Opinion
No. 043523–2009.
07-01-2014
VIVIR OF LI, INC, f/k/a Opus Vivir, Inc, Plaintiff, v. John EHRENKRANZ and Andra Ehrenkranz, Defendants. John Ehrenkranz and Andrea Ehrenkranz, on Behalf of themselves and all other Persons Similarly Situated as Beneficiaries with Claims for Work and Materials Supplied for the Project, Counterclaim Plaintiffs, v. Julian Boylan, Counterclaim Defendant.
Sam P. Israel, Esq., Sam P. Israel, PC, New York, Attorney for Plaintiffs. Michael P. Bowen, Esq., Kasowitz, Benson, Torres & Friedman LLP, New York, Attorney for the Defendant.
Sam P. Israel, Esq., Sam P. Israel, PC, New York, Attorney for Plaintiffs.
Michael P. Bowen, Esq., Kasowitz, Benson, Torres & Friedman LLP, New York, Attorney for the Defendant.
Opinion
EMILY PINES, J.
The Defendants/Counterclaimants in this action, John and Andra Ehrenkranz (“the Ehrenkranzs” or Defendants), having obtained a jury verdict in their favor in connection with the construction of their residence against Opus Vivir, seek to pierce the corporate veil of such entity in order to enter the Judgment they have filed against the corporation's owner, Julian Boylan. Upon the consent of counsel, following a jury trial on the dispute between the Ehrenkranzs and Opus Vivir, the issue of corporate veil piercing was submitted to the court for determination.
It is the Ehrenkranzs' position that Julian Boylan fraudulently dissipated all assets of Opus Vivir toward the latter part of 2008, when he was aware of a dispute with the Defendants, thereby shielding himself from any potential judgment. It is their position that Julian Boylan deliberately abused the corporate form to cause them harm. They argue that the corporation was never adequately capitalized; that the corporation commingled funds attributable to the Ehrenkranz job with funds from other jobs run by Julian Boylan's brother and a corporation he owns, MHR; that Julian Boylan used corporate funds for personal purposes; that Julian Boylan took $350,000 out of the corporation immediately before closing the corporate doors in order to repay himself a loan for which there are no source documents; and that Julian Boylan made no effort to maintain sufficient documentation to provide the Ehrenkranzs with an appropriate opportunity to present their claim.
Julian Boylan takes the position that Opus Vivir maintained appropriate corporate formalities and that all the payments that were made toward the end of 2008 were appropriate and properly documented. In fact, he argues that no funds were commingled; rather Opus Vivir paid all of its creditors and had funds to do so when such debts became due. When these properly documented debts were paid, according to Julian Boylan, all the correspondence demonstrates that while he believed he had a claim against the Ehrenkranzs, they had not asserted any monetary claim against Opus Vivir. These payments, according to Julian Boylan, were all to satisfy appropriate corporate obligations including documented loans. He argues, in addition, that there is no evidence of a required showing of fraud.
Michael Mingione testified as an expert in the field of forensic accounting on behalf of the Ehrenkranzs. He set forth that he has been a practicing certified public accountant for thirty years, examining closely held businesses with a significant concentration in the construction industry. Although Mr, Mingione had not yet had access to the QuickBooks files for Opus Vivir, Inc. prior to the hearing, he was given the documents on the first day of the hearing and the Court adjourned the completion of his testimony for over two months to grant him the opportunity to review these documents and to determine whether they supported his conclusions that had been based on other documents which he had reviewed. He described the QuickBooks system as an accounting program through which a business can track its costs, expenses and revenues. He stated that construction contractors often use it in order to track their expenses and revenues on a per job basis.
As Mr. Mingione had not been provided with these documents before the first hearing date, he testified that he based his original analysis on bank statements and cancelled checks of Opus Vivir for the years 2006–2008. With that limited information, he attempted to create a QuickBooks-like general ledger for the corporation. He also reviewed the company's tax returns and profit and loss statements and a balance sheet prepared by Shine & Company, the corporation's accounting firm. According to the witness, a review of the corporate tax returns shows that the initial corporate capitalization consisted of $100,000 recorded in 2003 as $1000 in capital and $99,000 as a loan. He was unable to determine whether those amounts came from Julian Boylan or his brother Dmitri Boylan, the two original shareholders. However, he found that in 2004, Dmitri was removed as a shareholder and thereafter no more than $1,000 was ever classified as corporate capital. The witness further stated that in 2004, there were a series of deposits listed as from Dmitri Boylan that totaled $460,000, initially recorded as income and then reclassified as loans from Dmitri to Opus Vivir. He could not ascertain from the documents whether these loans were ever repaid; however, the liability is set forth on the balance sheet as of 2004 and after repayment of some of these amounts, by the end of 2005, the loan account for Opus Vivir was reduced to $159,000. He then stated that by the end of 2005 the company had negative equity of $111,000 principally, in his opinion, financed by Dmitri Boylan. The amount of $1000 was the capital account which the witness stated remained through the end of 2008, the time by which Julian Boylan had stopped working on the Ehrenkranz job through Opus Vivir. Thus, he opined that the company was thinly capitalized since, as work progressed and funds came in, whether from loans or revenue, it was immediately spent. Therefore, at the end of any particular year he reviewed, there were never any meaningful monies in the Opus Vivir bank accounts; and through 2006, 2007 and 2008, there were many instances where the corporate account was overdrawn.Mr. Mingione stated that it was very unusual for a general contracting company to have an amount of $1000 paid in capital year after year; and that Opus Vivir was significantly undercapitalized, requiring it constantly to borrow from a Bank of America line of credit to cover its overdrafts for the relevant years.
