Opinion
No. CV 04-0832777
February 23, 2006
MEMORANDUM OF DECISION ON MOTION TO STRIKE (#119)
At issue is whether the court should grant the defendants' motion to strike counts one and three of the plaintiff's second amended complaint.
On May 2, 2005, the plaintiff, The Cadle Company, filed a second amended complaint against the defendants, John Zubretsky, Ann Zubretsky, and Access America-Wethersfield, Inc. (Access), with three counts: reverse piercing of the corporate veil, fraudulent transfer pursuant to General Statutes § 52-552 et seq., and constructive trust, respectively. This case arises from the pursuit of the plaintiff to satisfy a judgment against John Zubretsky made on March 22, 1993.
The plaintiff alleges in its second amended complaint that the original judgment was made in favor of Fleet Bank, N.A., and was assigned to the plaintiff on April 17, 1996.
In the first count of the second amended complaint, the plaintiff alleges, in part, that John Zubretsky and Ann Zubretsky used Access as an instrumentality to defraud the plaintiff and that Access was under such domination and control that it had no separate mind, will or existence of its own. In essence, the plaintiff seeks to pierce the corporate veil of Access, so as to obtain assets it believes rightfully belong to John Zubretsky in order to satisfy its judgment against John Zubretsky.
In the third count of the second amended complaint, the plaintiff incorporates the preceding allegations and further alleges, in part, that Ann Zubretsky took salary transfers from Access without a showing of reasonable consideration for those transfers, and that John Zubretsky and Ann Zubretsky benefitted from those transfers to the detriment of the plaintiff. In essence, this count is directed toward Ann Zubretsky and salary transfers made to her from Access.
On June 16, 2005, the defendants filed a motion to strike counts one and three of the plaintiff's second amended complaint, on the grounds that: "(1) they fail to properly plead a cause of action; (2) they allege insufficient facts to constitute valid Claims; and (3) They fail to state a claim upon which relief can be granted." The defendants filed a memorandum of law in support of their motion to strike.
In Bouchard v. People's Bank, 219 Conn. 465, 468 n. 4, 594 A.2d 1 (1991), our Supreme Court noted that "[b]ecause the defendant did not specify the distinct reasons for the claimed insufficiency of the plaintiff's complaint in its motion, the motion was `fatally defective' under Practice Book [§ 10-41] notwithstanding the defendant's inclusion of such reasons in its supporting memorandum . . . We, nevertheless, consider the defendant's motion in the form presented to the trial court due to the plaintiff's failure to object to its form and the nonjurisdictional nature of [10-41]." Similarly, in the present case, the defendants have failed to specify distinct reasons for the claimed insufficiently, however, the plaintiff has failed to object to the form of the motion to strike. This court, therefore, will consider the defendants' motion in the form presented.
On October 31, 2005, the plaintiff filed a memorandum of law in opposition to the motion to strike contesting all grounds raised by the defendants.
A. Standard of Review
"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). The role of the trial court in ruling on a motion to strike is "to examine the [complaint], construed in favor of the [plaintiff], to determine whether the [pleading party has] stated a legally sufficient cause of action." (Internal quotation marks omitted.) Dodd v. Middlesex Mutual Assurance Co., 242 Conn. 375, 378, 698 A.2d 859 (1997). When deciding the motion, "the court is limited to the facts alleged in the complaint." (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997).
B. Count One: Reverse Piercing of the Corporate Veil.
The defendants move to strike the first count of the second amended complaint, asserting that the plaintiff has failed to state a claim for reverse piercing of the corporate veil.
"A guiding concept behind both standard and reverse veil piercing cases is the need for the court to avoid an over-rigid preoccupation with questions of structure . . . and apply the preexisting and overarching principle that liability is imposed to reach an equitable result . . . We consider this directive to be sensible and therefore recognize that under the appropriate circumstances, i.e., when the elements of the identity or instrumentality rule have been established, a reverse pierce is a viable remedy that a court may employ when necessary to achieve an equitable result and when unfair prejudice will not result." (Citation omitted; emphasis added; internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, CT Page 3577 70 Conn.App. 133, 151, 799 A.2d 298, cert. denied, 261 Conn. 911, 806 A.2d 49 (2002). Thus a cause of action for reverse piercing of the corporate veil may be made by a showing under either the instrumentality rule or the identity rule.
