10 Year Employee Forgivable Loan Battle Frustrates UBS

August 13, 2018

Don't go to the gym before you read today's BrokeAndBroker.com Blog. In fact, sit down, put your feet up, and brew a pot of coffee. Today's article features what is now a 14-year long affair that started with a 2004 employee forgivable loan and became a 2008 filing of a FINRA Arbitration Statement of Claim by a former UBS associated person against that broker-dealer. It entails an arbitration and two rounds in the Ohio state courts. We may be done. We may not be done. It all depends upon whether someone decides to file yet another appeal. What is clear, at least as of today, is that the former employee sued UBS for nearly $3 million in compensatory and punitive damages plus interest, fees, and costs. As of this month, the employee owes UBS a lot of money. And that's not the worst of it.

2008 FINRA Arbitration Claim

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2008, associated person Claimant LaCava asserted breaches of contract and the covenant of good faith and fair dealing; failure to supervise; tortious interference; wrongful termination; and libel and slander. The claims arose in connection with Claimant's allegation that Respondents UBS Financial Services, Dyer, and Egan had unjustifiably, unilaterally, and wrongfully terminated his employment on July 17, 2008; and, thereafter, caused him severe emotional distress and economic hardship when they allegedly engaged in a series of deceptive activities with the intent to harm Claimant's ability to conduct business with his clients in the future and restricting his access to personal and business information necessary in order to continue to service his clients. Ultimately, Claimant LaCava sought $2,719.267.49 in compensatory damages, $2,000,000.00 in punitive damages, plus interest, $123, 780 in attorneys' fees, and costs. In the Matter of the FINRA Arbitration Between Albert V. LaCava, Jr. , Claimant, vs. UBS Financial Services, Inc., Bruce Dyer, and John T. Egan, Respondents -- AND -- UBS Financial Services, Inc, Counter-Claimant, vs  Albert V. LaCava, Jr. , Counter-Respondent (FINRA Arbitration  08-04976 / February 9, 2010) http://www.finra.org/sites/default/files/aao_documents/08-04976-Award-FINRA-20100209.pdf 

Respondents generally denied the allegations and asserted affirmative defenses. Respondents Dyer and Egan sought the expungement of Claimant's claims from their Central Registration Depository recoreds ("CRD")  The FINRA Arbitration Decision states that among the affirmative defenses were that:

[C]laimant failed to state a claim upon which relief can be granted; Claimant's purported losses, damages and harm were not caused by Respondents' actions or conduct; Claimant's termination was based on legitimate, non-retaliatory factors, including, without limitations. Claimant's repeated misconduct, dishonesty, insubordination, failure to comply with industry rules and regulations; Claimant's Statement of Claim is barred in whole or In part by the doctrines of waiver and estoppel; and Claimant's Statement of Claim is barred in whole or in part by the doctrine of unclean hands. 

UBS Counterclaim

Respondent UBS filed a Counterclaim against La Cava and alleged that LaCava had executed a Letter of Understanding around August 27, 2004, and accordingly received two forgivable loans that would be forgiven in equal annual installments on each of the six years following payment of the loan amounts provided LaCava remained employed by the firm. Upon LaCava's termination on July 17, 2008, UBS alleged that he was obligated to repay UBS the outstanding and unforgiven balance of the loans, interest, attorneys' fees, and costs. Ultimately, UBS sought $198,963.89 in compensatory damages; interest, $125,517.95 in attorneys' fee, and costs. 

LaCava generally denied UBS counter-claim and asserted affirmative defense, among which were that:

[U]BS failed to state a claim upon which relief can be granted; UBS's Counterclaim is barred in whole or in part by the doctrines of waiver and estoppel; the Counterclaim is barred in whole or In part by the doctrine of unclean hands; UBS has failed to mitigate any of its alleged losses, damages and harm; UBS's purported losses were caused by UBS's wrongful conduct and actions, not the Claimant's conduct and actions, therefore, UBS should and ought to be estopped from making such claims; and the claims of Claimant offset and exceed the claims of UBS under Its Counterclaim. 