Mr. Mingione testified that his review of Opus Vivir bank accounts from August through December of 2008 demonstrate withdrawals of substantial funds. These included a payment of $350,000 from the corporation to Julian Boylan which reflected that it was repayment of an alleged loan, but no source documents existed to determine how much money Julian Boylan had, in fact, loaned to the corporation. In addition, the asserted repayment of the $350,000 loan was accomplished just one day after Dmitri Boylan wired $326,127 into the account. In 2008, he found five or six deposits from Dmitri Boylan totaling approximately $526,000, $300,000 of which the accountants reclassified as a loan. Thus, he stated it appeared that there was a commingling of loan proceeds from Dmitri and Julian Boylan all placed in the same place without explanation. The only indication Mr. Mingione found backing up Julian Boylan's alleged loans to the corporation was a wire transfer in the amount of $75,000 from Julian Boylan in 2006. In 2006 and 2007, the corporate bank records show a series of checks made payable to Julian Boylan in the amount of $110,000. In addition, in December 2008, just before Opus Vivir allegedly “closed its doors,” Mr. Mingione found payments to Julian Boylan of $80,000. Indeed, the witness stated that even if he were to credit Julian Boylan with the funds that he claimed he loaned Opus Vivir, his withdrawals in 2008 left a debit balance of $65,000. Thus, the witness opined that Julian Boylan removed more money than even he claimed he loaned to the corporation.
In his review of the Opus Vivir bank balance at the end of 2008, Mr. Mignone stated that in early December, there was a balance of $15,005.00; that there were incidental deposits of $1000 and $27; and that the one large deposit was that of $226,938 from the Ehrenkranzs. From those funds, Julian Boylan made a payment to his subcontractor, Anderson Brothers of $77,729; payments to himself of $80,000; payments of $30,730 for a Bank of America line of credit; $6561 to GE Capital to pay the balance of a loan on a Bobcat; $11,383 to pay off the balance of a loan on a Toyota Land Cruiser; payment of $10,000 to Patrick Pools and two payments on bills for property owned by Dmitri Boylan. In addition, he found a payment, which was a repetition of a monthly payment for life insurance. When all of these checks cleared by January 2009, Opus Vivir had a remaining bank balance, according to Mr. Mingione, of zero.
Mr. Mingione also created his own recap of a job cost profit and loss summary. Although he was basically able to perform this function with regard to the Ehrenkranz home construction, he stated that it was practically impossible to do the same on the several other jobs that Opus Vivir was constructing because the information he had been provided with before the first day of trial did not specify the jobs for which income came in and expenses were paid. However, he set forth that based on the records available, he found that $3,024,000 was received for the Ehrenkranz work and that after subtracting out costs of labor and materials for construction, the gross profit generated from that job amounted to $1,394,000. For the other jobs, he found construction costs of $52,000 for a property labeled 25 Sandpiper (owned by Julian Boylan); $440,000 in costs for 56 Route 104 and $369,000 expended for 570 Dune Road, both owned by Dmitri Boylan. When he looked at monies coming in that were not from the Ehrenkranzs, he stated that they were insufficient to cover the other construction going on by Opus Vivir at these locations. For 2008 alone, Mr. Mingione found that Opus Vivir collected a gross profit on the Ehrenkranz construction of $780,000, and that work was still being done on Route 104 ($175,000) and 570 Dune Road ($64,000). Yet, as stated previously, the bank account was completely exhausted following the payments set forth above, many of which went, as stated to pay Julian Boylan, with no source proof of any actual loans other than the $75,000 in 2006.
On review of the accountants' work papers, Mr. Mingione stated he saw Opus Vivir sustained a loss in the years reviewed. Although money coming in from Dmitri Boylan was in each instance initially posted as revenue, it was then taken out of revenue and posted as a loan. The witness stated that this kind of alteration would generally only come from instructions by the client. Based on the witness's review of the Opus tax returns, he stated that the company paid no taxes in the years 2003 through 2007. In addition, he stated that the tax returns contained a major error in the 2007 and 2008 tax years because they failed to report the true gross revenues and expenses; rather, they labeled the difference between these two figures as the “revenue” of the company. Although the witness stated that the taxes owed might have been the same, whether these figures were reported or not, he still believed the error was significant because it kept from the IRS significant figures in excess of $1,000,000 that Opus Vivir was claiming to be legitimate business expenses.
Finally, Mr. Mingione stated that he never found a Certificate of Incorporation for Opus Vivir; that there were no records of board resolutions shown to him; that there were no board resolutions authorizing the borrowing of monies; there were no loan documents in the corporate records he was shown and that although Shine & Co had prepared a Certificate of Dissolution for Opus Vivir, none had been filed with the Secretary of State.
Alan I. Blass testified as an expert forensic accountant and fraud examiner on behalf of Julian Boylan. He also described himself as a forensic accountant—a field in which he has practiced for over 30 years. Mr. Blass spent the first 15 years of his career with the Federal Inspector General and then 7 years with the New York City Department of Investigation. The witness has been a certified fraud examiner since 1992 and stated that he has lectured extensively on the auditor's role in piercing the corporate veil. He set forth that he has testified in the past on cases involving efforts to pierce the corporate veil of construction companies.
