In a relatively novel approach, defendants in a bankruptcy proceeding asserted reverse piercing as a defense to a claim of fraudulent conveyance brought by the bankruptcy trustee. The trustee was attempting to cause a third-party to pay $450,000 to the estate. In re Freelander Capital Management Corp., 2009 Bankr. LEXIS 1195 (US Bkrptcy. Ct., SD Fla, April 29, 2009).
The relevant facts are these. On March 14, 2001 the debtor corporation loaned Designs, Inc. $500,000. The debtor corporation was wholly-owned by Burton Freelander. The sole shareholder of Designs was the debtor's second ex-wife. On April 11, 2001 the ex-wife withdrew $500,000 from a Designs account and deposited the money in a joint account owned by Burton and this ex-wife. A short time later Burton transferred $50,000 to the debtor's account. In a nice twist, Burton used $375,000 of the money to pay off a judgment involving his first ex-wife. All parties agreed that the second ex-wife thought the loan was from Burton and repaid to Burton.
The debtor filed Chapter 7 bankruptcy in 2003. All involved agree that the second ex-wife never withdrew funds from the joint account, never deposited any more funds into the account, and believed the payment of the $500,000 was a repayment of the loan. Nevertheless, the trustee asserted that the payment was a fraudulent conveyance and the second ex owed $450,000 to the debtor corporation.
The defendants, the second ex-wife and her corporation, Designs, Inc., asserted the doctrine of reverse veil piercing as their defense, claiming that the payment to the individual joint account was payment to the debtor corporation. The bankruptcy court agreed.
Applying Connecticut law because the debtor was a Connecticut corporation, the court found that there was such a unity of interest between Burton and the debtor and dominance by Burton over the corporation that the independence of the corporation had ceased to exist. The court further found that applying the doctrine of reverse piercing would achieve an equitable result and avoid unfair prejudice to the second ex-wife. The point being that she had already made the payment, she would not be retaining anything of value, and the loss to the creditors (who had already received restitution or had weak claims) was outweighed by the hardship to her if she had to make a second payment of $450,000.
Key to the court's decision, it appears, is the fact that the trustee had little use for the money given the status of the creditors' claims. Had there been substantial creditors with strong claims for the funds, the equities of the case might have caused a different result.
This as another example of the willingness of the courts to ignore the corporate form when it suits the equities of the situation. Is that what the law is supposed to be about?
- Marc Ward
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