Enforcing Judgments: Strategies for Locating and Recovering Corporate Assets

Transcription

1 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 TUESDAY, NOVEMBER 3, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Post-Judgment Discovery Matthew S. Kenefick

6 Sources of Information Sub Rosa: Internal Materials Informal Discovery Formal Discovery: Third Party Debtor 6

7 Internal Materials Credit Applications Financial Statements Cancelled Checks Invoices Tax Reporting Materials Use for internal analysis and to determine thirdparty information sources -- sub rosa 7

8 Informal Discovery Private Investigators Witness Interviews Online Searches (social media) UCC Filings Send funds and trace Use for internal analysis and to determine thirdparty information sources -- sub rosa 8

9 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 Issues Out of State Subpoena Practice Follow-up Subpoenas 9

10 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

11 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 11

12 Executing a Judgment 12

13 Execution Methods Levy writ of execution Receiver Charging Orders Lien Creation 13

14 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

15 Receivership Collect funds (e.g., rents) Marshall assets Parked funds (IRS, bonds etc.) Expensive better for larger/difficult situations 15

16 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

17 Matthew S. Kenefick Jeffer Mangels Butler & Mitchell, LLP (415)

18 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 Tel. No Web:

19 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: 19

20 Debtor-Creditor Law Common Law Corporate Law Bankruptcy Law 20

21 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 alterego of the debtor 21

22 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

23 What about a debtor s book of business? See Mitchell v. Lyons Professional Services, Inc., 09 Civ (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

24 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

25 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, (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 alterego 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

26 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

27 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

28 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) 28

29 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 conveyances by debtor which leave the debtor s business with unreasonably small capital DCL 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

30 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

31 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

32 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, (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 (1 st 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

33 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 th Avenue Associates Limited Partnership v. Arlen Corporation, 172 A.D.2d 445, 569 N.Y.S.2d 16 (1st Dep t. 1991) ( Arlen ) 33

34 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

35 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

36 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

37 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, (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 (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

38 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 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. 4 th 1510 (Ct.App. 4 th Dist. 2008) 38

39 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

40 Primary defense alleged was that owner had previously filed for bankruptcy and sought to reopen 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

41 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(2 nd 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 , July 28,

42 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

43 ENFORCING JUDGMENTS: STRATEGIES FOR LOCATING AND RECOVERING CORPORATE ASSETS Attorney David Seth Hill Halling & Cayo, S.C. Milwaukee, WI

44 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

45 SATISFCATION OF JUDGMENTS Collection Tips Form Homestead Exemption Rumage v. Gullberg, 235 Wis.2d 279, 611 N.W.2d 458 (2000) 45

46 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

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