Pergament v. Precision Sounds DJ's, Inc. et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
--------------------------------------------------------x 	For Publication
In re:
Case No.: 8-04-82696-478
Madelon Oko,
Chapter 7
Debtor.
--------------------------------------------------------x
Marc A. Pergament
Adv. Pro. No. 8-05-8928-478
Plaintiff,
-- against --
Precision Sounds DJ’s, Inc. and
Douglas OKO,
Defendants.
--------------------------------------------------------x
MEMORANDUM DECISION
Appearances:
Weinberg Gross & Pergament LLP
Attorneys for the Chapter 7 Trustee
By: Marc A. Pergament, Esq.
400 Garden City Plaza
Garden City, New York 11530
Kalb & Rosenfeld PC
Attorneys for Defendant Douglas Oko
By: Robert C. Reichelscheimer
283 Commack Road
Commack, New York 11725
Hon. Dorothy Eisenberg, United States Bankruptcy Judge
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Madelon Oko (the “Debtor”), filed her Chapter 13 petition on April 22, 2004, and the
case was converted to one under Chapter 7 on November 18, 2004. 	Marc A. Pergament, the
Chapter 7 Trustee (the “Plaintiff” or the “Trustee”), commenced this adversary proceeding
against Precision Sounds DJ’s, Inc. (“Precision”), and its sole shareholder, Douglas Oko (“Mr.
Oko” or the “Defendant”), the Debtor’s son (collectively, the “Defendants”), on November 8,
2005. The Trustee’s suit against Mr. Oko alleges that fraudulent conveyances were made to him
by the Debtor, and that Mr. Oko was the alter ego of Precision, and as such the corporate veil
between them should be pierced.
The Trustee alleges in his complaint that within a year before Debtor filed for
bankruptcy, from about October 2003 up to and including the petition date, the Debtor
transferred a total of $66,180.00 from her checking account to the defendants, for no apparent
consideration. Precision did not file an answer, or nor did it appear at the pre-trial conferences.
Due to Precision’s default the Court entered a judgment against it on May 15, 2006 for
$76,955.63, which included the amount of the transfer, interest, and legal fees pursuant to New
York Debtor Creditor Law (“DCL”) (the “Default Judgment”). The Plaintiff now seeks to pierce
the corporate veil and hold Douglas Oko personally responsible for the Default Judgment that
was entered against Precision.
The issue now before the Court is whether Douglas Oko is the alter ego of Precision such
that he should be found personally liable for the judgment entered against Precision. This Court
has jurisdiction of this matter pursuant to 28 U.S.C. § 1334. 	This contested matter is a core
proceeding under 28 U.S.C. § 157(b)(2)(A), (H), and (O), and 11 U.S.C. §§ 510, 541, 544, 548
and 550 and Rules 6009 and 7001 of the Federal Rules of Bankruptcy Procedure and § 270 et.
sec. of the New York Debtor Creditor Law (“DCL”). 	The following constitutes the Court’s
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findings of fact and conclusions of law as mandated by Rule 7052 of the Federal Rules of
Bankruptcy Procedure.
FACTS
The Defendant is a self-employed freelance disc jockey (“DJ”). 	He had been doing
business under the name Precision Sounds DJ’s since at least April of 1998. 	In February of
2002, on the advice of his accountant, he incorporated his business for “personal protection” and
formed Precision. 	Until the business was closed in early 2005, Mr. Oko was the sole
shareholder, officer, and director. At the July 7, 2008 hearing Mr. Oko testified that he provided
the necessary equipment for the startup of Precision. He also testified that he did not deposit any
money into a bank account of Precision Sounds when the corporation began. The earliest bank
corporate bank statement of Precision in the court record, from April 2002, stated that the March
2002 balance was $100.00. Mr. Oko also had a personal bank account with a small balance.
