In Re: Blatstein ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
9-3-1999
In Re: Blatstein
Precedential or Non-Precedential:
Docket 98-1972, 97-CV-07066, 97-CV-07063, 97-CV-07069, 97-CV-07064, 97-CV-07070
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Recommended Citation
"In Re: Blatstein" (1999). 1999 Decisions. Paper 248.
http://digitalcommons.law.villanova.edu/thirdcircuit_1999/248
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Filed September 3, 1999
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 98-1972
IN RE: ERIC J. BLATSTEIN; MAIN, INC.,
Debtors 718 ARCH STREET ASSOCIATES, LTD.
v.
LORI J. BLATSTEIN; MORRIS LIFT; DELAWARECO, INC. (D.C. No. 97-cv-07063)
IN RE: MAIN, INC.,
Debtor 718 ARCH STREET ASSOCIATES, LTD.; MITCHELL M. MILLER, ET AL.
v.
ERIC J. BLATSTEIN; MAIN, INC.; LORI J. BLATSTEIN, ET AL; MORRIS LIFT, CPA;
DELAWARECO, INC.; ENGINE 46 STEAK HOUSE, INC.; REEDCO, INC.; WATERFRONT
MANAGEMENT CORPORATION; COLUMBUSCO, INC.; AIRBEV, INC.; PIER 53 NORTH,
INC.
(D.C. No. 97-cv-07064)
IN RE: MAIN, INC.,
Debtor 718 ARCH STREET ASSOCIATES, LTD.; MITCHELL M. MILLER
v.
ERIC J. BLATSTEIN; LORI J. BLATSTEIN; MAIN, INC.; DELAWARECO, INC.; ENGINE
46
STEAK HOUSE, INC.; REEDCO, INC.; WATERFRONT MANAGEMENT CORPORATION;
COLUMBUSCO, INC.; AIRBEV, INC.; PIER 43 NORTH, INC.; MORRIS LIFT, CPA;
MAIN, INC.
(D.C. No. 97-cv-07066)
IN RE: MAIN INC.;
Debtor 718 ARCH STREET ASSOCIATES, LTD.; MITCHELL M. MILLER
v.
ERIC J. BLATSTEIN; MAIN, INC.; LORI J. BLATSTEIN; MORRIS LIFT, CPA;
DELAWARECO,
INC.; ENGINE 46 STEAK HOUSE, INC.; REEDCO, INC.; WATERFRONT MANAGEMENT
CORPORATION; COLUMBSCO, INC.; AIRBEV, INC.; PIER 53 NORTH, INC. (D.C. No.
97-cv-07069)
IN RE: ERIC J. BLATSTEIN; MAIN, INC.,
Debtors 718 ARCH STREET ASSOCIATES, LTD.
v.
ERIC J. BLATSTEIN; MAIN, INC.; LORI J. BLATSTEIN; MORRIS LIFT, CPA;
DELAWARECO,
INC.; ENGINE 46 STEAK HOUSE, INC.; REEDCO, INC., t/a MARGARITA CAFE;
WATERFRONT MANAGEMENT CORPORATION; COLUMBUSCO, INC.; AIRBEV, INC.; PIER
53 NORTH, INC. (D.C. No. 97-cv-07070)
718 Arch Street Associates, Ltd., Mitchell W. Miller, Esq., Trustee for
the Main, Inc. bankruptcy estate
and Michael H. Kaliner, Esq., Trustee for the Blatstein bankruptcy estate,
Appellants On Appeal from the United States District Court for the Eastern
District of Pennsylvania (D.C.
Civ. Nos. 97-07063/64/66/69/70) District Judge: Honorable Bruce W.
Kauffman
Argued July 12, 1999
BEFORE: GREENBERG, ALITO, and ROSENN, Circuit Judges
(Filed: September 3, 1999)
Steven M. Coren (argued) David Dormont Kaufman, Coren, Ress & Weidman 1525
Locust Street 17th
Floor Philadelphia, PA 19102
Attorneys for Appellants Eric L. Frank Miller, Frank & Miller 21 South
12th Street 640 PSFS Building
Philadelphia, PA 19107
Attorneys for Appellant Mitchell W. Miller Trustee for the Main, Inc.
Bankruptcy Estate Edward J.
DiDonato DiDonato & Winterhalter 1818 Market Street, Suite 3520
Philadelphia, PA 19103-3629
Attorneys for Appellee Eric J. Blatstein Kevin J. Carey (argued) Mesirov
Gelman Jaffee Cramer &
Jamieson 1735 Market Street, Suite 3800 Philadelphia, PA 19103-7598
Attorneys for Appellee Lori Blatstein
B. Christopher Lee (argued) Jocoby Donner, P.C. 1515 Market Street, Suite
2000 Philadelphia, PA
19102
Attorneys for Non Debtor Corporate Appellees Delawareco, Inc., Engine 46
Steak House, Inc., Reedco,
Inc., Waterfront Management Corporation, Columbusco, Inc., Airbev, Inc.,
Pier 53 North, Inc.
OPINION OF THE COURT
GREENBERG, Circuit Judge.
I. INTRODUCTION
This case concerns the bankruptcy proceedings of Eric J. Blatstein
("Blatstein") and the attempt by one of
his creditors joined by bankruptcy trustees to bring assets into his
bankruptcy estate. The creditor, 718 Arch
Street Associates, Ltd. ("Arch Street"), brought these adversary
proceedings in the bankruptcy court
accusing Blatstein of fraudulently transferring his income and his shares
in a number of corporations in the
restaurant and bar businesses he controlled to his wife, Lori J.
Blatstein. Arch Street also asked the
bankruptcy court to reverse pierce the veils of the corporations so as to
bring their assets into the
bankruptcy estates. The trustees of the Blatstein bankruptcy estate and of
the bankruptcy estate of Main,
Inc. ("Main"), one of the Blatsteins' jointly-held corporations, have
intervened as plaintiffs in this action. Arch
Street predicated its piercing the veil argument on the contention that
the corporations were Blatstein's"alter
egos." As we shall explain, a court in a successful reverse piercing case
disregards the corporate existence
so that the corporation's assets become available to a controlling party's
creditors to satisfy his debts. Thus,
a reverse piercing case differs from a classical piercing case as in the
latter the controlling party is
responsible for the corporation's debts. The bankruptcy court and the
district court on appeal rejected these
fraudulent transfer and reverse piercing claims insofar as the claims are
now before us. Arch Street and the
trustees then appealed to this court. We will reverse in part, as we find
that Eric Blatstein fraudulently
transferred his income to his wife in an effort to keep the money from his
creditors. We, however, will affirm
in part, as we conclude that the bankruptcy and district courts correctly
found that there had not been a
fraudulent transfer of corporate shares and correctly refused to pierce
the corporate veils.
II. STATEMENT OF THE CASE
This case grew out of Main's September 20, 1996 voluntary Chapter 11
petition. See In re Main, Inc., 213
B.R. 67, 72 (Bankr. E.D. Pa. 1997) ("Main II"), rev'd in part and aff'd in
part sub nom., In re Blatstein, 226
B.R. 140 (E.D. Pa. 1998).1 Main converted its case from a Chapter 11 to a
Chapter 7 proceeding after a
December 18, 1996 hearing in the bankruptcy court on a motion to dismiss
its petition. Blatstein then filed a
personal Chapter 7 proceeding on December 19, 1996.
Arch Street subsequently brought these adversary proceedings in both the
Blatstein and Main bankruptcy
cases against Eric and Lori Blatstein, Morris Lift, who was the
Blatsteins' accountant and Main's president,
and the Blatsteins' various jointly-held corporations.2 For
_________________________________________________________________
1. We are using the numerical designation of the Main bankruptcy cases as
the parties and the bankruptcy
court have used them even though we do not refer to all the Main cases.
2. These corporations are Delawareco, Inc., Engine 46 Steak House Inc.,
Reedco, Inc., Waterfront
Management Corporation, Columbusco, Inc., simplicity's sake, however, we
will refer to the appellees
collectively as "Blatstein" or "the Blatsteins," as appropriate in the
context. Michael H. Kaliner, trustee of the
Blatstein bankruptcy estate, and Mitchell Miller, trustee of the Main
bankruptcy estate, intervened as
plaintiffs in the proceedings and are appellants here. Nevertheless, we
will refer to the appellants collectively
as "Arch Street."