Mr. Blass stated that he reviewed Opus Vivir's bank statements for the period beginning January 2006 and ending January 2009, after the company essentially stopped doing business. He was able to identify all of the deposits coming into the corporation from both the Ehrenkranz job as well as from Dmitri Boylan and to identify the expenses related to the Ehrenkranz property versus all other properties that Opus Vivir was working on for the subject period. Mr. Blass did have an opportunity shortly before his testimony to review the corporation's QuickBooks files for the period that the company was in business. From these, he stated he was able to extract the disbursements on the Ehrenkranz job and a copy of a short term loan. Like Mr. Mingione, Mr. Blass reviewed the corporate profit and loss statements and balance sheets for 2006, 2007 and 2008. He reviewed corporate tax returns for 2007 through 2009. According to the witness, QuickBooks is the business standard for most companies and has excellent applications for construction businesses.
Mr. Blass set forth that his review of QuickBooks demonstrated that beginning in 2004 and continuing throughout Opus Vivir's business existence, Julian Boylan loaned the corporation monies in the sum of $730,000 and that as of October 11, 2007 the balance of such loans was $316,000. He stated further that the checks written by Opus Vivir to Julian Boylan for “Loan Repayments” that he reviewed are all accurately reported in the QuickBooks records as loan repayments to Julian Boylan from the corporate entity and that systematic and contemporaneous records were kept of corresponding wires and checks of loans made to Opus Vivir by Julian Boylan as well as the corporation's repayment of the same. He stated that there was evidence that Julian Boylan expended minor amounts for personal items throughout this period, but that in each instance these expenses were offset against his loans. The witness characterized this process as unusually prudent for a small company, stating that special attention was taken to purify corporate expenses to limit them to business expenses alone.
The witness stated that from his review of corporate profit and loss statements and the QuickBooks files, he saw that Opus Vivir maintained its records in such a way that clearly broke out income and expenses on a per job basis. According to the witness, Opus Vivir went beyond the requirements that the IRS sets forth in its 2002–28 revenue ruling, that not only permits a cash method of accounting for small construction companies; but also does not impose the requirement of segregating jobs for such companies with $10,000,000 or less in yearly income. He disagreed with Mr. Mingione regarding segregated accounts for each construction project and set forth that such a requirement is absurd and simply not the practice for small construction companies like Opus Vivir. He stated that the QuickBooks records clearly demonstrate that the corporation kept track of each separate project and far exceeded IRS requirements.
The witness prepared a report detailing, again from QuickBooks, all of the costs allocated for the Ehrenkranz residence. He also was able to calculate net profit on that job, based upon monies coming in and both direct and indirect costs, which he set forth amounted to approximately 15% of the revenues. By reviewing what he called substantial QuickBooks documentation, he found that the profit earned on the Ehrenkranz job was far less than that calculated by Mr. Mingione and was in the realm of $600,000 to $650,000.
Mr. Blass prepared a detailed analysis of the Opus Vivir bank account for the period from January 2007 through January 2009. He looked at all of the deposits and checks, including those relating to the Ehrenkranz job and those that related to properties owned by Dmitri Boylan or one of his corporations. Of the total deposits during this period of $7,202,159.23, the witness stated that he was able to reconcile to the penny this amount. In performing this review, the witness was able to segregate deposits from the Ehrenkranzs, deposits from other properties, loans from Dmitri Boylan and Julian Boylan, bank loans and overdraft protection from the Bank of America. From these records the witness detailed all of the direct expenses attributable to the Ehrenkranz job and separately to all the other properties for which Opus Vivir was performing work. With regard to payments to Macy's or Sleepy's which were raised as an issue by Mr. Mingione, Mr. Blass set forth that these were, in his view, appropriate expenditures as Opus Vivir was in the business of constructing and showing homes to prospective purchasers and such items only helped the homes appear more presentable. The witness also opined that expenditures for life insurance were not improper and are common in small businesses, to permit cash to be available if necessary.
Based upon his review of Opus Vivir's bank records, profit and loss statements and QuickBooks files, Mr. Blass set forth that the corporation was not undercapitalized; that it paid its bills as they became due; that it went beyond IRS requirements in recording revenues and expenses for separate jobs (a rarity for small construction companies); and that the records do not show any unpaid invoices for the period in question. With regard to the repayment of the Julian Boylan loan, the witness noted that the corporation stayed open for four more months and kept its accounts open for five months following this payment, continuing to pay debts to banks, on equipment and to Martin Anderson (its major contractor).
In addition, Mr. Blass opined that many small construction companies were experiencing financial difficulties in 2008 and 2009 and that it was not unusual or inappropriate for Opus Vivir to go out of business in that period, especially after it paid off its outstanding debts that appeared from all the financial records available. He set forth that if a company wanted to stiff its vendors, it would have emptied its bank accounts at the end of December 2008 and not waited for checks such as the one written to Anderson Brothers, to clear. Based on all of the above, Mr. Blass stated that none of the tests in his mind necessary for piercing the corporate veil of Opus Vivir had been met.
Stephen Macaluso, a certified public accountant with Shine and Company, the accounting firm for Opus Vivir from 2003 through 2009, testified as a fact witness. He stated that the QuickBooks files were provided to him each year and were used to provide the corporation's tax returns, and were maintained by Opus Vivir through its bookkeeper, Cindy Robinson. All of the information, other than the bank records that were entered onto QuickBooks, according to the witness, came from Cindy Robinson; therefore, he testified that he was never provided any verification that the loan accounts that purportedly came from Julian Boylan, actually came from Julian Boylan. The witness was aware that there was a journal entry for 2003 that adjusted the capital account of $100,000 and changed it to a $99,000 loan and $1000 capital account. He stated that this instruction came from Dmitri Boylan who set forth to him that these monies were to be utilized against work being done on Dmitri Boylan's properties. The witness also stated that he never saw any loan agreements between either Julian Boylan or Dmitri Boylan and Opus Vivir. The witness set forth that any changes made in the corporate documents concerning shifts between loans and income or reclassifications of the same, were performed at his client's instructions. He also affirmed that the corporation showed losses each year but that such was never discussed by anyone involved with Opus Vivir with his firm. The witness acknowledged that the 2007 and 2008 tax returns probably should have set forth real gross revenues and expenses rather than the difference between the two but he stated, as did Mr. Blass, that the tax impact on the corporation would have been identical.
