Virginia Corp. v. Galanis, 14474

• Decision Date: 11 August 1992
• Docket Number: No. 14474,14474
• Citation: 223 Conn. 436,613 A.2d 274
• Court: Connecticut Supreme Court
• Parties: VIRGINIA CORPORATION v. C. Chandra GALANIS, et al.

Page 274

613 A.2d 274

223 Conn. 436

VIRGINIA CORPORATION v. C. Chandra GALANIS, et al.

No. 14474.

Supreme Court of Connecticut.

Argued April 29, 1992.

Decided Aug. 11, 1992.

Edwin L. Doernberger, with whom was M. Mitchell Morse, New Haven, for appellants (plaintiff and defendant Consolidated Capital Corp.).

William A. Phillips, Greenwich, for appellee (defendant Armstrong Capital, S.A.).

Before PETERS, C.J., and CALLAHAN, GLASS, BORDEN and BERDON, JJ.

BORDEN, Justice.

The dispositive issues in this appeal are: (1) whether three judgment liens of the defendant Armstrong Capital, S.A. (Armstrong), on a particular piece of property are entitled to priority, in a foreclosure action, over the mortgages of the plaintiff, Virginia Corporation, and one of the defendants, Consolidated Capital Corporation (Consolidated Capital), on that property; and (2) whether moneys expended to maintain property during a mortgage foreclosure proceeding, authorized by the court, are to be given priority over the encumbrances on that property. The plaintiff brought this action to foreclose its mortgage, and appeals jointly with Consolidated Capital from the judgment of the trial court, Karazin, J., affirming the report of an attorney state trial referee that established the priorities of the encumbrances on the property. ¹

The plaintiff and Consolidated Capital claim that the trial referee improperly concluded that: (1) they had notice of a fraudulent conveyance of the property due to a notice filed on the land records by an interim trustee in bankruptcy; (2) the conveyances of the mortgages to them were fraudulent conveyances in which they had participated; (3) Armstrong's claims were not barred by the statute of limitations within which to bring an action to set aside a fraudulent conveyance; and (4) the moneys they had expended, pursuant to court authorization, in order to maintain the property during this foreclosure proceeding were not entitled to priority over the recorded encumbrances on the property. We affirm in part and reverse in part.

The relevant facts are as follows. On January 13, 1977, John Galanis ² purchased property known as 766 Lake Avenue in Greenwich (the property) in the name of Paisley Farms, Inc. (Paisley Farms). Galanis, who controlled Paisley Farms as its president, had Paisley Farms hold record title to the property in order to shield the property from his creditors. In November, 1978, Paisley Farms, at John Galanis' direction, conveyed the property to his attorney, Dennis Joy, as trustee. In June, 1979, Armstrong registered in Connecticut three judgments ³ that it had obtained against John Galanis for fraud.

In January, 1980, at Galanis' direction, Dennis Joy, as trustee, conveyed the property to Galanis' wife, C. Chandra Galanis (Chandra Galanis). Simultaneously, Chandra Galanis, at John Galanis' direction, conveyed the property to JPJ Investments, Inc. (JPJ Investments). These conveyances were recorded on April 25, 1980, and were all executed in order to shield the property from creditors of John Galanis. Five days later, on May 1, 1980, Chase Manhattan Bank instituted an involuntary bankruptcy proceeding against John Galanis. On April 13, 1981, the interim trustee in the bankruptcy proceeding recorded a notice in the Greenwich land records claiming an interest in the property on behalf of John Galanis' creditors. ⁴ In June, 1982, JPJ Investments, at the direction of John Galanis, conveyed the property to Chandra Galanis. John Galanis directed this conveyance in order to use the property as security for loans he planned to obtain.

On March 10, 1983, Chandra Galanis, Thomas Williams and Andover Financial Corporation ⁵ procured from the plaintiff a loan in the amount of $1,000,000 and executed a promissory note in that amount to the plaintiff. To secure the note, Chandra Galanis conveyed to the plaintiff a mortgage on the property that was recorded on the same day. On July 30, 1984, Chandra Galanis and Consolidated Mortgage ⁶ procured from Consolidated Capital a loan in the amount of $1,500,000 and executed a promissory note in that amount to Consolidated Capital. To secure the note, Chandra Galanis conveyed to Consolidated Capital a mortgage on the property that was recorded on August 9, 1984. The property was valued at approximately $3,000,000 when the trial began. ⁷ It is these mortgages of the plaintiff and Consolidated Capital that the trial court subordinated to the subsequently recorded judgment liens of Armstrong.

