Opinion
01 Civ. 1108, 01 Civ. 1225, 01 Civ. 1230
January 28, 2002
MEMORANDUM AND ORDER
Appellants Roy Babitt ("Babitt"), Chase Manhattan Bank ("Chase") and Citibank, N.A. ("Citibank") appeal an Order dated October 11, 2000 (the "October 11 Order"), of the United States Bankruptcy Court for the Southern District of New York ("Bankruptcy Court") (Hon. Richard A. Bohanon). For the reasons set forth below, the portion of the October 11 Order which dismissed the complaint in Adversary Proceeding No. 00-2297 brought by Babitt, Chapter 7 trustee of debtor Vytautas Vebeliunas ("Vytautas"), against Vanda Vebeliunas ("Vanda"), individually and as trustee of the "Vart Trust", an irrevocable trust ("IVT"), seeking the turnover to Babitt of certain property located in Lattingtown, New York, is affirmed in part and reversed in part and remanded.
BACKGROUND
On June 12, 1977, Vanda's husband Vytautas formed an entity known as North Shore Partnership ("NSP"). In re Vebeliunas, 252 B.R. 878, 882 (Bankr.S.D.N.Y. 2000). NSP's partners were Vanda, other family members and several of Vytautas' business associates. Id. On July 12, 1977, Litas Investing Co., Inc. ("Litas") acquired a residential estate located in Lattingtown, New York (the "Lattingtown Estate"). Id. Vytautas was an insider at Litas, which he used for real estate and other business ventures. Id. Vytautas, Vanda and their family began residing at the Lattingtown Estate shortly after Litas acquired it. Id. At the time of the October 11 Order, the Lattingtown Estate was valued between $4,000,000 and $5,000,000. Id. at 881. Directly adjacent to the Lattingtown Estate is Lot 384, a five-acre area valued at $1,000,000 at the time of the October 11 Order. Id.
On February 16, 1985, Vanda caused the IVT to be created. Id. at 882. Under its terms she is the sole trustee, and Vytautas is a beneficiary "eligible to 20% of all of the distributions from the Corpus of the Trust." Id. The stated purpose of the IVT was to hold title to the Lattingtown Estate. Id. On February 25, 1985, Litas conveyed the Lattingtown Estate to the IVT. Id.
On March 4, 1987, Vytautas caused to be created the "Vart Trust, a revocable, living trust" ("RVT"). Id. Vytautas was the sole trustee of the RVT; the beneficiaries were Vanda and certain children. Id. The RVT owned a life insurance policy on Vytautas' life and was meant to hold the Lattingtown Estate, although neither was ever actually transferred to the RVT. Id.
On May 13, 1987, Vytautas executed a first mortgage on the Lattingtown Estate to secure Chase's $1,000,000 loan to Vytautas. Id. at 884. In connection with that mortgage Vytautas affirmed that he lawfully owned the Lattingtown Estate — a statement he knew to be false at the time. Id. The same day, Vytautas "executed a deed from `VART TRUST BY: Vytautas Vebeliunas' to himself seeking to satisfy the bank's condition that he hold title to the Lattingtown Estate." Id. Chase then delivered Vytautas a check for $1,000,000. Id.
On September 1, 1987, Vytautas executed a second mortgage on the Lattingtown Estate to secure Citibank's $700,000 loan to Vytautas. Id. at 884-85. Vytautas had signed and delivered an affidavit one day earlier that, like the Chase mortgage, contained "patently" false and misleading statements — viz., that the IVT trust was actually a revocable trust. Id. The same day, Citibank sent to Vytautas a check for $700,000. Id. at 885.
On February 3, 1988, Vytautas, by deed, "purportedly transferred the Lattingtown Estate back to `VART TRUST.'" Id. at 885.
In January 1995, Chase "initiated a proceeding against [Vytautas] and others seeking to foreclose its lien on the Lattingtown Estate." Id. At this point Vytautas finally revealed to Chase the existence of the IVT. Id. He asserted that he did not own the Lattingtown Estate, but that the IVT did, and that he had only a 20% beneficial interest in the IVT. Id. The Bankruptcy Court found that "[t]his statement is, obviously, directly contrary to the statements he made to the banks to induce them to make the loans in the first place, is plainly a fabrication and is not credible." Id.
