Opinion
FSTCV106007056S
04-17-2017
Robert McKay v. Stuart L. Longman
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Kenneth B. Povodator, J.
Modern corporate laws, including laws pertaining to relatively newly-created entities such as LLCs, are intended to permit parties to rely on the separate existence of such entities, in order to provide some protection from personal liability. There is an implied proviso that the entities are not to be used for an improper purpose and there must be an attempt to recognize some level of corporate separateness of existence including adherence (substantially) with appropriate procedures. Limited exceptions have been recognized, including (especially) two variations on piercing the corporate veil. More generally, the concept of a fraudulent transfer of assets, common law and statutory (General Statutes § 52-552 et seq.), allows for property that had been transferred to such an entity to be reached by a creditor, if appropriate. In addition to the foregoing, there also is a relatively-rarely-invoked claim of reverse piercing of the corporate veil, which the plaintiff claims is applicable here.
This case tests the limits of some of the foregoing principles and beyond--relying on such theories as fraudulent conveyance and constructive trust, the plaintiff is seeking to reach assets claimed to be effectively owned by the principal defendant, Stuart Longman, despite the existence of corporate entities (and a trust) that facially owned the subject properties at most relevant times--sometimes through more than one level of entity. There is an overlay concerning the claimed corporate failures to follow required operational procedures. The net result is that the plaintiff is trying to reach assets and/or set aside a mortgage encumbering property, not nominally owned by the principal defendant, but nonetheless sought to be reached in order to satisfy an outstanding judgment against Mr. Longman. The plaintiff seeks to reach, as a judgment creditor, assets of distinct entities, entities that defendant Longman generally did not own as of record but typically if not universally, controlled. Simplistically, the question is whether the extent to which Mr. Longman has utilized corporate entities (and to a lesser extent, trusts for the benefit of family members), crossed some line between taking advantage of legitimate protective mechanisms and manipulating or abusing the system, with an overlay of claims of less-than-perfect adherence to required procedures and rules.
The court will start with a modified version of the background facts of this case, generally undisputed, as recited in a decision (#200.86) denying a motion for summary judgment that had been filed by defendant Hudson City Savings Bank (sometimes referred to as HCSB, or more simply, the bank).
This action was filed on October 15, 2010. The plaintiff named as defendants Stuart Longman, Sapphire Development, LLC, Emerald Investments, LLC, Fifty-five Post Road West Management Company, Inc., R.I.P.P. Corp., Chatham Haste, LLC, Stuart Longman Trustee of Stuart Longman Family Trust, Sixty SRA Management, LLC, Shelter Rock Enterprises, LLC, Sixty Shelter Rock Associates, LLC, Shelter Rock Development Associates, LLC, Two Great Pasture Road Associates, LLC, Lurie Investments, LLC, Parcelle Development, LLC, Solaire Development, LLC, Solaire Management, LLC, Solaire Funding, Inc., Solaire Tenant, LLC, Thirty-one Pecks Lane Associates, LLC, Dreamfields, LLC, WW Land Company, LLC, Hudson City Savings Bank, The Savings Bank of Danbury, and J.P. Morgan Chase Bank NA Intervening Defendant.
M& T Bank is the successor to the interests of Hudson City Savings Bank and late in the proceedings was substituted as a party. The court generally will refer to Hudson City (HCSB) as the relevant party, since all of the records and evidence predate the change.
The original complaint contained eight counts, primarily focusing on a property located in Ridgefield that has been the home for the Longman family for all times relevant to this case. The first count seeks a constructive trust based upon common-law fraud; the second count alleges a constructive trust as to property located in Greenwich; the third and fourth counts allege fraudulent transfers of the Longman residence pursuant to General Statutes § § 52-552e and 52-552f; the fifth and sixth counts relate to the Greenwich property and the seventh and eighth counts allege reverse piercing related to ownership of the Ridgefield property.
Long prior to trial, the case was withdrawn as to The Savings Bank of Danbury. J.P. Morgan Chase Bank NA attempted to intervene but never was given full-party status and did not participate in the trial. After the evidentiary phase and simultaneous with his filing of his reply briefs, the plaintiff filed a withdrawal directed to a number of defendants, specifically Fifty-Five (55) Post Road West Management, Chatham Haste, LLC, SIXTY(60) SRA Management, LLC, Shelter Rock Enterprises I, LLC, Shelter Rock Development Associates, LLC, Parcelle Development, LLC, Thirty-One (31) Pecks Lane Associates, LLC, and Dreamfields, LLC.
Departing from the history set forth in #200.86, immediately before the case was scheduled for trial in 2013, defendant Sapphire filed a bankruptcy petition in the U.S. Bankruptcy Court, which automatically stayed these proceedings. The bankruptcy proceedings were eventually dismissed by the Bankruptcy Judge on the basis that the application had been filed in bad faith, and that determination was subsequently affirmed by the District Court Judge. (Emerald has been dropped as a party due to still-earlier bankruptcy proceedings.) Focusing on more detailed facts, on October 26, 2007, HCSB entered into a loan transaction with Sapphire Development, LLC for property known as 424 West Mountain Road, Ridgefield, Connecticut. Sapphire Development, LLC was the borrower on the open-end mortgage that was signed by Stuart Longman as member of Sapphire Development, LLC. The mortgage for the property was secured and processed as a " No Income Stated Assets" loan. The loan was the first business transaction that Hudson City had with Sapphire Development, LLC. At the time, defendant Longman had a 5% ownership interest in Sapphire, with the balance owned by another entity, Emerald, which in turn was 95% owned by defendant Longman's wife, Gayla.
The Ridgefield property was the location of the Longman family home. The property has significant surplus acreage capable of development, and in the past had even more surplus acreage, the difference being that a portion of the property had been developed and sold off. Part of the defendant's claim is that Sapphire was in the real estate development business, and that as suitable or favorable situations arose, it intended to develop or sell off portions of the current property. The taxes and mortgage on the property had been paid by Sapphire (at least for a time), which has not filed an income tax return since 2006. The tax deductions for the real property and mortgage interest paid were taken by the defendant Longman on his personal tax return (joint with his wife, Gayla), at least in 2006 and 2007. In recent years, Sapphire has not paid the property taxes. Although a draft lease between the Longmans and Sapphire was claimed to have been drafted, there was no evidence that any such agreement ever was adopted or executed.
The plaintiff's side of this dispute had origins in litigation from more than 20 years ago--on or about July 1, 1996, the plaintiff obtained a judgment in the amount of $3,964,046.86 against defendant Stuart Longman in the Supreme Court of the State of New York. The New York litigation was the bitter end of a business relationship that had existed previously between plaintiff and defendant Longman. The judgment explicitly found that defendant Longman had acted in bad faith and otherwise improperly--more than just a breach of contract--in awarding damages and multiple of damages.
The plaintiff filed a certified copy of the New York judgment in the Stamford Superior Court in Connecticut in 1996. The plaintiff did not file any notice or record the judgment on any land records in Connecticut, until 2010. As of the date of judgment and the date of filing the judgment in Connecticut, the Ridgefield property was owned by Webster Bank as the result of a foreclosure. In or around September of 1996 the property was transferred to a Mr. Thomas (claimed by the plaintiff to be a straw-person for defendant Longman), leading to the various land transactions that culminated with the Ridgefield property owned in the name of Sapphire, setting the stage for perhaps the predominant issues in this case. All of the transactions that are part of the record for this dispute were concluded prior to any filing of a lis pendens or judgment lien by the plaintiff, and all of the transactions had been recorded on the local land records before the plaintiff filed any notice relating to his claims/rights on the local land records.
Before getting deeper into the facts, the court must summarily reject the position of the defendants that the plaintiff readily could have avoided the current litigation if only he had filed a judgment lien or lis pendens prior to 2010. The number of days that title to the property was in defendant Longman's name could be, as suggested by the opening words of this sentence, measured in days out of a multi-year period of time (subsequent to the 1990s era foreclosure). Unless the plaintiff were to have monitored the land records almost literally on a daily--or at least weekly--basis, it would approach lottery-type odds for there to have been a record ownership of the property by defendant Longman on any day that the plaintiff might have checked the land records for purposes of filing a suitable lien or lis pendens (as appropriate). The criticism is theoretically plausible but is not plausible as a practical matter, given the actual circumstances. Even if the plaintiff, in some sense, could have been more diligent, the primary protection against stale claims, at least with respect to legal remedies, is the statute of limitations, and the 1996 judgment, once registered in Connecticut, still was valid as of the date of commencement of this proceeding. As noted by the plaintiff in his brief, efforts were made to limit claims to the relevant statutes of limitation, with respect to fraudulent conveyances, etc.
