McKay v. LongmanMcKay v. Longman
- Reporters:
- ,
- Before:
- Robinson, Palmer, D’Auria, Mullins, Kahn, Ecker Js.
Pursuant to the Connecticut Uniform Fraudulent Transfer Act (CUFTA) (
Pursuant further to CUFTA (
The plaintiff, who had obtained a judgment in New York against his former business partner, the defendant L, sought to enforce that judgment in Connecticut through the imposition of constructive trusts on certain real property in Ridgefield and on the proceeds from the sale of real property in Greenwich, and by having the trial court apply the doctrine of reverse corporate veil piercing to eight defendant companies affiliated with L, namely, S Co., X Co., R Co., G Co., W Co. and three other companies collectively referred to as the S entities. After the plaintiff obtained the New York judgment, S Co., a real estate development business, whose only asset was the Ridgefield property, obtained a loan from the defendant bank, M Co., secured by a mortgage on the Ridgefield property. L, a member of S Co., executed the mortgage documents on behalf of S Co., and S Co. then transferred title to the property to L. L then obtained a loan, secured by a mortgage against the Ridgefield property, and transferred title to that property back to S Co. L and his family occupied a residence on the Ridgefield property but never executed a lease with S Co. or made any rental payments. Subsequently, L acquired title to the Greenwich property in his name but, shortly thereafter, quitclaimed title to that property to X Co., a company owned by L’s wife and controlled by L, for no more than nominal consideration and without payment of a conveyance tax. X Co. sold that property to a bona fide purchaser, and L, through X Co., distributed portions of the sale proceeds to L’s personal bank account and among the bank accounts of various entities with which L was associated. The plaintiff alleged that, pursuant to the provision ([Rev. to 2017]
1. The trial court correctly determined that the plaintiff lacked standing to challenge the enforceability of M Co.’s mortgage to S Co.: the plaintiff, who was not a party to the mortgage, a third-party beneficiary of it, or either a member or manager of S Co., did not fall within the zone of interests that
2. The trial court’s findings that L’s transfers of the Ridgefield property to S Co. and the Greenwich property to X Co. were fraudulent under
3. This court recognized the doctrine of outsider reverse corporate veil piercing, and the trial court’s application of the doctrine in the present case was not clearly erroneous:
a. This court, having recognized the doctrine of outsider reverse corporate veil piercing, set forth a three part test for its proper application, pursuant to which, first, the outsider must prove that, under the instrumentality or identity rule, as set forth in traditional veil piercing cases, the corporate entity has been so controlled and dominated that justice requires liability to be imposed or that there was such a unity of interest and ownership that the independence of the corporation had in effect ceased to exist, second, the trial court must consider the impact of reverse piercing on innocent shareholders and creditors, and, third, the trial court must consider whether adequate remedies at law are available.
b. The trial court’s determination to apply the doctrine of reverse corporate veil piercing to S Co., X Co., R Co. and G Co. was not clearly
c. The trial court’s decision not to apply the doctrine of reverse corporate veil piercing to the S entities was not clearly erroneous, because, although the S entities received from X Co. proceeds from the sale of the Greenwich property, they were not alter egos of L, as they were engaged in a legitimate business, and the granting of such relief would affect nonculpable investors, who would be prejudiced if the plaintiff were permitted to attach assets in which they have an interest; moreover, the trial court correctly determined that the plaintiff had abandoned his claim of reverse piercing with respect to W Co.
KAHN, J. These consolidated appeals require us to consider three main issues: (1) whether a plaintiff who is neither a party to a mortgage nor an intended beneficiary thereof has standing to challenge the enforceability of that mortgage under the Connecticut Limited Liability Company Act, General Statutes (Rev. to 2017)
The present case arises from the plaintiff’s efforts to enforce a foreign judgment. The trial court found the following facts. In July, 1996, after a falling out between the plaintiff and Longman, who were once business partners, the plaintiff obtained a judgment in New York against Longman in the amount of $3,964,046.86 on the basis of the New York trial court’s finding that Longman’s actions constituted affirmative fraud against the plaintiff and that Longman’s conduct was gross, wanton and wilful (New York judgment).3 The plaintiff promptly filed a certified copy of the New York judgment in Connecticut. The plaintiff’s efforts over the years to collect on the New York judgment have been unsuccessful, including his attempts to attach Longman’s assets, which, over time, were in the form of two Connecticut properties: real property located in Ridgefield, which was the location of Longman’s family residence (Ridgefield Property), and real property located in Greenwich (Greenwich Property).
Thrоughout the relevant time period, Longman transferred ownership of the Ridgefield and Greenwich Properties between himself and his various entities. Included among these land transfers are three contested transactions that ‘‘[set] the stage for . . . the predominant issues [on appeal].’’ Those three transactions, the additional details of which we set forth as necessary, occurred on the following dates and between the following parties. First, in October, 2007, Sapphire, a real estate development business owned partly by Longman
After learning of these and other transactions entered into by either Longman or the entities he purportedly controlled, in October, 2010, the plaintiff filed an eight count complaint against Longman and twenty entities affiliated with him, M&T Bank, and The Savings Bank of Danbury. See footnote 2 of this opinion. The action by the plaintiff included, inter alia,5 three main claims that are before us on appeal. First, the plaintiff alleged that various land transfers from Longman to entities he controlled—including his November, 2007 transfer of the Ridgefield Property to Sapphire and his February, 2010 transfer of the Greenwich Property to Lurie—violated
After an eight day bench trial, the trial court rendered judgment relevant to the issues on appeal in thе following manner. The trial court rendered judgment as to counts one, three, and four in favor of M&T Bank, holding, inter alia, that the plaintiff lacked standing to challenge the M&T mortgage. The trial court rendered judgment as to counts three through eight in favor of the plaintiff as against Longman, Sapphire, Lurie, R.I.P.P., and Great Pasture. As against W.W. Land and Solaire Development, LLC, Solaire Management, LLC,
In order to place the parties’ arguments on appeal in the proper context, we begin by outlining the trial court’s decision. First, the trial court rendered judgment in favor of the plaintiff as to counts three and four of his substituted complaint in the form of a declaratory judgment avoiding and setting aside the fraudulent transfer of the Ridgefield Property by Longman to Sapphire. Second, the court imposed a constructive trust on the Ridgefield Property, subjecting it to all postjudgment remedies that may be applicable. Third, the trial court rendered judgment in favor of the plaintiff as to counts five and six of his substituted complaint in the form of a declaratory judgment avoiding and setting aside the fraudulent transfer of the Greenwich Property by Longman to Lurie. Fourth, the trial court imposed a constructive trust on all moneys received from or other items of value acquired through the transfer of the Greenwich Property. Fifth, in addition to this constructive trust, the trial court entered an award of $250,000 in damages in favor of the plaintiff and against Lurie. Sixth, the trial court rendered judgment in favor of the plaintiff as to counts seven and eight of his substituted complaint in the form of a judgment declaring that Sapphire, Lurie, R.I.P.P., and Great Pasture are alter egos of Longman, and, as such, ‘‘their separate corporate existence shall be disregarded for purposes of satisfying the debt of . . . Longman to the plaintiff,’’ and enjoined those defendants from disposing of any assets prior to the satisfaction of the plaintiff’s foreign judgment. Seventh, the trial court rendered judgment in favor of M&T Bank as to all the claims asserted against it, including the plaintiff’s claim under counts one, three, and four that a mortgage on the Ridgefield Property between M&T Bank and Sapphire (M&T mortgage) should be declared void. Eighth, the trial court rendered judgment in favor of the Solaire entities and W.W. Land as to all counts asserted against them.6
The plaintiff appeals from the trial court’s judgment in favor of M&T Bank as to its claim under counts one, three, and four that the M&T mortgage should be declared void. The plaintiff claims that the trial court incorrectly determined that he lacked standing to challenge the enforceability of that mortgage under
Longman and the corporate defendants appeal from the trial court’s judgment as to counts three through six
Additionally, Longman and the corporate defendants appeal from the trial court’s judgment as to counts seven and eight whereby that court rendered a judgment declaring that Sapphire, Lurie, R.I.P.P., and Great Pasture constitute alter egos of Longman and, as such, applied the doctrine of reverse piercing of the corporate veil to reach their assets to satisfy the plaintiff’s foreign judgment. Those defendants claim that the reverse piercing doctrine conflicts with Connecticut law and that, in the alternative, the evidence in the present case does not support the application of reverse piercing. The plaintiff responds that this court should recognize reverse veil piercing as a viable remedy and conclude that the trial court properly applied the doctrine in the present case with respect to Sapphire, Lurie, R.I.P.P., and Great Pasture.