On May 21, 1998, Vytautas filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of New York, which was later transferred to Judge Bohanan in the United States Bankruptcy Court for the Southern District of New York. Id. at 881. In November 1998, the case was converted to one under Chapter 7, and Babitt was appointed trustee. Id.
The Bankruptcy Court consolidated two adversary proceedings for purposes of trial. Id. at 880. In the first adversary proceeding, appellant Babitt sought to have Lot 384 — which the IVT acquired from the NSP in 1997 — and the Lattingtown Estate turned over to the bankruptcy estate (the "Bankruptcy Estate") pursuant to 11 U.S.C. § 542. Id. at 881, 885. Babitt argued that Vytautas was merely an "alter ego" of the trust holding record title to those properties and that the trust should therefore be disregarded. Id. at 885. In the second adversary proceeding, Babitt objected to Vytautas' discharge, contending that Vytautas "knowingly made fraudulent, false oaths and withheld recorded information, under 11 U.S.C. § 727(a)." Id. at 881. Babitt also sought to except debts to Chase and Citibank from any discharge granted to Vytautas, pursuant to 11 U.S.C. § 723(a). Id. Chase and Citibank claimed first and junior liens, respectively, on the Lattingtown Estate due to the mortgages executed by Vytautas. Id.
At trial, after Babitt rested his case, Vanda moved for judgment as a matter of law pursuant to Rule 52(c) of the Federal Rules of Civil Procedure. Id. at 880. The Bankruptcy Court decided not to rule on the motion until the close of all the evidence. Id. Vanda rested her case, the parties presented their closing arguments, the motion was deemed moot, and the Bankruptcy Court took the case under submission. Id. at 880-81. On September 12, 2000, after receiving post trial briefs, the Bankruptcy Court issued a Memorandum of Decision that held: (1) in favor of Vanda individually and as trustee of the IVT dismissing the complaint as to her; (2) in favor of Babitt refusing to grant Vytautas a discharge under 11 U.S.C. § 727; and (3) alternatively, excepting from any discharge Vytautas may later be granted his debts to Chase and Citibank. Id. at 890.
The October 11 Order incorporated by reference the Bankruptcy Court's September 12, 2000, Memorandum and Decision.
In its Memorandum of Decision, the Bankruptcy Court rejected the argument that the alter ego theory of corporate law could be used to "pierce the veil" of the IVT — which held record title to the Lattingtown Estate and Lot 384 — and turn those properties over to the Bankruptcy Estate. Id. at 886. The Bankruptcy Court observed that it was "unable to find any reported decisions on point which support extension of the alter ego theory, a creature of corporate law, to the law of trusts." Id. The Bankruptcy Court distinguished certain cases that used an alter ego theory to "disregard a trust relationship" on the ground that those cases "involve a limited arena of taxpayer liability law where taxpayers attempted to use a trust transaction to avoid their personal tax liability." Id. at 886 n. 12 (citing Loving Saviour Church v. United States, 728 F.2d 1085 (8th Cir. 1984); F.P.P. Enters. v. United States, 830 F.3d 114 (8th Cir. 1987); William L. Comer Family Equity Trust v. United States, 732 F. Supp. 755 (E.D.Mich. 1990), aff'd sub nom., 966 F.2d 1455 (6th Cir. 1992); United States v. Letscher, 83 F. Supp.2d 367 (S.D.N.Y. 1999); United States v. Kattar, 81 F. Supp.2d 262 (D.N.H. 1999)). The Bankruptcy Court then engaged in a detailed explanation as to why it was declining to apply the alter ego theory to trusts. Vebeliunas, 252 B.R. at 886-87.
The Bankruptcy Court also rejected Babitt's argument that the IVT should be estopped from asserting ownership of the Lattingtown Estate because Vanda knew about the loans from Chase and Citibank but remained silent. Id. at 887-88. The Bankruptcy Court reasoned that Babitt "has not shown by a preponderance of the evidence that Vanda knew of the Chase and Citibank loans until Chase commenced foreclosure." Id. at 885. Finally, the Bankruptcy Court found that Babitt had proven the elements for a judgment refusing to grant Vytautas a discharge under 11 U.S.C. § 727 and that, if it might later be determined that Vytautas were entitled to a discharge, the debts he owes to Chase and Citibank must be excepted from it. Id. at 889-890.
