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CORDIUS TRUST v. KUMMERFELD

United States District Court, S.D. New York


March 30, 2004.

CORDIUS TRUST, Plaintiff, -v- ELIZABETH KUMMERFELD, KUMMERFELD ASSOCIATES, INC., Defendants, CORDIUS TRUST, Petitioner, -v- DONALD KUMMERFELD, Respondent

The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION AND ORDER

This action arises out of the efforts of Cordius Trust ("Cordius") to collect a judgment entered by this Court against Elizabeth Kummerfeld ("Ms. Kummerfeld") and Kummerfeld Associates, Inc. ("KAI") on April 11, 2000, and affirmed by the Page 2 Second Circuit Court of Appeals on November 30, 2000. Donald Kummerfeld ("Mr. Kummerfeld") is Ms. Kummerfeld's husband. Together, they are the sole officers and shareholders of KAI.

  On March 25, 2003, Cordius moved pursuant to Rule 69, Fed.R. Civ. P., for the issuance of a writ of execution and turnover order piercing the corporate veil of KAI in order to render Mr. Kummerfeld's assets amenable to attachment. Attached to Cordius's motion were evidentiary submissions in support of its claims, including the deposition testimony of Mr. and Ms. Kummerfeld. This action was referred to Magistrate Judge Ronald Ellis on March 27 for post-trial supervision. Mr. Kummerfeld opposed the March 25 motion on May 16 by filing his own evidentiary submissions, including his "Affidavit in Opposition to Petition and in Support of Motion to Dismiss" and excerpts of his deposition testimony and that of Ms. Kummerfeld, as well as a motion to dismiss the petition pursuant to Rules 12(b)(5) and 12(b)(6), Fed.R. Civ. P., on the grounds that service of process was inappropriate, the petition was defective, the action was improperly commenced as a special turnover proceeding, and Cordius failed to state a claim upon which relief may be granted. Over several months, the parties and Judge Ellis discussed Mr. Kummerfeld's procedural defenses and his June 13, 2003 letter request for sanctions. After determining that the record was complete, and that neither party wished to supplement its Page 3 submissions, Judge Ellis issued a Report and Recommendation ("Report") on February 19, 2004, recommending that Mr. Kummerfeld's motion to dismiss be denied and Cordius's motion to pierce the corporate veil be granted.

  Mr. Kummerfeld has filed objections to the Report, Cordius has filed a response, and Mr. Kummerfeld has filed a brief in further support of his objections. For the following reasons, Judge Ellis's recommendations are adopted.

  Background

 The Original Action

  The following facts are undisputed, unless otherwise noted. In the original proceedings before this Court, Cordius brought suit against Ms. Kummerfeld in her individual capacity and as president of KAI for breach of a promissory noted that she executed in settlement of claims of fraud and misconduct alleged by Cordius. On February 1, 2000, the Court denied defendants' motion to compel arbitration or, in the alternative, to dismiss the action for lack of jurisdiction. On February 7, at the conclusion of a bench trial, the Court delivered an Opinion granting judgment in favor of Cordius. As described in the February 7 Opinion, Cordius's claims arose from a March 1997 agreement in which KAI promised to invest Cordius's funds in a three-phase capital enhancement program.

  Cordius provided KAI with $400,000 upon execution of the Page 4 agreement. In June, Ms. Kummerfeld informed Cordius that its investment, with a 200% profit, would be released in approximately one week. In August 1997, Cordius was provided $100,000. In March 1998, Ms. Kummerfeld reported that Cordius would receive a $325,000 return of principal and a 240% profit within two weeks. That amount was not forthcoming, and a dispute arose between the parties concerning KAI's handling of the funds made available by Cordius. On March 5, 1999, in settlement of the dispute, Ms. Kummerfeld executed in both her individual capacity and as president of KAI a promissory note for $1,418,000. None of the payments required by the promissory note were made.

