Opinion
X10CV166033559S
08-15-2018
Personna NOBLE et al. v. NORTHLAND INVESTMENT CORP. et al.
UNPUBLISHED OPINION
OPINION
LINDA K. LAGER, JUDGE
This is a putative class action brought "to remedy injuries caused by the defendants’ practices in connection with ownership and management of the Church Street South housing complex in New Haven." (Church Street South) The defendants are Northland Investment Corporation (Northland), Lawrence R. Gotteisdiener (Gotteisdiener), Church Street New Haven, LLC (defendant LLC), Northland Fund II, LP (defendant LP), Northland Fund II Partners, LLC (defendant GP), DeMarco Management Corporation (DeMarco) and Wm. M. Hotchkiss Company (Hotchkiss). Defendant LP, defendant GP and Gotteisdiener move to strike all the claims against them in the now operative Second Amended Class Action Complaint at entry # 189 (complaint or operative complaint).
In brief, the complaint alleges that Church Street South was a low-income apartment complex located in New Haven across from Union Station (¶ 3) which was acquired in 2008 with title vested in the defendant LLC. (¶ 11). From the time the property was acquired and throughout the relevant time period, the defendants were on notice that it needed repairs to its structural elements (¶ 24) and had deficiencies identified by HUD and city inspections (¶ 28). Nonetheless, they allowed conditions to deteriorate "by choosing to spend much less than necessary on repairs and maintenance, with the plan to allow the property to become uninhabitable beyond repair" (¶ 27). The named plaintiffs, along with the putative class members, resided at Church Street South until such time as the alleged uninhabitable conditions of the premises resulted in their relocation (¶ 33). The operative complaint alleges that as a result of the conduct of the defendants, the named plaintiffs and members of the putative class suffered physical and emotional injuries, loss of personal property and other losses (Count One, ¶¶ 45-53).
In deciding a motion to strike, Practice Book § 10-39, the court must examine the allegations of the complaint in the light most favorable to the plaintiffs to determine the legal sufficiency of the causes of action from the pleaded facts, as well as the reasonable inferences that can be drawn from those facts. Violano v. Fernandez, 280 Conn. 310, 317-18, 907 A.2d 1188 (2006). Moreover, the "pleadings must be construed broadly and realistically, rather than narrowly and technically." Lawrence v. O and G Industries, Inc., 319 Conn. 641, 649, 126 A.3d 569 (2015). Finally, the court’s role is not to decide whether the evidence will support the cause of action but only to determine whether the allegations are legally sufficient to state the cause of action. Coe v. Board of Education, 301 Conn. 112, 117, 19 A.3d 640 (2011).
Defendant LP, defendant GP and Gotteisdiener maintain that the complaint fails to allege sufficient facts to impose liability on them on two grounds. First, they maintain that there are insufficient facts pleaded to impose liability on defendant LP and defendant GP on all counts. Second, Gotteisdiener maintains there are insufficient facts pleaded of his direct and individual participation in the conduct alleged in the first through fourth counts. The plaintiffs maintain the operative complaint contains sufficient factual allegations in both respects.
I.
There are allegations against four entity defendants in the operative complaint: Church Street New Haven, LLC (defendant LLC), the entity alleged to hold the title to Church Street South (¶ 11), is a Delaware limited liability company whose sole member is Northland Fund II, LP (defendant LP) (¶ 9.a) ). Defendant LP is a Delaware limited partnership whose general partner is Northland Fund II Partners, LLC (defendant GP) (¶ 9.b) ). Defendant GP is a Delaware limited liability company whose sole member is defendant Northland (¶ 9.c) ). The operative complaint not only alleges that Northland was in possession and control of the Church Street South complex, which could make it directly liable to the plaintiffs, but also alleges that the defendant GP and the defendant LP were used by Northland as alter-egos to create the defendant LLC (¶ 11) and that all three entities are "shell defendants" which, by inference, cannot insulate Northland from liability under the general law of corporations and partnerships. The moving defendants maintain that the defendant LLC, defendant LP and defendant GP are distinct and legitimate entities and that the complaint fails to allege sufficient facts to disregard their corporate and partnership structures.
