Matter of White Plains Plaza Realty LLC v Cappelli

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[*1] Matter of White Plains Plaza Realty LLC v Cappelli 2017 NY Slip Op 50582(U) Decided on May 2, 2017 Supreme Court, Westchester County Giacomo, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 2, 2017
Supreme Court, Westchester County

Application of White Plains Plaza Realty, LLC, Petitioner, For a Judgment Pursuant to CPLR 5225(b) and CPLR 5227,

against

Louis R. Cappelli and CAPPELLI ENTERPRISES, INC., Respondents.



70276/2015



Plaintiff

Al Donnellan aed@ddw-law.com

Defendant

mshapiro@kiscolaw.com
William J. Giacomo, J.

Factual and Procedural Background

This is a special proceeding, pursuant to CPLR 5225 and 5227, in which petitioner White Plains Plaza Realty, LLC seeks to set aside alleged fraudulent conveyances in violation of Debtor and Creditor Law article 10 and to collect on an unsatisfied judgment obtained in a separate action against a former commercial tenant.

Briefly, by way of background, petitioner is the former owner of One North Broadway, an office building located in White Plains. Petitioner had a commercial lease with TSI White Plains, LLC ("TSI") which operated a New York Sports Club in the building. In or about 2004 and 2005, TSI negotiated a lease to move its New York Sports Club facility across the street to the White Plains City Center, a new building constructed by a non-party entity controlled by respondent Louis R. Cappelli. As part of the lease negotiations, respondent Cappelli Enterprises, Inc. provided an indemnification agreement to TSI to pay for any losses or liabilities arising out of TSI's lease with petitioner. Subsequently, TSI defaulted on its lease payments owed to petitioner and, after some protracted litigation, in 2011 petitioner was awarded judgment in its favor against TSI in the amount of $900,561.53.

Thereafter, because TSI was judgment proof, on October 13, 2011, petitioner commenced a special proceeding against Cappelli Enterprises (Index No. 57039/2011) demanding that in accordance with the indemnification agreement, Cappelli Enterprises satisfy the judgment (hereinafter referred to as the underlying action). Subsequently, a judgment dated June 5, 2013, was rendered in favor of petitioner and against Cappelli Enterprises in the amount of $1,044,744.88 ("2013 Judgment"). The 2013 judgment remains unsatisfied.

Petitioner commenced this special proceeding against Mr. Cappelli and Cappelli Enterprises, pursuant to CPLR 5225 (b) and 5227 and the New York Debtor and Creditor Law. The petition seeks to pierce the corporate veil of Cappelli Enterprises and hold Mr. Cappelli, as its sole shareholder, officer and director, personally liable for the 2013 judgment.

This proceeding was commenced with the filing of a verified petition dated December 8, 2015. Issue was joined by the respondents with the filing and service of a verified answer dated February 4, 2016.

The petition alleges that there were three "conveyances" made subsequent to the commencement of the underlying action which eliminated more than $8 million in receivables owed to Cappelli Enterprises, without consideration, and consequently left Cappelli Enterprises without any assets and therefore judgment proof. The petition asserts that such conveyances were made with fraudulent intent and as a result, petitioner is seeking an award of attorneys' fees. The three purported conveyances are as follows:

(1) A "clean up" of Cappelli Enterprises' books and records for the year 2010 in which Mr. Cappelli directed that receivables owed to Cappelli Enterprises by Fuller Development and Concord, other entities controlled by Mr. Cappelli, totaling $7,564,070.78, be eliminated by a series of journal entries;(2) The write-off on Cappelli Enterprises books and records, as of December 31, 2010, of $1,377,847 as "bad debt" of sums paid through Cappelli Enterprises to fund 401(k) contributions for employees of other companies owned by Mr. Cappelli; and(3) A "transfer" on December 31, 2011, of Cappelli Enterprises' property and equipment to another entity owned by Mr. Cappelli.

In an order dated June 27, 2016, the Court (Bellantoni, J.) held that triable issues of fact existed which required that this matter be decided by trial.



Trial

A trial was held before this Court on October 27, 28, 31, and November 1, 2016. Petitioner's case consisted of testimony from Richard Dannenbaum and Kenneth DeGraw. Respondents' case consisted of testimony from Marigrace Amato and Louis R. Cappelli. The following relevant testimony was elicited:



Testimony of Richard Dannenbaum

Richard Dannenbaum, CPA, testified that he was employed by the Cappelli organization between August 2000 and July 2015 as the chief financial officer. The Cappelli organization was comprised of over one-hundred companies which included Cappelli Enterprises, Concord Associates, LTD, Fuller Development Company, LRC Construction, New Roc Management, Summit Property Management, George A. Fuller, Co., and Cappelli Sales and Marketing. Most of the companies occupied the same offices.