  The Court entered judgment in favor of Cordius for the full amount of the note, plus reasonable costs and attorney's fees. The Opinion stated:

The defendants' promised investment program indicates to this Court an effort to defraud the plaintiff. The failure to pay and the false statements contained in the letters prepared by the defendant and submitted to the plaintiff and which have been received in evidence during the course of this trial show a course of conduct to further victimize the plaintiff and deprive it of monies to which it was lawfully entitled.
The Second Circuit affirmed the judgment in a summary order dated November 30, 2000.*fn1 Cordius Trust v. Kummerfeld Assoc., Inc. et al., 242 F.3d 264 (Table), 2000 WL 1775516 (2d Cir. Jan. 2, Page 5 2001). On February 20, 2001, Cordius served Ms. Kummerfeld and KAI with a Restraining Notice to Judgment Debtor, pursuant to New York Civil Practice Law and Rules Section 5222(b). No payments have been made on the judgment owed Cordius.

 KAI

  KAI was formed in 1985 by Mr. and Ms. Kummerfeld, each of whom owns 50 percent of KAI's shares. Since the company's inception, Ms. Kummerfeld has been president and Mr. Kummerfeld has been chairman of the board and treasurer. In 1999, however, Mr. Kummerfeld could not recall who held the position of treasurer. He was also unaware of whether KAI had named a secretary or had adopted any by-laws. In 2001, Ms. Kummerfeld testified that KAI had never had a meeting of the shareholders, but that the board of directors met frequently, although no records were kept. Mr. Kummerfeld testified in 2000 that he had never attended a meeting of the shareholders or board of directors. In 2001, in another deposition taken by Cordius in its efforts to collect on its judgment, he stated that the shareholders and board of directors met, but that no records were kept of those meetings.

  In 1997, KAI earned $35,045 in revenue, received $200,000 in loans from Mr. Kummerfeld, and incurred $661,746 in expenses. In 1998, KAI earned $35,000 in revenue, received $318,500 in loans from Mr. Kummerfeld, and incurred $731,935 in expenses. In 2000, Page 6 KAI earned $48,000 in revenue, received $412,500 in loans from Mr. Kummerfeld, and incurred $534,464 in expenses. Over the course of the years for which financial information has been made available,*fn2 KAI earned a total of only $118,045, received $931,000 in loans from Mr. Kummerfeld, and spent in excess of $1,920,000.

  The expenses incurred by KAI included the following payments to Ms. Kummerfeld in 1997: $57,400 labeled "loan reimbursements," $3,741 to Ms. Kummerfeld for taxi services, $18,874.23 for meals, $9,025.30 for hotels, and $1,900 as petty cash. In 1998, Ms. Kummerfeld received $5,678.89 in petty cash, $3,411.40 for taxis, $6,747.83 for meals, and $42,789.00 for hotels. In 2000, Ms. Kummerfeld received $3,320 in petty cash, $12,901.82 for meals, and $40,611.05 for lodging.

  In 1997, the Kummerfelds flew to Lisbon and Buenos Aires at KAI's expense. Mr. Kummerfeld states that only his wife was conducting KAI business at the time, but that he received his ticket free as part of a two-for-one ticket package. In 1999, KAI funds were used to pay lawyers representing Ms. Kummerfeld in connection with federal charges of wire fraud and mail fraud Page 7 relating to a high-yield investment scheme.*fn3 In 2001, Mr. Kummerfeld used KAI's office space to operate a personal business, but paid no share of the monthly rent of $20,000. In 2000, 2001, and 2002, the Kummerfelds purchased box seats at the U.S. Open to entertain KAI clients. The price of these seats in 2000 was over $20,000.

  Based on KAI's business losses, the Kummerfelds declared tax deductions of $315,785 in 1997; $353,628 in 1998; and $417,189 in 2000. In 2001, Mr. Kummerfeld took out a $650,000 mortgage on his Cape Cod vacation home, appraised at approximately $1,700,000. He used the proceeds to loan approximately $400,000 to KAI. Cordius has been unable to attach the property in satisfaction of this Court's judgment because it is jointly held by Mr. and Ms. Kummerfeld.