The plaintiff appeals separately, however, from the trial court’s judgment as to counts seven and eight rendered in favor of the Solaire entities and W.W. Land with respect to that court’s refusal to declare those entities alter egos of Longman. The plaintiff claims that the trial court’s findings supported reverse piercing as to those entities. Longman and the corporate defendants respond that, if this court were to adopt reverse veil piercing, the trial court properly declined to apply it with respect to these four entities, because these entities are engaged in legitimate businesses and the application of reverse piercing would affect nonculpable parties who have an interest in those companies. We affirm the judgment of the trial court.
I
STANDING
Because the question of standing implicates subject matter jurisdiction, we first consider the plaintiff’s claim that the trial court improperly held that he lacked standing to bring an action under
The record reveals the following additional facts that are relevant to our resolution of this claim. In October, 2007, Sapphire entered into a loan agreement with M&T Bank, secured by the $2.5 million M&T mortgage on the Ridgefield Property. Longman, acting as one of Sapphire’s members,10 executed the mortgage documents. At the time he executed those documents, however, Longman owned only a 5 percent interest in Sapphire, with the remaining 95 percent interest owned almost exclusively by his wife, Gayla Longman (Gayla). Longman did not request Gayla’s approval before executing the M&T mortgage.
Among its provisions, Sapphire’s operating agreement vested in the operating manager the authority to manage the company, ‘‘[e]xcept for actions requiring the approval of the [m]embers pursuant to the provisions of the [Connecticut Limited Liability Company] Act, the [a]rticles [of organization], or this [operating] [a]greement . . . .’’ Under the same section, the operating agreement noted that the operating manager ‘‘shall not have the authority’’ to mortgage any property of Sapphire without the approval of a supermajority of Sapphire’s members, which was defined as ‘‘[m]embers holding an aggregate of . . . 100 [percent] or more of the [p]ercentage [i]nterests held by all [m]embers.’’11
At trial, M&T Bank introduced into evidence Sapphire’s 2008 statement of annual resolutions, which was signed by Gayla on January 27, 2008, a few months after Sapphire entered into the M&T mortgage, and contained a provision resolving ‘‘that all prior acts of the officers . . . including but not limited to entering into agreement[s] and executing documents prior to the adoption of said resolutions . . . are hereby ratified.’’ Gayla testified at trial that, upon signing the document, she intended to ratify all the acts taken by Longman on behalf of Sapphire prior to January, 2008.
The plaintiff asked the trial court to declare the M&T mortgage unenforceable under
The trial court determined that, ‘‘[a]bsent a viable claim that the mortgage transaction was a fraudulent transfer . . . the plaintiff [lacked standing] to challenge the sufficiency of the ratification process.’’ The court reasoned that ‘‘the plaintiff . . . provided no authority that a third-party stranger to a transaction has the right to challenge the ratification of the transaction . . . when the actual parties have done everything possible to show consent and have engaged in substantial performance.’’
On appeal, we begin with the general principles governing standing to assert a claim. ‘‘If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause. . . . A determination regarding a trial court’s subject matter jurisdiction is a question of law. When . . . the trial court draws conclusions of law, our review is plenary and we must decide whether its conclusions are legally and logically correct and find support in the facts that appear in the record. . . .
‘‘Standing is not a technical rule intended to keep aggrieved parties out of court; nor is it a test of substantive rights. Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions [that] may affect the rights of others are forged in hot controversy, with each view fairly and vigorously represented. . . . These two objectives are ordinarily held to have been met when a complainant makes a colorable claim of direct injury he has suffered or is likely to suffer, in an individual or representative capacity. Such a personal stake in the outcome of the controversy . . . provides the requisite assurance of concrete adverseness and diligent advocacy. . . . The requirement of directness between the injuries claimed by the plaintiff and the conduct of the defendant also is expressed, in our standing jurisprudence, by the focus on whether the plaintiff is the proper party to assert the claim at issue. . . .
‘‘Two broad yet distinct categories of aggrievement exist, classical and statutory. . . . Classical aggrievement requires a two part showing. First, a party must demonstrate a specific, personal and legal interest in the subject matter of the [controversy], as opposed to a general interest that all members of the community
‘‘In order to determine whether a party has standing to make a claim under a statute, a court must determine the interests and the parties that the statute was designed to protect. . . . Essentially the standing question in such cases is whether the . . . statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff’s position a right to judicial relief. . . . [Stated differently, the] plaintiff must be within the zone of interests protected by the statute.’’ (Citation omitted; internal quotation marks omitted.) McWeeny v. Hartford, 287 Conn. 56, 65, 946 A.2d 862 (2008).
The issue of whether an individual who was neither a party to nor an intended third-party beneficiary of a mortgage between a limited liability company and a bank falls within the zones of interests protected by
On the basis of the plain language of this statute, only members and managers—who represent either their own interests as agents or those derivative of the limited liability company—and the parties with whom those members or managers contract fall within the zone of interests protected by
General Statutes (Rev. to 2017)
Section 34-130 (c), by contrast, addresses situations in which a member or manager acts as an agent and that member or manager ‘‘is not apparently . . . carrying on in the usual way the business or affairs of the . . . company,’’ in which case his actions ‘‘[do] not bind the . . . company, unless authorized in accordance with the operating agreement . . . .’’ Subsection (c) appears to create a protection for the limited liability company itself, by restricting agents of the limited liability company from binding the limited liability company to extraordinary dealings, unless previously agreed on in the operating agreement.
Finally,
We conclude that the plaintiff in the present case, who was neither a party to the M&T mortgage nor a third-party beneficiary of it, does not fall within the zone of interests that
The plaintiff asks this court, however, to interpret the statute’s silence as to who may bring an action under
Additionally, to the extent that the plaintiff claims that, because the statute is silent, it confers standing on creditors of parties that enter into contracts with or on behalf of a limited liability company, his claim lacks merit because such a reading of
II
FRAUDULENT TRANSFERS UNDER CUFTA
We next address whether the trial court incorrectly determined that, under
We begin with the legal principles guiding our review of these claims. ‘‘A party alleging a fraudulent transfer or conveyance under the common law bears the burden of proving either: (1) that the conveyance was made without substantial consideration and rendered the transferor unable to meet his obligations or (2) that the conveyance was made with a fraudulent intent in which the grantee participated. . . . The party seeking to set aside a fraudulent conveyance need not satisfy both of these tests. . . . These are also elements of an action brought pursuant to
‘‘The determination of whether a fraudulent transfer took place is a question of fact and it is axiomatic that [t]he trial court’s [factual] findings are binding upon this court unless they are clearly erroneous in light of the evidence and the pleadings in the record as a whole. . . . We cannot retry the facts or pass on the credibility of the witnesses. . . . A finding of fact is clearly erroneous when there is no evidence in the record to support it . . . or when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. The elements of fraudulent conveyance, including whether the defendants acted with
A
We first address the contention by Longman and the corporate defendants that the trial court improperly held that Longman’s December 4, 2007 transfer of the Ridgefield Property back to Sapphire for nominal consideration constituted a fraudulent transfer under
Because we agree with the trial court that reviewing the history of the transactions involving the Ridgefiеld Property is helpful in a context such as this one, in which ‘‘[t]he number of days that title to the property was in . . . Longman’s name [since 1995] could be . . . measured in days out of a multiyear period of time,’’ we observe that the following additional facts found in the record are relevant to our resolution of the plaintiff’s fraudulent transfer claims with respect to the Ridgefield Property. In 1985, Longman purchased the Ridgefield Property, and, since 1987, he and his family lived in the residence located there. In 1995, while the New York action was pending against Longman, Longman executed a quitclaim deed conveying the Ridgefield Property to Gayla. Gayla provided no consideration for this transfer.