The FINRA Arbitration Panel denied and dismissed with prejudice all of Claimant LaCava's claims.

The FINRA Arbitration Panel found Claimant LaCava liable to and ordered him to pay to UBS Financial Services $196.963.89 in compensatory damages. 

Ohio Court of Common Pleas

Some eight years ago on April 1, 2010, UBS filed in the Ohio Court of Common Pleas to confirm its FINRA Arbitration Award and the court so confirmed on June 17, 2010. UBS's effort to satisfy the 2010 judgment didn't go well.  Seven or so years tick off. My, time flies!

In 2017, we find UBS embroiled in actions not just against Albert LaCava but now including his wife, Mary LaCava, and Assurance Investment management, LLC ("AIM"). How did the effort to confirm the 2010 FINRA Arbitration Award entangle those other parties? Ahhh . . . now that's a tortured tale. UBS Financial Services, Inc., Plaintiff, v. Albert V. LaCava, Jr., et al., Defendant (Order and Opinion, Ohio Court of Common Pleas, Cuyahoga County, 16-CV-868794 / July 28, 2017). http://brokeandbroker.com/PDF/LaCavaOHCtPleas.pdf 

It would appear that things have not gone well for Mr. LaCava since FINRA's 2010 award and the state court's confirmation. It would also appear that UBS has not been able to simply cash-in on its award. Although UBS has attempted to satisfy its 2010 court judgment, the broker-dealer:

has been thwarted at every juncture due to Mr. Lacava insolvency. There have been attempts through bank liens, garnishments, and foreclosure. There is apparently Federal Tax Lien on the Lacava home in an amount in excess of 142,000.00.

Page 2 of the Ct Common Pleas Order and Opinion

The Most Blatant Form of Fraudulent Conveyance

Insolvency? LaCava's insolvent? You may wonder how that came about. Certainly, UBS wondered and took steps to get answers for its questions. The Ohio Court of Common Pleas comes up with an answer in only the second paragraph of its 2017 Order and Opinion: "This case represents the most blatant form of fraudulent conveyance this court has ever seen." 

When a court characterizes anything before it as "the most blatant," you know that you're not going to be in for an easy time if you're the one engaging in that blatant conduct. What were the underlying facts that angered the Court? Consider this recitation:

AIM was created in 2008. In the original Operating Agreement, dated August 22, 2008, Mr. Lacava was the sole member and owner. On January 22, 2010, nineteen (19) days prior to the announcement of the award from the FINRA panel, Second Amended and Restated Operating Agreement for AIM was executed. With that amended agreement Mrs. Lacava went from no ownership to becoming member with 94.8% interest in AIM. Mr. Lacava interest was reduced to 5.2%. On August 27, 2016 there was further amendment to AIM operating agreement with language which purports to nullify statutory law preventing charging order against any members interest in AIM. V. 

In conjunction with the January 2010 amendment to AIM operating agreement, $140,000.00 was transferred by Mrs. Lacava to AIM as capital contribution. There was no payment to Mr. Lacava for relinquishing 94.8% of his ownership in AIM. During 2010, Mrs. Lacava received distribution of $182,365.00 from AIM and $51,407.00 of ordinary income from AIM. Distributions to Mrs. Lacava from AIM have continued since that time to the present. 

Throughout all the time of these money transfers and distributions, the sole employee of AIM was Mr. Lacava. He is the only registered financial advisor and the only one transacting business activities which produce income to AIM. Mr. Lacava does not receive, directly, any salary, bonus, compensation, or income of any kind for the work he performs at AIM. He pays no income taxes for any ordinary income received by him since he receives nothing for his work as financial advisor. 

While Mr. Lacava does not receive any income for his work, review of the banking records for AIM reveals that its accounts have been Used like personal checking account for Mr. Lacava and Mrs. Lacava. Entries are replete with charges for restaurants, retail stores, groceries, utility bills, on-line purchases, and veterinary bills to only mention few. 

