Opinion
No. CV 07-4033896
April 2, 2009
MEMORANDUM OF DECISION
The plaintiffs, Robert and Susan Breen, brought this action to "pierce the corporate veil" of Patriot Trust Equipment, LLC (Patriot), in order to hold the defendant, Craig Judge, liable on a judgment that the plaintiffs previously recovered against Patriot. The plaintiffs also allege that Judge violated the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a, et. seq., the Uniform Fraudulent Transfer Act, § 52-552a, et. seq., and that he was unjustly enriched. The case was tried over four days, and the parties submitted posttrial briefs.
The court finds the following facts proven by a preponderance of the evidence. Susan Breen was employed as a bookkeeper at Patriot from February 2003 to March 2004. Beginning in March 2003, Susan Breen deposited funds, which she had borrowed from credit card accounts in the name of Robert and Susan Breen, into Patriot's checking account. At the time Susan Breen made these deposits, Patriot was unable to pay its current liabilities, including vendor payments. Susan Breen testified she made these deposits to help Patriot avoid having to cease operation. Neither Judge, who was the managing member of Patriot, nor anyone else at Patriot solicited these deposits. Patriot did acknowledge the deposits, which were carried on the books of Patriot as a loan from Susan Breen. Susan Breen left employment at Patriot in March 2004. In August 2005, the plaintiffs, Robert and Susan Breen sued Patriot to recover the money they loaned, plus interest. In that action, Patriot was defaulted for failure to appear, and on January 8, 2006, judgment entered in the plaintiffs' favor, against Patriot, in the total amount of $58,495.35. Patriot's December 31, 2004 balance sheet shows a loan payable to Susan Breen in the amount of $22,842.47; the difference in the amount of this loan balance and the amount of the plaintiffs' judgment against Patriot is not germane to this decision. Suffice it to say that the judgment amount includes, in part, the plaintiffs' claims for reimbursement of exorbitant credit card interest and charges.
On May 14 and June 27, 2007, the plaintiffs conducted an examination of judgment debtor by examining Judge, who appeared as the representative of Patriot. The present action was commenced by writ dated October 23, 2007.
Piercing the Corporate Veil-First and Second Counts
"A court may pierce the corporate veil only under exceptional circumstances . . ." (Internal quotation marks omitted.) United Electrical Contractors, Inc. v. Progress Builders, Inc., 26 Conn.App. 749, 755, 603 A.2d 1190 (1992). In such unusual circumstances, "[c]ourts will disregard the fiction of separate legal entity when a corporation is a mere instrumentality or agent of another corporation or individual owning all or most of its stock . . . Under such circumstances the general rule, which recognizes the individuality of corporate entities and the independent character of each in respect to their corporate transactions, and the obligations incurred by each in the course of such transactions, will be disregarded, where . . . the interests of justice and righteous dealing so demand." (Internal quotation marks omitted.) Hersey v. Lonrho, Inc., 73 Conn.App. 78, 86, 807 A.2d 1009 (2002). The "issue of whether the corporate veil [should be] pierced presents a question of fact . . ." (Internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 148, 799 A.2d 298, cert. denied, 261 Conn. 91, 806 A.2d 49 (2002).
"When determining whether piercing the corporate veil is proper, our Supreme Court has endorsed two tests: the instrumentality test and the identity test. The instrumentality rule requires, in any case but an express agency, proof of three elements: (1) Control, 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 plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of." (Internal quotation marks omitted.) Hersey v. Lonrho, Inc., supra, 73 Conn.App. 87.
"The identity rule has been stated as follows: If a plaintiff can 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, 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 . . . The concept of piercing the corporate veil is equitable in nature and courts should pierce the corporate veil only under exceptional circumstances." (Internal quotation marks omitted.) KLM Industries, Inc. v. Tylutki, 75 Conn.App. 27, 32-33, 815 A.2d 688, cert. denied, 263 Conn. 916, 821 A.2d 770 (2003).
Rules regarding piercing the corporate veil may be used to disregard the entity structure of a limited liability company. See Litchfield Asset Management v. Howell, supra, 70 Conn.App. 147 (2002).
Much of the evidence and testimony at trial concerned the books and records of Patriot, and money received by Judge and his mother, Shirley Judge. Shirley Judge was a member of Patriot, LLC for a period of time and made capital contributions to Patriot. She also performed bookkeeping services at Patriot for no salary. Shirley Judge is not a party to this action and the court is without jurisdiction to determine any claims made by the plaintiffs against her.
