status as lender (i.e., 100% owner of Banco), and borrower (i.e., 50% owner of Loop), created a conflict of interest. Greenblatt admitted that his dual status affected his decision-making as lender, although he claimed that it somehow did not affect his decision-making as borrower:

Q: Did you find that your dual status as 50 percent owner of Loop Corp. and as the lender ever influenced your decisions as a lender?

A: Yes.

Q: And did you ever find that your status-your status as a 50 percent owner of Loop Corp. and the lender ever influenced your decisions as the 50 percent owner of Loop?

A: No.

Tr. Vol. 5A, pg. 65. Accordingly, Greenblatt's dual status as a lender and borrower created a clear conflict of interest that was conveniently ignored by the Individual Defendants and had a significant negative impact on the negotiation of the loan, its terms, its enforcement, and Loop's third-party creditors.

ii. The Non-Existent Banco-Loop "Negotiation"

Despite having a clear conflict of interest, Greenblatt "negotiated" the terms of the loan. Banco is owned by Greenblatt's family trust and Greenblatt is its only employee. During the negotiation process between Loop and Banco, Jahelka and Nichols represented Loop and Greenblatt represented Banco. Tr. Vol. 3A, p. 32-33; Tr. Vol. 4B, pg. 216. Greenblatt was also a 50% shareholder of Loop. Tr. Vol. 3A, pg. 32. Neither side was represented by counsel. Tr. Vol. 3A, p. 34-35.

As Banco's only employee, Greenblatt did little if any due diligence before deciding to loan Loop $9.9 million. "Banco"-a.k.a. Greenblatt*fn6-did not receive a loan application from Loop nor did it obtain a title commitment; Greenblatt did not perform a formal appraisal of Loop's assets, but instead performed an "off-the-cuff" valuation. Tr. Vol. 4B, pgs. 218-218. According to Greenblatt, he was qualified to appraise Loop's assets prior to entering into the loan because he believes himself to be an expert in the commercial real estate industry. Id.

Jahelka confirmed that Banco did not require Loop to provide Banco with any documentation prior to Banco agreeing to make the loan because Greenblatt, as a 50% owner of Loop, would have already been familiar with its financial condition. Tr. Vol. 3A, pg. 40. Although Banco obtained a blanket security interest over all of Loop's assets, Greenblatt did not obtain a personal guarantee from Loop's shareholders when it made the loan. According to Greenblatt, "Banco considers personal guarantees essentially worthless." Tr. Vol. 5A, pg. 19. Jahelka did not know why Greenblatt, on behalf of Banco, didn't asked for the personal guarantees of the shareholders. Tr. Vol. 3A, pg. 55. Although the loan and security agreement referenced a number of schedules that were to be attached as exhibits to the loan, there were no schedules attached to any of the loan documents produced as exhibits in this case and Jahelka did not know whether any such schedules were prepared. Tr. Vol. 3A, pg. 59.

Jahelka and Nichols' due diligence was non-existent. Jahelka could not recall asking Banco for a lower interest rate nor did he recall any discussions between himself, Nichols, and Greenblatt regarding pledging collateral. Tr. Vol. 3A, pgs. 37-38. When asked why Loop agreed to give Banco $32 million in collateral to secure a $9.9 million line of credit, Jahelka testified that Banco gave Loop the best terms available to it at the time. Loop, however, does not possess any documentation reflecting applications to any other banks or lenders other than Banco. Tr. Vol. 3A, pgs. 39-40.

Greenblatt conceded that his status as the 100% owner of Banco (the lender) and 50% owner of Loop Corp. (the borrower) allowed him to streamline the due diligence process, granting funds to Loop far quicker than they would have received from an arm's length lender. Tr. Vol. 4B, pg. 219-220. ("It is absolutely true that the knowledge that I had enabled Loop to skip a large portion of the process that it would have had to have gone through at a regular commercial bank or savings and loan or other insurance company or similar type lender.") With Greenblatt negotiating the terms of the loan agreement as the sole owner of the lender and as a 50% shareholder of the borrower, the terms of the loan agreement enabled Greenblatt, Nichols, and Jahelka to remain liquid while blocking Loop's third-party creditors from collecting their judgment.

