United States District Court, E.D. New York
[Copyrighted Material Omitted]
For Ng & Charming Trading: Bradford D. Conover, Esq., Conover Law Offices, New York, NY; David H. Wander, Esq., Davidoff Hutcher & Citron, New York, NY.
For Adler: Richard Braverman, Esq., Braverman Law Office PC, Garden City, NY.
MEMORANDUM & ORDER
JOANNA SEYBERT, United States District Judge.
Currently pending before the Court are appeals from Lisa Ng and Charming Trading Company (" Ng and Charming Trading" or " Plaintiffs" ) and from Stewart
Adler (" Adler" or " Debtor" ) arising out of a Chapter 7 bankruptcy action filed in the United States Bankruptcy Court for the Eastern District of New York. For the following reasons, Plaintiffs' appeal and Adler's appeal are both DENIED and the Bankruptcy Court's holdings are AFFIRMED.
On July 25, 2003, Plaintiffs filed a complaint against Adler and corporations owned by Adler (the " Corporations" ) in the Supreme Court of the State of New York, County of New York (the " State Court Lawsuit" ). Plaintiffs asserted claims based on breach of contract, fraud, and piercing the corporate veil. During the pendency of that action, on July 28, 2004, Adler filed a petition for relief under Chapter 7 with the United States Bankruptcy Court for the Eastern District of New York.
As a result of Adler's Chapter 7 petition, the State Court severed and stayed the State Court Lawsuit against him but allowed it to proceed against the Corporations. The State Court ultimately found the Corporations liable on the fraud and contract claims, and then held a six-day inquest on damages. On September 14, 2005, the State Court entered a judgment against the Corporations and in favor of Plaintiffs in the amount of $2,025,849.97.
On April 25, 2005, Plaintiffs commenced an adversary proceeding against Adler in connection with the bankruptcy action by filing a complaint: (1) " seeking to have their claims deemed non-dischargeable, pursuant to § § 523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code; " and (2) " objecting to the Debtor's discharge, pursuant to § § 727(a)(2), (a)(3), (a)(4)(A) and (a)(5) of the Bankruptcy Code." (Pls.' Opp. Br., Docket Entry 13, at 2-3.) Plaintiffs also included a claim for piercing the corporate veil. On December 18, 2006 Plaintiffs moved for summary judgment related to the § § 523(a)(2)(A) and § 727(a)(4) actions, which was granted on June 13, 2007. On June 22, 2007, Adler appealed that decision to the United States District Court for the Eastern District of New York. The District Court reversed the summary judgment order and remanded the case for further proceedings on the merits.
On September 14, 2010, " Plaintiffs filed a motion in limine seeking to preclude [Adler] from relitigating issues relating to the Corporations that were decided in the State Court lawsuit." (Pls.' Opp. Br., at 3.) Trial began on September 20, 2010 and continued for seven nonconsecutive days, concluding on February 3, 2011. On March 2, 2012 the Bankruptcy Court issued its first decision " find[ing] that the corporate veil should be pierced and [Adler] held liable for the Corporations' obligations to the Plaintiffs." In re Adler, 467 B.R. 279, 297 (E.D.N.Y. 2012).
On July 11, 2013, the Bankruptcy Court issued its second decision which denied Adler's discharge pursuant to § § 727(a)(2)(A), (a)(3), (a)(4)(A), and (a)(5) of the Bankruptcy Code. It also sua sponte held that the automatic stay pursuant to 11 U.S.C. § 362 applied retroactively to the Corporations. Therefore, the Bankruptcy Court found that the State Court judgment violated the automatic stay and was void ab initio. In re Adler, 494 B.R. 43, 59 (E.D.N.Y. 2013).
On July 24, 2013, Plaintiffs filed a notice of appeal with respect to the July 11, 2013
Order. Adler also filed a notice of appeal from the portion of the July 11, 2013 Order denying discharge as well as from the March 2, 2012 piercing the corporate veils.
On August 26, 2013, the Bankruptcy Court denied Plaintiff's motion in limine, and again declared the State Court judgment void ab initio. Plaintiffs amended their notice of appeal accordingly.
Plaintiffs' and Adler's appeals are now pending. The Court will first address the applicable legal standard before turning to the merits of each of the appeals.