SUPPLEMENTAL TESTIMONY
As per the stipulation between counsel for all parties, both experts provided follow-up reports which this Court has, as per agreement, admitted into evidence (Court Exhs 3 and 4). These reports were submitted in April 2014 after both witnesses had the opportunity to conduct a full review of the QuickBooks, which was not possible before the prior hearing date.
Michael Mingione reviewed the newly produced QuickBooks computer data files and work papers maintained by Mr. Macaluso. After such review, he stated that he fully adopted and stood by his prior testimony. He reiterated that Opus Vivir never made any profit on any job except for the Ehrenkranz project and that it used such profit for Dmitri/MHR work, resulting in deducted tax losses on those personal projects in violation of IRS Tax Code § 267 and its regulations. As examples, he set forth that in 2006, Dmitri Boylan paid Opus Vivir retroactively; that in 2007, as Ehrenkranz funds came into Opus Vivir, Dmitri Boylan/MHR funds dropped off sharply; and that in 2007 and 2008, underpayments by Dmitri Boylan on his jobs resulted in underpayments to Opus Vivir of $492,357 and $194, 931 respectively. At the same time, Dmitri Boylan recognized a profit of approximately $2,140,000 on the Ehrenkranz purchase. Mr. Mingione, therefore, calculated that Opus Vivir diverted $1,755,061 from the excessive profit on the Ehrenkranz deal.
Mr. Mingione reiterated his view that Julian Boylan used Opus Vivir funds to pay for his personal expenses, including work performed on his personal residence, car payments on his Jaguar, payments to department stores, overpayment of Julian Boylan's pruprorted loan account, and his personal life insurance. He stated that the new records demonstrated that not all of these expenses were set off against Julian Boylan's purported loans. These asserted overpayments amounted to $385,296. He also found that Opus Vivir was used to pay expenses on behalf of other Dmitri Boylan companies, including “Avature–Canada” and “Monstor.com”, which are somehow involved with providing sourcing services for major corporations and leading staffing companies and are not recipients of legitimate expenses for construction companies. During the 2005–2008 period, Mr. Mingione also set forth that he found Opus Vivir listed expenses for attorneys without any indication that these expenses were related to Opus Vivir's work.
Mr. Mingione calculated the economic loss to Opus Vivir as a result of Dmitri Boylan underpaying for work on his projects as well as a result of not being paid for work it performed on Julian Boylan's residence. By applying a mark up of 20% to these costs, he calculated this loss as $1,069,922. The loss from nonpayment for work on Julian Boylan's residence is accompanied by tax returns showing no salary to Julian Boylan for the subject years. In addition, the witness set forth that having a family member (Dmitri Boylan) pay less than market value for material and services of contractors is not permitted under IRC § 267.
Mr. Mingione reiterated his prior claim that Opus Vivir's tax returns for 2005–2008 failed to properly report gross revenue and business expenses. Upon his review of the QuickBooks records he now opined that they demonstrate that in 2007 and 2008, Opus Vivir was not passing through the expenses on the Ehrenkranz job as if they only related to that construction and neither Dmitri Boylan nor MHR paid all the business expenses associated with their jobs nor was there an Opus Vivir effort to pass through all business expenses on those jobs to Dmitri Boylan. As a result, he opined that Opus Vivir evaded reporting the true gross profit percentage to the IRS. Had this been discovered by the corporate accountant, Mr. Mingione stated that it would have uncovered a wrongful income tax scheme.
With regard to the winding down of Opus Vivir in late 2008 and early 2009, Mr. Mingione stated that there was never proper accounting in tax returns or from Julian and Dmitri Boylan regarding the manner in which the final monies were paid out. Thus, he set forth that there was no documentation provided from banks with regard to alleged fixed asset loans that were presumably paid off; there was no accounting for the disposition of assets such as the Toyota Land Cruiser, a Ford F–150 Truck and a Bobcat Loader, which he assumed were provided to Julian and or Dmitri Boylan; that by changing $300,000 in payments from Dmitri Boylan to Opus Vivir from revenue to a liability, Opus Vivir significantly reduced its taxable income, which only inured to Julian Boylan's benefit as sole owner of a subchapter S corporation; that the assertion that Dmitri Boylan ever overpaid for work on his projects is false; that there was no corporate tax return reporting of assets to Julian Boylan upon dissolution of Opus Vivir; and that there was no corporate reporting of the repayment of Julian Boylan's asserted loan to the corporation. Mr. Mingione also reiterated his claim that there was little documentation of the Julian Boylan loans to the corporation, and that by reviewing correspondence there was at least $100,000 more recorded as due Julian Boylan that the contemporaneous correspondence set forth.
Based on all of the above, Mr. Mingione opined that had Opus Vivir been paid solely for the costs it incurred merely on the Dmitri Boylan/MHR projects, it would have remained solvent; that the repayment of $430,000 to Julian Boylan, more than the books themselves showed was owed, contributed to the insolvency; and that the reclassification of the $300,000 in payments from Dmitri Boylan from revenue to a loan merely exacerbated the situation.
