Did Court Properly Deny Motion to Dismiss Debtor and Creditor Law Claims?
Louis Monteleone Fibres, Ltd. initially sued to recover damages for breach of contract against Hudson Baylor Brookhaven, LLC, Green Stream Recycling, LLC, Joseph Winters, and Anthony Core. Fibres filed an amended complaint adding Winters Bros. Green Stream Intermediate Holdings, LLC and GSR Holdings, LLC defendants.
In the amended complaint, Fibres alleged that it was a broker in waste paper and was in a business relationship with HBB, the operator of a municipal landfill, pursuant to an operations and maintenance agreement with the Town of Brookhaven. Fibres and HBB agreed that HBB would supply Fibres with recycled newspapers of a particular quality. However, according to the complaint, HBB provided noncompliant product, which caused Fibres to suffer substantial losses.
In the summer of 2018, Fibres met with representatives of HBB to discuss the claims regarding the quality of the noncompliant product. HBB allegedly accepted responsibility for the noncompliant product, indicated a desire to continue its relationship with Fibre, and requested an estimate of damages, which was transmitted to both Winters and Core in August 2018. While those negotiations were ongoing, HBB already had taken steps to withdraw from the agreement and cease operations at the landfill.
Winters and Core used their ownership of WBGSIH, GSRH, and GS to transfer substantial assets from HBB to GS, then from GS to WBGSIH and GSRH, and then from WBGSIH and GSRH to Joseph Winters and Core respectively, allegedly “leaving inadequate operating reserves and funds necessary [to] pay existing creditors.” Fibres asserted causes of action alleging breach of contract (first cause of action) and fraudulent conveyances pursuant to Debtor and Creditor Law §§ 273, 274, 275, and 276 (tenth through thirteenth causes of action). Under the seventh through ninth causes of action, Fibre sought to pierce the corporate veil.
Core and GSRH moved to dismiss the seventh cause of action insofar as asserted against GSRH, and the eighth and tenth through thirteenth causes of action insofar as asserted against them. Joseph Winters and WBGSIH moved to dismiss the seventh cause of action insofar as asserted against WBGSIH and the ninth through thirteenth causes of action insofar as asserted against them. In an order dated February 13, 2019, Supreme Court denied those branches of the motions. Core, GSRH, Winters and WBGSIH separately appealed.
Generally, a member of a limited liability company cannot personally be held liable for any debts, obligations or liabilities of the limited liability company, whether arising in tort, contract or otherwise. The concept of piercing the corporate veil is an exception to this general rule, permitting, in certain circumstances, the imposition of personal liability on members for the obligations of the limited liability company. Piercing the corporate veil is not a separate cause of action independent of the cause of action alleged against the entity. Instead, it is an assertion of facts and circumstances which will persuade the court to impose the entities’ obligations on its owners.
The decision whether to pierce the corporate veil in a given instance will necessarily depend on the attendant facts and equities. But generally piercing the LLC veil requires a showing that: (1) the owners exercised complete domination of the LLC in respect to the transaction attacked; and (2) such domination was used to commit a fraud or wrong against the party seeking to pierce the corporate veil which resulted in the party’s injury’.
At the pleading stage, a plaintiff must do more than merely allege that defendant engaged in improper acts or acted in ‘bad faith’ while representing the LLC. The plaintiff must adequately allege the existence of an obligation of the LLC and that defendant exercised complete domination and control over the entity and abused the privilege of doing business in that corporate form to perpetrate a wrong or injustice. ‘Factors to be considered in determining whether an individual has abused the privilege of doing business in the LLC form include the failure to adhere to LLC formalities, inadequate capitalization, commingling of assets, and the personal use of LLC funds.
Here, the complaint adequately alleged that the principals and their LLCs engaged in acts amounting to abuse of the LLC form. Among the allegations were that Winters and Core closely held WBGSIH, GSRH, and GS, and that through their domination of WBGSIH and GSRH, Winters and Core dominated HBB and GS in order to advance their personal interests, that they transferred millions of dollars of assets to themselves, leaving GS and HBB without adequate capitalization, and caused GS and HBB to go out of business by reneging on the agreement while simultaneously purporting to negotiate the resolution of the contract claims.
