enforcing judgments: strategies for locating and...
TRANSCRIPT
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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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Sources of Information
Sub Rosa:
• Internal Materials
• Informal Discovery
Formal Discovery:
• Third Party
• Debtor
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Internal Materials
Credit Applications
Financial Statements
Cancelled Checks
Invoices
Tax Reporting Materials
Use for internal analysis and to determine third-
party information sources -- sub rosa
7
Informal Discovery
Private Investigators
Witness Interviews
Online Searches (social media)
UCC Filings
Send funds and trace
Use for internal analysis and to determine third-
party information sources -- sub rosa
8
Third Party Discovery
Subpoena practice
Banks, business affiliates, employers
• Documents vs. testimony/Third-Party Examination
• Centralized location for service -- Department of Business
Oversight
Witness Interviews
Federal vs. State Notice Requirements
CCP 1985.3 Issues
Out of State Subpoena Practice
Follow-up Subpoenas 9
Discovery From Debtor
OEX
• 1 year lien created by service
• 1x every 4 months
Written Discovery
Reliability Issues
Strategic Aspects
• Lose surprise, might intimidate into payment or
force into Bankruptcy
10
Best Practices
Move quickly
Check own files
Be precise in requests
Use element of surprise
Create liens by service of OEX
Follow up discovery
Focus on info from third-parties who lack an interest
in dispute
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Writ of Execution
Levy on standard banks
Levy receivables
• Keeper/Till-Tap
Real property interests
• Stock cooperatives
Personal property
Items in Third Party possession
Wage garnishment – special procedures
Combine service with subpoenas – follow money 14
Receivership
Collect funds (e.g., rents)
Marshall assets
Parked funds (IRS, bonds etc.)
Expensive – better for larger/difficult
situations
15
Other Execution Issues Charging Orders (partnership/LLC)
• Lien created by service of motion
• Foreclose partnership/LLC interest
Create liens
• JL-1; Abstract of Judgment, Pending Action
Assert leverage
• CADL suspension; Contractor’s license
Wary of Bankruptcy
Third-Party Claims for Transfers
• UFTA, Successor liability, Alter-Ego 16
Matthew S. Kenefick
Jeffer Mangels Butler & Mitchell, LLP
(415) 398-8080
www.jmbm.com
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ENFORCING JUDGMENTS: STRATEGIES
FOR LOCATING AND RECOVERING
CORPORATE ASSETS
Piercing the corporate veil; alter ego
theory; reverse piercing
Presented by:
DANIEL A. FASS, ESQ.
Klapper & Fass
170 Hamilton Avenue
White Plains, NY 10601
Tel. No. 914.287.6466
Email: [email protected]
Web: www.collectionsnewyork.com
OVERVIEW
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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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
21
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
22
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
23
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…
24
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
Services, Inc., 727 F.Supp.2d 120 (E.D.N.Y. 2010) (turnover
order also available to assert piercing corporate veil and alter-
ego theories of liability)
A new proceeding not required, move by Order to Show Cause in
the district court where judgment obtained
Diversity and venue issues arise where a transferee is out of that
jurisdiction
Certain cases, including veil piercing and alter-ego are not
considered enforcement of judgment and require new action. See
Epperson v. Entertainment Express, Inc., 242 F.3d 100 (2d
Cir.2001) (district courts lack ancillary jurisdiction over claims of
alter ego liability and veil-piercing, that raise an independent
controversy with a new party in an effort to shift liability). 25
WHAT IS A FRAUDULENT
CONVEYANCE?
NY has adopted the Uniform Fraudulent Conveyance Act
Found in Article 10 of NY’s Debtor and Creditor Law
(“DCL”)
“Fraud” not a defined term in the statute, though certain
acts by debtors are deemed fraudulent
“Conveyance” is defined in Section 270 as: including
every payment of money, assignment, release, transfer,
lease, mortgage or pledge of tangible or intangible
property, and also the creation of any lien or
incumbrance
26
Key factor in a fraudulent conveyance is whether there is
“fair consideration”
Defined in DCL ¶ 272 : Fair consideration is given for
property, or obligation,
a. When in exchange for such property, or obligation, as a
fair equivalent therefor, and in good faith, property is
conveyed or an antecedent debt is satisfied, or
b. When such property, or obligation is received in good
faith to secure a present advance or antecedent debt in
amount not disproportionately small as compared with the
value of the property, or obligation obtained.