Before filing these proceedings, 718 Arch Street Associates, Ltd. obtained
a judgment by confession in state
court against Blatstein individually on November 12, 1992, for $2,774,803
on account of a breach of a
commercial lease. Subsequently, in connection with garnishment proceedings
to enforce the judgment, the
state court entered the judgment against Main.
In its complaints in the bankruptcy court, Arch Street alleged, inter
alia, that Lori Blatstein was not truly a
co- owner of the corporations, Blatstein fraudulently transferred all of
his income from the corporations to
her to avoid paying his creditors, Blatstein fraudulently transferred
Main's assets to Lift and other
corporations he controlled, and the Blatsteins' corporations were
Blatstein's alter egos and should be held
responsible for his debts.
The bankruptcy court held that Blatstein fraudulently conveyed his assets
in Main to Lift and other
corporations Blatstein controlled in a ruling which is not before us for
review. Accordingly, pursuant to 11
U.S.C. SS 727(a)(2)(A) and (a)(7) the bankruptcy court refused to
discharge him. Main II, 213 B.R. at 85.
The court, however, rejected Arch Street's arguments that the corporate
defendants were the alter egos
either of Blatstein or of each other and that Blatstein fraudulently
transferred his assets to his wife. Id. at
87-95. The bankruptcy court on further proceedings, which included Arch
Street's motion for
reconsideration of the order in Main II, calculated Arch Street's claim
for rents due as $582,443.65. In re
Main, Inc., 1997 WL 626544, at
_________________________________________________________________
Airbev, Inc., and Pier 53 North, Inc. The bankruptcy court found that all
the corporate defendants were
Pennsylvania corporations jointly owned by Eric and Lori Blatstein as
tenants by the entireties. See Main II,
213 B.R. at 74. *12 (Bankr. E.D. Pa. Oct. 7, 1997) ("Main III"). The court
partially granted the motion for
reconsideration with respect to the procedural implementation of the order
in Main II but did not disturb the
substantive dispositions we have described.
On appeal, the district court affirmed the bankruptcy court's rejection
both of Arch Street's claims that the
Blatsteins' corporations were Blatstein's alter egos and that he had
fraudulently transferred his corporate
shares and income to his wife, but reversed and remanded for further
proceedings in the bankruptcy court
that court's ruling that Blatstein fraudulently transferred Main's assets.
In re Blatstein, 226 B.R. 140, 148
(E.D. Pa. 1998). 3 Arch Street now appeals the district court's order
affirming the bankruptcy court's ruling
against its alter ego and fraudulent transfer claims. As we have
indicated, we will reverse in part and affirm in
part.
III. DISCUSSION
Arch Street contends that the district court erred in rejecting the
fraudulent transfer claims because the court
failed to take into account (1) Blatstein's insolvency at the time of the
transfers, (2) the Blatsteins' fraudulent
intention in effectuating the transfers, and (3) Lori Blatstein's failure
to prove that she gave reasonably
equivalent value for the transfers. Arch Street contends that because of
these legal errors, the district court
erroneously failed to recognize that Arch Street had proven that the
transfers were fraudulent as a matter of
law.
Arch Street also contends, on the theory that the Blatsteins' corporations
were his alter egos, that the district
court erred in affirming the bankruptcy court's refusal to pierce the
corporate veils. Arch Street argues that
the court did not account properly for its contentions that (1) the
corporations operated as facades for
Blatstein, (2) Blatstein
_________________________________________________________________
3. On remand, the bankruptcy court reconsidered its opinion, yet once
again concluded that the transfer of
Main's assets was fraudulent. In re Main, 1998 WL 778017, at *14-*16
(Bankr. E.D. Pa. Nov. 4, 1998)
("Main V"). used the corporations to hinder, delay, and defraud his
creditors, and (3) Blatstein commingled
corporate funds with his personal funds.
Blatstein initially argues, however, that we should not reach the merits
of the appeal as we lack jurisdiction to
do so. Because this jurisdictional argument would require us to dismiss
the appeal without considering the
case on the merits, we will deal with it first. Alternatively, Blatstein
urges that we affirm the district court's
order.
A. Standard of Review
We exercise plenary review over the question of whether we have
jurisdiction to entertain this appeal. See
In re Meyertech Corp., 831 F.2d 410, 413-14 (3d Cir. 1987). Likewise, we
have plenary review over the
district court's application of legal precepts. See In re Brown , 951 F.2d
564, 567 (3d Cir. 1991). On the
other hand, we review the bankruptcy court's factual findings for clear
error. See id. See also In re Forcroft
Square Co., 184 B.R. 671, 675 (E.D. Pa. 1995) ("[T]he determination of
whether there is . . . intent to
defraud [under Pennsylvania law] is a finding of fact which should not be
set aside on appellate review unless
that finding was clearly erroneous.") (citing United States v. Tabor Ct.
Realty Corp., 803 F.2d 1288, 1304
(3d Cir. 1986); In re Adeeb, 787 F.2d 1339, 1342 (9th Cir. 1986)).
B. Whether our jurisdiction is properly invoked
As we have indicated, before reaching the merits of this dispute we first
must determine whether we have
jurisdiction. This jurisdictional issue is implicated because the district
court's order in part remanded the case
for further proceedings in the bankruptcy court. Moreover, there will be
additional proceedings involving
numerous issues with respect to the bankruptcy estates in both the
district and bankruptcy courts.
In bankruptcy cases, we have jurisdiction pursuant to 28 U.S.C. § 158(d)
over appeals from "final
decisions, judgments, orders, and decrees entered," as here, by a district
court in its appellate capacity
under 28 U.S.C. § 158(a). Yet, we have recognized that in a bankruptcy
context we consider the question
of whether an order or judgment is final "in a more pragmatic and less
technical sense than in other matters. .
. ." Meyertech Corp., 831 F.2d at 414. Determining whether an appellant
has invoked our jurisdiction
properly entails "balancing a general reluctance to expand traditional
interpretations regarding finality and a
desire to effectuate a practical termination of the matter before us." Id.
The relevant factors consist of (1) the
impact of our consideration of the merits of the appeal upon the assets of
the bankrupt estate, (2) the
necessity for further fact-finding on remand, (3) the preclusive effect of
a decision on the merits on further
litigation, and (4) whether the interest of judicial economy would be
furthered by the exercise of jurisdiction.
Id. We have held that the impact upon the assets of the estate is the
"most important" factor in this balancing
scheme. See In re Market Square Inn, Inc., 978 F.2d 116, 120 (3d Cir.
1992).
Applying these factors here, we conclude that we have jurisdiction to
consider Arch Street's appeal, as all
four factors weigh in favor of our exercise of jurisdiction. First and
foremost, this appeal concerns identifying
assets of Blatstein's estate. Plainly, a reversal of the district court's
order and a determination that Blatstein
fraudulently conveyed his assets to his wife or that the Blatsteins'
corporations are his alter egos, would
result in the inclusion in his bankruptcy estate of substantial assets
which then would be available to satisfy, at
least in part, his creditors' claims. On the other hand, if we were to
affirm the district court's order, the assets
in the estate effectively would be determined.
Second, contrary to Blatstein's assertion in his brief, we find no need
for additional fact-finding on remand.
This appeal concerns three overarching matters, two involving fraudulent
transfers and one involving piercing
corporate veils, none of which will be duplicated in further proceedings
in the district or bankruptcy courts,
and none of which depends upon any facts still at issue or which will be
determined during subsequent
proceedings. Third, there can be no question but that our decision will be
preclusive. Finally, we serve
judicial economy by consideration of these claims. Thus, we conclude that
we have jurisdiction and will
consider this appeal on the merits. See In re Simpson, 36 F.3d 450, 452
(5th Cir. 1994) (per curiam)
(exercising jurisdiction over a trustee's appeal of a district court's
order reversing the bankruptcy court's
finding of a fraudulent transfer of an asset).