Mr. Dannenbaum was the CFO for all of Mr. Cappelli's companies including Cappelli Enterprises. There was one generalized staff that serviced all the different companies and the accounting department also serviced all the companies. Cappelli Enterprises was an overhead management entity with no recurring revenue source. Mr. Cappelli made all of the decisions for Cappelli Enterprises other than routine financial decisions. The capital to operate Cappelli Enterprises came from Mr. Cappelli.



The Journal Entries

Mr. Dannenbaum identified a closing package containing Cappelli Enterprises financial records for the years 2009, 2010, 2011, 2012, and 2013. He was responsible for the preparation of these documents. According to Mr. Dannenbaum, the December 31, 2010 balance sheet for Cappelli Enterprises showed an insolvent company.

The tax returns were prepared from the closing package. Mr. Dannenbaum testified that the 2009, 2010, and 2011 tax returns did not reflect the true value of the assets listed. The tax returns reflected the book value or the carrying value that was on the books and records of the company, not the market value.

Mr. Dannenbaum testified that if some of the entities needed funding, Cappelli Enterprises would source the funding and advance funds to those entities. Mr. Dannenbaum would categorize the funds as intercompany balances. In 2010 he realized that many of the intercompany accounts [*2]were not going to settle in cash. As a result, he wanted to clean up all the balance sheets and did so through a series of journal entries. The journal entries and timing of them were made at his suggestion. He was not aware of petitioner's underlying litigation at the time the cleanup was done. He stated that his intent was to try to reflect on the books the economic reality facing the companies.

Specifically, he testified that at the end of 2010, neither Concord Associates nor Fuller Development had the ability to pay back Cappelli Enterprises because of the recession. Concord had $75 million of mortgage debt and a number of other creditors related to the development and had no source of income generated from its own operations. As a result, $3,560,776.73 from Concord was written off the books of Cappelli Enterprises in journal entries and the debt was eliminated as being owed from Concord to Cappelli Enterprises — to do so, the debt was reclassified as a receivable from Concord to a receivable from the shareholder. The balance sheet for Concord improved as a result. Mr. Dannenbaum did the same thing with Fuller.

Mr. Dannenbaum testified that the purpose of the journal entries was to accurately reflect the financial condition of Cappelli Enterprises by eliminating the accumulation of intercompany balances. These loans were reclassified or written off in minor instances in such a manner as to more accurately reflect the financial condition of the company. Mr. Dannenbaum testified that Cappelli Enterprises did not give any release of the receivables to Concord or Fuller; there was no legal documentation. The purpose of the 2010 cleanup was in furtherance of closing out the books for all the entities.



The 401(k) Receivables

Cappelli Enterprises was the plan sponsor of the 401(k) plan which covered five or six constituent payroll entities. All contributions into the 401(k) plan were made by payroll deductions from participating employees in the plan. The payroll deduction would come out of the constituent company's employees' checks and the payroll would be funded by Mr. Cappelli, net of the 401(k) contribution. The employer did not match any contribution on behalf of the employees. When Mr. Cappelli paid Massachusetts Mutual, the sponsor of the 401(k) plan, it was in the amount of money that the employees had designated to be withheld from their salaries. If the employees had not designated any contribution, Mr. Cappelli would pay that money to the employee in the form of their salary. Mr. Dannenbaum testified and explained this procedure as follows: Mr. Cappelli would fund Cappelli Enterprises, Cappelli Enterprises would pay the balance of the employees' paychecks into the 401(k) plan, the affiliated company would pick up the obligation on their books, and the funding was marked as a receivable on Cappelli Enterprises' books. Mr. Dannenbaum testified that although he had to report the gross payroll on the affiliated companies' books, it was really not a receivable because it was a loan Mr. Cappeli made to pay into the 401(k) plan that the affiliated companies did not make.



The Fixed Assets — the Property and Equipment

Mr. Dannenbaum testified that the fixed assets included furniture, computer equipment and a phone system for the office space they were planning to take in Renaissance Square in White Plains, which were purchased by Cappelli Enterprises but funded by Mr. Cappelli. At some point in 2011, these fixed assets were moved off of the Cappelli Enterprises balance sheet to the balance sheet of LRC Construction. There was no bill of sale or transfer document and the furniture [*3]remained in place. Mr. Dannenbaum testified that this was not a sale of any sort and there was no determination as to the market value of these fixed assets.



