Posts tagged with "equitable remedy"

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

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.

Court Grants Legal and Equitable Relief in Breach of Non-Compete Agreement

Court Grants Legal and Equitable Relief in Breach of Non-Compete Agreement

National Truck Emergency Road Service, Inc. v. Peloquin, 2011 Conn. Super. LEXIS 2393

National Truck Emergency Road Service, Inc. (National Truck) was a Massachusetts corporation that engaged in interstate commerce by providing emergency road service to heavy and medium duty trucks and vans for local and national fleets. The company hired Mr. Barry Peloquin on August 25, 2008 to work as a customer service representative. The next day, the parties executed a non-compete agreement that prohibited Mr. Peloquin, for five years following termination, from working at a competing company within five hundred miles of the company’s headquarters located at 320 Main Street, Southbridge, MA. The agreement also stated that Mr. Peloquin was obligated to return any company property upon termination and contained a non-disclosure provision. Most importantly however, the covenant not to compete stipulated that in the event of a breach, National Truck would be entitled to “remedies allowed by law and equity”, therefore permitting National Truck to receive monetary damages and injunctive relief.
National Truck terminated Mr. Peloquin on October 20, 2009 and he soon found employment with a competing company in Connecticut and began servicing National truck’s customer YRC. The company sued Mr. Peloquin for illegally appropriating company lists and other protected intellectual property in conjunction with violating the non-compete agreement executed by the parties. The company asked the court to enforce the provisions of the non-compete and to order Mr. Peloquin to return all proprietary documents he took home during his employment with National Truck. The court found in favor of National Truck and granted both equitable and legal relief, although the injunction only addressed returning.
The court heard expert witness testimony and concluded that National Truck had $32,493.00 in damages directly attributable to illegal competition from Mr. Peloquin. The company experienced an unusual and dramatic drop off in business from YRC commencing shortly after Mr. Peloquin’s termination. Mr. Peloquin’s action created adverse financial consequences for National Truck, visible in the company’s lost profits and incurred expenses. While damages are not generally awarded in cases involving breach of a non-compete agreement, the agreement itself specifically stipulated that the employer (National Truck) would be entitled to them should the employee (Mr. Peloquin) violate the covenant. The court awarded National Truck the $32,493.00 in damages plus attorney’s fees and court costs.
The court was only willing to grant a portion of the injunctive relief sought by National Truck. It ordered that Mr. Peloquin return all National Truck documents within thirty days and abide by the non-disclosure clause. The court’s ruling however did not prevent his further employment with his current company because the court concluded that National Truck did not present adequate evidence to show that Mr. Peloquin violated the non-compete since litigation began or that he was likely to do so in the future. Without demonstrating the imminent threat of irreparable harm, National Truck was not entitled to injunctive relief with this specific matter.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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