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GMAC, LLC v. Hillquist

August 19, 2009

GMAC, LLC, PLAINTIFF,
v.
EINER HILLQUIST AND NEIL HILLQUIST, DEFENDANTS.



The opinion of the court was delivered by: Magistrate Judge P. Michael Mahoney

MEMORANDUM OPINION AND ORDER

I. INTRODUCTION

Plaintiff, GMAC, LLC, has filed a six-count, sixth amended complaint against defendants, Einer Hillquist and Neil Hillquist, concerning the sale of 11 vehicles financed by GMAC and sold by Fargo Motors, Inc., for which GMAC never received payment. In its complaint, GMAC seeks to pierce the corporate veil as to both Einer and Neil and alleges the following: breach of contract against Einer (Count I), fraud against Einer (Count II), fraud against Einer and Neil (Count III), conspiracy to commit fraud by Einer and Neil (Count IV), accounts stated against Einer and Neil (Count V), and conversion against Einer and Neil (Count VI).

All three parties have filed motions for summary judgment. All three parties seek summary judgment as to the issue of corporate veil piercing. GMAC and Einer each move for summary judgment in their favor on all six counts. In addition, Einer moves for summary judgment on two affirmative defenses. Neil moves for summary judgment on Counts III--V.

II. BACKGROUND

Einer owned and operated a car dealership known as Fargo Motors in Sycamore, Illinois from 1975 until March 11, 2004. Fargo Motors was operated as a sole proprietorship, and as such, Einer was personally liable for its debts and obligations. In June 1978, GMAC and Einer executed a Wholesale Security Agreement whereby GMAC agreed to provide financing to Fargo Motors to pay for vehicles that were part of Fargo Motor's floor plan. Pursuant to the agreement, GMAC took a security interest in the vehicles and in the proceeds from the sale thereof. Upon sale of the vehicles, Fargo Motors agreed to remit to GMAC the funds for the vehicles plus interest. On February 25, 2004, Einer also signed a General Security Agreement granting GMAC security interests in other certain properties owned by Fargo Motors.

Neil, Einer's son, worked as general manager of Fargo Motors from 1976 until March 11, 2004. Einer and Neil testified that, in December 2003, they began discussing the idea of incorporating the dealership so that Einer could pass it on to Neil. On March 11, 2004, Neil and Einer formed an Illinois corporation called Fargo Motors, Inc. ("FMI"). Neil testified that they formed FMI because Einer was no longer actively involved in the business. Einer took the position of president and Neil became secretary and treasurer. FMI was capitalized with $36,000 and stock was distributed. Einer took a 75% interest and Neil took a 25% interest.

FMI began operations as an automobile dealership at the same location as Fargo Motors. Neil acted as the general manager of the corporation and was in charge of the operations of FMI, a job similar to the one he had previously held with Fargo Motors. He was paid an annual salary of $20,000 by FMI. There was no change in the business address or the dealership employees as a result of the incorporation. The sign outside the building was not changed to reflect the incorporation. The phones were answered as they had been in the past. FMI used the same bank account as Fargo Motors. Neither Neil nor Einer notified GMAC of the change in corporate structure.

On November 3, 2004, Donna Malina, a portfolio manager for GMAC, sent a letter to Fargo Motors to the attention of Einer seeking a personal financial statement. Einer never responded to the letter. Around December 29, 2004, Malina apparently discovered that Fargo Motors had changed its corporate structure. Malina then filed an amended financial statement reflecting a change in borrower from Fargo Motors to FMI, and informed Neil that she would be sending correspondence to FMI related to the change in corporate structure. After that, no billing statements were addressed to Fargo Motors. On January 3, 2005, Malina sent a letter addressed to FMI to Neil's attention which sought signatures on various corporate documents. One such document sought to add Einer as a personal guarantor to FMI's debts. When FMI and Einer did not return the documents signed, Malina made follow-up phone calls to Neil on February 7 and March 4, 2005. During those calls, Neil indicated that he would verify whether the corporate collateral loan documents had been signed.

GMAC transferred the Fargo Motors file to Kenn Iribe, a portfolio manager, in March 2005. Iribe re-sent the documents to FMI for signatures, and had telephone conversations with Neil regarding the documents on June 28 and July 25, 2005. The exact substance of these conversations is in dispute. The documents were never signed or returned.

At the end of July 2005, Neil and Einer met with an attorney to discuss the possibility of FMI filing for bankruptcy. Allegedly on the advice of FMI's bankruptcy attorney, neither Neil nor Einer executed the collateral documents as requested by GMAC. FMI filed for Chapter 11 bankruptcy on August 5, 2005.

Both before and after GMAC learned of the change in corporate structure of Fargo Motors to FMI, it advanced money with which FMI purchased vehicles for its floor plan. The proceeds from the sale of a vehicle were put into FMI's general operating bank account. Remittance was drawn from that account and paid to GMAC usually within five days of the sale.