Testimony of Kenneth DeGraw

Kenneth DeGraw, CPA, petitioner's expert, testified that he is a certified fraud examiner specific to the field of evaluating books and records for fraudulent activity.

Mr. DeGraw testified that, according to the general ledger, as of December 29, 2010, Concord and Fuller Development owed Cappelli Enterprises $3.6 million and $4 million, respectively. A journal entry was thereafter written at year-end eliminating those balances. A memorandum from Mr. Dannenbaum directed the staff to eliminate the balances from Concord and Fuller, consolidate it with the shareholder loan account and then to zero out the shareholder loan account and call it a distribution of equity. Mr. DeGraw testified:

Q. Was that an appropriate accounting practice?A. The accounting is correct. However, the reality is that you can't distribute what you don't have (trial transcript 10/31/2016: 355).***Strictly from an accounting perspective, it is something that can be done. It is just not typical (trial transcript 10/31/2016: 357).

Mr. DeGraw further conceded that if the 401(k) receivables from the affiliated entities were not collectible, it would have been appropriate and good accounting practice to write off the receivables. Mr. DeGraw explained that a debt is written off because the company does not think it can collect the money. Mr. DeGraw further testified that writing off a debt does not mean that a release of the debt was provided. If the debt was thereafter paid, it would reverse. He testified that a receivable is sometimes written off as bad debt and then is subsequently collected, that is a normal trade receivable and "happens all the time". Mr. DeGraw agreed that evaluating accounts and balances so that they properly reflect the economics is appropriate. He testified that it is very typical at the end of the year, prior to doing tax returns to clean up the books.

Mr. DeGraw did not review the balance sheets for New Roc Management, Summit Property Management, George A. Fuller, Fuller Development Company, or Cappelli Sales and Marketing - all the entities that had the obligation to pay the 401(k) receivables back to Cappelli Enterprises. Thus, Mr. DeGraw did not know the financial condition of these companies in 2010. He did however testify that there was no market for those receivables.

As to the fixed assets, Mr. DeGraw testified that the balance sheet for 2009 indicated the book value not market value of the assets. There was no indication of the market value of the fixed assets from the balance sheet.

Mr. DeGraw conceded that he never reviewed any promissory notes, loan agreements, or security agreements from any affiliate to Cappelli Enterprises. He never reviewed any agreement whereby any of the affiliates agreed to pay money to Cappelli Enterprises in exchange for a loan. He never reviewed any written releases or any correspondence referring to written releases of the [*4]debt owed to Cappelli Enterprises by any affiliate. He also never reviewed any representations of Cappelli Enterprises' financial condition to TSI.



Testimony of Marigrace Amato

Marigrace Amato, CPA, testified that in 1998 she began working for BDO Seidman providing tax services to the Cappelli entities. She prepared and reviewed the tax returns, audits, and performed some transactional analysis for Cappelli Enterprises and for the development entities. Ms. Amato prepared the tax returns for Cappelli Enterprises every year since 1998. In connection with preparing the returns, Ms. Amato reviewed the final trial balance and any journal entries.

Ms. Amato testified that Cappelli Enterprises did not have any ownership interest in the development entities. Cappelli Enterprises was an overhead entity or a management company for all of the entities. Between 2009 and 2011, Cappelli Enterprises received its funds from Mr. Cappelli. The funds were accounted for by Mr. Dannenbaum. Mr. Cappelli would put money into a particular entity and Mr. Dannenbaum would tract what the funds were used for. Cappelli Enterprises did not perform any services for that money. This type of management company, Ms. Amato testified, is typical in real estate development.

Ms. Amato testified that the tax returns for tax year 2010 had to be submitted by October 31st, on extension due to Hurricane Irene. Ms. Amato reviewed and signed the tax returns for that year. Ms. Amato testified that it was not unusual for adjustments and corrections to be made to the December trial balance during the following year.

In referring to a memo from Mr. Dannenbaum concerning end of the year journal entries, dated October 25, 2011, Ms. Amato testified that she had seen the journal entries reflected there. The journal entries took transactions that were reported throughout the year and condensed them. Ms. Amato explained that data is gathered throughout the year and at year end the data is journalized with the proper entry. She explained that Mr. Cappelli put money into Cappelli Enterprises which the other entities used. That money was originally reflected in the Cappelli Enterprises books within the equity account as a shareholder loan, meaning that it was temporary. Those entries were later determined to properly be an equity transaction. In previous years, it was expected that this money would be paid back. Ms. Amato stated that the development projects were up and running and anticipated to be successful. At some point, however, the projects were at a standstill and were not going forward and there was no hope of repayment. Ms. Amato testified that because it was determined that there was no hope of repayment, the appropriate journal entry was to put it through the equity account as a distribution. Ms. Amato testified that these journal entries were not cash journal entries.

