2024 IL App (1st) 231160-U No. 1-23-1160 Order filed June 14, 2024 Fifth Division
NOTICE: This order was filed under Supreme Court Rule 23 and is not precedent except in the limited circumstances allowed under Rule 23(e)(1). ______________________________________________________________________________ IN THE APPELLATE COURT OF ILLINOIS FIRST DISTRICT ______________________________________________________________________________
THE PATRIOT GROUP, LLC, ) Appeal from the ) Circuit Court of Plaintiff-Appellant, ) Cook County. ) v. ) No. 19 L 50563 ) HILCO TRADING, LLC, ) Honorable ) Daniel P. Duffy, Defendant-Appellee. ) Judge Presiding.
JUSTICE NAVARRO delivered the judgment of the court. Presiding Justice Mitchell and Justice Mikva concurred in the judgment.
ORDER
¶1 Held: We affirm the circuit court’s dismissal of The Patriot Group, LLC’s amended complaint where its allegations are insufficient to state a veil-piercing claim against Hilco Trading, LLC, the parent company of Hilco Financial, LLC.
¶2 The Patriot Group, LLC (Patriot), obtained a judgment against Hilco Financial, LLC (Hilco
Financial), based on a breach of contract for more than $62 million. Because Hilco Financial did
not have the funds to satisfy the judgment, Patriot sued the parent company of Hilco Financial,
Hilco Trading, LLC (Hilco Trading), under a veil-piercing theory to collect that judgment. On No. 1-23-1160
Hilco Trading’s motion, the circuit court dismissed Patriot’s amended complaint with prejudice.
Patriot now appeals, contending that the court erred in dismissing its claim where it sufficiently
alleged that Hilco Financial and Hilco Trading operated as a single economic entity and there was
an element of injustice or unfairness that warranted Patriot piercing the veil of Hilco Financial and
making Hilco Trading liable for the underlying judgment. For the reasons that follow, we affirm.
¶3 I. BACKGROUND
¶4 Patriot is a company that provides asset-based financing solutions secured by a wide variety
of asset types and products. Hilco Trading is an Illinois-based company that owns, either directly
or indirectly, several companies in the business and financial services industries. Directly or
through its various subsidiaries, Hilco Trading offers a broad array of services, including merger
and acquisition facilitation, inventory appraisals, industrial asset acquisitions and liquidations, and
consumer receivables purchases.
¶5 In 2004, Hilco Trading formed Hilco Financial as a Delaware limited liability company to
focus on asset-based lending, i.e., loans secured by the borrowers’ collateral, and extending short-
term loans to entities that could not secure financing from traditional sources. 1 Both Hilco Trading
and Hilco Financial had their principal place of business at the same address in Northbrook,
Illinois. Hilco Trading owned approximately 84% of Hilco Financial. The following year, Hilco
Financial was capitalized through: (1) a $30 million senior secured facility provided by two banks;
(2) a $20 million junior secured mezzanine facility provided by Patriot under a subordinated credit
agreement; and (3) a $5 million equity contribution from Hilco Trading. According to the operative
1 Hilco Financial later became known as 1310 Financial, LLC, but we will refer to the company as Hilco Financial in this appeal.
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amended complaint in the instant case, in courting the financing from Patriot, an executive of Hilco
Trading indicated that the company would closely supervise the operations of Hilco Financial.
¶6 According to Hilco Financial’s 2006 amended and restated limited liability company
agreement, Hilco Trading was the managing member of Hilco Financial. Although the agreement
provided that Hilco Trading would have the exclusive authority to manage and control the
company, the agreement delegated the day-to-day operations to a chief executive officer. In
addition, Hilco Financial could not perform several actions without the written consent of Hilco
Trading, as managing member, including: (1) borrowing more than $100,000; (2) granting security
interests in any of its assets; (3) litigating or settling claims; or (4) hiring or firing officers or
employees. Hilco Trading also was required to establish a yearly budget for Hilco Financial and
had the authority to appoint or revoke authorized signatories on Hilco Financial’s behalf.
¶7 In 2007, Patriot and Hilco Financial amended their subordinated credit agreement, which
increased the credit facility to $30 million. Under the original and amended agreements, Patriot
contracted only with Hilco Financial, and not Hilco Trading. Additionally, Patriot had to approve
the third-party loans originated by Hilco Financial. By 2008, the majority of the loans in Hilco
Financial’s portfolio were in default, which caused the company to default on its credit facility
from Patriot. Shortly after, Hilco Financial ceased operations and surrendered possession of its
assets to its senior lender, a bank that had replaced the original two senior lending banks.
¶8 A. The Underlying Litigation
¶9 In 2010, Patriot sued Hilco Financial, Hilco Trading and other Hilco entities under various
causes of action in connection with the subordinated credit agreement and amended subordinated
credit agreement. Eventually, in June 2011, Patriot filed a second amended complaint. In short,
that pleading alleged a concerted effort by the various Hilco entities to induce Patriot into
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providing subordinated credit to fund Hilco Financial and approve risky third-party loans through
misrepresentations, fraudulent financial documents, and inflated appraisals.