DISCUSSION
I. Standard of Review
In exercising appellate jurisdiction, a district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed.R.Bankr. 8013. The district court reviews the bankruptcy court's finding of facts under a clearly erroneous standard, see id., and its conclusions of law de novo, In re AroChem Corp., 176 F.3d 610, 620 (2d Cir. 1999). A lower court's choice between two permissible views of the facts cannot be found to be clearly erroneous. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985); In re Grant Assocs., 154 B.R. 836, 840 (S.D.N.Y. 1993).
II. Disregard of the Trust Entity
On appeal, appellants argue that the Bankruptcy Court erred in holding, as a matter of law, that the alter ego doctrine is inapplicable to trusts. Appellants contend that the Bankruptcy Court erred in its finding that a trust is not "an entity in the technical sense" but rather a "relationship" that is incapable of having an alter ego. Vebeliunas, 252 B.R. at 887. Appellants suggest that the Bankruptcy Court improperly relied on the dictionary definition of "entity" rather than the definition provided in the Bankruptcy Code. See 11 U.S.C. § 101(15) (defining "entity" as to include "person, estate, trust, governmental unit and United States Trustee"); Vebeliunas, 252 B.R. at 887 n. 13. Appellants cite to numerous federal and state court decisions that purport to support the proposition that the alter ego theory is applicable to trusts. (Consolidated Brief of Appellants Roy Babitt, Chase Manhattan Bank and Citibank, N.A., at 9-11 (citing Posner v. S. Paul Posner 1976 Irrevocable Family Trust, 688 N.Y.S.2d 548 (1st Dept. 1999); Pappas v. Freund, 660 N.Y.S.2d 302 (Sup.Ct. 1997); Goldberg v. Goldberg, 568 N.Y.S.2d 394 (1st Dept. 1991); F.P.P., 830 F.2d 114; Comer, 732 F. Supp. 755; Letscher, 83 F. Supp.2d 367); Supplemental Brief of Appellant Citibank, N.A., at 1-2 (citing Vaughn v. Sexton, 975 F.2d 498 (8th Cir. 1992); In re Gillespie, 269 B.R. 383 (E.D. Bankr. Ark. Nov. 16, 2001))).
Appellees Vanda and the IVT maintain that the Bankruptcy Court correctly held that the alter ego theory is inapplicable to trusts. Appellees rely primarily upon an opinion from the Appellate Division, First Department, National Union Fire Insurance Co. v. Eagle Equipment Trust, 633 N.Y.S.2d 308, 308-09 (1st Dept. 1995), which noted:
"There is no authority for applying, by analogy, a theory of `piercing the corporate veil' to disregard the form of a trust when the trust was not formed for an illegal purpose and there is the requisite separation between beneficiary and trustee."
Appellees further argue that even if, as a general matter, the alter ego theory is applicable to trusts, it cannot be applied to the IVT because appellants cannot satisfy the two-part standard of proof for alter ego liability outlined in Morris v. New York State Department of Taxation Finance, 82 N.Y.2d 135 (1993).
A. The Alter Ego Theory Applies to the IVT
I find that the Bankruptcy Court's conclusion that the alter ego theory is inapplicable to the IVT is incorrect as a matter of law. "[W]hether a court is to equitably exercise the `alter ego' doctrine as to a particular entity must be determined in accordance with the law of the forum state." Wilshire Credit Corp. v. Karlin, 988 F. Supp. 570, 574 (D.Md. 1997) (citations omitted). In New York, however, there is "scant authority pertinent to the inquiry." Id. Further, that scant authority appears to be contradictory. Four years after National Union — which was decided in the context of a motion to dismiss the complaint for lack of personal jurisdiction — the Appellate Division decided Posner v. S. Paul Posner 1976 Irrevocable Family Trust, 688 N.Y.S.2d 548 (1st Dept. 1999). Posner involved an action to enforce a confession of judgment executed by the Trust in favor of plaintiff, whose wife served as the sole trustee. Id. at 549. The defendant-intervenor opposed the confession of judgment, asserting that it was a fraudulent conveyance intended to render the Trust insolvent and his judgment on the note unenforceable. Id. The Appellate Division held that the lower court "erred in dismissing defendant-intervenor's counterclaim for a declaration that plaintiff is the alter ego of the defendant Trust." Id.; see also Goldberg, 568 N.Y.S.2d at 395 (affirming trial court's finding, in a divorce proceeding, that "the defendant had deliberately dissipated marital funds and secreted marital assets through the conveyance of those assets to the aforementioned various trusts and alter ego corporations" and that these entities "served as the defendant's personal `pocket book,' thereby necessitating a distributive award to the plaintiff of her share of the marital property").