  Discussion

  Rule 72, Fed.R. Civ. P., and the Federal Magistrates Act, 28 U.S.C. § 636(b)(1)(A), provide the standard for district court review of a Magistrate Judge's order. For dispositive matters, a reviewing court "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate Page 8 judge." 28 U.S.C. § 636(b)(1)(C). The court shall make a de novo determination of those portions of the Report to which objection is made. United States v. Male Juvenile, 121 F.3d 34, 38 (2d Cir. 1997).

 1. Rule 69 Proceeding

  Mr. Kummerfeld contends that this action was improperly commenced as a turnover proceeding rather than a plenary action. The Report correctly concluded that this Court retains jurisdiction to enforce its judgment of April 11, 2000, pursuant to Rule 69, Fed.R.Civ.P. Rule 69 provides that "process to enforce a judgment shall be a writ of execution, unless the court directs otherwise." Rule 69, Fed.R.Civ.P. An action to pierce the corporate veil is "not itself an independent . . . cause of action, but rather is a means of imposing liability on an underlying cause of action." Peacock v. Thomas, 516 U.S. 349, 354 (1996) (citation omitted); Morris v. State Dep't of Taxation and Fin., 82 N.Y.2d 135, 141 (1993). An action to pierce the corporate veil in order to enforce a court's previous judgment is within the purview of Rule 69, Fed.R. Civ. P., and may be commenced as a petition for a writ of execution.

  The Court's jurisdiction over this matter, however, is not ancillary. Peacock, 516 U.S. at 357 (action to pierce the corporate veil requires independent jurisdictional basis); Epperson v. Entertainment Express, Inc., 242 F.3d 100, 105 Page 9 (2d Cir. 2001) (same). Subject matter jurisdiction over this action is based on the diversity of citizenship of the parties, including Mr. Kummerfeld.*fn4 28 U.S.C. § 1332.

  Mr. Kummerfeld argues that this action falls outside the scope of New York Civil Practice Law and Rules Section 5225(b), cited in the Report as the applicable procedural rule.*fn5 This proceeding is based on the Court's authority to enforce its judgment under Rule 69, Fed.R. Civ. P., and New York's substantive law governing claims to pierce the corporate veil. Rule 69's provision that the "procedure on execution . . . shall be in accordance with the practice and procedure of the state in which the district court is held" does not require that a specific state rule of procedure apply to a given action. HBE Leasing Corp. et al. v. Frank, 48 F.3d 623, 633 n.7 (2d Cir. 1995) (the technical availability of Section 5225(b) is not dispositive when the district court has jurisdiction). Page 10

 2. Pleadings

  Mr. Kummerfeld argues that Coridus's Rule 69 motion should be dismissed because he was not served with the pleading required under Section 402, N.Y. C.P.L.R.*fn6 The Report correctly finds that Mr. Kummerfeld received sufficient notice of Cordius's motion to pierce the corporate veil and render his assets amenable to attachment and an opportunity to be heard in response to the motion, vindicating his due process rights. See Nelson v. Adams, 529 U.S. 460, 466-68 (2000).

  Section 2001 permits a court to disregard a procedural irregularity if "a substantial right of a party is not prejudiced." N.Y. C.P.L.R. § 2001. Mr. Kummerfeld was served with a Notice of Petition, a Memorandum in Law in Support of Petition, and an Appendix of Exhibits in Support of Petition. These documents provide detailed descriptions of Cordius's claims and the evidence and legal arguments on which Cordius relies. No substantial right of Mr. Kummerfeld was infringed by the absence of a separate document labeled "Petition."

 3. Service of Process

  Mr. Kummerfeld claims that the proceeding must be dismissed because Cordius did not succeed in personally serving him with the petition, as is required under Section 403, N.Y. C.P.L.R. Page 11

  The Report notes that Cordius attempted personal service upon Mr. Kummerfeld at KAI, but was informed that Mr. Kummerfeld had moved and left no forwarding address.*fn7 Cordius then sent a certified copy of the petition and accompanying papers to Mr. Kummerfeld at his home address and another copy to Mr. Kummerfeld's previous attorney in this action. The Report concludes that Cordius reasonably relied on this Court's prior Opinion in this action, No. 99 Civ. 3200 (DLC), 2000 WL 10268 (S.D.N.Y. Jan. 3, 2000), which authorized Cordius to serve Mr. Kummerfeld by mail, based in part on his purposeful attempts to evade service.