Alan I. Blass set forth that he had not had the opportunity before his January 2014 testimony, to review Opus Vivir's QuickBooks software file. Having done so, he prepared several reports itemizing all Opus Vivir's operating expenses from its inception in 2003; a total cost of goods sold; and a detailed description of every project undertaken by the company since its inception. From this further review, he concluded that he observed no financial fraud or indicia of wrongdoing.
Mr. Blass testified that he disagreed with Mr. Mingione's conclusion that the QuickBooks records were not backed up by source documents. Thus, he averred that there were no material discrepancies between the QuickBooks records and what he verified through wire transfers, checks, bank debits and related records. He stated that: 1) nearly every wire transfer that was identified in the bank records was accurately recorded in QuickBooks; 2) the checks written by Opus Vivir to Julian Boylan for “Loan Repayments” were accurately reported in the QuickBooks records as loan repayments, and contemporaneous records were kept of corresponding wires and checks of loans made to Vivir by Julian Boylan as well as the repayments of such loans; and 3) there is no evidence that funds recorded in QuickBooks as being deposited by Julian Boylan into Opus Vivir's bank account were wired to Opus Vivir by Dmitri Boylan or vice versa. He further observed that each Opus Vivir withdrawal and check is accurately represented in the QuickBooks records; and that there exists no report from any company former employee or accountant that the company somehow altered its records. He also stated that he was able to verify that personal expenses of Julian Boylan's were in each instance applied against the loan amounts that the company owed Julian Boylan, evidencing that the corporation made appropriate note of non-business expenses in its records. Moreover, he set forth that he did not come across any significant personal expenses whatsoever and such that existed, in addition to all being properly recorded against Julian Boylan's loans, were consistent with those of small construction companies in size and type that he has reviewed in the past. He opined that when looking to see of a principal treated a company as a personal account, the forensic accountant will look for personal travel expenses, school tuition payments, vacations, non-business owned vehicle payments, mortgage payments, or items such as jewelry, sporting goods, groceries and the like. Mr. Blass found none of those types of expenses in the entire record and certainly not in the period of the Ehrenkranz home construction. He disagreed with Mr. Mingione's testimony that expenses for Pottery Barn, Macy's, Sleepy's and Monster, Inc. were improper. Rather, he opined that these are what one would expect to see in a construction company that builds residences, has employees and owns its own office. He countered Mr. Mingione's view that these were personal expenses. With regard to the assertion that Opus Vivir payments to Dimitri's company, Monster, Inc. and Avature Canada were improper, Mr. Blass countered that: 1) Monster, Inc. is a website used by businesses to recruit workers; 2) there is no evidence that Avature Canada exists; and 3) Avature is not listed on any of the QuickBooks documents as a payee.Mr. Blass took issue with Mr. Mingione's assertion that a construction company of Opus Vivir's size must segregate funds for each project it performs and noted Mr. Mingione's concession in previous testimony that it is not unlawful for such a company to aggregate funds in a single bank account to be used as a funding source for all of its construction projects. In addition, Mr. Blass attached a copy of IRS Revenue Procedure 2001–10 which specifically allows construction companies with under $10 million in sales, such as Opus Vivir, to use the cash method of accounting. Moreover, his review lead him to the conclusion that the Ehrenkranz funds did not, in fact, pay for or subsidize the construction projects performed for Dmitri Boylan or one of his corporations. His analysis concluded that looking at the 2003 through 2009 period Opus Vivir was in existence, the total income from Dmitri Boylan amounted to $6,267,299.55 and that the total costs attributed to Dmitri Boylan construction projects for the same period were $3,056,747.79. He found that Dmitri Boylan's method of payment to the company for his projects did not impair Opus Vivir's ability to perform the Ehrenkranz project and that this is supported by the contemporaneous correspondence during the bulk of that period demonstrating a good relation between the Ehrnekrnanzs and their contractor until the end of the project period. Looking specifically at the 2006–2008 period while construction was ongoing for the Ehrenkranz and Dmitri Boylan projects, Mr. Blass found as follows. In 2006, construction costs for non-Ehrnekranz projects were $1,352,854.95 while income from Dmitri Boylan for that year was $2,093,418.71. The 2007 company costs for non-Ehrnekranz projects were $1,352,854.95 and the total 2007 income from Dmitri Boylan was $859,000. In 2008, the total corporate costs for non-Ehrenkranz projects were $381,477.50 and thus, the total income for the period equaled $3,329,114.71 and construction costs for these non-Ehrenkranz projects totaled $2,973,390.38. Income from Dmitri Boylan to the company was $376,696 .00. He opined, therefore, that the allegation on behalf of the Ehrenkranzs that Dmitri Boylan underpaid Opus Vivir about $700,000 in 2007 and 2008 alone is exceedingly misleading since it is clear that taking the whole picture into account, including the time period for the Ehrenkranz project, Dmitri Boylan paid more that the costs of his projects.
Mr. Blass reviewed Opus Vivir's outstanding liabilities in January 2009, the time when it essentially went out of business, to review whether a flood of claims occurred after the company stopped its operations. He averred that he saw neither emails nor certified letters demanding payment, including any communications to that effect from the Ehrenkranzs.
Mr. Blass stated that he found no evidence of commingling and he commented that Opus Vivir kept contemporaneous records of Julian Boylan's loans and that such are consistent and synchronized with the 2006 through 2009 bank records.
