A corporation is a legal entity separate and distinct from its shareholders.  The corporate form generally shields shareholders from personal liability for the corporation’s debts.

medieval crusader knight's shield isolated on white
31281638

However, shareholders cannot incorporate to limit their liability, and then use the corporate form to cover their fraud.  Under such circumstances, a party may seek to “pierce the corporate veil” and hold shareholders personally liable.  Florida courts are generally reluctant to disregard the corporate form and require a showing of improper conduct in the formation or use of the corporation.

To pierce the corporate veil, a plaintiff must prove three factors:

  1. The shareholder “dominated and controlled the corporation to such an extent that the corporation’s independent existence, was in fact non-existent”  and the shareholders were alter egos of the corporation;
  2. The corporate form was used for a fraudulent or improper purpose; and
  3. The fraudulent or improper use of the corporate form caused injury to the plaintiff.

If a plaintiff can prove these three factors, then a court may pierce the corporate veil.  For example, in Eagle v. Benefield-Chappell, Inc., the Fourth DCA held two shareholders personally liable when the corporation was used to fraudulently increase construction costs to result in a higher fee to the corporation.  A court may also pierce the corporate veil where a controlling shareholder causes the corporation to make distributions or otherwise depletes corporate assets for his or her personal benefit while the corporation is unable to pay its debt.

However, in declining to pierce the corporate veil absent a finding of fraud, the Third DCA stated that “mere ownership of a corporation by a few shareholders, or even one shareholder, is an insufficient reason to pierce the corporate veil.”  In a recent opinion, the Third DCA also affirmed that “even if a corporation is merely an alter ego of its dominant shareholder or shareholders, the corporate veil cannot be pierced so long as the corporation’s separate identity was lawfully maintained.”

Other improper conduct that may justify piercing the corporate veil includes commingling funds of the corporation with funds of other corporations, commingling corporate funds with personal funds, utilizing corporate assets for personal use, failing to adequately capitalize the corporation, and using the corporate form to hide assets or otherwise avoid liability.

If a party successfully pierces the corporate veil, the corporation and shareholder will be treated as one person under the law and any acts committed by either the corporation or the shareholder are treated as the acts of both.  Thus, if either the corporation or shareholder is bound by a contract, judgment, or otherwise, both the corporation and the shareholder will be equally bound.

On June 27, a massive ransomware attack now known as “Petya” spread across the globe in a similar fashion to the WannaCry cyberattack in May. In our recent Privacy & Data Security alert, Fox Chief Privacy Officer and Partner Mark McCreary breaks down what we know about the attack, how to address it if your organization falls victim to it, and how to minimize the risks of future attacks:

Petya Cyberattack ScreenshotYesterday’s worldwide cyberattack once again exploited a vulnerability that has been known to experts for many months. These attacks are sure to continue and the best defense is knowledge. Awareness of how malware works and employee training to avoid the human error that may trigger an infection can prevent your organization from becoming a victim.

This latest ransomware variant, referred to as “Petya,” is similar in many respects to the “WannaCry” ransomware that affected hundreds of thousands of computers in mid-May, using the same Eternal Blue exploit to infect computers. The purpose of this Alert is to provide you some information believed or known at this time.

How Is a Computer Infected?

Experts believe the Petya malware is delivered in a Word document attached to an email. Once initiated by opening the Microsoft Word document, an unprotected computer becomes infected and the entire hard drive on that computer is encrypted by the program. This is notably different from WannaCry, which encrypted only files.

Once Petya is initiated, it begins seeking other unprotected computers in the same network to infect. It is not necessary to open the infected Microsoft Word document on each computer. An infection can occur by the malware spreading through a network environment.

To read Mark’s full discussion of the Petya attack, please visit the Fox Rothschild website.

Mark also notes that “I continue to stress to clients that in addition to hardening your IT resources, the absolute best thing your business can do is train employees how to detect and avoid malware and phishing.  In-person, annual privacy and security training is the best way to accomplish this.”

46059778 - letters flying into mail box

You have been served” – the famous phrase uttered by process servers everywhere, may never be heard by a bankruptcy defendant.

Why?

Well, Bankruptcy Rule 7004 bestows the rare privilege of nationwide service of process by FIRST CLASS U.S. MAIL of a Summons and Complaint on defendants (with a few exceptions).   In bankruptcy cases, a Summons and Complaint that comes in the mail is just as valid as if a process server knocked on your front door, handed you the lawsuit, looked you in the face and said, “you have been served.”

46795384 - shock.