Ordinarily, a corporate structure protects shareholders and members from personal liability. However, the equitable doctrine known as "piercing the corporate veil" allows a court to disregard the corporate structure if specific facts are established pursuant to the governing law of the state of incorporation, Weber v. U.S. Sterling Securities, Inc., 282 Conn. 722, 730, 924 A.2d 816 (2007), here Delaware. Similarly, a limited partnership ordinarily protects its limited partners from liability and the circumstances under which a foreign limited partnership may be held liable are governed by the laws of the state in which it was organized. General Statutes § 34-38f.
The original briefing in support and opposition to the motion to strike relied on Connecticut law regarding veil piercing (see entries ## 144, 168, 169). At oral argument on May 17, 2018, the court requested supplemental briefing regarding the choice-of-law issue and the parties now agree that Delaware law controls (see entries ## 183, 184, 193, 194).
Delaware law favors corporate structures. See Harco National Insurance Co. v. Green Farms, Inc., 1989 WL 110537, at *4 (Del.Ch. 1989) ("It should be noted at the outset that persuading a Delaware Court to disregard the corporate entity is a difficult task. The legal entity of a corporation will not be disturbed until sufficient reason appears"). Delaware courts have held that the corporate veil may be pierced where there is fraud. Pauley Petroleum, Inc. v. Continental Oil Co., 43 Del.Ch. 366, 231 A.2d 450, 452-53 (1967), aff’d, 239 A.2d 629, 633 (1968). Delaware courts have also disregarded the corporate form when the entity "is in fact a mere instrumentality or alter ego of its owner." Geyer v. Ingersoll Publications Co., 621 A.2d 784, 793 (Del.Ch., 1992). Fundamentally, Delaware courts will not disregard the corporate structure unless there is sufficient evidence of misuse of the corporate form. See Irwin & Leighton, Inc. v. W.M. Anderson Co., 532 A.2d 983, 989 (Del.Ch., 1987) ("the cases inevitably tend to evaluate the specific facts with a standard of ‘fraud’ or ‘misuse’ or some other general term of reproach in mind"). However, "the underlying cause of action does not supply the necessary fraud or injustice." Mobil Oil Corp. v. Linear Films, Inc., 718 F.Supp. 260, 268 (D.Del. 1989). "To support piercing the corporate veil, however, the fraud or injustice must consist of something more than the alleged wrong in the complaint and relate to a misuse of the corporate structure." Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, 2004 WL, 415251, at *7 (Del.Ch., 2004). Courts construing Delaware law have concluded that the standards for corporate veil piercing also apply to pierce the limited liability veil. NetJets Aviation, Inc. v. LHC Communications, LLC, 537 F.3d 168, 176 (2d Cir. 2008).
The plaintiffs’ briefed position is that the defendant LP is an "alter ego" of the defendant LLC and they only need to allege facts to pierce its veil because, if successful, the defendant GP will be held liable by operation of Delaware statute (entries # 183, 194), allowing them to reach Northland. The moving defendants argue that to hold Northland liable by way of veil piercing, rather than directly, there must be facts alleged to pierce not only the veil of the defendant LLC, but also the veil of the defendant GP, another Delaware limited liability company. The plaintiffs are correct that under Delaware law, specifically 6 Del. Code Ann. § § 15-306(a) and 17-403(b), a general partner of a limited partnership may be held liable to third parties for actions taken by the partnership. See Smith v. GC Services Limited Partnership, 2018 WL 1864929, at *1 (S.D.Ind., 2018); Valdez v. Capital Management Services, LP, 2010 WL 4643272, at *2, n.4 (S.D.Tex., 2010). But since the general partner of defendant LP is Northland Fund II Partners, LLC, another Delaware limited liability company, its veil likewise must be pierced under the alter ego theory to vicariously reach Northland Investment Corporation which is otherwise protected from liability to third persons under Delaware law. 6 Del. Code Ann. § 18-303. Because an alter ego theory is fact intensive, it is not readily susceptible to resolution at the motion to strike stage. Nonetheless, the party relying on a veil piercing theory has the obligation to plead facts to put the alter ego theory in issue.