Ms. Amato testified that Cappelli Enterprises had a 401(k) benefit plan. She stated that for related companies it is normal to have a common paymaster for employees participating in similar plans. Mr. Cappelli would put money into Cappelli Enterprises to fund the 401(k) plan for the employees of the various entities. It was not an expense for Cappelli Enterprises, rather a receivable from the related entities.

Ms. Amato testified that she determined that the amount entered in the journal as "bad debt" with respect to the 401(k) receivables was correct. On the tax returns, the bad debt was written off on Cappelli Enterprises as an expense, however, for the related companies that employed the [*5]contributing employees, it was identified as income. Ms. Amato stated that the accounting of the bad debt was correct. There was no tax effect because it was a deduction on one company and income on another company.



Testimony of Louis R. Cappelli

Louis R. Cappelli, president of Cappelli Enterprises, testified that Cappelli Enterprises was originally formed in 1989 as a construction company, however, in the late 1990s it became a management company. Cappelli Enterprises originally earned its own money as a construction company but later just received management fees. Since 2006 or 2007, Mr. Cappelli provided personal funds to Cappelli Enterprises. There were so many projects and special purpose entities that he decided to use Cappelli Enterprises as a management and operational company. He would put money into Cappelli Enterprises and Mr. Dannenbaum would disburse the money to the companies that needed it. He confirmed that the only role Cappelli Enterprises had with the development projects was funding. Cappelli Enterprises funded some of the pre-construction and pre-development costs of projects during the approval process.

Mr. Cappelli testified that in the mid to early 2000s, the only source of Cappelli Enterprises' cash to carry out its operation came from him. At that time, George A. Fuller Co. was building the City Center in White Plains. Cappelli Enterprises had nothing to do with that project. TSI leased space in City Center and in New Rochelle. LC White Plains Retail and Recreation, LLC is the owner and landlord of City Center that signed the lease with TSI. In New Rochelle, the owner and landlord is New Rock Retail, Parcel 1-A, Retail LLC that signed the lease with TSI. TSI never signed a lease with Cappelli Enterprises in New Rochelle or in White Plains. Mr. Cappelli testified that TSI never asked for financial statements for Cappelli Enterprises. Mr. Cappelli personally guaranteed up to $400,000 on the indemnity agreement between TSI and Cappelli Enterprises.

Mr. Cappelli testified in detail about the Concord project in Sullivan County, one of the development projects. The Concord was purchased in 1999 from bankruptcy for $29 million to develop as a racing casino. Mr. Cappelli testified that he is the owner of the Concord through Concord Associates, LTD, a limited partnership. Concord Associates has monetary obligations such as real estate taxes of approximately $450,000 a year, maintenance agreements, and payroll. According to Mr. Cappelli, it costs approximately $1.5 million to $2 million a year to maintain Concord Associates as a viable entity. Mr. Cappelli deposited his own money into Cappelli Enterprises which would then be allocated to Concord for these expenses. While it was always anticipated that Concord would pay the money back as it was pursuing a casino license, the project never went forward.

Mr. Cappelli identified mortgages signed by him on behalf of Concord against the land in Sullivan County. Mr. Cappelli personally guaranteed the mortgages [FN1] . Pursuant to the mortgages, Concord had an obligation to discharge liens and maintain the property and to pay the insurance, real estate taxes, carrying costs and sewer costs of the property. Mr. Cappelli provided the funds to [*6]Cappelli Enterprises which were then disbursed to Concord Associates to make the payments. Mr. Cappelli testified that the mortgage on the property remains unpaid.

The books for Cappelli Enterprises listed the money Mr. Cappelli contributed in this respect as a receivable from Concord Associates and in turn, as a receivable owed to him by Cappelli Enterprises. He testified that when the receivable was written off in 2010, Concord was not in position to pay the debt to him or Cappelli Enterprises due to the economic financial crisis of 2008 and 2009.

Mr. Cappelli testified that at the end of 2010 Fuller Development was also not in a position to pay back the receivable. At that time, due to the financial crisis Fuller Development was in a "workout with the bankers" and all of the revenue and any profit or sales was paid to the bank.



