Veil Piercing and Fraudulent Transfers Under the (New) DCL

• Posted on: Jan 31 2024

By: Jeffrey M. Haber

In 245 E. 19 Realty LLC v. 245 E. 19th St. Parking LLC, 2024 N.Y. Slip Op. 00368 (1st Dept. Jan. 30, 2024) (here), the Appellate Division, First Department examined a couple of issues frequently discussed in this Blog: veil piercing/alter ego liability and fraudulent transfers. 

As to the issue of fraudulent transfers, 245 E. 19 Realty provides us with the opportunity to examine a case involving the new Debtor and Creditor Law (“DCL”), which became effective on April 4, 2020. The new DCL replaced Article 10, Sections 270-281 of the DCL, the State’s almost century-old fraudulent conveyance law. 

[Eds. Note: This Blog examined the new DCL here.] 

Background

[Eds. Note: the factual discussion that follows comes from the complaint and the motion court’s decision and order.]

245 E. 19 Realty involved an alleged plan to avoid the negative implications of the Covid-19 pandemic and to increase profits by defendant HPS Investment Partners, LLC (“HPS”).

Plaintiff is the owner and landlord of a parking garage located in New York City (“Landlord”). Defendant 245 E. 19th Street Parking LLC (“Tenant”) entered into a written lease agreement on January 1, 2007, with Landlord’s predecessor-in-interest for the demised space at issue. 

According to Landlord, at the onset of the Covid-19 pandemic in March 2020, HPS devised a plan and scheme to help defendant Icon Parking Holdings, LLC (“Icon”), a company that HPS allegedly controlled, avoid the negative implications of the pandemic and to increase its profits. Under the plan, Icon’s affiliated garages would effectively stop paying rent. At the time, most garage operators expected an extreme downturn in their daily business.

Landlord alleged that HPS, and two of its members (also defendant in the action), directed that payment on Icon affiliates’ rent obligations immediately cease. Landlord claimed that HPS caused Icon to default on its affiliates’ lease obligations at numerous garage locations. Landlord maintained that Icon’s affiliated garages funneled all or substantially all of the funds held in reserve to Icon. Landlord alleged that the transfers from Tenant’s account left it unable to pay its rent when it became due. Thereafter, Icon purportedly transferred those funds to, among others, HPS. 

Landlord further alleged that Icon ceased its business operations at the premises. It claimed that: (1) Icon effectively merged into HPS; (2) HPS directed Icon to continue its business operations at the premises under the same ownership and management; and (3) HPS either managed, oversaw or directed the operation of Icon’s business at the premises. Tenant allegedly breached the lease by failing to timely pay monthly installments of fixed rent and additional rent. On March 15, 2021, Icon notified Landlord that it intended to surrender possession of the premises at the end of the month. On March 30, 2021, Icon surrendered possession of the subject premises.

Landlord filed an action, asserting 10 causes of action: (1) declaratory judgment; (2) breach of contract against Tenant; (3) alter ego liability/piercing the corporate veil against all defendants; (4) de facto merger against all defendants; (5) tortious interference with the lease against all defendants; (6) piercing the corporate veil against, inter alia, HPS; (7) tortious interference with contract against all defendants; (8) unjust enrichment against all defendants; (9) fraudulent conveyance under new Debtor and Creditor Law (“DCL”) § 273 against all defendants; and (10) attorney’s fees under DCL § 276-a.

Defendants moved to dismiss the complaint. The motion court granted the HPS defendants’ motion and granted in part and denied in part the Icon defendants’ motion.

The Motion Court’s Decision

Veil Piercing/Alter Ego Liability

“To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court will intervene.”¹ Notably, piercing the corporate veil is not an independent cause of action.² 

In determining whether the corporate entity³ is dominated and controlled, “courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity.”⁴ Significantly, “[n]o one factor is dispositive.”⁵

In determining whether the owners abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice, courts look at all the facts and circumstances. “Wrongdoing in this context does not necessarily require allegations of actual fraud. While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice.”⁶ Thus, “[a]llegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory.”⁷

Conclusory allegations of undercapitalization, intermingling of assets, and domination and control are insufficient to pierce the corporate veil.⁸ 

“As a preliminary matter,” noted the motion court, “the HPS defendants correctly assert that the third and fourth cause of action must be dismissed because “alter-ego liability is not an independent cause of action.”