At oral argument on May 17, 2018, the plaintiffs stated that they were relying on veil piercing ultimately to hold Northland Investment Corporation, as the sole member of Northland Fund II Partners, LLC (defendant GP) liable, but that they were not seeking to pierce Northland’s corporate veil to hold its shareholders liable.
Section 18-303 provides, in pertinent part: "(a) Except as otherwise provided by this chapter, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company."
Alter ego veil piercing under Delaware law arose in the context of cases seeking to hold a parent company liable for the conduct of wholly owned subsidiary, Mabon, Nugent & Co. v. Texas American Energy Corp., 1990 WL 44267, at *5 (Del.Ch. Apr. 12, 1990), or seeking to hold an owner liable for the conduct of the owner’s company. Geyer v. Ingersoll Publications Co., supra, 621 A.2d 784 (seeking to pierce the veil as to the president, chief executive officer and controlling shareholder of the named corporate defendant). "To prevail under this alter-ego theory, the plaintiff must demonstrate that the corporation [whose veil it seeks to pierce] and the [entity in control] operated as a single economic entity such that it would be inequitable to uphold a legal distinction between them. This is a difficult task." (Quotation marks omitted; citations omitted). Cohen v. Schroeder, 724 Fed.Appx. 45, 47 (2d Cir. 2018), aff’ing 248 F.Supp.3d 511 (S.D.N.Y. 2017). "To establish that an LLC is the alter ego of another entity, a party must establish that (i) the entities in question operated as a single economic entity, and (ii) there [is] an overall element of injustice or unfairness." (Quotation marks omitted; citation omitted). A.V.E.L.A., Inc. v. Estate of Marilyn Monroe, LLC, 2018 WL 1273343 at *4 (S.D.N.Y. March 5, 2018); see NetJets Aviation, Inc. v. LHC Communications, LLC, supra, 537 F.3d at 176.
The first element focuses on whether the entities were not sufficiently distinct from each other. Cohen v. Schroeder, supra, 248 F.Supp.3d at 519. Courts have looked to factors set out in Harco National Insurance Co. v. Green Farms, Inc., supra, 1989 WL 110537 at *4, emphasizing that "while no single factor can justify a decision to disregard the corporate entity ... some combination of them is required." Cohen v. Schroeder, supra, 248 F.Supp.3d at 519. (Quotation marks omitted; citation omitted); see Fletcher v. Atex, Inc., 68 F.3d 1451, 1458 (2d Cir. 1995). The factors include: how the entities operated in relationship to each other, whether the entities were adequately capitalized for their purposes, whether the entities were solvent, whether required records were kept, whether officers, directors and partners functioned properly, whether corporate and partnership formalities were observed, whether funds were commingled or siphoned, "and whether, in general, the [limited liability] corporation simply functioned as a facade for the dominant" entity. Harco National Insurance Co. v. Green Farms, Inc., supra, 1989 WL 110537 at *4.
The second element focuses on misuse of the corporate form. "The law requires that ... injustice be found in the defendants’ use of the corporate form," Mobil Oil Corp. v. Linear Films, Inc., supra, 718 F.Supp. at 269, and "must consist of something more than the alleged wrong in the complaint." Medi-Tec of Egypt Corp. v. Bausch & Lomb Surgical, supra, 2004 WL 415251, at *7; see Cohen v. Schroeder, supra, 248 F.Supp.3d at 524. "Where a corporation’s owners abuse the corporation’s legally limited liability to effect injustice, the corporation may be considered as an agency, adjunct or instrumentality of its owner ... and a court may exercise its equitable power to disregard the legal privilege of the corporate form ... The alter-ego claim thus turns on the facts of the owner’s operation of the corporation and its relationship to the [plaintiff]." (Quotation marks omitted; citations omitted). Kertesz v. Korn, 698 F.3d 89, 91 (2d Cir. 2012).
