Comm'r of Envtl. Prot. v. State Five Indus. Park, Inc., 18543.

• Decision Date: 20 March 2012
• Docket Number: No. 18543.,18543.
• Citation: 37 A.3d 724,304 Conn. 128
• Court: Connecticut Supreme Court
• Parties: COMMISSIONER OF ENVIRONMENTAL PROTECTION et al. v. STATE FIVE INDUSTRIAL PARK, INC., et al.

304 Conn. 128

37 A.3d 724

COMMISSIONER OF ENVIRONMENTAL PROTECTION et al.

v.STATE FIVE INDUSTRIAL PARK, INC., et al.

No. 18543.

Supreme Court of Connecticut.

Argued Sept. 6, 2011.Decided March 20, 2012.

Kerry M. Wisser, West Hartford, with whom was Nathan A. Schatz, for the appellants (defendants).

Krista E. Trousdale, assistant attorney general, with whom were Matthew I. Levine, assistant attorney general, Susan Gruen, corporation counsel, and, on the brief, Richard Blumenthal, former attorney general, and for the appellees (plaintiffs).

ROGERS, C.J., and NORCOTT, PALMER, ZARELLA, McLACHLAN and EVELEIGH, Js.

ROGERS, C.J.

This case raises the question of whether the equitable doctrine of reverse piercing of the corporate veil is a viable remedy in Connecticut. The defendants, State Five Industrial Park, Inc. (State Five), and Jean L. Farricielli (Jean), appeal ¹ from the judgment of the trial court holding them liable, after invoking both reverse and traditional veil piercing principles, for a $3.8 million judgment rendered in 2001 (2001 judgment) ² against Jean's husband, Joseph J. Farricielli (Joseph), and five corporations that he owned and/or controlled, in an environmental enforcement action (1999 action) brought by the plaintiffs, the commissioner of environmental protection (commissioner), the town of Hamden (town) and the town's zoning enforcement officer.³ See generally Rocque v. Farricielli, 269 Conn. 187, 848 A.2d 1206 (2004). The defendants claim that the trial court improperly employed reverse veil piercing to hold them liable for the 2001 judgment because that remedy should not be recognized at all in Connecticut or, alternatively, that the trial court should not have applied it given the facts of the present case. We agree that the facts that were proven in this case do not warrant reverse veil piercing and, accordingly, reverse the judgment.⁴

The following facts, which the trial court found, and procedural history are relevant to the appeal. On July 9, 1999, the commissioner initiated an action against Joseph and the five corporations that he controlled and/ or owned—Hamden Salvage, Inc., Tire Salvage, Inc., North Haven Tire Disposal, Inc., Quinnipiak Real Estate & Development Corporation and Hamden Sand & Stone, Inc.—alleging egregious violations of state statutes regulating solid waste disposal. Id., at 191, 848 A.2d 1206. “Specifically, the commissioner sought: an order from the trial court enforcing the terms of the commissioner's 1998 consent order with [Joseph] and his corporations, which was designed to end ongoing statutory violations; a temporary and permanent injunction requiring [Joseph] and his corporations to cease their illegal activities; and an order requiring [Joseph] and his corporations to pay civil penalties for each day of each alleged violation.... [T]he plaintiffs filed a joint amended complaint seeking, in addition to all of the aforementioned remedies, enforcement of an existing cease and desist order and the stipulated judgment in effect between the town and [Joseph] and his corporations, which was designed to end ongoing violations of various zoning ordinances. A bench trial took place in September and October, 2000, and the trial court issued its memorandum of decision on September 21, 2001, ordering all of the forms of relief sought by the plaintiffs.” Id., at 191–92, 848 A.2d 1206. Joseph appealed and, on June 1, 2004, this court affirmed the trial court's judgment. ⁵ Id., at 213, 848 A.2d 1206.

The 2001 judgment required Joseph and his corporations to, inter alia, post bonds, fund the closure of two illegal solid waste landfills and pay approximately $3.8 million in civil penalties to the commissioner and the town. The judgment also required Joseph and his corporations to reimburse the commissioner for amounts expended in addressing environmental conditions at the landfills. Although the bonds have been posted, in part, and substantial remediation work has been done at the subject properties since the 2001 judgment, the civil penalties largely have gone unpaid.

