Posts tagged with "claims of creditor"

State Employee Retirement Benefits Payments are Not Exempt from Garnishment by Victims of Violent Crime

State Employee Retirement Benefits Payments are Not Exempt from Garnishment by Victims of Violent Crime

Klingman v. Winters, KNLCV020560881, 2010 WL 5493498 (Conn. Super. Ct. Dec. 8, 2010)

In a case before the Superior Court of Connecticut, a victim of a violent crime sought to have a wage execution enforced against the retirement payments of her convicted assailant in order to collect the awarded judgment. The court found that the claim for a wage execution was valid and enforceable.

The plaintiff was awarded a $240,000 judgment for injuries she sustained from a physical attack by the defendant. The judgment was entered on a four-count complaint claiming negligence, reckless and wanton assault, intentional assault and violation of the Violence Against Women Act of 1995, 42 U.S.C. § 13981, based upon the applicable Connecticut General Statutes. The defendant declared bankruptcy; however, the bankruptcy court found that the plaintiff’s judgment was not subject to bankruptcy exemptions. In its memorandum of decision, the bankruptcy court characterized the attack as “vicious and brutal” and the injuries inflicted as “willful and malicious.”

A wage execution was entered against the defendant and the defendant’s employer, the State of Connecticut, and was paid to the plaintiff until the defendant retired. The plaintiff applied for a new wage execution, which was served on the State and returned by reason of the defendant’s retirement. The State contended that it discontinued payments on the wage execution because the defendant was placed on hazardous duty disability retirement and the execution was impermissible according to Connecticut law prohibiting assignments of state employees’ retirement benefits, Conn. Gen. Stat. § 5-171.

Under Connecticut law, retirement benefits of state employees are intended to support the member or beneficiary who is entitled to those payments; therefore, any assignment of such benefits is “null and void.” Conn. Gen. Stat. § 5-171. These benefits are “exempt from the claims of creditors.” However, if these general provisions are contrary to the law governing a particular circumstance, the law dictates “any payment shall be exempt to the maximum extent permitted by law.” Id. Connecticut law governing the general availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a, exempts “any pension plan, annuity or insurance contract or similar arrangement … established by federal or state statute for federal, state or municipal employees for the primary purpose of providing benefits upon retirement by reason of age, health or length of service” from the claims of all creditors of the plan beneficiary. Conn. Gen. Stat. § 52-321a(a)(5). However, this law also provides a specific exception for victims of violent crime: “Nothing in this section … shall impair the rights of a victim of crime … to recover damages awarded by a court of competent jurisdiction from any federal, state or municipal pension, annuity or insurance contract or similar arrangement … when such damages are the result of a crime committed by [the] participant or beneficiary.” Conn. Gen. Stat. § 52-321a(b).

The plaintiff argued that the defendant’s retirement payments should be garnished pursuant to the Connecticut law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a. She asserted that this law governed her particular circumstance as a victim of violent crime, and established an exception to the exemption of state employee retirement benefits stated in Section 5-171.

The plaintiff’s argument raises an issue of first impression in the Connecticut. Connecticut appellate courts have not addressed the specific issue of a victim’s right to enforce a withholding order pursuant to law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a. Discussion of the general applicability of this law has been limited to trial court decisions regarding alimony and child support obligations. These cases have consistently found that pension benefits covered by Section 52-321a are not exempt from income withholding orders. See, e.g., Sinicropi v. Sinicropi, 23 Conn. L. Rptr. 49 (Conn. Super. Ct. 1998); Foley v. Foley, 20 Conn. L. Rptr. 644 (Conn. Super. Ct. 1997).

The court found that the plaintiff was a victim of a crime; therefore, her claim for a wage execution upon the retirement benefits of the defendant fell within the statutory exception of Section 52-321a(b) and constituted a particular circumstance that fell within the statutory exception of Section 5-171. The court ordered that a wage execution may issue against the retirement benefits payments to the defendant by the State of Connecticut.

Should you have any questions relating to personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Continue Reading

Several Different Legal Theories May Allow Creditors To Reach a Debtor’s Assets Held in Trust

Several Different Legal Theories May Allow Creditors To Reach a Debtor’s Assets Held in Trust

United States v. Evseroff, 00-CV-06029 KAM, 2012 WL 1514860 (E.D.N.Y. Apr. 30, 2012)

In a recent case before the United States District Court for the Eastern District of New York, the United States government sought to collect delinquent taxes by accessing assets held in a trust established for the benefit of the taxpayer’s children. The current case was remanded to the District Court by the United States Court of Appeals for the Second Circuit after the Second Circuit reversed an earlier District Court ruling on the same matter. On remand, the District Court ruled that the government may collect against all assets held by the trust.

Between 1978 and 1982, the taxpayer invested in a series of tax shelters that generated deductions that were later disallowed by the Internal Revenue Service (IRS). In December 1990, after being audited, the taxpayer received notification that he owed over $227,000 in taxes and penalties. This amount was later corrected. In January 1992, the taxpayer received a notice of deficiency indicating that he had accrued more than $700,000 in tax liability. The taxpayer challenged the IRS calculation of his tax liability in a petition to the United States Tax Court. In November 1992, the Tax Court entered judgment against the taxpayer in the amount of $209,113 in taxes and penalties, and $560,000 in interest.

In June 1992, the taxpayer established a trust, naming a series of family friend and business associates as the trustees and naming his two sons as the beneficiaries. In the same month, he transferred approximately $220,000 to the trust and in October 1992 he transferred his primary residence, valued at $515,000, to the trust. The taxpayer received no consideration and there was no evidence the trust assumed the individual taxpayer’s mortgage obligations. Pursuant to the transfer agreement, the taxpayer was allowed to live in the residence and was responsible for the expenses of the residence, including the mortgage and property taxes. At the time of the transfer, the mortgage was scheduled to be paid off in five years; however, the transfer agreement did not specify an end date for the taxpayer’s occupancy.

At the bench trial held in 2005, the government advanced several theories for recovering assets from the trust, all of which were rejected by the District Court. The government appealed. In 2008, the United States Court of Appeals for the Second Circuit reversed the judgment and remanded the case. In its remand order, the Second Circuit directed the District Court to reconsider its findings with respect to whether the conveyances by the taxpayer to the trust were actually fraudulent, whether the trust held property as the taxpayer’s nominee and whether the trust was the taxpayer’s alter ego.

According to New York law, every conveyance made with “actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud” one’s creditors is fraudulent as to both present and future creditors. N.Y. Debtor and Creditor Law § 276. The primary issue is the intent of the debtor in making the conveyance, not the actual financial status of the debtor at the time of the conveyance. The requisite intent required by this section does not need to be proven by direct evidence; it may be inferred from circumstances surrounding the allegedly fraudulent transfer. Factors, known as “badges of fraud,” that a court may consider in determining fraudulent intent include: lack or inadequacy of consideration; close relationship between the transferor and the transferee; debtor’s retaining possession, benefit or use of the property; series of transactions after incurring the debt; the transferor’s knowledge of the creditor’s claim and the inability to pay it; the financial condition of the debtor before and after the transfer; and the shifting of assets to a corporation wholly owned by the debtor. See Steinberg v. Levine, 6 A.D.3d 620 (N.Y. 2004); In re Kaiser, 722 F.2d 1574, 1582–83 (2d Cir.1983) (citations omitted). To support a fraudulent conveyance finding, the creditor must have suffered some actual harm; however, actual harm may be found if the debtor depletes or diminishes the value of the assets of the debtor’s estate available to the creditors. Lippe v. Bairnco Corp., 249 F.Supp.2d 357, 375 (S.D.N.Y. 2003)