The court must examine the allegations of the operative complaint to determine if it contains relevant allegations in support of the first and second elements. The complaint alleges the defendant LLC and the defendant Northland "acted as a single economic unit," (¶ 13), that the officers, managers and employees of Northland were the officers, managers and employees of the defendant LLC (¶ 17), that the defendant Northland "directed the management of Defendant LP’s assets, revenues, liabilities and expenses" (¶ 12), that the defendant Northland, "through the defendant LLC as its alter ego" retained DeMarco and Hotchkiss (¶¶ 25, 26), that the "Defendant LP and Defendant General Partner, like the Defendant LLC, have no identity, existence, or ability to act separate from Northland and the control Northland exerts over them," (¶ 19) and that they "were created as conduits for Northland’s decision-making with regard to properties it owned and controlled and to allow it to obtain revenue from the operation of the properties or their possible redevelopment" (¶ 20).
These allegations along with the reasonable inferences that may be drawn from them, even when read broadly and in the light most favorable to sustaining their sufficiency, set forth conclusions but few facts to support the alter ego theory. Conclusory allegations that Northland, the defendant LLC, defendant LP and defendant GP acted "as a single economic unit" or that the defendant Northland exercised general control over the other entities do not suffice. National Gear & Piston, Inc. v. Cummins Power Systems, LLC, 975 F.Supp.2d 392, 405 (S.D.N.Y. 2013); see Bridgeport Harbour Place I, LLC v. Ganim, 303 Conn. 205, 212-13, 32 A.3d 296 (2011) ("A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged").
With respect to the first element, there are no allegations that the defendant LLC, defendant LP and defendant GP were undercapitalized or insolvent or that they did not keep records required under Delaware law. To the extent the complaint alleges that the defendant LLC and the defendant GP did not observe corporate formalities, "[i]n the alter-ego analysis of an LLC, somewhat less emphasis is placed on whether the LLC observed internal formalities because fewer such formalities are legally required." NetJets Aviation, Inc. v. LHC Communications, LLC, supra, 537 F.3d at 178. Allegations of common management and sole ownership likewise are not sufficient under Delaware law. Mabon, Nugent & Co. v. Texas American Energy Corp., supra, 1990 WL 44267 at *5. Nor are the allegations that the entities shared a common address, common offices, common directors and common employees. A.V.E.L.A., Inc. v. Estate of Marilyn Monroe, LLC, supra, 2018 WL 1273343 at *5. There is a specific factual allegation that the defendant Northland was listed as the named insured for Church Street South with defendant LLC, defendant LP and defendant GP listed as additional insureds (¶ 18) but that is akin to an allegation of common management. Finally, there is a single allegation that on one occasion in 2009 Northland allocated "funding from the property to pay parts of the salaries of Northland’s employees," (¶ 21), that could support an inference of commingling or siphoning. In the absence of factual allegations to support the other first element factors, this allegation standing alone does not suffice. Of greater significance, the complaint is devoid of factual allegations that Northland used the structures of the defendant LLC, defendant LP and defendant GP to perpetrate an injustice beyond the tort, CUTPA and contract claims alleged in this action and fails to meet the requirements of the second element of Delaware alter ego veil piercing.
The plaintiffs agree they have alleged that the "Defendant LLC was created by the other entities for the purpose of engaging in the allegedly tortious, unfair and illegal conduct described in the complaint. " (Emphasis supplied.) (Entry # 194, p. 7.)