Mr. Blass also disagreed with Mr. Mingione's conclusion that Opus Vivir was insolvent during its operations and undercapitalized from its inception. He repeated that the bank records and QuickBooks demonstrated that the company had ample access to funds and indisputably paid its bills as they came due from 2003 through 2008. In this vein, he set forth that the corporation was approved for its line of credit and maintained it, which would not have been possible if it was truly insolvent or undercapitalized. Moreover, the debt was in his opinion regularly serviced.
With regard to Mr. Mingione's statements that Dmitri Boylan failed to pre-pay Opus Vivir for its projects and that he made “round-number” payments to Opus Vivir whenever the company had cash needs, Mr. Blass stated that there is nothing fraudulent about receiving partial/staggered or round number payments nor does such violate any generally accepted accounting principles. He also offered that several of the Ehrenkranz payments themselves were “round number” payments. He also argues that Mr. Mignone's statement that Opus Vivir deducted a fabricated loss on its tax returns in violation of 26 USC § 267(a) was completely inapposite because that section relates only to the sale or exchange of real property and not sales for construction services.
Mr. Blass asserted that based upon his twenty years of practice as a forensic fraud examiner in the field of examining businesses that dissolve and are left without assets, he sees no meaningful indicia that Opus Vivir was stripped of its assets beginning in August 2008 for the purposes of avoiding a creditor's claims. With regard to the August 2008 $350,000 repayment of the Julian Boylan loan, the QuickBooks files indicate that he loaned the corporation a net of $314,227.00, most of it entering the corporate books in 2005, before the Ehrenkranz project even began; the corporation expended about $240,000 on the project following the loan repayment; and Julian Boylan invested $50,000 in Opus Vivir in October 2008, at a time when the company was completing work on change orders in advance of payment from the Ehrenkranzs. He set forth that Julian Boylan could have requested that Dmitri Boylan wire him those funds directly to avoid any asset infusion; however, the fact that the two did not transact around the corporate entity is further evidence that Julian Boylan was adhering to corporate formalities. Finally, he states that the evidence belies a claim that Julian Boylan was motivated by a desire to abscond with corporate assets to the detriment of its creditors. As set forth in his prior testimony, after receiving the final Ehrenkranz payment in December 2008, Julian Boylan made clear business related payments to subcontractors, vendors, and financial lenders and for corporate construction equipment. It then kept its books open for all these checks to clear. There were no demand letters or lawsuits filed at the time.
A Supplemental Affidavit was also provided to the Court by the accountant for Opus Vivir, Stephen Macaluso (Court's 5). Mr. Macaluso set forth and provided what he claimed were the corporation's profit and loss statements for the period of 2004–2008, because Mr. Blass's reports had been presented on an accrual basis and, therefore, Mr. Macaluso wanted these to be compared to those of Mr. Mingione, who had also prepared such on a cash basis.. He stated that prior to 2007, Dmitri Boylan and MHR were the primary clients of the corporation. He found that the company accounted for its Costs of Goods Sold (“COGS”) comprising the actual costs of construction labor and materials on a per job basis between the relevant years of 2006–2008. However, he also found that the company did not calculate income on a per job basis for the same period. Instead, the revenue coming to Opus Vivir from the Dmitri projects was recorded as “Other Income” and was allocated to all corporate projects. Based upon this review, he found the following. In 2006, the revenue received from Dmitri Boylan projects resulted in a corporate gross profits of $430,225. This gross profit was large enough to cover the unpaid COGS for non-Ehrenkranz projects for the 2007 and 2008 years. He stated that the corporation earned a total gross profit of $719,652 for all projects in 2007–2008, including the Ehrenkranz job. The Ehrenkranz project's gross profit was $1,106,291 for the same period. Therefore, the non Ehrenkranz (or Dmitri Boylan) projects for the same period had direct costs that exceeded income from such projects of $386,639 ($1,106,291–$719,652). By subtracting that excess cost figure from the 2006 gross profit on Dmitri Boylan jobs, Opus Vivir had income in excess of expenses for construction and labor and goods on the Dmitri Boylan jobs of $43,586 ($430,225–$386,639) for the entire Ehrenkranz job years. This figure is separate and apart form a loan received by Opus Vivir in 2008 from Dmitri Boylan in the amount of $300,000. Thus, using the cash method, like Mr. Mingione, Mr. Macaluso disputed Mingione's statement that Dmitri Boylan did not pay for his projects. He also set forth that taking the entire history of Opus Vivir and its costs and income from Dmitri Boylan on the same cash basis, he calculated that the corporation earned total gross profits from non Ehrenkranz jobs of $581,303. Thus, the cumulative annual losses incurred by the company (and noted on corporate tax returns) resulted, in his opinion, from operating expenses and were not, as Mr. Mingione opined, a result of underpayment by Dmitri Boylan with respect to labor and materials.
With regard to Mr. Mingione's belief that the QuickBooks records incorrectly attribute $100,000 more to Julian Boylan than he actually provided, Macaluso's review notes and emails do not indicate such an error.
During a final oral argument, counsel for both the Ehrenkranzs and Julian Boylan presented charts as demonstrations of the issues set forth (Court Exhs 1 and 2). Counsel for the Ehrenkranzs asserted that Mr. Blass miscalculated the profits earned on the Dmitri Boylan work and that if properly viewed utilizing the cash method of accounting, the gross profit on the Dmitri Boylan jobs for the entire period amounted to only $579,000 while the same for the Ehrenkranz job was $1,673,000. It is then asserted that the company finished with a net loss of $17,000. The Ehrnekranzs' exhibit also sets forth that based on its calculations of underpayment for Dmitri Boylan's work, unpaid work on Julian Boylan's home, unpaid personal expenses (including those for whole life insurance, department stores and distribution of company assets, as well as the overpayment of Julian Boylan's loan), an amount of $1,198,000 was improperly diverted over the years of Opus Vivir's existence. The chart also reiterates that the corporate tax returns under reported taxable income and that the lack of source documentation should be the subject of an adverse inference against Julian Boylan in this matter.
