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