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holding that “it is appropriate to address the merits” although the complaint must be dismissed for improper service because “it is more efficient to resolve the merits as to all respondents now and thus avoid the additional delay of new service”
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01 Civ. 1228 (GEL)
March 14, 2002
Peter L. Critchell, New York, New York, for Plaintiff-Petitioner AG Worldwide.
Thomas J. Fleming, New York, New York, for Respondents KPR Finanz-und Verwaltung AG and Niklaus F. Zenger.
OPINION AND ORDER
Plaintiff-petitioner AG Worldwide ("AG") seeks to commence a special proceeding pursuant to New York CPLR §§ 5225(b) and 5227 to collect monies owed to it by defendant Red Cube Management AG ("RCM"), the judgment debtor, from respondents Red Cube International AG ("RCI"), KPR Finanz-und Verwaltung AG ("KPR"), and Niklaus F. Zenger ("Zenger"). These New York provisions are only applicable if AG can establish that the respondents RCI, KPR, and Zenger possess assets in which RCM has an interest. To show such an interest, AG relies on theories of corporate veil piercing, third party beneficiary, and fraudulent conveyance.
Respondents KPR and Zenger move to dismiss the special proceeding as to them. For the reasons stated below, this motion is granted. Although petitioner has a considerable equitable claim, and RCM's pattern of delay and avoidance of paying a legitimate debt and judgment is frustrating, petitioner has not demonstrated that this debt is collectable from respondents Zenger and KPR. However, since respondent RCI has defaulted by failing to reply to AG's application, petitioner's request for relief against RCI is granted in part. PROCEDURAL BACKGROUND
At oral argument, petitioner asked this Court to enter more elaborate findings against RCI. (1/17/02 Tr. at 6-7.) However, entry of extensive findings of fact and conclusions of law on this record would be inappropriate. The Court's only finding is that since RCI has failed to plead or otherwise defend, a finding of liability is appropriate. See Fed.R.Civ.P. 55.
On February 16, 2001, AG filed this action for breach of contract against RCM. (Critchell Decl., Dec. 17, 2001, ¶ 7.) In a stipulation and order of settlement dated July 30, 2001, RCM confessed judgment in the amount of $3.25 million, and judgment was duly entered for that amount. (Id. Ex. 4 ¶ 2.) In a settlement agreement annexed as an exhibit to that stipulation, RCM agreed to pay $2.4 million to AG by September 30, 2001. (Id. ¶ 8.) Pursuant to that agreement, AG became entitled to immediate enforcement of the judgment when AG failed to make the payment. (Id. ¶ 8.) The Court has jurisdiction to hear claims or other matters arising out of the enforcement of the stipulation and the settlement agreement. (Id. Ex. 4 ¶ 4.)
In this motion, AG looks to respondents, rather than to RCM, for satisfaction of that judgment. (Resp'ts Mem. Supp. Mot. to Dismiss at 2.) AG alleges that respondents used their control of RCM to fraudulently incur a debt that RCM could not repay and then fraudulently sought to avoid that debt. (Critchell Decl., Dec. 17, 2001, ¶ 49.)
This phase of the action began on December 17, 2001, when AG, proceeding by an order to show cause, sought a temporary restraining order and preliminary injunction, and institution of a special proceeding. Pursuant to that order to show cause, the Court entered a temporary restraining order, and ordered respondents to show cause why a special proceeding should not be granted. RCI did not respond; Zenger and KPR opposed AG's demand for relief and moved to dismiss the special proceeding.
The temporary restraining order enjoined transactions between respondents and a company named Ultrak, further actions consummating the sale of RCM to AT Trading AG, and use of advertising and marketing material created by AG for RCM. (Pl.-Pet.'s Order to Show Cause at 3.)
Oral argument was held on January 17, 2002. At the close of that proceeding, the Court denied AG's motion for a preliminary injunction and vacated any remaining effect of the temporary restraining order. (1/17/02 Tr. at 60-62.) We reserved decision, however, on respondents' motion to dismiss the special proceeding, in order to further consider the veil piercing issue on the merits. (Id. at 63.)