¶ 10 Following a stipulated order, in which Patriot agreed to dismiss certain claims with and
without prejudice, and Hilco Trading agreed to withdraw its motion to dismiss on certain claims,
Patriot’s remaining claims were against: (1) Hilco Financial for breach of the amended
subordinated credit agreement and fraud; (2) Hilco Trading for fraud, fraudulent transfer and
constructive fraudulent transfer; (3) Hilco entities involved in appraisals (the Hilco Appraisal
Entities) for negligent misrepresentation; and (4) Hilco, Inc., another member of Hilco Financial,
for constructive fraudulent transfer. One of the claims that Patriot agreed to dismiss without
prejudice was a veil-piercing claim against Hilco Trading.
¶ 11 Beginning in late 2015, the parties filed various motions for summary judgment.
Ultimately, the circuit court granted Patriot summary judgment on its breach of contract claim
against Hilco Financial in an amount to be determined later at a prove-up. The court, however,
granted summary judgment to Hilco Financial on Patriot’s fraud claim. The court granted Hilco
Trading summary judgment on Patriot’s claims of fraud, fraudulent transfer and constructive
fraudulent transfer. Finally, the court granted the Hilco Appraisal Entities summary judgment on
Patriot’s negligent misrepresentation claim and Hilco, Inc., summary judgment on Patriot’s
constructive fraudulent transfer claim.
¶ 12 Patriot appealed, challenging the circuit court’s grant of summary judgment to Hilco
Trading and Hilco Financial on its fraud claims as well as the court’s grant of summary judgment
to the Hilco Appraisal Entities on its negligent misrepresentation claim. In September 2018, this
court affirmed the circuit court’s grant of summary judgment to the Hilco entities. See Patriot
Group, LLC v. Hilco Financial, LLC, 2018 IL App (1st) 170345-U.
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¶ 13 B. The Instant Litigation
¶ 14 In June 2019, the circuit court entered a judgment in favor of Patriot on its breach of
contract claim against Hilco Financial in the amount of $62,335,460 with postjudgment interest.
When Hilco Financial indicated it could not pay the judgment, Patriot sued Hilco Trading under a
veil-piercing theory to collect the judgment entered against Hilco Financial. Hilco Trading moved
to dismiss Patriot’s complaint under section 2-615 and section 2-619(a)(4) of the Code of Civil
Procedure (Code) (735 ILCS 5/2-615, 2-619(a)(4) (West 2020)), the latter based on collateral
estoppel. The circuit court denied Hilco Trading’s motion on the issue of collateral estoppel, but
granted the motion under section 2-615 without prejudice because Patriot’s allegations were
insufficient to state a claim for veil-piercing.
¶ 15 In July 2021, Patriot filed the operative amended complaint against Hilco Trading. Patriot
posited that Hilco Trading and Hilco Financial operated as a single economic entity and Hilco
Financial was merely the alter ego of Hilco Trading. In turn, Patriot asserted that Hilco Trading
was responsible for Hilco Financial’s liabilities and obligations, including the approximately $62
million monetary judgment in the underlying litigation.
¶ 16 Hilco Trading again moved to dismiss Patriot’s amended complaint pursuant to section 2-
615 and section 2-619(a)(4) of the Code (id.). Under section 2-615, Hilco Trading contended that
Patriot’s amended complaint was legally deficient and warranted dismissal. Under section 2-
619(a)(4), Hilco Trading contended that several allegations contained in Patriot’s amended
complaint were barred by collateral estoppel in light of the underlying litigation and had to be
stricken. Hilco Trading asserted that, stripped of these allegations, Patriot’s amended complaint
was simply a rehashing of the same allegations in the initial complaint, which the circuit court
already found insufficient to state a claim for veil-piercing, thus similarly warranting dismissal.
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¶ 17 Following briefing, the circuit court granted Hilco Trading’s motion pursuant to section
2-615 with prejudice, finding that Patriot’s allegations were insufficient to state a cause of action
for veil-piercing. The court denied Hilco Trading’s motion to dismiss under section 2-619(a)(4) as
moot.
¶ 18 This appeal followed.
¶ 19 II. ANALYSIS
¶ 20 Patriot contends that the circuit court erred in dismissing its amended complaint pursuant
to section 2-615 of the Code (id.). Specifically, Patriot argues that its amended complaint
sufficiently alleged that Hilco Financial and Hilco Trading operated as a single economic entity
and there was an element of injustice or unfairness involved in order to pierce the veil of Hilco
Financial and make Hilco Trading liable for the underlying monetary judgment.
¶ 21 A section 2-615 motion to dismiss challenges the “legal sufficiency” of the complaint.
Henderson Square Condominium Ass’n v. LAB Townhomes, LLC, 2015 IL 118139, ¶ 61. The
critical question “is whether the allegations of the complaint, construed in the light most favorable
to the plaintiff, are sufficient to state a cause of action upon which relief can be granted.” Id. In
resolving this question, all well-pled facts and reasonable inferences from those facts must be
accepted as true. Nyhammer v. Basta, 2022 IL 128354, ¶ 23. “A complaint should not be dismissed
pursuant to section 2-615 unless it is clearly apparent that no set of facts can be proved that would
entitle the plaintiff to recovery.” Dent v. Constellation NewEnergy, Inc., 2022 IL 126795, ¶ 25.
