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Take My Business Not My Home: A Layman’s Guide to Protecting Yourself in Your Business

On Behalf of | Mar 15, 2022 | Uncategorized

Take My Business, Not My Home!
As litigation attorneys one of our primary objective is to extract money from our adversary and put into the pocket of our clients. Obtaining a money judgment against the owners and principals of the business we are suing gives us the best likelihood of achieving this objective. As business owners, you do not want to be personally liable for the debts of your company. The general rule is that corporations and companies are separate entities which are wholly distinct from their owners. But there are exceptions to this rule. Several laws permit us to attach personal liability upon the business owners for the debts and judgments of the businesses that they own. In this article we will outline and detail relevant legal doctrine that will bootstrap your businesses liabilities onto you individually. We will be reviewing tort law, New York common law veil piercing, and various provisions of the New York State Debtor & Creditor Law. Once you are aware of these laws you will be able to conduct yourself, in your business, in a way that will keep your personal assets free and clear from creditors, as well as, those harmed as the result of your businesses operations.
Incorporating your business or forming your limited liability company creates a “corporate veil” or “shield” which is the first essential step to protecting your personal assets (your savings accounts, your homes, your investments, etc.). If you have not incorporated or formed a limited liability company you do not have the protection of the “corporate veil” and the risk to your personal wealth is substantial. Remember the woman whose lap was burned by McDonald’s Coffee at that take-out window? What if the McDonalds franchisee was made personally liable for her injuries? The financial life of the owner and his or her family would be ruined. What about the business that delivers damaged or non-conforming goods and is sued for
$25,000? $50,000? or $5,000,000? Without the corporate veil the outcome can be devastating.

Chapter 1
Remedies Available When the Corporate Veil is Pierced
The most obvious remedy available to those who pierce the corporate veil is a money judgment against the individual wrongdoer. There are provisional remedies that may be invoked early on in the litigation against the individual that will serve to preserve and protect that individual’s assets during the course of the litigation. You have to make a strong showing based upon a very good set of facts, but attachment, constructive trust, appointment of a receiver, and injunctions against the disposition of property may be awarded by the court. The Debtor Creditor Law provides for statutory remedies, as well, and the remedies will have a real impact on you and you business.



Under the debtor creditor law a matured claim is one which has become absolutely due without contingency, though not necessarily liquidated, or presently payable. When a debtor creditor law violation is proven by a creditor with a matured claim, the creditor is entitled to unwind the transaction in order to satisfy their claim.

“Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser,
(a) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, or (b) Disregard the conveyance and attach or levy execution upon the property conveyed.”


The remedies available to those with unmatured claims are similar to, and enumerate the provisional remedies that are available to those seeking redress for common law veil piercing and intentional tort, and also provides the remedy after a finding of fact, of setting aside the conveyance.

“Where a conveyance made or obligation incurred is fraudulent as to a creditor whose claim has not matured he may proceed in a court of competent jurisdiction against any person against whom

he could have proceeded had his claim matured, and the court may,
a. Restrain the defendant from disposing of his property.
b. Appoint a receiver to take charge of the property,
c. Set aside the conveyance or annul the obligation, or
d. Make any order which the circumstances of the case may require.”

Chapter 2
Creating the Corporate Veil. Incorporating Your Business or Forming a Limited Liability Company; The First Step to Protecting yourself.
New York law shields the personal assets of entrepreneurs and business owners from the debts and liabilities that their duly formed or organized “Corporation” or “Limited Liability Company” incur. Incorporating your business or forming your limited liability company creates the “corporate veil” or “shield” which is vital for protecting your personal assets. Corporations and limited liability companies are treated as “individuals” that are wholly distinct and separate from their owners. The corporate individuals get their own Tax I.D. numbers (Employment Identification Numbers) and carry with them their own rights and responsibilities. As separate individuals these business “are not” their owners and operators; they are separate and distinct entities in the eyes of the law, each responsible for its own separate liabilities and obligations.
If you are conducting business in your own name, or as a “d/b/a,” then you are personally liable and responsible for your business liabilities and debts. “Fred Smith Contracting Services” and “Irene Jones d/b/a Irene’s Home Cleaning” may have separate bank accounts for the business, fancy letterhead, and an advertising campaign. But legally Fred Smith and Irene Jones and their respective businesses are the “same individuals” and both Fred and Irene are personally liable for the debts and obligations of their businesses.

