254 F. Supp. 3d 609
S.D.N.Y.2017Background
- TRE operated an online accounts-receivable exchange and by 2015 faced severe funding distress and litigation exposure (including Brooklawn’s arbitration claim).
- Gary Mueller (investor) agreed to lead a financing that collapsed after an adverse arbitration award increased perceived litigation risk; Mueller then helped form "NewCo" (LiquidX) to buy TRE’s Comerica loan and foreclose on TRE assets.
- TRE insiders (Toffey, Connolly, Kovacs) secretly participated in and coordinated the NewCo plan, used personal email to communicate, and remained involved in TRE while preparing LiquidX to assume the business.
- LiquidX purchased the loan, obtained a low independent appraisal, and on Dec. 31 executed a partial strict-foreclosure arrangement that enabled LiquidX to acquire TRE’s business and run it as LiquidX starting Jan. 1, 2016.
- Brooklawn alleged the transaction was engineered to strip TRE of assets and evade Brooklawn’s arbitration recovery; LiquidX sued for a declaratory judgment that it was not TRE’s alter ego and could not be joined to the Louisiana arbitration.
- After a four-day bench trial, the court found LiquidX was TRE’s alter ego and that LiquidX could be joined to the Louisiana arbitration; LiquidX’s declaratory claims were dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LiquidX is TRE's alter ego | LiquidX argued it was a separate, properly formed purchaser and not subject to veil piercing | Brooklawn argued LiquidX and TRE were effectively the same enterprise and LiquidX was created to evade TRE’s creditors | Court held LiquidX is TRE's alter ego based on totality of facts showing domination and non-arm's-length transfer |
| Whether LiquidX may be joined to the Louisiana arbitration | LiquidX argued joinder is improper because it is not TRE and the arbitration agreement governs only TRE | Brooklawn argued LiquidX can be joined because LiquidX used TRE’s corporate form to perpetrate a wrong against creditors | Court held LiquidX may be joined to the arbitration as TRE's alter ego |
| Choice of law for alter-ego inquiry | LiquidX favored Delaware or Louisiana law; Brooklawn favored New York or Louisiana | Parties disputed which state’s alter-ego doctrine applies | Court applied New York law (finding no actual conflict among NY, DE, LA doctrines) |
| Whether control was used to perpetrate a wrong | LiquidX contended the foreclosure was a legitimate creditor exercise on a distressed borrower | Brooklawn contended insiders structured the foreclosure to strip assets and leave creditors unpaid | Court found control was used to perpetrate a wrong (engineered foreclosure, low appraisal, insider coordination) |
Key Cases Cited
- Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131 (2d Cir.) (lists non-exclusive factors for veil piercing/alter-ego)
- Walkovszky v. Carlton, 18 N.Y.2d 414 (N.Y.) (piercing the corporate veil to prevent fraud or achieve equity)
- Morris v. N.Y. State Dep’t of Taxation and Fin., 82 N.Y.2d 135 (N.Y.) (two-part test: domination and use of control to commit a wrong)
- United States v. Funds Held in the Name or for the Benefit of Wetterer, 210 F.3d 96 (2d Cir.) (totality-of-the-facts approach to domination/control)
- JSC Foreign Econ. Assoc. Technostroyexport v. Int’l Dev. and Trade Servs., Inc., 386 F.Supp.2d 461 (S.D.N.Y.) (veil piercing where domination abused to perpetrate injustice)
- Carte Blanche (Singapore) PTE, Ltd. v. Diners Club Int’l, Inc., 758 F.Supp. 908 (S.D.N.Y.) (stripping assets to render a subsidiary judgment-proof can constitute fraud or wrong)