At one point, the defendants suggested that the plaintiff could have filed something in the nature of a conditional lien or lis pendens, asserting rights to the extent that defendant Longman had or might have an interest in the subject property not reflected on the land records. Assuming without deciding that that might have been a possible strategy, the court notes the likelihood that in a highly contentious relationship as between the plaintiff and defendant Longman--each thinking that the other had wronged him--it would seem to be an open invitation to a claim of slander of title.
In terms of details, there is little in dispute. The court was presented with voluminous evidence, and the stack of documents probably is more than 11/2 feet tall. All of the land transactions were documented meticulously, sometimes to the minute with respect to recording on land records (especially since some recordings were delayed and others needed to be a precise order). Bank statements were dissected, in terms of analyzing expenditures and payments to various persons and entities, as well as income. Records relating to corporate structures, as well as, in some instances, actual operating procedures, were presented to the court (primarily to show departures from those procedures). The primary focus was on " interpretation" of these facts--what was " really" going on? Both the plaintiff and defendant Longman feel that the other, in some fashion, took advantage of him, and the recriminations continued to the present.
In claiming that the property actually/equitably belongs to Stuart Longman, in a functional sense, notwithstanding the state of the title, the plaintiff relies upon four quitclaim-deed-transactions and three somewhat related/associated mortgage-loan transactions, summarized in Exhibit 122 and presented at page 3 of the plaintiff's brief.
1. August 27-28, 2007, a quitclaim deed from Sapphire to Mr. Longman as trustee, with an associated WAMU mortgage.
2. An August 31, 2007 quitclaim deed from Stewart Longman as trustee, back to Sapphire, with the HCSB mortgage transaction on October 26, 2007.
3. An October 26, 2007 quitclaim deed from Sapphire to Stewart Longman (individually)--recorded one minute after the HCSB mortgage was recorded--with an associated J.P. Morgan Chase mortgage on November 20, 2007
4. A November 16, 2007 quitclaim deed from defendant Longman back to Sapphire.
In emphasizing the perceive sham-like quality of Sapphire, the plaintiff points to the fact that from 2006 onward, Sapphire conducted essentially no business, had essentially no employees, etc. From the middle of page 3 through the end of page 5 of the post-hearing brief, there is a 2 1/2-page listing of factors that the plaintiff asserts establish the basis for the claim that Mr. Longman effectively was the owner of the Ridgefield property. Many of the factors recited relate to whether Mr. Longman functionally was the owner, but others relate to the elements of a fraudulent transfer claim, including knowledge of the debt, failure to pay the debt, agreed/stipulated value the property, etc. The court will allude to some of this evidence (almost all, undisputed), as appropriate.
Additional facts will be discussed as necessary.
Discussion
In some respects, it is difficult to separate and isolate claims, given the overlapping nature of claims and conduct. The court will start by addressing relatively discrete issues that can be addressed without too much overlap, with the remaining overlapping issues addressed in a somewhat less discrete fashion.
I. The HCSB loan
HCSB entered into a mortgage-loan transaction with Sapphire and defendant Longman, loaning $2.5 million, with a mortgage on the Ridgefield property as security. Sapphire was the record owner of the property at the time. The parties stipulated that at the time of the transaction, the property had a value of $5.5 million (and bank documents submitted to the court indicated that the property was perceived to be worth more). The plaintiff claims that the mortgage was improper, particularly in that it was not properly authorized by (on behalf of) Sapphire, and therefore seeks to have the transaction vacated. The plaintiff also claims that a constructive trust should be imposed.
Not surprisingly, the bank and defendant Longman contend that the mortgage transaction was a bona fide transaction. As something of a backup position, the bank argues that at a minimum, to the extent that 80-90% of the proceeds of the attacked transaction went to pay off an earlier unchallenged mortgage loan, that the bank would be entitled to equitable subrogation to that extent. The bank also argues that the plaintiff does not establish the necessary prerequisites for a constructive trust.
The principal claim in this regard is that the plaintiff allows his reading of the Sapphire corporate documents indicate that a supermajority was required to approve such a transaction, and that in the absence of a formal approval by Gayla Longman, who had the necessary interests to reach that threshold, the transaction was not properly authorized by Sapphire. In response, the defendants offered a different interpretation of the controlling corporate procedures, and in any event, pointed to a formal ratification by Gayla Longman, of all conduct of defendant Longman, implicitly including his conduct relating to the subject mortgage transaction.
In connection with the attack on this transaction, the plaintiff argues that there were numerous warning signs, instances of lack of diligence, etc., relating to the decision to provide a mortgage loan for purposes of refinancing the Ridgefield property. In this regard, the failure to obtain proper authorization for the mortgage transaction, while perhaps the most significant problem, was compounded by additional shortcomings of the bank's staff.
The court is mindful of the fact that the mortgage transaction in question took place in 2007, immediately before the residential mortgage " bubble" burst and immediately prior to the generally-recognized beginning of what many call the " Great Recession." Notably, however, whereas the vast majority of criticisms of mortgage-lending practices focused on the injury to mortgagors, here the complaint is coming from an unknown (to the lender) judgment creditor of the individual borrower, with the property being provided as security owned by an entity legally distinct from the judgment debtor.
Even if the court were to accept that the bank had been negligent in failing to do its own investigation as to the existence of judgments against Mr. Longman, the question remains as to how that translates into some form of duty owed to an unknown judgment creditor? Any obligation to investigate the existence of judgments against a potential borrower would seem to be a purely internal due-diligence matter, intended to limit the risk to the lender that a loan might not be repaid. (The same appears to be true of the other alleged shortcomings in the process.) Conversely, it is not for the court or an undisclosed judgment creditor to second guess a lender, when there is more than ample equity in a property being used for security for the loan--and this was a loan issued without regard to the earnings or earning capacity of the borrower. In other words, if a lender is relying primarily if not exclusively on the existence of more-than-ample equity in the to-be-mortgaged property rather than other assets or income, there might be an understandable lack of (major) concern about " other" issues relating to the borrower. (Again, the property was worth at least twice the principal of the mortgage Loan.)
The primary focus of the plaintiff was the sufficiency of the authority of Mr. Longman, acting in a representative capacity for Sapphire, to execute the mortgage documents on behalf of Sapphire, and therefore a more detailed discussion is warranted. As noted, the claim is that the internal workings of Sapphire required a level of authorization (supermajority) that was not a matter of record at the time that Mr. Longman signed the paperwork on behalf of Sapphire.
The obvious question--and it has been raised by the defendants--is whether the plaintiff effectively has standing to raise such a concern. It would be for Sapphire to complain that someone without appropriate authority purported to act on its behalf, not a third party not involved in any aspect of the transaction. Further, the defendants offered proof of ratification of the acts of Mr. Longman, curing the claim of lack of authority at the time that the documents were signed. That is insufficient, according to the plaintiff.
The plaintiff, perhaps understandably, puts emphasis on a claim that the lack of proper authorization from Sapphire, at the time of the transaction, rendered the transaction void rather than voidable. The plaintiff cites cases in support of that proposition, but the court finds those cases less than persuasive, and in fact, in at least one case there is what appears to be a less than rigorous use of terminology, and in another case, it appears to be a matter of perspective rather than law that is the basis for the language upon which the plaintiff relies.
To start--what does void mean? The official comments to Restatement (Second) of Contracts § 7 (1981) relating to the distinction between void and voidable cites to two cases, one a trial level decision from Pennsylvania and the other from the New York Court of Appeals. The latter decision states:
The court is not inclined to rely on a cited trial court decision, and therefore focuses on the New York appellate decision, particularly since our courts often look to New York law for guidance.
