The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A Enforcing Judgments: Strategies for Locating and Recovering Corporate Assets Leveraging Alter Ego Liability, Piercing the Corporate Veil, Reverse Piercing and Fraudulent Conveyance Theories Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, NOVEMBER 3, 2015 Matthew S. Kenefick, Partner, Jeffer Mangels Butler & Mitchell, San Francisco Daniel A. Fass, Klapper & Fass, White Plains, N.Y. David Seth Hill, Halling & Cayo, Milwaukee
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The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Enforcing Judgments: Strategies for
Locating and Recovering Corporate Assets Leveraging Alter Ego Liability, Piercing the Corporate Veil,
Reverse Piercing and Fraudulent Conveyance Theories
Presentation Limited Primarily to New York Law and a case study which brings together all of the elements
Finding Corporate Assets By Undoing Fraudulent Transfers (F/T) and Veil Piercing Requires Skills That All Good Collection Attorneys Need: Being “Jim Rockford” - Good P.I. Instincts
Being a Forensic Accountant
Knowing Corporate Law
Willing to tough it out - time intensive, complex and frustrating
Pursuing F/T and Veil Piercing case brings together at least four bodies of law:
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• Debtor-Creditor Law
• Common Law
• Corporate Law
• Bankruptcy Law
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PROCEDURAL TOOLS AND
DEFINITIONS
Article 52 of New York’s Civil Practice Law and Rules
(“CPLR”) tells you how to use the state court to enforce
a judgment
Article 52 also tells you what kinds of assets are
covered by its enforcement procedures
Article 52 does not tell you what is a fraudulent transfer,
or what is veil piercing or when someone is the alter-
ego of the debtor
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CPLR § 5201 (b) defines property subject to enforcement: A money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested, unless it is exempt from application to the satisfaction of the judgment.
Broad and covers most “plain vanilla” assets; but what about something like a trade name?
Trade name could be important if it is the only asset a debtor has
See Chocolate Singles case: Victoria Graphics, Inc. v. Priorities Publications, Inc., 167 Misc.2d 607 (Civ. Ct. Queens Co. 1996) – trademark assignable if assignee in same or similar business as assignor
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What about a debtor’s “book of business”?
See Mitchell v. Lyons Professional Services, Inc., 09 Civ. 1587 (EDNY, Decided June 8, 2015) – Customer accounts were property of debtor, subject to fraudulent transfer claim
In NY, creditor who is trying to retrieve assets debtor has transferred to another person or who wants to go behind the façade of the corporation to hold an officer, director or shareholder liable, must start a new proceeding commonly referred to as a “turnover” proceeding, using the special proceeding mechanism provided by CPLR Article 4
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See CPLR § 5225 (b): Property not in the possession of
judgment debtor. Upon a special proceeding commenced
by the judgment creditor, against a person in possession or
custody of money or other personal property in which the
judgment debtor has an interest, or against a person who is
a transferee of money or other personal property from the
judgment debtor, where it is shown that the judgment
debtor is entitled to the possession of such property or that
the judgment creditor's rights to the property are superior to
those of the transferee, the court shall require such person
to pay the money, or so much of it as is sufficient to satisfy
the judgment…
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What if you obtained a judgment in federal court?
Federal Court has power to enforce it owns judgments. Kashi v.
Gratsos, 712 F.Supp. 23, 25-26 (S.D.N.Y. 1989)
Fed. R. Civ. P. 65 provides that federal court can use state
judgment enforcement procedures. Mitchell v. Lyons Professional
Lederer v. King, 214 A.D.2d 354, 625 N.Y.S. 149 (1st
Dep’t. 1995) (alter-ego claim does not require pleading
of fraud, only that individual defendants’ control of
corporate defendant was used to commit wrong against
plaintiff)
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WHAT IS VEIL PIERCING?
Like alter-ego the goal is to eliminate the protection of limited liability and go after the owner of the corporation
The elements and proof to prove a veil piercing claim are similar to alter ego. Freeman v. Complex Computing Co., 119 F.3d 1044 (2d Cir. 1997).