The District Court found that the taxpayer was well aware of his tax liabilities and other potential demands on his assets when he transferred his residence and $220,000 to the trust in 1992. Evidence of the taxpayer’s conduct at the time of the transfers supported the court’s finding that the taxpayer acted with the intention to hinder or delay collection of his assets. The taxpayer retained the benefits of ownership of the residence after it was transferred to the trust for no consideration. His payments of mortgage and other property-related expenses, in lieu of rent, were the type of payments that would be made by a property owner, not a renter. Much of the taxpayer’s net worth consisted of cash, which he was continually transferring among bank accounts held by family and close associates, as well as withdrawing to hold in an office safe. These transfers and withdrawals made it difficult for the IRS to locate and value the taxpayer’s assets. The District Court also found that the transfers of cash and real estate to the trust unambiguously caused the requisite actual harm to his creditors by reducing the assets that the taxpayer had available to satisfy his tax debt and reducing the value of his readily accessible assets well below the amount of his tax debt. After the transfers, the IRS would have had to collect between fifty and ninety percent of his remaining assets to satisfy his tax debt. As a result of this analysis, the District Court found that the taxpayer’s intent to evade the IRS collection efforts was substantial and sufficient on its own; therefore, the court concluded that the taxpayer’s transfer of the residence and $220,000 to the trusts was actually fraudulent within the definition of New York law. The remedy for fraudulent conveyance is that the creditor may collect upon the fraudulently conveyed property. Therefore, the District Court held that the government may collect against the assets in the trust on this basis.

The nominee theory focuses on the relationship between the taxpayer and the property to determine whether a taxpayer has engaged in a legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the property’s true owner. Richards v. United States, 231 B.R. 571, 578 (E.D.Pa.1999). The overall objective of the nominee analysis is to determine whether the debor retained the practical benefits of ownership while transferring legal title. Id. The critical consideration is whether the taxpayer exercised active or substantial control over the property. Factors examined by the court include: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee’s name in anticipation of a liability while the transferor remains in control of the property; (3) where there is a close relationship between the nominee and the transferor; (4) whether they failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property. Giardino v. United States, No. 96–CV–6348T, 1997 WL 1038197, at *2 (W.D.N.Y. Oct.29, 1997). A nominee finding can be made even where there is no intent to defraud creditors or hinder collection efforts. Where a nominee relationship is found, the government may access only the property held on the taxpayer’s behalf by the nominee and not all the property of the nominee.

The District Court found that the trust was the taxpayer’s nominee with respect to the residence only, and not with respect to the $220,000. The taxpayer had a close relationship with the trustees and the trust paid no consideration for the transfer of the residence. There was no evidence in the transfer agreement that the trust prevented the taxpayer from benefitting from the use and occupancy of the residence as much as when he held legal title to it. The District Court found the evidence that the taxpayer made some payments relating to the property to be insufficient evidence to rebut the inference that he was the de facto owner of the property. The payments that the taxpayer made in exchange for his occupancy were precisely those that an owner would make. Once the mortgage was paid off, the taxpayer was only responsible for upkeep and expenses for the property; therefore, the trust received no net return from this asset. The District Court considered that, were the trust acting as the owner of the property, it would have sought market rental rates that would have exceeded the taxpayer’s payments. Therefore, the District Court found that the trust held the residence as the taxpayer’s nominee and that the government could recover the taxpayer’s debts against the residence under a nominee theory.

The alter ego theory differs from the nominee theory because the nominee theory focuses on the taxpayer’s control over and benefit from the actual property, while the alter ego theory emphasizes the taxpayer’s control over the entity that holds the property. The alter ego doctrine arose from the law of corporations and allows the creditor to disregard the corporate form (also known as “piercing the corporate veil”) by either using an individual owner’s assets to satisfy a corporation’s debts or using the corporation’s assets to satisfy the individual owner’s debts. Although the New York Court of Appeals has never held that the alter ego theory may be applied to reach assets held in trust, the District Court found no policy reason not to extend the application of veil piercing to trusts. The policy behind piercing the corporate veil is to prevent a debtor from using the corporate form to unjustly avoid liability, which applies equally to trusts. Therefore, the District Court held that the alter ego theory could be applied to the trust in the instant case.

To pierce the corporate veil in New York, a plaintiff must show that “(1) the owner exercised such control that the corporation has become a mere instrumentality of the owner, who is the real actor; (2) the owner used this control to commit a fraud or ‘other wrong’; and (3) the fraud or wrong results in an unjust loss or injury to the plaintiff.” Babitt v. Vebeliunas,332 F.3d 85, 91–92 (2d Cir.2003) (citations omitted); see also Wm. Passalacqua Builders, Inc. v. Resnick Developers S. Inc., 933 F.2d 131, 138 (2d Cir.1991). With respect to analyzing the taxpayer’s control over the trust, the relevant factors can be drawn by analogy from the corporate context. In analyzing the alter ego question as it relates to a corporation, courts consider factors such as the absence of formalities, the amount of business discretion displayed by the allegedly dominated corporation, whether the related corporations deal with the dominated corporation at arm’s length and whether the corporation in question had property that was used by other of the corporations as if it were its own. Vebeliunas,332 F.3d at 91 n.3 (citation omitted).