I note that in New York the standard to be applied to determine whether to disregard the corporate form for jurisdictional purposes is different from that applicable for liability purposes. See Dorfman v. Marriott Int'l Hotels, Inc., No. 99 CV 10496 (CSH), 2002 WL 14363, at *18 (S.D.N.Y. Jan. 3, 2002). Compare Freeman v. Complex Computing Co., 119 F.3d 1044, 1053 (2d Cir. 1997) (listing ten factors considered by courts in determining whether to pierce corporate veil for liability purposes), with Jazini v. Nissan Motor Co., 148 F.3d 181, 184-85 (2d Cir. 1998) (listing four factors considered by courts in determining whether subsidiary is mere department of parent for jurisdictional purposes).
The New York Court of Appeals has not specifically addressed the issue of whether the alter ego theory is generally applicable to trusts. Absent this controlling authority, I must assess how the Court of Appeals would handle this issue if the court were required to make such a determination. See In re Joint Eastern and Southern District Asbestos Litigation, 721 F. Supp. 433, 434 (E. S.D.N.Y. 1988).
There is overwhelming authority, in New York and elsewhere, that "the IRS may proceed against an alter ego or nominee of a delinquent taxpayer for the purposes of satisfying the taxpayer's obligations," which includes the piercing of trusts. Letshcer, 83 F. Supp.2d at 375; see also, e.g., Blue Lotus Holdings Ltd., Inc. v. United States, No. 96-CV-233, 1996 WL 679758, at *3 (N.D.N.Y. Oct. 22, 1996) (citing G.M. Leasing Corp. v. United States, 429 U.S. 338, 351 (1977)). As noted above, however, the Bankruptcy Court found that those cases were inapplicable to the instant case. Vebeliunas, 252 B.R. at 886 n. 12 ("Those cases which do use a similar theory to disregard a trust relationship are easily distinguishable from the case at bar. They involve a limited arena of taxpayer liability law where taxpayers attempted to use a trust transaction to avoid their personal tax liability.").
The Bankruptcy Court's conclusion that the alter ego theory cannot be applied to the instant case is mistaken as a matter of law. First, while the Bankruptcy Court purported to distinguish the taxpayer liability cases, it failed to explain why the reasoning underlying those cases is not at least analogous — if not directly applicable — to the instant case. Second, contrary to the Bankruptcy Court's assertion, there are a number of reported cases outside of the taxpayer liability context in which the alter ego theory has been held applicable to trusts. See, e.g., Walsh v. Kelly, No. 97-17093, 1999 WL 14296, at *1 (9th Cir. Jan. 12, 1999) (former attorney of defendant Kelly recovered monies from Kelly, the alter ego of the Kelly trust); Vaughn, 975 F.2d at 504 (pension plan trustee plaintiffs recovered monies from Ronald Sexton, the grantor, trustee and a beneficiary of the Sexton Family Trust); Gillespie, 269 B.R. at 388-390 (chapter 7 trustee recovered monies from the creator, settlor, beneficiary and trustee of the Carolyn Gillespie Trust); Bracken v. Earl, 40 S.W.3d 499, 503 (Ct.App.Tenn. 2000) (plaintiff, an 82-year-old widowed woman, recovered monies paid to defendant for alleged investment opportunities; trustees were held to be "nothing more than names on paper"). Third, while the Court of Appeals may not have dealt with the issue directly, it has often relied upon notions of equity when disregarding corporate form. See, e.g., Morris, 82 N.Y.2d at 140 ("Broadly speaking, the courts will disregard the corporate form, or, to use accepted terminology, `pierce the corporate veil', whenever necessary `to prevent fraud or to achieve equity.'" (quoting Walkovszky v. Carlton, 18 N.Y.2d 414 (1966)). Given the closely analogous New York piercing cases in the taxpayer liability context, the general trend of courts outside of New York of piercing trusts in non-taxpayer liability cases, and the Court of Appeals' general concern for equitable resolutions in approving the disregard of corporate form where appropriate, it is likely that the Court of Appeals would conclude the alter ego theory may be applied properly to the IVT.
