126 F. Supp. 3d 388
S.D.N.Y.2015Background
- AFTC owned four Florida apartment complexes and leased them to A & M Florida Properties I–III (A & M companies); Allen and Edith Gross owned the A & M companies and Allen solely owned GFI Management Services, Inc. (GFIM).
- GFIM managed the properties for monthly fees (about 6%), and the Grosses personally funded the A & M companies’ security deposits and made inter-company, interest-free loans to cover operating shortfalls and hurricane repairs.
- By late 2006 the A & M companies were unable to meet lease obligations; Gross negotiated a Purchase and Sale Agreement (PSA) with AFTC (July 2007) under which unpaid lease arrears would be added to the purchase price.
- In June 2007, while insolvent, the A & M companies repaid over $1 million in antecedent loans to the Grosses, GFIM, and affiliated entities; GFIM also continued to receive monthly management fees.
- Bankruptcy and litigation followed; in October 2010 AFTC obtained judgments totaling $7.5 million (A & M companies and GFIA) and $100,000 (GFIM). GFIM paid $100,000; the others paid nothing. AFTC sued under NY CPLR § 5225(b) and DCL §§ 273, 273-a, 276 and sought to pierce corporate veils.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were management-fee payments to GFIM fraudulent conveyances? | Fees were payments to an insider that reduced assets available to AFTC and thus were fraudulent. | Fees compensated bona fide, contemporaneous management services at market rates and were disclosed. | Denied: fees were paid for fair equivalent value and not actually fraudulent. |
| Were loan repayments to Defendants fraudulent conveyances? | Repayments to insider-defendants while insolvent were constructively and actually fraudulent. | Repayments were made in anticipation of PSA closing; parties intended purchaser to satisfy arrears, so no actual fraud. | Partially granted: repayments were constructively fraudulent under DCL § 273 but not actually fraudulent under § 276. |
| Could AFTC pierce the corporate veil to reach Grosses and GFIM for full $7.5M judgment? | Defendants dominated entities and intentionally stripped assets to render them judgment-proof. | Transactions were disclosed, legitimate business actions, and aimed at completing the PSA; no intentional scheme to defraud AFTC. | Denied: AFTC failed to prove both domination-used-for-wrongdoing element required for veil piercing. |
| Remedy and recovery under CPLR § 5225(b) | Seek full enforcement of $7.5M via recovery of transfers to Defendants. | Recovery limited to avoidable transfers; some transfers were valid. | Ordered recovery of $350,000 from Allen Gross, $125,000 from Edith Gross, and $10,000 from GFIM (total $485,000). |
Key Cases Cited
- Walkovszky v. Carlton, 18 N.Y.2d 414 (N.Y. 1966) (veil piercing requires disregarding corporate form only in limited, equitable circumstances)
- Morris v. New York State Dep’t of Taxation & Fin., 82 N.Y.2d 135 (N.Y. 1993) (two-prong veil-piercing test: complete domination and misuse causing plaintiff’s injury)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (repayment of antecedent debt generally constitutes fair consideration, except to insiders)
- Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131 (2d Cir. 1991) (non-exhaustive factors for assessing corporate domination)
- ABN AMRO Bank, N.V. v. MBIA Inc., 17 N.Y.3d 208 (N.Y. 2011) (heavy burden for party seeking to pierce corporate veil)
- Commonwealth of N. Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55 (N.Y. 2013) (CPLR § 5225(b) requires actual, not merely constructive, possession)