The District Court that the trust was an alter ego of the taxpayer. The trust formalities were so poorly observed as to give rise to the inference that the trust was not a bona fide independent entity. Between 1992 and 1998, the trust did not record the taxpayer’s payment of expenses for the residence as income and, during this period, the trust did not claim the mortgage interest deduction for the residence. The individual taxpayer remained as the named beneficiary of the flood and fire insurance policies of the residence. The accounting work for the trust was performed by a business associate of the taxpayer as a professional courtesy. The trust tax statements were sent directly to the taxpayer instead of to the trustees. The District Court also found that the manner in which the trust was managed also demonstrate that it was an extension of the taxpayer because there was little evidence that the trustees were actively involved in managing the trust or its assets. Having trustees play an active role in managing the trust is an important factor in deciding whether to respect the form of a trust because active involvement of trustees would support the separate existence of a trust. Dean v. United States, 987 F.Supp. 1160, 1165 (W.D.Mo.1997). Finally, the taxpayer demonstrated his domination of the trust by controlling its property to a high degree.

Once the District Court found that the taxpayer controlled the trust, the next steps were to determine whether he used that control to commit a fraud or a wrong against the government, in its capacity as a creditor, and whether that wrong resulted in an unjust loss. The court found these elements to be plainly satisfied by the facts and its previous findings with respect to actual fraudulent conveyance and the nominee doctrine. Therefore, the District Court concluded that the existence of the trust as a separate entity was a legal fiction. Under the alter ego theory, the government may collect against all assets held by the trust as if they were held by the taxpayer himself.

Therefore, the District Court held that the government may proceed to collect against all the assets held by the trust that the taxpayer established for benefit of his sons in order to satisfy his delinquent tax liabilities.

Should you have any questions relating to trusts and other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Continue Reading

Owners of a Limited Liability Company Cannot Claim Homestead Exemption for Real Property Held by the LLC

Owners of a Limited Liability Company Cannot Claim Homestead Exemption for Real Property Held by the LLC

In re Kochman, 11-50111, 2011 WL 5325792 (Bankr. D. Conn. Nov. 3, 2011)

In a case before the United States Bankruptcy Court for the District of Connecticut, the Chapter 7 trustee objected to an aggregate homestead exemption claimed by the debtors for property owned by a limited liability company that they controlled at the time of the bankruptcy filing. The court sustained the objection and denied the homestead exemption.

The debtors were joint owners of Kochman Holdings Group, LLC (“the LLC”), which was a single asset real estate holding company established to hold title to a two-story building in West Cornwall, Connecticut. The first floor of the building was used by the debtors to conduct their respective businesses. A portion of second floor of the building was used as the debtors’ residence, and the remainder of the second floor was used for unspecified personal and business purposes.
In January 2011, the debtors filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701 et seq. The petition listed their street address as the address of the building owned by the LLC. Pursuant to 11 U.S.C.§ 522(b)(3), the debtors listed personal exemptions allowed by state law, including an aggregate homestead exemption for their primary residence. See Conn. Gen. Stat. § 52-352b(t) (2009). The debtors calculated the value of their exemption to be approximately $88,000, which was the total net equity in the building owned by the LLC. The trustee objected to the homestead exemption.