A voidable contract is one where one or more parties thereto have the power, by a manifestation of election to do so, to avoid the legal relations created by the contract; or by ratification of the contract to extinguish the power of avoidance (Restatement, Contracts, s 13). Where a contract is voidable on both sides, as where there has been a violation of the duty of loyalty and improvidence by executors knowingly participated in and induced by the other contracting parties (see 84 Misc.2d, at p. 858, 379 N.Y.S.2d at p. 952), the transaction is not wholly void, since in order to prevent the contract from having its normal operation the claim or defense must in some manner be asserted and also since the contract is capable of ratification, such a contract affects from the outset the legal relations of the parties (1 Williston, Contracts (3d ed.), s 15, pp. 28-29). The question of whether there has been an abandonment or abrogation of a contract is usually one of fact. Matter of Rothko's Estate, 43 N.Y.2d 305, 323-24, 372 N.E.2d 291, 299, 401 N.Y.S.2d 449 (1977).
Similarly, the Restatement itself later attempts to emphasize the distinction:
c. " Void" rather than voidable. It is sometimes loosely said that, where the rule stated in this Section applies, there is a " void contract" as distinguished from a voidable one. See Comment a to § 7. This distinction has important consequences. For example, the recipient of a misrepresentation may be held to have ratified the contract if it is voidable but not if it is " void." Furthermore, a good faith purchaser may acquire good title to property if he takes it from one who obtained voidable title by misrepresentation but not if he takes it from one who obtained " void title" by misrepresentation. Restatement (Second) of Contracts § 163 (1981)
In other words, if a contract or instrument is truly " void, " then it appears to be beyond ratification, as it is a nullity.
The defendant bank properly notes that in all of the situations cited by the plaintiff where a deed or instrument has been declared void, it has been at the instance of the party who did not authorize the transaction. See, e.g. Simmons v. Ball, 68 So.3d 831 (2011). In 1230 Park Associates, LLC v. Northern Source, LLC, 852 N.Y.S.2d 92, 48 A.D.3d 355 (2008), the Appellate Division entered an order that the transaction was null and void--it did not state that it was void ab initio, but rather on the application of the party sought to be bound, challenging the authority of the person who had entered into the transaction, the court concluded that it was void. A voidable transaction, at the option of the proper party, becomes void--and that appears to be the conclusion reached. (Note that the court discussed, in its brief decision, not only actual authority but apparent authority.) In other words, saying that a transaction was void after the conclusion of a trial is not instructive of the treatment before trial; after a trial relating to a voidable transaction, the only available options would appear to be valid or void. Before trial, however, voidable--some level of uncertainty--can be an option.
Finally, in Northlake Development, L.L.C. v. BankPlus, 60 So.3d 792 (2011) (also referred to as Kinwood Capital Group, L.L.C. v. BankPlus ), although repeatedly referring to the transaction as being void, the court also used language suggesting either a refusal to adopt the concepts identified in the Restatement, or the court effectively created a third category in the otherwise generally recognized void/voidable dichotomy.
" So where no actual or apparent authority exists to transfer a principal's property, we decline to characterize the deed as voidable. Rather, it is void unless and until later ratified. Ratification is a principal's after-the-fact, conscious decision to be bound by an agent's unauthorized act, and it is that decision that can trigger the principal's liability to third parties. Where the agent has no actual or apparent authority, a principal has no need to repudiate an agent's unauthorized act in order to 'put things back' the way they were. Absent ratification--and prior to ratification--nothing changes." 60 So.3d 797.
Under this analysis, there appears to be three separate concepts: void ab initio (void and not subject to ratification); void, but subject to ratification; and voidable. The only difference between voidable and void under the Kinwood analysis would appear to be with respect to the validity of the transaction, prior to the proper party articulating a position--is there a presumption of validity based on facial regularity (someone purporting to be authorized, executing the instrument) or is there to be a presumption of invalidity subject to validation by way of ratification?
Note that despite the seemingly absolute nature of the determination, it necessarily implicates a trial-related perspective. Is every transaction to be presumed void absent a self-proving quality relating to authorization? Inferentially, only after an owner or other principal challenges the authority of a purported agent is there going to be any concern as to whether to presume the transaction was void or presume the transaction was valid. (As discussed in the decision, there can be substantial consequences relating to subsequent purchasers.)
Kinwood notes possible concern for the rights of, and risks to, subsequent transferees--but again, the plaintiff is not a transferee at this juncture, and is not a party to the transaction. And even if Kinwood were deemed to control, the decision explicitly recognizes ratification as a means of validation of an otherwise void transaction, and recognizes that actions or even inaction can demonstrate ratification. The recognition of a potential for ratification is inconsistent with the position advanced by the plaintiff, seeking formalistic purity in the ratification process. (Here, there was an explicit attempt at ratification, and there were payments made on the loan suggesting ratification by conduct.)
Conversely, the plaintiff effectively seeks a windfall. As of commencement of this action, his lis pendens was junior to a number of mortgages, including the first-in-line mortgage and loan that he currently challenges. That loan was used primarily to pay off a prior loan (WAMU), the principal of which was approximately 90% of the principal of the loan issued by HCSB. The bank's loan replaced the WAMU loan, and the bank's security interest replaced that of WAMU at the top of the list. In seeking to void the HCSB mortgage, or at least its priority, the plaintiff seeks to obtain a better secured position than it would have had if the HCSB transaction had never occurred.
Absent a viable claim that the mortgage transaction was a fraudulent transfer--and the facial equivalence between the amount of money provided by the lender and the loan principal with accompanying mortgage security seems to prevent any serious claim that this was not a bona fide mortgage transaction to the extent that it was an exchange of equivalent value--the court does not see where the plaintiff has the right to challenge the sufficiency of the ratification process. It may have been a testament to carelessness by the lender's staff--and that assumes that the more-than-ample equity might not lull the staff into a perception of less of a need for what otherwise might be perceived as important details--but the events of 2007 did not affect the plaintiff.
Quite simply, the plaintiff has provided no authority that a third-party stranger to a transaction has the right to challenge the ratification of the transaction (assuming that it was in need of ratification), when the actual parties have done everything possible to show consent and have engaged in substantial performance.
Accordingly, the court rejects the contention that the loan was fatally defective, or that in a related vein, a constructive trust or other remedy is warranted. Therefore, the court does not need to address the extent to which equitable subrogation might apply.
II Fraudulent Transfers
Under Connecticut law, a plaintiff may maintain an action for fraudulent conveyance under either the common law or the Uniform Fraudulent Transfer Act. Whether a claim is brought under the common law or the applicable statute, General Statutes § 52-552e, the elements are the same . . . A party alleging a fraudulent transfer or conveyance under the common law bears the burden of proving either: (1) that the conveyance was made without substantial consideration and rendered the transferor unable to meet his obligations or (2) that the conveyance was made with a fraudulent intent in which the grantee participated . . . These are also the elements of an action brought pursuant to General Statutes § 52-552e(a) . . . Indeed, although the statute provides a broader range of remedies than the common law . . . the Uniform Fraudulent Transfer Act is largely an adoption and clarification of the standards of the common law of [fraudulent conveyances] . . . (Internal quotation marks and citation, omitted.) T.D. Bank, N.A. v. SM Phoenix Merritt 8, LLC, J.D. Fairfield at Bridgeport, CV106011034S, Superior Court of Connecticut (July 19, 2011).
Preliminarily, the court recognizes that the plaintiff has pointed out that in Stuart v. Stuart, 297 Conn. 26, 40-41, 996 A.2d 259, 268 (2010), the Supreme Court questioned the origins of the use of a clear and convincing standard with respect to the burden of proof in a claim of fraudulent transfer/conveyance. However, it is clear that notwithstanding any professed uncertainty as to the origins of the standard, and notwithstanding any suggestion that the Supreme Court might revisit that standard, the clear and convincing burden of proof has been used in cases subsequent to Stuart .
The question of whether a fraudulent conveyance took place is solely a question of fact to be determined by the trier . . . We will not disturb the trial court's factual findings unless they are clearly erroneous and unsupported by the record. A fraudulent conveyance must be proven by clear and convincing evidence . . . (Internal quotation marks and citations, omitted.) Cottrell v. Cottrell, 133 Conn.App. 52, 63-64, 33 A.3d 839, 846-47 (2012).
With respect to the claim of fraudulent transfer, the court agrees with the plaintiff that it is helpful to review the entire history of transactions concerning the Ridgefield property, although the court does believe that the plaintiff overstates the significance of some transactions in that regard. Thus, with respect to the initial identified transaction in 1995, the plaintiff characterizes the transfer from defendant Longman to his wife as " purporting to transfer" the property to her (p. 16 of brief)--other than the plaintiff's inference of a fraudulent intent (presumably based in large measure by subsequent conduct), there is no evidence before the court relating to the bona fides of that transfer. Similarly, in identifying the periods of time in which the property was in the name of defendant Longman, the plaintiff includes a brief period of time in which the property was in his name as trustee of what has been characterized as a " defective" trust--while that may be indicative of persistent efforts to avoid having the title to the property in the name of the defendant individually, the court does not recall any detailed legal analysis (much less a persuasive analysis) that the claimed defect in that trust was such as to make it a nullity, and still further, that such a transfer to a trustee of a defective trust would be the equivalent of ownership by the individual in a personal capacity. Aside from the arguments advanced by defendants, there is no evidence of an intent to give or transfer the property to defendant Longman in an individual capacity, and conversely, the attempt to transfer the property to him as a trustee clearly negates any such intent. The court rejects any implication or assertion that a transfer of property to the trustee of a trust with a defect--even a fatal defect--is tantamount to a gift to the trustee in a personal capacity.
One of the refinance transactions prior to the ones discussed at length was one in which the property nominally was in the name of defendant Longman as trustee of the so-called defective trust. As with the pattern discussed throughout this decision, a prior loan was paid off and a surplus of funds seemingly went to defendant Longman, notwithstanding his nominal status as a trustee.
In discussing the claimed fraudulent conveyances, the plaintiff relies, at least in part, on the testimony of Gayla Longman that she did not know why certain transactions occurred and had no recollection of certain events. The court's recollection is consistent with that contention--it seems that an overwhelming majority of inquiries were met with such responses (especially inquiries by plaintiff's attorney). Nonetheless, the court is satisfied that limited weight should be given to the answers themselves and the inferences that the plaintiff implicitly asks the court to draw. (As discussed below, it does have a bearing on the characterization of Mrs. Longman as passively-acquiescing in conduct as opposed to a more participatory role.) It is clear that the overarching position of Gayla Longman was that she relied upon defendant Longman, her husband, to take care of all such transactions and decisions. She explicitly stated that she had delegated authority to him to act on her behalf, both in a personal capacity and to the extent that she had a controlling voice in decision-making by various entities. She further indicated that as necessary, she had ratified his decisions, again, whether she was acting individually, or acting as a controlling voice in the decisions of an entity. Given that degree of reliance, her inability to recall specific facts, specific decisions, specific transactions, etc., can hardly be characterized as surprising or anything but consistent with the deference to defendant Longman as the decision-maker.
As implicit above, that does not mean that her testimony is of no significance. Her total reliance on, and blanket ratification of, everything done by defendant Longman undercuts the attempt to portray her as a wholly innocent non-party whose interests may be adversely affected by the outcome of this litigation. It is not clear why she was not made a party given the broad spectrum of relief being sought that might impact her, but the defendants' protestations that relief might affect an innocent party such as Gayla, is mitigated by the circumstances.
The plaintiff claims that the use of various entities and trusts are symptomatic and probative of the improper quality to the transactions relating to the Ridgefield property and, to a lesser extent, other properties and ventures. The court does not perceive the plaintiff's claim to be that reliance on corporate entities for ownership of property and distribution of funds to family members on a regular basis inherently is wrongful. Rather, the claim is that the frequency and purpose behind transfers to and from (and among) entities in this context is indicative of the goal to frustrate existing creditors, including, of course, the plaintiff. There is, of course, no doubt that the existence of creditors was known to defendant Longman. He was aware of the New York judgment, he had been made aware of the registration of the judgment in Connecticut, and he was aware of the separate deficiency judgment that had been entered years earlier.
If there had been no transfers of the property or any interest in the property after 2005 (with the possible exception of a transfer to a trust), there might be little to discuss. If Sapphire truly were in the real estate development business, it is not clear why they would have been repeated extractions of equity from the property, with the equity seemingly going to defendant Longman personally rather than business purposes of the business. A business of course may distribute income or assets to its owners, but again, defendant Longman was a minimal owner of Sapphire (5%). A business may allow its property to be used for security for a loan to its principal, but there is no stated or apparent or employed reason why Sapphire might have allowed its sole asset to be used as security for a loan that was in part or in whole intended to benefit defendant Longman, a minority interest at best. Perhaps the most jarring point, however, was the brief transfer of the property to defendant Longman, in a personal capacity.
To be sure, as emphasized by the defendants, a major portion of each transaction went to pay off pre-existing mortgage indebtedness, but the practice appears to have been relatively consistently that each refinance was accompanied by extraction of equity--the principal of each successive loan was greater than the preceding indebtedness.
Again, the court does not believe that doctrines such as piercing the corporate veil are intended to be games of gotcha. The situation here, however, is not simply a matter of failure to comply with technicalities such as having annual meetings, formal resolutions, etc. Seemingly in an attempt to get a more favorable interest rate available to owner-occupied properties, the Ridgefield property was transferred to defendant Longman for the purpose of obtaining a mortgage from Chase. After some of the equity was extracted in that transaction, the property was transferred from defendant Longman, back to Sapphire. This, in turn, was after the HCSB transaction where Sapphire provided the equity to back the loan on which defendant Longman was a borrower, again with equity proceeds (after paying off an earlier mortgage) going directly to defendant Longman as borrower.
There are two alternate views (not mutually exclusive) for this series of events. Either Sapphire was effectively a sham entity, used by defendant Longman for shielding his chief asset from creditors while allowing extraction of equity (and providing a place for his family to live, while potentially appreciating in value); or, the transactions involving defendant Longman, allowing him to extract equity while the property was owned by Sapphire coupled with a no-consideration back and forth transfer spanning but a few weeks, whereby the property quickly moved from Sapphire to defendant Longman and back, were seemingly within the scope of General Statutes § 52-552a et seq., the Uniform Fraudulent Transfer Act. These transactions must be viewed in the context of other transactions in the 3-4 year period leading to this litigation, and in turn, the events during the period allowable by statutory limitations periods are additionally informed as to significance and meaning by yet earlier events.
Defendant Longman cannot have it both ways. If Sapphire truly were entitled to be viewed as an independent entity, how to explain the absence of any consideration for the transfer of the property to him and the absence of any consideration from him to Sapphire for the transfer back and the seemingly gratuitous allowance of use of Sapphire's chief (sole) asset as security for a loan to defendant Longman? How might Sapphire have benefited, as an independent entity, from the sequence of transactions whereby equity was repeatedly extracted and the property became security for a six-figure loan to defendant Longman? Conversely, none of these considerations would apply were Sapphire perceived to be nothing more than a personal " piggy bank" for defendant Longman, serving no purpose other than to advance the interests of defendant Longman personally while facially shielding his assets from any possible creditors. 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.
The transactions whereby Sapphire transferred the property to defendant Longman, defendant Longman then obtained a loan secured by the Ridgefield property, and then transferred the property back to Sapphire subject to that mortgage, facially and substantively satisfy the statute. Whatever the reason for the transfer to defendant Longman, the prompt transfer back to Sapphire likely (to a clear and convincing evidence level of confidence) was intended to shield the property from any creditors (" hinder, delay or defraud any creditor of the debtor"). Numerous factors set forth in subsection (b) clearly are applicable: defendant Longman appears to have been an " insider" with respect to Sapphire; he retained control of the property in a functional sense given his role in Sapphire; there is a history of substantial delays in recording transactions; a multimillion dollar judgment had entered against him a decade earlier; at the time of the transfer back to Sapphire, the property was or appeared to be the overwhelming majority of assets (by value) then-identifiable as owned by defendant Longman; there was no consideration stated or paid for the transaction; he appears to have been rendered insolvent by the transfer, to the extent that the outstanding judgments appear to have exceeded all of his identified assets.