The motion court granted the HPS defendants’ motion to dismiss the veil piercing allegations asserted against them. The motion court found the allegations of “domination and control with respect to these defendants” to be “conclusory and … based upon ‘information and belief,’” which is “insufficient” to withstand a motion to dismiss. The motion court explained that “[a]lthough Landlord relies on allegedly fraudulent liens filed against Icon’s affiliates, Landlord has not set forth facts showing ‘complete domination of the corporation … in respect to the transaction attacked’ and ‘that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.’”⁹ 

With regard to the Icon defendants, the motion court held that “the complaint adequately alleges particularized facts to warrant piercing the corporate veil with respect to Icon.” The motion court explained that the complaint sufficiently alleged “that Icon and Tenant ignored corporate formalities and operated as a single economic entity” and that “Icon transferred funds from Tenant’s account on a daily basis, rendering Tenant insolvent at the end of the day and unable to pay rent to Landlord.” The motion court found that there were too many issues of fact making the claim to pierce the corporate veil unsuited for resolution on a pre-answer, pre-discovery motion to dismiss.

Fraudulent Transfers Under The DCL

In 245 E. 19th Street, Landlord asserted claims under Sections 273(a)(2) and 273(a)(1) of the new DCL.

Section 273(a)(2) provides for setting aside transfers or obligations where the defendant or debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation. Section 273(a)(2) further provides that the debtor be engaged or about to be engaged in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

DCL § 273(a)(1) requires actual intent to hinder, delay or defraud any creditor of the debtor. Under DCL § 273(a)(1), “[t]here is no requirement that a transaction involve common law deceit or fraudulent misrepresentation to be voidable for ‘actual intent.’ Actual intent to hinder or delay creditors suffices.”¹⁰ Because it is difficult to prove actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on “badges of fraud” to support his/her case – that is, circumstances that are commonly associated with fraudulent transfers that their presence gives rise to an inference of intent. Section 273(b) of the DCL enumerates 11 non-exclusive “badges of fraud” that courts may consider in determining intent. These factors include whether the transfer was made to an insider, whether the transfer was concealed, whether the debtor was subject to suit, and whether the debtor absconded.

The motion court found that the complaint alleged sufficient badges of fraud to support a DCL § 273(a)(1) claim against the Icon defendants. The motion court explained that the complaint alleged that: (1) Icon was an insider of Tenant; (2) the transfers were concealed from Landlord; (3) all of Tenant’s assets were swept into Icon’s account on a daily basis; (4) the transfers lacked reasonably equivalent value; and (5) the transfers left Tenant insolvent on a daily basis. Such allegations, said the motion court, sufficed to sustain the claim as against the Icon defendants.

However, the motion court held that the complaint failed to allege that the transfers were made to them. “The DCL does not, ‘either explicitly or implicitly, create a creditor’s remedy for money damages against parties who … were neither transferees of the assets nor beneficiaries of the conveyance,’” said the motion court.¹¹ “While Landlord argues that the HPS defendants were the ultimate financial beneficiaries of the alleged wrongful scheme,” noted the motion court, “the complaint only makes conclusory allegations that the HPS defendants benefitted from the alleged fraudulent transfers.” Therefore, concluded the motion court, “the HPS defendants are entitled to dismissal of the ninth and tenth causes of action.”

The First Department’s Decision and Order

On appeal, the First Department modified the order to grant Tenant and Icon’s motion to dismiss as to the alter ego/veil-piercing and declaratory judgment claims against them, and otherwise affirmed the order.

The Court held that the “alter ego/veil-piercing claims against the Icon defendants should have been dismissed, as there is no independent cause of action for veil-piercing.”¹² However, said the Court, veil-piercing was “appropriate as to these defendants” as Landlord “sufficiently alleged that Icon dominated Tenant with respect to the transaction attacked, disregarding corporate formalities and intermingling funds by transferring all of Tenant’s revenue to itself each day.”¹³

The Court also found that Landlord “sufficiently alleged that Icon’s domination of Tenant was used to commit a wrong against it — i.e., that Icon transferred all of Tenant’s revenue to itself each day, rendering Tenant unable to pay rent and then intentionally declining to use that revenue to pay rent on Tenant’s behalf.”¹⁴ The Court said that “[i]t [was] not dispositive that centralized cash management systems [were] commonplace or that the subject system was already in existence prior to the rent nonpayment scheme, as even if the system was not itself fraudulent, plaintiff alleged that Icon took advantage of it to perpetuate a fraud.”¹⁵