In their reply memorandum at entry # 194, the plaintiffs argued for the first time that "Defendant LP and Defendant General Partner may also be held liable ‘on principles of agency, without reference to fraud or inequity’ relying on Phoenix Canada Oil Co., Ltd. v. Texaco, Inc., 658 F.Supp. 1061, 1084 (D.Del. 1984), aff’d in part, 842 F .2d 1466, 1477-78 (3rd Cir. 1988) (remanded to explore customary agency principles). Like the alter-ego theory, the agency theory of veil piercing has been applied to hold a parent corporation liable for the activities of its subsidiary corporation "only if the parent dominates those activities," looking to factors comparable to those set forth in Harco National Insurance Co. v. Green Farms, Inc., 1989 WL 110537, at *4 (Del.Ch. 1989), see p. 7 supra, such as "stock ownership, officers and directors, financing, responsibility for day-to-day operations, arrangements for payment of salaries and expenses, and origin of subsidiary’s business and assets." (Quotation marks omitted; citation omitted). Phoenix Canada Oil Co., Ltd. v. Texaco, Inc., 658 F.Supp. at 1084; see Henry v. St. Croix Alumina, LLC, 2007 U.S. Dist. LEXIS 98205 *25, *27, 2007 WL 6030275, *8-9, *9 (D. Virgin Islands, 2007). The absence of factual allegations to support the Harco factors has already been discussed, see p. 9 supra .Alternatively, "a corporation- completely independent of second corporation- may assume the role of the second corporation’s agent in the course of one or more specific transactions." Albert v. Alex. Brown Management Services, 2005 WL 2130607 at *9 (Del.Ch. 2005). This requires allegations of traditional agency liability, that is, actual authority or apparent authority. Id., *10. Under Delaware law, actual authority requires factual allegations that Northland expressly gave the defendant LLC authority to bind it as its agent and apparent authority requires allegations that Northland "knowingly or negligently" permitted its agent, defendant LLC, to exercise authority or held it out as possessing authority that it did not expressly grant to it. Id. "The doctrine of apparent authority expands the authority of an actual agent ..." Cefaratti v. Aranow, 321 Conn. 593, 602, n.6, 141 A.3d 752 (2016). The operative complaint does not contain factual allegations in support of traditional agency liability.
Based on the foregoing, the claims in all six counts against the moving defendant LP and moving defendant GP are stricken. This conclusion, however, does not mean the plaintiffs must revise the complaint to remove allegations that support their claim that the remaining defendants directly engaged in the conduct alleged in counts one through six even if those allegations refer to Northland Fund II, LP and Northland Fund II Partners, LLC. Nor does it mean that the plaintiffs cannot seek equitable veil piercing in the future if they ultimately prevail against the defendant LLC and it is unable to satisfy a judgment.
II.
The plaintiffs seek to hold Gotteisdiener, Northland’s chief executive and chairman, personally liable for the conduct alleged in counts one, two, three and four. This theory of liability does not involve veil piercing because officers and shareholders who commit a tort can be held personally liable "regardless of whether the corporation itself is liable." Kilduff v. Adams, Inc., 219 Conn. 314, 332, 593 A.2d 478 (1991). Connecticut law applies because the plaintiffs’ alleged injuries occurred here. Macomber v. Travelers Property & Casualty Corp., 277 Conn. 617, 640, 894 A.2d 240 (2006). "[A]n officer of a corporation does not incur personal liability for its torts merely because of his official position. Where ... an officer commits or participates in the commission of a tort, whether or not he acts on behalf of his ... corporation, he is liable to third persons injured thereby." Scribner v. O’Brien, Inc., 169 Conn. 389, 404, 363 A.2d 160 (1975). "Thus, a director or officer who commits the tort or who directs the tortious act done, or participates or operates therein, is liable to third persons injured thereby, even though liability may also attach to the corporation for the tort." (Quotation marks omitted; citation omitted.) Ventres v. Goodspeed Airport, LLC, 275 Conn. 105, 142, 881 A.2d 937 (2005). The commission or participation in the tortious conduct is a question of fact. Id.