The Journal Entries and the Clean Up

As to the bookkeeping journal entries for the year end of December 31, 2010, Mr. Cappelli testified that he told Mr. Dannenbaum to go through the books of all the companies in an effort to show their lenders a clear picture of their worth and identify the real assets and liabilities of the companies at the end of 2010. Mr. Cappelli reviewed the journal entries for Concord Associates of $3,560,776 and Fuller Development of $4 million attached to the memo from Mr. Dannenbaum dated October 25, 2011. He testified that he provided those funds to Concord Associates and Fuller through Cappelli Enterprises.

Mr. Cappelli explained that he told Mr. Dannenbaum to "organize, clean up, and make more accurate" the books and records of all companies for year-end 2010, including those that had nothing to do with Cappelli Enterprises. The purpose of the clean-up was "[s]o it would more accurately reflect for bankers and lenders, [for] the year ending 2010 the financial condition of all of the [ ] 100 operating companies that we had." Due to the economic crisis, he wanted to insure that the books reflected the true value of the worth of assets in 2010 and 2011. During that period of time, Mr. Cappelli testified that he was in what is called "real estate workout" and as a result, the lenders were requesting additional information in order to assess how much of the loan needed to be written down and how much would ultimately be paid back during this period. Mr. Cappelli testified that he sold $50 million of personal assets to keep the company alive and to pay back the banks. Mr. Cappelli testified, with respect to the memo from Mr. Dannenbaum dated October 28, 2011, that he directed that additional journal entries be made.

As a result of these journal entries, Mr. Cappelli did not receive any cash and the financial condition of Cappelli Enterprises was not changed in any way. Cappelli Enterprises did not provide any release to Concord Associates or Fuller for the elimination of the receivables. He never signed any document releasing any of the companies of their liability.

After the journal entries were made for 2010, Mr. Cappelli continued to fund Concord Associates and Fuller Development because he personally guaranteed their mortgages and had to keep the projects going.

When the journal entries were made to take the debt from Concord Associates to Cappelli [*7]Enterprises off the books, it had the effect of an increase to Concord's assets. For every journal entry that was made on one entity, there was a corresponding journal entry for another entity because there had to be a balanced book. The impact of the journal entries on the books of the individual companies was an increase in value of the companies by relieving them of an obligation to pay debt to Cappelli Enterprises.

With respect to the memos and the journal entries made, Mr. Cappelli testified that he had absolutely no fraudulent intent to hide assets. Because there was debt for approximately $800 million, he was in the middle of working out solutions and trying to figure out how to get the maximum dollars to the lenders. Mr. Cappelli testified that he was focused on those secured lenders and making sure the balance sheets and financial condition were accurately portrayed. He stated that an intercompany receivable "at that point in time was not a fair way for me to make an assessment to say, this company is worth X, Y, Z because it is owed money from this other company that I own, X, Y, Z, when I knew it could not pay it." (trial transcript 11/1/2016: 583). He further testified:

"I was not responding to a lawsuit for $900,000 that had been filed against [Cappelli Enterprises]. All of these millions and tens of millions, hundreds millions of dollars of problems that we had was not driven by a $900,000 lawsuit against Cappelli Enterprises I was personally on the hook, on the personal guarantees for over $800 million." (trial transcript 11/1/2016: 583).

Mr. Cappelli testified that the financial statements were accurate prior to that time but they had to be marked to market. For example, if something was worth $10 two years ago and today its worth $1, it doesn't remain on the balance sheet as $10, it must be marked to market of $1. Mr. Cappelli stated that he did not want fraudulent assets on his balance sheet.

Mr. Cappelli testified that given the secured obligations of Concord Associates and Fuller, as well as the other companies, it would have been impossible to pay a receivable without the money winding up going to the secured lender. The secured lenders would have sued him if he had taken a receivable and paid it to an unsecured creditor or an intercompany affiliate.



The 401(k) Plan Payments

Mr. Cappelli identified a document entitled "Cappelli Enterprises Miscellaneous Receivables" and testified that he was familiar with the 401(k) receivables. He explained that he placed funds into Cappelli Enterprises which in turn paid Mass Mutual the 401(k) contributions. Mr. Cappelli was the owner of the companies whose employees contributed to the 401(k) plan: Fuller Development [FN2] ; George A. Fuller Co.[FN3] ; Summit Property Management [FN4] ; and Cappelli Sales [FN5] . All of these companies had employees who participated in the 401(k) plan. Cappelli Enterprises had the agreement with Mass Mutual for the 401(k). Mr. Cappelli funded the net amount for the payroll into the various companies that could not pay for themselves. In order to pay the 401(k), Mr. Cappelli [*8]paid the balance into Cappelli Enterprises which then paid Mass Mutual. Mr. Dannenbaum then allocated the cost out to the different companies. Mr. Cappelli testified that for all of the companies, he paid the 401(k) through Cappelli Enterprises because it was easier to control all of the employees through one umbrella plan for the 401(k). However, he stated that in return the individual companies never repaid him or Cappelli Enterprises as they did not have the ability to pay and so the receivables were written off as bad debt.

