| Colonial Sur. Co. v Lakeview Advisors, LLC |
| 2012 NY Slip Op 02015 [93 AD3d 1253] |
| March 16, 2012 |
| Appellate Division, Fourth Department |
| Matter of Colonial Surety Company,Appellant-Respondent, v Lakeview Advisors, LLC, Respondent-Appellant, andResolution Management, LLC, Respondent, et al., Respondent. (Appeal No.2.) |
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Motion for reargument of the appeal and cross appeal is granted and, upon reargument, thememorandum and order entered February 18, 2011 (81 AD3d 1460 [2011]) is amended byadding to the first sentence of the order the words "and cross appeal" after the word "Appeal"and, beginning with the second paragraph, is otherwise vacated and the following memorandumand ordering paragraph is substituted therefor:
"It is hereby ordered that the cross appeal is unanimously dismissed and the order andjudgment so appealed from is reversed on the law without costs, the petition is reinstated and thematter is remitted to Supreme Court, Erie County, for further proceedings in accordance with thefollowing memorandum: Petitioner previously obtained a judgment against Paul W. O'Brien, themanager and sole principal of respondent Lakeview Advisors, LLC (Lakeview). Petitionercommenced this proceeding pursuant to CPLR article 52 seeking to enforce that judgment withrespect to, inter alia, a debt owed to Lakeview by respondent Resolution Management, LLC(Resolution), as well as Resolution's accounts receivable in which Lakeview had a securityinterest. Petitioner contended that it was entitled to pierce the corporate veil of Lakeview andthus to execute its judgment upon Lakeview's interest in that property. In appeal No. 1, petitionerappeals from an order that, inter alia, directed Resolution to pay the sum of $537,000 into anescrow account pending resolution of the proceeding. In appeal No. 2, petitioner appeals from anorder and judgment that, inter alia, vacated the order in appeal No. 1 and dismissed the petition.
Initially, we note that the appeal from the order in appeal No. 1 must be dismissed becausethe right to appeal from that intermediate order terminated upon the entry of the order andjudgment in appeal No. 2 (see Murphy v CSX Transp., Inc. [appeal No. 1], 78 AD3d1543 [2010]; Smith v Catholic Med. Ctr. of Brooklyn & Queens, 155 AD2d 435 [1989]).The issues raised in appeal No. 1 will be considered upon the appeal from the order andjudgment in appeal No. 2 (see Matter of Aho, 39 NY2d 241, 248 [1976]).
Next, we note that the cross appeal in appeal No. 2 must be dismissed. Lakeview, "wh[ich] isnot aggrieved by the [order and] judgment . . . appealed from [in appeal No. 2] andwh[ich], therefore, has no right to bring an appeal [therefrom], is entitled to raise an error madebelow, for review by the appellate court, as long as that error has been properly preserved andwould, if corrected, support a judgment in [its] favor . . . Any such error isreviewable once[, as here,] the final judgment or order has been properly appealed from by thelosing party" (Parochial Bus Sys. v Board of Educ. of City of N.Y., 60 NY2d 539, 546[1983]). We conclude that the issue raised by Lakeview was properly preserved and wouldwarrant judgment in its favor in the event that it had merit. Therefore, although we must dismissthe cross appeal because Lakeview is not aggrieved, we consider its contention as an alternateground for affirmance. Nevertheless, we further conclude that Lakeview's contention is withoutmerit because we agree with petitioner that Supreme Court abused its discretion in dismissing thepetition.
By its order and judgment in appeal No. 2, the court reverse-pierced the corporate veil of[*2]Lakeview and concluded that it was the alter ego of O'Brienbased, inter alia, upon the evidence in the record establishing that O'Brien was using Lakeview inan attempt to thwart petitioner's attempts to collect on its underlying judgment. Respondentscontend that we should determine that the court erred in reverse-piercing the corporate veil and inconcluding that Lakeview, a limited liability company, was the alter ego of O'Brien. We rejectthat contention.
Contrary to respondents' contention, petitioner satisfied its burden of justifying the piercingof the corporate veil. It is well settled that "the doctrine of piercing the corporate veil. . . applies to limited liability companies . . . In so doing, [petitioner]bears 'a heavy burden of showing that the corporation was dominated as to the transactionattacked and that such domination was the instrument of fraud or otherwise resulted in wrongfulor inequitable consequences' " (Retropolis, Inc. v 14th St. Dev. LLC, 17 AD3d 209, 210 [2005],quoting TNS Holdings v MKI Sec. Corp., 92 NY2d 335, 339 [1998]). Here, O'Brien infact admitted that he dominated the limited liability company (LLC). In addition, the evidence inthe record demonstrates that O'Brien established the LLC after the prior judgment at issue hereinwas entered against him in order to shield his assets from petitioner, and after he fraudulentlyattempted to have the debt discharged in bankruptcy. Furthermore, he used LLC funds to paypersonal expenses, make payments to his wife in lieu of his salary, and contribute to his personalIRA account. He also closed his personal checking account and used Lakeview checks to pay hispersonal bills. Based on those actions, we conclude that inequitable consequences would result ifwe were to permit him to shield his assets from petitioner, his judgment creditor, by misusing theLLC in this manner (see generally National Union Fire Ins. Co. of Pittsburgh, Pa. vBodek, 270 AD2d 139 [2000], lv dismissed 95 NY2d 887 [2000], rearg denied95 NY2d 959 [2000]; Austin Powder Co. v McCullough, 216 AD2d 825 [1995]).Thus, the court did not abuse its discretion in reverse-piercing Lakeview's corporate veil.