DISCUSSION
In general, judgments cannot be satisfied with assets of third parties against whom the judgment does not run. See. e.g., Grupo Mexicano v. Alliance Bond Fund, Inc., 527 U.S. 308, 321 (1999). In turnover proceedings pursuant to CPLR §§ 5225 and 5227, judgment creditors can reach third parties who hold assets "in which the judgment debtor has an interest, or against a person who is a transferee of money or other personal property of the judgment debtor, where it is shown that the judgment debtor is entitled to possession of such property or that the judgment creditor's rights to the property are superior to the transferee." CPLR § 5225(b). The connection between the judgment debtor and the assets is an essential component of the turnover proceeding. According to the Second Circuit, § 5225(b) "provides a two-step analysis in determining whether property belonging to a judgment debtor — but in the possession of a third party — should be turned over to a judgment creditor." Beauvais v. Allegiance Securities, 942 F.2d 838, 840 (2d Cir. 1991). First, the judgment debtor must have "an interest" in the property sought by the judgment creditor. Second, the court must make "one of two findings: . . . that the judgment debtor is 'entitled to possession of such property,' or . . . that 'the judgment creditor's fights to the property are superior' to those of the party in whose possession it is." Id.
We conclude that AG fails to establish even the first showing as to Zenger and KPR. Claims that RCM has an interest in Zenger's and KPR's assets because of corporate veil piercing, fraudulent conveyance, and third party beneficiary are not persuasive. The turnover proceeding is inappropriate as to them.
I. Respondents' Motion to Dismiss
Respondents Zenger and KPR move to dismiss the special proceedings on the grounds that petitioner has not properly served them, has selected a court that lacks personal jurisdiction, and has failed to allege legally and factually sufficient claims. (Resp'ts Mem. Supp. Mot. to Dismiss at 2.) After a brief discussion of the service and personal jurisdiction issues, we focus on whether AG has demonstrated the necessary connection between the assets sought and RCM.
A. Service and Personal Jurisdiction
With the exception of RCI, respondents have not been properly served as required by Federal Rule of Civil Procedure 4(f). Service on foreign defendants "from whom a waiver has not been obtained and filed . . . may be effected in a place not within any judicial district of the United States: (1) by any internationally agreed means reasonably calculated to give notice, such as those means authorized by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents." Fed.R.Civ.P. 4(f)(1). Despite this rule, AG attempted to reach respondents, a foreign individual and two foreign entities, by serving Matthew Gordon, an agent and officer of RCM and RCI located in Brooklyn, New York. (Critchell Decl., Jan. 8, 2002, ¶ 5; id. Ex. 34 ¶ 1.) That service does not satisfy the requirements of the Federal Rules as to Zenger and KPR. Although Gordon was authorized as an agent of RCM for service in this action and is an officer of RCI, AG has offered no evidence to suggest that his agency extends to Zenger personally or to KPR. Even if this Court were to pierce the corporate veil between RCM and Zenger or KPR, extending Gordon's agency would be a stretch; there is no basis for a finding that Gordon is authorized to accept service of process on behalf of any person or entity other than RCM and RCI.
Although the proceeding must be dismissed as against Zenger and KPR for improper service, it is appropriate to address the merits. A dismissal purely on grounds of improper service would simply require petitioner to serve respondents again according to the Hague Convention or by other means. Since the merits have been fully argued and dismissal is required in any event, it is more efficient to resolve the merits as to all respondents now and thus avoid the additional delay of new service.
The personal jurisdiction issues are intertwined with the merits. Although Zenger is a Swiss citizen, and RCI and KPR are Swiss companies, much of the alleged activity on which this action is based took place in New York. If the activity can be attributed to Zenger personally or to KPR and RCI on a veil-piercing theory, personal jurisdiction would be proper. Accordingly, the critical inquiry is whether petitioner has presented persuasive veil-piercing claims.