Mr. Cappelli testified that the bad debt write-off created a cancellation of debt on the individual companies for tax purposes, a corresponding income to him, and a deduction to Cappelli Enterprises. The write-off had no effect on Mr. Cappelli personally. He testified:

Q. Did you receive any benefit from the write off of the bad debt?A. When you say "personally," I didn't receive any benefit tax-wise but as far as getting the money back, when the debt was written off to Cappelli Enterprises, it obviously did not get paid back to me which I funded. So I lost money, but on a tax basis, it was even. (trial transcript 11/1/2016: 580).

Fixed Assets — Office Furniture

Mr. Cappelli testified that he was familiar with the journal entries that related to the Cappelli Enterprises' office furniture and computer hardware. The office furniture was for the offices of Cappelli Enterprises and some of the various companies and was still being used. Mr. Cappelli testified he put funds into Cappelli Enterprises to pay for the furniture and never received any of that money back. The furniture was moved from the books of Cappelli Enterprises to the books of LRC Construction because at the time Cappelli Enterprises was inactive. The title was not changed, it was just moved onto the books and the furniture and computers remained in the same place.



Post-Trial Arguments

Petitioner argues that the evidence demonstrates that Cappelli Enterprises made fraudulent conveyances in violation of Debtor and Creditor Law ("DCL") 273 and 273-a. In directing and causing the journal entries to eliminate the receivables. Petitioner argues that Mr. Cappelli and Cappelli Enterprises acted with actual intent to defraud creditors, in violation of DCL 276, and therefore, petitioner is entitled to an award of attorneys' fees pursuant to DCL 276-a. Petitioner further contends that the Court should pierce the corporate veil and hold Mr. Cappelli personally responsible for the judgment and because the conveyances were fraudulent, a judgment should be entered against Mr. Cappelli.

Respondents argue that no evidence was presented to support a claim that they violated DCL 273, 273-a, or 276-a. Respondents contend that the journal entries were not "conveyances" as defined by DCL 270, and in any event, the journal entries were made in good faith. Moreover, respondents argue that petitioner failed to submit any evidence of the value of the receivables and therefore they failed to prove lack of fair consideration.



Discussion

Article 10 of the Debtor Creditor Law applies to fraudulent conveyances. A conveyance is deemed fraudulent as to creditors "not only where it is made with actual intent 'to hinder, delay or [*9]defraud' creditors (Debtor and Creditor Law § 276), but also where the fraud is constructive, i.e., the conveyance is made without fair consideration by a person (1) who is insolvent or will thereby be rendered insolvent (Debtor and Creditor Law § 273), or (2) against whom an action is pending or a judgment has been docketed for money damages (Debtor and Creditor Law § 273-a) " (Marine Midland Bank v Murkoff, 120 AD2d 122, 124 [2d Dept 1986]).

I. Constructive Fraud Pursuant to DCL 273 and 273-a

Debtor and Creditor Law § 273 provides that "[e]very conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent . . . without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration." A finding of constructive fraud pursuant to section 273 may be predicated upon proof of insolvency and lack of fair consideration, without a showing of actual motive or intent to defraud (American Panel Tec v Hyrise, Inc., 31 AD3d 586, 587 [2006]; see Berner Trucking v Brown, 281 AD2d 924 [2001]; Gallagher v Kirschner, 220 AD2d 948 [1995]; Matter of American Inv. Bank v Marine Midland Bank, 191 AD2d 690, 692 [1993]).

Debtor and Creditor Law § 273-a provides that "[e]very conveyance made without fair consideration when the person making it is a defendant in an action for money damages is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment". In order to prevail under DCL § 273-a, petitioner is required to demonstrate that respondent was a defendant in an action for money damages, or had a judgment docketed against it, at the time of the underlying conveyances, that the resulting judgment remains unsatisfied and that the underlying conveyances were made without fair consideration (see Fane v Howard, 13 AD3d 950, 951 [2004]; Matter of Mega Personal Lines, Inc. v Halton, 9 AD3d 553, 555 [2004]; Murin v Estate of Schwalen, 31 AD3d 1031 [3d Dept 2006]).