At approximately the same time as the New York judgment was rendered, the Ridgefield Property went into strict foreclosure, and a deficiency judgment was rendered in favor of Webster Bank, which entered into a settlement agreement in 1997 with Longman while the case was on appeal. Thereafter, the Ridgefield Property was transferred by Webster Bank in two portions: one portion to Longman’s friend, David A. Thomas, and the second portion to R.I.P.P., a corporation created by Longman, of which Gayla was its sole shareholder and Longman its only director. Thomas transferred title to his portion of the property to R.I.P.P. in return for a
In January, 2002, Highland, acting through Longman, transferred title to the Ridgefield Property17 to Longman individually. ‘‘[O]n the same day’’ that Longman executed the deed that transferred the Ridgefield Property from Highland to him, he individually executed an ‘‘open-end mortgage from . . . Washington Mutual Bank, FA . . . .’’ He recorded both the mortgage and the deed six days later. Longman admitted at trial that ‘‘the reason for the quitclaim deed . . . [was] obviously to effect this financing.’’ The original principal amount of this mortgage was $1,920,000. On February 7, 2002, Longman recorded a quitclaim deed conveying the Ridgefield Property back to Highland.
On July 27, 2007, Longman recorded a merger, executed on November 21, 2006, of Highland into Sapphire, then owned 95 percent by Emerald and 5 percent by Longman. Thereafter, on August 28, 2007,18 Sapphire—the remaining entity postmerger—quitclaimed the Ridgefield Property to Longman, as trustee of The Stuart Longman Family Trust. This conveyance was made ‘‘in connection with’’ a second Washington Mutual mortgage on the Ridgefield Property that Longman executed as trustee of The Stuart Longman Family Trust.19 The second mortgage, which was obtained on August 27, 2007,20 in the amount of $2,800,000, was used in part to pay off the first Wаshington Mutual mortgage made to Longman individually.
On August 28, 2007, the day after he obtained the second Washington Mutual mortgage, Longman applied for the M&T mortgage loan.21 On August 31, 2007, Longman, as trustee for The Stuart Longman Family Trust, quitclaimed the property back to Sapphire. The M&T mortgage was closed on October 26, 2007, and the proceeds were disbursed to Sapphire on October 31, 2007. Certain proceeds from the M&T mortgage, in the amount of $2,294,596.24, were paid to Washington Mutual for the satisfaction of the second mortgage, given to The Stuart Longman Family Trust. There was a net balance of $199,921.55 remaining from the M&T mortgage proceeds, which was disbursed to Longman, and Longman testified that he does not know where that money went or how he spent it.
On the same dates that the M&T mortgage was closed and the proceeds were disbursed, Sapphire executed
With this background in mind, we turn to the governing law. As we have indicated, the plaintiff’s claims of fraudulent transfer fall under
The trial court first considered the plaintiff’s fraudulent transfer claims regarding the Ridgefield Property under
(Footnotes omitted.) In its analysis of
We conclude that these findings are not clearly erroneous. The record revealed, among other facts detailed by the trial court, that Longman was an insider, as Sapphire was owned directly and indirectly by him and Gayla, and he made all of the decisions for the company. See, e.g., Zapolsky v. Sacks, 191 Conn. 194, 200–201, 464 A.2d 30 (1983) (close relationship between defendants supported finding of fraudulent intent). The record revealed that, through this close relationship, various transfers enabled Longman to use the Ridgefield Property as security for multiple loans, some of which were obtained by Longman in an individual capacity and paid off by loans acquired in a representative role; a recording delay with respect to both Longman’s transfer of the Ridgefield Property back to Sapphire and the Chase Bank mortgage allowed Longman to obtain that mortgage without ever holding the proceeds under his name; there was a lack of consideration; and there was no indication of any benefit to Sapphire for allowing Longman, through these transfers, to extract equity from its sole asset.
We also reject Longman’s argument that the trial court incorrectly determined that Longman’s transfer of the Ridgefield Property to Sapphire in October, 2007, constituted a fraudulent transfer because he was merely the facilitator of the loan for Sapphire. As we have explained, there is no evidence in the record that Sapphire, a purportedly independent real estate entity whose only asset was the Ridgefield Property, did or would benefit from Longman’s obtaining an individual home equity loan secured by the property less than one month after Sapphire itself obtained the proceeds from the M&T mortgage.24 We observe that, from the circumstances surrounding Longman’s application for and recording of the Chase Bank mortgage, coupled with the history of multiple transfers, the trial court correctly found fraudulent intent. See, e.g., National Council on Compensation Ins., Inc. v. Caro & Graifman, P.C., 259 F. Supp. 2d 172, 179 (D. Conn. 2003) (under Connecticut law, ‘‘[a]ctual fraudulent intent may be inferred from the circumstances surrounding the transactiоn’’).
The trial court next considered the plaintiff’s fraudulent transfer claims under
B
We next address the claim by Longman and the corporate defendants that the trial court improperly found that the February 12, 2010 transfer of the Greenwich Property to Lurie constituted a fraudulent transfer under
The record reveals the following additional facts that are relevant to our resolution of this claim. On February 9, 2010, Longman acquired the Greenwich Property for $1,049,000 from Thomas, the same friend who, at one time, acquired an interest in the Ridgefield Property. Longman financed the purchase with a $600,000 commercial mortgage loan and paid the equity remainder. The closing statement for this transaction lists the balance of funds paid by Longman as $515,000.
At trial, the plaintiff introduced records from Longman’s personal bank account and the bank accounts of Solaire Funding, Inc., Lurie, and R.I.P.P. to chronicle the following series of transactions, which occurred during the days leading up to the purchase of the Greenwich Property. On February 3, 2010, Longman transferred $500,000 from his personal bank account to the bank account of Solaire Funding, Inc., a corporation whose operating agreement lists Lurie as its sole member and Longman as its sole director. Solaire Funding,
On February 9, 2010, Longman executed a commercial mortgage loan to finance the remaining $600,000 of the purchase price of the Greenwich Property, and Thomas executed the deed to the property that same day. Three days later, on February 12, 2010, Longman quitclaimed the property to Lurie, which was 100 percent owned by Gayla, for the stated consideration of $10. Longman testified that there was no conveyance tax paid with respect to this transfer. On April 30, 2010, Lurie sold the Greenwich Property to a bona fide purchaser for $1,850,000. On May 3, 2010, Lurie distributed the portions of the sale’s proceeds to Longman’s personal bank account and among the bank accounts of Solaire Funding, Inc., the Solaire entities, Sapphire, R.I.P.P., and W.W. Land. Longman testified that he did not ‘‘have any specific knowledge’’ as to why he made these transfers on behalf of Lurie.