In general, for a corporate veil piercing claim, the Court applies the law of the jurisdiction of incorporation. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995). Following this general rule, we should apply Swiss law. However, neither petitioner nor respondents have provided any references to Swiss law, and all parties have relied exclusively on New York law in their memoranda. In light of the parties' behavior, the Court will assume that Swiss law does not differ significantly from New York law, and that the parties have implicitly consented to the application of New York law. See. e.g., Golden Pacific Bancorp v. FDIC, 273 F.3d 509, 514 n. 4 (2d Cir. 2001); Walter E. Heller Co. v. Video Innovations, Inc., 730 F.2d 50, 53 (2d Cir. 1984); Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d 150, 155 n. 3 (2d Cir. 1968) (Friendly, J.); Larsen v. A.C. Carpenter, Inc., 620 F. Supp. 1084, 1103 (S.D.N.Y. 1985), aff'd mem., 800 F.2d 1128 (2d Cir. 1986).
AG asks this Court to disregard RCM's corporate form and treat the respondents and RCM as a single entity, as though RCM "does not exist" "as an entity separate and apart from Respondents." (Id. ¶ 28.) To succeed on this corporate veil-piercing claim, AG must demonstrate that respondents had complete dominion and control over RCM, and must show that such control was used to carry out a fraud or wrong that caused injury to AG. See. e.g., Freeman v. Complex Computing Co., Inc., 119 F.3d 1044, 1052 (2d Cir. 1997). Such a showing is necessary because the limited liability provided by the corporate form fosters important social and economic policies. In fact, a "'principal attribute of, and in many cases, the major reason for, the corporate form of business is the elimination of personal shareholder liability'" Carte Blanche (Singapore) PTE., LTD. v. Diners Club Int'l, Inc., 758 F. Supp. 908, 913 (S.D.N.Y. 1991) (citations omitted). The "presumption" against disregarding the corporate form "is particularly strong in contract cases, in which plaintiff has chosen the party with which it has contracted, and may negotiate guarantees or other security arrangements." Id. (citations omitted). Given the presumption against piercing the corporate veil, AG must show with specificity why this Court should reach each respondent.
AG argues that respondents are the substance behind RCM (Critchell Decl., Dec. 17, 2001, ¶ 28), and characterizes RCM as a non-operational entity that functioned solely as a cost center to hold employment and other contracts (id. ¶ 13, Ex. 24 at 43). Relying primarily on the deposition testimony of Richard K. Lin, an employee of Red Cube, Inc. with some global responsibilities as a representative of RCI (id. Ex. 24 at 23), AG claims that RCM had uncertain assets, did not have income, operated at a loss, did not have any of its own employees, and did not maintain independent offices but instead used space in RCI's Zurich office. (Id. Ex. 24 at 45, 50-51).
Red Cube, Inc., a Delaware corporation licensed and located in New York, is an American subsidiary of RCI. (1/17/02 Tr. at 4-5.)
Respondents allegedly used their complete dominion and control over RCM to fraudulently and wrongfully "incur a debt [to AG] that RCM could never, on its own, repay and then [sought] to avoid that debt by means including fraudulently misrepresenting RCM's financial wherewithal, submitting false affidavits to this Court and fraudulently conveying RCM's assets." (Pl.-Pet. Mem. at 7.) The mere fact that RCM has limited assets, and eventually proved unable to pay its obligations, does not constitute a fraud, even if AG's inability to recover what it is owed is a direct result of RCM's limited resources and even if respondents deliberately acted through a separate corporation to limit their exposure. Limited liability is the essence of the corporate form. AG chose to deal with RCM in full knowledge that it was relying only on the credit of RCM alone, and that under ordinary circumstances it could not look to the wealth of RCM's owners or affiliates to pay RCM's debts if the corporation's assets were insufficient to do so. Recognizing this, AG argues that four distinct instances of misconduct or wrongdoing take this case outside the ordinary rule and permit disregard of the corporate form: the sale of RCM to AT Trading (Critchell Decl., Dec. 17, 2001, ¶ 13), the purchase of Ultrak stock by Zenger (id. ¶ 14-20), Zenger's oral promise to pay the judgment during a February 6, 2001, phone call, followed by a confirming e-mail (id. ¶ 35), and alleged perjury by Zenger in his April 19, 2001, affidavit (id. ¶ 38).