I. Legal Standard
Federal district courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. FED. R. BANKR. P. 8013. The Bankruptcy Court's " [f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." Id.; see also Momentum Mfg. Corp. v. Emp. Creditors Comm. (In re Momentum Mfg. Corp.), 25 F.3d 1132, 1136 (2d Cir. 1994). The Bankruptcy Court's legal conclusions, however, are reviewed de novo. See Momentum Mfg. Co.,
25 F.3d at 1136 .
II. Adler's Appeal
A. Appeal of the March 2, 2012 Order Piercing the Corporate Veil
Adler maintains that the Bankruptcy Court erred in its March 2, 2012 Order, in which the Bankruptcy Court pierced the corporate veil and found that Adler could be held liable for the debts of the Corporations.
See In re Adler (the " Piercing Order" ), 467 B.R. 279 (Bankr. E.D.N.Y. 2012). The Court disagrees.
In order to pierce the corporate veil, a party must demonstrate that " (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury." Mars Electronics of N.Y., Inc. v. U.S.A. Direct, Inc., 28 F.Supp.2d 91, 97 (E.D.N.Y. 1998) (internal quotation marks and citations omitted); accord First Keystone Consultants, Inc. v. Schlesinger Elec. Contractors, Inc., 871 F.Supp.2d 103, 124 (E.D.N.Y. 2012). In determining domination, courts consider, inter alia, the following factors:
(1) whether corporate formalities are observed, (2) whether the capitalization is adequate, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) whether there is overlap in ownership, officers, directors, and personnel, . . .  whether the corporation is treated as an independent profit center, [and] whether others pay or guarantee debts of the dominated corporation . . . .
Mars Elecs. of N.Y., Inc., 28 F.Supp.2d at 97-98 (quoting Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997)).
" '[T]here is no set rule as to how many . . . factors must be present in order to pierce the corporate veil.'" Fed. Nat'l Mortg. Ass'n v. Olympia Mortg. Corp., 724 F.Supp.2d 308, 319 (E.D.N.Y. 2010) (quoting William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600-01 (2d Cir. 1989) (alterations in original)). The Court will consider each of these factors in turn.
1. Corporate Formalities
Adler proffers a litany of ways in which corporate formalities were observed. For example, he asserts that each corporation was separately incorporated by an attorney, each corporation had a separate
bank account bearing the name of the corporation, each corporation had separate checks which bore the full corporate name, only the Corporations paid Plaintiffs, each corporation had separate factoring agreements with separate account numbers, each corporation received separate monthly factoring statements from the factor, each corporation had its own employer identification number, each corporation had its own letterhead, each corporation received separate invoices under its separate corporate name, each corporation issued separate invoices under its own corporate name, and each corporation issued separate purchase orders. (Adler's Appellant Br., Docket Entry 10, at 21-23.) Adler also asserts that the Corporations hired a bookkeeper and a Certified Public Accountant (" CPA" ). (Adler's Appellant Br. at 24.) Plaintiffs argue that Adler admitted that stock certificates were never issued, and that he failed to retain the original corporate kits. (Pls.' Opp. Br. at 10.) Plaintiffs further assert that Adler could not produce contemporaneous financial records, that tax returns were never prepared for some Corporations, and that some tax returns were prepared long after the Corporations ceased operations. (Pls.' Opp. Br. at 10.) The Court finds that the Bankruptcy Court did not err in holding that the lack of corporate formalities weighed in favor of piercing the corporate veil.
The Bankruptcy Court fully addressed the same issues Adler now raises before this Court. In fact, these issues were not questioned. Rather, Judge Grossman noted that the contemporaneous financial reports that Adler contended were prepared by the Corporations' bookkeeper were never produced. Piercing Order, 467 B.R. at 287. He further held that " while the evidence shows that the Corporations did keep separate accounts and separate factoring agreements, the evidence also shows that the Debtor, at times, directed the invoices of one Corporation to be paid by another, and the overhead for all of the Corporations, at times, to be paid by a single Corporation." Id. at 288 (internal citation omitted).
The Bankruptcy Court based its decision directly upon Adler's testimony as well as the testimony of Certified Public Accountant Michael Portnoy's and the documentary evidence. Moreover, actions such as inadequate record keeping, lack of corporate kits, and failure to comply with governmental requirements--such as taxes--are the very types of corporate formalities that courts analyze in considering this factor.
