BUSINESS ASSET sEARCH

Overview of a Corporate Asset Search

The most common areas of investigation in a commercial asset search include the following:

• Business Bank Accounts

• Company Benefit, Retirement and Profit-Sharing Plans

• Real Estate, Vehicles and Financed Equipment

• Extent of Active Business Operations

• Identification of Principals, Parent Company, Subsidiaries and Affiliates

• Fraudulent Conveyances (Property Transfers to Principals, Associates or Affiliates)

• Corporate Credit Profile (Bankruptcies, Liens, Judgments and Financing)

• Securities Filings

For large corporations and multinational firms, additional asset classes can be explored, including intangible assets such as service contracts, licensing agreements, patents, trademarks and copyrights. Complex corporate investigations may also require examination of joint ventures, foreign subsidiaries and off-balance-sheet entities.

For small and midsize companies, we also typically review the personal financial status of company principals. This information can be particularly relevant for family businesses and single-member limited liability companies.

Determining the specific scope and budget of a business asset search requires a case-by-case assessment. Is the company large or small? Public or private? Is the asset search being conducted for judgment collection or pre-litigation assessment? We discuss these questions with clients at the outset of each investigation, and prepare a retainer agreement outlining the estimated cost and timeframe for the investigation.

Locating Business Bank Accounts

For collection of a judgment against a business, the most important concern for most clients is locating active bank accounts – and determining whether those accounts contain sufficient funds to satisfy the judgment.

We have established successful methods and reliable sources for locating accounts at banks and credit unions. More than 90% of our comprehensive asset investigations result in the identification of undisclosed financial accounts that were previously unknown to the client. Results of business bank account searches generally include name and address of the financial institution and approximate current balance.

We strictly abide by state and federal laws, including the Gramm-Leach-Blilely Act and the Fair Credit Reporting Act (FCRA), when conducting these searches. Our investigators do not use pretexting to obtain bank account information.

Real Estate: Commercial, Investment and Agricultural Property

The land, buildings and facilities owned by a business are often an important part of its overall holdings. When evaluating the value of real property during an asset search, consideration must be given to local assessments and estimated market value, as well as any revenue represented by leases and tenants.

Determining the extent of mortgage financing is necessary for calculating the owner’s equity. Secured debt is also a key factor in determining whether a pre-existing lien against the property would prevent a judgment creditor from forcing a foreclosure sale. Other encumbrances – such as tax liens, mechanic’s liens, lis pendens, and foreclosures – can also affect the net value and liquidity of real property.
 

Corporate Securities Filings

Publicly traded companies are required to file periodic reports to provide a clear view of company operations and financial status to investors. In any investigation of a public company, a diligent search of corporate filings with the Securities and Exchange Commission (SEC) is an essential step for identifying assets, affiliations and financing.

Private companies, as well, have reporting and disclosure requirements if they have sold company stock in a private placement. Technology start-ups and entrepreneurs often pursue this path to raising capital in their early stages of growth. Under the Securities Act of 1933, every offer to sell company stock must be registered with the SEC or otherwise meet an exemption under Regulation D. The Reg D exemption permits smaller companies to raise capital through the sale of equity or debt securities to high-net-worth individuals and accredited investors. Companies planning a private placement must file a Form D with the SEC, which is a brief notice that identifies the size of the offering, as well as other general information such as principal business address and executive officers, directors, and promoters. The Form D may also contain information on company revenue and aggregate net asset value, although private issuers can (and often do) decline to disclose such details.
 

Company Benefit and Retirement Plans

In addition to bank accounts, we also identify IRS-registered retirement, pension and benefit plans. These ERISA benefit plans – established under provisions of the Employee Retirement Income Security Act – commonly include 401(k), deferred compensation, and profit-sharing plans established by an employer. Qualified ERISA plans are often exempt from judgment collection, but even an exempt plan can provide useful insights on the financial health of the business, including the number of employees and the amount of money they have set aside.

Many small employers - particularly doctors - tend to consider the ERISA protections important, because they believe their retirement savings will remain safe regardless of litigation outcomes. However, under certain circumstances, funds in ERISA plans may be vulnerable to creditors. For example, if a single-member LLC creates and funds a new plan after litigation was filed, for the sole purpose of safeguarding the principal’s assets, then a court could potentially be persuaded that the transfer was fraudulent and the funds are not entitled to protection. Additionally, at least one federal court has ruled that such benefits are no longer protected after they are distributed from the plan to the beneficiary.
 

Piercing the Corporate Veil

A key reason for forming corporations and limited liability companies is to shield business owners and managers from personal responsibility for business debts. Yet when judgment is rendered against a company, courts can lift the limited liability protection and hold the principals personally liable. This is known as piercing the corporate veil.  Once the veil is pierced, personal assets of the debtors become recoverable by the judgment creditor.