Banco's loan agreement effectively shielded Loop from its creditors and was drafted carefully to ensure that Greenblatt controlled Loop from the date of the loan forward.*fn7 The Banco-Loop loan granted Banco a first-position security interest over all of Loop's assets, including its operating subsidiaries, partnership interests, inventory, accounts, general intangibles, as well as all proceeds and products of any of those interests. PTX 19, pg. 13, § 4.1. Pursuant to Loop's note, interest would accrue at the rate of 12% per year, and the maturity date of the note was December 31, 2001. PTX 20.

The terms also placed Banco, and thus Greenblatt, in a position of power over Loop's assets. Jahelka admitted that Loop's pledge of $32 million in collateral to Banco, was regardless of whether Loop owed Banco a $1 or $10 million. Tr. Vol. 3A, pg. 43. Despite having pledged $32 million worth of real estate to collateralize the line of credit, Loop did not have complete access to the funds to do with them as Loop pleased. Tr. Vol. 3A, pg. 44.

Conveniently, the parties' guaranty and security agreement states that the relationship between Loop and Banco is "solely that of borrower or guarantor and lender," and disclaims any fiduciary responsibilities by Banco. PTX 19, pg. 28, § 10.4. Nevertheless, Greenblatt conceded at trial that he owed fiduciary duties to Loop Corp. and Loop's shareholders, which created a conflict of interest for him, when he testified as follows:

Q: And didn't you owe fiduciary duties to Loop Corp. and to Loop Corp.'s shareholders at the time that this loan document was entered into?

A: Yes. There's no question of that.

Q: Okay. And then you didn't think it was a conflict of interest for you to be the 50 percent owner of Loop Corp. owing fiduciary duties to Loop and its shareholders while at the same time representing Banco, the lender in this transaction? A: That's not the case. There definitely was some conflict in interest.

Q: Okay. Yet you went through with the loan anyways?

A: Mr. Jahelka and Mr. Nichols approved the loan on behalf of Loop without my determination as part of the judgment.

Tr. Vol. 5A, pg. 25.

Nichols admitted that he had to get Greenblatt's approval to make distributions even prior to the time that Loop defaulted on Banco's loan:

Q: Why would you need to get your lender's approval to make a distribution to yourself before May of 2001?

A: It is just something that I just did.

Q: Well didn't you have control over your own company at that time? Weren't you allowed as shareholders and officers and directors to pay yourselves what you wanted to?

A: Well, to the extent that there was a draw down from Banco's line, I would always go to Mr. Greenblatt for just-if nothing else, to let him know that we are drawing down on that line.

Tr. Vol. 4B, pgs. 140-141. Perhaps recognizing the impact of his testimony, Nichols subsequently changed his answer.*fn8 Tr. Vol. 4B, pgs. 141-145. When asked whether after May of 2001 Banco had to approve all of Loop's payments to third-parties, Nichols responded "not all payments, no." Tr. Vol. 4B, pg. 159.

Q: When you say you viewed it that way, were you ever a party to a conversation with anybody representing Banco, where Banco said to you or Mr. Jahelka that every payment, whether it is compensation or to a third party creditor, must be approved by Banco?

A: I do recall conversations with Banco which provided Banco with that level of oversight.

Q: So Mr. Greenblatt would tell you who you could and could not pay?

A: He definitely had oversight.

Q: Well, did he have the final say as to who could and could not be paid?

A: Given his status as the senior secured lender, yeah.

Tr. Vol. 4B, pg. 160.

The fact that the Individual Defendants enforced and ignored the terms of the Banco-Loop loan agreement at Greenblatt's behest is proof that the loan was a sham transaction designed to put Greenblatt in control of Loop's assets. The evidence showed that the terms favoring Banco's priority lien over Loop's assets were enforced but other terms, such as terms favorable to third-party creditors, were ignored. For example, Loop did not provide Banco with financial information pertaining to it on a regular or quarterly basis even though Section 5.3 of the Banco loan required it to do so. Tr. Vol. 3A, pg. 58. Similarly, Banco did not require Loop to provide it with unqualified audited consolidated financial statements prepared by an independent Certified Public Accountant even though it was required by Sections 6.1 and 6.2 of the guaranty and security agreement. PTX 19, Pgs. 16-17. Tr. Vol. 5-A, pg. 22. At trial, Greenblatt explained that Banco did not require audited financial information because he was already aware of Loop's financial condition by virtue of his status as a 50% owner:

Q: And Banco really wouldn't need to obtain this information, because, you know, you're the owner of Banco and you're also a 50 percent owner of Loop Corp. and you'd already know this information, correct?