Chapter 3
Piercing the Corporate Veil

Just like any shield or veil they can be “pierced” or “set aside” rendering them unable to protect or hide the person behind it. In the context of “corporate veil piercing” the protection that the shield and veil affords are stripped away to permit litigants and creditor to attach personal liability to the owners of the business. Veil piercing is an equitable doctrine which puts the decision to hold the business owner accountable in the hands of the judge.
i. Corporate veil is pierced to attach liability to the corporation’s individual owners. In many instances the veil of the corporation will be pierced to attach liability to an individual shareholder/owner/ member of the business. But the veil can also be pierced to attach liability to employees, as well as, other’s who control the business.

ii. Equitable/Putative Owners of the Business. Under the doctrine of equitable and putative ownership an individual who is not an owner or shareholder of a corporation “on paper” will nonetheless be deemed an owner of the business, subject to liability. Where the non-owner defendant exercises considerable authority over the corporation to the point of completely disregarding the corporate form and acting as though its assets are his/her alone to manage and distribute she will be held liable. Put another way, where the person controlling or substantially participating in, or direction the activities of the business, the court will impute a formal corporate title on the individual to reflect their true role. These equitable/ putative owners of the business are subject to personal liability as if they were owners- in fact. We encounter these types of situations where parents put business in the name of their children or spouse, or where the “paper” owner/ manager/ or officers are serving as the nominee for another person.

iii. Veil piercing to Attach Liability to a Parent Corporation or Related Entities. Business relationships and transactions amongst related entities and parent/subsidiary companies can lead to veil piercing of the dominant company or the related entities. Having many different entities that perform in a vertically integrated fashion is a terrific way to conduct business but it is not without its risks. Often times these related entities share common ownership, managers, officers, directors, employees, office space, phone numbers, accountants and

bookkeepers. As is discussed in detail in Chapter 3, these efficiencies are also part of the test for veil piercing, so you have to be careful.

Chapter 4
Acts Or Omissions that Will Permit The Corporate Veil To Be Pierced
The legal doctrines of New York tort law, common law veil piercing, and the New York State Debtor & Creditor Law are common legal doctrine used to veil pierce.
As the owner of the business you will be held personally liable for your intentional acts that harm others. This same rule applies to your employees, but that is another story for another day.
i. Intentional Torts. The commission of intentional torts such as, assault, battery, defamation, theft/embezzlement/conversion, and infringement of a patent, will expose the business owner to personal liability.

ii. Corporate Torts/ Acts of the Corporation/ Company. A director of a company may be held individually liable to third parties for a tort committed by an official act of the corporation if the individual either participated in the tort, directed, controlled, approved, or ratified the decision that led to the commission of the tort. In addition, individual board members who did not do the act, but who actively aided and abetted the corporate tortfeasor’s act will be held individually liable for the tortfeasors’ action. Officers, shareholders, and directors will remain individually liable if their actions constitute independent tortious conduct. Ie. the corporate officer acted outside the scope of his or her authority, or the officer personally gained from the bad act. Independent torts sufficient to support personal liability may include the diversion of a business opportunity, the conversion of corporate merchandise and property, conspiracy and deceit, infringement of a patent, violation of housing discrimination law, interfering with prospective contract or corporate opportunities, committing toxic torts such as dumping toxic waste; creating or distributing fraudulent documents.
The courts will hold you responsible for bad acts that you commit or that you aide and abet. Be cognizant that your actions may expose you to being named individually in a lawsuit. If your company’s insurance carrier provides a defense to your company in such a lawsuit they may defend your tortious conduct under a reservation of rights but you will not be indemnified for any damage you cause as the result of a proven intentional tort you commit. If your line of business requires that you or your employees use physical force in your ordinary business operations, then be sure your insurance broker procures you very specific insurance

policies that will cover you and your employees when reasonable force is required to be used on the job. Ie. concert venue security companies, bodyguards/personal security details, bars, taverns, and nightclubs that hire security.