"Although Superior Court decisions differ as to what extent a complaint must allege the elements of the instrumentality rule or the identity rule, the decisions are consistent in holding that, at a minimum, the complaint must allege a sufficient factual basis for a court to pierce the corporate veil." Rosina v. Bilides Building Excavating, LLC., Superior Court, judicial district of New Haven, Docket No. CV 02 0462976 (December 3, 2002, Zoarski, J.T.R.); see also Pompilli v. Pro-line Painting, Superior Court, judicial district of New Haven, Docket No. CV 04 4001774 (May 13, 2005, Lopez, J.) ( 39 Conn. L. Rptr. 347, 349) (citing cases).
(i). The Instrumentality Rule
In their memorandum of law, the defendants argue that the plaintiff has failed to state a cause of action under the instrumentality rule because the plaintiff (1) fails to allege sufficient facts necessary to show intentional fraudulent acts and (2) fails to allege any facts to show control and that a breach of duty proximately caused the plaintiff's injury.
Under the instrumentality rule, "in any case but an express agency, proof of three elements [is required]: (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." (Emphasis in original; internal quotation marks omitted.) Morris v. Cee Dee, LLC, 90 Conn.App. 403, 414, 877 A.2d 899, cert. granted, 275 Conn. 929, 883 A.2d 1245 (2005), quoting Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 553, 447 A.2d 406 (1982).
The defendants argue that the plaintiff is required to allege clear, precise and unequivocal factual evidence of fraudulent behavior. In support of this proposition the defendants rely upon Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 133. In that case, however, the Appellate Court "conclud[ed] that the proper standard applicable to the identity and instrumentality rules is the preponderance of the evidence standard." (Emphasis added.) Id., 148-49 n. 12. The heightened burden referred to by the court in that case concerned a claim for conspiracy to commit a fraudulent conveyance, which is not in issue in the present case. Id., 143. Moreover, the Appellate Court noted: "[t]he instrumentality rule merely requires the trial court to find that the defendants committed an unjust act in contravention of the plaintiff's legal rights . . . It is not necessary to prove actual fraud." (Citation omitted; internal quotation marks omitted.) Id., 155 n. 17. Thus, the plaintiff is not required to allege actual fraud to meet the requirements of the instrumentality rule.
In the present case, the plaintiff alleges in count one, in part, that the defendants John Zubretsky and Ann Zubretsky had a duty to operate Access in a lawful, honest manner, and that their failure to do so has prevented the plaintiff from being able to exercise its legal right to satisfy its judgment. Specifically, the plaintiff alleges that while John Zubretsky was not paid a salary, he was permitted to withdraw funds in the guise of a loan, that he was permitted to utilize company funds for personal expenditures, and that these and other activities prevented the plaintiff from exercising its rights in obtaining relief from John Zubretsky. Accordingly, the plaintiff alleges sufficient facts in count one to support the element of instrumentality rule that "the defendants committed an unjust act in contravention of the plaintiff's legal rights." See Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 155 n. 17.
As noted, the defendants also argue that the plaintiff fails to allege facts sufficient to show domination or control under the instrumentality rule. "[I]n assessing whether an entity is dominated or controlled, [courts] have looked for the presence of a number of factors. Those include: (1) the absence of corporate formalities; (2) inadequate capitalization; (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes; (4) overlapping ownership, officers, directors, personnel; (5) common office space, address, phones; (6) the amount of business discretion by the allegedly dominated corporation; (7) whether the corporations dealt with each other at arm's length; (8) whether the corporations are treated as independent profit centers; (9) payment or guarantee of debts of the dominated corporation; and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own." (Internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 152-53.