Initially, the issue for the Court to consider is whether the journal entries made in the books of Cappelli Enterprises were "conveyances" as that term is defined by the DCL. If the journal entries are considered "conveyances", the next issue is whether the evidence demonstrates that such conveyances were fraudulent pursuant to DCL 273, 273-a, or 276.

A. Conveyances

A necessary element of a cause of action pursuant to Debtor and Creditor Law §§ 273, 273-a and 276 is a "conveyance" (State Farm Ins. Co. v Shanley & Schwartz, Inc., 111 AD3d 918, 919 [2d Dep't 2013]). A "conveyance" is defined as "every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or incumbrance" (Debtor and Creditor Law § 270).

Here, the evidence adduced at trial fails to establish that the journal entries on the books of Cappelli Enterprises were conveyances as that term is defined in section 270 of the Debtor and Creditor Law. The testimony establishes that the journal entries never conveyed anything as there [*10]was no payment of money, no assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property. The evidence is uncontroverted that Cappelli Enterprises never executed any written release to the individual entities; Cappelli Enterprises merely made journal entries writing off the receivables as uncollectible or bad debt. These journal entries do not constitute a conveyance. Cappelli Enterprises' right and ability to pursue collection of the receivables was not affected by the journal entries. In fact, Mr. DeGraw, petitioner's expert, testified that it was good accounting practice to write off the receivables. Indeed, Mr. DeGraw further testified that writing off a debt does not mean that a release of the debt was provided and that writing off bad debt which is then subsequently collected "happens all the time." Moreover, whatever rights petitioner had as an unsecured judgment creditor to pursue receivables owed to Cappelli Enterprises were not affected by the journal entries.

Inasmuch as the journal entries were not "conveyances" as defined by the statute, petitioner's claims under the Debtor and Creditor Law fail.

B. Fair Consideration

Even if the journal entries can be considered "conveyances" under the Debtor and Creditor Law, petitioner failed to demonstrate that the conveyances were made without fair consideration [FN6] . The burden of proving lack of fair consideration is upon the party challenging the conveyance (Joslin v Lopez, 309 AD2d 837, 838 [2003]).

Fair consideration requires that "the exchange not only be for equivalent value, but also that the conveyance be made in good faith" (Ede v Ede, 193 AD2d 940, 941-942; see Debtor and Creditor Law § 272; Murin v Estate of Schwalen, 31 AD3d 1031 [3d Dept 2006]). Fair consideration exists "when in exchange for such property or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied" or "[w]hen such property, or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property, or obligation obtained" (Debtor and Creditor Law § 272; see Matter of BSL Dev. Corp. v Aquabogue Cove Partners, 212 AD2d 694, 695-696). "[T]he good faith of both transferor and transferee is stressed as an indispensable condition in the definition of fair consideration under either branch of the statutory language" (Stout St. Fund I, L.P. v Halifax Group, LLC, __ AD3d ___, 2017 NY App. Div. LEXIS 1566 [2d Dept Mar. 1, 2017] citing Julien J. Studley, Inc. v Lefrak, 66 AD2d 208, 213).

Petitioner failed to submit any evidence at trial of the value of the receivables that were written off by Cappelli Enterprises. The evidence demonstrates that Cappelli Enterprises made internal journal write-offs of receivables it deemed to be uncollectible. No consideration was received for these write-offs from the individual companies because Cappelli Enterprises never [*11]released the individual companies from the debt.

Petitioner cannot prove the receivables that were written off were "released" for less than fair value because petitioner has not submitted any evidence of the fair value of the receivables. Mr. Dannenbaum testified that the 2009, 2010, and 2011 tax returns did not reflect the true value of the assets listed. The tax returns reflected the book value or the carrying value that was on the books and records of the company, not the market value. With respect to the 401(k) receivables, Mr. DeGraw, petitioner's expert, did not review the balance sheets for New Roc Management, Summit Property Management, George A. Fuller, Fuller Development Company, or Cappelli Sales and Marketing - all the entities that had the obligation to pay the 401(k) receivables back to Cappelli Enterprises. Thus, Mr. DeGraw did not know the financial condition of these companies in 2010. However, Mr. DeGraw admitted that there was no market for the receivables, i.e. no one was going to buy them.

As to the fixed assets, Mr. DeGraw testified that the balance sheet for 2009 indicated the book value not market value of the assets. There was no indication of the market value of the fixed assets from the balance sheet (see generally Matter of Abreu v Barkin & Assoc. Real Estate, LLC, 136 AD3d 600, 601 [1st Dept 2016] [holding that petition should have been denied as to fraudulent conveyances where petitioner failed to show that $20,000 was not a "fair equivalent" for the items sold]).

