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Cordius Trust v. Kummerfeld

August 29, 2007

CORDIUS TRUST, PLAINTIFF,
v.
ELIZABETH KUMMERFELD, KUMMERFELD ASSOCIATES, INC., DEFENDANTS.



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 satisfy an April 11, 2000 judgment ("April 2000 Judgment") granting it $1,418,000 plus interest and reasonable attorneys fees and costs from Kummerfeld Associates, Inc. ("KAI") and Elizabeth Kummerfeld ("Ms. Kummerfeld"). Cordius seeks to pierce the corporate veil of KAI and attach the assets of Donald Kummerfeld ("Kummerfeld"), who along with Ms. Kummerfeld, his wife (together, "the Kummerfelds") are KAI's sole shareholders, officers, and directors. This Court granted Cordius's petition for a writ of execution and turnover proceeding to pierce KAI's veil in an Opinion issued on March 30, 2004, Cordius Trust v. Kummerfeld, No. 99 Civ. 3200 (DLC), 2004 WL 616125 (S.D.N.Y. Mar. 30, 2004) ("March 2004 Opinion"), and entered judgment in favor of Cordius on April 30. Cordius Trust v. Kummerfeld, No. 99 Civ. 3200 (DLC) (S.D.N.Y. Apr. 30, 2004)(entering judgment in favor of plaintiff regarding petition for writ of execution and turnover proceeding to pierce corporate veil) ("April 2004 Judgment"). The Second Circuit Court of Appeals affirmed in part, vacated the order granting the petition, and remanded the matter for further development of the factual record with regards to two questions: whether Kummerfeld used his domination of KAI to injure the plaintiff and whether Cordius suffered injuries that reflect the type of abuse of the corporate form warranting the equitable remedy of piercing the corporate veil. Cordius Trust v. Kummerfeld, 153 Fed. Appx. 761, 763 (2d Cir. 2005) (unpublished summary order) ("Appellate Opinion"). A mandate issued on November 2, 2005.

Cordius and Kummerfeld have both moved for summary judgment on plaintiff's veil piercing claim pursuant to Rule 56, Fed. R. Civ. P. For the reasons set forth below, both motions are denied.

BACKGROUND

The facts at the heart of the instant action and its complex procedural history are set forth in numerous Opinions issued by this Court and the Court of Appeals.*fn1 Familiarity with these Opinions is assumed. The following facts are taken from the submissions on the instant motion and are undisputed unless otherwise noted.*fn2

A. KAI

KAI was formed as a New York subchapter-S corporation in 1985 by Elizabeth and Donald Kummerfeld. The Kummerfelds each own fifty percent of KAI's shares. Since its inception, Ms. Kummerfeld has been the president of KAI and Kummerfeld has served as chairman of the board and treasurer. KAI marketing materials describe the company as a "diversified financial and investment banking firm" engaged in "financial and management consulting, mergers and acquisitions and strategic investments in new ventures and in growth oriented companies." The record in the instant motion does not provide evidence that KAI conducted any legitimate, revenue-generating business since 1997.

In 1987, Kummerfeld became president and CEO of Magazine Publishers of America ("MPA"), a magazine publishing trade association. He held this full-time position until his November 1999 retirement.*fn3 According to the terms of his employment agreement with MPA, Kummerfeld was to "discontinue all business activities for or on behalf of [KAI]," except for "occasional consultation" that would not impinge on his MPA duties, while Ms. Kummerfeld was to continue managing the company. Kummerfeld remained chairman and treasurer of KAI, even after joining MPA. He has testified that after 1997 he was not paid a salary by KAI, was not authorized to write checks on behalf of the company, and did not receive any distribution of shareholder profits. Kummerfeld continued, however, to deduct his loans to KAI on his income tax returns.*fn4

B. KAI's Finances

KAI ceased being profitable in the mid-1990s and terminated active business operations in 2002. As found in the March 2004 Opinion, at the time and shortly following the actions that gave rise to the plaintiff's claims in 1997, KAI depended on Kummerfeld's financing, without which it would have ceased to function. KAI spent vastly more money than it received in fee income. In 1997, 1998 and 2000, a significant portion of the corporation's annual revenue consisted of unrestricted loans made by Kummerfeld from his personal assets to support the company's operations when it "needed cash." During these years, Kummerfeld contributed $931,000 in loans by drawing funds from his personal savings account and MPA retirement fund, and by refinancing a Cape Cod vacation home appraised at $1.7 million, which he jointly owns with his wife.*fn5 None of Kummerfeld's loans were governed by terms set forth in notes. KAI did not provide any security for the loans or pay interest on them. Kummerfeld has testified, however, that in an "informal[]" agreement with KAI, he gained the privilege of using KAI office space in exchange for these loans, which permitted KAI to pay the rent for its offices in Manhattan's East Side.*fn6 KAI has not, to date, repaid any portion of Kummerfeld's loans to the company.

Kummerfeld's loans were used to pay expenses that granted KAI the appearance of a legitimate business. These expenses include payments for renting KAI's East Side offices, utilities, insurance, office supplies, payroll for its employees and consultants.*fn7 For example, KAI's rent from 1997 to 2001 was $240,000.*fn8 Kummerfeld also paid for litigation expenses. The company retained an attorney to defend Elizabeth Kummerfeld against charges of wire fraud and conspiracy to defraud the United States in an action before this Court.*fn9 It also paid for her legal representation with regard to a subpoena issued by the United States Attorney in Cleveland, Ohio in a matter concerning a co-defendant in her criminal case in the Southern District of New York.*fn10 In 2001, KAI spent $50,000 to settle a 2000 New York Supreme Court judgment against it in an action brought by Blue Arrow Services, Inc. to recover rents owed by KAI's subtenants to its landlord. Kummerfeld issued personal checks totaling $50,000 to settle the matter. In 2003, KAI settled a securities fraud action brought against it and the Kummerfelds in the Western District of Tennessee, Gazabo S.A. de C.V. v. Kummerfeld, No. 01 Civ. 2579 (JPM). Kummerfeld and his son-inlaw each wrote checks for $10,000 to settle this action.

KAI also spent money on travel and entertainment from which Kummerfeld personally benefited. The company purchased tickets for the Kummerfelds to travel on KAI trips abroad. On October 29, 1997, KAI paid $469.69 for Kummerfeld to travel to Lisbon, Portugal. KAI similarly paid $3,888.70 on August 6, 1997, for Kummerfeld to fly to Buenos Aires, Argentina.*fn11 While Kummerfeld maintains that he conducted business on these trips as well, he has failed to offer evidence as to what business he conducted on behalf of KAI.

Since its inception and until 2002, KAI paid for the use of a corporate box at the U.S. Open, from which Kummerfeld also personally benefited. Between 1997 and 2002, it paid anywhere from $56,100 to $74,940 to secure courtside boxes and other seats at the U.S. Open.*fn12 After a 2003 subpoena was issued to the United States Tennis Association (USTA) to produce documents relating to KAI and the Kummerfelds' ...


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