At the July 7, 2008 hearing the Debtor testified that over a period of several months,
beginning in autumn of 2003, around six months before her bankruptcy filing, she provided
funds to Precision using checks from her personal bank account. The funds that she gave her son
were derived from the sale of her home on October 29, 2003. 	Debtor stated that she did so
whenever her son would make a verbal request for financial assistance for Precision. 	These
funds were used to help pay business expenses of Precision, such as payroll, rent, and other
requirements to keep the business afloat.
Despite these payments, the Debtor did not have a legal interest in the business. 	The
individual payments by the Debtor were not earmarked for any specific corporate expenses, and
the schedules annexed to her bankruptcy petition did not list any money owed to her from
Precision. 	She had no written agreement for repayment with Precision nor did she receive any
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promissory note with respect to the funds that she provided to Precision. The Defendant did not
keep a ledger of the amounts that his mother provided, nor did he keep one for the funds that he
paid to any employee or business expense. Additionally, the Debtor testified that she considered
the payments to be gifts, and did not expect to be repaid.
Over the entire course of the existence of the corporate bank account, checks were
written for an innumerable amount of non-corporate expenses. 	Precision paid for the expenses
of the Debtor and her husband, including mortgage payments, car payments, life insurance
premiums, medical bills, utility bills and $5,564.65 for a fifty-inch television set. 	Although he
took no paychecks, Mr. Oko withdrew funds from the corporate account for his personal
expenses as he saw fit. 	For example, Precision paid for his gym membership and made
payments on his behalf to the Suffolk County Department of Probation due to an unrelated
criminal conviction of the Defendant. 	There were also countless checks made to cash, for
personal expenses of both Mr. Oko and his parents.
Mr. Oko testified that he kept records in the form of customer contracts, a computer
spreadsheet, and a record book, but that they were all disposed of when the corporate offices
were vacated in early 2005. At the time the records were disposed of, the corporation was still in
the process of winding down operations. The evidence before the Court shows that the records
are unrecoverable, and the Defendant never formally dissolved the corporation, which ultimately
ceased operations in the middle of 2005.
During the time that it operated, Precision provided DJs, dancers and the like for
approximately one-hundred and fifty to two hundred parties per year. 	The clients were mostly
private individuals, who each paid by check or by cash. The dancers and other employees were
paid for each job, effectively functioning as independent contractors, as Mr. Oko would issue
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IRS Form 1099s to them. Precision had no permanent employees other than Mr. Oko. Although
the Debtor listed Precision as an employer on her petition, she testified that she was never an
officer or employee of Precision. Similarly, Mr. Oko’s father listed Precision as an employer on
a mortgage application even though he had never worked for Precision, nor had he been paid by
the business.
DISCUSSION
a. The Standard for “Piercing the Corporate Veil”
“The general rule is that a corporation exists independently of its owners as a separate
legal entity.” 	Goscienski ex rel. Frier v. Larosa (In re Montclair Homes), 200 B.R. 84, 99
(Bankr. E.D.N.Y. 1996); see Morris v. New York State Dept. of Taxation and Fin., 82 N.Y.2d
135, 140 (1993). 	The liability of shareholders is usually limited to the amount of their
investments, and shareholders are not personally liable for debts or liabilities of the corporation
itself. 	See In re Montclair, 200 B.R. at 99; Wm. Passalacqua Builders, Inc. v. Resnick
Developers S., Inc., 933 F.2d 131, 139 (2d Cir. 1991); Walkovszky v. Carlton, 18 N.Y.2d 414,
417, 276 N.Y.S.2d 585, 223 N.E.2d 6 (1966). 	In light of the general rule, most courts are
generally reluctant to impose liability on the shareholders for the actions of the corporation.