Longman was asked at trial: ‘‘Who actually paid the equity piece of [the Greenwich Property]?’’ Longman responded that he ‘‘[did not] recall the source of the funds at [that] point, although it appear[ed] that the funds were drawn from a . . . Vanguard account . . . [a]nd were deposited into the R.I.P.P. account that [he] controlled and used for these purposes and was then in some way transferred to the attorney that closed on the property.’’ When asked, in a follow-up question, whether he remembered testifying in his deposition that the money came from ‘‘Lurie and/or Emerald,’’ and whether ‘‘that [would] be true,’’ Longman responded, ‘‘if that’s what I said at the time . . . I’m not arguing.’’
The trial court determined that ‘‘the Lurie transaction . . . falls within the range of statutory and common-law fraudulent transactions,’’ noting that ‘‘[t]he fact that the property was sold to the bona fide purchaser less than three months after the initial acquisition of the property by Longman, with the actual title of ownership by [him] of perhaps a week, fits the pattern of . . . avoiding ownership in the name of Longman except to the minimal extent necessary for purposes of obtaining financing.’’ The trial court reasoned that the New York judgment debt that Longman owed to the plaintiff had increased by approximately $1 million dollars by 2010, Lurie provided ‘‘no consideration’’ for the transfer of the title to the Greenwich Property, and Longman, through Lurie, distributed a significant amount of the proceeds from the sale to entities controlled by Longman and to
We conclude that the trial court‘s determination that the February 12, 2010 transfer from Longman to Lurie constituted a fraudulent transfer under
Second, because the record supports the trial court‘s finding that Longman purchased the Greenwich Property with money from his personal bank account, the fact that Lurie, an entity owned solely by Longman‘s wife, paid nothing more than nominal consideration and neither party paid a conveyance tax, further supports the trial court‘s conclusion that the transfer to Lurie was fraudulent. See, e.g., In re Galaz, 850 F.3d 800, 804–805 (5th Cir. 2017) (lack of ” ‘reasonably equivalent’ ” consideration presented badge of fraud indicating actual intent); In re Bifani, 580 Fed. Appx. 740, 746 (11th Cir. 2014) (same); Cadle Co. v. Newhouse, 74 Fed. Appx. 152, 153 (2d Cir. 2003) (same). Additionally, based on the amount of the New York judgment alone, it appears from the record that Longman‘s debts exceeded his identified assets. Longman also controlled the proceeds from the sale of the Greenwich Property when he paid off his credit card balance, and distributed various amounts to other corporate defendants and his personal bank account. See In re Kaiser, 722 F.2d 1574, 1583 (2d Cir. 1983) (“[t]he shifting of assets by the debtor to a corporation wholly controlled by him is [a] badge of fraud“). Moreover, looming large over this transaction, as noted by the trial court, was the fact that, “[w]hile it certainly is understandable that [Longman] would have wanted to replenish . . . [the] account from which some of the purchase funds had been obtained,” there was no apparent reason—other than the avoidance of creditors like the plaintiff—for why Longman would have first transferred the property to Lurie, sold it and distributed the proceeds from that entity.
III
The final issue we address is whether this court recognizes the doctrine of reverse piercing of the corporate veil and, if so, whether the trial court properly applied the doctrine under the facts of the present case. The principle known as reverse veil piercing is an equitable rеmedy by which a court imposes liability on a corporation for the acts of a corporate insider. Courts have generally recognized two forms of reverse veil piercing: insider and outsider. 1 Fletcher Cyclopedia of the Law of Corporations (Rev. 2018) § 41.70. Insider reverse veil piercing is applicable to cases in which the plaintiff is a corporate insider seeking to disregard the corporate form for his own benefit. See 18 Am. Jur. 2d 699–700, Corporations § 51 (2004). Outsider reverse veil piercing, otherwise known as “third-party reverse piercing” and the type of reverse piercing at issue in the present case, “extends the traditional [veil piercing] doctrine to permit a third-party creditor to pierce the corporate veil to satisfy the debts of an individual shareholder out of the corporation‘s assets.” 1 Fletcher Cyclopedia of the Law of Corporations, supra, § 41.70.
A number of jurisdictions have recognized outsider reverse piercing claims. E.g., In re Phillips, 139 P.3d 639, 646 (Colo. 2006) (en banc) (recognizing outsider reverse piercing and citing to several jurisdictions noting same); C.F. Trust, Inc. v. First Flight L.P., 266 Va. 3, 11, 580 S.E.2d 806 (2003) (“Virginia does recognize the concept of outsider reverse piercing and that this concept can be applied to a Virginia limited partnership“).25 Because outsider reverse piercing differs from traditional reverse piercing by allowing the creditor to reach the corporation‘s assets without regard to the origin of those assets, however, some courts have rejected the doctrine to protect nonculpable shareholders and creditors. See, e.g., Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510, 1513, 77 Cal. Rptr. 3d 96 (2008) (outsider reverse piercing “can harm innocent shareholders and corporate creditors“); Acree v. McMahan, 276 Ga. 880, 881, 585 S.E.2d 873 (2003) (“[w]e reject reverse piercing, at least to the extent that it would allow an ‘outsider,’ such as a third-party creditor, to pierce the veil in order to reach a corporation‘s assets to satisfy claims against an individual corporate insider“).
The plaintiff and Longman and the corporate defendants separately appeal from the trial court‘s determination to apply reverse veil piercing to four of the eight corporate defendants. Longman and the corporate defendants ask this court either to reject the doctrine of reverse piercing or, in the alternative, to hold that the trial court improperly applied it to Sapphire, Lurie, R.I.P.P., and Great Pasture. The plaintiff responds that this court should adopt reverse piercing and hold that the trial court‘s conclusion was improper only insofar
A
We begin by addressing the question of whether this jurisdiction recognizes the doctrine of reverse veil piercing.26 Longman and the corporate defendants claim that this court should reject the doctrine because it serves no legitimate purpose and contravenes public policy. In response, the plaintiff claims that reverse veil piercing is a viable remedy in other jurisdictions and that it should be adopted in Connecticut, as the facts of this case justify adopting the doctrine. We conclude that Connecticut recognizes the doctrine of outsider reverse piercing of the corporate veil.27
Because reverse veil piercing constitutes an expansion of the traditional veil piercing doctrine, a brief history of traditional veil piercing provides an informative backdrop. Connecticut first recognized traditional veil piercing claims, by which a court may disregard a corporate fiction to hold individual stockholders liable, in Zaist v. Olson, 154 Conn. 563, 227 A.2d 552 (1967). In Zaist, this court held that courts may pierce the corporate veil under one of two theories: either the instrumentality rule or the identity rule. Id., 575. “The veil may be pierced if the elements of either theory are satisfied.” Avant Capital Partners, LLC v. Strathmore Development Co. Michigan, LLC, Docket No. 312-CV-1194 (VLB), 2015 WL 136391, *6 (D. Conn. January 9, 2015). Since Zaist, this court has noted that “[t]he concept of piercing the corporate veil is equitable in nature,” and “[n]o hard and fast rule . . . [exists to determine] the conditions under which the entity may be disregarded . . . as they vary according to the circumstances of each case.” (Citations omitted; internal quotation marks omitted.) Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 555–56, 447 A.2d 406 (1982). Consequently, this court has not applied traditional veil piercing lightly but, rather, has pierced the veil “only under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” (Internal quotation marks omitted.) Id., 557; see also, e.g., Naples v. Keystone Building & Development Corp., 295 Conn. 214, 234, 990 A.2d 326 (2010) (“courts decline to pierce the veil of even the closest corporations in the absence of proof that failure to do so will perpetrate a fraud or other injustice“).
