Business Owner Personally Liable To Company Creditor: Paid Himself Before Satisfying Creditor’s Judgment

January 24, 2014 | Comments Off on Business Owner Personally Liable To Company Creditor: Paid Himself Before Satisfying Creditor’s Judgment
Posted by Donald F. Campbell, Jr.

Business owners of insolvent companies should be careful about who gets paid and, more importantly, who does not.  The New Jersey Appellate Division recently upheld a $78,333.91 fraudulent transfer judgment against the owner of a construction company after the owner ignored a bankruptcy trustee’s judgment against his company and then used company funds to pay various personal expenses before shutting the business down.

Walter Bondar was the sole owner of Bonpel Builders (“Bonpel”), a limited liability company.  In 2002, Bonpel Builders performed carpentry work for Velocita Corporation (“Velocita”), a telecommunications company and Velocita paid Bonpel $71,543.64 for the work.  Less than ninety days later, Velocita filed for Chapter 7 bankruptcy in New Jersey.  In 2004, Velocita’s bankruptcy Trustee asserted a claim against Bonpel claiming the payment from Velocita to Bonpel was a preference payment under §547 of the United States Bankruptcy Code and subject to avoidance.  Bonpel initially contested the claim, but eventually defaulted, resulting in a judgment being entered against Bonpel in the amount of $71,543.64, plus interest.  Prior to entry of the judgment, Mr. Bondar transferred all of Bonpel’s assets to Ark Builders, LLC, another company of which Mr. Bondar was the sole member.  The Trustee sought to collect on the judgment and obtained the appointment of a state court Receiver for Bonpel.  The Receiver served discovery requests on Mr. Bondar and the records produced revealed that Mr. Bondar used company funds to pay for the following personal expenses: $32,787.00 for his daughter’s college expenses; $22,432.00 for family medical expenses; $76,537.00 for cash withdrawals; and $101,591.00 for charitable donations.  Importantly, some of these payments were made after the Trustee asserted the preference claim.

The Receiver filed a complaint in New Jersey state court alleging Bonpel fraudulently transferred funds to Mr. Bondar and his family in violation of the New Jersey Uniform Fraudulent Transfer Act (“UFTA”) (N.J.S.A. 25:2-25 et seq.).  Mr. Bondar filed an answer denying the Receiver’s allegations arguing the payments were made in consideration for Mr. Bondar’s services to Bonpel and, therefore, were not fraudulent.  The Court disagreed with Mr. Bondar’s defense and ruled that the payments to Mr. Bondar were fraudulent transfers to an “insider” in violation of Section 27b of the UFTA.  Section 27b states that “a transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.”  The judge concluded that Mr. Bondar was aware of Bonpel’s obligations to pay the Trustee at the time most of the alleged transfers were made and that Mr. Bondar made a conscious decision to pay his personal expenses rather that those of an “unrelated creditor.”  The judge explained that even after the Trustee filed the preference claim in May, 2004, Mr. Bondar still used Bonpel’s funds to pay “more than $135,000.00” of his personal expenses.  The Judge found that Bonpel was insolvent when the Trustee filed the preference claim against Bonpel, that Bonpel did not have the ability to pay both the Trustee and Mr. Bondar and that Mr. Bondar chose to pay himself first and ignore the Trustee’s claim.  The Court entered judgment against Mr. Bondar in the amount of $78,333.91.

Business owners of an insolvent company should take heed.  Though payment to the owner for services rendered to the company may ordinarily be legitimate transactions, once the company becomes insolvent, transfers to “insiders” are subject to scrutiny by creditors.  The facts in this case are rather egregious.  It is never prudent to pay personal expenses directly from company funds; however, this decision goes even further.  Even assuming Mr. Bondar was entitled to receive these transfers in consideration for services performed, the court found that he could not prefer his claims over that of a non-insider.  Therefore, company owners should be careful when receiving payments from their company while creditors remain unpaid.  Though there are certain defenses available, business owners could ultimately become personally liable for the creditors’ claims.

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