Tailwinds for Judgment Creditors: Reverse Veil Piercing Continues to Gain Steam in New York

The ‘Enforcement Case of the Month’ is a series authored by New York-based Investment Managers Gabe Bluestone and Jeff Newton, discussing recent U.S. court decisions and assessing their impact on judgment/award enforcement strategies and asset recovery efforts globally.

Judgment and award creditors often fret that US courts are unfriendly and the tools to unravel complicated asset protection schemes are inadequate. In an encouraging ruling refuting this sentiment, the Southern District of New York recently reiterated its endorsement for reverse veil piercing as a remedy for unsatisfied judgment creditors seeking to hold corporate entities responsible for judgment liabilities of shareholders and directors.

The court’s decision in Citibank, N.A. v. Aralpa Holdings Ltd. P’ship, Case No. 1:22-cv-08842 (JLR), 2024 U.S. Dist. LEXIS 18891, 2024 WL 398094 (S.D.N.Y. Feb. 2, 2024) found that two corporate entities housing trophy real estate properties in New York and Miami controlled by Mexican business titan Rodrigo Lebois Mateos—entities with no connection to the underlying loan or judgment—were liable for a nearly $40 million judgment issued personally against Lebois.

Reverse Veil Piercing Standard

Under traditional veil piercing in New York, an otherwise immune shareholder or director may be held personally liable for the debts of a corporation if the owners and/or directors have (a) exercised complete domination of the business and (b) such domination was used to commit a fraud or wrong against the plaintiff. The domination element is assessed through a variety of non-exhaustive factors, including a corporation’s undercapitalization, failure to follow corporate formalities, commingling of corporate and personal funds, and personal use of corporate property.  Reverse veil piercing involves the logical corollary: attaching the judgment liability of a corporation’s owners and/or directors to the business entity through a similar factual analysis. Underlying these equitable claims is the near-bedrock principle that the law generally disfavors any disregard of the corporate form, in either direction. After all, the essential purpose of corporations and business entities is to provide an expressly separate legal existence from the individuals owning and operating them.  It is no small feat for a court to disregard the corporate form and pierce or reverse pierce the corporate veil given the implications of disrupting the legal partition protections offered by corporations.  Yet courts will not hesitate to elevate substance over form to avoid inequitable results.

Citibank v. Aralpa Holdings Partnership

In 2017, Citibank agreed to provide Aralpa Holdings Partnership Ltd. with a $20 million line of credit that was personally guaranteed by Lebois.  Under the Guaranty, Lebois represented that he had a net worth of “not less than $200 million,” and agreed to provide semi-annual personal financial statements to Citibank. Lebois’ Guaranty was amended three times: the line was increased to $50 million, and Lebois agreed to maintain a net worth of not less than $400 million in each version.

Background

Lebois provided Citibank with the personal financial statements and over years represented that his net worth exceeded $400 million.  Each statement listed specific personal assets Lebois owned, including tens of millions of dollars’ worth of art, boats, and jewelry. Every statement also included a “Personal Real Estate” section, listing: (a) an asset labeled “NY, NY,” and (b) another one called “Miami, FL (Fisher Island).” These properties were legally owned by separate corporate entities. The New York property referenced a high-rise condominium on Billionaire’s Row in Manhattan owned by One57 36B, LLC (“One57”) and the Miami property referred to a luxury home on the exclusive Fisher Island held by Aralpa Miami Investments LLC (“Aralpa Miami”) (this home was sold for nearly $9 million in early 2023—the proceeds of which were not deposited in Aralpa Miami’s bank account).

One57 was a single member LLC that identified Lebois as president and his daughter as secretary. The LLC’s sole member was Mexican corporation Aralpa Capital SA de DV, an entity that Lebois served as president of, and his daughter was an “authorized signer.”

Aralpa Miami’s sole member was also Aralpa Capital SA de CV. Lebois’ daughter testified that her father held “no position” with the Mexican entity and that she was a managing director handling operational matters along with another colleague. Aralpa Miami also maintained a bank account in Miami holding more than $2 million.

Neither One57 or Aralpa Miami maintained an office or conducted any business beyond holding the real estate. Each relied on transfers from Lebois’ personal accounts to cover mortgage and property management expenses.

Decision

Citibank already held a $40 million judgment against Lebois personally. It moved post-judgment to hold One57 and Aralpa Miami liable as well—to secure the NYC property and Aralpa Miami’s bank account—under a reverse veil piercing theory.

The court assessed the domination prong of the test and found Lebois controlled One57 and Aralpa Miami so deeply that each entity was a “mere instrumentality” of his. The court relied on the following facts:  (a) both entities were inadequately capitalized and conducted no business, and any funds that had been in their bank accounts were deposited from Lebois’ personal accounts; (b) both entities used Lebois’ personal addresses as their own; (c) Lebois personally provided the money for the mortgage payments on each property; and (d) both entities had property that Lebois used as if it were his own.

For the second prong—whether Lebois’ domination over One57 and Aralpa Miami was used to “commit a fraud or wrong” which resulted in injury to the plaintiff—the court also found in favor of Citibank. It determined that Lebois’ repeated representations to Citibank (by way of his personal financial statements) that the properties were his own when it benefitted him, only to disclaim any control once a creditor came calling, was a clear “judgment-proofing” fraud that warranted reverse veil piercing and attaching liability to the entities.

The court did not base its conclusion on Lebois owning One57 or Aralpa Miami, directly or indirectly. Rather, it found that he was an “equitable owner” of each—the distinction being that an individual who exercises sufficient control over a corporation can be deemed to own it in equity, notwithstanding that he or she is not a legal shareholder or member. Indeed, Judge Jennifer Rochon’s decision makes no reference to whether Lebois was the ultimate beneficial owner of One57 and/or Aralpa Miami.

The court reached the merits of the dispute after addressing objections to the court’s jurisdiction—subject matter and personal (for Aralpa Miami)—and the substantive governing law. Aralpa Miami, a Georgia LLC, contended that Georgia law should apply to the reverse veil piercing claim because New York’s adherence to the internal affairs doctrine required it. The doctrine generally recognizes that a corporation’s state of incorporation regulates the internal affairs of that entity. Notably, Georgia law does not permit reverse veil piercing.  Because New York, however, rejects a per se application of the internal affairs doctrine, and Aralpa Miami had no meaningful connection to Georgia beyond being organized there, the court found that because New York was the jurisdiction with the “greatest interest” in the dispute, its law governed.

One57 and Aralpa Miami noticed an appeal to the Second Circuit shortly after the decision was issued.

Takeaway

While reverse veil piercing remains a limited and highly fact specific remedy, the Aralpa decision reminds us that courts continue to be attuned to protecting judgment creditors especially as the ever sophisticated and motivated asset protection industry seeks new ways to insulate and conceal assets from creditors. Judgment creditors enforcing awards against individuals in New York are wise to consider reverse veil piercing as a powerful arrow in the enforcement quiver.