This is an area of the law we are most expert at. We often need to examine debtor’s bank records to trace funds to fraudulent transferees. This is in the nature of forensic accounting.
One technique business debtors employ is to close one corporation and open another corporation that is doing the same or a similar business. It takes creativity to demonstrate to the court that the second business is really just the alter ego and successor in interest to the initial debtor business. Sometimes examining the debtor’s bank records is not enough. In addition, a deposition may need to be conducted of the debtor’s principal to help establish successor liability. The investigation may turn up improper transfers to the principal or to family members.
For many small corporations I have observed that the principals use the corporation’s bank account as their personal checking account, paying such things as their home mortgage, yacht club membership, boat dock fees, a girlfriend’s rent, and other personal expenses. These types of expenses may be considered fraudulent transfers that should establish the personal liability of the transferor, and if the transferee is a family member, possibly the liability of the transferee.
In a recent case I noted from bank records that payments of approximately $40,000 were made to the debtor’s principal’s son, who was engaged in a completely separate business. At a deposition I questioned the debtor’s principal about the basis for those payments, and his answer was at best sketchy. I told the man that I had a viable cause of action against his son as a fraudulent transferee. His attorney must have advised him similarly, for within two weeks the case was settled. The principal did not want me to sue his son.
I have another interesting case presently on appeal, where the principals of the debtor business contributed money to their pension plan after my client’s cause of action for unpaid rent arose.
I contend that makes the individual transferors personally liable, such that the pension fund, and the ultimate recipient of the funds, the individual pension funds of the principals, should be required to disgorge those funds to pay a creditor. That relies on the New York law concept that in the first instance a corporation is a trust fund for the payment of debts to its creditors. By failing to pay my client, an unrelated creditor, before paying themselves by contributing corporate funds to the pension fund, the corporate debtor and its principals violated New York law. When that case is decided by the appellate court, I will be sure to report the result.
So, the point is to find the debtor’s pressure point and hone in on it to try to get the debtor to pay my client.
Once you have a judgment, there are many steps you can attempt to take to enforce the judgment, such as restraining notices to bank accounts or to anyone who may potentially owe the debtor money. With the proper representation, you can step between anyone who owes the debtor money and the debtor themselves, so that you can collect on your judgment and receive the money that you’re owed. An attorney may also be able to access money that has been placed in mutual funds or other accounts, so that you can receive the money that’s owed to you. The law permits Turnover Proceedings to stop anyone who owes your debtor money from paying that debtor and have that money come to you instead. This is a great device and is very frequently successful.