Those allegations indicated that HBB’s withdrawal from the agreement and the transfers of all of HBB’s assets were done in order to evade liability to Fibres. Accordingly, Supreme Court properly denied those branches of the Core/GSRH motion to dismiss the seventh cause of action insofar as asserted against GSRH and the eighth cause of action insofar as asserted against them. And properly denied those branches of the motion of Winters and WBGSIH to dismiss the seventh cause of action insofar as asserted against WBGSIH and the ninth cause of action insofar as asserted against them.
Pursuant to the version of DCL§ 273, applicable at the time of the conveyances, a conveyance that rendered the conveyor insolvent was fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration. Pursuant to the version of DCL§ 274, applicable at the time of the conveyances, a conveyance was fraudulent as to creditors without regard to actual intent when it is made without fair consideration when the person making it was engaged or was about to engage in a business or transaction for which the property remaining in his or her hands after the conveyance was an unreasonably small capital. The version of DCL Law § 275, applicable at the time of the conveyances, provided that a conveyance made without fair consideration at a time when the person making the conveyance intends or believes that he or she will incur debts beyond his or her ability to pay as they mature, was fraudulent as to both present and future creditors. Pursuant to that constructive fraud provision, a conveyance made by a person who had a good indication of oncoming insolvency was deemed to be fraudulent. To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed. For the purposes of those DCL a creditor was defined as “any person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent”.
Here, the amended complaint alleged sufficient facts to state causes of action alleging fraudulent conveyances pursuant to Debtor and Creditor Law former §§ 273, 274, and 275. Valid claims of violations of Debtor and Creditor Law former §§ 273, 274, and 275 do not require proof of actual intent to defraud and are not required to be pleaded with the particularity required by CPLR 3016 (b). Fibres sufficiently alleged that it was a creditor of HBB and, thereby a creditor of Core, Winters and WBGSIH, since it asserted a breach of contract cause of action against HBB, even though that cause of action was unmatured at the time of the alleged conveyances. Accordingly, Supreme Court properly denied those branches of the separate motions of the Core, Winters and WBGSIH to dismiss the tenth through twelfth causes of action insofar as asserted against each of them.
Pursuant to Debtor and Creditor Law former § 276, every conveyance made with actual intent to hinder, delay, or defraud either present or future creditors is fraudulent. The requisite intent required by this section need not be proven by direct evidence, but may be inferred from the circumstances surrounding the allegedly fraudulent transfer. In determining whether a conveyance was fraudulent, the courts will consider badges of fraud, which are circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent. A pleading asserting a cause of action pursuant to Debtor and Creditor Law former § 276 was required to be pleaded with particularity. When, however, the operative facts are peculiarly within the knowledge of the party alleged to have committed the fraud, it may be impossible at the early stages of the proceeding for the plaintiff to detail all the circumstances constituting the fraud. Accordingly, the pleading requirement will be deemed to have been met when the facts are sufficient to permit a reasonable inference of the alleged conduct A prime example of this type of fraud is where a debtor transfers his or her property to another while retaining the use thereof so as to continue in business free from the claims of creditors.
Here, Fibres lleged facts establishing sufficient indicia of fraud to support a cause of action of actual fraud pursuant to Debtor and Creditor Law former § 276, including that HBB’s agents sought to put off Fibre by continuing settlement negotiations, while simultaneously transferring HBB’s and/or GS’s assets among the Core, Winters and WBGSIH, removing HBB from the agreement, and having other companies controlled by Winters and Core continue to provide recycling services for the Town. Accordingly, Supreme Court properly denied those branches of the separate motions of the Core, Winters and WBGSIH to dismiss the thirteenth cause of action insofar as asserted against each of them.