Furthermore, the evidence supports a finding that the journal entries were made in good faith. The testimony establishes that in 2011, Cappelli Enterprises was attempting to clean its books and accurately reflect its financial condition to its lenders. In fact, petitioner's own expert confirmed that evaluating accounts and balances so that they properly reflect the economics is appropriate and that it is very typical at the end of the year, prior to doing tax returns to clean up the books.

The Court finds Mr. Cappelli's testimony credible in this respect. With respect to the memos and the journal entries made, Mr. Cappelli testified that because there was debt for approximately $800 million, he was in the middle of working out solutions and trying to figure out how to get the maximum dollars to the lenders. He was focused on making sure the balance sheets and financial condition was accurately portrayed.

Accordingly, the Court finds that even if the journal entries were conveyances, the evidence demonstrates that such conveyances were made in good faith and there is no evidence to support a finding of lack of fair consideration.

II. Actual Fraud Pursuant to DCL 276

Debtor and Creditor Law 276 requires proof that the transferor actually intended to "hinder, delay, or defraud" any present or future creditors (Debtor and Creditor Law § 276; see Kreisler Borg Florman Gen. Constr. Co., Inc. v Tower 56, LLC, 58 AD3d 694, 696 [2009]; Matter of CIT Group/Commercial Servs., Inc. v 160-09 Jamaica Ave. Ltd. Partnership, 25 AD3d 301, 303 [2006] quoting Berner Trucking v Brown, 281 AD2d at 925; Zanani v Meisels, 78 AD3d 823 [2d Dept 2010]). The burden of proof to establish actual fraud under Debtor and Creditor Law § 276 is upon the creditor who seeks to have the conveyance set aside and the standard for such proof is clear and convincing evidence (see Matter of U.S. Bancorp Equip. Fin., Inc. v Rubashkin, 98 AD3d 1057 [2d [*12]Dept 2012]; Marine Midland Bank v Murkoff, 120 AD2d 122, 126 [1986]).

In accordance with all the foregoing reasons, petitioner failed to prove by clear and convincing evidence that Mr. Cappelli or Cappelli Enterprises actually intended to hinder, delay or defraud any creditors.

III. Piercing the Corporate Veil

A party seeking to pierce the corporate veil must also establish "that the owners, through their domination, abused the privilege of doing business in the corporate form" (Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 142 [1993]; see Gateway I Group, Inc. v Park Ave. Physicians, P.C., 62 AD3d 141 [2009]). The factors to be considered in determining whether the owner has "abused the privilege of doing business in the corporate form" include whether there was a "failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use" (Millennium Constr., LLC v Loupolover, 44 AD3d 1016, 1016-1017 [2007]; see Gateway I Group, Inc. v Park Ave. Physicians, P.C., 62 AD3d 141] East Hampton Union Free School Dist. v Sandpebble Bldrs., Inc., 66 AD3d 122, 126-127 [2d Dept 2009]).

Petitioner failed to show that Mr. Cappelli did not observe the corporate formalities. In fact, the evidence demonstrates that corporate formalities were observed. Moreover, inasmuch as petitioner failed to establish that Mr. Cappelli committed a fraud or wrong against it, there is no basis for piercing Cappelli Enterpries' corporate veil and requiring Mr. Cappelli to satisfy the judgment (see generally Matter of Town of Southampton v Chiodi, 75 AD3d 604 [2d Dept 2010]).



Conclusion

Based upon the foregoing, the petitioner failed to demonstrate that respondents violated DCL 273, 273-a, or 276. Accordingly, the petition is DISMISSED in its entirety.



Dated: May 2, 2017

White Plains, New York

________________________________________

HON. WILLIAM J. GIACOMO, J.S.C. Footnotes

Footnote 1: Mr. Cappelli testified that he personally guaranteed all the construction loans his companies received from the Bank of Scotland, Canadian Imperial Bank of Commerce, and Union Labor Life Insurance Company.

Footnote 2:Fuller Development is a development company that would find and secure properties.

Footnote 3:George A. Fuller Co. is the construction company that was performing all of the actual construction work.

Footnote 4:Summit Property Management runs the completed projects such as the City Center project in White Plains.

Footnote 5:Cappelli Sales sells the condominiums at the Ritz Carlton in White Plains.

Footnote 6:There is no dispute that Cappelli Enterprises was a defendant in an action for money damages at the time the journal entries were made, nor is there any dispute that the 2013 judgment has not been satisfied (see Debtor and Creditor Law 273, 273-a).



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