However, if a corporation is liable for a certain obligation, under certain circumstances, a
party can persuade the court to “pierce the corporate veil,” thus imposing the corporate
obligations on its owners. Old Republic Nat'l Title Ins. Co. v. Moskowitz, 747 N.Y.S.2d 556, 558
(N.Y. App. Div. 2002); Morris v. New York State Dept. of Taxation and Fin., 82 N.Y.2d 135,
140-141 (1993) (“The doctrine of piercing the corporate veil is typically employed by a third
party seeking to go behind the corporate existence in order to circumvent the limited liability of
the owners and to hold them liable for some underlying corporate obligation.”).
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A court addressing a situation where it may “pierce the corporate veil” will analyze the
facts and the law on a case-by-case basis. 	See Balmer v. 1716 Realty LLC, 2008 U.S. Dist.
LEXIS 38113, 12 (E.D.N.Y. May 9, 2008); Morris v. N.Y. State Dept. of Taxation & Fin., 82
N.Y.2d 135, 141 (1993). 	“Courts will reluctantly disregard the corporate form and hold
shareholders personally liable for the acts or debts of a corporation in the interests of justice and
whenever necessary to prevent fraud or achieve equity.” In re Montclair, 200 B.R. at 99; Walter
E. Heller & Co. v. Video Innovations, Inc., 730 F.2d 50, 53-54 (2d Cir. 1984); Port Chester Elec.
Constr. Corp. v. Atlas, 40 N.Y.2d 652, 656-57, 389 N.Y.S.2d 327, 357 N.E.2d 983 (1976).
“[C]ourts usually pierce the corporate veil where . . . the owners of the corporation misuse the
corporate form to accomplish their own personal affairs instead of the corporation's business.”
In re Montclair, 200 B.R. at 99.
A plaintiff who wants to hold the owners of a corporation personally liable for corporate
obligations must show (1) that the owners of the corporation exercised complete domination or
control concerning the transactions at issue; and (2) that such domination was used to commit a
fraud or a wrong against the plaintiff which resulted in harm. 	See Badian v. Elliott, 165 Fed.
Appx. 886, 891 (2d Cir. 2006); American Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir.
1988) Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir. 1988), cert. denied, 488 U.S. 852, 109
S. Ct. 136, 102 L. Ed. 2d 109 (1988); Morris v. N.Y. State Dept. of Taxation & Fin., 82 N.Y.2d
135, 141-142 (1993); Millennium Constr., LLC v. Loupolover, 2007 NY Slip Op 8201, 1-2 (N.Y.
App. Div. 2d Dep't 2007).
b. Should the Corporate Veil Between Precision and the Defendant Be Pierced?
Among the factors tending to show domination and control, and the ones which are
relevant to this corporation in this case, are (i) absence of corporate formalities such as election
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of 	directors, 	issuance 	of 	stock 	and 	maintenance 	of 	corporate 	records, 	(ii) 	inadequate
capitalization, (iii) use of corporate funds for personal rather than corporate purpose and (iv) the
payment or guarantee of debts of the corporation by the owners or by another related
corporation. 	See Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131,
139 (2d Cir. 1991); William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 600-01 (2d Cir. 1989);
Orenbuch v. N. Shore Health Sys., 250 F. Supp. 2d 145, 150-151 (E.D.N.Y. 2003); see also In re
Casale, 62 B.R. 889, 897-98 (Bankr. E.D.N.Y. 1986), aff'd, 72 B.R. 222 (E.D.N.Y. 1987).
In the present case, the Defendant Douglas Oko did not bother with corporate formalities.
As the sole director, officer, and shareholder of Precision, the record shows that he did not hold
any formal meetings or keep corporate minutes or other corporate records. Precision apparently
did not have any full time employees other than Mr. Oko, notwithstanding the independent
contractors he hired from time to time to perform at the parties and events that he was hired for.
Although Mr. Oko testified that he did keep some records, he was not able to show the court a
single slip of paper evidencing corporate activity, having apparently thrown away all of his
records and the corporate computer before the filing of the Debtor’s bankruptcy case. With the
exception of Mr. Oko’s testimony at the July 7, 2008 hearing and checks made payable to him or
from him to others from the corporate bank account, no evidence was presented that showed that
any corporate records for Precision ever actually existed. 	Besides a corporate name on a
checkbook, there was no “corporate separateness” between Precision and Mr. Oko.