  There is no dispute that Mr. Kummerfeld received the papers in this action, and that he filed a response with the Court. He argues, however, that the petition should be dismissed because the Court's prior authorization of service by mail does not extend to this petition initiating a new and independent action. As stated above, an action to pierce the corporate veil is a means of imposing liability on an underlying cause of action. Cordius made a good faith effort to serve Mr. Kummerfeld personally, and, when that failed, reasonably relied upon this Court's prior authorization in this litigation of alternative Page 12 service on Mr. Kummerfeld by certified mail.

 4. Mr. Kummerfeld's Motion to Dismiss

  A court may dismiss an action pursuant to Rule 12(b)(6) only if "it appears beyond doubt, even when the complaint is liberally construed, that the plaintiff can prove no set of facts which would entitle him to relief." Jaghory v. New York State Dep't of Educ., 131 F.3d 326, 329 (2d Cir. 1997) (citations omitted). In construing the complaint, the court must "accept all factual allegations in the complaint as true and draw inferences from those allegations in the light most favorable to the plaintiff." Id. "Given the Federal Rules' simplified standard for pleading, a court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 514 (2002).*fn8 Page 13

  Mr. Kummerfeld filed a motion to dismiss this action pursuant to Rules 12(b)(5) and 12(b)(6), Fed.R. Civ. P., on procedural grounds already addressed and on the ground that Cordius failed to state a viable claim for relief. The Report recommended denial of the motion to dismiss.

  Mr. Kummerfeld argues that the Report erred in recommending denial of his motion to dismiss when Cordius did not allege that Mr. Kummerfeld exercised dominion and control over KAI with respect to the transaction at issue — KAI's failure to satisfy the judgment entered by this Court. Cordius's petition alleges the following. Judgment was entered in March 2000 and was affirmed by the Court of Appeals in November of that year. Mr. Kummerfeld has been chairman and treasurer of KAI since its founding and remains in those positions. He loaned KAI over Page 14 $400,000 — roughly eight times KAI's income — in 2000, and approximately the same amount in 2001. Mr. Kummerfeld was reimbursed for expenses incurred in his capacity as chairman in December 2000, and traveled internationally on KAI business in 2001. The petition sufficiently alleges that Mr. Kummerfeld exercised dominion and control over KAI when it failed to pay the judgment owed to Cordius.

  Mr. Kummerfeld further contends that the Report erred in recommending denial of his motion to dismiss since Cordius did not allege that he committed any actionable fraud or wrongdoing against it. He argues Cordius does not point to evidence establishing that he was aware of his wife's fraudulent activities at the time that he made loans to KAI. The wrong Mr. Kummerfeld is alleged to have perpetuated is KAI's failure to satisfy the judgment entered by this Court. Cordius alleges judgment was entered by this Court in April 2000 and affirmed in November. The petition includes as exhibits the deposition testimony taken of Mr. Kummerfeld in December 1999, January 2000 and November 2001 in relation to this judgment. The petition alleges that Mr. Kummerfeld continued to act as chairman, treasurer and lender to KAI when it failed to pay the judgment owed to Cordius. Cordius has sufficiently alleged that Mr. Kummerfeld used his domination of KAI to perpetuate a wrong against the plaintiff. Page 15

 5. Cordius's Motion to Pierce the Corporate Veil

  In a special turnover proceeding based on New York law, made applicable pursuant to Rule 69, Fed.R. Civ. P., "a court may grant summary relief where there are no questions of fact, but it must conduct a trial on disputed issues of fact on adverse claims in a turnover matter." HBE Leasing, 48 F.3d at 633 (citation omitted).*fn9 Summary relief may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the court must view all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of the movant's pleadings. Rule 56(e), Fed.R. Civ. P.; accord Burt Rigid Box, Inc. v. Travelers Page 16 Property Cas. Corp., 302 F.3d 83, 91 (2d Cir. 2002).*fn10