Our review of the court’s dismissal pursuant to section 2-615 is de novo. Id.
¶ 22 In the instant case, both parties agree that the substantive law of Delaware applies to
Patriot’s veil-piercing claim, as that is the state of formation of Hilco Financial, the entity whose
veil Patriot attempts to pierce. See Westmeyer v. Flynn, 382 Ill. App. 3d 952, 957, 960 (2008).
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Under Delaware’s Limited Liability Company Act (the LLC Act), as a general matter and absent
an agreement:
“the debts, obligations and liabilities of a limited liability company, whether arising
in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of
the limited liability company, and no member or manager of a limited liability
company shall be obligated personally for any such debt, obligation or liability of
the limited liability company solely by reason of being a member or acting as a
manager of the limited liability company.” Del. Code Ann. tit. 6, § 18-303.
However, the doctrine of piercing the corporate veil, which applies to limited liability companies
in Delaware (see Westmeyer, 382 Ill. App. 3d at 960), allows “creditors to reach the assets of the
owners of the entity.” Feeley v. NHAOCG, LLC, 62 A.3d 649, 667 (Del. Ch. 2012).
¶ 23 Despite the existence of the veil-piercing doctrine, Delaware law strongly enforces the
separate legal existence of limited liability companies. Verdantus Advisors, LLC v. Parker
Infrastructure Partners, LLC, No. 2020-0194-KSJM, 2022 WL 611274, at *2 (Del. Ch. Mar. 2,
2022). In turn, “[v]eil piercing is a tough thing to plead and a tougher thing to get, and for good
reason,” as “Delaware is in the business of forming entities.” Id. “[O]nly in exceptional
circumstances” does Delaware law disregard the separate legal existence of a limited liability
company and allow its veil to be pierced. Cleveland-Cliffs Burns Harbor LLC v. Boomerang Tube,
LLC, No. 2022-0378-LWW, 2023 WL 5688392, at *4 (Del. Ch. Sept. 5, 2023).
¶ 24 As Patriot claimed in its amended complaint that Hilco Financial was merely the alter ego
of Hilco Trading, there had to be sufficient allegations therein that Hilco Trading and Hilco
Financial “operate[d] as a single economic entity such that it would be inequitable *** to uphold
a legal distinction between them.” (Internal quotation marks omitted.) Id. at *5. Under the alter-
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ego doctrine, “the subsidiary must be a sham and exist for no other purpose than as a vehicle for
fraud.” (Internal quotation marks omitted.) Id. There are several factors used to determine whether
two entities operated as a single economic entity: “(1) whether the company was adequately
capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate
formalities were observed; (4) whether the dominant shareholder siphoned company funds; and
(5) whether, in general, the company simply functioned as a façade for the dominant shareholder.”
(Internal quotation marks omitted.) Verdantus, 2022 WL 611274, at *2. No single factor is
dispositive. Cleveland-Cliffs, 2023 WL 5688392, at *5. Instead, the “ultimate decision regarding
veil-piercing is largely based on some combination of these factors, in addition to an overall
element of injustice or unfairness.” (Internal quotation marks omitted.) Id.
¶ 25 A. Hilco Financial’s Capitalization
¶ 26 First, we must determine whether Patriot sufficiently alleged that Hilco Financial was
undercapitalized for its business undertaking. According to Patriot’s amended complaint, Hilco
Financial was undercapitalized where its debt-to-equity ratio was 10:1 given its $50 million in debt
compared to the $5 million equity contribution by Hilco Trading, and Hilco Trading’s $5 million
equity contribution was unreasonably low in light of Hilco Financial’s high-risk lending enterprise.
¶ 27 As a preliminary matter, “undercapitalization is rarely sufficient to pierce the corporate
veil, because otherwise” every subsidiary that becomes insolvent or every start-up corporation that
fails would be pierced. In re BH S & B Holdings LLC, 420 B.R. 112, 136 (Bankr. S.D.N.Y. 2009)
(applying Delaware law), aff’d as modified, 807 F. Supp. 2d 199 (S.D.N.Y. 2011). Nevertheless,
when analyzing whether a subsidiary was undercapitalized for its business enterprise, our focus is
“on the initial capitalization: ‘whether a corporate entity was or was not set up for financial failure.’
” Id. (quoting George Hyman Construction Co. v. Gateman, 16 F. Supp. 2d 129, 152-53 (D. Mass.
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1998)). Being set up for failure generally means whether the company has failed to put in reserve
unencumbered capital reasonably sufficient to cover the entity’s prospective liabilities. Id. at 136-
37. “ ‘[T]he inquiry into corporate capitalization is most relevant for the inference it provides into
whether the corporation was established to defraud its creditors or other improper purpose such as
avoiding the risks known to be attendant to a type of business.’ ” Trevino v. Merscorp, Inc., 583
F. Supp. 2d 521, 530 (D. Del. 2008) (quoting Trustees of National Elevator Industry Pension,
Health Benefit and Educational Funds v. Lutyk, 332 F.3d 188, 197 (3d Cir. 2003)).