With regards to capitalization, the record shows that the Defendant failed to properly
capitalize his business when it was formed. 	He testified that he did not put money into a bank
account when he formed the business. 	Although Mr. Oko testified that he did provide other
capital contributions in the form of equipment to get the corporation started, he could not point to
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any documentary or other physical evidence regarding the type, quantity or value of whatever
equipment he may have provided. 	When asked about the equipment at the hearing, the
Defendant testified that he disposed of the equipment when the corporation closed because it was
valueless. He could not state how much he paid for them originally, what funds he used to pay
for them, or how much the value of the equipment decreased during the life of Precision.
Defendant also used the funds of Precision to pay his own personal debts and obligations,
as well as those of his parents. Mr. Oko withdrew funds from the corporate bank account as if it
was his own and the funds were used to pay for an incalculable amount of his personal expenses,
such as his gym membership and his obligations to the Suffolk County Probation Board due to
his criminal conviction. 	Additionally, he made payments on behalf of his parents for their
mortgage, car payments, medical bills, and home entertainment systems. 	Although Defendant
testified that he considered the payments to his parents to be repayments of the monies that his
mother had lent to him, some of those payments were made as early as May of 2002, which was
more than a year before his mother began making her contributions to Precision’s corporate
obligations. No ledger was kept by himself or his parents evidencing the true amount of monies
that were transferred between them. The evidence shows that Mr. Oko dominated and controlled
every facet of Precision’s existence and operations. 	He used the corporate bank account as his
own private checking account. Precision had no separate corporate existence. Precision and Mr.
Oko were one and the same.
Douglas Oko, by his domination of Precision resulted in harm to Precision, and to
creditors of this Debtor’s bankruptcy estate. It has been stated that domination of a corporation
is not enough, and that New York law requires a showing that “the owners, through their
domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or
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injustice against plaintiff, which resulted in plaintiff's injury.” Balmer v. 1716 Realty LLC, 2008
U.S. Dist. LEXIS 38113, 21-22 (E.D.N.Y. May 9, 2008); see Morris, 82 N.Y.2d at 141-42;
Passalacqua, 933 F.2d at 137-39. 	If a company is unable to pay the debts, claims, and
obligations pending against it due to an individual’s domination of the business, then a plaintiff
has likely been injured. 	See, e.g., Balmer v. 1716 Realty LLC, 2008 U.S. Dist. LEXIS 38113,
21-22 (E.D.N.Y. May 9, 2008); Austin Powder Co. v. McCullough, 216 A.D.2d 825, 827, 628
N.Y.S.2d 855 (N.Y. App. Div. 1995).
As discussed above, the record is clear that the Defendant used the assets of Precision to
pay his own personal obligations, and those of his parents. 	The facts show that the Defendant
accepted money for the corporation from the Debtor, which could have been recoverable by the
Plaintiff for the benefit of creditors of the Debtor’s bankruptcy estate. 	He drained the assets of
Precision to pay his own and his parents’ personal expenses, and thus he depleted any assets with
which the corporation could pay off the corporation’s creditors, including the Plaintiff with
respect to the default judgment obtained against Precision. 	Based on the totality of the
circumstances, the Defendant cannot use the corporate form to shield himself from the
obligations of Precision which resulted due to his inappropriate domination and control of the
business.
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CONCLUSION
Pursuant to the above findings of fact and conclusions of law, the Court finds that
Douglas Oko is the alter ego of Precision and, in the interest of justice, the corporate veil should
be pierced, and Douglas Oko be held personally responsible for the Plaintiff’s judgment against
Precision in the amount of $76,955.63.
Dated: October 6, 2008
Central Islip, New York
s/ Dorothy Eisenberg
Honorable Dorothy Eisenberg
United States Bankruptcy Court
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