Julian Boylan's counsel presented another chart basically reiterating the party's claims that Mr. Mingione's numbers are cherry picked leaving out the years that Dmitri Boylan paid substantial amounts to the corporation, that he improperly added a 20% mark up to the Dmitri projects without any basis therefor, and that he added operating costs as direct costs, again improperly. Julian Boylan's counsel also recapped his expert's view of the Dmitri projects for the 2006–2007 period setting forth that in fact a gross profit was made in addition to $300,000 infused by Dmitri Boylan in additional payments. The Boylan chart also demonstrates that during the period when the Ehrnekranzs claim Julian Boylan was dumping the corporate assets, $50,000 was reinvested in the company on October 15, 2008, again showing that Opus Vivir was advancing funds to pay for the cost of the Ehrenkranzs' change orders. Julian Boylan's counsel reiterated his arguments that the whole life insurance and department store type amounts were proper corporate expenditures for a construction company in Opus Vivir's closely held construction business as were as the amounts set forth for Monstor.com.
DISCUSSION
One of the primary and completely legitimate purposes of incorporating is to limit or eliminate totally the potential personal liability of corporate principals. Bonacasa Realty Co., LLC v. Salvatore, 109 AD3d 946, 972 N.Y.S.2d 84 (2d Dep't 2013). Equity, however, will intervene to disregard the corporate form when the facts presented make such a determination necessary in order to avoid fraud or to achieve equity. Id.; see Matter of Morris v. New York State Department of Taxation and Finance, 82 N.Y.2d 135, 603 N.Y.S.2d 807, 623 NE 2d 1127 (1993). A party seeking the relief embedded in the veil piercing doctrine has the burden of establishing that: “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury.” Matter of Morris v. New York State Department of Taxation and Finance, supra; Millennium Construction, LLC v. Louplover, 44 AD3d 1016, 845 N.Y.S.2d 110 (2d Dep't 2007). The mere fact that a corporation was completely dominated by the owners and acted as their “alter ego” without more, will not suffice to support the equitable relief sought. Matter of Morris, supra; Millenium Construction, supra.
Since the concept of veil piercing is an equitable one, whether it is available will depend in each instance on the facts presented. Millenium Construction, supra. The factors a court must consider include: (1) failure on the part of the entity to adhere to corporate formalities; (2) inadequate capitalization; (3) commingling of assets; (4) and use of corporate funds for personal purposes. Superior Transcribing Services, LLC v. Paul, 72 AD3d 675, 8978 N.Y.S.2d 234 (2d Dep't 2010). An example of a recent court decision upholding the piercing of the corporate veil is found in the case of Flushing Plaza Associates v. Albert, 102 AD3d 737, 958, N.Y.S.2d 713 (2d Dep't 2013). In that case, a corporate tenant defaulted under the terms of its commercial lease; and, therefore, the landlord obtained a judgment against the tenant entity. When a subsequent action was brought against the corporate tenant's sole owner, the evidence demonstrated that he withdrew funds days before the judgment against the corporation and while the lawsuit was pending, essentially rendering the entity judgment proof. In addition, the corporate tenant continued taking money from its subtenants ten months after it stopped making any payments to the plaintiff landlord. Thus, the appellate court affirmed the trial court's finding that the individual exercised his total domination and control over the corporate entity to commit a wrong against the plaintiff. Flushing Plaza Associates, supra.
In another case upholding a trial court's determination to pierce the corporate veil, the Fourth Department affirmed the findings that, inter alia, the director/shareholder of a professional corporation left the corporation's rented property after the entity had stopped paying rent, took corporate clients as his own in a new business, used corporate funds to pay off a credit on which he was personally liable, and issued a check to himself for corporate expenses. A & M global Management Corp. v. Northtown Urology Associates, PC, 115 AD3d 1283, 983, N.Y.S.2d 368 (4th Dep't 2014).
In Bonacasa Realty Company, LLC v. Salvatore, supra, the appellate court affirmed the lower court's refusal to pierce the corporate veil to hold the sole shareholder of a commercial tenant liable for breach of its lease, stating that there was no evidence that domination and control was exercised over the entity in order in order to harm the plaintiff; and, in any case, that a breach of contract, without more, does not constitute the kind of fraud or wrong necessary prior to piercing the corporate veil. 109 AD3d 946, 972 NYS (2d Dep't 2010).
In Goldman v. Chapman, 44 AD3d 938, 844 N.Y.S.2d 126 (2d Dep't 2007), the Second Department reversed the lower court and dismissed a special proceeding brought to pierce the veil of corporate judgment debtor in order to reach its sole officer, director and shareholder. The Court found that although the Petitioner had demonstrated that the individual exercised domination and control over the entity, he failed to establish the second prong of the test demonstrating that such control was utilized to commit a wrong or fraud against the suing party. Id; see also, Superior Transcribing Service LLC v. Paul, 72 AD3d 675, 898 N.Y.S.2d 234 (2d Dep't 2010).
In this case, both parties have submitted substantial complex evidence both in favor of and against a determination to pierce the corporate veil of Opus Vivir, Inc. The thoroughness and competence of both experts makes the decision in this case a difficult one.