A: Banco wouldn't require an audit, because Banco is aware that the-the manner in which the financial statements were constructed and is aware that it was constructed properly.

Q: And Banco's aware of that fact because you happen to be the 50 percent owner of Loop Corp., right?

A: Yes.

Tr. Vol. 5A, pg. 24.

On the other hand, Banco enforced Section 7.6 of the loan agreement which prohibited Loop from making distributions to its shareholders without Banco's approval. Jahelka explained that the process for obtaining Banco's approval consisted of Jahelka, Nichols and Greenblatt meeting to discuss making a distribution and Greenblatt consenting to that distribution on Banco's behalf. Jahelka testified that when Greenblatt wanted a distribution, he, as Loop's 50% shareholder, would ask himself, as Loop's lender if it was okay and he would tell himself yes. Even Jahelka was at a loss to explain the logistics of how Greenblatt, as a 50% shareholder, was able to ask Greenblatt, as Banco's only employee, for approval to make a distribution to himself. Tr. Vol. 3A, pgs. 60-61. Of course, there is nothing documenting Greenblatt's decision to permit Jahelka and Nichols to distribute money to themselves from Loop's coffers. Tr. Vol. 3A, pg. 60.

2. The Banco Loan Shielded Loop from Creditors Such as Wachovia

The Banco loan documents provided very little restriction on the use of proceeds. Loop was permitted to use the proceeds from the Banco loan for start-up costs, "projects"-which were defined as "the projects operated by Loop and its Subsidiaries"-and costs "already incurred." PTX 19, Pg. 21, § 7,.15; Pg. 7, §1.1; Tr. Vol. 5A, pg. 75. According to Greenblatt, Loop's investment in HRMI via its margin account at Wachovia constituted such a "project." Tr. Vol. 5A, pg. 76. But when a margin debt came due on the Wachovia account, Greenblatt refused to allow the Banco funds to be utilized to pay the debt. Greenblatt rationalized his decision by claiming the initial purchase of the HRMI stock was a "cost" and the margin debt incurred in the account was "financing." Tr. Vol. 5-A, Pg. 95. Greenblatt's refusal to allow Loop to repay the debt and Loop's assent to Banco's refusal occurred in spite of the clear language of the loan documents which permitted the proceeds of the loan to be used for repayment of prior indebtedness. When asked about this particular loan term, Jahelka acknowledged: "As I read this term, it would appear that is does not require Banco's approval for payment of prior indebtedness." Tr. Vol. 3A, pg. 51.

While Banco refused to allow Loop to use the proceeds of the loan to pay down its margin debt, it was quite comfortable with Loop "investing" in related companies such as EZ Links:

Q: And in that transaction Banco allowed Loop to use the proceeds of that sale as opposed to funneling those proceeds up to Banco and paying off the loan, right?

A: Yes. That was-to the extent there were proceeds, Banco made its decision to allow Loop to keep the proceeds and fund probably EZ Links at the same time. I don't really recall, but, yes, if we allowed them to keep the proceeds, Banco would not have to make any further advances.

Tr. Vol. 5A, pg. 47. Moreover, Banco was quite comfortable allowing Loop to divest collateral on its loan with Banco's approval so long as it involved other Greenblatt-related entities. For example, Loop transferred its ownership interests in the real estate partnerships to Loop Properties with Banco's knowledge and consent. Tr. Vol. 5A, pg. 44.

In 2001, Loop defaulted on Banco's loan. Stip. ¶¶ 35-37. When Loop defaulted, Banco didn't enforce the loan agreement by sending a written notice of default demanding payment or filing suit against Loop or seeking foreclosure. In fact, Jahelka did not know of any actions taken by Banco since May 2001 to enforce its rights under any loan agreement with Loop. Tr. Vol. 3A, pg. 70-74. Instead, Banco decided to lend Loop an additional $17 million and add 12% interest onto the loan amounting to $1 million year. Stip. 35-37; Tr. Vol. 5A, pg. 96-98; Tr. Vol. 3A, pg. 70-74.