In the present case, the plaintiff alleges, in part, that John Zubretsky has check writing authority, that he regularly borrows money from Access without loan documentation, and that John Zubretsky and Ann Zubretsky are the sole corporate officers of Access. Moreover, the plaintiff alleges that Ann Zubretsky owns one hundred percent of Access stock. See Fishman v. LM Development, Inc., Superior Court, judicial district of Litchfield, Docket No. CV 057205 (August 26, 1992, Pickett, J.) ( 7 Conn. L. Rptr. 779, 779-80). The plaintiff sufficiently alleges facts to support a finding of domination and control under the instrumentality rule for purposes of review on a motion to strike.
In Fishman v. LM Development, Inc., Superior Court, 7 Conn. L. Rptr. 779-80, the court denied the motion to strike as to counts against the individual defendant, finding under the instrumentality theory of piercing the corporate veil: the plaintiff alleged individual defendant dominated transactions involving purchase and sale of property so that corporation had no separate existence; he used control to breach parties' contract and to divest corporation of assets; and that plaintiff was injured because he caused faulty construction and may have rendered corporation insolvent.
Finally, allegations, when considered together, are legally sufficient to establish that the breach of duty by the defendants proximately caused the plaintiff's injury.
A finding that the complaint sufficiently alleges facts to meet the instrumentality rule is grounds to deny the motion to strike as to count one alone. For purposes of this memorandum, however, the defendants' argument for striking count one under the identity rule are also discussed.
(ii). The Identity Rule
The defendants next argue that the plaintiff's cause of action fails under the identity rule because the facts alleged do not support the plaintiff's claim that John Zubretsky controlled and dominated Access.
Under the identity rule, "[i]f the 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." (Internal quotation marks omitted.) Morris v. Cee Dee, LLC, supra, 90 Conn.App. 414-15, quoting Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., supra, 187 Conn. 554.
"The identity rule primarily applies to prevent injustice in the situation where two corporate entities are, in reality, controlled as one enterprise because of the existence of common owners, officers, directors or shareholders and because of the lack of observance of corporate formalities between the two entities . . . There must be such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal." (Citation omitted; internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 156. "Although the identity . . . doctrine has been primarily applied to reach beyond the veil to another corporation, it may also be employed to hold an individual liable." (Internal quotation marks omitted.) Klopp v. Thermal-Sash, Inc., 13 Conn.App. 87, 89 n. 3, 534 A.2d 907 (1987). Thus, there is no predicate of two corporate entities for application of the identity rule.
A review of the complaint demonstrates a number of alleged facts that suggest the identity of John Zubretsky and Access were one and the same. For instance, the plaintiff alleges that John Zubretsky had checking writing authority for Access, that Access made substantial loans to him with documentation, and that he used a credit card funded by Access. Each of these facts indicates a melding of identity between the defendants, even without considering the inferences raised from the allegations that John Zubretsky was the president of Access and that his wife, defendant Ann Zubretsky, was the sole stock holder. These allegations are more than mere legal conclusions. See Rosina v. Bilides Building Excavating, LLC., supra, Superior Court, Docket No. CV 02 0462976 (allegation of unity of interest alone insufficient to pierce corporate veil). Therefore, the plaintiff has alleged sufficient facts to meet the requirements of the identity rule.
For the reasons provided above, the court denies the defendants' motion to strike count one of the plaintiff's second amended complaint.
C. Count Three: Constructive Trust
In count three of the second amended complaint, the plaintiff claims that Ann Zubretsky would be unjustly enriched if she were permitted to retain salary transfers from Access, and asks that this court impose a constructive trust. The plaintiff has framed this count as a claim for constructive trust. The request for the imposition of a constructive trust, however, is not a separate cause of action, but rather a remedy. See Macomber v. Travelers Property Casualty Corp., 261 Conn. 620, 623 n. 3, 804 A.2d 180 (2002). As mentioned, the defendant moves to strike this count because "(1) they fail to properly plead a cause of action; (2) they allege insufficient facts to constitute valid Claims; and (3) They fail to state a claim upon which relief can be granted." Although the defendants have not set forth the specific ground that this is not a recognized cause of action in Connecticut, this court grants the defendants' motion to strike count three of the complaint because the plaintiff has failed to state claim upon which relief can be granted and has not objected to the form of the present motion.
