Even though a Philadelphia judge has indicated sales revenues were diverted from a business marketing corporate promotional items and a corporate interior design firm to yet another corporation, the judge said she could not address the allegedly fraudulent transfer because it was not raised by a litigant during arbitration.

Philadelphia Court of Common Pleas Judge Patricia A. McInerney, one of the judges in the commerce program, ruled that any fraudulent transfer could not be addressed in court when it was not addressed in the arbitration.

The case involves: a messy business dispute between two women who co-owned two companies, MediaMark and Ark, which, respectively, were in the business of corporate interior design and selling corporate promotional items like coffee cups and pens; one woman’s claim that she was not bought out as required by contract as well as locked out of the business premises; and the other woman’s claim that all the shared business assets were fraudulently transferred.

On one side of the dispute was Gina Scotolati and MediaMark claiming that Scotolati’s partner in Ark failed to buy her out as required by contract and also locked her out of the offices. On the other side of the dispute was Ann Hoffman and Ark, claiming that Scotolati removed assets from MediaMark to MediaMark Spotlight in violation of the state Uniform Fraudulent Transfer Act.

McInerney said that when the late Senior Judge Albert W. Sheppard Jr. granted a motion to strike or modify the arbitration award that it was in error because Hoffman had the opportunity to assert the claims of fraudulent transfer in the arbitration and by not doing so “lost her right to re-litigate them.”

Sheppard, who initially ruled against a motion to review the arbitration, may have granted the second motion to review the arbitration because it was discovered post-arbitration that MediaMark was insolvent and unable to satisfy the arbitration award to Ark, McInerney said.

“The court neither condones Scotolati’s failure to timely inform the arbitrator of MediaMark’s insolvency, nor the sudden diversion of revenues from sales of promotional items which should have been deposited in the account of MediaMark, but were inexplicably deposited in the account of Spotlight,” McInerney said. “Unfortunately, Hoffman’s failure to assert the claim of fraudulent transfer through the arbitration process prevents this court from rectifying Scotolati’s improper conduct, and precludes modification of the arbitral award.”

The facts of the fraudulent transfers were before the arbitrator but were not asserted by Hoffman as actual claims, McInerney said.

McInerney originally entered judgment against Scotolati, but, while Hoffman argued in court papers that a fraudulent transfer action can be raised at “any point in litigation when the fraudulent transfer issue became apparent,” McInerney ultimately agreed with Scotolati’s argument in court papers that “the court erred in admitting any evidence on the question of whether a fraudulent transfer was made from MediaMark because the arbitral opinion and award was res judicata and a full and final disposition of all claims that could have been made arising out of the occurrence of 2005.”

Hoffman had argued that the “newly formed MediaMark Spotlight was indistinguishable from and a continuation of MediaMark and the alter ego of Gina Scotolati,” while Scotolati argued that the court “erroneously pierced the corporate veil on the basis that the business of Spotlight was indistinguishable from the business of MediaMark.”

The arbitrator awarded $42,000 from Hoffman for Scotolati’s shares in Ark, $64,558 in favor of Ark against MediaMark, and $11,692 in favor of Ark against Scotolati individually, according to court papers.

Thomas J. Barnes of Egbert & Barnes was the attorney for Scotolati, MediaMark and MediaMark Spotlight, but withdrew his appearance. Robert Bovarnick of Bovarnick & Associates now represents them.

C. George Milner of C. George Milner P.C. represents Hoffman.

Neither attorney responded to a request for comment.

McInerney’s opinion in Scotolati v. Hoffman, in which she suggested that her order be affirmed on appeal, was issued October 11.

Amaris Elliott-Engel can be contacted at 215-557-2354 or aelliott-engel@alm.com. Follow her on Twitter @AmarisTLI.

(Copies of the five-page opinion in Scotolati v. Hoffman, PICS No. 12-0367, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •