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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

6

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

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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 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

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,

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

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…

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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

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

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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

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)

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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”)

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

dsh@hallingcayo.com

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

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