This court has addressed reverse veil piercing only once, in Commissioner of Environmental Protectionv. State Five Industrial Park, Inc., 304 Conn. 128, 37 A.3d 724 (2012) (State Five).28 Although this court determined that the facts of that case did not warrant reverse veil piercing29 and, therefore, did not reach the issue, it observed that reverse veil piercing depends on the facts of the case and recognized equitable concerns regarding adoption of the doctrine but declined to foreclose its adoption in the future when presented with the “appropriate case.” Id., 138 n.13. The appropriate case, this court explained, would be one in which the doctrine could be recognized under circumstances in which “it achieves its equitable purрose without harming third parties.”30 Id. This court went on to note that, if it were to adopt reverse piercing, it would limit its application. See id., 140 (“[a]lthough some courts have adopted reverse veil piercing with little distinction as a logical corollary of traditional veil piercing, because the two share the same equitable goals, others wisely have recognized important differences between them and have either limited, or disallowed entirely, reverse veil piercing” [emphasis added]).
The majority in State Five outlined, in dicta, three concerns that arise specifically from the application of reverse veil piercing and suggested methods of limiting application of the doctrine. Id., 140–42. First, this court noted the concern that reverse piercing allows creditors to bypass normal judgment collection procedures. Id., 140. Second, this court noted that reverse piercing can harm nonculpable shareholders and creditors. Id. Third, this court noted that, as an equitable remedy, reverse piercing should be imposed only when there is an absence of adequate remedies at law. Id., 141. In a sole concurrence,31 Justice Zarella echoed these concerns,32 noting that, in contrast to traditional veil piercing, in which “the corporation itself is not affected by the piercing,” in reverse veil piercing “[t]he corporation itself is liable—and thus corporate assets are vulnerable—for the wrongdoing of an individual.” Id., 155.
We begin by discussing the first and second concerns articulated by the majority in State Five, which we observe are interrelated. On the one hand, the majority noted that “reverse piercing bypasses normal judgment-collection procedures, whereby judgment creditors [of an individual judgment debtor] attach the judgment debtor‘s shares in the corporation and not the corporation‘s assets . . . prejudic[ing] [other] rightful creditors of the corporation, who relied on the entity‘s separate corporate existence when extending it credit . . . .” (Internal quotation marks omitted.) Id., 140.33 On the other hand, the majority in State Five noted that, “if a corporation has other [nonculpable] shareholders, they [too] obviously will be prejudiced if the corporation‘s assets can be attached directly . . . [because, in] contrast [to] ordinary piercing cases, [in which] only the assets of the particular shareholder [or other insider] who is determined to be the corporation‘s alter
Quoting the Virginia Supreme Court‘s opinion in C.F. Trust, Inc. v. First Flight L.P., supra, 266 Va. 12–13, in which that court recognized reverse piercing, this court stated, “a court considering reverse veil piercing must weigh the impact of such action upon innocent investors . . . [and] innocent secured and unsecured creditors.”34 (Internal quotation marks omitted.) State Five, supra, 304 Conn. 142; see also id., 158 (Zarella, J., concurring). Other jurisdictions that have applied outsider reverse piercing have adopted the same considerations. See, e.g., In re Phillips, supra, 139 P.3d 646 (recognizing outsider reverse piercing of corporate veil doctrine but placing limitations on circumstances that would permit application, noting that, “[w]hen innocent shareholders or creditors would be prejudiced by outside reverse piercing, an equitable result is not achieved“).
With respect to the third concern, that reverse veil piercing should not be applied if adequate remedies at law are available, this court in State Five explained that, unlike “the case of a traditional veil pierce . . . [in which] the judgment creditor cannot reach the assets of the individual shareholders due to limitations on liability imposed by corporate law . . . when the judgment debtor is a shareholder or other insider, many legal remedies potentially are available to reach corporate assets that rightfully should be available for collection . . . .” (Citation omitted; internal quotation marks omitted.) State Five, supra, 304 Conn. 141. Therefore, this court indicated that, “because corporate veil piercing is an equitable remedy, it should be granted only in the absence of adequate remedies at law . . . including the attachment of the debtor‘s shares in the corporation . . . garnishment of . . . pay from the corporation . . . or . . . challenging . . . transfers of assets to the corporation as fraudulent conveyances or illegal conversion . . . .”35 (Citations omitted.) Id. Other jurisdictions that have adopted reverse veil piercing have articulated the same additional consideration. See, e.g., In re Phillips, supra, 139 P.3d 647 (“the availability of alternative, adequate remedies must be considered by the trial court“); C.F. Trust, Inc. v. First Flight L.P., supra, 266 Va. 13 (“[t]he court must also consider the availability of other remedies the creditor may pursue“).
Declining “to hold that this doctrine is not viable under any circumstance,” the majority in State Five noted that it was “not convinced . . . that [these three] concerns cannot be addressed adequately, in the appropriate case . . . and [was] reluctant to presume that
In summary, the following is the proper test to apply when an outsider seeks to reverse pierce the corporate veil. We reiterate that the inquiry is a three part process. In part one, thе outsider must first prove that, under the instrumentality and/or identity rules, as set forth in traditional veil piercing cases, “the corporate entity has been so controlled and dominated that justice requires liability to be imposed . . . .” (Internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, 70 Conn. App. 133, 147, 799 A.2d 298, cert. denied, 261 Conn. 911, 806 A.2d 49 (2002). If the outsider prevails on part one, then, in part two, trial courts must, consistent with our dicta in State Five, consider the impact of reverse piercing on innocent shareholders and creditors. In part three, also consistent with our dicta in State Five, trial courts must consider whether adequate remedies at law are available.
In part one of the test, which is similar to traditional veil piercing, trial courts must first apply the instrumentality and/or identity rules and determine if the elements of either are satisfied. See Avant Capital Partners, LLC v. Strathmore Development Co. Michigan, LLC, supra, 2015 WL 136391, *6. The instrumentality rule involves an examination of the defendant‘s relationship to the company and requires the court to determine whether there exists proof of three elements: “(1) Control [by the defendant], not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of [the] plaintiff‘s legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.” (Emphasis in original; internal quotation marks omitted.) Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 553.
With regard to the second and third prongs of the instrumentality test, that is, (2) whether such control was used to commit a fraud or wrong, and (3) whether that fraud or wrong proximately caused the plaintiff‘s loss, this court has stated that “[i]t is not enough . . . simply to show that a judgment remains unsatisfied . . . . There must be some wrong beyond the creditor‘s inability to collect, which is contrary to the creditor‘s rights, and that wrong must have proximately caused the inability to collect.” (Citations omitted.) State Five, supra, 304 Conn. 150.
The identity rule, which this court has observed “complement[s] the instrumentality rule,” has one prong, which requires the plaintiff to show “that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, [in which case] an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.” (Internal quotation marks omitted.) Zaist v. Olsen, supra, 154 Conn. 575, 576; see also Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 554.
If the trial court finds that either the instrumentality or identity rule is met, then it must consider the remaining two parts of the proposed test, i.e., the State Five considerations. Under part two, the court must “weigh the impact of such action upon innocent investors . . . [and] innocent secured and unsecured creditors,” and, under part three, the court must “consider the availability of other remedies the creditor may pursue.” (Internal quotation marks omitted.) State Five, supra, 304 Conn. 142, quoting C.F. Trust, Inc. v. First Flight L.P., supra, 266 Va. 12–13.
With this test in mind, we now review the trial court‘s application of reverse veil piercing to the facts of the present case. The same legal principles that govern traditional veil piercing govern reverse veil piercing. “Whether the circumstances of a particular case justify the piercing of the corporate veil presents a question of fact. . . . Accordingly, we defer to the trial court‘s decision to pierce the corporate veil, as well as any subsidiary factual findings, unless they are clearly erroneous. . . . A court‘s determination is clearly erroneous only in cases in which the record contains no evidence to support it, or in cases in which there is evidence, but the reviewing court is left with the definite and firm conviction that a mistake has been made. . . .