AG discusses these wrongs as though all respondents participated in the same manner, but respondents share different relationships with RCM and also have different connections to the alleged fraudulent or wrongful behavior. Zenger was involved in all the alleged wrongdoings. RCI was involved in the sale. KPR's involvement in all of the alleged wrongs is not stated with specificity and is unclear. Proper analysis requires that each respondent be considered separately, examining each particular respondent's relationship with RCM and that respondent's involvement in the alleged wrongdoings.
1. RCM and RCI
The relationship between RCI and RCM is the least complicated. At the time RCM contracted with AG, RCM was the 100% subsidiary of RCI. (Id. ¶ 26.) RCI is a Swiss holding company for the Red Cube entities, an enterprise that promotes voice-over internet protocol as an alternative to phone lines. (Zenger Decl., Jan. 2, 2002, ¶ 2.) Though the relationship with RCI is fairly straightforward, analysis of the claims against RCI is not. Since RCI has defaulted by failing to respond to petitioner's motion, discussion of the claims against RCI will be limited.
On November 15, 2001, RCI sold RCM's assets and liabilities to AT Trading AG for one Swiss franc. (Critchell Decl., Dec. 17, 2002, ¶ 13.) The sale contract was signed by Zenger. (Id. Ex. 11.) RCM announced bankruptcy on December 12, 2001. (Id. ¶ 10.) AG claims that the sale of RCM was an attempt to frustrate the judgment and was a fraudulent conveyance (id. ¶ 13) and that the corporate veil between RCM and RCI should be pierced.
Additional details of the sale cannot be determined because neither AG nor any other party has provided an English translation of the contract.
AG's fraudulent conveyance theory cannot succeed. New York's Debtor and Creditor Law § 273 on fraudulent conveyance provides a remedy for transfers of assets by the judgment debtor to a third party. Sklaroti v. Rosenberg, 125 F. Supp.2d 67, 74 (S.D.N.Y. 2000). RCI, however, is not the judgment debtor; RCM is. If RCM alienated any of its assets to prevent AG from enforcing its judgment, a fraudulent conveyance claim could be made. But RCM's (apparently already inadequate) assets were not reduced by RCI's sale of RCM, with all its assets and liabilities, to new owners. The transaction affected only the ownership of RCM, not its ability or inability to pay its debts.
AG's claim that the corporate veil should be pierced as between RCM and RCI, however, is plausible. Because RCI owned 100% of RCM, it had complete dominion and control over its subsidiary. As for a fraud or wrong causing injury to petitioner, AG's petition can fairly be read to allege that RCM was deliberately undercapitalized, and was intentionally created without assets or the prospect of income, in order to incur costs for the benefit of its parent and affiliated companies without any intention or prospect of paying those costs. Whether or not these allegations could be proved if put to the test, RCI has chosen not to dispute them. Failure to plead or otherwise defend is grounds for default judgment. Fed.R.Civ.P. 55.
2. RCM and Zenger
Although AG's claims against Zenger rest upon different factual foundations, the legal standard is the same. Again, petitioner must establish that Zenger had complete dominion and control and that he committed a fraud or wrong that caused injury. See Freeman, 119 F.3d at 1052 (2d Cir. 1997).
Zenger's relationship to RCM is based upon his leadership role in the management of the Red Cube entities. In an attempt to prove complete dominion and control, petitioner claims that Zenger and Markus Muller were the sole officers of RCM. (Critchell Decl., Dec. 17, 2001, ¶ 26, Ex. 24 (deposition of Richard K. Lin) at 46.) Zenger's declaration does not state his exact role at RCM. (Zenger Decl., Jan. 2, 2002, at ¶¶ 3, 6, 9.) It is difficult to discern because Zenger and others often used "Red Cube" without specificity to describe RCM, RCI, and other Red Cube entities. It is clear, however, that Zenger was the President and CEO of RCI until November 23, 2001. (Id. at ¶ 3.) He continues to serve as Chairman of the Board of Directors of RCI. (Id.) The record does not reveal who owns the stock of RCI.