Since the confirmation of the award, UBS has attempted to satisfy its judgment. It has been thwarted at every juncture due to Mr. Lacava insolvency. There have been attempts through bank liens, garnishments, and foreclosure. There is apparently Federal Tax Lien on the Lacava home in an amount in excess of 142,000.00.

Pages 1 - 2 of the Ct Common Pleas Order and Opinion

Fraudulent Transfer

The Court of Common Pleas found that the case before it was governed by R.C. Chapter 1335: Ohio Uniform Transfer Act, under which UBS sought a charging order against the members interests in AIM; avoidance of the transfer of $140,000.00 and membership in AIM; attachment/garnishment of the transferred asset;  an injunction against further disposition of assets; compensatory and punitive damages; interest; and attorneys' fee.

In parsing through the facts before it, the court referenced the so-called 11 "badges of fraud," by which a "fraudulent transfer" is typically identified and found that 9 of those hallmarks were satisfied. Among some of the findings made were that LaCava continued to run AIM and was its only employee and only registered advisor despite retaining only a 5.8% interest. As to UBS's timely action upon learning of the purported fraudulent conveyances, the court found that the firm only became aware of the transactions during Discovery and that AIM engaged in an ongoing pattern of amending its Operating Agreement as recently as 2016 that was designed to frustrate UBS and avoid the judgment. Pointedly, the Court emphasized that Lacava made the first challenged transfer only 19 days before the $196,963.89 FINRA Arbitration Award was rendered. Finally, in what it deemed the "essence of the case," the Court found that 

Assets were transferred to AIM, used through AIM, and continue to be used through AIM. This includes the $140,000.00 transfer, the profits earned and the use of the AIM accounts as if they were the personal accounts of the Lacavas.

Page 4 of the Ct Common Pleas Order and Opinion

Statute of Limitations: Summary Judgment Granted to AIM

A quirk in the Court's Order and Opinion is set forth as follows:

AIM moved for summary judgment on the basis of statute of limitations. Judgment is granted in favor of AIM on that ground. However, since AIM is in the line of transferees and in keeping with the statute, it is bound by the court decision to comply with this order and is restricted from disbursing any money or asset other than to satisfy this judgment.

Page 5 of the Ct Common Pleas Order and Opinion

Punitive Damages

In ruling on the matters before it, the Court of Common Pleas enjoined the Defendants and all parties acting in concert with them from a disposition of any assets of AIM, Mr. LaCava, or Mrs. LaCava. The Court granted the charging order against the LaCavas' AIM interests and voided the $140,000 transfer to AIM and ordered said funds to be held to satisfy the judgment with an attachment of same to UBS. Further, the Court granted $196,963.89 in compensatory damages with interest, and required UBS's counsel to file an affidavit for attorneys' fees. Finally, the Court awarded $98,481.95 in punitive damages against Mr. LaCava representing one-half of the original judgment. In offering its rationale for the award of punitive damages, the Court explains that:

[I]n order to obtain punitive damages there must be clear and convincing evidence of actual malice or intent, or reckless disregard for the rights of others. Mr. Lacava is guilty of both. There can be no doubt of the combination of dislike for UBS and the intent to prevent UBS from ever collecting the judgment it received through the FINRA arbitration. Throughout various filings by Mr. Lacava it shows an intense dislike and disrespect for UBS and its principals and employees. Mr. Lacava did not only perpetrate fraud upon UBS but is also perpetrating fraud upon this court. He admits working full time for AIMand generating income for AIM but receives no compensation for his efforts. This is not charity and he uses the income generated by AIM indirectly for his own use and welfare. The AIM accounts, as shown in the bank records, have been used for more than business related items as discussed above. Mr. Lacava has either failed to file or provide tax returns for recent years and maybe defrauding the Internal Revenue Service by failing to report his actual income and pay taxes on that ordinary income. It is long past time for these behaviors to cease and it is appropriate to set an example. Punitive damages are also referred to as exemplary damages so that the world can see that there is punishment for malicious and intentional conduct to the detriment of others. The court awards punitive damages against Mr. Lacava in the amount of $98,481.95, an amount representing one-half oft he original judgment.