C. The fraudulent transfer claims
1. An overview
The bankruptcy court rejected Arch Street's claims that Blatstein
fraudulently transferred his stock in the
jointly owned corporations and his income derived from the businesses to
Lori Blatstein. In this regard it
reasoned that all of the stock certificates indicated that the Blatsteins
owned the corporations as tenants by
the entireties and had so owned them since their inception. Moreover, it
accepted Lori Blatstein's testimony
that the couple had opened her personal bank account and deposited
Blatstein's income into it because of
his bad reputation with banks and to avoid a federal tax lien on
Blatstein's assets. Main II, 213 B.R. at
93-95. The bankruptcy court's decision rested, then, upon its belief that
(1) Blatstein did not transfer assets
to Lori Blatstein, and (2) if there were any transfers from Blatstein to
Lori Blatstein, then in making the
transfers Blatstein did not possess an actual intent to defraud his
creditors under Pennsylvania law which the
parties agree is applicable.
On reconsideration, the bankruptcy court again rejected Arch Street's
fraudulent transfer claims. Main III,
1997 WL 626544, at *4-*6. This time the court rejected a "constructive
fraud" theory of intent by pointing
out that Blatstein's income came from the corporations the Blatsteins co-
owned, and thus "were not the
same as paychecks from a third-party employer," but instead "could be
viewed as distributions of dividends
or equity from the corporations. . . ." Id. at *6. Therefore, the court
implicitly found that Blatstein did not
transfer any earned income to Lori when he deposited his income into her
personal accounts. Moreover,
inasmuch as Lori used these deposits to satisfy the Blatsteins' joint
obligations and the debts of the various
corporations, the court found it "impossible, on this record, to find that
``reasonably equivalent value' was not
given to Blatstein and the corporations in exchange for their deposits
into these accounts." Id. The district
court affirmed the bankruptcy court's findings on these issues. Blatstein,
226 B.R. at 159-60.
On this appeal, Arch Street contends that the bankruptcy court's factual
findings should have led that court
to conclude that Blatstein possessed an actual intent to defraud his
creditors when he issued stock in Lori's
name and when he made deposits into Lori's personal accounts. Arch Street
also argues that even if we
were tofind that Blatstein did not actually intend to defraud his
creditors, we should hold that his transfers
were fraudulent because they fail Pennsylvania's "constructive fraud"
analysis applicable in fraudulent transfer
cases. Arch Street contends that the bankruptcy and district courts erred
by incorrectly placing the burden
of proof on it, instead of shifting the burden to Lori to establish by
clear and convincing evidence either that
Blatstein was solvent at the time of the transfers or that she gave him
fair consideration for the conveyances.
We will affirm the district court's order affirming the bankruptcy court's
finding that Blatstein did not
fraudulently transfer corporate shares to his wife, but will reverse the
district court's order affirming the
bankruptcy court's finding concerning his income transfers to her personal
bank account.
Initially on these fraudulent transfer issues we set forth the germane
state law. The Pennsylvania Uniform
Fraudulent Transfer Act ("PUFTA") provides that a "transfer made or
obligation incurred by a debtor is
fraudulent as to a creditor, . . . if the debtor made the transfer or
incurred the obligation: (1) with actual intent
to hinder, delay or defraud any creditor of the debtor; or (2) without
receiving a reasonably equivalent value
in exchange for the transfer or obligation, and the debtor" was insolvent
at the time of the transfer or became
insolvent as a result of it. 12 Pa. Cons. Stat. Ann. § 5104 (West 1999).
The first provision provides for
liability under an "actual intent" theory of fraud, while the second is a
"constructive fraud" provision. 2. The
stock "transfers"
The bankruptcy and district courts rested their holdings on their belief
that the Blatsteins did not transfer any
stock between them because they owned all the corporate stock at all times
from their inception as tenants
by the entireties. We agree. Pennsylvania defines an"asset" for PUFTA
purposes as the "property of a
debtor" but not including "an interest in property held in tenancy by the
entireties to the extent it is not subject
to process by a creditor holding a claim against only one tenant." 12 Pa.
Cons. Stat. Ann. §5101(b). Thus, if
the Blatsteins always owned their corporations as tenants by the
entireties, Arch Street's allegation that
Blatstein transferred them to Lori Blatstein to defraud his creditors must
fail.
We reach this conclusion even in the face of evidence that Blatstein alone
provided or arranged for the
assets to establish the businesses and that Lori Blatstein did not know
that she was a joint owner of the
corporations. 4 As the bankruptcy court noted, Pennsylvania law presumes
that property titled to a husband
and wife is owned by them as tenants by the entireties even if only one
spouse paid for the property or even
if one spouse was unaware of her ownership of the property. Main II, 213
B.R. at 93 (relying upon In re
Estate of Holmes, 200 A.2d 745, 747 (Pa. 1964)). Because the Blatsteins
always had held their corporate
shares as tenants by the entireties, Blatstein never "transferred" any
shares to his wife, and thus could not
have fraudulently transferred the shares to her. Accordingly, we will
affirm the district and bankruptcy courts
on this point.
_________________________________________________________________
4. We do not deal with a situation in which it is claimed that there was a
fraudulent transfer of assets to a
jointly owned corporation and that that transfer should be set aside. Arch
Street repeatedly sets forth that it
was the titling of the stock that was the fraudulent transfer. Thus, it
states the issue as follows: "Whether the
bankruptcy court (and district court) erred in ruling that Blatstein's
titling of the stock of his corporation in the
names of Blatstein and Lori Blatstein as tenants by the entireties, while
Blatstein was insolvent, were not
fraudulent transfers." Br. at 2. See also br. at 26, 29-30, 47. 3.
Blatstein's income "transfers"
We reject, however, the bankruptcy court's conclusions with respect to
Blatstein's income transfers to Lori's
personal bank accounts. Unquestionably, Lori would have been entitled to
dividends from the corporations.
So we would uphold transfers of that nature. But the bankruptcy court held
that Eric's income checks
constituted income of that character because the checks "were not the same
as paychecks from a third-party
employer," but instead "could be viewed as distributions of dividends or
equity from the corporations. . . ."
Main III, 1997 WL 626544, at *6 (emphasis added).
We reject this conclusion. First, the payments were made by the
corporations only to Blatstein and not to
Lori Blatstein. Furthermore, the form of payments reflected reality as
Blatstein undoubtedly operated the
businesses. In fact, as Arch Street pointed out in its brief and again at
oral argument, Blatstein treated his
paychecks as wages or Schedule C sole-proprietorship income on his tax
returns and not as dividends or
distributions to a shareholder. Br. at 45. Likewise, the corporations
treated the payments as wages or
commissions and not as distributions to a shareholder.
While the bankruptcy court viewed the determination of the character of
the income as a factual matter, even
reviewing for clear error, see Brown, 951 F.2d at 567, we are "left with
the definite and firm conviction that
a mistake has been committed." United States v. United States Gypsum Co.,
333 U.S. 364, 395, 68 S. Ct.
525, 542 (1948). Consequently, we hold that the court's finding that
Blatstein did not transfer his income to
Lori Blatstein was clearly erroneous. In sum, we see no reason why income
that in form and fact was earned
for services should be reclassified as dividends or equity distributions.
Our conclusion that Blatstein's income was earned income leads us to
consider the bankruptcy court'sfinding
that he deposited his income into Lori's accounts because his credit and
reputation with banks was poor,
and because he "was trying to keep the funds from being seized or frozen
by the IRS or other taxing
authorities, pursuant to a tax lien, in light of the personal income taxes
which he owed to the IRS." Main II,
213 B.R. at 94. The bankruptcy court further noted that "taxes were paid
from[a brokerage] Account, and
therefore no fraud on the IRS or other taxing authorities appears to have
been effected." Id. These findings
are significant because, notwithstanding the bankruptcy court's contrary
conclusion, they clearly demonstrate
that despite the payment of some taxes, Blatstein intended to defraud the
Internal Revenue Service, one of
his creditors.
PUFTA does not require proof to set aside a transfer that the debtor
intended to defraud the specific
creditor bringing the fraudulent transfer claim. PUFTA deems a transfer
fraudulent if the debtor had the
"actual intent to hinder, delay or defraud any creditor. . . ." 12 Pa.