As noted above, the stock of RCM was owned 100% by RCI. Petitioner also claims that Zenger was the sole member of RCM's board, but only cites a statement by Zenger in an unrelated matter admitting that he was the sole board member of CyberOffice Management AG. (Critchell Decl., Dec. 17, 2001, ¶ 26, Ex. 25 at 51.) Petitioner fails to explain the relationship between CyberOffice Management AG and RCM. On the record, it appears that CyberOffice, a company controlled by Zenger. was purchased by Red Cube some time in 1999. (Id. Ex. 29 at 2.)
Liability can be imposed on an individual for corporate dealings "when a corporation is used by an individual to accomplish his own and not the corporation's business." Win. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991). In making this determination, "[t]he critical question is whether the corporation is a 'shell' being used by the individual shareowners to advance their own 'purely personal rather than corporate ends.'" Id. (citations omitted). The Second Circuit has described "factors that would tend to show" such dominion and control. Id. at 139. These factors include "(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence . . ., (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 corporate at anus 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." Id. (citations omitted). The record is not nearly adequate to establish that Zenger so dominated RCI.
Even assuming that AG could show that Zenger exercised complete dominion and control, it must still demonstrate that he used his control "to commit a fraud or other wrong that causes plaintiff's loss." Id. at 138 (citations omitted). Petitioner makes four such allegations: fraudulent conveyance of RCM to AT Trading, purchase of Ultrak shares with the intent to merge RCI, guarantee of RCM's debt, and perjury. Since none of these allegations is sufficient, there is no basis to pierce the corporate veil and allow petitioner to reach Zenger's personal assets.
a. The Sale of RCM to AT Trading
As discussed above, RCI sold RCM to AT Trading; Zenger participated in the sale, signing the sale contract on behalf of RCI. AG has failed to allege any facts from which it could be inferred that this transfer was fraudulent. Nothing suggests that the sale was an attempt to hide RCM's assets. AT Trading purchased both the assets and liabilities of RCM. (Resp'ts Mem. Opp. at 7-8.) Accordingly, AG or other creditors seeking satisfaction of RCM's debts have as much recourse after the sale as before.
b. Ultrak Transactions
On September 25, 2001, Zenger purchased shares of Ultrak common stock. (Critchell Decl. Dec. 17, 2001, ¶ 18, Ex. 16). AG alleges that this purchase will result in an eventual merger of RCI into Ultrak — a merger that was apparently discussed in August 2001 (id. ¶ 15, Exs. 12, 13), and that such a merger is another attempt by Zenger to frustrate the judgment against RCM. None of the documents submitted with AG's petition indicates that such a merger is planned or likely. According to a November 28, 2001, Schedule 13D, the shares of common stock that Zenger purchased were transferred to Victoria Eagle Strategic Fund. (Id. ¶ 18, Ex. 17.) A news report about the transfer added that, according to the filing, "'No agreement has been reached between Ultrak and Red Cube regarding a merger transaction.'" (Id. Ex. 17.) Thus, the projected merger is purely speculative.
Although Ultrak appeared in court at the January hearing and submitted affidavits and a memorandum in opposition to petitioner's motion, Ultrak is not named either as a defendant in the underlying case or as a respondent in the ancillary proceeding, and is thus a stranger to the action. (1/17/02 Tr. at 2.)
In addition to the purchase of common stock, on November 30, 2001, Ultrak approved a contract between Ultrak CEO George Broady and Zenger for the sale to Zenger of Broady's preferred stock holdings in Ultrak and a voting proxy for additional shares of common stock. (Id. ¶ 19.) As of December 17, 2001, that sale had not yet been consummated. (Id.) Even if that sale goes through, AG has not solidly connected the sale to a merger plan.