FMI sold one vehicle in May, one in June, and nine in July for which it never remitted funds to GMAC. Neil testified that the money from those sales was drawn from FMI's account to pay other bills. One such bill was a rent payment made to an investment company owned by Einer and from which FMI leased its property. At the end of July 2005, GMAC sent FMI a billing statement which indicated the amounts due to GMAC. As of the period ending July 30, 2005, the total outstanding amount owed on the 11 vehicles was $284,538.17.

III. DISCUSSION

A. Statement of the Law

A court may only grant summary judgment "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Hemsworth v. Quotesmith.com, Inc., 476 F.3d 487, 489--90 (7th Cir. 2007). In evaluating such a motion, the court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. at 490. The court must draw all reasonable inferences in the light most favorable to the party opposing the motion. Id. In considering cross-motions for summary judgment, the court views all facts and draws all reasonable inferences "in a light most favorable to the party against whom the motion under consideration is made." Schneider v. Sentry Group Long Term Disability Plan, 422 F.3d 621, 626 (7th Cir. 2005) (quotation marks omitted). If the moving party bears the burden of persuasion at trial, that party must support its motion with credible evidence to show that, even in the absence of an adequate response by the non-movant, it is entitled to judgment as a matter of law. Saab Cars USA, Inc. v. United States, 434 F.3d 1359, 1368 (Fed. Cir. 2006); Arnett v. Myers, 281 F.3d 552, 562 (6th Cir. 2002); see also Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986) (Brennan, J., dissenting) (The moving party "must support its motion with credible evidence . . . that would entitle it to a directed verdict if not controverted at trial."). Moreover, a party who bears the burden of proof on a particular issue may not rest on its pleadings, but must affirmatively demonstrate that there is a genuine issue of material fact by identifying with reasonable particularity the evidence upon which the party relies. Hemsworth, 476 F.3d at 489--90.

B. Count I-Breach of Contract as to Einer

To prove a breach of contract, the plaintiff must prove "(1) offer and acceptance, (2) consideration, (3) definite and certain terms, (4) performance by the plaintiff of all required conditions, (5) breach, and (6) damages." Vill. Of S. Elgin v. Waste Mgmt. of Ill., Inc., 348 Ill. App. 3d 929, 810 N.E. 2d 658, 669 (Ill. App. Ct. 2004). Neither party disputes that the Wholesale Security Agreement and the General Security Agreement were valid contracts between GMAC and Fargo Motors. Fargo Motors ceased on March 11, 2004, at which time FMI was formed. GMAC discovered the dissolution of Fargo Motors and the formation of FMI around December 29, 2004. The 11 vehicles at issue in this litigation, for which no remittance was given GMAC, were sold by FMI in May, June, and July 2005.

After December 29, 2004, GMAC could have repossessed its vehicles or stopped the credit line. Instead, GMAC knowingly continued to finance vehicles for FMI. Upon sale of a vehicle, GMAC expected remittance from FMI. When FMI failed to remit funds owed to GMAC, it breached an agreement. A breach of contract claim appears properly asserted against FMI, not Einer.

Normally, these circumstances warrant summary judgment for Einer. However, GMAC asserts three theories as to why Einer is personally liable for the funds that FMI did not remit to GMAC: (1) the court should pierce the corporate veil of FMI; (2) successor liability flows from Fargo Motors to FMI; and (3) Einer personally guaranteed the debts of FMI to GMAC. If any of these theories are viable, Einer may be liable for FMI's breach. GMAC also argues that the corporate veil should be pierced as to Neil.

1. Piercing the Corporate Veil

The court will address GMAC's motion for summary judgment as to piercing the corporate veil with regard to both Einer and Neil in this section. In Illinois, "a corporation is a legal entity separate and distinct from its shareholders, directors and officers, and, generally from other corporations with which it may be affiliated." Van Dorn Co. v. Future Chemical & Oil Corp., 753 F.2d 565, 569 (7th Cir. 1985). To pierce the corporate veil, a plaintiff must satisfy a two prong test. First, the plaintiff must prove that there is a unity of interest and ownership such "that the separate personalities of the corporation and the individual or other corporation no longer exist." Id. at 569--70. In evaluating the unity of interest and ownership between a corporation and an individual, courts consider the following factors:

(1) inadequate capitalization; (2) failure to issue stock; (3) failure to observe corporate formalities; (4) nonpayment of dividends; (5) insolvency of the debtor corporation; (6) nonfunctioning of the other officers or directors; (7) absence of corporate records; (8) commingling of funds; (9) diversion of assets from the corporation by or to a shareholder; (10) failure to maintain arm's length relationships among related entities; and (11) whether the corporation is a mere facade for the operation of the dominant shareholders.

Wachovia Sec., LLC v. Neuhauser et al., 528 F. Supp. 2d 834, 854--55 (N.D. Ill. 2007) (quoting Dimmit & Owens Fin., Inc. v. Superior Sports Prods., Inc., 196 F. Supp. 2d 731, 738 (N.D. Ill. 2002)). Second, the plaintiff must show that circumstances exist "such that adherence to the fiction of [a] separate ...


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