Cons. Stat. Ann. § 5104 (emphasis
added). Similarly, the courts apply the bankruptcy code's denial of
discharge provision, 11 U.S.C. §
727(a)(2)(A), to "require[ ] only that the debtor make the transfer with
intent to hinder, delay, or defraud``a
creditor.' There is no requirement that the debtor intend to hinder all of
his creditors." Adeeb, 787 F.2d at
1343.
We recognize that the bankruptcy court indicated that Blatstein intended
to shield the income to pay some of
his debts, including reducing some of his tax liability as the court noted
that "taxes were paid from [a
brokerage] Account, and therefore no fraud on the IRS or other taxing
authorities appears to have been
effected." Main II, 213 B.R. at 94. Nevertheless, as the Adeeb court
stated: "Our inquiry under [11 U.S.C.
§ ] 727(a)(2)(A) is whether [debtor] intended to hinder or delay a
creditor. If he did, he had the intent
penalized by the statute notwithstanding any other motivation he may have
had for the transfer." 787 F.2d at
1343. We will apply the same principle under PUFTA. See also In re Greene,
202 B.R. 68, 73 (Bankr. D.
Md. 1996) (holding that debtor's attempt to avoid one creditor's
collection efforts in an effort to allow him to
pay other creditors "does not change the fact that Debtor transferred . .
. assets with the actual intent to
hinder" a creditor); In re Cooper, 150 B.R. 462, 467 (D. Colo. 1993)
(holding transfers to wife were
fraudulent even though wife was one of debtor's creditors); United States
v. Purcell , 798 F. Supp. 1102,
1113 (E.D. Pa. 1991), aff 'd, 972 F.2d 1334 (3d Cir. 1992) (table)
(finding a conveyance fraudulent under
PUFTA's predecessor when defendant attempted to avoid federal tax lien by
conveying his property to his
wife as a tenant by the entireties). Thus, we conclude that the bankruptcy
court's determination that Blatstein
did not have the actual intent to defraud his creditors was erroneous.5
Furthermore, although not necessary for our result, we note that the
bankruptcy court erred in its
"constructive fraud" analysis by incorrectly placing on Arch Street the
burden of proving that reasonably
equivalent value was not given for the transfer: "[W]e believe that lack
of ``reasonably equivalent value' for
the transfer is not proven. . . ." Main III, 1997 WL 626544, at *6. In
fact, if the grantor is in debt at the time
of a transfer PUFTA places on the grantee the burden of proving by clear
and convincing evidence either
that the grantor was solvent at the time of the transfer or that the
grantee had given reasonably equivalent
value for the conveyance. See Elliott v. Kiesewetter, 98 F.3d 47, 56- 57
(3d Cir. 1996).6 Inasmuch, as the
bankruptcy court found that, "the record supports Blatstein's insolvency
at the time of his transfers to Lori,"
Main III, 1997 WL 626544, at *6, Lori could have defeated a constructive
fraud claim solely by proving
that she gave adequate consideration for the transfers.
_________________________________________________________________
5. The bankruptcy court also ignored (without explanation) an admission by
Lori Blatstein in a pre-trial
deposition that"the Arch judgment was a factor" in the Blatsteins'
decision to put Blatstein's income into her
personal accounts. Main II, 213 B.R. at 93-94. This testimony demonstrates
that, in addition to avoiding the
IRS's tax lien, Blatstein also intended to hinder Arch Street's attempts
to collect its judgment, and provides
another basis for our conclusion that he possessed the actual intent to
defraud his creditors under PUFTA.
6. Moreover, according to a long-standing district court case, this burden
may be heavier on a grantor's wife
when she is the grantee: "the burden is on the wife to show by clear and
satisfactory evidence, beyond that
required of other creditors, that at the time of the transfer he was
solvent or that she paid full consideration."
Winter v. Welker, 174 F. Supp. 836, 843 (E.D. Pa. 1959). The bankruptcy
court found Blatstein's
testimony on this issue to be credible and relied upon it to hold that
Lori had given reasonably equivalent
value for the deposit of his income into her accounts. Specifically, the
court reasoned that Lori received
income from Blatstein that ultimately could be viewed as a dividend on her
half-ownership of the
corporations, and used this income to pay off certain of the Blatsteins'
joint debts as well as debts owed by
the corporations. Id.
Yet, by failing to place the burden on Lori to prove that she gave
reasonable consideration, the court did not
adopt the more plausible interpretation of the facts: that Blatstein
retained control over the funds despite
transferring them to his wife. Lori Blatstein used the funds both for her
benefit and that of her husband for
such purposes as paying their joint debts and putting aside money for
their children's college educations.
These payments suggest that Blatstein's conveyances were in title only,
and that instead of giving her
husband consideration in the form of payment of his debts, Lori merely was
using the money where Blatstein
directed her to use it.
In this regard we note that the bankruptcy court, which had an opportunity
to observe the Blatsteins testify,
described Lori's role "as a faithful spouse, homemaker, and occasional
business partner." Without shifting
the burden of proof to Lori on the consideration issue, the bankruptcy
court could not make a proper ruling
on the point. Nevertheless, in light of our holding that Blatstein
possessed an actual intent to defraud his
creditors, it is not necessary for us to remand for consideration of the
income transfers under the
constructive fraud provisions of PUFTA.
D. The alter ego claims
Arch Street's final argument on appeal is that the bankruptcy and district
courts erred in failing to reverse
pierce the veils of the Blatsteins' corporations to satisfy Blatstein's
debts. Arch Street contends that the
bankruptcy court made the necessary factual findings yet erred in applying
the law to these findings, resulting
in its erroneous conclusion that the Blatsteins' corporations were not
Blatstein's alter egos and that they were
not the alter egos of each other.7
The bankruptcy court held that the Blatsteins' corporations were not
Blatstein's alter egos despite the
presence of some factors that weighed in favor of piercing the corporate
veils. For example, the court found
that the corporations paid numerous personal expenses of the Blatsteins
and made interest-free loans to
them. Main II, 213 B.R. at 89-90. Nevertheless, the court declined to
pierce the corporate veils, primarily
by relying on Arch Street's expert's testimony on cross-examination. The
expert recognized that the
Blatsteins declared these amounts on their joint income tax returns as
income, and that the corporations took
deductions on their tax returns for these amounts. Id. at 91. Moreover,
while he recognized that as a result
of the interaction between Blatstein and Main, Main did not owe Blatstein
money (which would indicate that
Blatstein had invested heavily in Main to hide his assets in the
corporation), he noted that Blatstein owed
Main $402,000. Id. Further, he noted that while the corporations paid
$269,000 of the Blatsteins' personal
expenses, the Blatsteins paid $360,000 of the corporations' expenses. Id.
The court also recounted that Blatstein's expert's testimony supported
upholding the corporate form. The
expert testified that the corporate transactions were not made to hinder
Blatstein's creditors, and that "since
there were no transfers to the corporations from Blatstein, he could not
have technically engaged in any
fraudulent conveyance." Id. Moreover, the expert indicated that the
transfers to Blatstein actually benefitted
his creditors, and that closely-held corporations often grant interest-
free loans to their officers and pay their
officers' expenses as long as these amounts are reflected on their books
as compensation. Id. In fact, he
testified that it would be
_________________________________________________________________
7. Arch Street does not press vigorously before us its claim that the
corporations were each others' alter
egos which is weaker than its claim that they were Blatstein's alter egos.
For this reason, and in light of our
rejection of Arch Street's stronger alter ego claim, we will affirm the
district court's rejection of it without
discussion. unusual for a corporation to charge interest in such a
situation. Id. at 92.
Thus, the court concluded, that while some factors weighed in favor of
piercing the corporate veils, the lack
of evidence of other factors was dispositive. First, the court found "no
proof that the various corporations . ..
were in existence only to benefit [Blatstein's] private concerns." Id. at
91. In fact, it appeared that all of the
corporations other than Main were financially stable and successful
businesses. Id. Second, the court found
no proof in the record to support a conclusion that the Blatsteins abused
the corporate form for illegitimate
purposes. Id. Third, the court found that each corporation adhered to
corporate formalities by keeping its
own financial records and bank accounts and by recording each loan granted
to the Blatsteins. Id. Finally,
the court concluded that except for the fraudulent transfers regarding
Main, none of the corporations
committed any fraudulent acts, nor was there evidence that Blatstein
siphoned funds either in or out of them.