Greenblatt elected to extend an additional $17 million to Loop in lieu of foreclosing on the $9.9 million because he felt it would "maximize the value of Loop's assets." Tr. Vol. 5B, pgs. 106-109.

Consequently, the current balance on Loop's loan to Banco is approximately $16 to $17 million, with perhaps an additional $1 million in interest. Tr. Vol. 4B, p. 191. May testified that Loop did not pay off the Banco line in full at the end of 2003 and that Banco made additional advances to Loop as late as 2004. Tr. Vol. 1-B, Pg. 220.

In summary, Banco chose to loan additional money to a company in default rather than use the proceeds from the sale of Loop's assets to pay Loop's debts to creditors like Wachovia. On this issue, Greenblatt flippantly testified that he would never advance funds to Loop in order to pay off Loop's margin debt with Wachovia because "[i]t's not Banco's general practice to make advances on troubled debt to pay under-to pay lower classes of creditors." Tr. Vol. 5A, pgs. 128. Based on the foregoing, the Court finds that the Loop-Banco Loan Agreement was devised to keep Greenblatt in control of Loop's assets and to avoid paying Loop's creditors.

3. Loop's Failure to Maintain Arm's Length Relationships Among Related Entities

Banco's participation in the Loop loan is evidence of Loop's failure to maintain arm's length relationships among related entities.*fn9 First, Banco and Loop are related entities in that they share a common owner-Greenblatt. Additionally, the evidence at trial showed that Banco sold a $3 million participation interest in the Loop loan to a number of "participating entities," including Old Colony Properties, Telegraph Properties, 200 West Properties and H&M Partners. PTX 21, Tr. Vol. 5A, pgs. 93-95. Greenblatt signed the participation agreement on behalf of Banco and the participants. Id., Tr. Vol. 5A, pg. 92. Old Colony Properties, Telegraph Properties, 200 West Properties and H&M Partners are Loop's subsidiaries. Id. In other words, Loop's subsidiaries contributed $3 million to assist Banco in funding the $9.9 million to Loop and Loop subsequently pledged its interest in the participating entities to Banco as collateral to secure the loan. Id.; PTX 21, PTX 19. According to Greenblatt:

Q: So the participants here, the participating entities, they're not only participants in the loan, but they are themselves the collateral securing the loan, right?

A: It's true that they're participants, and it's true that they've pledged collateral for the loan.

Q: Well, they themselves are the collateral, right?

A: Yes.

Tr. Vol. 5A, pg. 94-95.

By entering into participation agreements with subsidiaries of the borrower, which also happened to be pledged as collateral, Greenblatt effectively created a complex lending structure that ultimately resulted in Loop contributing the funds (via its subsidiaries) that Banco would then turn around and lend back to Loop. As a result, control over the funds and use of the pledged assets remained effectively unchanged. Accordingly, this Court finds that the Banco loan was nothing more than a vehicle to avoid Loop's creditors by ensuring that all of Loop's assets were fully encumbered by a blanket lien in favor of Greenblatt, the dominant shareholder of both Banco and Loop.

4. Greenblatt's Testimony Regarding Banco-Loop Loan Documents

Review of Banco's loan statements to Loop was critical to the Court's analysis of piercing the corporate veil. Wachovia claimed that after Loop's margin debt became due, Loop, at Banco's direction, diverted its assets to other related entities such as Scattered, EZ Links, Telegraph, and Loop Telecom rather than pay its creditors. Defendants argued Loop's post-debt transfer of assets was an attempt to avoid its creditors because Banco gave Loop "dollar-for-dollar" credit on the Banco line in exchange for the transfers. Wachovia, not surprisingly, requested documentation that would reflect Banco's purported "dollar-for-dollar" credit since no such documentation had been produced in discovery.