¶ 28 Although in its amended complaint, Patriot claims that Hilco Financial was
undercapitalized, Patriot concedes that, in 2004, Hilco Financial was formed for a legitimate
purpose, which was to provide loans to entities that had difficulty borrowing from traditional
sources. By conceding that Hilco Financial was formed for a legitimate purpose, Patriot has
undermined its assertion that Hilco Financial was undercapitalized. See id. at 530-32 (dismissing
a veil-piercing claim, in part, where the plaintiffs conceded in their complaint that a subsidiary
“was established for a legitimate purpose”) (Emphasis in original). Regardless, Patriot’s assertion
that Hilco Trading’s $5 million equity contribution to Hilco Financial was unreasonably low in
light of Hilco Financial’s high-risk lending enterprise is conclusory, and therefore need not be
accepted as true for purposes of a motion to dismiss. See Coghlan v. Beck, 2013 IL App (1st)
120891, ¶ 35. And while Patriot claims that Hilco Financial’s debt-to-equity ratio of 10:1 shows
that it was undercapitalized, without additional supporting factual allegations, this assertion does
not sufficiently show that Hilco Financial was set up for failure. See In re BH S, 420 B.R. at 136.
¶ 29 Furthermore, Patriot repeatedly cites Boeing Co. v. KB Yuzhnoye, No. CV 13-00730-AB
(AJWx), 2016 WL 2851297 (C.D. Cal. May 13, 2016), to show that it alleged sufficient facts to
establish Hilco Financial was undercapitalized. However, in Boeing, the company at issue
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launched satellites, and was capitalized with only $100 and a promise of a $200 million revolving
line of credit that never came through. Id. at *17. As a result, the only financing to the satellite
company came from its parent company on an emergency basis. Id. Given this, the federal district
court observed that the subsidiary was “in a business that requires a huge amount of capital; yet,
[it] ha[d] no capital except that which [its parent]” gave, resulting in the subsidiary being “wholly
undercapitalized.” Id. at *25. This pales in comparison to the instant case where Hilco Financial
was initially capitalized with $55 million, the vast majority of which did not come from Hilco
Trading, its parent company. Consequently, Patriot’s allegations are insufficient to demonstrate
that Hilco Financial was undercapitalized for its business enterprise.
¶ 30 B. Hilco Financial’s Insolvency
¶ 31 Second, we must determine whether Patriot sufficiently alleged that Hilco Financial was
insolvent. “A[n entity] may be insolvent under Delaware law either when its liabilities exceed its
assets, or when it is unable to pay its debts as they come due.” SV Investment Partners, LLC v.
ThoughtWorks, Inc., 7 A.3d 973, 987 (Del. Ch. 2010), aff’d, 37 A.3d 205 (Del. 2011).
¶ 32 According to Patriot’s amended complaint, by January 11, 2008, Hilco Financial was
insolvent. Supporting this conclusion, Patriot alleged that, in February 2008, Hilco Financial
disclosed to Patriot that most of the loans in its portfolio were in default, and the following month,
Hilco Financial ceased payments to Patriot, which were required under the amended subordinated
credit agreement. Hilco Trading, however, citing to various decisions that do not apply Delaware
law, posits that the relevant period for viewing Hilco Financial’s fiscal condition was when Hilco
Financial and Patriot entered into the subordinated credit agreement in November 2005 and the
amended subordinated credit agreement in September 2007. To this end, Hilco Trading argues that
Patriot’s allegations did not show that Hilco Financial was insolvent at those times. However, in
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citing to decisions that do not apply Delaware law, Hilco Trading tacitly acknowledges that no
decision applying Delaware law has applied such a temporal requirement.
¶ 33 In fact, in the recent decision of Cleveland-Cliffs, 2023 WL 5688392, the Delaware Court
of Chancery did not analyze a company’s alleged insolvency at the time of purported transactions
with a creditor. There, Boomerang Tube, LLC, purchased more than $7 million in goods from
ArcelorMittal Burns Harbor LLC and ArcelorMittal USA LLC between June and November 2020,
but then failed to pay the associated invoices. Id. at *1-2. Thereafter, Cleveland-Cliffs Burns
Harbor LLC and Cleveland-Cliffs Steel LLC purchased the ArcelorMittal entities and became the
successors-in-interest to the unpaid invoices of Boomerang. Id. at *2. In January 2021, the assets
of Boomerang were sold at a public auction pursuant to Article 9 of New York’s Uniform
Commercial Code. Id. Later, the Cleveland-Cliffs entities sued Boomerang’s parent company
under a veil-piercing theory to collect what they were owed. Id. at *3-4. In analyzing the veil-
piercing claim, the court observed that “[o]nly the second factor,” i.e., insolvency, was “satisfied
as to Boomerang, which was left insolvent after the Article 9 sale.” Id. at *5. In other words, the
court examined Boomerang’s insolvency for purposes of veil-piercing not at the time of the
transaction with the ArcelorMittal entities, but rather following the Article 9 sale. Id.