On the record, Zenger's transactions with Ultrak are personal, conducted by Zenger on his own behalf. Zenger was the only respondent involved in this action. The record does not reveal how, if at all, RCI and KPR participated in the sale or negotiations between Zenger and Ultrak. However, even if RCI and Ultrak were to merge, AG provides no evidence, or even plausible speculation, as to how such a merger would affect AG's ability to enforce any rights it has against RCI or RCM. A change in the corporate form of RCI would not affect any liability that RCI has on the judgment against RCM, and there is no evidence, and no reason to believe, that the merged entity (assuming arguendo such a merger occurs) will be less able to satisfy any judgment than its predecessor(s). There is no basis for a conclusion that Zenger's transactions with Broady or Ultrak are fraudulent or in any way designed to affect RCM's or RCI's creditors. In short, Zenger's purchase of stock in a corporation that has nothing to do with this litigation provides no conceivable basis for treating Zenger and RCM (which has no apparent connection to the Ultrak purchases) as alter egos.
c. Guarantee
AG also claims that Zenger guaranteed RCM's debts both personally and on behalf of RCI "and/or" KPR, and has since failed to fulfil those responsibilities. (Id. ¶ 33.) These allegations are based on a February 5, 2001, phone conversation among Zenger, AG's CEO Peter Arnell ("Arnell"), and Jordan Rednor CEO of Draft Worldwide, Inc. At Arnell's request, General Counsel for AG taped the phone conversation and had it transcribed. (Id. Ex. 35.) Any guarantee made during the conversation is unenforceable by reason of the statute of frauds. In New York, an oral promise to pay the debts of another is not enforceable without a writing unless the situation fits certain limited exceptions to the general rule. See e.g., Martin Roofing. Inc. v. Goldstein, 60 N.Y.2d 262, 264 (1983). This case does not fall within those exceptions, as neither partial performance nor new consideration have been adequately alleged.
Zenger's February 6, 2001, e-mail confirming his understanding of the agreement (Critchell Decl., Dec. 17, 2001, Ex. 33) does not overcome the statute of frauds as to Zenger personally — although it may constitute an additional reason to reach RCI (see supra "RCM and RCI"). In that e-mail, Zenger wrote, " Red Cube will pay against the open balance of 3,776,565.51 USD 1,000,000.00 every two weeks, the first payment starting in 5 days from now." (Critchell Decl., Dec. 17, 2001, Ex. 33) (emphasis added).) He signed the e-mail "Red Cube, Nik Zenger, CEO." (Id.) From the e-mail, it is unclear whether Zenger was acting on behalf of RCM or RCI or both, or of some other Red Cube entity. But the record contains no evidence supporting the allegation that Zenger made this promise in his personal capacity, and the signature as "Red Cube," by Zenger in his capacity as "CEO," compellingly demonstrates the opposite. At any rate, while a guarantee of RCM's obligation by RCI or Zenger, if proved, would provide an independent basis for liability on their part, such a guarantee would not be probative of disregard of corporate formalities or a fraud justifying piercing the corporate veil.
d. Perjury
Petitioner's final allegation of wrongdoing concerns statements made by Zenger and Matthew Gordon, an agent of RCM for purposes of this action and a Red Cube employee, in their April 2001 affidavits. (Id. ¶ 38, Exs. 27, 34.) Petitioner claims that Zenger committed perjury when he described Red Cube as financially solid despite knowledge to the contrary (id.) and when he stated that he did not know that the $3.7 million allegedly due included monthly commissions (id. ¶ 39). He made these statements in an affidavit opposing petitioner's motion for relief that included requests for a $150,000 bond to be posted by RCM, an attachment of RCM's assets in New York, and expedited discovery. Even if we accept these allegations as true, perjury of this type does not constitute a fraud or wrongdoing that uses RCM's corporate form. The fact that a corporation engages in fraudulent conduct by perjury on the part of an agent does not defeat the distinction between the corporation and the agent.
The alleged perjury of Gordon does not seem relevant here. Gordon is not a party to this case. He was Vice President for American Operations of Red Cube, Inc., and for the purposes of this action, an agent of RCM. (Critchell Decl. Ex. 34 ¶ 1.) His misstatements, if any, may be attributed to RCM, but not to Zenger personally.