Bankruptcy adversary proceedings move quickly, and generally an adversary defendant only has 30 days after the date of the issuance (not mailing, not receipt) of the Summons to respond to the Complaint.  A Scheduling Order often accompanies the Summons and Complaint and outlines all the substantive deadlines for discovery and trial leading up to the pretrial conference, which is generally within 90 days.

Accordingly, if you are served with a Summons in a bankruptcy case, notifying you that an adversary proceeding has been filed against you, best take it seriously and seek out legal advice from a qualified bankruptcy attorney as soon as possible!


  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

Can a foreclosure sale be held when interrelated counterclaims remain pending?  Florida’s Second District Court of Appeal recently addressed this issue in DeLong v. Paradise Lakes Condominium Association, Inc., 2nd DCA Case No. 2D16-547 (Fla. 2nd DCA Feb. 22, 2017).

50301009 - final decision stencil print on the grunge white brick wall

In DeLong, a condominium association was granted a summary final judgment of foreclosure.  However, the condominium Owner’s interrelated counterclaims had not been resolved.  Accordingly, the appellate court found that the Association’s summary final judgment was neither final, nor appealable.

65888487 - legal cartoon about having a hearing too early in the morning.

The Second DCA, treating the appeal as a proceeding for writ of certiorari, concluded that the trial court

departed from the essential requirements of law when it authorized the sale of the property prior to the rendition of an appealable final judgment … .

DeLong should serve as a reminder that a foreclosure sale may not proceed until a final appealable order has been entered and all interrelated claims have been resolved.

12291259 - house and dollar notes on scale

The recent decision in the Olivares case [2016 WL 6810716 (Bankr. S.D. Fla. 2016) reminds lenders of the perils of being a second mortgage holder where equity is questionable.

A lender that held a second mortgage on real property owned by the chapter 13 debtor objected to the debtor’s proposed plan on the basis that the debtor’s plan was filed in bad faith, not feasible and the debtor proposed to pay the first mortgage holder with out participating in the mortgage modification mediation program.  The debtor filed a motion to value the property and determine the secured status of the lender.

Unfortunately for the second mortgage holder, the decision of the Court came down to one issue, the determination that there was no equity in the property in excess of the first mortgage.  The lender conceded that there was no equity in the debtor’s real property.  Specifically, the property was valued at $459,544.00 and the amount owed on the first mortgage is $823,372.03.

The second lender attempted to make several objections that could have been raised by the first mortgage holder, but the Court found that the second mortgage holder could not argue objections belonging to a third party, including: 1) the debtor’s inability to meet the payment requirements of the first mortgage, 2) the veracity of the family members promises to help fund the first mortgage payments, and 3) bad faith for failure to participate in the MMM program.
The second mortgage holder also argued that the debtor could not strip off liens where the first mortgage is being “treated outside the plan”, but failed to cite any legal authority for their argument.
As a result, the Court found that the plan was proposed in good faith, confirmable, and the motion to value and strip off its lien should be granted.  The only solace for the second mortgage holder is that the lien strip is conditional upon the debtor’s successful completion of all payments under her chapter 13 Plan.

  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

41726030 - redeem word on an orange ticket to illustrate special offer redemption or contest winning entry

What is “redemption” in bankruptcy?

  • Redemption is an option available to Chapter 7 individual debtor (not corporations or business entities).
  • Redemption may allow the debtor to keep personal property (intended for personal, family, or household use) which is acting as collateral for a secured debt.
  • The most common example of personal property may be redeemed is an automobile.
  • The personal property is redeemed by paying the lienholder the amount of its allowed secured claim in full by one lump sum payment.  However, the road to redemption is oftentimes too difficult for debtors to travel because of the lump sum payment requirement.

60746631 - redemption written on the road

How does “redemption” work?

Suppose the debtor files for bankruptcy and still owes $20,000 to ABC Bank on her Honda Civic but, the car is now only worth $12,000.  In this scenario, ABC Bank has a debt secured by the vehicle up to its value ($12,000) and $8,000 that is essentially unsecured.

During the redemption process, the debtor can generally wipe out the unsecured portion (in this example, $8,000) by paying ABC Bank a lump sum of $12,000.  If the debtor chooses redemption and can follow through with payment, the debtor will own the car free and clear once the debtor receives her discharge.

If redemption is not an option, the debtor may be able to keep her Honda Civic by “reaffirming” the debt instead.  In that case, the debtor signs a “reaffirmation agreement” with ABC Bank prior to discharge where, the debtor agrees to again become legally obligated to pay all or portion of the entire debt owed by the debtor on the Honda Civic to ABC Bank, essentially excepting the debt from discharge.

