US v. Golden Acres, Inc.

Decision Date19 December 1988
Docket NumberCiv. A. No. 85-179-JRR.
Citation702 F. Supp. 1097
PartiesUNITED STATES of America, Plaintiff, v. GOLDEN ACRES, INC., J.L. Capano, Inc., Joseph L. Capano and Mario B. Capano, Defendants.
CourtU.S. District Court — District of Delaware

William C. Carpenter, Jr., U.S. Atty. and Charlene D. Davis, Asst. U.S. Atty., U.S. Dept. of Justice, Wilmington, Del. (John R. Bolton, Asst. Atty. Gen., J. Christopher Kohn, Robert M. Hollis and Gregory A. Harrison, U.S. Dept. of Justice, Washington, D.C., and Patricia G. Beatley, Dept. of Housing & Urban Development, Washington, D.C., of counsel), for plaintiff.

L. Vincent Ramunno, of Ramunno & Ramunno, Wilmington, Del., for defendants.

OPINION

ROTH, District Judge:

The United States of America, representing the interests of the Department of Housing and Urban Development (HUD), filed this suit against defendants Golden Acres, Inc., J.L. Capano, Inc., Joseph L. Capano, and Mario B. Capano, on March 21, 1985. On April 15, 1988, we granted plaintiff's motion for summary judgment against J.L. Capano, Inc., Joseph L. Capano, and Mario B. Capano, (the Capanos) for violation of the Federal Priority Statute, 31 U.S.C. § 3713, United States v. Golden Acres, et al., 684 F.Supp. 96 (D.Del.1988), thus holding the Capanos liable for $466,760.54 paid to them or to corporations they controlled between October 1, 1976, and December 31, 1981. The issue of whether prejudgment interest would be awarded to HUD on this recovery was left for later determination. On April 19, 1988, we entered a default judgment for $991,516.23 against defendant Golden Acres, Inc. for breach of a HUD security instrument known as a "Regulatory Agreement." However, Golden Acres, Inc., as a corporate entity, has been void and defunct for over five years.

The issues now before the Court are whether to award prejudgment interest on the $466,760.54 judgment against the Capanos and whether to pierce the corporate veil of Golden Acres, Inc. ("Golden Acres") and hold defendants J.L. Capano, Inc., Joseph L. Capano, and Mario B. Capano liable for the default judgment against Golden Acres. A bench trial on this question was held on April 18 and 19, 1988. Pursuant to Fed.R.Civ.P. Rule 52(a), we now make the following findings of fact and conclusions of law.

FINDINGS OF FACT1

In March, 1972, P. Donald Woodall hired Joseph L. Capano to construct an 88-unit apartment project located in New Castle County, Delaware. The project was owned by Golden Acres, Inc., a Delaware corporation. Mr. Woodall and his wife owned all of the outstanding Golden Acres stock.

On March 28, 1974, Golden Acres executed and delivered to the Central Mortgage Company a Mortgage Note for $1,389,100. The Mortgage Note was secured by a mortgage encumbering the project. Concurrently, HUD insured repayment of the Mortgage Note in accordance with the National Housing Act, 12 U.S.C. § 1715l(d)(4) (1982), a provision designed to assist private industry in providing rental housing to low and moderate income families. In consideration for the insurance, Golden Acres signed a Regulatory Agreement with HUD. The Regulatory Agreement and mortgage were duly and properly recorded.

HUD relies on Regulatory Agreements like the one signed by the Woodalls to retain control of apartment projects such as Golden Acres. The Agreement places substantial restrictions on the mortgagor's operation of a multifamily project. It controls the amount of rent that may be charged, establishes a reserve for a replacement fund, requires prompt mortgage payments, restricts the use of the rents and income of the project, and prohibits conveyance, transfer, or encumbrance of the property.

The amount borrowed by Golden Acres under the mortgage fell short of the total construction costs for the apartment complex. Accordingly, on the same day that the mortgage and Regulatory Agreement were executed, the Woodalls personally executed a promissory note and memorandum of agreement with and to J.L. Capano, Inc. for $234,000, the balance owing to J.L. Capano, Inc. for construction costs. Under the terms of these documents, the Woodalls had until December 30, 1974, to pay J.L. Capano, Inc. If the Woodalls failed to make payment by that date, they would have to surrender all their capital stock in Golden Acres to J.L. Capano, Inc.

The Woodalls failed to meet their obligation on the promissory note. As a result, on January 7, 1975, J.L. Capano, Inc. took control of all Golden Acres stock. The Woodalls resigned as officers of Golden Acres. Joseph L. Capano and Mario B. Capano became the sole officers and directors of Golden Acres. Mario B. Capano assumed control of corporate finances, including the payment of creditors. From this time until December 8, 1981, J.L. Capano, Inc. owned 100 percent of Golden Acres stock. In turn, Mario B. Capano and Joseph L. Capano each owned 50 percent of the stock in J.L. Capano, Inc. and were its sole officers, directors, and shareholders.