Nevertheless, this memorandum addresses the contours of the constructive trust doctrine. "Our general standards governing the imposition of a constructive trust are well established. [A] constructive trust arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, enjoy . . . Moreover, the party sought to be held liable for a constructive trust must have engaged in conduct that wrongfully harmed the plaintiff." (Citations omitted; internal quotation marks omitted.) Wendell Corp. Trustee v. Thurston, 239 Conn. 109, 113-14, 680 A.2d 1314 (1996).
"The imposition of a constructive trust by equity is a remedial device designed to prevent unjust enrichment . . . Thus, a constructive trust arises where a person who holds title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it." (Internal quotation marks omitted.) Guilietti v. Giulietti, 65 Conn.App. 813, 856, 784 A.2d 905 (2001). "In order for a constructive trust to be imposed, the plaintiff must allege fraud, misrepresentation, imposition, circumvention, artifice or concealment, or abuse of confidential relations." (Internal quotation marks omitted.) Id., 860.
As a preliminary matter, both parties rely upon Gulack v. Gulack, 30 Conn.App. 305, 312-13, 620 A.2d 181 (1993), for the elements of a constructive trust. As Judge Thim has pointed out, however, "[t]he Gulack case concerned what is often called a resulting trust . . . A resulting trust arises to effectuate the intent of the settlor. A constructive trust, on the other hand, is imposed to redress wrong or unjust enrichment . . . A constructive trust is imposed not because of the intention of the parties but because the person holding title to property would profit by a wrong or would be unjustly enriched if he were permitted to keep the property . . . Connecticut courts have imposed constructive trusts where there has been no intent on behalf of the grantor to benefit a third person." (Citations omitted; internal quotation marks omitted.) Rabbit Ears Productions, Inc. v. Rogue, Superior Court, judicial district of Fairfield, Docket No. CV 94 15050 (December 8, 1994). "Despite some confusion in the courts between resulting and constructive trusts, the concepts are distinguishable. A resulting trust exists where the acts or expressions of the parties indicate an intent that a trust relation result from their transaction; a constructive trust is a trust imposed by a court of equity to compel a person who unfairly holds a property interest to convey such interest to the rightful owner . . . [A] constructive trust defeats or prevents the wrongful act of one of the parties, and is more aptly characterized as a `fraud-rectifying' trust. Thus, the feature which distinguishes constructive trusts from resulting trusts is that the former do not arise `by virtue of agreement or intention, either actual or implied, but by operation of law, or, more accurately, by construction of the court . . . In this regard, it has been stated that a constructive trust is a flexible, equitable remedy, and is more tenuous than a resulting trust." 76 Am.Jur.2d 185-87, Trusts § 132 (2005). Thus, "[i]n order for a constructive trust to be imposed, the plaintiff must allege fraud, misrepresentation, imposition, circumvention, artifice or concealment, or abuse of confidential relations." Wing v. White, 14 Conn.App. 642, 644, 542 A.2d 748 (1988).
The defendants argue that the plaintiff must allege "clear and convincing facts" to sustain the elements of a fraud. This argument is misplaced, however, since the "party sought to be held liable for a constructive trust must have engaged in conduct that wrongfully harmed the plaintiff." (Emphasis added.) Wendell Corp. Trustee v. Thurston, supra, 239 Conn. 114. Moreover, "[w]hile fraud, misrepresentation, bad faith, or overreaching generally provide a rationale for the imposition of constructive trusts, constructive trusts are also imposed in broader circumstances." (Emphasis added.) 76 Am.Jur.2d 224, Trusts § 169 (2005). Thus, there is no requirement that fraud be proved specifically.
IV. CONCLUSION
For the reasons stated above, this court denies the defendants' motion to strike count one and grants the motion to strike count three of the plaintiff's second amended complaint.