Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Stephanie Cumings
Dec. 21 — A debtor who took over his wife's businesses when she developed serious health issues will have to use the business assets to pay off his personal debts (BCL-Sheffield, LLC v. Gemini Int'l, Inc. (In re Tolomeo), 2015 BL 409960, N.D. Ill., No. 1:15-cv-08118, 12/15/15).
Judge Sara L. Ellis found that the businesses were essentially alter egos of the debtor because he had been using business funds to pay his personal bills and had even been stashing his own money in the business accounts after he filed for bankruptcy.
The court also found that the wife's assets should be brought into the debtor's bankruptcy because the debtor “exercised significant control” over his sick wife.
Michael Tolomeo's wife Laura owned three businesses at one point, but became severely ill. Her husband took over running the businesses for several years, acting as president for two of them.
Tolomeo used funds from the business accounts to pay personal bills, including his mortgage, insurance, cable bills, gym membership, and even the retainer for his bankruptcy attorney. Tolomeo and his wife would both periodically receive payroll checks from one of the businesses, even though neither of them worked for it. One of the businesses also didn't file tax returns between 2008 and 2012.
Throughout this period, Laura wasn't completely reliant on her husband and adult children in every aspect of her daily life. Before his bankruptcy filing, Tolomeo gave all of his money to Laura, who had no income or funds of her own, which was then used to pay his personal bills.
Tolomeo filed to reorganize under Chapter 11 bankruptcy, which is available to individuals whose debts exceed the statutory thresholds for Chapter 13 bankruptcy. After filing for bankruptcy, Tolomeo was required to open a debtor-in-possession (DIP) account and use it for post-petition payments.
Nevertheless, Tolomeo continued paying bills from the business accounts and even deposited his paychecks and Social Security checks into one of the business accounts. When he ended up converting his bankruptcy to a Chapter 7 liquidation, he withdrew nearly all of the funds from the DIP account and put them in the business accounts. A lawsuit was initiated against the businesses and Laura, which sought to bring their assets into Tolomeo's bankruptcy estate. The bankruptcy court issued proposed findings to the district court that recommended finding in favor of the plaintiffs.
The district court agreed that the businesses and the debtor's wife were alter egos of the debtor, and so their assets belonged in the debtor's estate. The alter ego doctrine requires showing that there is a “unity of interest and ownership” between the debtor and the businesses, and it would “sanction a fraud or promote injustice” to allow the debtor and the businesses to be treated as separate entities.
The court said that a “unity of interest and ownership” can be shown through commingling funds and a failure to adhere to corporate formalities.
The court noted that the businesses were controlled and managed exclusively by the debtor following Laura's health issues. The court also said it was undisputed that there was an “extensive, if not complete, commingling of funds” between the debtor, his wife, and the businesses. The commingling even continued after the bankruptcy filing, as the debtor flaunted his responsibility to use the DIP account correctly.
In fact, while the debtor was using funds from the businesses to pay his expenses, he didn't even have a checking account, savings account, or credit card in his own name.
There was also a failure to follow corporate formalities, like using the debtor's home address as a business address, failing to pay taxes, and using funds from one business to pay the expenses of another.
Elizabeth Buckey Vandesteeg of Sugar Felsenthal Grais & Hammer LLP, Chicago, Jonathan Paul Friedland of Schiff Hardin LLP, Chicago, and Jason Brett Hirsh and Gary Irwin Blackman of Levenfeld Pearlstein, LLC, Chicago, represented the plaintiffs.
Terrence Michael Jordan of Jordan Law PC, Chicago, represented the defendants.
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