After the recordation of the mortgages, Armstrong filed a suit against John and Chandra Galanis seeking collection of its three registered judgments. On March 12, 1986, Armstrong obtained a prejudgment remedy of attachment against John and Chandra Galanis in the total amount of $2,213,000 and recorded the attachment against the property. Armstrong thereafter recorded judgment lien certificates for its three judgments against the property on September 9, 1987. It is these judgment liens, rather than the attachments, to which the trial court gave priority over the mortgages of the plaintiff and Consolidated Capital.

On September 26, 1986, the plaintiff filed the present action to foreclose its mortgage on the property. On July 6, 1987, Armstrong filed its answer and special defenses to the foreclosure action, along with a counterclaim against the plaintiff and a cross complaint against Consolidated Capital. In its special defenses, Armstrong claimed that the plaintiff and Consolidated Capital "knew or should have known that the defendant Chandra Galanis was holding title to the premises as nominee of John Galanis," that they knew John Galanis was involved in fraudulent activity and that they had "conspired with him to disguise his interest in the premises...." Armstrong sought to have the mortgages declared null and void.

On September 21, 1990, after a trial to an attorney state trial referee, W. James Cousins, the referee issued a report concluding that Armstrong had proven, by clear and convincing evidence, that the conveyances of the property, directed by John Galanis, were fraudulent conveyances made with the intent to defraud John Galanis' creditors. ⁸ The referee then noted that "Armstrong, having proven that John Galanis fraudulently conveyed his property to avoid creditors, established its right to enforce its judgments against the property. That right is subject only to the intervening rights of someone who innocently buys or encumbers the property without notice of Armstrong's claim. Trumbull v. Hewitt, 65 Conn. 60, 31 A. 492 (1894), 37 Am.Jur.2d, Fraudulent Conveyances § 153. The rights of the buyer or encumbrancer are inferior to those of a creditor, if the buyer or encumbrancer 'knew or ought to have known of the fraudulent transfer, having been informed of facts which suggested an investigation of title....' 37 Am.Jur.2d, [supra, p. 824]." The referee found that the plaintiff and Consolidated Capital had actual knowledge of the fraudulent transfers through "the extensive and close relationship these lenders had with the fraudulent transferor, John Galanis."

On the basis of these findings, the trial referee assigned Armstrong's three judgment liens a priority position over the mortgages of the plaintiff and Consolidated Capital. On July 2, 1991, the trial court, Karazin, J., rendered judgment in accordance with the trial referee's report and recommendations. The plaintiff and Consolidated Capital appealed to the Appellate Court from that judgment, and we transferred the appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c).

I

The plaintiff's and Consolidated Capital's first claim is that the trial referee improperly found that they had participated with Chandra Galanis in John Galanis' scheme to defraud his creditors when they received their mortgages on the property. They argue that in order to set aside their mortgages, Armstrong was required to prove, by clear and convincing evidence, that the mortgage conveyances had been made with fraudulent intent in which they had participated. They stress that "[i]t must be emphasized that the [clear and convincing evidence] standard of proof must be applied to the conveyances from Chandra Galanis to [the plaintiff] and Consolidated Capital."

Armstrong claims, on the contrary, that since the plaintiff and Consolidated Capital had actual knowledge of the fraudulent conveyance directed by John Galanis to Chandra Galanis, the record owner of the property at the time of the mortgage conveyances, the plaintiff and Consolidated Capital were not bona fide encumbrancers and, therefore, their mortgage encumbrances on the property were subordinate to the claims of Galanis' defrauded creditors. In other words, Armstrong argues that irrespective of the trial referee's finding that the plaintiff and Consolidated Capital participated in John Galanis' fraudulent scheme, the fact that they had actual knowledge of the fraudulent conveyance to Chandra Galanis that was directed by John Galanis "destroys [their] pretended bona-fides." ⁹ We agree with Armstrong.

The plaintiff and Consolidated Capital initially claim that Armstrong is barred by the three year statute of limitations within which to bring an action to set aside a fraudulent conveyance. See Travelers Indemnity Co. v. Rubin, 209 Conn. 437, 441, 551 A.2d 1220 (1988) (three year tort statute of limitations of General Statutes § 52-577 applies to common law fraudulent conveyance action). The trial referee held that any statute of limitations was tolled due to John Galanis' fraudulent concealment of the various fraudulent conveyances and by the automatic stay during the bankruptcy proceeding. We note, contrary to the assertions of the plaintiff and Consolidated Capital, that the present case is not an action brought by Armstrong to set aside the mortgage conveyances from Chandra Galanis to the plaintiff and Consolidated Capital. ¹⁰...