Skip to main content



United States of America v. Chang

2006 WL 757823 (U.S. Dist. Ct. D. N.J. 2006) (Unpublished)

CORPORATIONS; VEIL PIERCING—Where the conduct alleged to justify piercing the corporate veil is that a corporation is a “sham” or “facade,” a finding “akin to fraud” is necessary.

The Small Business Association (SBA), an agency of the United States of America, held two judgments against a building owner. The building owner entered into a contract to sell its building. Prior to the sale, the building owner granted mortgages on the building in favor of his creditors. After the close of the sale, two other companies received wire transfers out of the proceeds of the sale. Subsequently, those two companies transferred money by wire to members of the building owner’s family for consideration. The SBA filed a complaint seeking to recover those monies from the family members.

In front of the District Court, the SBA argued for a reverse piercing of the corporate veil under the theory that the other two companies were merely alter egos of the building owner. As such, the SBA sought to impose liability on those two entities for the obligations owed by the building owner.

To decide whether a debtor corporation is little more than a legal fiction, Courts in the Third Circuit consider many factors, including the following: its gross undercapitalization, its failure to observe corporate formalities, nonpayment of dividends, insolvency, the siphoning of funds from the debtor corporation by the dominant stockholder, the nonfunctionality of its officers and directors, the absence of corporate records, and whether the corporation was merely a facade for the operations of its dominant stockholder. Here, Court also pointed out that where the conduct alleged to justify piercing the corporate veil is that a corporation is a “sham” or “façade,” a finding “akin to fraud” is necessary.

The SBA argued that the other two companies had established their alter ego status by their own admission when they failed to respond to requests for admissions by the SBA. Federal Rule of Civil Procedure 36(a) provides that any matter in a request for admission is deemed admitted unless denied or objected. Thus, the Court found that the other two companies were alter egos of the building owner because the SBA’s requests for admissions determining the other companies status were unanswered and, thereby, deemed admitted. Furthermore, the Court’s finding was bolstered by the family member’s acknowledgment, in their depositions, that the wire transfers were, in fact, coming from the building owner and, therefore, the family members implicitly admitted that the entities were acting by and through the building owner.

Turning to the fraudulent transfer claims pursuant to New Jersey law, the SBA was required to demonstrate that the transfers were made after the building owner’s obligation to the SBA arose, that the building owner made the transfers without receiving a reasonably equivalent value in exchange, and that the building owner was insolvent at the time of the transfers or became insolvent as a result of the transfers.

First, the Court found that the judgment against the building owner arose before any of the transfers were made.

Second, although the admissions deemed made by the building owners family members stated that the transfers were made without receiving consideration in exchange, those statements were contested by the family members who alleged that the transfers were made in satisfaction of an antecedent debt owed by the building owner, in particular to satisfy a divorce settlement to pay for their college expenses. The divorce settlement agreement required the building owner to pay for college expenses “commensurate with his ability.” The Court, however, found that because the building owner was insolvent at the time of the transfers, he didn’t have the ability to pay, and he therefore didn’t owe an antecedent obligation to his family members. Furthermore, the family members conceded that they failed to respond to the SBA’s request for admission, but argued that they were under no obligation to answer the question of whether they provided any consideration for the transfers. The Court disagreed, finding that the family member’s refusal to answer the request for admissions was in contravention of the federal court rule and finding that the statements that the transfers were made for no consideration were deemed admitted.

Lastly, the SBA argued that the building owner was insolvent at the time of the transfers. The SBA pointed to the statutory definition of insolvency, i.e., “a debtor who is generally not paying his debts as they become due is presumed to be insolvent.” In light of the building owner’s deposition and the failure of his family members to present evidence to the contrary, the Court found that there was no genuine issue of material fact as to the building owner’s insolvency at the time of the transfers.

Thus, the Court concluded that the SBA provided sufficient evidence to demonstrate an absence of genuine issues as to material facts as to each of the elements of Fraudulent Transfer Act entered judgment against the family members for the value of the transfers in accordance with New Jersey statutory law.


MEISLIK & MEISLIK
66 Park Street • Montclair, New Jersey 07042
tel: 973-783-3000 • fax: 973-744-5757 • info@meislik.com