¶ 34 Because we are applying Delaware law in this veil-piercing action and, likewise to our
knowledge, no Delaware court has mandated such a temporal requirement, we will not apply one.
As such, when viewing Patriot’s assertions that, in February 2008, Hilco Financial informed
Patriot that most of the loans in its portfolio had defaulted and, the following month, Hilco
Financial ceased payments to Patriot under the amended subordinated credit agreement, Patriot
sufficiently alleged that Hilco Financial became insolvent in January 2008. See ThoughtWorks, 7
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A.3d at 987 (“A[n entity] may be insolvent under Delaware law either when its liabilities exceed
its assets, or when it is unable to pay its debts as they come due.”).
¶ 35 C. Corporate Formalities
¶ 36 Third, we must determine whether Patriot sufficiently alleged that Hilco Financial failed
to observe corporate formalities, which, in this context, means formalities required of a limited
liability company, as Hilco Financial was such an entity, not a corporation.
¶ 37 In Patriot’s amended complaint, it asserted that Hilco Trading ignored such formalities in
its operation of Hilco Financial. In particular, the amended complaint alleged that Hilco Trading
and Hilco Financial shared key leadership and operated out of the same offices. The amended
complaint further asserted that Hilco Trading had the exclusive authority to manage and control
Hilco Financial, and Hilco Trading directed all of Hilco Financial’s activities. For example,
according to the amended complaint, Hilco Trading prepared all of Hilco Financial’s important
financial documents, vetted and approved all of Hilco Financial’s loans, exercised control over
Hilco Financial’s funds, and directed related Hilco entities to appraise all assets secured by Hilco
Financial’s loans. Additionally, the amended complaint asserted that, in soliciting Patriot to
provide funding to Hilco Financial, Hilco Trading represented that it would closely supervise Hilco
Financial’s operations.
¶ 38 A limited liability company has “few statutorily mandated formalities.” Verdantus, 2022
WL 611274, at *2. Given this, “[i]n the alter-ego analysis of an LLC, somewhat less emphasis is
placed on whether the LLC observed internal formalities because fewer such formalities are legally
required.” NetJets Aviation, Inc. v. LHC Communications, LLC, 537 F.3d 168, 178 (2d Cir. 2008)
(applying Delaware law). Despite Patriot’s various allegations about Hilco Financial’s operations,
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none of those allegations demonstrate that Hilco Financial violated what was required of it under
the LLC Act (Del. Code Ann. tit. 6, § 18-101 et seq.)
¶ 39 Many of Patriot’s allegations involve Hilco Trading’s management and control of Hilco
Financial. But, as Hilco Trading points out, Hilco Trading was the managing member of Hilco
Financial, and the LLC Act allows an entity to be both a member and manager of a limited liability
company. See id. § 18-403; Feeley, 62 A.3d at 662 (observing that, “[u]nder the LLC Act, there
are two basic types of members,” including “members who are also managers and exercise
managerial functions in a member-managed LLC”). And “more often than not, Delaware courts
have upheld the legal significance of corporate form, in a corporate-subsidiary complex, despite
the fact of substantial overlap in the management and control of the two entities.” Leslie v.
Telephonics Office Technologies, Inc., No. CIV. A. 13045, 1993 WL 547188, at *8 (Del. Ch. Dec.
30, 1993). Moreover, merely because a parent and subsidiary share employees or an office, that is
not enough to pierce the subsidiary’s veil. See VFS Financial, Inc. v. Falcon Fifty LLC, 17 F. Supp.
3d 372, 383-84 (S.D.N.Y. 2014) (applying Delaware law and finding that “the mere fact that a
subsidiary shares employees, officers, and directors with a parent does not permit the corporate
form to be disregarded”) (Internal quotation marks omitted.); Capmark Financial Group Inc. v.
Goldman Sachs Credit Partners L.P., 491 B.R. 335, 350 (S.D.N.Y. 2013) (applying Delaware law
and concluding “[t]hat a subsidiary shares employees, officers, and directors with a parent does
not permit the corporate form to be disregarded”).
¶ 40 While in the amended complaint, Patriot points to Hilco Financial’s limited liability
company agreement to show that significant decisions had to be approved by Hilco Trading, such
approval does not demonstrate that Hilco Financial lacked appropriate operating formalities or that
the two entities were a single economic entity. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1459-60
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(2d Cir. 1995) (where a parent company had to approve “real estate leases, major capital
expenditures, negotiations for a sale of minority stock ownership to [another company], or the fact
that [the parent company] played a significant role in the ultimate sale of [the subsidiary’s] assets
to a third party,” the Second Circuit Court of Appeals observed, in applying Delaware law, that
such “conduct is typical of a majority shareholder or parent corporation”).
¶ 41 In a corporation, examples of corporate formalities are “whether dividends were paid,
corporate records kept, [and whether] officers and directors function[ed] properly.” (Internal
quotation marks omitted.) Maloney-Refaie v. Bridge at School, Inc., 958 A.2d 871, 881 (Del. Ch.