Yet another option would be for the debtor to surrender her Honda Civic to ABC Bank.  In this case, assuming the debtor receives her discharge, she will no longer by liable for any debt to ABC Bank on the Honda Civic.

The decision whether to surrender, redeem, or reaffirm in bankruptcy is a difficult one and any debtor facing these issues will want to consult an experienced bankruptcy attorney before making any election.


  Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP. Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation. You can contact Heather at 561-804-4419 or hries@foxrothschild.com.

 

Florida’s Second District Court of Appeal recently addressed an interesting question concerning whether Florida’s Consumer Collection Practices Act applies to an action seeking a deficiency decree. In the situation presented, the appellate court answered the question in the negative.

31281620 - calendar and blue pushpin. mark on the calendar at 30.

In Dyck O’Neal, Inc. v. Kami Ward, Fla. 2d DCA Case No. 2D15-2989 (Fla. 2nd DCA Jan. 27, 2017), the 2nd DCA was presented with the issue of whether compliance with Fla. Stat. § 559.715, a provision of Florida’s Consumer Collection Practices Act (“FCCPA”) that requires written notice of assignment of a consumer debt at least 30 days before any action to collect that debt, is required in a deficiency action following a foreclosure judgment. Specifically, after a final judgment of foreclosure was entered against Ms. Ward and the property was sold at auction for $100, the judgment was assigned to Dyck O’Neal, Inc., which then filed a deficiency action against Ms. Ward. Ms. Ward defended by arguing that she had not received notice of the assignment at least 30 days before the deficiency action was filed. The trial court agreed and granted summary judgment in her favor.

31728133 - urgent notice words in 3d letters delivered to a green mailbox for important information mail, message, alert or critical correspondence

The appellate court reversed, finding that FCCPA (Fla. Stat. §§ 559.55 – 559.785) did not apply because a deficiency action is not an action to collect a consumer debt on a note, but rather an action to obtain a monetary judgment on a foreclosure judgment.

Because a deficiency action is not an action to collect consumer debt, section 559.715’s [notice] requirement … does not apply.

The Second District’s opinion provides guidance to lenders as to the applicability of FCCPA to deficiency actions and precludes the assertion of this defense in such cases.

 

In my May 26th post, I raised several questions that unsecured creditors in any Chapter 11 case should know the answers to and take action where appropriate.  One of those questions is “Am I entitled to priority payment?”  This is also important to answer in a Chapter 7 case.

12222184 - priority rubber stamp

Your delinquent customer told you not to worry, you were first in line for payment, and that payment would be coming soon.  Next thing you know, your customer has filed a bankruptcy and you have not been paid.  As discussed in my June 24th post, you obtain a proof of claim form and are prepared to fill it out and file it before the deadline, but then you get to the last question, number 12 – “Is all or part of the claim entitled to priority under 11 U.S.C. § 507(a)?”

Your first impulse is to check “yes” – of course you are entitled to priority – the debtor told you that you were first place, a VIP for payment.

37035389 - vip abstract quilted background, diamonds and golden letters with crown.

NOT so fast…most creditors’ claims are “general” unsecured claims, and not entitled to priority treatment.  Take a breath and ask yourself, does my claim fit into any of the following categories:

  • domestic & child support obligation;
  • salary, wages, or benefits owed to an employee;
  • deposit of less than $2,850.00 towards the purchase, lease, or rental of property or services for personal, family, or household use;
  • claim for contribution to an employee benefit plan;
  • claim of grain farmer or fisherman relating to storage and processing facility;
  • certain unsecured taxes or penalties owed to the government;
  • claim for death or personal injury resulting from operation of a motor vehicle or vessel by an intoxicated debtor;
  • customs duty arising out of the importation of merchandise; or
  • claim based on commitment by the debtor to a Federal depository institutions regulatory agency to maintain the capital of an insured deposition institution.

If you fall into one of these categories, GREAT, but chances are that you DO NOT!  Resist the urge to check “other”!  Check the “No” box, sign the bottom of the form and send it in.

Feeling angry and/or depressed?  If your customer is in Chapter 11, you may want to consider joining a support group – perhaps the “Official Committee of Unsecured Creditors” – fondly referred to as the OCC or GUCCs.  I’ll be back to discuss that in a future blog post!


Heather L. Ries is an attorney with the Financial Restructuring and Bankruptcy Department of the law firm of Fox Rothschild LLP.  Heather focuses her practice in matters related to bankruptcy, creditors’ rights, commercial workout and foreclosure disputes, and commercial litigation.  You can contact Heather at 561-804-4419 or hries@foxrothschild.com.