B. Vebeliunas is the Alter Ego of the IVT
Having determined that the alter ego theory is applicable to the IVT, I also find that, based on the Bankruptcy Court's findings of fact, appellants have satisfied the two-part Morris standard, which is typically used to pierce the veil of corporations. In Morris, which has been described as "the leading New York case on piercing the corporate veil," Mars Electronics v. U.S.A. Direct, Inc., 28 F. Supp.2d 91, 96 (E.D.N.Y. 1998), the Court of Appeals found that "piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury." Morris, 82 N.Y.2d at 141.
New York courts have considered at least the following factors in determining whether an individual is the alter ego of a corporation:
"(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own."
Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir. 1991). "[A]lthough there is no mechanical rule as to how many and to what degree [these factors] must be present to pierce the corporate veil, the courts apply the preexisting and overarching principle `that liability is imposed to reach an equitable result.'" Bridgestone / Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 17-18 (2d Cir. 1996) (citation omitted).
While traditional veil piercing results in an individual's being held liable for the debts of a corporation, New York also recognizes the doctrine of "reverse" veil piercing. See American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) (citing State v. Easton, 647 N.Y.S.2d 904, 908-09 (Sup.Ct. 1995)). "Typically, reverse veil piercing arises when a plaintiff seeks to hold a corporate entity accountable for the actions of its shareholders." Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 293, 321 (Bankr. S.D.N.Y. 1999) (citing American Fuel, 122 F.3d at 134). "Courts that pierce the corporate veil in reverse are guided by the rules that govern straight veil piercing." Id.
The findings of fact made by the Bankruptcy Court, viewed in conjunction with the above Passalacqua factors, compel the conclusion that the IVT trust should be pierced. As to the first Passalacqua factor, the Bankruptcy Court found specifically that "the IVT did not follow the usual `formalities' expected of trusts":
"3. The debtor [Vytautas] and Vanda received and kept rents from the Lattingtown Estate;
4. After Vanda's son, Aras Vebeliunas, the named successor trustee of the IVT, became involved he also routinely retained rent monies to which the IVT was entitled;
. . .
6. Neither the debtor, Vanda nor any family member have ever paid any rent to the IVT for their use and occupancy of the Lattingtown Estate."
Vebeliunas, 252 B.R. at 883. The Bankruptcy Court's factual findings 3 and 4 to the effect that Vytautas and other family members retained rent monies due the Trust demonstrate the third Passalacqua factor, viz., that "funds are . . . taken out of the [trust] for personal rather than [trust] uses." Relevant to the seventh Passalacqua factor, "whether related [individuals] deal[t] with the [IVT] at arms-length," are findings 3 and 4 (Vytautas and other family members retained rent monies due the IVT), 6 (Vytautas and family never paid rent for their occupancy of the Lattingtown Estate), 12 (Vytautas, as sole trustee of a "Vart Trust" purported to convey the Lattingtown Estate to himself), and 15 (Vytautas purported to transfer the Lattingtown Estate back to the "Vart Trust").
Although all of the Bankruptcy Court's numbered findings are relevant to the tenth Passalaccqua factor, that is, "whether the [trust] in question had property that was used by [Vytautas] as if it were [his] own," particularly relevant are findings 3 and 4 (retention of rent monies due the IVT), 5 (Vytautas granted an easement over the Lattingtown Estate to the local utility company), 6 (Vytautas and his family members paid no rent for their use of the Lattingtown Estate), 7 (Vytautas and Vanda took deductions from their personal income tax returns for real estate taxes and interest relating to the Lattingtown Estate), 13 (in September 1987, Vytautas granted mortgages on the Lattingtown Estate to Chase and Citibank to secure notes totaling $1.7 million, the proceeds of which were received by him), 16 (Vytautas granted an easement over the Lattingtown Estate to neighbors), 17 (in 1990, Vytautas purported to grant a mortgage on the Lattingtown Estate to a business associate), 18 (in 1992, Vytautas signed an appearance bond in the Eastern District in the amount of $2 million secured by the Lattingtown Estate), and 19 (in 1993, Vytautas signed a Confession of Judgment in which he agreed to forfeit the Lattingtown Estate, "declaring it to be a personal asset," if he did not appear for his criminal trial).