Patriot was in the business of outfitting trucks with snow plows and truck bodies. Patriot commenced operation in January 2002, and it filed articles of dissolution with the secretary of the state on September 16, 2005. At the trial, the accountant for Patriot and Judge, Michael Michaud, testified at length as to information contained in the tax returns filed by Patriot and Judge for the years 2002 through 2005. The court found his testimony credible and of assistance.
In 2002, Patriot's gross receipts were $479,963, and after deducting the costs of goods sold, its total income was $96,085. Deductions from income totaled $135,960, resulting in a loss of $39,875. At the end of 2002, Judge was a 50 percent shareholder and a Brian Clark was a 50 percent shareholder in Patriot. During that year, Judge contributed $48,640.00 to the business. At the end of the year, his capital account was $25,354.
In 2003, Patriot's gross sales were $810,459 and its income was $155,580. Patriot's expenses were $262,010, and the business had a loss of $106,430. At the end of 2003, Judge's capital account had a negative value of $23,311.
In 2004, Patriot had gross sales of $950,926 and income of $157,551.00. Expenses were $267,100, resulting in a loss of $109,559. In 2004, Judge contributed $52,144 to his capital account, which had a negative value of $26,674 at the end of the year. At the end of 2004, Judge was a 50 percent shareholder, and the remaining 50 percent of the company was owned by his mother, Shirley Judge.
In 2005, the year the business ceased operations, Patriot had sales of $405,044 and income of $102,224. The expenses were $170,948, resulting in a loss of $68,744.
During the time Patriot was in existence, Judge worked at the business full-time as its managing member. While Patriot was in business, Judge received money from Patriot in the form of draws, and by way of payment of his personal expenses. These draws and personal expenses were noted on the books of the business. For each tax year, the amounts received by Judge, by way of draw or payment of personal expenses, were re-characterized as guaranteed payments to the partner. These payments were shown on the business tax returns and were carried over to Judge's personal tax returns. These guaranteed payments served to reduce the losses that Judge could claim on his personal return from Patriot's operations. The guaranteed payments to Judge were as follows: for 2002, $23,619; for 2003, $41,686; for 2004, $38,486; and, for 2005, $18,896.
In applying the instrumentality test to the facts of this case, the court cannot find that Judge exerted such control over Patriot that it had no existence of its own. As noted earlier, Judge shared ownership of Patriot, at various times, with Alan Clark and Shirley Judge. The business did not exist only for Judge's benefit, but was a going business with average annual sales of approximately $660,000 for the four years it was in operation. Furthermore, Patriot kept books and records, filed tax returns, and gave notice of its dissolution to the secretary of the state. In KLM Industries, Inc. v. Tylutki, supra, 75 Conn.App. 35 (2003), the Appellate Court found that similar practices were inconsistent with a finding that a company was the instrumentality of the president of the company.
As to the identity test, the court is not persuaded that there was such a unity of interest between Judge and Patriot that Patriot's independence never began or ceased. This case does not present the exceptional circumstances that justify piercing the corporate veil.
Fraudulent Transfers-Fourth Count
The plaintiffs have alleged that Judge controlled Patriot and transferred certain assets of Patriot to, or for the benefit of, himself. The plaintiff further alleges these transfers violate the Uniform Fraudulent Transfer Act, General Statutes § 52-552a et seq. In particular, the plaintiffs allege that the transfers were fraudulent, pursuant to §§ 52-552e and 52-552f(a). Although it does not find that piercing the corporate veil of Patriot is justified, the court does find that Judge, as the managing member, had sufficient control over Patriot to effectuate the transfers discussed below.
General Statutes § 52-552e provides: "(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, if the creditor's claim arose before the transfer was made or the obligation was incurred and if the debtor made the transfer or incurred the obligation: (1) With actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
(b) In determining actual intent under subdivision (1) of subsection (a) of this section, 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."
General Statutes § 52-522f(a) provides: "A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation."
"In cases arising under General Statutes § 52-552, the statutory predecessor to the Fraudulent Transfer Act, [§ 52-552a, et. seq.,] which was repealed by Public Acts 1991, No. 91-297, § 13, [the appellate courts] held that [t]he determination of the question of fraudulent intent is clearly an issue of fact which must often be inferred from surrounding circumstances . . . Such a fact is, then, not ordinarily proven by direct evidence, but rather, by inference from other facts proven — the indicia or badges of fraud . . . [The appellate courts] see no reason to depart from that standard under the Fraudulent Transfer Act." (Citations omitted; internal quotation marks omitted.) Dietter v. Dietter, 54 Conn.App. 481, 487, 737 A.2d 926 (1999).