In footnote 1 of his brief, the plaintiff indicates that he is not pursuing a claim of " constructive fraudulent transfers to an 'insider' " as allowed by § 52-552f(b). That does not preclude the court's consideration of insider-like status (or actual insider status if applicable) in considering statutory criteria (and at this point, the court is addressing a different statute, § 52-552e).
In addition to the plaintiff's multi-million dollar judgment, there also was a still-outstanding deficiency judgment.
The court notes that the only substantial assets that ever were identified by defendant Longman as possibly indicative of his ability to pay debts was Florida property, which he conceded was tied up in litigation. There was no indication as to an even-theoretical ability to liquidate those assets in order to pay debts, and an inability to pay debts as they become due necessarily implicates questions of ability to liquidate assets to pay such bills. As already mentioned, the court was made aware that at the time of the Sapphire transactions, there was a deficiency judgment from the late 1990s that was not paid off until approximately 2009, such that there was at least one additional debt of defendant Longman that was long-overdue in being paid.
Moving on, General Statutes § 52-552f provides:
(a) 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.
(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.
Again, the transactions whereby Sapphire transferred the property to defendant Longman, defendant Longman then obtained a loan secured by the Ridgefield property, and then transferred the property back to Sapphire subject to that mortgage, facially and substantively satisfy this statute. Again, there was no consideration whatsoever for the transfer back to Sapphire, much less " reasonably equivalent value" and the existence of the multimillion dollar judgment--essentially doubled by the time of this transaction to approximately $8 million (11 years of interest accruing at 9% per year)--rendered the defendant insolvent (if he were not already insolvent).
The claim that the Greenwich property transaction also was a fraudulent transfer presents a different situation in many respects. Instead of a pattern of multiple transfers, going back perhaps a decade prior to the subject transaction, this was a situation involving a single purchase and subsequent sale--with a brief separation of time--of the subject property. Mr. Thomas, yet again, was involved in an early stage of this transaction--he bought the property, have developed it to some unspecified extent, and then sold it to defendant Longman--who then promptly transferred it to Lurie, after acquiring the property through payment of funds from a Vanguard account maintained by the Longmans, coupled with commercial financing. Within weeks, the property appears to have been sold to a bona fide purchaser for what appears to have been a reasonable value. The proceeds of the sale, however, were quickly dispersed to a variety of Longman-controlled entities, and personal-to-Longman destinations including a substantial " repayment" to the Vanguard account (and payment of a sizable credit card balance).
The court recognizes that acquiring a property through a straw-person transaction can have a legitimate purpose. Absent the context present here, the court would have little reason to infer any improper purpose. The fact that the property was sold to the bona fide purchaser less than three months after the initial acquisition of the property by defendant Longman, with the actual title ownership by defendant Longman of perhaps a week, fits the pattern of the transactions involving Sapphire and the Ridgefield property--avoiding ownership in the name of defendant Longman except to the minimal extent necessary for purposes of obtaining financing. As reflected in the table on page 35 of the plaintiff's brief and in the discussion continuing on to page 36, almost $1 million was promptly dispersed to Longman-related/controlled entities and/or otherwise for the benefit of defendant Longman.
With the Sapphire-related transactions providing a background and context, the Lurie transaction again falls within the range of statutory and common-law fraudulent transactions. As compared to the timing of the Sapphire transactions in 2007, the plaintiff's judgment--with a 9% annual interest increment--had increased by somewhere in the area of $1 million. There was no consideration given by Lurie to the defendant, much less something approximating reasonable value. Conversely, the sale proceeds were dispersed across some eight different entities directly or indirectly owned, and seemingly all controlled, by defendant Longman. While it certainly is understandable that defendant Longman would have wanted to replenish (at least partially) the Vanguard account from which some of the purchase funds had been obtained, what possible reason would there be for Lurie to have done so instead?
The problem with respect to this transaction, however, is that the property no longer is owned by the transferee as is the case of the Ridgefield property which is still owned by Sapphire. Lurie dispersed more than half of the proceeds almost immediately, and there is no indication that Lurie retains any appreciable funds that are traceable to this transaction (now seven years in the past).
In light of this posture, the plaintiff asks that a constructive trust should be imposed on these various entities, to the extent of their receipt of funds. While attractive, there is at least one problem as to some of these entities.
The court was presented with evidence that the Solaire entities actually are engaged in ongoing business activities, with each of the entities playing a different role in the business of solar power installations. To the extent that the Solaire entities comprise a business that is ongoing, and may have other investors/owners, the characterization of the funds that were transferred may be significant. The plaintiff seems to be taking the somewhat simplistic approach that money is fungible, and that if money was given to these entities, a constructive trust to that extent can be imposed on the assets or money of those businesses. The problem, however, is that if those funds were capital contributions in exchange for ownership interests, it is not the funds or assets of the businesses that would seem to be the proper focus of any equitable action by the court, but rather the ownership interests of defendant Longman and/or his family members and/or affiliated businesses.
Payments to Sapphire, RIPP, and W.W. Land, to the extent that the plaintiff still is pursuing those entities, are another matter. To the extent that any or all of these entities have any assets, a constructive trust is an appropriate vehicle for attempting to recover part or all of their share of the proceeds of this sale. (There is no suggestion in the record of any valid purpose for such disbursements in 2010 to these entities, and defendant Longman could not recall any reason, during his testimony.)
The court appreciates that the defendants have provided an alternate interpretation for the facts that were presented to the court. While plausible as presented by the defendants, the court believes that the interpretation proffered by the defendants only could be accepted in the absence of the actual context. Figuratively, the defendant is urging the court to determine the existence of a forest by counting and identifying each tree.
The defendants are correct that defendant Longman only owned the property, in his name, for brief periods of time. The defendants admit that the transfer into his name, for purposes of the Chase mortgage, was to satisfy a requirement that the property be owner-occupied. As soon as the transaction was consummated, the property was transferred back to Sapphire. The transfer of the property to Sapphire, years prior to any allowable look-back period, could not be challenged as fraudulent, but that does not mean that the court cannot recognize that defendant Longman was the de facto owner, with ownership in third-party entities likely to prevent the property from being reached by creditors. By transferring the property back into his name, he effectively reset the ability of the court to examine whether a transfer was for purposes of avoiding judgment creditors.
Further, without even getting into the contract provisions identified by the plaintiffs with respect to that Chase mortgage (the consequences of transfers and/or cessation of owner occupancy), what can be said about the bona fides of the in-and-out transactions, over a period of weeks, seemingly acknowledged to have been solely for the purpose of leading (misleading?) Chase to believe that the property was owner-occupied? The very existence of those transactions indicates that the defendants did not believe that Chase would accept the equivalence of Sapphire-ownership and Longman-occupancy but that the property had to be titled in the name of an occupant. Knowing that the bank would not accept such an equivalency, the only reasonable inference is that defendant Longman was more concerned about having the property remain in his name than in any consequences should Chase learn of the subsequent transfer.
The court appreciates the argument of defendants that tax returns, etc., are not indicative of the state of title. The issue, however, is not whether the pieces of evidence offered by the plaintiff, by themselves, prove that defendant Longman had title to the property, but rather whether all of the evidence pointed in the same direction, that the property was, de facto, owned by defendant Longman, with the transfer of title primarily if not solely to avoid exposure to creditors.
At page 8 of their brief, the defendants state:
Finally, the claim that mortgage proceeds went to " Longman" is also not indicative of any fraud. Each loan Plaintiff references in his brief paid off prior loans, except for excess proceeds which went to the borrower. In each instance Longman served as the manager of the borrower, trustee of the borrower or co-borrower personally. Most important, with respect to the October 31, 2007 HCSB loan, Longman was a co-borrower on the promissory note and thus was clearly entitled to receive loan proceeds. These events are not indicative of any fraud.
The defendants may be correct that the described facts are not " indicative of any fraud" in any overt sense, but again, what is the rationale for Sapphire allowing its property to be used as security for a non-owner's borrowing? From a more practical perspective, the question would be: Why would Sapphire allow a portion of its equity to be extracted by way of a mortgage loan such as this? And in context: why would Sapphire do this, after having transferred the property, briefly, to defendant Longman, resulting in an additional encumbrance on the property, more clearly an extraction of equity? In other words, sequential mortgages, with extraction of equity, including one title-transfer to defendant Longman personally, could be innocent, or could be consistent--as the court has found--with a pattern whereby the property was treated as owned by defendant Longman, with title held in (and on one occasion within the statute of limitations, transferred to) Sapphire, for purposes of avoidance of creditors.