Following a successful lawsuit against a company, post-judgment discovery may reveal that the business is defunct. In such situations, evidence can be gathered through further investigation to support a motion to pierce the corporate veil. Factors include:

• Failure to maintain separation between the company and its owners. If business owners comingle assets – and treat the company accounts like their personal pocketbook – a court may determine the corporation or LLC is simply an ‘alter ego’ of the business owners. The liability protection ordinarily afforded by a corporate structure can also be voided if owners and officers fail to follow standard practices and formalities, such as adopting company bylaws, holding annual meetings, and maintaining detailed minutes of key decisions made by directors, shareholders and members.
  

• Fraudulent acts and corporate wrongdoing. Sometimes business owners shut down their company to avoid paying creditors – only to form a new company with the same assets, operations and employees. The same business may keep springing up, under slightly different names, forcing creditors to engage in a costly game of whack-a-mole to locate and collect the business assets. Presenting compelling evidence of wrongful corporate conduct could persuade a court to put the principals’ personal assets in play.
  

• Undercapitalization and unjust costs. In considering a motion to pierce the veil, courts will evaluate whether the available assets of the debtor company were reasonable in relation to the business purpose. Courts rarely punish business owners and officers for failure to make enough money, or for running a business into the ground through poor management. However, if the business lacked adequate capital to operate independently – for example, if major company expenses were charged to the personal credit cards of the owner – then undercapitalization becomes a serious consideration, particularly if the company’s creditors have suffered unjust costs.

Similar concerns apply if an individual forms a limited liability company or corporation immediately after litigation has been filed against him (or her) individually. This may indicate a financial strategy for ring-fencing assets to protect them from creditors. An asset investigation may yield evidence that the company is an alter ego of its owner – and, in short, a sham.
 

Fraudulent Transfers

Identifying improper transfers of assets to other entities and company principals is often a critical focus for business asset investigations.

Faced with a sizable judgment, multiple lawsuits or other serious liabilities, some business owners seeking to protect their company’s assets may believe they can make themselves ‘judgment proof’ by transferring assets to other privately held entities. Presented with the threat of litigation or an award for money damages, they pretend to be insolvent, presenting financial statements with conspicuously low cash flow as proof of reduced revenue, never acknowledging the profits accruing to the other entity.

If the transfer of a debtor’s property is undertaken solely to deter or obstruct a creditor, then it is generally considered a fraudulent transfer. Constructive fraud occurs when assets are transferred in exchange for inadequate consideration. Constructive fraud is a common target of trustees in corporate bankruptcies. If the exchange of assets was made with the intent to deceive, then transfer is referred to as actual fraud. 

An exchange of assets that is actual fraudulent or constructive fraud can be voided, forcing the return of the assets to the original owner, where they can then be garnished by creditors. Avoidance and recovery of fraudulent transfers are a central tenet of the Uniform Fraudulent Conveyance Act (UFCA) and the Uniform Voidable Transactions Act (UVTA), previously known as the Uniform Fraudulent Transfer Act (UFTA). Provisions of UFCA and UVTA grant relief for creditors by establishing grounds for reversing the transfer of assets that would have otherwise been available to satisfy a legitimate claim.
 

Case Study: Settlement Negotiation

Following an accidental death at an amusement park in the Midwest, attorneys representing the decedent’s family planned to meet with the park owners to discuss a potential settlement. In preparation, the law firm requested a pre-litigation business asset search.

Our investigators identified more than $100 million in corporate assets, including hundreds of parcels of real property. We also uncovered a complex web of limited liability companies and shell corporations – more than 50 entities in total, controlled by a common principal – that had been established to hold assets in several states. These findings guided our client's settlement negotiations, resulting in a highly favorable settlement for the decedent's family.
 

Case Study: Evaluating a Potential Partner

A businessman in the Cleveland area was interested in vetting a potential partner who had agreed to personally invest $30 million in a new joint venture. The deal required a substantial up-front cash commitment from the client, which would be lost if the financing later fell through. He requested an investigation of his new partner’s background, including a full financial profile.

The partner initially appeared to be a low-risk candidate: clean credit; no criminal record; no judgments, liens or bankruptcies. However, investigation of his assets revealed that his expensive home was heavily encumbered in debt, and although he had 10 separate bank and brokerage accounts, the combined balances were in the low six-figures. Despite his representations, he did not have enough money to pay off his mortgage, much less cover a multi-million-dollar investment.
 

Judgment Collection

If pursuing an asset investigation after a judgment has been entered against a business, the next step after locating the assets is to collect what is owed. The most common collection methods include levying bank accounts and filing liens against property.

For a business with a fleet of vehicles or a significant stock of equipment, it may be possible to have the assets seized and sold under court order.

Till taps and keepers are other options to consider, where permitted by state law. A till tap consists of the direct seizure of money, taken from the cash register of a business. A keeper is an extended form of till tap, where a law enforcement deputy remains at the company and seizes all cash on hand, plus all incoming payments made during business hours.

After the successful completion of an asset search, collection efforts should be coordinated by an attorney.
 

Consult an Investigator

If you would like to discuss a business asset search, please complete the form below. You can also speak with an investigator by contacting our offices at 800-580-8755.