In Connecticut, any “natural person” is entitled to claim an exemption for his homestead up to $75,000, which is calculated based on the fair market value of the property less the amount of any statutory or consensual lien. Conn. Gen. Stat. § 52–352b(t) (2009). A “homestead” is defined as “owner-occupied real property … used as a primary residence.” Id. at § 52–352a (e) (2005) Case law has further refined this definition to establish three requirements for real property to constitute an individual’s statutory homestead: (1) the individual must “own[ ]” the subject real property within the meaning of Section 52–352a as of the relevant time; (2) the individual must “occup[y] ” the subject real property within the meaning of Section 52–352a as of the relevant time; and (3) the subject real property must be “used as a primary residence” within the meaning of Section 52–352a as of the relevant time. In re Kujan, 286 B.R. 216, 220–21 (Bankr.D.Conn.2002); see also KLC, Inc. v. Trayner, 426 F.3d 172, 175 (2d Cir. 2005) (citing Kujan as “setting out ‘homestead’ requirements for invocation of homestead exemption”).

The exemptions afforded by Section 52-352a only apply to the property of persons, not artificial entities. Shawmut Bank, N.A. v. Valley Farms, et al., 222 Conn. 361, 366 (1992). When a person elects to own assets through an artificial entity for a legal advantage, such as limiting personal liability, he must accept the corresponding legal disadvantage arising from the limitation of Section 52-352a. Id.

The debtors admitted that the property for which they were claiming a homestead exemption was owned by the LLC. However, the debtors argued that the equitable doctrine of reverse piercing of the corporate veil should be applied so that they, as sole joint owners of the LLC, could be considered owners of the property for the purposes of claiming the homestead exemption. The debtors testified that forming an LLC and putting legal title to the property in the name of the LLC were good faith technical transactions that they executed upon the advice of their attorney with no understanding of the implications.

The Bankruptcy Court rejected the debtors’ argument. In recommending an LLC to hold title to the property, the debtors’ attorney fully understood that the benefits of such an arrangement included preventing the debtors’ individual creditors from reaching the property. An individual cannot place ownership of a property in an artificial entity so as to be unreachable by his individual creditors, and then later assert ownership of the property so as to be entitled to claim a homestead exemption in it. The court reinforced precedent by asserting that when an individual choose to take advantage of the benefits of an artificial entity, he must also bear the corresponding burdens. Because the LLC, and not the debtors, owned the property, the Bankruptcy Court found no basis for the debtors to claim a homestead exemption.

The Bankruptcy Court made the additional finding that, even if the debtors were entitled to claim a homestead exemption, the claim of $88,000 was “patently objectionable” because it represented the entire net equity in the property. Only the net equity in the portion of the property used as a primary residence could be claimed as a homestead exemption. Because the record contained no evidence as to the value of the residential portion, the Bankruptcy Court would be unable to calculate the value of the homestead exemption, had the exemption been allowed.

Because the Bankruptcy Court found that the debtors did not own the property at the time they filed for bankruptcy protection, they could not claim a homestead exemption in the property. Therefore, the court sustained the trustee’s objection to the claimed homestead exemption.

Should you have any questions relating to bankruptcy or asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Continue Reading

Connecticut Supreme Court Protects Corporate and Personal Assets By Denying Reverse Piercing of the Corporate Veil

Connecticut Supreme Court Protects Corporate and Personal Assets By Denying Reverse Piercing of the Corporate Veil

Commissioner of Environmental Protection, et al., v. State Five Industrial Park, Inc., et al, 304 Conn. 128, 37 A.3d 724 (2012)

In a recent case before the Supreme Court of Connecticut, State Five Industrial Park, Inc., (“State Five”) and Jean L. Farricielli (“Jean”) appealed a trial court judgment holding them liable for a $3.8 million judgment rendered in 2001against Jean’s husband, Joseph J. Farricielli (“Joseph”) and five corporations that he owned and/or controlled. The Supreme Court transferred the case from the appellate division, reversed the lower court judgment and remanded the case with direction to render judgment in favor of State Five. Although the Supreme Court concluded that the facts of this specific case did not support the application of reverse veil piercing, the court refused to address whether that doctrine should be disallowed in Connecticut under any and all circumstances.

In 1999, the Commissioner of Environmental Protection (“commissioner”), the town of Hamden (“town”) and the town’s zoning enforcement officer (collectively, “the plaintiffs”) brought an environmental enforcement action against Joseph and the five corporations that he owned and/or controlled alleging egregious violations of state solid waste disposal statutes. A bench trial took place in 2000 and, in 2001, a memorandum of decision was issued awarding the plaintiffs all relief sought, including civil penalties for each day of each alleged violation, which totaled approximately $3.8 million. Joseph appealed and, in 2004, the Supreme Court affirmed the trial court judgment against him and the five corporations.