III. Reverse Piercing
The court agrees (for the reasons discussed above) that Sapphire and Lurie have been proven to be artifices, used by defendant Longman effectively only for the purpose of engaging moving assets and money, without having an existence for purposes of carrying out any meaningful activity as a separate entity. The court recognizes that real estate development has cycles, and that there could be periods of time of inactivity when the phase of the cycle is not propitious, but these entities were not dormant in that sense--they carried on activities for the benefit of defendant Longman without regard to ostensible separate existence or articulated corporate purpose.
RIPP is a closer call. It was not engaged in any of the real estate transactions in recent years (although it was involved in the pre-2007 transactions whereby the Ridgefield property went through foreclosure yet ended up remaining in the possession and control of defendant Longman and his controlled entities/family). The fact that its funds are used to pay family members the equivalent of an allowance, and is used to pay personal bills would not be enough--part of the question is where the money came from. Tipping the balance is the fact that the only identified source of funds in the relevant timeframe was from Lurie, and Lurie already has been identified as not truly an independent entity. Compounding the situation is the fact that family members had separate RIPP-based accounts with the ability to write personal checks, further undercutting any claim that it was a legitimate and separate entity.
The Solaire entities present the most difficult situation. The plaintiff has marshaled the evidence in favor of their treatment as additional sham entities. The court heard testimony, however, that they are engaged in a legitimate business (solar power). The fact that the Solaire Fund was somewhat involved in the Greenwich property transaction certainly is troubling in this regard, as is the evidence of use of its funds for payment of personal expenses. The fact that it was used to fund solar projects makes the existence of various financial transactions in and out of the entity, not especially surprising.
The court already has expressed its concern as the extent to which some of those transactions may have represented capital contributions or other valid business transactions, for value. The concern about impact on innocent parties and the collateral damage to an ongoing business, militate against applying the doctrine to these entities. Nonetheless, any contributions of defendant Longman, Lurie, Sapphire or RIPP resulting in equity or security interests would be reachable to the same extent that they would be reachable by a creditor of Longman.
2GP is yet another target of the plaintiffs. This is another Longman-controlled entity, with ownership in his wife and son. The evidence, scant as it was with regard to this entity, puts it in the category of vehicles created for financial " hide the pea" exercises, with no purpose or use nor any semblance of a separate existence.
The plaintiff separately discusses Solaire Tenant, LLC, 60 Shelter Rock Associates, LLC, and W.W. Land Company, LLC. The arguments essentially abandon the claim of reverse piercing as to these entities due to considerations such as the existence of innocent-and-unrelated parties as well as a likely-futile stipulated prejudgment remedy in place as to W.W. Land. The court already has indicated its unwillingness to apply the doctrine to Solaire-related parties.
At page 12 of their brief, the defendants state:
To begin with, as a general proposition, the doctrine of reverse piercing is on the verge of collapse. While the court in Commissioner v. State Five Indus. Park, Inc., 304 Conn. 128, 37 A.3d 724 (2012), implicitly acknowledged the existence of the doctrine, the Court rejected its application in that case and Justice Zarella argued forcefully that the doctrine has no place in our legal system. Since then, virtually all Connecticut courts have noted the questionable validity of the doctrine. See e.g. Stein v. KI & JP, LLC, 2013 WL 3118405 (Conn.Super.Ct. 2013); Kuryla v. Coady, 2013 WL 1494223 (Conn.Super.Ct. 2013).
To address these points in reverse order: Trial courts often note the existence of uncertainties as to the existence or applicability of a doctrine or legal principle. Thus, the court in this opinion, above, noted the existence of a Supreme Court decision questioning the basis for a clear and convincing standard in fraudulent transfer cases, but this court then went on to note that notwithstanding that question, appellate-level courts continue to apply (or recognize application of) that standard. As a trial court, this court is required to follow appellate precedent.
The fact that " Justice Zarella argued forcefully that the doctrine has no place in our legal system" in a concurring opinion may assist this court in understanding the issues raised by the concept of reverse piercing, perhaps providing an exclamation point to the cautionary principles identified in the majority opinion. To the extent that this was a " dissent" from the refusal of the majority to consider the ongoing viability of the doctrine, again, as a trial court, this court is obliged to follow and apply existing law, not dissenting-type opinions.
The defendants may be correct that State Five was less than a rousing endorsement of the continuing vitality of reverse piercing, but it was a recognition nonetheless of the continuing existence of the doctrine as previously articulated in appellate-level decisions.
The court also rejects the contention that this case is weaker than State Five . For example, in that decision, the court observed that " [n]o testimony or other evidence was presented that tended to show that the [family member-owners] were aware of, and acquiesced in, any of the conduct that the trial court found objectionable." 304 Conn. at 143. The record in this case reflects that Gayla Longman, the relevant family member with ownership interests in the various entities, repeatedly was on record as having given defendant Longman full and effectively sole authority to make decisions as to all identified entities, to the extent that she nominally was a decision-maker. She more than acquiesced in the conduct of defendant Longman; she expressed no direct interest in any of the affairs of the businesses and authorized (not merely acquiesced in) the relevant conduct. Nor is this merely a matter of " [e]vidence of the [family member's] lack of involvement in running [the subject business], making necessary business decisions or suggesting any changes" (id. )--there was affirmative authorization for defendant Longman to make all decisions. Further, State Five as an entity actually engaged in business activities separate and apart from the conduct that allegedly justified reverse piercing.
In Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 152-53, 799 A.2d 298 (2002), the initial appellate decision recognizing reverse piercing, the court identified some of the considerations relating to piercing and reverse piercing:
We first consider whether the element of domination and control is present under the facts of this case. Specifically, we inquire as to whether the court properly found that [the defendant] dominated and controlled [the to-be-pierced entity] directly, and that through extension of her control of [that entity], she also controlled [another entity]. Courts, in assessing whether an entity is dominated or controlled, 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 and citations, omitted.)
There were attempts to adhere to corporate formalities. Capitalization, in this case, itself is an issue--Sapphire's only asset of note was the Ridgefield property but its questionable ability to pay taxes was a measure of the uncertainty of adequacy of its capitalization, and all of the subject entities that the court has included had no cognizable capital or sources of income other than the inter-entity transfers (or funds from such private sources as the Vanguard account). Factors 3 through 10 all point in the direction of piercing--pervasive payment of personal expenses of Longman family members (and payments to family members); consistent ownership by Longman family members (chiefly Gayla--or a family trust) with defendant Longman as the actual decision-maker by title and function; the Ridgefield property (home) as the business address for most entities; no indicia of independent business decisions/discretion; while there was evidence of a paper trail for inter-entity transactions, the transactions had no identified or identifiable business purpose, i.e. all subject to the never-explained and often-unexplainable " discretion" of defendant Longman; the entities were not profit-centers much less independent profit centers, as the principal transaction of Lurie was isolated and took place only after a consideration-free transfer from brief ownership by defendant Longman, whereas the others had no identified material profit-generation in any relevant time period; Sapphire was essentially a guarantor of the personal debt of defendant Longman via the Chase mortgage, and there was at best ambiguity as to whether the taxes on the property were being paid by defendant Longman as opposed to the nominal owner (when taxes were paid); and defendant Longman was able to tap the equity of Sapphire, and draw down assets of other entities without regard to business (or any able-to-be-articulated) purpose.
Often, the failure to follow corporate procedures (meetings, resolutions, etc.) is the obvious pointer to a piercing situation; here, it is virtually the only factor pointing away from piercing.
To the extent that the defendants rely on three factors identified in State Five, the court has considered them. The court is satisfied that there is no basis for concern about other creditors of these entities. Again, the court has rejected the Solaire entities as coming within the scope of reverse piercing. The defendants have characterized there as having been no evidence of possible other creditors of other entities that are subject to this analysis; the court perceives there to have been evidence of no activities whatsoever of those entities, other than inter-entity-type transactions (or transactions with the Longmans). The one possible exception might be Sapphire, but its creditors all appear to be secured creditors i.e. mortgagees, and in any event, as to suffer, the reverse piercing is in the nature of a " backup" to the fraudulent transfer claim, Sapphire having no identified material asset other than the Ridgefield property.