  Under New York law, a court may pierce the corporate veil "where 1) the owner exercised complete domination over the corporation with respect to the transaction at issue, and 2) such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." MAG Portfolio Consult v. Merlin Biomed Group LLC, 268 F.3d 58, 63 (2d Cir. 2001); American Fuel Corp. v. Utah Energy Dev. Co., Inc., 122 F.3d 130, 134 (2d Cir. 1997). It bears emphasis that domination alone is insufficient to justify piercing the corporate veil. Freeman v. Complex Computing Co., 119 F.3d 1044, 1053 (2d Cir. 1997). The plaintiff must show that the dominator's control over the corporation was utilized to perpetuate a fraud or wrong injuring the plaintiff. Id. New York courts are reluctant to pierce the corporate veil, but are guided by principles of equity in determining whether to disregard the corporate form. William Wricrley Jr. Co. v. Waters, 890 F.2d 594, 600 (2d Cir. 1989); Brunswick Corp. v. Waxman, 599 F.2d 34, 36 (2d Cir. 1979).

  To determine whether a company is dominated, courts consider many factors, including the following: (1) disregard of corporate Page 17 formalities; (2) inadequate capitalization; (3) intermingling of funds; (4) overlap in ownership, officers, directors, and personnel; (5) common office space, address and telephone numbers of corporate entities; (6) the degree of discretion shown by the allegedly dominated corporation; (7) whether the dealings between the alleged dominator and the corporation are at arms length; (8) whether the corporation is treated as independent profit center; (9) whether others pay or guarantee debts of the dominated corporation; and (10) intermingling of property between the alleged dominator and the corporation. MAG Portfolio, 268 F.3d at 63. Whether to pierce the corporate veil requires a fact-specific inquiry in which no single factor is decisive. Freeman, 199 F.3d at 1053.

  The Report concludes that Mr. Kummerfeld dominated KAI to the point that the corporation served as an alter ego for him and his wife, finding specifically that KAI disregarded corporate formalities, that KAI was inadequately capitalized, that the Kummerfelds appropriated KAI funds for their own use, and that the Kummerfelds mingled their personal funds with KAI funds. The Report finds that Mr. Kummerfeld's continued funding and management of KAI before and after this Court's judgment perpetuated KAI's wrong against Cordius. The Report therefore recommends that KAI's corporate veil be pierced to render Mr. Kummerfeld's assets subject to attachment. Page 18

  Mr. Kummerfeld objects to the Report's recommendation that Cordius be awarded summary relief on the ground that there are material issues of fact with respect to whether he dominated KAI and whether his domination perpetuated a wrong that injured Cordius.*fn11 With respect to the domination element, Mr. Kummerfeld argues that he presented evidence raising a material issue of fact with respect to each of the factors on which the Report relied to support its conclusion that Mr. Kummerfeld dominated KAI with respect to its failure to satisfy this Court's judgment.

  The Report concludes that KAI failed to observe corporate formalities. Mr. and Ms. Kummerfeld are the sole officers and shareholders of KAI; she is president, and he is chairman of the board and treasurer. In 1999, however, Kummerfeld could not recall if a secretary or treasurer had been named upon KAI's Page 19 formation, or if there had ever been a shareholder meeting or meeting of the board of directors. In 2001, Mr. Kummerfeld stated that the board of directors had met during that year, but that no minutes or official records were kept of the meeting. Mr. Kummerfeld's argument that KAI is a functioning company does not raise a material issue of fact with respect to the Report's conclusion that KAI failed to observe corporate formalities.*fn12

  The Report concludes that KAI was inadequately capitalized. In 2000, KAI's expenses were approximately $534,464 and its revenue totaled only $48,000. Even Mr. Kummerfeld's loan of $412,500 was not sufficient to cover KAI's expenses. The financial data for KAI in 1997 and 1998 reveal even greater shortfalls, suggesting a pattern of undercapitalization that continued after judgment was entered against KAI by this Court.*fn13 KAI was undercapitalized even with Mr. Kummerfeld's infusion of personal funds. His argument that KAI was adequately funded because he loaned the corporation money is misplaced and does not Page 20 create a question of fact.*fn14