2008). Patriot’s allegations do not show that Hilco Financial failed to follow any analogous
formalities required of a limited liability company under the LLC Act (Del. Code Ann. tit. 6, § 18-
101 et seq.) and do not show that Hilco Trading and Hilco Financial operated in manner atypical
of a parent-subsidiary relationship. Consequently, Patriot’s allegations are insufficient to
demonstrate that Hilco Financial failed to observe required formalities.
¶ 42 D. Siphoning of Company Funds
¶ 43 Fourth, we must determine whether Patriot sufficiently alleged that Hilco Trading, as the
majority member of Hilco Financial, siphoned company funds. According to Patriot’s amended
complaint, in January 2008, Hilco Trading issued a resolution declaring that Hilco Financial’s
income for 2007 was expected to be more than $9 million, which resulted in an approximately
$3.7 million presumptive tax liability for the members of Hilco Financial. In turn, according to the
amended complaint, Hilco Trading caused Hilco Financial to distribute approximately $3.7 million
to Hilco Financial’s members, the majority of which went to Hilco Trading as the majority
member, to cover the estimated tax liability. However, the amended complaint alleged that, despite
projecting Hilco Financial’s income to be more than $9 million, Hilco Trading knew that Hilco
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Financial had actually lost more than $5 million, which was borne out through a revised financial
statement in April 2008. As such, the amended complaint claimed that Hilco Financial’s
approximately $3.7 million distribution was fraudulent and only used by Hilco Trading, as the
majority member, to siphon away the remaining assets of Hilco Financial.
¶ 44 “[S]iphoning funds is different than making distributions to members that are permitted by
law.” In re The Heritage Organization, L.L.C., 413 B.R. 438, 517 n. 69 (Bankr. N.D. Tex. 2009)
(applying Delaware law). “Siphoning suggests the improper taking of funds that the owner was
not legally entitled to receive.” Id. Under the LLC Act, a limited liability company may make cash
distributions “in the manner provided in a limited liability company agreement.” Del. Code Ann.
tit. 6, § 18-504. It is not uncommon for a limited liability company’s agreement to allow for cash
distributions to be made to cover a member’s estimated tax liability. See, e.g., Lion Copolymer
Holdings, LLC v. Lion Polymers, LLC, 614 S.W.3d 729, 731 (Tex. 2020); Wilson v. Gandis, 844
S.E.2d 631, 637 (S.C. 2020); In re SGK Ventures, LLC, 521 B.R. 842, 859 (Bankr. N.D. Ill. 2014).
Nonetheless, the LLC Act generally prohibits a limited liability company from making
distributions to a member that would render the company insolvent or while the company is
insolvent. Del. Code Ann. tit. 6, § 18-607(a).
¶ 45 Viewing the allegations of the amended complaint alone in the light most favorable to
Patriot without any reference to affirmative matters, as we must for purposes of a section 2-615
motion to dismiss (see Village of Belle Rive v. Illinois Central R.R. Co., 2018 IL App (5th) 170036,
¶ 9), Patriot alleged sufficient facts to show Hilco Trading siphoned company funds of Hilco
Financial in this one instance. 2 As we already concluded that Patriot made a sufficient showing of
2 Although we find as such, we note that the alleged fraudulent nature of this distribution formed the basis of Patriot’s fraudulent transfer and constructive fraudulent transfer claims against Hilco Trading
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Hilco Financial’s insolvency, Patriot’s assertions that, during the same time period, Hilco Trading
caused Hilco Financial to distribute approximately $3.7 million in the form of an estimated tax
liability to its members sufficiently alleged that the distribution was improper because the
distribution caused Hilco Financial to become insolvent or occurred while Hilco Financial was
insolvent. See Del. Code Ann. tit. 6, § 18-607(a); GEBAM, Inc. v. Investment Realty Series I, LLC,
15 F. Supp. 3d 1311, 1327 (N.D. Ga. 2013) (applying Delaware law and finding where, “some
evidence suggests that the Individual Defendants engaged in unauthorized disbursements,” that
conduct could be considered “a siphoning of corporate funds”).
¶ 46 E. Functioning as a Façade
¶ 47 Fifth, we must determine whether Patriot sufficiently alleged that, in general, Hilco
Financial simply functioned as a façade for Hilco Trading, as the majority member. According to
Patriot’s amended complaint, once many of Hilco Financial’s borrowers began defaulting on their
loans in 2007, Hilco Trading allegedly prepared false financial statements, compliance certificates
and collateral reports on Hilco Financial’s behalf. Additionally, the amended complaint alleged
that Hilco Trading exercised significant control over Hilco Financial, including approving loans
and controlling Hilco Financial’s funds. All told, according to the amended complaint, Hilco
Trading treated Hilco Financial as an extension of itself rather than a distinct business entity.
¶ 48 In analyzing this factor, Patriot must allege facts showing that Hilco Financial “had no
legitimate business operations and was merely a fraudulent corporation.” In re Moll Industries,
Inc., 454 B.R. 574, 589 (Bankr. D. Del. 2011). The parent company must dominate and control
the subsidiary so significantly such that the subsidiary fails to have “legal or independent
and Hilco, Inc., in the underlying litigation. Ultimately, the circuit court granted summary judgment to Hilco Trading and Hilco, Inc., on these claims, and Patriot did not appeal those judgments.