Specifically as to the transactions at issue with Chase and Citibank, the Bankruptcy Court found:
11. In February, 1987, in connection with a loan application, debtor represented to Chase that the RVT, over which he had complete control, was the owner of the Lattingtown Estate;
12. In May, 1987[,] Debtor, as sole trustee of `Vart Trust' purported to convey the Lattingtown Estate to himself;
13. In May and September, 1987 debtor granted separate mortgages to Chase and Citibank to secure notes totaling $1,700,000 with the Lattingtown Estate;
14. In August, 1987, in connection with the loan application to Citibank, debtor signed a sworn affidavit stating that the RVT owned the Lattingtown Estate and there was no IVT;
15. On February 3, 1998 debtor purportedly transferred the Lattingtown Estate back to the `Vart Trust.'"
Vebeliunas, 252 B.R. at 883. In other words, Vytautas "exercised complete domination of the [IVT] in respect to the transaction attacked." Morris, 82 N.Y.2d at 141. Appellees argue that even if the Morris standard is applicable to the IVT and appellants demonstrate that Vytautas exercised complete domination of the IVT, appellants cannot satisfy the second Morris prong, i.e., that Vytautas' domination of the IVT "was used to commit a fraud or wrong against [Chase and Citibank] which resulted in [the banks'] injury." 82 N.Y.2d at 141. Specifically, appellees suggest that Chase and Citibank insisted Vytautas be held personally liable for the $1.7 million in loans he received upon execution of the two mortgages on the Lattingtown Estate. (Brief of Respondents, Vanda Vebeliunas and Irrevocable VART Trust, at 11-13). Therefore, appellees argue, because the IVT conducted no business with the banks, the IVT — whether or not dominated by Vytautas — was "clearly not used to cause the injury in question because the IVT was not a party to the transaction." (Id. at 13) (emphasis omitted).
I reject this argument. As the Bankruptcy Court found, Vytautas applied to Chase for a loan, and Chase "preliminarily agreed to loan [Vytautas] $1,000,000 secured by a first mortgage on the Lattingtown Estate." Vebeliunas, 252 B.R. at 884. Chase subsequently "became aware from its title report that the [Lattingtown Estate] was held by the IVT and, as a condition of the loan, it required that title to the collateral be held in [Vytautas'] name only at the time of loan closing." Id. Several months later, Vytautas "executed a deed from `VART TRUST BY: Vytautas Vebeliunas' to himself seeking to satisfy the bank's condition that he hold title to the Lattingtown Estate." Id. Vytautas "knew that the statements he made [to Chase] about ownership of the Lattingtown Estate were false, fraudulent and misrepresented the truth of who held title." Id. Only after receiving these fraudulent documents did Chase deliver to Vytautas the $1,000,000 loan. Id.
Similarly, Citibank agreed to loan Vytautas $700,000 secured by a second mortgage on the Lattingtown Estate. Id. When Citibank's title insurer, Ticor, requested from Vytautas "a copy of the trust which held title to the [Lattingtown Estate]," Vytautas' lawyer sent a copy of the RVT. Id. Ticor noticed, however, that "the February 1985 deed from Litas was to `VART TRUST, an Irrevocable Trust' and the trust instrument which had been furnished to it was specifically a revocable trust." Vytautas then made a "false representation" by stating that the Vart Trust was a revocable, and not an irrevocable, trust. Id. at 884-85. Based on this representation, Citibank provided Vytautas the $700,000 loan. Id. at 885.
While it is true that the IVT was not actually a party to the Chase and Citibank loans to Vytautas, this does not negate the fact that Vytautas used the IVT in connection with the loan applications "to commit a fraud or wrong against [Chase and Citibank] which resulted in [the banks'] injury," Morris, 82 N.Y.2d at 141. Through his domination of the IVT, Vytautas was able to obscure continuously the fact that the IVT was the true owner of the Lattingtown Estate. Further, the injury suffered by the banks was a direct result of abuse of the trust form by Vytautas. The fact that the IVT was not a party to the fraudulent transactions perpetrated upon the banks is irrelevant, because Vytautas' domination of the IVT led to that fraud. See TNS Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339 (1998) ("Evidence of domination alone does not suffice without an additional showing that it led to inequity, fraud or malfeasance." (citing Morris, 82 N.Y.2d at 141-42)). Therefore, I find that appellants have also satisfied the second prong of Morris.