“Generally, a corporation is a distinct legal entity and the stockholders are not personally liable for the acts and obligations of the corporation . . . or vice versa. Courts will, however, disregard the fiction of a separate legal entity to pierce the shield of immunity afforded by the corporate structure in a situation in which the corporate entity has been so controlled and dominated that justice requires liability to be imposed on the real actor. . . . In a traditional veil piercing case, a litigant requests that a court disregard the existence of a corporate entity so that the litigant can reach the assets of a corporate insider, usually a majority shareholder. In a reverse piercing action, however, the claimant seeks to reach the assets of a cоrporation or some other business entity . . . to satisfy claims or a judgment obtained against a corporate insider. . . . In either circumstance, veil piercing is not lightly imposed. [C]orporate veils exist for a reason and should be pierced only reluctantly and cautiously. The law permits the incorporation of businesses for the very purpose of isolating liabilities among separate entities. . . . Accordingly, the corporate veil is pierced only under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” (Citations omitted; internal quotation marks omitted.) State Five, supra, 304 Conn. 138–39.
The plaintiff claims that the trial court properly applied the doctrine in the present case with respect to Sapphire, Lurie, R.I.P.P., and Great Pasture, as that court properly applied the instrumentality rule and considered the concerns this court raised in State Five, but asks this court to reverse the trial court‘s decision not to reverse pierce the Solaire entities and W.W. Land. To support the latter claim, the plaintiff argues, first, that the trial court intended to reverse pierce the veil of W.W. Land and that it confused the Solaire entities named here with a separate entity, Solaire Tenant, LLC
In addition to the facts already set forth in parts I and II of this opinion, the record reveals the following facts that are relevant to our resolution of these claims. Testimonial and documentary evidence admitted at trial—which included deeds, corporate documents, bank statements, tax documentation, and bankruptcy records—revealed the following, often interrelated, facts about the history of Sapphire, Lurie, R.I.P.P., and Great Pasture. Longman originally organized Sapphire to purchase and develop a property located at 2 Great Pasture Road in Danbury. As part of a reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, however, Sapphire transferred title to that property in 2006 to a newly created entity, Great Pasture. Sapphire did not have any employees, and its sole asset from that point forward was the Ridgefield Property, which did not produce an income. While holding the Ridgefield Property, Sapphire conducted no business, and the Longman family continued to reside in the residence located there without ever executing a written lease with Sapphire.
After the transfer of 2 Great Pasture Road, Sapphire derived its income from the other related entities. On its 2007 M&T mortgage application, Longman listed Lurie and Great Pasture under “bank accounts” as assets of Sapphire. In 2007, Longman also filed, on behalf of Sapphire, a final tax return for the company, which he claimed he did not carefully review, if he reviewed it at all. According to Sapphire‘s bank statements and the monthly operating reports it filed during bankruptcy,37 Lurie contributed most, if not all, of the income that Sapphire received from 2009 to 2012.38
Although Sapphire did not itself generate any income, Longman continued to use its assets and equity for his personal use. In 2006 and 2007, Longman and Gayla took itemized deductions on their joint federal tax returns for taxes and mortgage interest associated with the Ridgefield Property. Additionally, Sapphire‘s 2006 federal tax return indicated that Emerald, which held a 95 percent interest in Sapphire according to Sapphire‘s operating agreement, was allocated 5 percent of the
During the relevant time period, Gayla owned a majority interest in Sapphire, but Longman made decisions on behalf of the company. Prior to 2008, Gayla held a majority interest in Sapphire through her majority interest in Emerald. In 2008, Longman assigned his 5 percent interest and Emerald‘s 95 percent interest in Sapphire to Gayla for no consideration. Longman remained Sapphire‘s operating manager throughout the relevant time period, and Sapphire‘s operating agreement required a supermajority vote to remove him. The record revealed that, during the time periods before and after the 2008 assignment that gave Gayla 100 percent ownership interest in Sapphire, Longman made decisions on behalf of the company in his capacity as Sapphire‘s operating manager.
The history of Lurie, another real estate development company controlled by Longman, reveals that Lurie was also used to hold Longman‘s property and provide funds to the Longman family. As we have explained, in 2010, Lurie held title to the Greenwich Property, purchased by Longman, for two months, until Lurie sold it to a bona fide purchaser and distributed most of the proсeeds of that sale to the other corporate defendants three days later. Longman testified that he did not believe that Lurie had filed tax returns for the five years preceding Longman‘s 2011 deposition. Longman also admitted that, over a period of “five [or] six years,” he would “regularly” allocate, from Lurie, $250 per week to the children “while they were in school” and $500 per week to Gayla.
Like Sapphire and Lurie, R.I.P.P. was owned by Gayla, and it distributed funds from its account to the Longman family members.39 At trial, Longman testified that R.I.P.P., which was owned 100 percent by Gayla, with Longman and Gayla as its only directors, was “[o]riginally . . . conceived to be a family owned company that would handle investments on behalf of the family.” Longman testified, however, that R.I.P.P. “never actually did much. It was superseded [by other companies] shortly after being formed . . . .” Longman testified at trial that, as was the case with Lurie, Gayla and their children were able “to write personal checks” from their individualized R.I.P.P. accounts, in order to extract allowances from the company.
The fourth entity pierced by the trial court, Great Pasture, held real property located at the address from which it received its name, after Sapphire transferred that property to it during Sapphire‘s 2006 reorganization. Lurie was the company‘s sole equity member after 2007, and Longman and his son, Matthew Longman, were the managers of Great Pasture. Longman was also
Unlike the former four entities, to which the trial court applied reverse veil piercing, Solaire Development, Solaire Management, and Solaire Funding were commercial businesses that provided services on an ongoing basis. They developed “commercial solar projects [such as] large [ground and rooftop] solar farms,” which, at the time of their inception, “were the largest commercial solar installations in New England . . . .” As described by Longman, “Solaire Development owns the projects. Solaire Tenant leases the projects from Solaire Development as part of a sale of tax credits that funded the development of these projects. Solaire Management manages the sale of the electricity from those projects.” Longman testified that this structure was organized to allow an investor, in this circumstance, Bank of America, “to obtain [a particular] tax benefit . . . and . . . [also] to effect the investment of the equity . . . required to build these projects.” Specifically, Longman testified that “Solaire Tenant . . . [sold] the investment tax credit . . . to . . . Bank of America . . . through a broker called Cityscape Capital. . . . Cityscape Capital, as the managing broker of that transaction, actually owns 99 percent of Solaire Tenant and leases the arrays from Solaire Development. That structure allows for Bank of America, as the purchaser of the credits, to . . . receive the tax credit.”
At the time of trial, the Solaire entities employed approximately ten people, who handled the field, regulatory, administrative, human resources, payroll, and accounting tasks associated with these solar projects. The Solaire entities also employed an individual to maintain the corporate books “on a regular basis.” The Solaire entities also had outside investors and creditors, including Bank of America, which, Longman testified, was “the ultimate purchaser and beneficiary of the [investment] tax credit and the depreciation [on these projects], which they [obtained] via the ownership structure that was set up among these entities.” Solaire Funding, one of these entities, also received a treasury grant from the federal government in 2009.
The last of the corporate defendants, W.W. Land, “was formed to purchase, subdivide, and build out . . . a fifty unit . . . subdivision in Palatka, Florida . . . .” At the time of trial, W.W. Land was “still owning and dealing with the Florida subdivision that was built out
1
Reverse Veil Piecing as to Sapphire, Lurie, R.I.P.P., and Great Pasture
In light of this evidentiary record, we address the claim of Longman and the corporate defendants that the trial court improperly applied reverse piercing to Sapphire, Lurie, R.I.P.P., and Great Pasture. In his posttrial brief, the plaintiff claimed, inter alia, that the trial court should reverse pierce these four entities because Longman‘s control over them—evidenced by their ownership structure and the movement of funds between them—rendered them artifices. Longman and the corporate defendants responded that reverse piercing the corporate veil is not viable law in Connecticut and, in the alternative, it would be improper for the trial court to apply the doctrine to the present case because the evidence did not support that these entities were alter egos and the State Five considerations precluded relief.