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significance of its own,” i.e., “some sort of elaborate shell game.” (Internal quotation marks
omitted) In re BH S & B, 420 B.R. at 140-41.
¶ 49 As previously noted, Patriot’s amended complaint acknowledged that Hilco Trading, either
directly or indirectly, offered a broad array of financial and business services, including merger
and acquisition facilitation, inventory appraisals, industrial asset acquisitions and liquidations, and
consumer receivables purchases. The amended complaint further acknowledged that Hilco
Financial was formed to extend credit through short-term loans to companies that had difficulty
borrowing from traditional lenders. Generally, such a concession that Hilco Financial and Hilco
Trading operated in discrete financial or business spaces would be fatal to Patriot’s façade claim.
See In re Moll, 454 B.R. at 589-90 (applying Delaware law and finding allegations “insufficient
to allege that [a subsidiary] was a mere facade for [the parent]” as they “were separate businesses,
operating in completely different fields”); In re Foxmeyer, 290 B.R. 229, 244 (Bankr. D. Del.
2003) (applying Delaware law and rejecting claim that the subsidiary acted merely as a façade for
the parent-holding company where the subsidiary operated a pharmaceutical distribution business
and its parent operated “several discrete albeit related healthcare businesses”).
¶ 50 Despite this concession, the plaintiff need not allege that the company “was created with
fraud or unfairness in mind” but rather “[i]t is sufficient” to allege that company eventually became
used in such a manner. NetJets, 537 F.3d at 177. Patriot claims that Hilco Financial became a
vehicle for fraud based on the allegedly improper distribution from Hilco Financial to its members
as well as allegations that Hilco Trading prepared false financial statements, compliance
certificates and collateral reports on behalf of Hilco Financial. While these assertions present
potential causes of actions against the Hilco entities, as Patriot raised in the underlying litigation,
such allegations are insufficient to demonstrate that Hilco Financial was merely a façade for Hilco
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Trading. 3 Although Patriot claims that Hilco Trading essentially controlled Hilco Financial with
the same people running both companies, Patriot has not alleged anything that the LLC Act does
not contemplate by allowing a member-managed limited liability company. See Del. Code Ann.
tit. 6, § 18-403; Feeley, 62 A.3d at 662. And, as previously discussed, it is not uncommon for a
parent and subsidiary to share key leadership, or for a parent to approve critical decisions and
policies of a subsidiary. See VFS Financial, 17 F. Supp. 3d at 383-84; Fletcher, 68 F.3d at 1459-
60.
¶ 51 Patriot’s allegations show that Hilco Trading exercised some degree of control over Hilco
Financial, but those allegations are insufficient to show “exclusive domination and control [ ] to
the point” that Hilco Financial “no longer ha[d] legal or independent significance of [its] own.”
(Internal quotation marks omitted.) Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P.
v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999). Moreover, Patriot’s amended complaint is replete
with concessions that Hilco Financial operated a legitimate business for a period of time, belying
any notion that Hilco Financial was a sham and existed for no other purpose than as a vehicle for
fraud. See DG BF, LLC v. Ray, No. 2020-0459-MTZ, 2021 WL 776742, at *26-28 (Del. Ch. Mar.
1, 2021) (dismissing veil-piercing claim where complaint conceded the subsidiary corporation ran
a legitimate business, demonstrating that the subsidiary was not a sham). Consequently, Patriot’s
allegations are insufficient to demonstrate that, in general, Hilco Financial simply functioned as a
façade for Hilco Trading, as the majority member.
3 We again note that, in the underlying litigation, Patriot claimed that Hilco Trading and Hilco Financial committed fraud when they made false statements of material fact though these same financial statements, compliance certificates and collateral reports that overstated the quality of Hilco Financial’s investment portfolio and the company’s overall financial health. Ultimately, the circuit court granted summary judgment to Hilco Trading and Hilco Financial on these claims, and both judgments were affirmed on appeal in Patriot, 2018 IL App (1st) 170345-U.
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¶ 52 F. Injustice or Unfairness
¶ 53 As previously discussed, in determining whether two companies operated as a single
economic entity, no single factor is dispositive, but rather, the “ultimate decision regarding veil-
piercing is largely based on some combination of these factors, in addition to an overall element
of injustice or unfairness.” (Internal quotation marks omitted.) Cleveland-Cliffs, 2023 WL
5688392, at *5. As Patriot has sufficiently alleged two of the five factors, we now must determine
whether Patriot sufficiently alleged an overall element of injustice or unfairness.
¶ 54 In its amended complaint, Patriot alleged that there was an overall element of injustice or
unfairness where it alleged that Hilco Trading repeatedly lied to induce Patriot to lend millions of
dollars to Hilco Financial, failing to properly capitalize Hilco Financial and failing to follow proper
corporate formalities. The amended complaint claimed that Hilco Financial was purely a
mechanism for Hilco Trading to gamble Patriot’s money without risk because, if Hilco Financial’s
loans were successful, Hilco Trading would make money and if Hilco Financial’s loans were
unsuccessful, Hilco Trading could hide behind the veil of Hilco Financial. In turn, in the amended
complaint, Patriot posited that Hilco Financial’s limited liability company form was the key to
Hilco Trading’s “scheme.”