In 2005, the civil penalties of approximately $3.8 million were still largely unpaid; therefore, the plaintiffs initiated the present action. They argued that principles of reverse piercing of the corporate veil should be applied to hold State Five liable for the 2001 judgment against Joseph and that principles of traditional piercing of the corporate veil should be applied thereafter to hold Jean liable for the resulting judgment against State Five. The trial court concluded that reverse veil piercing was warranted because Joseph used State Five to hide assets and used State Five funds to pay thousands of dollars in personal expenses; both actions complicated the plaintiffs’ normal efforts to collect their judgment. Once Joseph’s liability was imputed to State Five, the trial court concluded that traditional veil piercing principles applied to Jean, who was the majority shareholder in State Five. Therefore, the lower court held both State Five and Jean liable for the 2001 judgment against Joseph, plus pre-judgment interest on the outstanding amount, for a total liability of over $4.1 million.

The appeal raised the question of whether the equitable doctrine of reverse piercing of the corporate veil is a viable remedy in Connecticut. State Five and Jean argued that the trial court improperly applied veil piercing principles because that remedy should not be recognized in Connecticut under any circumstances. In the alternative, State Five and Jean argued that the trial court should not have applied veil piercing principles given the facts of the instant case.

A corporation generally is a distinct legal entity, and stockholders are not personally liable for the acts and obligations of the corporation. Saphir v. Neustadt, 177 Conn. 191, 209, 413 A.2d 843 (1979). This corporate shield of liability is pierced in only exceptional circumstances, such as where the corporation is a “mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” Angelo Tomasso, Inc. v. Armor Construction & Paving, Inc., 187 Conn. 544, 557, 447 A.2d 406 (1982). (internal quotation marks omitted.) In veil piercing cases, the party seeking to disregard the corporate form bears the burden of proving that there is a basis to do so. In a traditional veil piercing case, the corporate veil shields a majority shareholder or other corporate insider who is abusing the corporate fiction in order to perpetuate a wrong; therefore, the claimant requests that the court disregard the corporate form in order to reach this individual’s assets. C.F. Trust, Inc. v. First Flight, L.P., 266 Va. 3, 10, 580 S.E.2d 806 (2003). In a reverse veil piercing case, however, the corporate form protects the corporation which gets used by a dominant shareholder or other corporate insider to perpetuate a fraud or defeat a rightful claim of an outsider; therefore, the claimant seeks to reach the assets of the corporation to satisfy claims or a judgment obtained against the corporate insider. Tomasso, 187 Conn. at 557, 447 A.2d 406. Three specific concerns have been identified in the distinction between these two doctrines: (1) reverse piercing bypasses normal judgment collection procedures, prejudicing the rightful creditors of the corporation who relied on the entity’s separate corporate existence; (2) reverse piercing prejudices the rights of the non-culpable shareholders; and (3) when the judgment creditor is a shareholder or other insider, there other legal remedies are potentially available to obviate the need for the more drastic remedy of corporate disregard. Therefore, a court contemplating reverse veil piercing must weigh the impact of this action on innocent investors and creditors, and consider the availability of other remedies to satisfy the debt. C.F. Trust, 266 Va. at 12–13, 580 S.E.2d 806.

In Connecticut jurisprudence, two rules form the legal standard for the application of traditional veil piercing doctrine and reverse veil piercing doctrine: the identity rule and the instrumentality rule. The instrumentality rule requires proof of three elements: (1) control, equivalent to the complete domination of finances, policy and business practice such that the corporate entity had no separate mind, will or existence of its own with respect to the contested transaction; (2) that such control was used 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 such control and breach of duty proximately caused the injury or unjust loss complained of. Naples v. Keystone Building & Development Corp., 295 Conn. 214, 232, 990 A.2d 326 (2010) (internal quotation marks omitted.) The identity rule requires that the plaintiff show that there was such a unity of interest and ownership between the shareholder and the corporation that the independence of the corporation had in effect ceased or had never begun, and adhering to the legal fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability. Id.