With respect to the potential effect on equity holders, principally (almost exclusively) Gayla Longman, the court already has identified the discussion in State Five relating to a requirement of more than mere acquiescence. While her involvement was purely passive, that was based on her delegation of authority to her husband, defendant Longman, and conversely, to the extent that there is a concern about equity interests, the evidence indicates that there was no consideration provided but rather Mr. Longman, in creating entities, simply designated her as member or shareholder, again inferentially to remove him by at least one step from nominal ownership of any of these entities. Again, while the court has not been given any reason why she was not made a party (or any other family members), the court rejects the mini-Hobson's choice: the only way a creditor can attack a moderately sophisticated scheme whereby multiple family members are given equity interests in otherwise-sham entities would be to have a dragnet-type inclusion of all such family members as parties. (Or would the court have to engage in a second-tier fraudulent transfer analysis with respect to transfers of such minor interests?)
The third consideration is the availability of adequate remedies at law. The court already has applied a statutory and common-law framework for fraudulent transfers to the Ridgefield property as nominally owned by Sapphire, but the " hook" in this case is the brief period of time that the property actually was owned by defendant Longman within the relevant timeframe. A similar approach was taken with respect to the Greenwich property and Lurie--but the prompt dispersal of funds from the sale of the property creates both a multi-tiered issue as to identity of parties as well as the difficulty of tracking funds from a transaction that is now seven years in the past. More generally, the multiplicity of entities, the constant movement of money between entities and to the family members, and the need for a painstaking analysis of actual bank records to track such movement of money, makes the tracing of specific sums of money difficult if not impossible, absent a fraudulent transfer without liquidation.
IV. Constructive Trust
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, hold and enjoy . . . A constructive trust arises whenever another's property has been wrongfully appropriated and converted into a different form . . . [or] when 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. The issue raised by a claim for a constructive trust is, in essence, whether a party has committed actual or constructive fraud or whether he or she has been unjustly enriched. (Internal quotation marks and citations, omitted; emphasis as in cited case.) Garrigus v. Viarengo, 112 Conn.App. 655, 672, 963 A.2d 1065, 1075 (2009).
Application of this general principle to the specifics of this case is difficult. To the extent that the proceeds from the sale of the Greenwich property were used to purchase interests in other entities, by or through Lurie, those interests are subject to a constructive trust in favor of the plaintiff. To the extent that the court has found reverse piercing to be applicable to entities other than Lurie and Sapphire, in the absence of any non-Longman-related owners, the assets of such entities also are subject to a constructive trust. However, to the extent that the plaintiff has asserted independent claims for constructive trusts, the facts do not match the legal requirements, absent more appropriate theories such as fraudulent conveyance and reverse piercing.
The plaintiff candidly acknowledged doubts as to whether a constructive trust could be a separate cause of action or was available only as a remedy--not having articulated a basis for an independent determination of liability on such a theory, the court must rule in favor of the defendants on the pure constructive trust claims.
V. Defenses
The court briefly will address the defenses asserted by the Longman defendants. (No discussion is required as to the bank's defenses as the court has not found the plaintiff to have proven a claim against the bank.)
The first three defenses are laches, waiver, and estoppel. These are equitable defenses; to the extent that they are claimed to be applicable to claims arising under the Uniform Fraudulent Transfer Act, they are inapplicable. The court further must observe that to the extent that they contend that there were unreasonable delays in pursuing relief, statutory limitation periods are the proper benchmarks.
The burden was on the defendants to establish these defenses as to the equitable claims. Merely looking at a calendar, and saying that the plaintiff waited three years, is insufficient for any of these defenses. For example, waiver is the intentional relinquishment of a known right; there was no credible evidence that the plaintiff was aware of the various transactions between entities and defendant Longman, at any time appreciably before the time that the lawsuit was commenced. There was no evidence of an intentional relinquishment of rights.
There was no evidence of an unreasonable delay; again, it implicitly requires a benchmark time, and there was no evidence of an unreasonable delay from the time that the plaintiff became aware of the various inter-entity transactions used by defendant Longman. With respect to estoppel, there is a requirement of a change in position in reliance upon the conduct of another party--aside from the questionable ability to rely upon the inaction of somebody without knowledge of the details of the situation later acted upon, what was the " reasonable" reliance? The court rejects the notion that the continued course of conduct found objectionable might be deemed reasonable reliance for purposes of estoppel. There was no change in position in reliance on inaction--there was a continuation of the pre-existing process of the defendants in keeping any substantial assets out of the name of defendant Longman.
The fourth special defense asserts a statute of limitations-type defense, but the defendants did not establish why the general statute of limitations for torts should be applicable to a fraudulent transfer claim, when the Act contains its own statutorily-designated limitations periods. Further, to the extent that there is alternate reliance on any common-law tort theory, the defendants have not explained how a lawsuit served on October 1, 2010 cannot relate back to events occurring in and after October 2007, the focus of claimed tortious/remediable conduct. (Conduct prior to that date was for purposes of context and patterns of behavior.)
Finally, the plaintiff has effectively abandoned any claim under General Statutes § 52-552f(b) such that the one-year limitation period for that narrow and seemingly inapplicable provision is inapplicable. (The provision is applicable only in cases of transfers " if the transfer was made to an insider for an antecedent debt" and there was no evidence of any antecedent debt for any transfer.)
Recap/Summary
The court has rejected the plaintiff's attack on the validity of the HCSB mortgage transaction involving Sapphire. As to the bank, the proper paperwork was submitted, and there was a follow-up of ratification by Gayla Longman, to the extent such ratification was needed. Conversely, as a stranger to the transaction, plaintiff has no right to question the validity of an agreement in the absence of any challenge by one of the parties to the agreement, and where both parties not only have manifested their agreement but actually have performed such that there was ratification both explicitly and by conduct.
Although in isolation the " flipping" of ownership of the Ridgefield property from Sapphire to defendant Longman and back to Sapphire, all in a matter of weeks, might seem innocuous, in the context of the history of the dealings of Sapphire, the substantial unsatisfied indebtedness of defendant Longman, and the diligence with which he attempted to keep property out of his name (with two notable exceptions) while freely moving assets and money between entities, the court is satisfied, by a clear and convincing standard, that the transfer back to Sapphire was for purposes of avoiding creditors--not only the approximately $8 million owed at that time to the plaintiff but also the then-unsatisfied deficiency judgment mentioned earlier.
The very brief period of time in which defendant Longman was the owner of the Greenwich property similarly was a result of the desire to have assets in his name as briefly as necessary, in order to avoid creditors. As of that transaction, while the deficiency judgment had been satisfied, the additional 2 1/2 years or more had added perhaps another million dollars to the amount owed to the plaintiff. (This transaction indirectly reflected on the question of the adequacy of capitalization of Lurie (or its creditworthiness)--the funding of the purchase from Mr. Thomas primarily came from personal assets of the Longmans coupled with financing obtained by Mr. Longman.) The most obvious if not only purpose for the prompt transfer of the property to Lurie, after it had been acquired, seems to have been getting the property out of the name of Mr. Longman.
Reverse piercing is a secondary aspect of any involvement of Sapphire and Lurie. The court has rejected application of the doctrine to the Solaire entities, but the other identified entities which served no purpose but to allow money and assets to be moved around and distributed to the Longman family are subject to that application. The court rejects the notion that Longman family members are unfairly being affected by application of this doctrine in this case--in one instance, one son is identified as a 5% owner, without any apparent " basis" in that investment and everything else appears to be Gayla Longman. Gayla Longman cannot have it both ways--professing innocence yet repeatedly deferring to her husband, giving a blanket authorization to her husband, and as necessary ratifying his conduct (as was made explicitly clear with respect to the HCSB mortgage loan where there was an issue as to whether Mr. Longman had been duly authorized to act on behalf of Sapphire).
The court will now put everything in the context of the specific claims set forth in the operative complaint (#268.00):
The first count (constructive trust re: Ridgefield property)--as discussed in detail, the court has found by clear and convincing evidence that there was a fraudulent transfer of the Ridgefield property from defendant Longman to Sapphire. That is the gravamen of the third count; a constructive trust is a permissible remedy under that count. Similarly, the court has found that the plaintiff has proven reverse piercing, at least with respect to Sapphire and the Ridgefield property.