Id. at 92. Thus, except for the fraudulent transfers of Main, neither
Blatstein nor the other corporations
worked injustice upon the creditors, and hence equity did not require
piercing the corporate veils. Id.
After setting forth the appropriate legal precepts, the district court
agreed with the bankruptcy court's
assessment. Blatstein, 226 B.R. at 158-59. The court emphasized that while
the corporations paid the
Blatsteins' personal expenses and provided them with interest-free loans,
these amounts were recorded in
the corporate ledgers and were reported to the IRS as income. Id. at 159.
The court also emphasized the
fact that "rather than using the corporate entities to shelter funds
otherwise available to his creditors, Blatstein
was a net debtor to his corporations, owing Main in excess of $400,000."
Id. Therefore, the district court
affirmed the bankruptcy court's refusal to pierce the corporate veils. Id.
We will affirm the district court on
this point. Pennsylvania law, applicable here, recognizes a strong
presumption against piercing the corporate
veil. See Lumax Indus., Inc. v. Aultman, 669 A.2d 893, 895 (Pa. 1995). The
"classical" piercing of the
corporate veil is an equitable remedy whereby a court disregards "the
existence of the corporation to make
the corporation's individual principals and their personal assets liable
for the debts of the corporation." In re
Schuster, 132 B.R. 604, 607 (Bankr. D. Minn. 1991). In those instances, we
have stated that the factors
weighing in favor of piercing the veil include:
failure to observe corporate formalities, non-payment of dividends,
insolvency of the debtor corporation at
the time, siphoning of funds of the corporation by the dominant
shareholder, non-functioning of other officers
or directors, absence of corporate records, and the fact that the
corporation is merely a facade for the
operations of the dominant stockholder or stockholders.
Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1521 (3d Cir.
1994) (internal quotation marks
omitted), aff'd, 514 U.S. 938, 115 S. Ct. 1920 (1995). We also recognized
in Kaplan that courts sometimes
consider undercapitalization a relevant factor, and that
[n]ot every disregard of corporate formalities or failure to maintain
corporate records justifies piercing the
corporate veil. That remedy is available only if it is also shown that a
corporation's affairs and personnel
were manipulated to such an extent that it became nothing more than a sham
used to disguise the alter ego's
use of its assets for his own benefit in fraud of its creditors. In short,
the evidence must show that the
corporation's owners abused the legal separation of a corporation from its
owners and used the corporation
for illegitimate purposes.
Id.
While a classical piercing renders a shareholder responsible for the
actions of the corporation, in a "
``reverse' piercing, assets of the corporate entity are used to satisfy the
debts of a corporate insider so that
the corporate entity and the individual will be considered one and the
same." In re Mass, 178 B.R. 626, 627
(M.D. Pa. 1995). See also In re Schuster, 132 B.R. at 607. It is not
surprising that it has been recognized
that only "exceptional circumstances" warrant granting this "unusual"
remedy. In re Mass, 178 B.R. at 627.
Consequently, a court should use its equitable powers to disregard the
corporate form only if reverse
piercing of the veil "will prevent fraud, illegality, injustice, [or] a
contravention of public policy. . . ." In re
Mass, 178 B.R. at 629 (internal quotation marks omitted).
The district court in Mass did uphold the bankruptcy court's decision to
reverse pierce the corporate veil of
Mountain Cleaners, the debtors' corporation in that case. 178 B.R. at 631.
Borrowing the analysis of
Schuster, 132 B.R. 604, the court analyzed the "balance between debtor's
and creditor's remedies which
the bankruptcy system is intended to serve." Mass, 178 B.R. at 629. The
law imposes this balance whereby
the "debtor receives the equitable remedy of discharge and the creditor
the remedy of receiving a pro rata
share of the value which the [Bankruptcy] Code dictates must be available
to creditors after the debtor's
``fresh start.' " Id. at 629-30.
After applying this balancing test, the Mass court decided that the facts
warranted a reverse piercing:
In this case, there was a total failure to observe any corporate
formalities by the debtors; there were no
directors' or shareholders' meetings and no dividends were paid; there are
no corporate records; no
corporate tax records were maintained; the business premises were not
leased to the corporation; and at no
time was the dry cleaning business conducted as a corporate entity. At all
times the debtors used the
proceeds of the business as if they were the assets of the individual
debtors themselves.
Id. at 630. In contrast the bankruptcy court in this case simply did not
find equivalent factors present.
Furthermore, the Mass court found significant the fact that the debtors
had changed a personal business
account into a corporate account yet continued using the account for
personal expenses after filing the
Chapter 11 proceeding. Id. at 628. Indeed, "the debtors maintained no
other bank accounts, personal or
business, during the bankruptcy case." Id. In fact, the only corporate
actions the debtors had taken were the
transfer of their checking account into the corporation's name and the
execution of an equipment lease with a
telephone company that lay at the crux of the suit. Id.8 Accordingly, the
court held that "the account at issue
served as the exclusive ``debtor-in- possession' account" and that " ``it
was estate funds, not ``corporate'
funds, that were placed in the account.' " Id. at 631.
The situation here is different. Although the Blatsteins did not run their
corporations as strictly separate
entities, they did uphold the corporate form sufficiently by having the
corporations keep separate records
and bank accounts, and entering on the books all loans the corporations
made to each other and to the
shareholders.
Moreover, this case lacks an equitable justification for reverse piercing
the corporate veils. Arch Street
contends that the limited commingling of funds and payment of personal
expenses by the corporations was
part of an elaborate plan by which Blatstein was attempting to frustrate
his creditors' collection efforts.
Although such an assertion, if true, might provide the equitable
justification otherwise absent here, the
bankruptcy court found the opposite to be true. The bankruptcy court found
that Blatstein did not hide any
of his personal assets in the corporations, nor did he commingle his
assets with the corporations' assets so
that separation would be impossible. We find no basis in the record to
justify a conclusion that the court's
finding was clearly erroneous. Hence, unlike in Mass, the assets that in
this case are corporate assets in form
are, in fact, corporate assets and are not part of Blatstein's bankruptcy
estate. Consequently, we uphold the
district court's order affirming the bankruptcy court's decision to deny
Arch Street the remedy of reverse
piercing.
_________________________________________________________________
8. Basically, Bell Atlantic had leased the corporation some telephone
equipment, and was attempting to
receive full payment of the lease after the corporation breached its
contract. The debtors and the trustee of
the bankruptcy estate brought the action to pierce the corporate veil of
the cleaning business to bring the
corporation's assets into the bankruptcy estate and thus force Bell
Atlantic to advance its claim through the
estate.
IV. CONCLUSION
For the foregoing reasons, we will reverse the portion of the district
court's order affirming the bankruptcy
court's order holding that Blatstein did not fraudulently transfer his
income to Lori Blatstein's personal bank
accounts, and will affirm the portions of the district court's order
affirming the bankruptcy court's
determinations concerning the alleged fraudulent transfers of corporate
shares and refusal to reverse pierce
the corporate veils of the Blatsteins' corporations. We will remand the
case to the district court for further
proceedings consistent with this opinion. The parties will bear their own
costs on this appeal. ROSENN,
Circuit Judge, concurring and dissenting:
I concur and join with the majority except with respect to the alter ego
issue and the question relating to
Blatstein's transfer of stock to his wife, Lori. I do not reach this
latter issue in light of my position on alter
ego. As to the former issue, I believe that this record establishes that
at all times Eric Blatstein1 used the
non-debtor corporations as his personal pawns. He manipulated them at will
to hinder and avoid his
personal creditors by unrestrictedly drawing checks on each of them to
meet personal expenses, purchases,
and other obligations. He ignored the corporate form and the separate
personalities of the corporations. I,
therefore, respectfully dissent on the alter ego claims.