Mr. Mingione aptly points out that corporate formalities were not followed and states that he found no records authorizing either corporate borrowing or approving loan documents; that looking in the 2006 through 2007 period, it appeared that Ehrenkranz funds were being utilized to fund the Dmitri Boylan projects; that Julian Boylan did use Opus Vivir funds to pay certain personal expenses; that Opus Vivir evaded reporting its true profit percentages to the IRS; and that in its last few months, Julian Boylan, the sole owner of the corporation, denuded the entity of all funds in order to make payments, including one in the amount of $350,000 to himself which was, at the very least, an overpayment of over $65,000.
Likewise, Mr. Blass testified that the Quickbooks were indeed verified through his review of wire transfers, checks, bank deposits, and other records; that Opus Vivir was permitted by IRS Revenue Ruling 2002–28 to utilize a cash method of accounting, which the corporation did properly, setting forth in its QuickBooks all amounts coming in and being expended on its separate jobs; that reviewing the period of its existence from 2003 through the end of 2008, Opus Vivir received more in funds than it expended on Dmitri Boylan or MHR projects; and that the bulk of the personal funds paid to Julian Boylan over the years of the corporation's operation were in fact applied against his loan amounts and diminished the same.
Mr. Macaluso, utilizing what he termed the same calculation methods as Mr. Mingione, opined that the records are proof that Dmitri Boylan's projects were not paid for by the Ehrnekranzs and that the QuickBooks records did not overstate the amount of Julian Boylan loans to the corporation.
While Mr. Mingione's analysis of various jobs performed by Opus Vivir results in high profits on the Ehrenkranz job and corporate losses on all jobs for Dmitri Boylan or his corporations; Mr. Blass's analysis demonstrates that smaller profits were earned on the Ehrenkranz project than Mr. Mingione set forth and that profits were indeed realized on the Dmitri Boylan constructions. Mr. Blass's general conclusions are supported by Mr. Macaluso. Both experts agreed that Julian Boylan did remove approximately $65,000 more than the QuickBooks indicated he was owed in August of 2008; however, Mr. Blass points out that he reviewed all the correspondence between Julian Boylan and the Ehrenkranzs during the period between the Summer and Winter of 2008, and there is none in which the Ehrnekranzs set forth that they are owed money by Opus Vivir.
Faced with two excellent experts and a corporate accountant on an extremely complex matter, the Court finds that the testimony weighs so evenly that it is required to find that the Ehrnekranzs have failed to meet their burden of demonstrating that they are entitled to the somewhat extraordinary relief requested in the context of piercing the corporate veil. While the Court acknowledges that Julian Boylan exercised dominion and control over the entity, such is not only common in closely held corporations, but is simply not sufficient to apply the remedy sought herein. Again, while the corporate requirements were also often not met vis a vis loan approvals, there are records going back before the Ehrenkranz job was even contemplated, demonstrating that Julian Boylan did loan substantial amounts of funds to the entity. While source documents of amounts of this loan are missing, there are bank records of much of the same and the QuickBooks records, categorized by both experts as typical and appropriate for small construction companies such as Opus Vivir, consistently setting forth loan amounts by Julian Boylan to the corporation. While the entity did not keep the funds from its different jobs in separate bank accounts, its accounting files show that it did separately list all expenses from each separate job over the entire period of its existence. Although the Dmitri Boylan revenues were not job allocated, they were able to be quantified and did exceed costs of goods sold. These records therefore show, in the Court's opinion, that more was received than expended over the years for the Dmitri Boylan jobs. While the Court does find that Julian Boylan expended monies over the years for personal expenses, it also finds credible Mr. Blass's testimony that most of these were utilized to reduce his loan accounts. While Julian Boylan paid himself more than the loan documents and even the QuickBooks records showed he was owed, there was no claim either asserted against him at the time nor was there anything in writing setting forth that one was even contemplated—the writings introduced at trial only relating to Opus Vivir's potential claim against the Ehrenkranzs. While the Court also finds probable Mr. Mingione's opinion that Opus Vivir underpaid its income taxes for years, again, there is no connection between those acts and the corporation's breach of its contract with the Ehrenkranzs. The real distinction between the case law the Court has reviewed which allows veil piercing and the case at bar lies in the “purpose” element of the doctrine. Thus, while the Court agrees with the Ehrnekranzs' excellent expert that Julian Boylan used the corporation for personal expenses and filed questionable tax documents, this is not a case where these actions were done in order to commit a wrong or fraud upon the Ehrnekranzs. It is significant that when the final payments by the corporation were made, the Ehrenkranzs had not written a word in their extensive communications with Julian Boylan, that they had or were even contemplating a claim against the corporate entity.
In addition, the Court agrees with Mr. Blass that the Opus Vivir corporate books and records were actually more detailed than those kept by closely held corporations in the construction business.
Under all of the circumstances, the Court finds that the counterclaim Defendants have failed to sustain the burden of demonstrating their claim for the relief sought. In this regard, the Court also rejects the assertion by the Ehrenkranzs' counsel that Julian Boylan is personally liable for the breach of contract judgment against the corporation under BCL § 1005, which limits corporate distributions to shareholders only after adequately providing for payment of its liabilities. In this case, there were no records of outstanding liabilities to the Ehrenkranzs nor indeed even a writing suggesting one might be coming at some future date at the time that Julian Boylan made the final payments, the substantial bulk of which were not shareholder distributions; but, rather, payment of corporate debts.
Based on all of the above, the Court declines to pierce the corporate veil in order to hold Julian Boylan liable for the Judgment entered against the corporation-Opus Vivir, Inc.
This constitutes the DECISION and ORDER of the Court.