Counts one through four set forth a theory that from the time of its acquisition, the owners and managers of Church Street South negligently, recklessly and deliberately acted or failed to act to maintain the premises so that conditions would deteriorate to the point that Church Street South would become uninhabitable. The motion to strike the claims against Gotteisdiener focuses on the plaintiffs’ failure to allege specific facts regarding his personal participation in the ownership and management of Church Street South and challenges the accuracy of certain allegations. At the motion to strike stage, however, the court must deal only with the sufficiency of the allegations and not their accuracy as the court must presume compliance with the Practice Book § 4-2(b) requirement that there is "good ground" to support the allegations of the complaint.
The Reply Memorandum in Further Support of the Northland Defendants’ Motion to Strike (# 193), at pages 2-3, references the absence of allegations about "when, where, to whom and in what context" certain public statements of Gotteisdiener were made and claims the plaintiffs "incorrectly" allege Gotteisdiener’s participation in various decisions with respect to the ownership and management of Church Street South.
The operative complaint alleges "Gotteisdiener ... participated in the conduct described in the complaint, including the decisions concerning the acquisition of Church Street South, maintenance of Church Street South, the relocation of residents from Church Street South, and the potential redevelopment of Church Street South" (¶ 5), "had possession of and control over the property" (¶ 6), and "was personally involved in decisions regarding the day-to-day management of the complex, including decisions about repairs, responses to complaints, and moving families to area motels, among other subjects." (¶ 7.) It also alleges that at the time Church Street South was acquired, Gotteisdiener, along with the other defendants, had "notice that in order to be decent, safe, and sanitary, Church Street South badly needed repairs to its structural elements, such as the building envelope, roofing, windows, plumbing, heating, ventilation, bathroom and kitchen fixtures, electrical systems, means of egress, and exhausts." (¶ 24.) And it alleges that Gotteisdiener, along with the other defendants, knew of "the unsafe and deteriorating conditions at Church Street South, [but] allowed conditions to deteriorate even further by choosing to spend much less on necessary repairs and maintenance, with the plan of allowing the property to become uninhabitable beyond repair" by, for example, only making repairs when ordered to do so by officials, making insufficient repairs, hiring incompetent or unlicensed contractors, and ordering contractors "to conceal problems by patching holes, toxic mold stains, and other damage with paint, compound, or bleach, instead of addressing the root of the problem." (¶ 27.)
Count one (negligence) alleges various dangerous and defective conditions resulting in environmental and health hazards which the complaint alleges the defendants, including Gotteisdiener, failed to remediate and repair (¶¶ 41-43), count two (recklessness) alleges that the defendants, including Gotteisdiener, were aware of the dangerous and defective conditions but chose not to correct them because of "their desire to empty the project." (¶ 42) and count four (negligent infliction of emotional distress) relies on the allegations of negligent and reckless conduct in counts one and two. Count three (CUTPA) alleges that the defendants’ "conduct was a plan of ‘demolition by neglect’ allowing conditions to deteriorate to a point where tenants would be forced to move out" and specifies the conduct the defendants, including Gotteisdiener, engaged in. The allegations in the operative complaint and the reasonable inferences to be drawn therefrom, viewed in the light most favorable to the plaintiffs, suffice to allege Gotteisdiener’s personal liability, subject to trial proof of Gotteisdiener’s direct involvement in the conduct alleged. D’Angelo Development & Construction Corp. v. Cordovano, 121 Conn.App. 165, 186, 995 A.2d 79, cert. denied, 297 Conn. 923, 998 A.2d 167 (2010).
III.
For the reasons stated in section I, the motion to strike the claims in all counts against the defendants Northland Fund II, LP and Northland Fund II Partners, LLC is granted. For the reasons stated in section II, the motion to strike the claims against the defendant Lawrence R. Gotteisdiener is denied.