The trial court first examined the facts presented under the instrumentality rule. The trial court found that ” ‘the element of domination and control’ ” was present. The trial court reasoned that “Sapphire‘s only asset of note was the Ridgefield Property, but its questionable ability to pay taxes was a measure of the uncertainty of [the] adequacy of its capitalization, and all of the subject entities that the court has included had no cognizable capital or sources of income other than the inter-entity transfers (or funds from such private sources as the Vanguard account). Factors three through ten all point in the direction of piercing—pervasive payment of personal expenses of Longman family members (and payments to family members); consistent ownership by Longman family members (chiefly Gayla—or a family trust) with Longman as the actual decision maker by title and function; the Ridgefield Property (home) as the business address for most entities; no indicia of independent business decisions/discretion; while there was evidence of a paper trail for inter-entity transactions, the transactions had no identified or identifiable business purpose, i.e., all [were] subject to the never explained and often unexplainable ” ‘discretion’ ” of [Longman]; the entities were not profit centers much less independent profit centers, as the principal transaction of Lurie was isolated and took place only after a consideration free transfer from brief
Our review of the trial court decision reveals that the court made all the requisite findings to establish instrumentality, fraud, and proximate cause.40 Specifically, regarding whether Longman used his control and dominance to perpetrate a fraud or wrong, the trial court found that the evidence revealed that Longman fraudulently transferred the Ridgefield Property and the Greenwich Property to Sapphire and Lurie, respectively, “for purposes of avoiding creditors.” But cf. State Five, supra, 304 Conn. 148 (reverse piercing was denied when plaintiff could not prove proximate cause because debtor‘s transfer of large parcel of real property to State Five occurred “more than five years prior to the 2001 judgment that imposed the fines at issue“). Additionally, the trial court found that the lack of any “semblance of a separate existence” of Great Pasture and the fact that R.I.P.P.‘s “only identified source of funds in the relevant time frame [came] from Lurie, and Lurie already has been identified as not truly an independent entity,” rendered these entities as additional “vehicles created for financial ‘hide the pea’ exercises . . . .” With respect to whether the wrong perpetrated proximately caused the plaintiff‘s loss, the trial court found that these transfers rendered the plaintiff unable to attach Longman‘s assets.
After applying the instrumentality rule, the trial court considered whether innocent equity holders41 or creditors would be prejudiced by the piercing and whether adequate remedies at law were available to the plaintiff. Regarding the question of whether innocent equity holders or creditors would be prejudiced by the piercing, the trial court found that “there [was] no basis for concern about other creditors . . . [as] there [has] been no evidence of possible other creditors of . . . entities . . . subject to this analysis,” with the exception of “Sapphire, [whose] creditors all appear to be secured creditors . . . and, in any event . . . the reverse piercing is in the nature of a ‘backup’ to the fraudulent transfer claim . . . .” The court also considered the existence of nonculpable equity holders, principally Gayla, and noted that she received ownership of the entities for “no consideration,” gave “Longman full and effectively sole authority to make decisions as to all identified entities . . . [and] more than acquiesced in the conduct of [Longman as] she expressed no direct interest . . . [and gave] affirmative authorization
The trial court next turned to the consideration of whether adequate remedies at law were available. The court found, with regard to the transfers of the Ridgefield Property, that, although it “already . . . applied a statutory and common-law framework for fraudulent transfers to the Ridgefield Property as nominally owned by Sapphire . . . the ‘hook’ in this case [was] the brief period of time that the property actually was owned by [Longman] within the relevant time frame.” Likewise, with regard to the transfers of the Greenwich Property, that court found that “the multiplicity of entities, the constant movement of money between entities and to the family members, and the need for a painstaking analysis of actual bank records to track such movement of money, makes the tracing of specific sums of money difficult, if not impossible, absent a fraudulent transfer without liquidation.”
After our review of the trial court‘s application of the facts with respect to Sapphire, Lurie, R.I.P.P., and Great Pasture under our three part test for reverse piercing, we conclude that the trial court‘s determination to apply the doctrine of reverse piercing as to those entities was not clearly erroneous. First, we agree with the trial court‘s analysis under the instrumentality rule. The trial court‘s conclusion that none “of the subject entities . . . included [by that court] had [any] cognizable capital or sources of income other than thе inter-entity transfers”43 or contributions from Longman‘s personal Vanguard account is supported by the record, which reveals the following. Sapphire was originally organized “to purchase and develop 2 Great Pasture Road in Danbury . . . [and] it transferred title to that property [in 2006] to . . . Great Pasture . . . .” After the transfer, Sapphire‘s only asset was the Ridgefield Property, and Longman testified that he did not know of any income Sapphire derived from that property since 2006, and that, by 2007, Sapphire engaged in no management activities because “the market was completely dead.”44 Lurie‘s only asset was the Greenwich Property, which was transferred via a warranty deed to a bona fide purchaser in April, 2010. After the sale, “Lurie dispersed more than [one] half of the proceeds almost immediately [to the other entities] and there [was] no indication that Lurie retain[ed] any appreciable funds . . . .” The record also revealed that Sapphire and Lurie stopped filing tax returns around 2006. See Litchfield Asset Management Corp. v. Howell, supra, 70 Conn. App. 138 (reverse piercing applied where companies at issue failed to file tax returns during years preceding trial). Finally, it appears from the record that the only asset ever held by R.I.P.P. was the Ridgefield Property, of which it held only a portion and only from August, 1997 through August, 2001.45
Additionally, the trial court‘s findings that the “inter-
Further, the trial court‘s findings that there existed “consistent ownership by Longman family members . . . with Longman as the actual decision maker by title and function . . . [and] the Ridgefield Property (home) as the business address for most entities” are likewise supported by the evidence. The record reveals that most of the businesses used the address of the Ridgefield Property, the location of the Longman family‘s home, as their business addresses. Additionally, Sapphire managed the Ridgefield Property as its sole business but had no employees and did not receive any rental payments from the Longman family, who lived in the residence. See Litchfield Asset Management Corp. v. Howell, supra, 70 Conn. App. 137 (reverse piercing applied where companies were located at debtor‘s personal residence, had no employees, and did not pay rent). The record further revealed that, from the time that Sapphire merged with one of Longman‘s former limited liability companies, Highland Connecticut Investment, LLC, in 2007, ownership of Sapphire transferred between Longman, Gayla, and Emerald.46 At the time of M&T Bank‘s loan to Sapphire in exchange for a mortgage of the Ridgefield Property, Longman had a 5 percent ownership interest in Sapphire and the other 95 percent was owned by Emerald, 95 percent of which, in turn, was owned by Gayla and 5 percent of which was owned by Longman. In 2008, Longman transferred 100 percent of the shares in Sapphire to Gayla for no consideration,47 and, in 2010, Gayla transferred her interest to a family trust of which Longman was the trustee. Similarly, Longman and Gayla were the only directors of R.I.P.P., and Gayla was the sole shareholder. Gayla owned 100 percent of the membership interest in Lurie, until that interest was assigned to
Having concluded that it was not clearly erroneous for the trial court to find that Longman exercised control and dominance over Sapphire, Lurie, R.I.P.P., and Great Pasture under the second and third prongs of the instrumentality rule, we further conclude that it was not clearly erroneous for the trial court to find that Longman used that control and dominance to perpetrate a fraud or wrong and that such wrong proximately caused the plaintiff‘s loss. Cf. Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., supra, 187 Conn. 558. The trial court found that the evidence revealed that Longman fraudulently transferred the Ridgefield Property and the Greenwich Property to Sapphire and Lurie, respectively, “for the purposes of avoiding creditors . . . .” Additionally, it was not clearly erroneous for the trial court to determine that Longman‘s transfers of property between his various entities made it nearly impossible for the plaintiff to attach Longman‘s assets in order to satisfy the debt owed to him.