See Fed. Nat'l Mortg. Ass'n, 724 F.Supp.2d at 318 (" Olympia lacked many of the formalities of corporate existence, including . . . keeping of complete and accurate official corporate records." ); DER Travel Servs., Inc. v. Dream Tours & Adventures, Inc., No. 99-CV-2231, 2005 WL 2848939, at *11 (S.D.N.Y. Oct. 28, 2005) (finding a lack of corporate formalities, in part, due to a failure to file corporate tax returns); see also Nat'l Integrated Grp. Pension Plan v. Dunhill Food Equip. Corp., 938 F.Supp.2d 361, 376 n.11 (E.D.N.Y. 2013) (informal sessions with an accountant were insufficient to constitute corporate formalities). In fact, courts provide such actions as examples of the definition of corporate formalities. See, e.g., In re Montclair Homes, 200 B.R. 84, 99 (Bankr. E.D.N.Y. 1996) (giving maintenance of corporate records as an example of a
corporate formality). As such, this Court finds that the corporate formalities factor weighs in favor of piercing the corporate veil and that Adler's appeal in this regard is without merit.
2. Inadequate Capitalization
Adler next asserts that the Corporations were not undercapitalized because they were financed by purchase order financing agreements. (See, e.g., Adler's Appellant Br. at 20, 22.) Plaintiffs argue that Adler admitted that he never invested any money or capital in the Corporations between 1997 and 2000 and that factor financing is not capital. (Pls.' Opp. Br. at 11.) The Court finds that this factor also weighs in favor of piercing the corporate veil.
The Bankruptcy Court held that, while it was undisputed that the Corporations were funded by factor financing, financing is not the same as capital. Piercing Order, 467 B.R. at 289-90 (citing Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 139-40 (2d Cir. 1991)). The Bankruptcy Court also found that Adler's start up contributions did not constitute capital and rejected Adler's argument that Plaintiffs knew or should have known about the Corporations' financing. Id. at 290.
Adler cites no cases holding that factoring agreements or financing are sufficient to show capital. Though there are few cases on this issue specifically, Passalacqua and the Court's independent research confirm that capital requires something more than financing or loans. See Wm. Passalacqua Builders, Inc., 933 F.2d at 139-40 (finding that loans and financing demonstrated inadequate capitalization); Northern Tankers (Cyprus) Ltd. v. Backstrom, 967 F.Supp. 1391, 1403 (D. Conn. 1997) (finding inadequate capitalization where the capitalization " was in virtually all instances strictly nominal, and the various entities survived almost entirely on 'loans' and personal guarantees" ).
Furthermore, even assuming that Plaintiffs had some knowledge of the Corporations' general financing structures, there is nothing to indicate that they had any idea that the Corporations were shell corporations or that they were inadequately capitalized. Contra Lakah v. UBS AG, 996 F.Supp.2d 250, 268 (S.D.N.Y. 2014) (the respondents investigated the business to determine whether they could meet financial obligations and documents made clear that the issuer was a shell company).
Thus, the Court finds that this factor also weighs in favor of piercing the corporate veil and that Adler's appeal in this regard is without merit.
3. Personal Use of Corporate Assets
Adler next contends that, although corporate monies were sent to his wife, Cindy Speiser's, bank account, this was because Ms. Speiser would " lay out money for the Corporations," and the Corporations would repay her. (Adler's Appellant Br. at 30-31.) He asserts that all expenses were paid to her and properly noted in the Corporations' books. In fact, he contends that Plaintiffs " failed to demonstrate any misappropriation of the Corporations' funds; nor did [Plaintiffs] show that Adler ever used any of the Corporations' property for his own." (Adler's Appellant Br. at 31.) Plaintiffs point out that no records showed that the transfers to Ms. Speiser's account were for valid corporate expenses. (Pls.' Opp. Br. at 12-13.)
The Bankruptcy Court actually acknowledged--and agreed--with Adler's current argument that the evidence did not show one way or the other whether the funds sent to Ms. Speiser's account were used for personal expenses. Piercing Order, 467 B.R. at 291. Rather, Judge Grossman held that " the arrangement with Ms. Speiser does demonstrate the Corporations'
failure to observe the most fundamental corporate formalities."
Thus, it is not clear what Adler is appealing in this regard. The Bankruptcy Court never held that Adler used the money in Ms. Speiser's account for personal reasons. Moreover, Adler does not seem to dispute that the use of personal bank accounts can demonstrate a lack of corporate formalities, nor can he. See Nat'l Integrated Grp. Pension Plan, 938 F.Supp.2d at 377 (" Even if the Court accepts Thaw's claim that he reimbursed the companies for the majority of his personal expenses, his use of corporate credit cards to pay over $300,000 in personal expenses is evidence of domination." ); First Keystone Consultants, Inc., 871 F.Supp.2d at 126 (holding that even accepting the plaintiffs' explanations on certain factors, this would still indicate domination).
Accordingly, the Court finds that Adler's appeal is ...