As president and chief executive officer, Blatstein controlled and
dominated the corporations' finances,
policies, and business practices. Except for obtaining the articles of
incorporation, only minimum corporate
formalities were observed. Although the Blatsteins claimed they owned the
corporate stock by the entireties,
Lori Blatstein, his wife, did not know she owned any corporate stock,
possessed no certificate, and she
made no payment for any.
Extensive corporate loans were obtained and extended without corporate
resolutions, either formal or
informal, and there were no meetings of the board of directors or
stockholders. When Blatstein deemed it
desirable, the corporations engaged in fraudulent transfers, not only by
Main, but with the participation of
CFI and Columbusco. The corporate form was ignored whenever it suited
Blatstein's convenience. Blatstein
also fraudulently transferred his income derived from the corporations to
Lori's bank account. For these
reasons and more, as I discuss infra, I believe the corporate veil as to
all corporate defendants should be
pierced to avoid manifest injustice.
I.
The doctrine that a corporation is a legal entity separate and apart from
the shareholders composing it is a
legal _________________________________________________________________
1. References in this dissent to "Blatstein" are to Eric Blatstein only.
fiction designed to serve convenience
and justice. It will be disregarded whenever justice or public policy
demands. "[W]henever one in control of
a corporation uses that control, or uses the corporate assets, to further
his or her own personal interests, the
fiction of the separate entity may properly be disregarded." Ragan v. Tri-
County Excavating, Inc., 62 F.3d
501, 508 (3d Cir. 1995) (quoting Ashley v. Ashley, 393 A.2d 637, 641 (Pa.
1978)).
Although courts will not lightly pierce a corporate veil, nevertheless in
an appropriate case and in furtherance
of the ends of justice, a corporation and the persons who own its stock
and assets will be treated as
identical. Cunningham v. Rendezvous, Inc., 699 F.2d 676, 680 (4th Cir.
1983); Hanrahan v. Audubon
Builders, Inc., 614 A.2d 748, 753 (Pa. Super. 1992). The effect of such a
decision in this case
appropriately would sweep all of the assets of the non-debtor defendants
into the Blatstein estate, an
objective sought by the trustees and the other plaintiffs, and one that is
just. In United States v. Pisani, 646
F.2d 83, 88 (3d Cir. 1981), we fashioned a federal rule and held that the
corporate entity could be
disregarded and the principal stockholder held liable to a creditor of the
corporation where relevant factors
as set forth in DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co.,
540 F.2d 681 (4th Cir. 1976),
showed that piercing the corporate veil was appropriate.
Factors to be considered in whether to pierce a corporate veil are gross
undercapitalization and
failure to observe corporate formalities, non-payment of dividends, the
insolvency of the debtor corporation
at the time, siphoning of funds of the corporation by the dominant
stockholder, non-functioning of other
officers or directors, absence of corporate records, and the fact that the
corporation is merely a facade for
the operations of the dominant stockholder or stockholders.
Pisani, 646 F.2d at 88 (quoting DeWitt Truck Brokers, 540 F.2d at 686-87).
In Pisani, this court also found relevant additional factors favoring
piercing the corporate veil, such as
operating the corporation with large sums loaned by the stockholder to the
corporation and repayment with
corporate funds while the corporation was failing, and keeping the
corporation undercapitalized by lending it
money instead of investing equity. Id.
As the majority observes, the bankruptcy court, relying heavily on
testimony of defendants' expert witness,
Miller, declined to pierce the corporate veil. The bankruptcy judge relied
on Miller, although he realized that
Miller's experience with debtors of questionable moral and legal standards
"may have jaded his
perceptions." Main II, 213 B.R. at 82. He also thought that Miller was
"occasionally over-aggressive in
defending himself from what he claimed were distortions of the facts
introduced by Plaintiffs' counsel." Id. at
77. Miller apparently impressed the bankruptcy court with his general
thesis that in his experience, "he had
observed all or most of the practices at issue and found them acceptable
business practices." Id. Two or
more wrongs, however, do not make a right and, in some instances, Miller's
testimony has the ring of judge
and jury, as well as expert.
As the majority observes, the bankruptcy court found no proof that the
various corporations were in
existence only to benefit Blatstein's private concerns, or for
illegitimate purposes. It also appeared to the
court that all of the corporations other than Main were financially stable
and successful businesses. As I
discuss below, they were not. In addition, the court found that each
corporation adhered to corporate
formalities by keeping its own financial records and bank accounts, and by
recording each loan granted to
the Blatsteins. I disagree with the court's conclusions, some of which are
couched as findings, for reasons
that follow, and I do not believe that keeping financial records by each
corporation is sufficient to determine
whether they adhered to corporate formalities in light of the evidence to
the contrary.2 The bankruptcy court
ignored significant factors that justify piercing the corporate veil.
_________________________________________________________________
2. This court reviews the bankruptcy court's legal conclusions de novo,
factual findings for clear error, and
exercises of discretion for abuse of discretion. See Interface Group-
Nevada, Inc. v. Trans World Airlines,
Inc. (In re Trans World Airlines, Inc.), 145 F.3d 124, 130-31 (3d Cir.
1998). This court has plenary review
of the district court's order. Id. I believe an analysis of the alter ego
issue must begin with an understanding
of the role and character of the principal players in the activities of
the corporations.
The architect in the formation of the non-debtor corporations is Eric
Blatstein, now bankrupt and insolvent
since 1980 when the IRS filed a lien against all of his property. His
wife, Lori, collaborated with him, serving
"as a faithful spouse, homemaker, and occasional business partner." Main
II, 213 B.R. at 77. Also playing
an important role is Morris Lift, Blatstein's accountant andfinancier.
Lift made loans to Blatstein or on
Blatstein's behalf to the corporations through various unwritten
arrangements. Actively participating in the
"sham foreclosure" of Main and the fraudulent transfer of some of its
assets to some of the non-debtor
corporations, he assisted Blatstein in his persistent efforts to defeat
the claims of his creditors. According to
the bankruptcy court:
Prior to July 1996, Blatstein was the chief executive officer ("CEO") and
president of all of the corporate
Defendants. He remains as president and CEO of all of the corporate
defendants except Main, of which Lift
became president as of July 1996 after "foreclosing" on the assets and
stock of Main on July 25, 1996.
Blatstein has final decision-making power and is the sole individual with
check writing authority for all of the
corporations in issue, including Main, the latter of which all of the
defense witnesses agree Lift allowed him
to continue to "run" after the "foreclosure" by Lift. The employees of all
of these corporations act under
Blatstein's direction.
Id. at 74.
The bankruptcy court also found that Lift had been an "insider" of some of
the debtors in the critical months
prior to their filing; that Lift's foreclosure on his note against Main of
its assets was a sham transaction, and
that"the transfer of most or all of Main's assets to a series of other
Blatstein-controlled entities within the year
prior to the bankruptcy filings constituted ``actual' fraudulent
conveyances which must be set aside." Id. at
67. The collusive foreclosure sale was arranged to prevent Arch from
executing on its judgment against
Main's assets. The court found Lift's claims of innocence not credible,
id. at 81, and found him to be "a
willing accomplice to a fraudulent conveyance." Id. at 81-82. The court
found the credibility of Lift and
Blatstein highly questionable as to numerous issues throughout the trial.
Id. at 13.
The bankruptcy court was convinced that at all times Blatstein had been
"in control of the corporate
defendants' management and operations." The court was also persuaded that
when Blatstein testified that he
directed Shoop, the controller for each of the corporations, to deposit
all funds of Main after its bank
accounts were garnished, and all of Main's accounts receivable, into
Reedco's accounts and later into CFI's
accounts, this testimony constituted an admission "that his intentions
were to hinder and/or delay Arch from
executing on its judgment against Main." Id. at 83. The court also
rejected Miller's attempts to trivialize this
wrongdoing as a standard business practice. Id. The court found that the
transfers orchestrated by Blatstein
rendered Main "an insolvent, worthless shell," and constituted an actual
fraudulent conveyance of Main
assets to Reedco, CFI, Lift and Columbusco within one year of Blatstein's
bankruptcy. Main II, 213 B.R. at
83.