Whether the circumstances of a particular case justify the piercing of the corporate veil presents a question of fact. Therefore, the Supreme Court defers to the trial court decision to pierce the corporate veil, as well as any subsidiary factual findings, unless these factual findings are clearly erroneous, which means that either the record contains no evidence to support the findings or the reviewing court is left with the “definite and firm conviction” that a mistake has been made.

The Supreme Court concluded that, in the present matter, the trial court should not have applied reverse veil piercing, regardless of whether it is a viable theory in Connecticut. Certain subsidiary factual findings related to crucial factors that necessarily render reverse veil piercing inequitable lacked evidentiary support and, therefore, were clearly erroneous. Furthermore, after reviewing the trial court’s application of the instrumentality and identity rules, the Supreme Court was left with the definite and firm conviction that a mistake has been made.

The Supreme Court determined that the trial court did not adequately ensure that third party creditors did not exist or, if they did, that these creditors would not be harmed by applying reverse veil piercing principles that made all of the corporation’s assets available to satisfy the 2001 judgment. Permitting direct attachment of corporate assets to satisfy an individual insider’s debt undermines corporate viability, reasonably relied upon by creditors, with no forewarning. Testimony and printed statements in evidence at trial indicated that State Five had a line of credit with a local bank; however, the trial court concluded that this bank would not be harmed by the reverse piercing because the line of credit had been paid off in 2007 and the line was secured with Jean’s personal assets rather than corporate property. The Supreme Court determined that this finding was clearly erroneous because the record was silent as to the outstanding balance on the line of credit as of the date of trial and the precedent in Connecticut is that a lender in this context extends credit in reasonable reliance on the existence of both a viable borrower in possession of assets and the additional security provided by a secondary obligor.

Evidence that certain State Five shareholders were not involved in running the corporation, making necessary business decisions or suggesting changes did not support the trial court’s factual finding that these shareholders were complicit in Joseph’s activities. Because the plaintiffs did not establish that these shareholders were not innocent, the Supreme Court determined that it was improper for the trial court to apply reverse piercing without regard to whether the interests of these individuals would be impacted.

Finally, the Supreme Court was convinced that the trial court improperly concluded that the equitable remedy was warranted in this case. To justify any veil piercing action pursuant to the instrumentality rule, it must be shown that the insider debtor exercised complete control over the subject corporation and used such control “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 plaintiffs’] legal rights; and … that the aforesaid control and breach of duty … proximately cause[d] the injury or unjust loss complained of.” Tomasso, 187 Conn. at 553, 447 A.2d 406. To justify imposing the entire obligation of the 2001 judgment on State Five, the plaintiffs needed to show that Joseph exercised his control over State Five to divert or hide assets that belonged to him personally or to his corporations and that otherwise would have been available to satisfy that judgment. Additionally, the plaintiffs needed to demonstrate that these maneuvers were the proximate cause of the plaintiffs’ inability to collect $3.8 million that it otherwise would have been able to recover. The Supreme Court found that the trial court’s analysis failed to specifically establish the necessary connection between Joseph’s improper actions in relation to State Five and the plaintiffs’ inability to collect on the 2001 judgment.

The Supreme Court found that the identity rule was not satisfied in the present case. It was neither unjust nor inequitable to permit State Five to avoid liability for the judgment against Joseph and his other corporations when State Five received little in the way of assets from those parties and much in the way of liabilities. Additionally, in paying personal expenses for Joseph, State Five has been caused to pay other expenses for which it is not legally obligated.

Because the Supreme Court concluded that the trial court improperly applied reverse veil piercing, Joseph’s liability for the 2001 judgment could not be imputed to State Five. Therefore, there was no liability to transfer from State Five to Jean.

The Supreme Court had a definite and firm conviction that a mistake has been made because the trial court’s application of the equitable remedy of reverse veil piercing was based in part on unsupported factual findings, and the court employed improper reasoning when analyzing other facts. Therefore, the Supreme Court set aside the trial court’s factual determinations as clearly erroneous, reversed the lower court judgment, and remanded the case with direction to render judgment in favor of State Five and Jean Farricielli.

Should you have any questions relating to corporate or personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

Continue Reading