During Wachovia's case in chief, Greenblatt testified that Banco sent either monthly or quarterly loan statements to Loop but that he didn't have them because he didn't know their whereabouts. Tr. Vol. 5A, pp. 30-31. Apparently, "Loop" searched for the loan statements but couldn't find them. Tr. Vol. 5A, p. 71. When questioned by defense counsel, Greenblatt was more cooperative and testified that the loan statements were also a part of Banco's books and records and that it would have maintained those records for three years or as long as the IRS required it keep them. Tr. Vol. 6A, pp. 85-88. When asked whether he destroyed the records as opposed to not being able to find them, Greenblatt stated, "It was my testimony that I couldn't find them, but also that I testified that I wasn't required to keep them that long." Id. When asked, "Well, regardless of whether you're required to keep them, you did not destroy them, did you?" Greenblatt replied, "I have no recollection." Id. Regarding Banco's potential destruction of key evidence Greenblatt stated:

Q: Okay. So it is possible that you would have destroyed the Banco Panamericano loan statements to Loop Corp. in 2000, 2001, 2002? [objections omitted]

A: There's no way that I would have destroyed them in 2000, 2001, or 2002. If they were destroyed, which could have been the case because we don't keep records longer than the IRS requires to keep them, they would have been done in 2004. *** Q: Okay. And were you aware in 2004 that a lawsuit had been filed against Loop and Banco Panamericano?

A: Yes.

Q: Okay. So you wouldn't have destroyed them after the lawsuit was filed, would you?

A: You know, I have no idea what I would have done then. But the--if I knew they were to be kept for a lawsuit, I certainly wouldn't have been destroying them. But you didn't even subpoena--you didn't even ask for them.

A: Well, sir, I'm not sure I understand your testimony. Is it your testimony that you may have thrown out documents after 2004 under the assumption that they weren't asked for?

A: No.

[portion omitted]

Q: Now, do you recall whether or not those documents related to the loan statements that would have gone to Loop on a monthly or quarterly basis or a yearly basis, whether those were destroyed?

A: It's our general operating procedure not to keep records longer than the IRS requires us to keep them. I don't particularly recall whether they were destroyed or not.

Q: Okay. Is it possible they were [destroyed]?

A: Yes.

Tr. Vol. 6A, pp. 86-88.

The next day, Greenblatt insisted that counsel had not previously asked about Banco's loan "statements," but had in fact asked him about Banco's loan "invoices."

Q: Okay. So is it your testimony today that when you said last week that you couldn't find the loan statements that reflected those credits, is it your testimony that those loan statements do exist?

A: I think you're asking me about something different than you asked me last week.

Q: No-A: You asked me last week about whether I sent invoices reflecting the loans, and this [morning] you're asking me about the loan statement.

Q: No, sir. I will tell you that you were specifically asked last week: Was there a loan statement that was sent to Loop that reflected the credits given to it by Banco on a dollar-by-dollar basis? You stated that there was, and then you stated that you couldn't find them. So that's the question that I'm following up on this morning.

A: That's not what I'm talking about.

Q: Okay.

A: You asked me about invoices that I sent to Loop versus statements of Loop's balance on the loan.

Q: Okay. Well, the record will reflect what it reflects.

Tr. Vol. 6A, pp. 90-91. Then, Greenblatt testified that the "loan statements"-which he referred to as the loan balance-were in fact in Banco's possession but hadn't been produced because Wachovia didn't ask for them. Tr. Vol. 6A, p. 92.

After the bench trial, documents supporting Defendants' dollar-for-dollar defense magically appeared. Greenblatt produced the documents-this time calling them Banco's "ledger" along with an affidavit in support of their admission. Dk. 362, Ex. A. Banco's "ledger" was located four years after the lawsuit was filed and after the conclusion of the trial. Greenblatt's affidavit and Banco's "ledger" are stricken pursuant to Federal Rule of Evidence 37 (b)(2)(A)(ii) and 37(c)(1)(C).*fn10

Greenblatt's counsel was forced to concede-despite his client's testimony to the contrary-that Wachovia asked for the entirety of Banco's financial records via requests for production 92 through 102. And despite counsel's arguments in their post-trial submission briefs, the propriety of the Banco-Loop loan has been at issue since Wachovia filed its First Amended Complaint. Dk. 362, p. 3; Dk. 52. In short, Banco's loan statements fall within the purview of Wachovia's discovery requests and should have been produced. Banco's failure to do so until after trial merits striking the "exhibits." ...


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