Of Fraudulent Conveyances and Shell Games: What amounts to a mere change in a business’s name will not protect the business from its creditors – and at least in this case, created personal liability for its owner

Boy, this case turned out to be a real mess … for the other guys.

A little over two years ago, a client came to me with what appeared to be a simple collection matter. The client was a clinical laboratory. One of its clients (we will call them ABC Co) had failed to pay about $24,000 for services rendered by my client. In fact, ABC Co never paid even $1.00 to my client over a period of approximately a year-and-a-half. When I contacted ABC Co to discuss the matter I was essentially ignored. My client authorized the filing of a lawsuit against ABC Co. After the “complaint” (this is the document that initiates the action) was filed at the Courthouse, it was time to “serve” (i. e, deliver) the complaint to ABC Co. The process server (the guys and gals that deliver the complaint) went to ABC Co’s place of business to serve the complaint. The process server’s “Status Report and Declaration of Non-Service” described what happened next:

The receptionist informed the process server that the business now at the premises is XYZ Co and that “they [XYZ Co] use to be ABC Co.” The process server thereafter prepared the Declaration of Non Service, including stating that he “was unable to effect service for the following reasons: XYZ CO HERE, PER RECEPTIONIST, THEY USE TO BE ABC CO.” Now, to make a very long story much shorter, after investigating what happened here is what I found. Sometime after my client (and I imagine others as well) had started to chase its money from ABC Co, ABC Co’s owner (we will call her Dr. Tricky) filed a “Certificate of Dissolution” bringing an end to ABC Co’s corporate existence. Dr. Tricky then incorporated a new entity (XYZ Co). Without missing a beat, Dr. Tricky continued to run the same business, at the same address, using the same employees, same equipment, etc. The only difference between the two entities (ABC Co and XYZ Co) was the name. As just one of many examples of misrepresentations made by Dr. Tricky, the Certificate of Dissolution of ABC Co that she executed and filed included the statement that “The corporation’s known debts and liabilities have been actually paid.” Ahem, ah, Dr. Tricky, remember us?

Dr. Tricky continued to basically ignore my client, me and the lawsuit, apparently feeling that it was not XYZ Co’s problem, and certainly not her problem (as in no personal liability). Well, as we were now aware of the “shell game” that had been perpetrated by Dr. Tricky, I “amended” the complaint TO ADD XYZ Co as a defendant under “fraudulent conveyance” theories, and TO ADD Dr. Tricky, INDIVIDUALLY, for “conspiracy to commit a fraudulent transfer.” Even then, perhaps believing that we could never succeed in getting a judgment against XYZ Co and Dr. Tricky herself, XYZ Co and Dr. Tricky (along with ABC Co) continued to ignore the lawsuit. Well ABC Co, XYZ Co and Dr. Tricky all “defaulted” (i. e., they failed to file any response to the complaint served on them). As a result, I succeeded in obtaining “Default Judgments” against all three (jointly and severally) for the $24,000 in unpaid invoices.

Well, as you can imagine, Dr. Tricky FINALLY stopped ignoring the lawsuit when she was finally served with a copy of the Default Judgment entered against her INDIVIDUALLY. Funny how that works. Her efforts to “set aside” (i. e., undo) the Default and the Default Judgment entered against her ultimately failed. In my experience, usually such “shell games” are done with a little more care and planning. Dr. Tricky’s attempt was so blatant and transparent that it resulted in her becoming PERSONALLY LIABLE for the debt of ABC Co.

Also, it is usually not a good idea for a business with an established business address to ignore legal papers. I mean what do you tell the judge … “yah, that’s our address, but we are not there …!”

I mean REALLY?


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