In its bench decision underlying the order and judgment in appeal No. 2, the court concluded,among other things, that it "would not be equitable" to permit petitioner to pursue money thatResolution owed to Lakeview because to do so would "prejudice creditors of Lakeview," i.e., sixentities (hereafter, note holders) that allegedly loaned Lakeview the money that it in turn laterloaned to Resolution. We agree with petitioner that, based on the evidence in the record and thecourt's determination of the credibility of the witnesses who testified at the hearing on the instantpetition, the court abused its discretion in its balancing of the equities.
It is clear that the court has the authority under CPLR article 52 to consider the rights of otherentities who may also have a claim to property or debts owed to a judgment creditor and, indeed,pursuant to CPLR 5225 (b) and 5227, "[t]he court may permit any adverse claimant to intervenein the [CPLR article 52] proceeding and may determine his [or her] rights in accordance withsection 5239." In addition, "CPLR 5240 grants the courts broad discretionary power to controland regulate the enforcement of a money judgment under article 52 to prevent 'unreasonableannoyance, expense, embarrassment, disadvantage, or other prejudice to any person or the courts'" (Guardian Loan Co. v Early, 47 NY2d 515, 519 [1979]; see Rondack Constr. Servs., Inc. vKaatsbaan Intl. Dance Ctr., Inc., 13 NY3d 580, 585 [2009]; Matter of Stern v Hirsch, 79 AD3d1046 [2010]). The statute "serves as an equitable safety valve which allows a court torestrain execution upon its judgment where unwarranted hardship would otherwise result. Thedecisional process invoked is the balancing of harm likely to result from execution, against thenecessity of using that immediate means of attempted satisfaction" (Seyfarth v Bi-CountyElec. Corp., 73 Misc 2d 363, 365 [1973]; see Fiore v Oakwood Plaza Shopping Ctr.,178 AD2d 311, 312 [1991], appeal [*3]dismissed 80NY2d 826 [1992]). One of the factors that the court was required to consider was whether "therecord supports the [petitioner]'s contention that [respondents are] attempting to frustrate[petitioner]'s attempts to collect the money owed" to petitioner by O'Brien (Putnam CountyNatl. Bank of Carmel v Pryschlak, 226 AD2d 358, 358 [1996]; see Matter of AMEVCapital Corp. v Kirk, 180 AD2d 791 [1992]).
Here, we conclude that the court failed to consider petitioner's right to execute upon itsjudgment, failed to take proper consideration of respondents' efforts to prevent petitioner fromcollecting on its judgment, and reached its conclusion regarding the prejudice to the note holdersin the absence of any compelling evidence that such prejudice exists. Although both O'Brien andMark Bohn, the president of Resolution, testified at the hearing on the petition that the noteholders would be damaged, their credibility was severely damaged by, among other things, thecourt's finding that one of O'Brien's affidavits was "inherently incredible," and the denial ofO'Brien's request to discharge in bankruptcy the judgment underlying this proceeding on theground that he provided false filings and testimony in the bankruptcy matter. Indeed, notablyabsent from the record is any testimony or evidence from the note holders establishing thatResolution in fact repurchased the original notes, what the terms of such a repurchase might havebeen, or how the note holders would be prejudiced by any default or delay in repayment of theirloans. In addition, the substituted promissory notes that allegedly demonstrated that a repurchaseof the loan occurred were not notarized, and they were undated with the exception of one datedapproximately eight months before the repurchase transaction is alleged to have occurred. Basedupon our review of the record as a whole, we conclude that the court erred in determining that theprejudice to the note holders outweighed petitioner's right to collect on its judgment.
Consequently, we reverse the order and judgment and reinstate the petition, and we remit thematter to Supreme Court for further proceedings, including a new hearing on the petition. Thecourt may determine the rights of any claimant to the funds held in escrow upon the interventionof such party pursuant to CPLR 5225 (b) and 5227. We further direct that, pending thedisposition of the petition, the second, third and sixth ordering paragraphs of the order of thisCourt dated November 5, 2010 shall continue to be in full force and effect unless modified bySupreme Court in accordance with our decision herein, and we expressly incorporate thoseordering paragraphs into our order in appeal No. 2. We note that petitioner has made severalmotions in this Court seeking discovery with respect to Resolution's compliance with theconditions of the order of this Court dated November 5, 2010. We refer those matters to SupremeCourt, to be resolved in conjunction with the further proceedings on the petition.
We have considered petitioner's remaining contentions and conclude that they are withoutmerit, or are academic in light of our determination. Present—Smith, J.P., Peradotto,Lindley, Sconiers and Martoche, JJ.