Common law veil piercing is a legal doctrine created by the courts to remedy injustices perpetrated by business owners in the course of commerce. To pierce the corporate veil the court will find that the defendant abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against another party. Put another way, a court may disregard the corporate entity if it decides that piercing the veil will prevent fraud, illegality, injustice, a contravention of public policy, or prevent the corporation from shielding someone from criminal liability. A party seeking to pierce the corporate veil must establish 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 the plaintiff’s injury. Even absent fraud, the corporate veil will be pierced to achieve equity, when a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own and can be called the other’s alter ego.

The doctrine has evolved over hundreds of years, culminating in the creation of an enumerated ‘tests’ or ‘set of standards’ which must be applied when determine if veil piercing is an appropriate remedy in any particular case. Not one single factor is dispositive of the issue and not all of the factors must be present for the court to award veil piercing. The practice and application of law is a social science not a physical science. Each case rests on its own unique set of facts as applied to standards applied by the judge. The factors will include, but will not necessarily be limited to:

(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 and lack of assets;
(3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, as well as, shuttling personal funds in and out of the corporation;
(4) the perpetration of fraud by means of the corporate vehicle (Ie. the torts listed above in subsection A of this chapter);
(5) the existence of post-tort activity conducted to strip the corporation of assets in anticipation of impending legal liability (which will be discussed in more detail in subsection C of this chapter).

When measuring the conduct of parent, subsidiary, and related corporations, the ‘test’ includes items “(1)” through “(5),” as well as, the following:

(6) overlap in ownership, officers, directors, and personnel;
(7) common office space, address and telephone numbers of corporate entities;
(8) the amount of business discretion displayed by the allegedly dominated corporation;
(9) whether the related corporations deal with the dominated corporation at arms length;
(10) whether the corporations are treated as independent profit centers;
(11) 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.
The outcomes of these cases are varied as the facts, circumstances, and players involved in each case vary from case to case. Best practice is to be cognizant of the law and err on the side of caution.
Article 10 of the New York Debtor Creditor Law contains provisions which protect creditors from debtors who waste, scuttle, and secret, assets in order to render themselves judgment proof in the face of the matured and un-matured claims of creditors. The statutes are duly enacted laws of the New York State Legislature. The statutes themselves set forth the rule so it is instructive to read the actual code provisions, which are set forth below. Pursuant to the statutes, liability attaches for “intentional” or “actual fraudulent” conveyances, as well as, “constructively fraudulent” conveyances, which are determined to be fraudulent without proving the “intention” to commit the fraud. All of the statutes detailed in this subsection deem certain activities to be “fraudulent” and they all serve as a spring board to attaching personal liability to the individual owners who violate these provisions. The Debtor Creditor Law contains its own separate and distinct set of remedies for the fraudulent transactions but common law veil piercing is still a viable remedy for violations of the statute. Domination and control of the entity, as well as, over the transaction must still be proven. The courts will consistently veil pierce when a violation of Section 276- actual fraud is proven. The courts may veil pierce when there is liability under Section 273, 274, or 275, which do not require a finding of actual fraudulent intent. The courts may still require a showing of a ‘deceitful’ or an ‘unjust purpose’ or a ‘scheme to defraud,’ to pierce for these Debtor Creditor Law Violations.

“Every conveyance made and every obligation incurred with actual intent, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”
While this statute is very helpful proving ‘intent’ of actual fraud is difficult. The courts also understood that direct evidence of fraudulent intent is often elusive. Therefore, courts have given us some help- another ‘test.’ The ‘badges of fraud’ are a set of circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent. Each of the badges need not be proven and no one badge is dispositive. Badges of fraud, which may be considered as evidence in a fraudulent conveyance action, include:

(1) the close relationship among the parties to the transaction;
(2) the inadequacy of consideration;
(3) the transferor’s knowledge of the creditor’s claims, or claims so likely to arise as to be certain, and the transferor’s inability to pay them; and,
(4) the retention of control of property by the transferor after the conveyance.

A party who can prove actual fraud at trial is entitled to their reasonable attorneys’ fees, as well as, a fair shot of attaching personal liability to the corporate insider. Here is a list of common occurrences where actual intent is proven: a corporation or an individual transfers real property by deed to a spouse, partner, or to another company; a director makes large cash withdrawals to himself, or to another business entity he/she controls; a president of a company takes large distributions or dramatically increases their salary.
Since proving actual fraud can be difficult the legislature provides a remedy to defrauded creditors who do not successfully prove actual fraud. Constructive fraud is more readily proven.
“A conveyance made by a person who will thereby be rendered insolvent thereby is fraudulent as to creditors without regard to his or her actual intent if the conveyance was made without fair consideration.”


Section 274 is another constructive fraud provision, which imputes fraud without the need to prove “intent.” To satisfy this statute, the court looks at the facts as they existed at the time that the transaction, or series of transactions, were made.

“Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.”


Section 275 is another constructive fraud provision, which imputes fraud without the need to prove “intent.” But the court must determine whether the purported wrongdoer, “intended” or “believed” that by making the conveyance he would be incurring debts beyond the ability to pay for them as they mature. To satisfy this statute the court looks at the facts as they existed at the time that the transaction, or series of transactions, were made. The court will then surmise or make a determination as to what the wrongdoer intended or believed at the time.

“Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.”

Chapter 5
Defenses To Veil Piercing and the Debtor Creditor Law
As the owner of a business defending against a veil piercing lawsuit your defense will depend on the nature of the claims. The defenses raised in intentional tort cases and common law veil piercing cases are usually working to disprove what the plaintiff is trying to prove. For example, the defendant would try to disprove the many factors in the common law veil piercing test that is universally applied. In the business tort case, the alleged wrongdoer will try to prove that they had nothing to do with the alleged wrongful act.
The Debtor Creditor Law provides its own set of defenses which are worth reviewing.
1. Debtor Creditor Law Section 278 protects transactions made to ‘bona fide purchasers for value.’

That portion of the statute which provides: “except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser.”

“Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser,
(a) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, or (b) Disregard the conveyance and attach or levy execution upon the property conveyed.”

These innocent purchasers will not have their property clawed back or attached, by a creditor. It has been our experience that many fraudulent conveyances are not made to innocent purchasers. In many cases common law veil piercing will nevertheless be a viable remedy against the wrongdoer, where the Section 278 remedy is not available.

2. Defenses to Debtor Creditor Law Sections, 273, 274, 275 and 276.

In order to evade liability under Sections 273, 274, 275, 276 of the Debtor Creditor Law, the transaction may not have rendered the company or corporation insolvent. And if insolvency was rendered, then the transaction must have been made for fair consideration.

i. If the transaction does not render the company Insolvent then technically there should be sufficient assets on hand to satisfy the claim against your company; no foul, because there should be money to pay the creditor. A company is insolvent when the present fair saleable value of its assets is less than the amount that will be required to pay the provable liability on the existing debts as they become absolute and matured.

ii. The outflow of the asset was made for Fair Consideration
Fair consideration, as defined in Debtor Creditor Law Section 272, is when:
(1) in exchange for conveying such property, or obligation, a fair equivalent has been obtained therefor; and, (2) in good faith, property is conveyed or an antecedent debt is satisfied, as the result of the conveyance. Recognizing that this formulation is less than precise, courts have ruled that “fair consideration” must be determined “upon the facts and circumstances of each particular case” or When such property, or obligation is received in good faith to secure a present advance or antecedent debt in an amount

not disproportionately small as compared with the value of the property or obligation being obtained.


The rule in New York is that there can be no fair consideration for transfer of property when “good faith” is lacking; good faith is required of both the transferor and transferee.
Preferential transfers to corporate insiders (ie. shareholders, members, presidents, and board of directors, and to companies to wit that person is also a member or shareholder of, as well as, to subsidiaries, affiliates, and related companies) are not made in good faith, and are not transfers for fair consideration, as a matter of law. That means that withdrawals and transfers of assets can only go to a limited number of places and still be safe, especially when we are dealing with small to medium size businesses that are closely held.

As a responsible business owner you should understand the extent of your protection that the corporate veil provides.

Disclaimer. This material is intended for educational purposes only and must not be relied upon as the giving of legal advice. The content covered in this article are not the only laws that are relevant or essential to the topics covered, herein. Understand, that legal text books are the size of phone books and are intended to cover an exhaustive set of materials that cover the majority, if not all, legal doctrine in a particular field or area of the law. This article is intended to introduce you to some of the laws that are pertinent to keeping your personal assets safe. The writer of this article is admitted to practice law in the State of New York. The legal doctrine contained in this series are limited to New York Law. Please consult with an attorney in your state with respect to the legal doctrine and principals contained herein. Please consult with your attorney if you have any questions or concerns about the points raised herein.