"The elements of fraudulent conveyance, including whether the defendants acted with fraudulent intent, must be proven by clear, precise and unequivocal evidence." (Internal quotation marks omitted.) Certain Underwrites at Lloyd's, London v. Cooperman, 289 Conn. 383, 395, 957 A.2d 836 (2008).
As noted earlier, Judge received payments from the corporation during the four years it was in existence. These payments averaged approximately $30,000 per year. The court has carefully reviewed the Quickbook reports that detail the amounts and dates of payment received by Judge from 2003 through 2005. The 2002 information on payments was not submitted. An analysis of the payments to Judge shows that in 2003, he received fifty-eight payments which averaged $325 each, and the largest was $2,600. In 2004, there were 254 payments, which averaged $208 each, and the largest was a mortgage payment of $2,851. Finally, from January through July 2005, Judge received sixty-nine payments, which averaged $273 each. The largest payment was $5,501, which appears to be for a double mortgage payment.
During the years that Judge received these payments, he was the managing member of Patriot and he operated the company on a full-time basis. It is reasonable to infer that the payments that Judge received were in the form of compensation for his efforts at Patriot. Admittedly, the balance sheets for Patriot for the year ending December 31, 2003, December 31, 2004, and December 31, 2005, indicate that the liabilities of Patriot exceeded its assets. It does appear, however, that capital, in the approximate amount of $200,0000, contributed by Judge and Shirley Judge, allowed Patriot to continue in business. Considering all of the surrounding circumstances, and applying the required higher standard of clear and precise proof, the court cannot conclude that the payments made by Patriot to Judge were made with the actual intent to hinder, delay or defraud the creditors of Patriot. The compensation Judge received by way of payments does not appear to be excessive, and it does not establish a badge of fraud.
"[T]he Connecticut Fraudulent Transfer Act . . . is essentially a codification of the common law of fraudulent conveyances. Molitor v. Molitor, 184 Conn. 530, 535, 440 A.2d 215 (1981). The purpose underlying both the common law and the statutory fraudulent conveyance action is to ensure the Court's ability to invalidate property transfers that are clearly fraudulent as to present creditors." National Loan Investors, L.P. v. LAN Associates XII, LLP, Superior Court, complex litigation docket at New Britain, No. X03 CV 99 0495407 (June 28, 2002, Aurigemma, J.). In other words, "the general purpose of fraudulent transfer law . . . is to prevent [a] debtor from taking deliberate action to hinder, delay, or defraud his creditors by providing a remedy to creditors and potential creditors to undo the detrimental effects of a fraudulent transfer." (Internal quotation marks omitted.) In re Raytech Corp., 241 B.R. 790, 794 (Bankr.D.Conn. 1999). See also, 37 Am.Jur.2d 520, Fraudulent Conveyances and Transfers § 1 (2001).
Although it may not be a good business practice for an owner-operator to pay himself or herself a reasonable and regular compensation when the business is not making a profit, it is not a fraudulent transfer if he or she does so. To hold otherwise could make any operator who received income from a failed business liable under the Fraudulent Transfer Act. That is not the purpose of the Act.
The plaintiffs did provide evidence that several large checks from Patriot were made payable to cash. Three checks were issued in December 2003, which totaled $21,706.90. The court has considered the testimony surrounding these checks and is persuaded that the checks were used to purchase bank checks in order to pay for Patriot's inventory. Judge testified that vendors would not accept Patriot's business checks.
The plaintiffs did establish that in September 2005, after Patriot ceased operations, Judge sold a forklift and a mig welder that belonged to Patriot for approximately $2,000, which he retained. This amount is similar in size to payments that Judge received from Patriot during its operations. Considering all of the surrounding circumstances previously discussed, the court cannot find by clear and precise evidence that this transfer was fraudulent.
In the third count of their complaint, the plaintiffs allege that Judge violated CUTPA. Considering the evidence and the findings made, the court concludes that the plaintiffs have not sustained their burden of proof regarding this count.
In the fifth count the plaintiffs allege that Judge has been unjustly enriched by funds received from the plaintiffs. The evidence shows that any monies loaned by the plaintiff were paid directly to Patriot and not Judge. The plaintiffs have not sustained their burden as to this count.
For the foregoing reasons, judgment may enter for the defendant on all counts of the complaint.