Take the Money and Run: Probably Unfair and Definitely Affecting Commerce
James M. Weiss
A company is faced with the prospect of a multi-million-dollar judgment. In response, the company’s president starts a new company, transfers the business and assets, and leaves the first company insolvent. Once the judgment is entered, the creditor seeks to enforce the judgment against the new company by piercing the corporate veil.
This fact pattern is hardly unique. But does it reach the level of an unfair or deceptive trade practice under N.C. Gen. Stat. § 75-1.1?
That’s the topic of a recent decision from the North Carolina Court of Appeals. In General Fidelity Insurance Co. v. WFT, Inc., a unanimous panel affirmed a judgment holding that the conduct described above violated section 75-1.1.
WFT, Inc., a North Carolina corporation, began working with General Fidelity in 2005. When a dispute arose between them, they went to arbitration. In August 2013, a final arbitration award was entered in favor of General Fidelity. And in December 2013, a Texas court (possibly in old El Paso) reduced that award to a judgment of over $2.3 million plus interest and attorneys’ fees.
In May 2014, General Fidelity filed suit in Mecklenburg County to enforce the Texas judgment. General Fidelity named WFT as a defendant, but also named Blessmatch Marine Insurance Services, Inc., Alpha Marine Underwriters, Inc., and Peter J. Willis Fleming.
WFT Hides the Assets
General Fidelity might have hired Billy Mack or another detective down in Texas to help track down these additional entities. Who were they and why did General Fidelity name them as defendants?
Well, at the same time the arbitration was occurring, Peter Fleming, WFT’s sole shareholder and director, started Blessmatch and Alpha Marine. First, WFT transferred its assets to Blessmatch. Fleming testified that WFT became insolvent as soon as Blessmatch was formed. Alpha Marine was no different; Fleming testified that all three companies were “one and the same business” and that the decision to rebrand WFT as Blessmatch was nothing more than a name change.
The North Carolina Litigation
After several years of litigation, General Fidelity won summary judgment on all claims except its section 75-1.1 claim; that claim proceeded to a bench trial. The other claims—(1) breach of fiduciary duty, (2) constructive fraud, (3) fraudulent transfer, and (4) piercing the corporate veil—established the conduct and injury elements of a section 75-1.1 claim, but not the “in or affecting commerce” prong.
Is Moving Assets to Avoid a Judgment “In or Affecting Commerce”?
The trial court found multiple ways in which the defendants’ behavior affected commerce. First, the very purpose of forming Blessmatch and Alpha Marine was to avoid having to pay WFT’s creditors. The trial court reasoned that blessing this type of behavior would permit corporate entities “to incur debts, be subject to judgments, and yet freely transfer assets to other entities in order to avoid payment of those obligations.”
The Court of Appeals agreed with this reasoning, finding that it was consistent with the purpose of section 75-1.1—to provide a civil means to maintain ethical standards of dealings in business.
This case is a good reminder that whenever you consider a veil-piercing claim, look at the surrounding circumstances—there might be a viable section 75-1.1 claim as well. And heading down south might not always let you get away with the money.
Author: Jamie Weiss