Finally, appellants argue that, even if it were proper to pierce the IVT, the Lattingtown Estate would necessarily revert back to Vanda. Appellants rely on the Bankruptcy Court's finding that Vanda is the sole creator and trustee of the IVT, while Vytautas is merely a beneficiary "eligible to 20% of all of the distributions from the Corpus of the Trust." Vebeliunas, 252 B.R. at 882. Therefore, appellants suggest, because Vytautas never owned the Lattingtown Estate or served as a trustee to the IVT, the Lattingtown Estate cannot be considered part of the Bankruptcy Estate.
I reject this argument as well. "New York courts have recognized for veil-piercing purposes the doctrine of equitable ownership, under which an individual who exercises sufficient control over the corporation may be deemed an `equitable owner.'" Freeman, 119 F.3d at 1051; see also, e.g., Mediators, Inc. v. Manney, No. 93 Civ. 2304 (CSH), 1996 WL 554576, at *5 (S.D.N Y Sept. 30, 1996) (recognizing that a nonshareholder could be held liable "under an alter ego theory if she was an `equitable owner'"); Guilder v. Cornith Constr. Corp., 651 N.Y.S.2d 706, 707 (3d Dept. 1997) ("Even if the [principals] were not [the corporation]'s legal owners, it is apparent that they dominated and controlled the corporation to such an extent that they may be considered its equitable owners."); see also, e.g., Easton, 647 N.Y.S.2d at 909 (holding two corporations liable under reverse piercing theory "for a judgment debt of their dominant owner (Easton) who is not a `legal' shareholder/owner but an `equitable' one."). In determining the identity of the equitable owner, New York courts have traditionally looked to substance over form. See Bozzuto's, Inc. v. Vescio, No. 00-5040, 2000 WL 1715281, at *2 (2d Cir. Nov. 13, 2000) ("It is well established that a bankruptcy court, as a court of equity, may look through form to substance when determining the true nature of a transaction as it relates to the rights of parties against a bankrupt's estate." (quoting Liona Corp. v. PCH Assoc. (In re PCH Assoc.), 949 F.2d 585, 597 (2d Cir. 1991))); Bartle v. Finkelstein, 241 N.Y.S.2d 655, 660 (4th Dept. 1963) ("Where a court of equity is seeking to adjust rights between parties it looks at the merits rather than at form and to that end will disregard the fiction of a separate corporate entity where justice requires that it should be done." (citing People v. North River Sugar Refining Co., 121 N.Y. 582 (1890)). Applying these principles to the instant case, it is plain that Vytautas is the equitable owner of the Lattingtown Estate. Given this fact, combined with Vytautas' complete domination of the IVT that he used to commit fraud against Chase and Citibank, I find that the Bankruptcy Court erred in finding that the Lattingtown Estate should not be included in the Bankruptcy Estate.
With respect to Lot 384, which the IVT acquired from the NSP in 1997, there is no evidence in the record that Vytautas was involved in the purchase of that property. At trial, Vanda testified that the IVT borrowed $100,000 to fund the purchase of Lot 384. (Appellant Roy L. Babitt's Designation of Items to be Included in the Record on Appeal, Ex. 12, at 705). Appellants do not dispute this testimony. Further, it appears that Vytautas was in federal prison at the time that the IVT purchased Lot 384. See Vebeliunas, 252 B.R. at 882. Thus, the Bankruptcy Court was correct in finding that Lot 384 should not be included in the Bankruptcy Estate.
III. Ratification
Having found that the Lattingtown Estate is part of the Bankruptcy Estate, I do not address appellants' assertion that the Bankruptcy Court erred in failing to consider Babitt's argument that the IVT ratified Vytautas' ownership of the Lattingtown Estate.
CONCLUSION
The portion of the October 11 Order dismissing Babitt's complaint against Vanda, individually and as trustee of the IVT, seeking the turnover to Babitt of the Lattingtown Estate and Lot 384, is affirmed in part and reversed in part and remanded to the Bankruptcy Court for further proceedings consistent with this order, in that the Lattingtown Estate should be included in the Bankruptcy Estate but Lot 384 should not be included in the Bankruptcy Estate.
SO ORDERED: