In litigation, it is one thing to obtain a judgment against an individual or entity, but it is another thing to actually collect on that judgment. One scenario that often plays out occurs when a plaintiff has obtained a judgment against a business entity only to find out that the company is out of business and/or has transferred its assets and popped up under a different name. This strategy is undertaken for obvious reasons – to avoid collection efforts on the judgment while continuing to do business under a different identity. However, if you are the judgment holder, all is not lost. A recent decision from the Commercial Division in Suffolk County awarded a judgment holder with summary judgment against a successor corporation making it liable for the judgment of the defunct entity.
In All County Paving Corp. v. Darren Construction, Inc. (J. Emerson), plaintiff All County Paving Corp. (“All County”) had obtained a judgment against an entity known as Darren Construction Services, Ltd. (“Darren Construction Services”) back in 2011 in the sum of $82,275.74. Darren Construction Services was owned by Michael Fusco (“Fusco”) who acted as the sole officer, director and shareholder of that entity. All County then commenced this action against Fusco and a different company, Darren Construction, Inc. (“Darren Construction”) alleging that Fusco created Darren Construction in an effort to avoid paying All County and other creditors. The lawsuit alleged claims for fraudulent conveyances under the Debtor and Creditor Law and also sought personal liability against Fusco by piercing the corporate veil. Both All County and the defendants ultimately moved for summary judgment with respect to plaintiff’s claims.
In deciding the respective motions, the Court noted that New York permits recovery of transfers when there has been a fraudulent conveyance that unfairly diminishes a debtor’s estate. Under Debtor and Creditor Law § 273 and § 273-a, constructive fraud can be shown when the debtor transfers assets without fair consideration and the debtor is or becomes insolvent or the debtor has a judgment docketed against it that has not been satisfied. Additionally, transfers to controlling shareholders, officers or directors of an insolvent corporation are presumed to be fraudulent and made in bad faith. Matter of CIT Group/Commercial Servs. Inc. v. 160-09 Jamaica Ave. Ltd. Partnership, 25 A.D.3d 301, 303 (1st Dep’t 2006). Under Debtor and Creditor Law § 276, the creditor must show actual intent to defraud on the part of the transferor in order to set aside a transfer as fraudulent.
In its examination of the facts here, the Court found that Darren Construction (the successor company) was formed August 22, 2011. Darren Construction Services then failed to appear at a Court conference in the prior litigation a mere two weeks later on October 4, 2011 and, as a result, a default judgment was entered against Darren Construction Services on October 11, 2011. The Court further noted that Fusco is the sole owner, shareholder and director of Darren Construction (as he was with Darren Construction Services) and the two businesses are the same, use the same phone number, and operate out of the same address. Even more telling was the fact that, as soon as Darren Construction was formed, Darren Construction Services went out of business. While the defendants attempted to argue that there was no transfer of assets between the two companies, the Court held otherwise, noting that the “good will” of Darren Construction Services, a saleable asset, was transferred to Darren Construction without any consideration being exchanged for such good will. Further, at the time of the transfer, Darren Construction Services was insolvent and the judgment was unsatisfied.
As a result the Court found the transfer to be in violation of both § 273 and § 273-a of the Debtor and Creditor Law. The Court also found that, based on the circumstances of the transfer, there was an intent to defraud in violation of § 276 of the Debtor and Creditor Law which was further confirmed by Fusco’s deposition testimony. As such, the Court held that All County was entitled to summary judgment against Darren Construction due to the fraudulent conveyance. As an aside, the Court denied summary judgment against both sides as it pertained to the claims against Fusco individually under a corporate veil theory noting that neither side had met its burden to warrant summary judgment.
The important takeaway from this decision is that all is not lost if you have a judgment against what appears, on its face, to be a defunct entity. It is vital to conduct the proper due diligence even before a judgment is obtained to determine if the entity is still doing business under a different name and whether the defunct entity fraudulently transferred assets to avoid collection efforts. It is very possible, as was the case here, that a new door will open that will allow you to collect against an entity and/or individual with assets.