Claim for piercing the corporate veil exists where “a corporation is shown to be a mere shell dominated and controlled by another for the latter's own purposes”. 888 7th Avenue Associates Limited Partnership v. Arlen Corporation, 172 A.D.2d 445, 569 N.Y.S.2d 16 (1st Dep’t. 1991) (“Arlen”)
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Explanatory holding of Arlen: The allegations
that Arlen, the parent incorporator and sole
owner of the undercapitalized subsidiary
(defendant Dunville Realty), sharing common
officers and directors with Dunville, exercising
free access to Dunville's bank accounts for
payment of its own salaries and operating
expenses as well as those of other Arlen
subsidiaries, thus depleting all of Dunville's liquid
assets before plaintiff could satisfy its judgment
for more than $500,000 in delinquent rent,
sufficiently plead a cause of action for piercing
the corporate veil (citations omitted)
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Domination factors: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlap in ownership, officers, directors and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the amount of business discretion displayed by the allegedly dominated corporation; (7) whether the related corporations deal with the dominated corporation at arms length; (8) whether the corporations are treated as independent profit centers; (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group; and (10) whether the corporation in question had property that was used by others. WM. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131 (2d. Cir. 1991) (“Passalacqua”)
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What’s the difference between alter-ego and veil
piercing?
No practical difference in non-bankruptcy case. See
Passalacqua
In bankruptcy, allegation of alter-ego v. veil piercing could
lead to different consequences. See In re Mihalatos, 527
B.R. 55 (Bkrtcy. E.D.N.Y. 2015)(creditor sought to bar
discharge by arguing that certain conduct of the debtor’s
corporation which the creditor argued was the debtor’s
alter-ego should be imputed to the debtor as corporation
and debtor were one and same; bankruptcy did not find
corporation was alter-ego and discharge not barred on
that basis).
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WHAT IS REVERSE VEIL PIERCING?
Seeking to hold a debtor’s corporation liable for the debt of a corporation’s principal officer, director or shareholder. See American Fuel Corp. v. Utah Energy Development Co., Inc., 122 F.3d 130 (2d Cir. 1997); see also, State of New York v. Easton, 169 Misc. 2d 282, 288-89 (Sup. Ct. Albany Co. 1995)
Two Prong test: (1) the owner or shareholder exercised domination over the corporation and (2) that the domination was used to commit a fraud or wrong. Monteleone v. The Leverage Group, 2009 WL 249801 (E.D.N.Y. 2009) citing JSC Foreign Econ Ass’n Technostroyexport v. Int’l Dev. and Trade Servs., Inc., 295 F.Supp.2d 366, 379 (S.D.N.Y. 2004)
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Domination requirement relaxed in certain
circumstances in favor of finding control. Securities
Investor Protection Corp. v. Stratton Oakmont, Inc., 234
B.R. 293 (Bankr. S.D.N.Y. 1999); see also American
Fuel, 122 F.3d at 134-35
Same domination factors considered. See
Passalacqua.
Reverse veil piercing not recognized in every
jurisdiction. E.g. Not recognized in California. See
Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App.
4th 1510 (Ct.App. 4th Dist. 2008)
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FEDEX TECHCONNECT V. ONTREND
INTERNATIONAL ET AL:
A CASE STUDY
A post judgment enforcement action brought by Klapper & Fass in the Southern District of NY
Example of federal court exercising the power to enforce its own judgment utilizing the construct of CPLR Article 52
Proceeding brought on by order to show cause in order to obtain jurisdiction of the owner of defendant and another related company also owned by the defendant
Claims were that owner caused defendant to fraudulently convey substantially all of the assets of defendant to a second company after defendant had been sued by FedEx and then proceeded to use the second company as her personal bank account
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Primary defense alleged was that owner had previously filed for bankruptcy and sought to re-open the bankruptcy to include FedEx.
How did we discover the transfers and the personal use of corporate assets? Post judgment deposition of the owner revealed how she
treated both companies
Defendant and second company were forced to produce bank statements and accounting records
Careful review of statements and accounting records revealed the truth
Proceeding was tried before the district court and FedEx was awarded a separate judgment against the owner for the full amount of the original judgment. Owner’s bankruptcy defenses were rejected.
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What did the district court find?
Needed to create the link between the conveyances made by defendant to second company and owner’s use of second company’s assets
Transfers to second company were fraudulent under DCL §§ 273-a and 273 and 274 because transfers made after FedEx sued Ontrend and transfers left Ontrend with unreasonably small capital
Second company took such assets as a constructive trustee, thus available to creditors (the “Link”). See Julien J. Studley, Inc. v. Lefrak, 66 A.D.2d 208, 213, 412 N.Y.S.2d 901(2nd Dep’t. 1979)
Owner controlled second company, used it as mere instrumentality and used company to pay many of her personal expenses, thus owner was alter-ego of second company See FedEx Techconnect v. Ontrend International, 11 Civ. 03359, July 28, 2015.
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DID WE LEARN ANYTHING?
Do the hard work and find the transfers
Hopefully have a client that will support you
Often debtors start transferring money after suit is commenced
Officers and principals of corporate debtors are not preferential creditors and in fact have fiduciary duties to creditors
100% owned and closely held businesses are the most susceptible to alter ego and veil piercing claims - they just don’t observe the formalities and think of their companies as themselves