On January 7, 1975, when the Capanos, through J.L. Capano, Inc., assumed control of Golden Acres, the corporation was still current on its monthly mortgage payments to HUD. Golden Acres continued to be current on the mortgage while under the Capanos' control until May 1, 1976, when it failed to make the mortgage payment then due. Thereafter, Golden Acres failed to make sufficient payments to bring the loan current. On September 29, 1976, HUD, pursuant to its role as insurer, was assigned the Mortgage Note and Mortgage.

It is not difficult to ascertain why Golden Acres was not able to make its mortgage payments to HUD after the Capanos took control. When the Capanos obtained the Golden Acres stock pursuant to the Woodalls' agreement with J.L. Capano, Inc., the Capanos did not consider the Woodalls' debt to J.L. Capano, Inc. to have been satisfied; rather, they viewed ownership of Golden Acres as a means to regain the $234,000 construction costs which the Woodalls had failed to pay them. Mario Capano testified that he believed, when he obtained the Golden Acres stock, it was as if he had obtained the key to a safe deposit box, and he could then get in the box and obtain the money inside. M. Capano Tr. B-23-24. Getting paid the $234,000 was the Capanos' primary goal, despite their knowledge of the outstanding mortgage debt that Golden Acres owed to HUD. In fact, Mario Capano perceived himself to be a senior creditor to HUD. M. Capano Dep. p. 47.

Unfortunately, the Capanos could not "repay" themselves out of Golden Acres' profits because there were no profits. M. Capano Tr. B-11-12. Not only were there no profits, but in fact the 1975-78 end of the year balance sheets reveal that the corporation's liabilities exceeded its assets for those years. While no corporate records for the period after 1978 have been introduced, defendants have also admitted that the value of the assets of Golden Acres was less than the value of its liabilities for the years 1976 to 1981, inclusive. Ex. 4 at 2, Ex. 5 at 2, Ex. 7 at 2, Ex. 8 at 2, Ex. 11 at 5.

In the mid-1970's, when they took control of Golden Acres, Mario and Joseph Capano had a practice of creating a separate corporation for each new construction project. In fact, J.L. Capano, Inc. and Golden Acres were just two of the approximately 40 corporations the Capanos have operated to date. All of the Capano corporations were closely held and would appear to have been very informally operated. For example, in operating and managing J.L. Capano, Inc., between January 7, 1975, and December 8, 1981, no formal board of directors' or stockholders' meetings for the corporation were ever held. J.L. Capano, Inc. is now a defunct, nonoperating corporation.

Similarly, no formal meetings for Golden Acres were ever held. Furthermore, the Capanos maintained no corporate records for Golden Acres, except for tax returns and accounting books. The corporate kit and minute book for Golden Acres were never opened. And while Joseph L. Capano was listed as an officer and director of Golden Acres, he never formally functioned in that capacity. Mario Capano considered Golden Acres to be his project and he handled it as he saw fit. M. Capano Tr. A-175-176.

The Capanos also took a casual approach to the finances of Golden Acres. In addition to the fact that the corporation was insolvent, that it never had any net income or profits, and that it always operated at a loss, neither J.L. Capano, Inc., Joseph Capano, nor Mario Capano ever contributed to Golden Acres any money which they intended to be an investment of equity or capital, without expectation of repayment. M. Capano Tr. A-186-87, A-199. While the Capanos would sometimes make informal, undocumented loans to Golden Acres through other corporations they controlled, these loans were made to protect the apartment building — the corporate asset — so that it would continue to generate funds and enable them to recover the money they believed was owed them. No attempts were made to improve the capital position of the corporation itself. Id.

Moreover, between January 7, 1975 and December 8, 1981, Golden Acres never declared or paid any dividends. Whenever excess cash was left in the corporate checking account after bills and payroll had been paid at the end of the month, Mario Capano would write a check for the balance remaining payable to himself, his brother, or companies they owned and controlled. M. Capano Tr. A-183. In fact, $466,760.54 of all the payments made by Golden Acres between May 12, 1978, and December 31, 1981, were made to Mario B. Capano, Joseph L. Capano, J.L. Capano, Inc., J.L. Capano Builders, Inc., or other companies that the Capanos owned or controlled. Ex. 12 at 6-25, Ex. 13, Ex. 14. These payments were intended by the Capanos to repay to them the preexisting $234,000 principal debt, plus an arbitrary rate of interest that they believed was owed by Golden Acres. These payments are represented by 129 separate checks dated between May 12, 1978,...

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