Moving to the remaining two parts of the test, which address the three concerns of State Five, we conclude that the trial court‘s findings that there was no impact to either innocent investors or creditors and no adequate remedies at law were not clearly erroneous. The trial court considered the existence of nonculpable creditors and equity holders, including mortgagees of the Ridgefield Property, Gayla, and Matthew Longman, and found that none would be prejudiced by its application of reverse piercing as to the four entities. The record revealed that, after 2006, Matthew Longman had no membership interest in Great Pasture, and Gayla authorized or ratified the decisions made by Longman with respect to those entities, in which she held a majority of the membership interests. See Litchfield Asset Management Corp. v. Howell, supra, 70 Conn. App. 137 (reverse piercing applied where no family members, other than debtor, participated in companies in any way, but received free loans and gifts from them). But see State Five, supra, 304 Conn. 142–43 (reverse piercing rejected where trial court failed to analyze whether debtor‘s sons, who had an interest in State Five, would be negatively affected if court applied reverse piercing as to that company). These findings are strengthened by the fact that the trial court declined to reverse pierce the Solaire entities—although it noted that “[t]he plain-
As to whether adequate remedies at law were available, it was not clearly erroneous for the trial court to conclude, under the facts of this case, that there was no adequate remedy. The trial court specifically found that “the brief period of time that the [Ridgefield] Property actually was owned by [Longman] within the relevant time frame” allowed for the reverse piercing of the corporate veil and holding the assets of Sapphire available for the debt of Longman. Further, it was not clearly erroneous for the trial court to find that, with regard to the Greenwich Property, “the multiplicity of entities [and] constant movement of money” made it nearly impossible to calculate a monetary damages award under a fraudulent conveyance claim, which “generally is appropriate only where the transferee subsequently disposes of the transferred property and retains the proceeds of that disposition.” Litchfield Asset Management Corp. v. Howell, supra, 70 Conn. App. 145.
2
Reverse Veil Piecing as to the Solaire Entities and W.W. Land
We next turn to the plaintiff‘s claim that the trial court improperly declined to apply reverse piercing to the Solaire entities.49 The plaintiff claims that the Solaire entities are alter egos through Longman‘s ownership and management of them, that no nonculpable shareholders or creditors exist, and that no adequate remedies at law are available to provide the plaintiff with relief. Longman and the corporate defendants first respond that the plaintiff failed to introduce evidence to support his assеrtion that the Solaire entities are alter egos of Longman, as those entities “are engaged in legitimate [solar power] business . . . .” We conclude that the trial court‘s decision with respect to the Solaire entities was not clearly erroneous.
The principal reason that the trial court refused to reverse pierce the Solaire entities is that granting such relief would affect nonculpable investors, such as Cityscape Capital and Bank of America, which would be prejudiced by allowing the plaintiff ” ‘to attach assets in which they have an interest.’ ”50 State Five, supra, 304 Conn. 141. The trial court did note that “[t]he Solaire entities present the most difficult situation,” as “[t]he plaintiff . . . marshaled the evidence in favor of their treatment as additional sham entities.” That court also noted, however, that it “heard testimony . . . that [those entities] are engaged in a legitimate business
For the reasons set forth in this opinion, we conclude that the plaintiff, a stranger to the M&T mortgage, lacked standing to challenge the enforceability of that mortgage under
The judgment is affirmed.
In this opinion the other justices concurred.
Notes
Similarly, because, as the plaintiff conceded in his posttrial brief, the record established that W.W. Land had no assets at the time of the trial court‘s judgment, we reject the plaintiff‘s claim that the trial court intended to create a constructive trust to recover funds transferred from Lurie to W.W. Land after the sale of the Greenwich Property. With respect to Sapphire, R.I.P.P., and W.W. Land, the trial court noted that, “[t]o the extent that any or all of these entities have any assets, a constructive trust is an appropriate vehicle for attempting to recover part or all of their share of the prоceeds of this sale.” (Emphasis added.) On the basis of the fact that the trial court found that W.W. Land did not have any available assets at that time, we observe that it was not clear error for the trial court to refrain from rendering judgment against W.W. Land for the imposition of a constructive trust, as such a remedy was not available. This observation is supported by the fact that the trial court chose to create a constructive trust for Sapphire.
“(b) If the articles of organization provide that management of the limited liability company is vested in a manager or managers: (1) No member, solely by reason of being a member, is an agent of the limited liability company; and (2) every manager is an agent of the limited liability company for the purpose of its business or affairs, and the act of any manager, including, but not limited to, the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business or affairs of the limited liability company of which he is a manager binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom he is dealing has knowledge of the fact that the manager has no such authority.
“(c) An act of a manager or member which is not apparently for the carrying on in the usual way the business or affairs of the limited liability company does not bind the limited liability company, unless authorized in accordance with the operating agreement, at the time of the transaction or at any other time.
“(d) An act of a manager or member in contravention of a restriction on authority shall not bind the limited liability company to persons having
“(b) In determining actual intent under subdivision (1) of subsection (a) . . . consideration may be given, among other factors to whether: (1) The transfer or obligation was to an insider, (2) the debtor retained possession or control of the property transferred after the transfer, (3) the transfer or obligation was disclosed or concealed, (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit, (5) the transfer was of substantially all the debtor‘s assets, (6) the debtor absconded, (7) the debtor removed or concealed assets, (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred, (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred, (10) the transfer occurred shortly before or shortly after a substantial debt was incurred, and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.”
“(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.”
While these actions were pending, the defendant and her husband, Jon Howell, formed two limited liability companies, Howell Interiors and Architectural Design, LLC (Design) and Antiquities Associates, LLC (Antiquities). Id., 135–36. Design and Antiquities were owned by the Howell family in the following manner: the defendant owned a 97 percent interest in Design, after borrowing against her life insurance policies to contribute $144,679 in exchange for ownership; Jon Howell and their two daughters, Wendi Howell and Marla Howell, each owned 1 percent of the shares after each contributed $10. Design, in turn, owned 99 percent of Antiquities, after it contributed $102,901 in exchange for its interest, and the defendant owned the remaining 1 percent of the shares after contributing $10. Id., 136.
After it was unable to reach the assets owed to it by Interiors and the defendant, Litchfield brought an action against the defendant, Jon Howell, Design and Antiquities, alleging that Design and Antiquities were shell companies created in a conspired effort “to fraudulently divert . . . assets beyond [Litchfield‘s] reach as a judgment creditor . . . .” Id. In upholding the trial court‘s application of reverse piercing to those companies and recognizing reverse piercing for the first time, the Appellate Court noted that the defendant “[was] the general manager of both Design and Antiquities. Neither company ha[d] any employees . . . [and] [b]oth companies operate[d] out of a loft space above the garage at . . . [the] [Howells‘] personal residence. Neither company [paid] any rent . . . . [The defendant] exercised complete control over the policies, finances, and business practices of Design and Antiquities; there is no indication in the record that Jon Howell, Wendi Howell or Marla Howell participated in their operation in any significant way. [The defendant] has never drawn a salary or received regular distributions from either Design or Antiquities, but consistently has used company funds to pay for many personal expenses and to provide . . . free loans or gifts to family members. . . . [P]ayments for Antiquities’ sales were deposited in Design‘s account without a corresponding reimbursement . . . [and] tax returns were not filed for either company for the two years preceding trial.” Id., 137–38.