I turn now to an analysis of the corporate ownership. Although the
Blatsteins professed to hold the capital
stock of each of the corporations by the entireties, this representation
is suspect. Blatstein testified that his
wife Lori did not pay for stock in the corporations and wrote no check in
purchase of the stock. Lori also
admitted that she did not know whether she owned stock in the
corporations, and, after an effort to evade
answering questions pertaining to her stock interest, testified that no
stock certificate was ever issued to her.
She also admitted that she never paid anything to purchase stock in the
companies.3 When
_________________________________________________________________
3. Lori testified:
Q. That wasn't my question. The question was, isn't it true you have never
been given a stock certificate that
has your name on it. confronted with his federal tax returns prepared by
Lift and returns filed with the
Commonwealth of Pennsylvania, Blatstein admitted that each of them
reported, under Blatstein's oath, that
he was the sole owner of the corporations.
The plaintiffs assert that Blatstein treated the corporations as a single
entity. I agree. The Waterfront
Management Corporation was organized for the purpose of managing all of
the corporations and Shoop
served as controller, as well as controller for each of the non-debtor
corporations. Blatstein instructed
Shoop that if one of his corporations lacked sufficient funds to pay its
bills to use the funds of another
corporation. For example, in 1996 the aggregate expenses paid by one
corporation on behalf of another
amounted to $554,749, a not insignificant sum. These frequent intercompany
payments do not show
"financially stable and successful businesses." A corporation charged no
interest on intercompany"loans" and
there was no agreement as to when or how they were to be repaid. Id. at
92. The court found that these
intercompany transactions were numerous; the court noted that Airbev paid
$150,000 of Delawareco's
taxes. Engine 46 paid the start up costs for Airbev, and Main did the same
for Reedco. Id. The companies
also made frequent
_________________________________________________________________
A. Yes.
Q. And you have not paid cash to purchase stock in any of the companies
that your husband runs, is that
correct?
A. Correct.
Q. And you don't think that you ever wrote a check to purchase stock in
any of the companies that your
husband runs, is that correct?
A. Not that I can recall.
Q. As a matter of fact, you can't tell if you ever paid anything to
purchase stock in any of the companies that
your husband runs, is that right?
* * *
A. Not that I can recall. payments on Blatstein's $500,000 personal tax
liability to the Internal Revenue
Service on his prior companies that failed. It is evident that the
corporations were grossly undercapitalized;
they each borrowed money from each other for start up costs and for
capital.
The various corporations paid personal expenses of Blatstein, which were
treated as loans. "No loan
documents were ever executed," id., and there were no documents to show
when they would be repaid.
The records were unclear to the court regarding how much money Blatstein
owed Main on monies
advanced in his behalf for payment of personal expenses, although one
exhibit introduced at trial showed a
sum in excess of $400,000. Id.
Essentially, Blatstein used his corporations as his personal bank.
Whenever Blatstein paid his personal
obligations, whether expenses, real estate purchases, personal taxes or
old debts, he drew checks on the
corporations. He had no personal bank account. In August 1996, Columbusco
paid $39,000 for his
personal expenses. The 1995 tax return for Delawareco alone showed
outstanding loans to shareholders of
$283,570. In 1996, the corporation paid $269,117 for Blatstein's personal
expenses. The corporations
made a large down payment for his Bucks County estate and afterward
payments on the remaining debt,
and wages for a horse trainer and stable hand. The bankruptcy court
summarized some of the evidence
relating to Blatstein's personal expenses as follows:
At trial, Shoop testified that numerous personal expenses of the
Blatsteins were paid by the various
corporations, including expenses for a horse trainer hired by the
Blatsteins, loan payments to Lift for money
loaned to the Blatsteins for the purchase of their home, and payments of
Blatstein's personal income tax
debts owed to the Internal Revenue Service ("the IRS"). This testimony was
confirmed by Blatstein and Lift
during their trial testimony as well, and by numerous financial documents
introduced into evidence.
Main II, 213 B.R. at 89. The bankruptcy court further found: Loans from
the corporate defendants to the
Blatsteins include the $140,000 down payment that Pier 53 made on the
Blatstein residence, which was
purchased in 1994. The monthly mortgage payments on this loan are made by
Delawareco and Main. In
addition, Delawareco and Columbusco made the payments on Blatstein's
personal federal income tax
liability. The Beratans were being repaid with $1,000 per week payments
from Main and its successor
entities, e.g., Reedco, [Chicken Fingers], and Columbusco.
Id. at 90.
In addition, Blatstein siphoned large sums of money as "loans" or "wages"
from the corporations,
notwithstanding their gross undercapitalization and their scurrying to
borrow money from each other to stay
afloat. For the year 1996, he drew $555,288 in gross wages from Waterfront
Management Corporation.
These funds were deposited in Lori's bank accounts. His personal IRS
return for 1995 showed gross wages
of almost $500,000. These funds also went into his wife's account, which
this court now holds constituted
fraudulent transfers.
Despite the bankruptcy court's negative findings as to Blatstein's
credibility and his fraudulent activity to
avoid paying creditors, the continuous and extensive payment of his
personal obligations by the corporations
and the non- observance of the corporate forms or ordinary business
practices, the bankruptcy court,
largely persuaded by Miller, refused to pierce the corporate veil. Miller,
the defendants' expert, opined that
there was nothing wrong with a corporation directly paying the expenses of
a dominant shareholder. That
depends, however, upon whether the payments are occasional, the amount,
and the financial status of the
dominant shareholder, whether he is a person of worth or insolvent and
without assets, and whether the
corporations are financially stable or severely undercapitalized.
The Pennsylvania Superior Court in Hanrahan v. Audubon Builders, Inc. held
that where corporate funds
were utilized, in the form of direct payments, as is the case here, from
the corporations' accounts for the
shareholders' personal expenses, including expenses at their home, for
personal jewelry, personal mortgage
payments, and their son's private school tuition, piercing the corporate
veil was appropriate. 614 A.2d at
753. The salient considerations here demonstrate that the personal
expenses and other substantial personal
obligations were paid and the large withdrawals permitted because
Blatstein made the decision, he drew the
checks, and corporate formalities were ignored.
I believe that Miller, who the judge acknowledged might have had "jaded
perceptions" because of his prior
experiences with debtors of dubious practices, misled the court. Miller
applied his own personal "measuring
stick" to reach for his conclusion that the corporate defendants were not
Blatstein's alter ego. Id. at 92.
Miller and the bankruptcy judge compartmentalized Blatstein's
improprieties as isolated, discrete acts
instead of viewing the totality of all the circumstances surrounding
Blatstein's wide range of activities with the
corporations. Miller attempted to minimize the number and amounts of
Blatstein's personal expenses paid by
offering his own formula. He took 1996 total gross revenues of the
corporate defendants and divided it by
Blatstein's personal expenses to come up with 3.89% as representative of
the total gross revenues paid for
personal expenses. With this approach, he ignored the net earnings of the
corporations, treated the
corporations as a single entity for this purpose, and gave no
consideration to Blatstein's disregard of the
corporate form and the separate personalities of the corporations and the
individual. In DeWitt Truck
Brokers, which we cited with approval in Pisani, the court noted
that"[t]he conclusion to disregard the
corporate entity may not, however, rest on a single factor." 540 F.2d at
687.
Miller concluded that technically no fraudulent transfers in the form of
company loans occurred because the
transfers were from solvent corporations. They were barely solvent,
however, only if the loans to an
insolvent Blatstein are considered in the calculation. Of greater
relevance and importance than the solvency
of the corporations, however, in determining whether the corporate veil
should be pierced are the character,
quantity, and frequency of the intercompany loans and the payment of
Blatstein's expenses, all made solely
at Blatstein's behest and accomplished in total disregard of ordinary
corporate business practices. These
corporations not only made loans to each other but they directly issued
their checks to creditors in payment
of another corporation's bill and then booked the same as an inter-company
loan. As the court noted in
DeWitt Truck Brokers, "undercapitalization, coupled with disregard of
corporate formalities, lack of
participation on the part of the other stockholders, and the failure to
pay dividends while paying substantial
sums, whether by way of salary or otherwise, to the dominant stockholder
... has been regarded fairly
uniformly to constitute a basis for an imposition of individual liability
under the doctrine." 540 F.2d at 687.
