In a recent decision, the New Jersey Appellate Division seemed to blur the lines between a creditor attempting to execute upon funds held for its debtor’s benefit and a creditor attempting to end-run an action to pierce the corporate veil to attach a third-party entity’s assets.

In Comengo Law Group, PC v. Phillips, No. A-4908-17T1 (App. Div. May 22, 2019), the plaintiff-judgment creditor filed suit against an individual defendant, John Phillips, Jr. The plaintiff subsequently obtained a default judgment against the individual in the amount of $11,132.18. More than two years after entry of judgment, the plaintiff levied on a bank account owned by The John “Jack” Phillips Family Foundation Ltd., which objected and submitted evidential materials to the court showing a distinction between it and the individual judgment debtor. The plaintiff responded with materials suggesting that the Foundation should not be entitled to rely on its corporate veil.

The lower-court judge heard argument on whether the plaintiff could levy against the Foundation’s bank account. Without conducting an evidentiary hearing, the judge ruled against the Foundation and entered an order that required the Foundation to turn over of the levied funds to the plaintiff.

The Foundation intervened in the action and appealed from the lower court’s order. On appeal, the Foundation argued that the plaintiff was wrongfully permitted to execute on its property because it is not the judgment debtor, that any questions about the legitimacy of the Foundation’s corporate veil and its liability for the individual’s debt may only be pursued in a separate lawsuit, and that the plaintiff failed to prove by clear and convincing evidence that the Foundation’s corporate veil should be pierced.

The Appellate Division agreed with the Foundation and reversed and remanded the matter for entry of an order lifting the levy on the Foundation’s bank account. The Appellate Division also authorized the lower court to enter “other relief necessary to undo the actions taken against the Foundation.” Citing the U.S. Supreme Court’s decision in Nelson v. Adams, 529 U.S. 460, 465-66 (2000), the Appellate Division reasoned that “the Foundation was entitled to due process, which would include the right to have the civil claim against it set forth in a complaint, the right to be personally served with that complaint, the right to file a responsive pleading, the right to discovery, and all the other rights delineated in our court rules prior to the entry of a judgment against it.”

This decision seems well-reasoned, but it also presumes, without any factual recitation, that the levy was due to the creditor believing that the Foundation is the “alter ego” of the individual debtor, rather than because the Foundation was holding funds due to the debtor. Because the Appellate Division did not explicate the facts, this decision leaves creditors in an unsure position. When dealing with judgments that are in the range of that in Comengo, it is burdensome, if not impossible, for creditors to negotiate New Jersey’s complicated judgment collection rules and make themselves whole.

The Comengo decision can be found at:
https://www.njcourts.gov/attorneys/assets/opinions/appellate/unpublished/a4908-17.pdf?c=NUI

To discuss creditors’ rights matters with this article’s author, please contact:

Jonathan P. Vuotto, Esq.
jpv@mcandrewvuotto.com