27
When is there not fair consideration?
Usually when there is not good faith
For example, an officer of a debtor who makes distributions
to himself or repays so-called “loans”, close in time to the
entry of the judgment, either before or after
The “insider” status of the officer defeats good faith
necessary for fair consideration
See Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d
249, 477 N.Y.S.2d 374, 378 (1984); Laco X-Ray Sys., Inc.
v. Fingerhut, 88 A.D.2d 425, 433, 453 N.Y.S.2d 757, 762
(2d Dep't 1982) appeal dismissed58 N.Y.2d 606, 447
N.E.2d 86, 460 N.Y.S.2d 1026 (1983)
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Certain activity of the debtor which lacks fair
consideration is deemed fraudulent with out regard to
actual intent:
DCL § 273 – conveyances by debtor that render debtor
insolvent
DCL § 273-a – conveyances made by debtor when a
debtor is defendant in action for money damages
DCL § 274 - conveyances by debtor which leave the
debtor’s business with unreasonably small capital
DCL § 275 - conveyances by debtor which leave the
debtor with an inability to pay debts as they mature
DCL § 276 deals with fraud with actual intent
29
WHAT IS ALTER-EGO?
A theory which says that acts of the owner of a corporation make him or her indistinguishable from the corporation
In order to state a claim for alter ego liability under New York law the following is required: The owner exercised such control that the
corporation has become a mere instrumentality of the owner, who is the real actor
The owner used this control to commit a fraud or ‘other wrong’
The fraud or wrong results in an unjust loss or injury to the plaintiff
30
To aid the analysis, following factors are
considered:
the absence of the formalities that constitute and
manifest the corporate existence, for example,
issuance of stock, election of directors, and keeping of
corporate records;
the use of corporate funds deposited in or taken
out of the corporation's accounts for personal rather
than corporate purposes;
overlap in ownership, officers, directors, and
personnel;
use of common office space, address and
telephone numbers of corporate entities;
the extent to which the allegedly dominated
corporation displayed business discretion;
31
whether the corporation in question had property that was
used by the controlling person or corporation as if it were
its own.
See In re Adler, Coleman Clearing Corp., 469 F.Supp.2d
112,117-18 (S.D.N.Y. 2007); And see Morris v. New York
State Department of Taxation and Finance, 82 N.Y.2d
135, 141, 623 N.E.2d 1157, 603 N.Y.S.2d 807 (1993);
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)
32
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”)
33
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)
34
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”)
35
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).
36
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)
37
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)
38
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
39
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.
40
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.
41
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
Show the client the Money!
42
ENFORCING JUDGMENTS: STRATEGIES FOR LOCATING
AND RECOVERING CORPORATE ASSETS
Attorney David Seth Hill
Halling & Cayo, S.C.
Milwaukee, WI
LITIGATION TO ENFORCE A JUDGMENT
• Docketing Judgment • Cheapest and Easiest Collection Method • ALWAYS DOCKET YOUR JUDGMENT
• Post-judgment Discovery • Supplementary Examinations – Wis. Stats. Ch. 816 • Crown Castle USA, Inc. v. Orion Construction Group, LLC
• Garnishments • Earnings and Non-Earnings Garnishments – Wis. Stats. Ch. 812
• Executions • Eloff v. Riesch, 14 Wis.2d 519, 111 N.W.2d 578 (1961).
• Charging Orders • LLC and Partnership
• Receivers • Supplemental
44
SATISFCATION OF JUDGMENTS
• Collection Tips
• Form
• Homestead Exemption • Rumage v. Gullberg, 235 Wis.2d 279, 611 N.W.2d 458
(2000)
45
SATISFCATION OF JUDGMENTS
• Collection Tips - Free (or low cost) ways to try and find assets:
• Does business have a website? • Does business advertise? • UCC filings
• Article 9 issues
• Court website (CCAP) • Reviewing what other Creditors have done
• Partial Satisfaction of judgment lien • Did business ever write you a check? • Talk with the Debtor about Settlement
• Consider Debtor signing promissory note, give you a security interest in certain property, or assignment of rents
46