¶ 55 As an initial matter, “[a] breach of contract, without more, does not supply the fraud or
injustice required to pierce the corporate veil.” Compagnie des Grands Hotels d’Afrique S.A. v.
Starman Hotel Holdings LLC, No. 1:18-cv-00654-SB-SRF, 2023 WL 5095274, at *9 (D. Del.
Aug. 8, 2023). “To hold otherwise would render the fraud or injustice element meaningless.” Mobil
Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 268 (D. Del. 1989). And thus, while Patriot’s
inability to collect a monetary judgment of more than $62 million is, in some sense, an injustice
and unfair, it is not the kind of injustice or unfairness contemplated under the veil-piercing
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doctrine. Id. Rather, the injustice or unfairness must be the result of the abuse of an entity’s
business form. Cohen v. Schroeder, 248 F. Supp. 3d 511, 523 (S.D.N.Y. 2017) (applying Delaware
law), aff’d, 724 F. App’x 45 (2d Cir. 2018). “In other words, the [entity] effectively must exist as
a sham or shell through which [a controlling party] perpetrates injustice.” Id. The critical inquiry
is whether the defendant “abused the corporate form and, through that abuse, perpetrated fraud on
an innocent third party.” Doberstein v. G-P Industries, Inc., No. 9995-VCP, 2015 WL 6606484,
at *4 (Del. Ch. Oct. 30, 2015).
¶ 56 In the instant case, when Patriot entered into the subordinated credit agreement and
amended subordinated credit agreement with Hilco Financial in 2005 and 2007, respectively,
Patriot knew it was contracting solely with Hilco Financial, and not Hilco Trading, and never
sought to obtain a guarantee from Hilco Trading on its credit facility to Hilco Financial.
Additionally, Patriot knew that Hilco Financial would be engaged in high-risk lending and its
credit facility was subordinate to Hilco Financial’s senior lenders. These facts show that, under the
veil-piercing principles, Patriot is not purely an innocent third party. Rather, Patriot entered into a
high-risk subordinated credit agreement, and when the loans that Hilco Financial originated
defaulted, the risks associated with Patriot’s lending came to naught. What Patriot has alleged does
not sufficiently show that Hilco Trading or Hilco Financial abused its business form and
perpetuated a fraud upon Patriot, as an innocent third party. See id.
¶ 57 We acknowledge that we found Patriot sufficiently alleged that Hilco Trading siphoned
Hilco Financial’s company funds in one instance based on the approximately $3.7 million
distribution. However, it does not follow that, because Patriot sufficiently alleged a siphoning of
company funds in this instance, Patriot sufficiently alleged that the siphoning was fraudulent in
nature or that Hilco Financial abused its business form in making that distribution. As noted, the
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LLC Act generally prohibits a limited liability company from making distributions to members
that would render the company insolvent or while the company is insolvent. Del. Code Ann. tit. 6,
§ 18-607(a). According to the amended complaint, the approximately $3.7 million distribution,
which was to cover the estimated tax liabilities of Hilco Financial’s members, was based on Hilco
Financial’s projected income in 2007 of more than $9 million. As it turns out, however, according
to the amended complaint, Hilco Financial actually lost more than $5 million that year, which was
allegedly borne out by a revised financial statement in April 2008. The mere fact that an income
projection turned out to be wrong and, in hindsight, the distribution was potentially improper under
Delaware law does not, in and of itself, show fraud. That is to say, while Patriot may have
sufficiently alleged that Hilco Trading siphoned Hilco Financial’s funds in this one instance,
Patriot has not sufficiently alleged that Hilco Trading or Hilco Financial did so through an abuse
of their business form. See GEBAM, 15 F. Supp. 3d at 1327 (dismissing a veil-piercing claim
where “some evidence suggests that the [defendants] engaged in unauthorized disbursements and
*** such conduct amounted to a siphoning of corporate funds,” but “there [wa]s no evidence that
the [defendants] did this through an abuse of the corporate form”). Consequently, Patriot’s
allegations are insufficient to show an overall element of injustice or unfairness necessary to pierce
Hilco Financial’s veil.
¶ 58 Even with Patriot sufficiently alleging two of the five factors to show that Hilco Trading
and Hilco Financial operated as a single economic entity, because Patriot’s allegations are
insufficient to show an overall element of injustice or unfairness, the circuit court properly
dismissed Patriot’s amended complaint under section 2-615 of the Code (735 ILCS 5/2-615 (West
2020)). See Cleveland-Cliffs, 2023 WL 5688392, at *5. Given this conclusion, we need not address
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Hilco Trading’s alternative basis for dismissal of collateral estoppel under section 2-619(a)(4) of
the Code (id. § 2-619(a)(4)), which the court denied as moot.
¶ 59 III. CONCLUSION
¶ 60 For the reasons stated, we affirm the judgment of the circuit court of Cook County.
¶ 61 Affirmed.
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