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An attempt by a Long Island dentist and his wife to use Florida law to protect their home from creditors has been defeated by a state appellate court’s ruling allowing two New York law firms to engage in a reverse piercing of the corporate veil. The Appellate Division, Second Department’s unanimous ruling Monday in Sweeney, Cohn, Stahl & Vaccaro v. Kane, 2002-04052, directs the appointment of a receiver to conduct the sale of a home in Southampton, which is the primary asset of the couple’s Florida-based corporation. The proceeds of the sale will be used to pay off liens and the judgments acquired by Sweeney, Cohn, Stahl & Vaccaro and Seltzer Sussman & Habermann after the wife, Amy Kane, failed to pay her legal fees. Justice Marquette L. Floyd in Suffolk County Supreme Court had denied the law firms’ request that he order the sale of the corporate asset to satisfy the judgments against Ms. Kane because Florida law protects the couple’s holdings in the corporation from the creditors of only one of the spouses. The law firms had argued that New York law should be applied, which would allow use of the reverse-piercing theory, thus enabling the sale of the asset to satisfy their judgments. Justice Stephen G. Crane, writing for the four-judge appellate panel, rejected the argument that New York law should apply, but he said the same result could be reached under Florida case law, which is the law he applied here. Seltzer Sussman of Jericho had represented Ms. Kane in the administration of an estate in Surrogate’s Court in Westchester County, and sued her to collect the firm’s fee. Sweeney Cohn of White Plains, now known as Sweeney, Cohn, Stahl, Spector & Frank, represented Ms. Kane in the attorney fee proceeding and negotiated a settlement in which she agreed to pay $13,000. Four months before entering into the stipulation of settlement in 1994, Ms. Kane and her husband George incorporated Gin Properties Inc. as a subchapter S corporation in Florida. The Kanes, who lived in Dix Hills at the time and owned a condominium in Sarasota, Fla., used the Sarasota address as the corporate address. Less than a week later, they bought a house on Gin Lane in Southampton, N.Y., and assigned the home to the corporate entity. Gin Lane is a fashionable address in the beachfront community. Justice Crane’s opinion noted that Dr. Kane, a dentist with an office on Long Island and in Westchester County, and his wife had improved their property with the addition of a home entertainment theater and putting green. However, Ms. Kane had failed to pay judgments of $13,000 to the Seltzer firm, obtained after she failed to comply with the settlement, and $5,050 judgment obtained by Sweeney Cohn after she failed to pay the balance due on its retainer. Justice Crane explained that piercing the corporate veil is an equitable concept that allows a creditor to disregard a corporation and hold its controlling shareholders personally liable for the corporate debt. Reverse-piercing makes the corporation liable for the debt of the shareholders. Reverse-piercing is recognized under Florida law, “where the shareholders have formed or used the corporation to secrete assets and thereby avoid preexisting personal liability,” the judge said, quoting a 1987 decision of the Third District, Florida Court of Appeals, EPICA v. Swiss Bank Corp. S.A., 507 So2d 1119. If the Kanes had bought the Southampton home in their own names, they would have held it as tenants by the entireties and New York law would have applied. The law firms’ judgments would have become liens against Amy Kane’s interest in the home and could be sold under an execution, which was probably an “impractical” solution, Justice Crane noted. Under Florida law, only the creditors of both spouses may attach property held as tenants by the entireties, he pointed out. The creditor of one spouse alone may not reach the property without a showing of fraud. However, when the Kanes assumed a corporate identity to avoid the execution on Ms. Kane’s interest in the property, they fulfilled the requirements for reverse-piercing under Florida’s EPICA case, Justice Crane said. The Kanes, sole shareholders of the corporation, “formed it to protect assets from claims of creditors such as the plaintiffs, thereby, in effect, defrauding them,” he wrote. The Kanes completely controlled the property, making Gin Properties Inc. their alter ego and making the property subject to claims of their creditors, he added. Mr. Kane was a “driving force behind the scheme to avoid Amy Kane’s creditors,” and “benefitted as much as she did from using the corporate form for personal purposes,” the judge said. Thus, Mr. Kane could be held jointly and severally liable for the constructive, if not actual, fraud on his wife’s creditors. Justices Sondra Miller, Robert W. Schmidt and Sandra L. Townes concurred with Justice Crane’s opinion. The appealing law firms were represented by Julius W. Cohn of Sweeney, Cohn. Jeffrey G. Stark and Lynn M. Brown of Meyer, Suozzi, English & Klein of Mineola were counsel for the Kanes.

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