Locating and Recovering Corporate Assets Leveraging Alter Ego - - PowerPoint PPT Presentation

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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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Post-Judgment Discovery

Matthew S. Kenefick

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

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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

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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

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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

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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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Executing a Judgment

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Execution Methods

 Levy writ of execution  Receiver  Charging Orders  Lien Creation

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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

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Receivership

 Collect funds (e.g., rents)  Marshall assets  Parked funds (IRS, bonds etc.)  Expensive – better for larger/difficult

situations

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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

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Matthew S. Kenefick

Jeffer Mangels Butler & Mitchell, LLP (415) 398-8080 msk@jmbm.com 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: dfass@klapperfass.com 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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• 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,

• r 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 Services, Inc., 727 F.Supp.2d 120 (E.D.N.Y. 2010) (turnover

• rder 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).

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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

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 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.

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 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

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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

• wner, 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

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 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

• ut 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;

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 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

• f 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

• wner of the undercapitalized subsidiary

(defendant Dunville Realty), sharing common

• fficers 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

• f 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-

• pen 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

• bserve the formalities and think of their companies as themselves

 Show the client the Money!

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ENFORCING JUDGMENTS: STRATEGIES FOR LOCATING AND RECOVERING CORPORATE ASSETS

Attorney David Seth Hill Halling & Cayo, S.C. Milwaukee, WI dsh@hallingcayo.com

LIT ITIGATION TO ENFORCE A JU 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

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SATISFCATION OF JU JUDGMENTS

• Collection Tips
• Form
• Homestead Exemption
• Rumage v. Gullberg, 235 Wis.2d 279, 611 N.W.2d 458

(2000)

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SATISFCATION OF JU 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

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