In 2005, the plaintiffs initiated the present action, alleging that Jean and State Five should be held liable for all of the obligations imposed upon Joseph and his corporations pursuant to the 2001 judgment. Specifically, they alleged that reverse veil piercing should apply to hold State Five liable for the 2001 judgment against Joseph and that traditional veil piercing thereafter should apply to hold Jean liable for the resulting judgment against State Five. As to each veil piercing claim, the plaintiffs alleged that both the instrumentality and identity rules had been satisfied.

A trial to the court was held in February and March, 2008. The trial court examined the activities of Joseph, Jean and State Five prior and subsequent to the 2001 judgment and found the following facts. State Five, under its present name and various others, has been in existence since 1967.⁶ State Five's most substantial asset is a piece of land in Hamden known as parcel C. ⁷ State Five primarily is engaged in leasing out portions of parcel C to commercial tenants, for which it collects rents. Parcel C also houses a cellular telephone tower, for which State Five has received rental income. On October 14, 1999, during the pendency of the 1999 action, the commissioner attempted to add State Five as a defendant in that action, but its motion was denied.⁸

Over the years, Joseph has quitclaimed real property to State Five, including parcel C in February, 1996. In January, 2000, he caused Tire Salvage, Inc., to transfer a strip of land to State Five so that parcel C would meet the requisite regulatory requirements for construction of the cellular telephone tower. Between 2001 and 2004, Joseph wrote personal checks transferring funds to State Five, and he provided a down payment for a pickup truck for the company.

Joseph presently has no ownership interest in State Five. All of the stock of State Five is owned by another entity, Recycling Enterprises (Recycling). Eighty percent of the stock of Recycling is owned by Jean, and the remaining 20 percent is owned by the two sons of Jean and Joseph, thereby giving the sons an indirect ownership interest in State Five. The sons are not parties to this action. This ownership structure originated in the late 1980s, when Joseph transferred all of the stock of State Five to Recycling, and has been in place since then, except for a period between December, 2001, and August, 2004. During that period, Recycling transferred ownership of all of State Five's stock to a friend of Jean and Joseph, William J. LaVelle.⁹ The trial court found that Joseph had negotiated the transfer of stock to LaVelle, that it was not an authentic sale ¹⁰ and that Joseph and Jean retained control over State Five during the period of LaVelle's ownership.

Joseph currently is not an officer or director of State Five. Prior to February, 2001, he was president of State Five, but on February 15, 2001, LaVelle assumed that office. Jean is currently president and sole officer and director of State Five. The sons have not been involved in running either State Five or Recycling. According to the trial court, the sons “had no real involvement with [those companies]. They did not make any decisions necessary to run the business and did not make any suggestions that things be done any differently.”

Prior to February, 2001, Joseph ran all aspects of State Five. Thereafter, although he held no formal office or position at State Five, he remained very involved in its operations. During the period that LaVelle owned State Five and was its president, LaVelle's control over State Five was restricted, and Joseph and Jean both continued to participate in State Five's affairs. Although it was agreed that LaVelle would split profits that accrued from the development of parcel C with Joseph and Jean, LaVelle ran into roadblocks when pursuing that development, and no significant progress was made. Jean frequently was present at State Five's offices and dealt with its tenants. Joseph maintained an office at State Five, sometimes received wages from the corporation and continued to deal with its tenants. He directed its bookkeeper and accountant as to how to characterize transactions, and he wrote correspondence on State Five's behalf. Both Joseph and Jean continued to write checks from State Five's checking account.

Subsequent to the 2001 judgment, State Five continued to earn rental income from its existing tenants, and it gained several new tenants during LaVelle's tenure. While State Five previously had operated profitably as a landlord and, between 1998 and 2000, was not liable on any notes to lending institutions, it began, starting in 2001, to take on substantial debt by assuming obligations of Hamden Sand & Stone, Inc., without also acquiring that corporation's assets. The corporate debt that State Five assumed had been personally guaranteed by Jean and Joseph. Between 2001 and 2006, State Five's financial condition worsened, it became thinly capitalized and most of its debt did not relate to its business as a landlord.

To keep State Five viable, Jean contributed her own funds, as well as those borrowed from her mother, to finance State Five. Additionally, she borrowed against her own property, and property she owned jointly with Joseph, and put the proceeds into State Five. State Five also opened a line of credit with Citizens Bank, which was secured with Jean's personal assets.

Despite its poor financial condition, State Five paid “thousands of dollars” worth of personal expenses for Jean and Joseph, consisting mostly of joint obligations, but also including individual expenses such as Joseph's legal expenses. State Five's accounting treatment of these personal expenses was improper and inconsistent, and it lacked appropriate documentation. Although Joseph and Jean have caused State Five to make payments to...