The Court held that the “alter ego/veil-piercing claims against the HPS defendants were properly dismissed.”¹⁶ As with the alter ego/veil-piercing claims against the Icon defendants, the Court dismissed the causes of action seeking such relief as “there is no independent cause of action for veil-piercing.”¹⁷ Moreover, held the Court, “plaintiff’s allegations of domination and control by the HPS defendants [were] conclusory and based on information and belief.”¹⁸

The Court further held that the “fraudulent conveyance claim against Icon was correctly sustained.”¹⁹ The Court found that “[p]laintiff sufficiently alleged that Tenant did not receive fair consideration for transferring its total revenue to Icon each day, establishing a constructive fraudulent conveyance.”²⁰ The Court noted that “[w]hile Icon was supposed to provide management and administrative services in exchange for these transfers, including paying Tenant’s bills, plaintiff alleged that Icon stopped paying Tenant’s rent.”²¹ 

“Plaintiff also sufficiently alleged badges of fraud,” said the Court, “raising an inference of actual intent to defraud, establishing an actual fraudulent conveyance.”²² In this regard, explained the Court, “[p]laintiff alleged that the transfers were made to an insider (Icon), were concealed from plaintiff, were of substantially all of Tenant’s assets, were made without receiving reasonably equivalent value in exchange, and rendered Tenant insolvent.”²³

Finally, the Court held that the fraudulent conveyance claim against the HPS defendants was correctly dismissed.²⁴ The Court found that “Plaintiff’s allegations that Icon was controlled by HPS and that monies collected by Icon from Tenant were subsequently transferred to the HPS defendants [were] conclusory and entirely made upon information and belief, and [were] contradicted by the very affidavits plaintiff relie[d] on.”²⁵ The Court also found that the “liens made by HPS to Icon and Tenant (which were filed several months after the alleged fraudulent scheme began) [were] not, in and of themselves, evidence of control or of any subsequent transfer.”²⁶ 

Footnotes

1. Tap Holdings, LLC v. Orix Fin. Corp., 109 A.D.3d 167, 174 (1st Dept. 2013) (citing ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208, 229 (2011)).
2. Id.
3. The doctrine of piercing the corporate veil applies equally to limited liability companies. See Retropolis, Inc. v. 14th St. Dev. LLC, 17 A.D.3d 209, 210 (1st Dept. 2005).
4. Tap Holdings, 109 A.D.3d at 174 (quoting TNS Holdings v. MKI Sec. Corp., 243 A.D.2d 297, 300 (1st Dept. 1997), rev’d on other grounds, 92 N.Y.2d 335 (1998)).
5. Id.
6. Baby Phat Holding Co., LLC v. Kellwood Co., 123 A.D.3d 405, 407-408 (1st Dept. 2014) (citations omitted); see also Grammas v. Lockwood Assoc., LLC, 95 A.D.3d 1073, 1075-1076 (2d Dept 2012).
7. Id.
8. See Saivest Empreendimentos Imobiliarios E. Participacoes, Ltda v. Elman Invs., Inc., 117 A.D.3d 447, 450 (1st Dept. 2014); accord Andejo Corp. v. South St. Seaport Ltd. P’ship, 40 A.D.3d 407, 407 (1st Dept. 2007) (a plaintiff seeking to pierce the corporate veil must “allege particularized facts to warrant piercing the corporate veil”); Albstein v. Elany Contr. Corp., 30 A.D.3d 210, 210 (1st Dept. 2006), lv. denied, 7 N.Y.3d 712 (2006) (conclusory allegations that a corporation is undercapitalized and functions as the alter ego of the owner are insufficient to pierce the corporate veil).
9. Quoting Baby Phat Holding, 123 A.D.3d at 407.
10. James Gadsden and Alan Kolod, Supplementary Practice Commentaries, McKinney’s Debtor and Creditor Law § 273.
11. Quoting Federal Deposit Ins. Corp. v. Porco, 75 N.Y.2d 840, 842 (1990).
12. Slip Op. at *1 (citing Tap Holdings, 109 A.D.3d at 174).
13. Id. (citation omitted).
14. Id. (citation omitted).
15. Id. (citation omitted).
16. Id. at *3.
17. Id.
18. Id. (citing 501 Fifth Ave. Co. LLC v. Alvona LLC, 110 A.D.3d 494, 494 (1st Dept. 2013)).
19. Id. at *2.
20. Id. (citing DCL § 273(a)(2)).
21. Id. (citation omitted).
22. Id. (citing (DCL § 273(a)(1), (b)).
23. Id. (citation omitted).
24. Id. at *3.
25. Id. (citations omitted).
26. Id.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. 

This article is for informational purposes and is not intended to be and should not be taken as legal advice.