Page 6 of the Ct Common Pleas Order and Opinion

Ohio Court of Appeals

You didn't think that LaCava was going to accept the Ohio Court of Common Pleas ruling as final -- did you? Nah. This one is going into the ring for the 13th Round of a 12 Round bout. 

In September 2017, AIM appealed the Court of Common Pleas' judgment to the Ohio Court of Appeals and cited 14 errors for review. Among the issues raised in AIM's appeal is that the lower court ordered "conscious shocking extreme financial punishments, effectively putting the AIM out of business." Paragraph 14 of the Ct of App Opinion.   UBS Financial Services, Inc., et al, Plaintiffs/Appellees, v. Albert V. LaCava, Jr., et al., Defendants/Appellants (Opinion, Ohio Court of Appeals, Eighth Appellate District, No. 106256 / August 9, 2018) 

SIDE BAR: By way of update, the Court of Appeals notes that the Court of Common Pleas had awarded UBS $50,155 in attorneys' fees and $480.33 in expenses. 

Freeze Out

In its Motion for Summary Judgment, AIM argued that UBS had failed to satisfy the statute of limitations for fraudulent transfer claims; and, in fact, the Court of Common Pleas had granted summary judgment on that very point. AIM further argued that the lower court erred, however, when it ordered a freeze of its assets and accounts and mandated that same only be release to satisfy the court's judgment. Accordingly, AIM asserted that  the statute of limitations  governing fraudulent transfer barred UBS claims against it and precluded the court of common pleas from ordering the company to comply with its order. Moreover, AIM argued that a charging order was UBS's sole and exclusive remedy against Mr. Lacava to the exclusion of AIM. As more fully presented in the Ct of App Opinion:

{¶28} UBS named AIM in its complaint in relation to its request for a charging order against Mr. Lacava, who previously transferred his ownership interest in AIM to his wife. The record reflects that Mr. and Mrs. Lacava have full control of AIM -- AIM's January 21, 2010 operating agreement provides that Mr. Lacava's ownership interest of AIM was 5.2 percent, and Mrs. Lacava's ownership interest of AIM was 94.8 percent. Accordingly, the trial court's order requiring AIM -- comprised of the fraudulent transferor and the fraudulent transferee -- to comply with the charging order was not unreasonable, unlawful, or unconstitutional. 

{¶29} AIM appears to argue that the trial court erred by ordering AIM to comply with the charging order because UBS's claims were against Mr. Lacava, not AIM, and thus the trial court had no authority to prohibit AIM from disbursing money and/or assets other than to satisfy the judgment the trial court entered in favor of UBS against Mr. Lacava. AIM's argument -- that the trial court had no authority to order the assets that Mr. Lacava transferred into AIM or to Mrs. Lacava be frozen except to satisfy UBS's judgment -- would render R.C. Chapter 1336 and R.C. 1705.19 meaningless, particularly because the Lacavas have full control of AIM. 

{¶30} Finally, regarding AIM's argument that the trial court violated R.C. 1705.19 in ordering AIM to comply with the charging order, it is unsupported by the record. Contrary to AIM's assertion, the trial court did not grant UBS the right to obtain possession of or exercise remedies with respect to AIM's property. The trial court simply ordered AIM to comply with the charging order to ensure that the judgment in favor of UBS was satisfied. Once the judgment was satisfied, either by Mr. Lacava or the assets that he had transferred to AIM and/or Mrs. Lacava, AIM was free to use the LLC's money, assets, and accounts however AIM wished to do so. 