  The Report concludes that the Kummerfelds appropriated KAI funds for their own use. For instance, KAI funds were used to pay lawyers who represented Ms. Kummerfeld in relation to a subpoena issued by federal prosecutors in Ohio and to federal charges of wire fraud and conspiracy to commit wire fraud, of which she was convicted in the Southern District of New York. Mr. Kummerfeld does not dispute this fact. Further, Mr. Kummerfeld operated his business out of the KAI offices, but did not pay any rent to KAI. Mr. Kummerfeld offers no documentation or other evidence to support his bald assertion that the rent-free arrangement was a form of repayment for his loans to the corporation. He has failed to raise a question of fact regarding the owners' appropriation of KAI funds for their own use.

  The Report concludes that the Kummerfelds engaged in the commingling of their personal funds and those of KAI. Mr. Kummerfeld infused substantial sums of money into KAI during the years of 1997, 1998, and 2000. In 2001, he mortgaged his home on Cape Cod, deposited the funds in his personal account, and used Page 21 the proceeds to pay KAI's debts and back rent. In 1997, Ms. Kummerfeld withdrew funds, characterized as "loan reimbursements," in excess of $50,000. Mr. Kummerfeld has provided no support for his argument that this disbursement was a repayment for a loan Ms. Kummerfeld had previously made to KAI rather than the comingling of personal and KAI funds.*fn15

  Mr. Kummerfeld has not raised a material issue of fact with respect to his domination of KAI. The record supports the conclusion that KAI disregarded corporate formalities and was inadequately capitalized, and that the Kummerfelds appropriated KAI funds for personal use and commingled their funds with those of KAI. In addition, the facts discussed above indicate that KAI was not treated as an independent profit center and that Mr. Kummerfeld paid KAI's debts.*fn16 Page 22

  In sum, Mr. Kummerfeld has raised no material issue of fact concerning his domination of KAI. He has not genuinely disputed Judge Ellis's findings that KAI disregarded corporate formalities, that KAI was inadequately capitalized, that the Kummerfelds appropriated KAI funds for their own use, and that the Kummerfelds intermingled their personal funds with those of KAI. Mr. Kummerfeld has not presented evidence related to these or to any other factor relevant to a piercing analysis to raise a disputed issue regarding a material fact or to provide a basis upon which a reasonable jury could find in his favor.

  Similarly, Mr. Kummerfeld has not provided evidence genuinely disputing the Report's conclusion that his domination of KAI was used to perpetuate a wrong injuring Cordius, namely the failure of KAI to satisfy the judgment in this action. Mr. Kummerfeld was deposed three times in relation to the underlying action, and Mr. Kummerfeld does not contend that he was unaware of the judgment entered by this Court. He continued to loan substantial amounts to KAI, without which it likely would not have been able to continue, and continues to act as chairman of the board and treasurer. In 2001, he utilized KAI's office space and its seats to the U.S. Open, and traveled to Kuala Lampur for what he asserts was KAI business. Since the entry of judgment in March 2000, KAI has not made a single payment in satisfaction of the judgment owed to Cordius. Mr. Kummerfeld's contention that Page 23 he was unaware of the fraud committed by Ms. Kummerfeld and KAI prior to the entry of the judgment is not relevant to his participation in KAI's failure to satisfy the judgment entered by this Court.

  Considering the facts specific to this action, it is necessary to pierce the corporate veil of KAI and render Mr. Kummerfeld's assets amendable to attachment in order to enforce this Court's prior judgment and to achieve equity in this matter. The Report's recommendations are adopted.

  Conclusion

  Mr. Kummerfeld's motion to dismiss is denied. Cordius's motion for a writ of execution and turnover order piercing the corporate veil of KAI and rendering Mr. Kummerfeld's assets amenable to attachment is granted.

  SO ORDERED.


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