Miller's opinion also addressed the legal factors reserved for courts
under an alter ego analysis and
exceeded the bounds of an accounting expert in his conclusion that
piercing the corporate veil here was not
justified. Relying on Miller's testimony, the bankruptcy court held that
the plaintiffs failed to carry their
burden. I disagree, for the record provides overwhelming evidence that
Blatstein, as the president and sole
stockholder of each corporation, the principal, if not the only
stockholder, with sole check drawing power,
ignored the corporate form, and treated the corporations as a single
entity and his alter ego. A glaring
example of Blatstein's disregard of the corporate entity is his agreement
without appropriate corporate
authorization with Transmedia Network, Inc. This is an organization which
purchases food credit for its
members and it pays the restaurant or night club fifty cents for every
dollar of credit purchased. A provision
of the agreement Blatstein entered into with Transmedia is that if one of
the Blatstein restaurants closes, food
credits can be used at all the other restaurants in which he has an
interest. Thus, if the restaurant that was
paid for the food credits received all the money and thereafter closed its
doors or could not honor the
credits, the other restaurants operated by the corporations would make
good to Transmedia members. He
had a similar arrangement with the Jefferson Bank under which checks
written by one corporation which has
not sufficient funds will be paid by one of the other companies that has
sufficient funds available. Blatstein,
during the life of the corporations, has systematically schemed to avoid
his creditors and has cleverly used
the corporations and Lori's bank accounts to thwart their efforts. He
avoided his creditors by keeping no
bank accounts or property in his name to answer for his debts, but paid
expenses and whatever other
obligations he chose to pay with corporate funds. All family bank
deposits, including his income, were in his
wife's name. His personal purchases were made by one or more of the
corporations, for he had no personal
accounts of his own, including the purchase of his Bucks County estate.
The corporations paid his personal
income taxes, including personal withholding taxes owing for prior failed
corporations. The corporations
made large "loans" to him, although they were undercapitalized and in
financial straits. Blatstein even
admitted that four of these corporations, Delawareco, Reedco, Engine 46,
and Columbusco, continued to
make payments to him or on his behalf after they had been garnished. This
is probative evidence of
fraudulent conduct and abuse of the corporate entity. See Northern Tankers
(Cyprus) Ltd. v. Backstrom,
967 F. Supp. 1391, 1413 (D. Conn. 1997).
Personal and corporate finances were intermingled. The bankruptcy court
found that funds in the Gruntal
account, of which $480,000 was deposited on October 3, 1995, came from
Delawareco and was "used to
purchase items for the Blatsteins' residence; to pay their mortgage; [and]
to pay bills, predominantly tax
liabilities, on behalf of the various corporate defendants." Main II, 213
B.R. at 94 (emphasis added). As the
president and dominant stockholder of each corporation, time after time he
disregarded the corporate
structure of his companies for personal purposes.
In circumstances not as flagrant as we have here, this court in the past
has pierced the corporate veil. There
is such unity of interest, ownership and function between Blatstein and
the non-debtor corporations that the
separate personalities of the individual and the corporations no longer
exist. This fusion of the corporate and
individual personalities "may be satisfied by a showing of domination and
control of the corporation, which
occurs most often in the context of a parent-subsidiary relationship or of
a closely held corporation." Note,
Piercing the Corporate Veil: The Alter Ego Doctrine Under Federal Common
Law, 95 Harv. L. Rev. 853,
854-55 (1982) (emphasis added).
In Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1521 (3d Cir.
1994), aff 'd, 514 U.S. 938
(1995), this court held that the corporate veil may be pierced when a
corporation's affairs and personnel
were manipulated to such an extent that they became nothing more than a
sham to disguise the alter ego's
use of their assets for his own benefit in fraud of creditors. The
activities of the non- debtor corporations
here show that they played a major role in meeting Blatstein's personal
needs in assisting him in his struggle
to hinder and avoid his creditors. Proof of fraud, however, is not
necessary to justify piercing the corporate
veil, although fraudulent elements are present here. Under DeWitt, it is
clear that "the corporate veil may be
pierced in appropriate circumstances even in the absence of fraud or
wrongdoing." Cunningham, 699 F.2d
at 680.
The bankruptcy court was also influenced in its decision by the clearly
erroneous belief that the non-debtor
corporations "are financially stable and successful businesses." Main II,
213 B.R. at 91. If relevant, which I
doubt, the evidence is to the contrary. Each corporation frequently paid
bills for the other and checks
shuttled back and forth in an effort to meet expenses and creditors, all
of which reveals the fragile financial
condition of the companies.
Despite the absence of any documents evidencing the "loans" to Blatstein,
their terms as to repayment,
interest, or collateral, or any corporate authorization of the loans,
formal or informal, the court concluded
that corporate formalities were observed because each corporation had its
own bank account and kept its
own financial records. However, separate bank accounts and records for
each corporation are not alone
sufficient proof that corporate formalities were observed and the
corporate entity respected, particularly
when the bank accounts were each subject to Blatstein's exclusive control
and used for his personal
purposes. The records kept by each corporation are ordinary business
records without any distinctive
corporate characteristics except that each corporation kept its own.
Shoop admitted that several weeks before his final deposition in this
case, Lift told him to clean up his
records, which resulted in the reduction of Blatstein's loan balances
"because my records were inaccurate."
Shoop also acknowledged that during his service as Controller from July
12, 1994 through 1996, he never
issued a 1099 form to Lift showing the payment to him of interest on his
loans to the corporations. He
explained these annual lapses as an "oversight." He also admitted issuing
a check to Lift for $9,000 on
September 18, 1996, at Lift's direction which he could not explain.
Although the foregoing illustrates that the
corporate records were not always accurate as to Blatstein and Lift, they
do show that in 1996, the
corporations paid for Blatstein's personal expenses of $269,117.16 plus
his wages for the year of
$558,288. (256a). In undercapitalized corporations struggling to meet
their current expenses, a withdrawal
of $827,405 by Blatstein in one year constituted a "siphoning of funds of
the corporation by the dominant
stockholder." Pisani, 646 F.2d at 88.
Although the majority acknowledges that "the Blatsteins did not run their
corporations as strictly separate
entities," it concludes that they did uphold the corporate form
sufficiently because the corporations kept
separate records and bank accounts, and entered on the books all loans the
corporations made to each
other and to the shareholders. Maj. Op. at 21. I do not believe that under
the law of this circuit, this one
factor should defeat an equitable result and bar the piercing of the
corporate veil in light of the many factors
present that demonstrate the unity of interest and ownership of Blatstein
and his corporations that
commenced with the initial fraudulent transfers from Main to Reedco.
When one views the total picture, illuminated by the relevant factors set
forth in DeWitt Truck Brokers, Inc.
v. W. Ray Flemming Fruit Co., which were adopted by this court in United
States v. Pisani, justification for
piercing the corporate veil is clear. First, the corporations were grossly
undercapitalized. Second, corporate
formalities were never observed, and officers and directors were non-
functional. Although the corporations
kept separate bank accounts and separate records, this one factor is not
determinative. Third, Blatstein, the
dominant and, in my opinion, the sole stockholder, flagrantly siphoned
funds from the corporations. He
commingled personal and corporate funds. Fourth, Blatstein alone drew
checks on the bank accounts of
each of the corporations and corporation funds were used extensively for
all of his personal obligations and
expenses. Fifth, Blatstein used the corporations to hinder and delay
creditors, including the fraudulent
transfer of some of Main's assets in the face of garnishment proceedings
to Reedco and Columbusco, and
the fraudulent transfer of funds siphoned from the corporations to his
wife's bank accounts. Finally, the total
picture of Blatstein's activities portray that his corporations were "a
facade for the operations of the
dominant stockholder." Pisani, 646 F.2d at 88.
Accordingly, I respectfully dissent from the majority's decision to affirm
the district court's order affirming the
bankruptcy court's determination not to pierce the corporate veil of
Blatstein's corporations.
A True Copy: Teste:
Clerk of the United States Court of Appeals for the Third Circuit 36
FOOTNOTES