Judgment Affirmed

In affirming the lower court, the Court of Appeals ordered that UBS recover costs and that the Court of Common Pleas execute the judgment. In its "Conclusion," the Court of Appeals offers this succinct rationale:

{¶92} After thoroughly reviewing the record, we affirm the trial court's orders on summary judgment. The trial court's order requiring AIM to comply with the charging order was not unreasonable, unlawful, or unconstitutional, and the trial court's order did not violate AIM's due process rights. The statute of limitations set forth in R.C. 1336.09, governing fraudulent transfer claims, did not preclude the trial court from ordering AIM to comply with the charging order. AIM lacks standing to challenge the trial court's judgment as it pertains to the rights of Mr. and Mrs. Lacava or the other members of AIM. The trial court did not err in failing to order UBS to pay AIM's legal fees. The trial court did not abuse its discretion in denying AIM's motion to transfer venue to Summit County. The trial court did not err in denying AIM's motion to be removed as a defendant.

Bill Singer's Comment

A prodigious effort from the FINRA arbitrators to the two Ohio courts. At all levels, the issues are well presented and the courts did an admirable job setting out the disputes and the rationale for their ensuing findings. All that being said, I'm still wrestling with how the courts granted/sustained AIM's motion on the issue of the statute of limitations as set forth for fraudulent conveyances yet those same courts rest the bulk of their orders on the occurrence of fraudulent conveyances. I respect the superb presentation of the underlying rationale by both courts and I sort of get their points and the connections, but it's still a bit of soft legal ground that could prove quicksand should LaCava pursue further appeals. It's tough to get around the basic outcome that AIM gets hit with an asset freeze although "UBS did not assert a fraudulent transfer claim against AIM. In fact, UBS did not assert any claims against AIM. . ." Paragraph 20 of the Ohio Ct App Opinion. Looking back through the course of the dispute, I see how the dots got connected and it's compelling, but what makes commonsense does not always hold up as jurisprudence. Ultimately, I think the courts got it right and made the correct calls. Notwithstanding, there are some cracks in the foundation.

LaCava is a very, very instructive case for those embroiled in Employee Forgivable Loan disputes with their current or former industry employer. Most arbitrators and judges focus on the "forgivable" and place even more emphasis on the "Loan" aspects of an EFL.  The historic starting point for analysis by triers-of-facts of EFL disputes is that the transactions are forgiven in stages and they are structured as loans even though many in the industry persist in viewing them as bonuses or outright grants/gifts. Full forgiveness of all EFL balances is contingent upon serving out the term during which the loans are forgiven. You hate working at your employer? Great. Leave but give back what hasn't accrued under the "forgiven" period. You want to protect yourself against all of the problems that crop up when a new manager comes on board or the firm decides to no longer permit you to sell a particular product or engage in a particular investment strategy? Okay, for starters, put the proceeds of the loan in a bank account and only withdraw what has accrued at the end of each year -- that's your quasi-insurance policy. 

Am I stating that there are no exceptions to repayment? Absolutely not -- I've represented folks who managed to fully avoid repayment or who negotiated a substantial reduction. In some cases, the former employer firm had engaged in horrific abuses that forced the employee to leave on terms that fully supported the accelerated forgiveness of any remaining balance. In other cases, the employer considered certain issues and made a sensible decision that litigation would not have made financial sense or been in the firm's best interest. In contrast, sometimes an employer may be in the right but the cost of filing or defending against a lawsuit doesn't make sense; e.g., $20,000 in legal fees versus a $5,000 EFL balance.

The fascinating aspect of  LaCava is in wondering how much more it cost LaCava to not repay the balance of his loan and fight this long fight with UBS. It may well be that LaCava's tale is 100% sympathetic and you might agree that UBS done him wrong. Even if you arrive at that position, add up the dollar amounts of the arbitration and court proceedings, add up the awarded damages, interest, cost, expenses, and attorneys' fees. Factor in the harm caused by the judicial intervention into AIM's affairs. Now think long and hard about what we often refer to as a "business person's decision." Notice how the scales of justice start gyrating up and down? Welcome to my world.