McKay v. Longman, SC 20013

• Court: Supreme Court of Connecticut
• Writing for the Court: KAHN, J.
• Decision Date: 23 July 2019
• Parties: ROBERT J. MCKAY v. STUART L. LONGMAN ET AL.
• Docket Number: SC 20013,SC 20014

ROBERT J. MCKAY
v.
STUART L. LONGMAN ET AL.

SC 20013
SC 20014

Supreme Court of Connecticut

Argued November 15, 2018
July 23, 2019

Robinson, C. J., and Palmer, D'Auria, Mullins, Kahn and Ecker, Js.^*

Syllabus

Pursuant to the Connecticut Uniform Fraudulent Transfer Act (CUFTA) (§ 52-552e [a] [1] and [2]), a transfer made by a debtor is fraudulent as to a creditor if the creditor's claim arose before the transfer was made and if the debtor made the transfer with intent to hinder, delay or defraud any creditor of the debtor or without receiving a reasonably equivalent value in exchange for the transfer.

Pursuant further to CUFTA (§ 52-552f [a]), a transfer made by a debtor is fraudulent as to a creditor if the creditor's claim arose before the transfer was made, the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer, and the debtor was insolvent at that time or became insolvent as a result of the transfer.

The plaintiff, who had obtained a judgment in New York against his former business partner, the defendant L, sought to enforce that judgment in Connecticut through the imposition of constructive trusts on certain real property in Ridgefield and on the proceeds from the sale of real property in Greenwich, and by having the trial court apply the doctrine of reverse corporate veil piercing to eight defendant companies affiliated with L, namely, S Co., X Co., R Co., G Co., W Co. and three other companies collectively referred to as the S entities. After the plaintiff obtained the New York judgment, S Co., a real estate development business, whose only asset was the Ridgefield property, obtained a loan from the defendant bank, M Co., secured by a mortgage on the Ridgefield property. L, a member of S Co., executed the mortgage documents on behalf of S Co., and S Co. then transferred title to the property to L. L then obtained a loan, secured by a mortgage against the Ridgefield property, and transferred title to that property back to S Co. L and his family occupied a residence on the Ridgefield property but never executed a lease with S Co. or made any rental payments. Subsequently, L acquired title to the Greenwich property in his name but, shortly thereafter, quitclaimed title to that property to X Co., a company owned by L's wife and controlled by L, for no more than nominal consideration and without payment of a conveyance tax. X Co. sold that property to a bona fide purchaser, and L, through X Co., distributed portions of the sale proceeds to L's personal bank account and among the bank accounts of various entities with which L was associated. The plaintiff alleged that, pursuant to the provision ([Rev. to 2017] § 34-130) of the Connecticut Limited Liability Company Act governing the authority of members and managers of limited liability companies to execute legal instruments on behalf of such companies, L did not have the authority to bind S Co. to the mortgage agreement with M Co., and sought to have that mortgage declared void so that it would not be an encumbrance on the Ridgefield property for purposes of enforcing the New York judgment. The plaintiff also alleged that L, through his control of various entities, fraudulently transferred the Ridgefield property to S Co. and the Greenwich property to X Co., in violation of §§ 52-552e (a) (1) and (2) and 52-552f (a), in an attempt to avoid creditors such as the plaintiff. The plaintiff further claimed that the trial court should apply the doctrine of reverse corporate veil piercing, an equitable remedy by which a court imposes liability on a corporation for the acts of a corporate insider, allowing a creditor to reach the assets of the corporation, to the eight defendant companies, to the extent necessary to satisfy the New York judgment. The trial court concluded that the plaintiff lacked standing to challenge the mortgage between M Co. and S Co. and to have it declared void. The trial court also set aside as fraudulent L's transfer of the Ridgefield property to S Co. and the Greenwich property to X Co. The court imposed a constructive trust on the Ridgefield property in favor of the plaintiff, subjecting it to all applicable postjudgment remedies, and imposed a constructive

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trust on all moneys received from or other items of value acquired through the transfer of the Greenwich property, and awarded damages to the plaintiff. The trial court finally determined that S Co., X Co., R Co. and G Co. were alter egos of L, and that their separate corporate existence was to be disregarded for purposes of satisfying L's debt to the plaintiff, enjoining those companies from disposing of any assets prior to the satisfaction of the plaintiff's New York judgment but that the S entities were not alter egos of L. From the trial court's judgment, L, S Co., X Co., R Co. and G Co. appealed, and the plaintiff filed a separate appeal. Held:

1. The trial court correctly determined that the plaintiff lacked standing to challenge the enforceability of M Co.'s mortgage to S Co.: the plaintiff, who was not a party to the mortgage, a third-party beneficiary of it, or either a member or manager of S Co., did not fall within the zone of interests that § 34-130 was intended to protect, and, when M Co. and S Co. entered into the mortgage agreement, the plaintiff had not yet recorded a lis pendens on the land records and, therefore, had no recorded title interest in the property; moreover, there was no merit to the plaintiff's claim that, because the text of § 34-130 is silent as to who may bring an action under that statute, it confers standing on creditors of parties that enter into contracts with or on behalf of a limited liability company, as the effect of such a rule would expose future lenders to any and all such claims by any creditors of any party that enters into a contract with a limited liability company, thereby contradicting the apparent intent of the legislature in enacting the Connecticut Limited Liability Company Act, which was to give maximum effect to the enforceability of limited liability company agreements.

2. The trial court's findings that L's transfers of the Ridgefield property to S Co. and the Greenwich property to X Co. were fraudulent under §§ 52-552e and 52-552f were not clearly erroneous: multiple factors set forth in § 52-552e (b) supported the trial court's finding with respect to the Ridgefield property, including that L was an insider with respect to S Co., as S Co. was owned directly and indirectly by L and his wife and L made all of the decisions for S Co., that, through this insider relationship, L used the Ridgefield property as security for multiple loans, some of which were obtained by L in an individual capacity and paid off by loans acquired in a representative capacity, that there was a recording delay with respect to L's transfer of the Ridgefield property back to S Co., which allowed L to obtain a second mortgage without ever holding the transfer proceeds in his name, that there was no more than nominal consideration for the transfer, and that there was no indication of any benefit to S Co. for allowing L, through this and related transfers, to extract equity from S Co.'s sole asset; moreover, with respect to the Greenwich property, this court determined that the property constituted L's asset for purposes of CUFTA, as the record supported the trial court's finding that L acquired that property with purchase money provided through a series of transfers originating from L's personal bank account, there was evidence that X Co., an entity owned solely by L's wife, paid nothing more than nominal consideration for the property and that neither party paid a conveyance tax on the transfer, it appeared from the record that L's debts exceeded his identified assets, based on the amount of the New York judgment, which had increased significantly by the time of the transfer, and there was no apparent reason for the transfer to X Co., other than the avoidance of creditors such as the plaintiff.

3. This court recognized the doctrine of outsider reverse corporate veil piercing, and the trial court's application of the doctrine in the present case was not clearly erroneous:

a. This court, having recognized the doctrine of outsider reverse corporate veil piercing, set forth a three part test for its proper application, pursuant to which, first, the outsider must prove that, under the instrumentality or identity rule, as set forth in traditional veil piercing cases, the corporate entity has been so controlled and dominated that justice requires liability to be imposed or that there was such a unity of interest and ownership that the independence of the corporation had in effect ceased to exist, second, the trial court must consider the impact of reverse piercing on innocent shareholders and creditors, and, third, the trial court must consider whether adequate remedies at law are available.
b. The trial court's determination to apply the doctrine of reverse corporate veil piercing to S Co., X Co., R Co. and G Co. was not clearly

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erroneous: testimonial and documentary evidence admitted at trial demonstrated that L exercised control and dominance over S Co., X Co., R Co. and G Co. to perpetuate a fraud or wrong and that such wrong proximately caused the plaintiff's loss, as that evidence revealed, inter alia, that L fraudulently transferred the Ridgefield and Greenwich properties to S Co. and X Co., respectively, for the purpose of avoiding creditors, the property transfers rendered the plaintiff unable to attach L's assets in order to satisfy the debt owed to him, none of the four entities had any cognizable capital or sources of income other that from the transfers or from L's personal accounts, any inter-entity transactions made in conjunction with the transfers had no identified or identifiable business purpose and were subject to L's discretion, S Co. allowed L to maintain the family residence on its

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