The Court denied the request for a bond and an attachment in a proceeding on April 20, 2001. (4/20/01 Tr. at 29.) The parties were ordered to complete discovery by July 31, 2001. (Order of Apr. 23, 2001.)
3. RCM and KPR
The relationship between KPR and RCM is the most attenuated. Petitioner attempts to reach KPR through Zenger and RCI by claiming that Zenger's control of KPR connects the company to RCM. (Critchell Decl., Dec. 17, 2001, ¶ 6.) This approach is not convincing, and does not satisfy the required showing of complete dominion and control.
KPR is also a Swiss company; it is owned and controlled by members of the Zenger family. (Zenger Decl., Jan. 2, 2002, ¶ 4.) Zenger asserts that he is a minority shareholder of KPR. (Id. ¶ 1.) AG offers no evidence that Zenger controls KPR, or that KPR control or dominates RCI or RCM. That Zenger owns a minority stake of [(PR and is also an officer and director of RCI is not enough to lump KPR together with Zenger and, in turn, with RCM, in disregard of the separate legal personality of each. AG attempts to bolster the connection between KPR and RCM by claiming that KPR is an acquisition vehicle used by RCI to acquire and dispose of entities. (Critchell Decl., Dec. 17, 2001, ¶ 31, Ex. 24 at 76.) The evidentiary snippets AG cites do not suggest that any such transactions were fraudulent. (Id. ¶ 31 (citing Lin's deposition, Ex. 24 at 76, and a Pricewaterhouse Coopers audit from November 13, 2000, Ex. 28 at 3).) According to Lin, KPR bought companies at market value and sold them to RCI at the same price. (Id. Ex. 24 at 76.) Pricewaterhouse Coopers did not conclude that dealings with KPR were improper; the report simply urged improved clarity and transparency, observing that certain transactions "have not necessarily been at terms third parties would have negotiated." (Id. Ex. 28 at 3.)
[(PR, an original investor in RCI, initially owned a majority of RCI's shares. This interest was diluted over the past two years as RCI raised equity from other sources. KPR owned less than 1% of the shares of RCI by mid-2001. (Zenger Decl., Jan. 2, 2002, ¶ 4.)
In addition to an inadequate showing of complete dominion and control, AG has also failed to allege any specific fraud or wrong committed by KPR that caused injury to AG. KPR's involvement with any of the alleged wrongs — assuming arguendo any wrongdoing has been shown at all — is neither clear nor specific. Indeed, it is impossible to identify any concrete participation of KPR in the AT Trading or Ultrak transactions, the alleged guarantee, or the alleged perjury by Zenger or Gordon.
II. Contempt
The petition also demands that this Court hold respondents in contempt for violating the retraining notices. Restraining notices issued against parties other than the judgment debtor only have effect "if, at the time of service, he or she owes a debt to the judgment debtor . . . or he or she is in possession or custody of property in which he or she knows, or has reason to believe the judgment debtor . . . has an interest." CPLR § 5222. The notices only reach property and debts with such a connection to the judgment debtor. If the third parties do not have property or debts in which the judgment debtor has an interest, the restraining notices are not effective. Fasolino Foods Co., Inc. v. Banca Nazionale Del Lavoro, 1992 WL 123650 at *2 (S.D.N.Y. May 28, 1992). If the notices are ineffective, respondents cannot violate them. Since petitioner has failed to demonstrate veil piercing as to Zenger or KPR, or an effective promise to pay by Zenger, there is no showing that these parties held any property of RCM. Accordingly, there is no basis for holding Zenger or KPR in contempt of the notices.
CONCLUSION
Accordingly, Zenger's and KPR's motion to dismiss the special proceeding as to them is granted. Since RCI has failed to answer, however, and since the petition states valid theories on which the corporate veil between RCI and RCM could be lifted, a default judgment will be entered holding RCI jointly and severally liable for the judgment earlier entered against RCM.
SO ORDERED: