Long Island bankruptcy judge pierces corporate veil to permit investor in movie about mafia member, to file claim against the individual debtor, even though the debtor had done business through a corporate entity
It is basic advice for individuals conducting business to set up a corporate entity to provide a mechanism to limit personal liability in the event the business is not successful.
However, as was demonstrated in this Long Island Chapter 13 bankruptcy case, when the corporate entity is used for illegitimate purposes, the individual should not be permitted to insulate himself from the consequences of his fraudulent conduct.
The debtor, Georgios Stamou, in 2009, filed an individual Chapter 13 bankruptcy in the United States Bankruptcy Court for the Eastern District of New York, located in Central Islip. The debtor’s 100% plan was thereafter confirmed.
The debtor probably thought everything was going well. It was not. A creditor of his corporate business entity was now seeking recourse on a business debt. Several years earlier, the debtor created a corporate entity to handle his business of producing television programs and movies. The debtor was the sole employee.
“Easy Street” Movie — A Troubled Child Drawn Into Life of Organized Crime
The wife of a self-proclaimed former member of an organized crime family wrote a script for a movie project, tentatively titled, “Easy Street,” about a troubled child who is drawn into a life of organized crime, based on her husband’s life.
She hired the debtor’s corporate entity to produce the movie and paid him more than $400,000. When the project failed, she sued him in state court, alleging that the debtor improperly diverted $343,000 for unrelated business and personal expenses.
The debtor did not even schedule the potential claim in the bankruptcy. The creditor learned of the bankruptcy filing during post-petition state court litigation against the corporate entity. The matter soon landed before Bankruptcy Judge Robert E. Grossman who had presided over the Chapter 13 case.
After an evidentiary hearing, Judge Grossman concluded that the corporate veil should be lifted and that the debtor should be responsible for the harm to the creditor. He then permitted the creditor to file a proof of claim in the individual case, although the decision did not address the amount of the claim or whether it should be dischargeable.
Corporate Veil Pierced by Bankruptcy Court
In a twenty-page decision that Judge Grossman issued on January 17, 2013, the Judge provided a detailed discussion with regard to piercing the corporate veil and stated that in order to succeed in piercing the corporate veil, the creditor must show that 1) the owner “exercised complete domination of the corporation in respect to the transaction attacked” and 2) “such domination was used to commit a fraud or wrong against the plaintiff which resulted in injury.” In re Georgios Stamou (8-09-78895, Bankr.E.D.N.Y.).
Here, the debtor disclosed that he used the funds to pay for groceries, hotels, pet supplies, doctor bills, meals and entertainment, income tax, and 100% of the costs of operating the corporate office, even though the corporate entity simultaneously had other ongoing projects with other clients.
He also used the money for travel, flying to three European countries, claiming that he was scouting movie locations for the film. Judge Grossman did not find the debtor to be credible with some of his explanations and determined that the corporate entity did not satisfy its implied duty of good faith and fair dealing under an oral agreement with the creditor.
Once the creditor files the proof of claim, the debtor will have to decide whether to object to it. In any event, he will need to modify his plan if he still has a feasible financial situation to cover the additional payments needed to satisfy the new claim.
Click here to see the actual In re Georgios Stamou decision by Judge Grossman .