However, the court has not found an independent " fraud" as seemingly alleged in this count, in distinction to the claims in the other counts. Any misrepresentations that were made to any bank are of no consequence with respect to the claims of the plaintiff. Therefore, while the relief sought is available under other counts, to the extent that this first count asserts a claim distinct from other counts, judgment enters in favor of the defendants--the plaintiff has not established an independent fraud-based claim for constructive trust.
The second count (constructive trust re: Greenwich property)--the analysis is essentially identical to the first count and therefore the result must be the same.
The third count (fraudulent transfer of Ridgefield property--52-552e(a)(1))--the court has found by clear and convincing evidence that there was a fraudulent transfer of the Ridgefield property from defendant Longman to Sapphire. The court is satisfied, again to a clear and convincing standard, that the pattern of transfers was intended, and the transfer from defendant Longman to Sapphire in particular was intended, to avoid exposure to creditors such as (chiefly) the plaintiff. Judgment enters in favor of the plaintiff on this count.
The fourth Count is similar to the third count, except that it relies upon § 52-552e(a)(2) (and originally relied as an alternate upon § 52-552f, since abandoned). It is clear that there was inadequate consideration--no consideration--for the transaction satisfying the first part of the test. It also is clear that the divestiture of the ownership to Sapphire left defendant Longman with insufficient assets to engage in any business and/or pay off his debts as they matured--the pattern was to extract money and promptly transfer proceeds as deemed convenient to any of the various entities he controlled or to the beneficiaries of his largess.
The fifth count is similar to the third count, except as pertains to the Greenwich Property (General Statutes § 52-552e(a)(1)). The court has found by clear and convincing evidence that there was a fraudulent transfer of the Greenwich property from defendant Longman to Lurie. Having invested hundreds of thousands of dollars of personal money (from the Vanguard account) as well as undertaking personal liability for financing, the transfer to Lurie (for no apparent consideration), within a few weeks, with a sale to an ultimate purchaser in the offing, leaves little room for substantial doubts--the goal was to remove title from defendant Longman's name so as to avoid any exposure to creditors such as the plaintiff.
The sixth count is similar to the fourth count, except applicable to the Greenwich property. The analysis is the same, and probably more so--whereas in the case of the transfer to Sapphire, there had been an extraction of cash through a refinance during the brief ownership by defendant Longman, there was no generation of money during the brief time the property was owned by defendant Longman; only expenditures and incurred liability.
The seventh count asserts reverse piercing based on an instrumentality analysis. The eighth count asserts reverse piercing based on an identity or unity of interest analysis. In this case, it is hard to draw any distinction given the total dominance and manner of utilization of the entities, in particular Sapphire and Lurie. While formalities were given lip-service, the identified entities that are found to be subject to reverse piercing, and in particular Sapphire and Lurie, were simply shells used for whatever purposes defendant Longman chose (subject to formal ratification by his wife (essentially blindly), as needed). There was no separate raison d'etre, no independent courses of action, in any meaningful sense. Although playing small roles, the same is true for RIPP and 2GP.
Presenting the net effect in a more condensed format:
Judgment shall enter in favor of Hudson City Savings Bank (now M& T Bank) as to all claims asserted against it.
Judgment also enters in favor of the Shelter Rock entities and the Solaire entities and W.W. Land Co. (and any defendants against whom the plaintiff has abandoned claims but not formally withdrawn).
Judgment also enters in favor of the Shelter Rock entities and the Solaire entities and W.W. Land Co. (and any defendants against whom the plaintiff has abandoned claims but not formally withdrawn).
As noted early in this decision, the case has been withdrawn as to The Savings Bank of Danbury, Fifty-Five (55) Post Road West Management, Chatham Haste, LLC, SIXTY (60) SRA Management, LLC, Shelter Rock Enterprises I, LLC, Shelter Rock Development Associates, LLC, Parcelle Development LLC, Thirty-One (31) Pecks Lane Associates, LLC, and Dreamfields, LLC.
Judgment enters in favor of the remaining defendants as to the first and second counts.
Judgment enters in favor of the plaintiff, as against defendant Longman and defendant Sapphire, as to the third and fifth counts.
Judgment enters in favor of the plaintiff, as against defendant Longman and defendant Lurie, as to the fourth and sixth counts.
Judgment enters in favor of the plaintiff, as against defendants Longman, Sapphire, Lurie, RIPP and 2 Great Pasture Road Associates, LLC (" 2GP"), with respect to the seventh and eighth counts.
(The Longman defendants have observed that defendant HCSB offered no evidence relating to its cross claim against Sapphire and did not address that claim in its post-hearing brief. The claim is deemed abandoned, and judgment enters in favor of defendant Sapphire as to that cross complaint.)
Claims for relief
[No relief is available under the first and second counts.]
As to the third and fourth counts, the court enters an order in the nature of a declaratory judgment, avoiding and setting aside the fraudulent transfer of the Ridgefield property by defendant Longman to Sapphire, and immediately imposes a constructive trust on said property, in favor of the plaintiff. As a corollary, the defendants are enjoined from taking any action to encumber or dispose of any interest in such property. As a result of such orders, the property is subject to any and all postjudgment remedies that may be applicable.
As to the fifth and sixth counts, the court enters an order in the nature of a declaratory judgment, declaring that the transfer of the Greenwich property from defendant Longman to defendant Lurie was a fraudulent conveyance, imposing a constructive trust on all monies received from the transaction, and all securities or other items of value acquired through expenditure of any or all such funds. As a corollary, the defendants are enjoined from taking any action to encumber or dispose of any remaining property. As a result of such orders, any remaining money, and any property obtained through the expenditure of such money, is subject to any and all postjudgment remedies that may be applicable. (The court will entertain a particularized request for appointment of receiver, to the extent that suitable property/assets are identified that might benefit from appointment of a receiver.) To the extent that the plaintiff has requested an order of damages against defendant Lurie, the court enters an award of $250,000 damages against defendant Lurie, with any remaining assets of Lurie, whether or not attributable to the proceeds of its sale of Greenwich property, being credited against the judgment.
As to the seventh and eighth counts, the court enters an order the nature of declaratory judgment, that defendants Sapphire, Lurie, RIPP and 2 Great Pasture Road Associates, LLC (" 2GP") were instrumentalities and or alter egos of the defendant Longman and their separate corporate existence shall be disregarded for purposes of satisfying the debt of defendant Longman to the plaintiff, and such defendants are enjoined from disposing of any assets prior to satisfaction of the New York judgment in favor of the plaintiff. (Again, the court will entertain a particularized request for appointment of receiver, to the extent that suitable property/assets are identified that might benefit from appointment of a receiver.)
Conclusion
Analogous to the mythical Hydra, each issue as addressed in this case tended to spawn multiple sub-issues that needed to be resolved. As should be obvious, the court has attempted to avoid the details and minutia of the various activities of everyone identified as playing a role, attempting to focus on the broader issues and determinative facts.
Feeling a sense that he had been betrayed and wronged by the plaintiff, it is not totally surprising that somebody like defendant Longman, with a modicum of financial acumen, would try to arrange his affairs so as to minimize the exposure to postjudgment remedies, especially in the multi-million-dollar range. Recognizing its possible origin is a far cry from sanctioning the conduct. It is one thing, as with respect to the Solaire entities, to specialize the functions of multiple entities in a single endeavor; it is another matter to use multiple entities for an elaborate variation on the carnival " find the pea" (a/k/a shell game). The court feels obligated to return, yet again, to Gayla Longman. The court recognizes that in a sense, she was " innocent" of active wrongdoing, but by authorizing her husband to act in all respects on her behalf and on behalf of the entities she nominally controlled, by affirmatively ratifying whatever it was he had done, and ultimately benefiting from the intricate financial arrangements he had established (not only for her but for the children), the court does not believe that a claim of innocence in the context of the appellant-level concerns expressed relating to reverse piercing, carry enough weight for the court to be hesitant to act as it has done.
Judgment shall enter in accordance with the foregoing.