Opinion
No. CV-07-5002464-S
February 27, 2008
MEMORANDUM OF DECISION ON MOTION TO STRIKE BY DEFENDANTS GC INDUSTRIES CORP. AND THOMAS ABELLA
The defendants, GC Industries Corp. ("GCI") and Thomas Abella (Abella), have moved to strike Counts Eleven through Seventeen of the Complaint dated July 20, 2005, on the grounds that those counts fail to state a cause of action.
Allegations of the Complaint
The Complaint alleges that Metalpro, LLC (Metalpro), a Connecticut limited liability company, executed a promissory note to the defendant TD Banknorth in the amount of $744,000 on October 20, 2003. To secure that promissory note Metalpro executed a security agreement which gave TD Banknorth a first priority security interest in the assets of Metalpro. In addition, the defendants Thomas E. Wright and Elizabeth L. Wright, sole members of Metalpro, executed guaranties of the payment of the promissory note.
At all relevant times the defendant Thomas Abella, of New Jersey was the sole owner of the defendant GC Industries Corp., a Connecticut corporation, and 111, LLC, a Connecticut limited liability company.
On January 31, 2006 111, LLC purchased the Wright's interest in Metalpro. In consideration of that purchase 111, LLC executed a promissory note in the amount of $842,000 payable to the Wrights. That note was guarantied by GC Industries Corp. 111, LLC and GC Industries Corp. also executed guaranties of Metalpro's obligation to TD Banknorth.
On January 31, 2006 Metalpro executed employment agreements with the Wrights. On August 22, 2006 TD Banknorth notified Metalpro that it was in default under the promissory note from the Wrights. Thereafter Abella and the Wrights acted as the agent for TD Banknorth in collecting the assets of Metalpro and holding an auction of the assets to satisfy the indebtedness to TD Banknorth.
On September 11, 2006 the plaintiff obtained a prejudgment remedy order in the amount of $86,000 against Metalpro and on September 12, 2006 the plaintiff filed a UCC-1 with the Connecticut Secretary of State to indicate that it was a secured creditor of Metalpro. On September 26, 2006 TD Banknorth held a secured creditor's auction of the assets of Metalpro pursuant to Connecticut General Statutes § 42a-9 610.
The proceeds from that auction were sufficient to satisfy the debt from Metalpro to TD Banknorth and TD Banknorth advised the plaintiff that it was holding $18,803.25 for the benefit of the plaintiff. On October 2, 2006 TD Banknorth advised the plaintiff that it had exercised its right of set-off with respect to the assets of Metalpro and that it was no longer holding any assets for the benefit of the plaintiff.
While the plaintiff was a creditor of Metalpro, the Wrights made transfers of Metalpro's assets to themselves for their own personal benefit with the intent to hinder, delay, or defraud the plaintiff and other creditors in violation of Connecticut General Statutes § 52-552e, and Metalpro became insolvent shortly after the transfers were made.
Count Eleven of the Complaint alleges that while the plaintiff was a creditor of Metalpro, Abella and GCI through Abella, transferred the accounts receivable and/or other assets of Metalpro to the Wrights with the intent to hinder, delay or defraud the plaintiff in violation of § 52-552e. Count Twelve alleges a violation of § 52-552e(a)(2) in that Metalpro did not receive a reasonably equivalent value in exchange for the transfers to the Wrights and that Metalpro intended to incur debts beyond its ability to pay them as they became due. Count Thirteen alleges that while the plaintiff was a creditor of Metalpro, Metalpro, through GCI and Abella transferred the accounts receivable and/or other assets of Metalpro to the Wrights in violation of § 55-552f(a) in that Metalpro did not receive a reasonably equivalent value in exchange for the transfers and Metalpro was insolvent at the time of the transfers or became insolvent as a result of the transfers.
Count Fourteen alleges that the aforementioned conduct of GCI and Abella violated § 55-552f(b) in that the Wrights were insiders of Metalpro and the transfers were made for an antecedent debt and that Abella and GCI knew that Metalpro was insolvent at the time of the transfers. Count Fifteen alleges that Abella and GCI breached a fiduciary duty owed to the plaintiff and other creditors of Metalpro in that they knew or should have known that Metalpro was insolvent and yet transferred the accounts receivable and/or other assets of Metalpro to the Wrights.
Count Sixteen alleges that Abella and GCI have combined with the Wrights and 111, LLC in a civil conspiracy to unlawfully prevent the plaintiff from collecting its debt from Metalpro. Count Seventeen alleges that Abella and GCI were engaged in the conduct of "trade" and "commerce" within the meaning of Connecticut General Statutes § 42a-110a et seq., the Connecticut Unfair Trade Practices Act ("CUTPA") when they caused the aforementioned transfers from Metalpro to the Wrights to occur and that their actions constituted immoral, unethical and/or unscrupulous conduct in violation of CUTPA.
Discussion of the Law and Ruling
The function of a motion to strike is to test the legal sufficiency of a pleading. Practice Book § 10-39; Ferryman v. Groton, 212 Conn. 138, 142, 561 A.2d 432 (1989); Mingachos v. CBS, Inc., 196 Conn. 91, 108, 491 A.2d 368 (1985). In deciding a motion to strike the trial court must consider as true the factual allegations, but not the legal conclusions set forth in the complaint. Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990); Blancato v. Feldspar Corp., 203 Conn. 34, 36, 522 A.2d 1235 (1987).
The court should view the facts in a broad fashion, not strictly limited to the allegations, but also including the facts necessarily implied by and fairly provable under them. Dennison v. Klotz, 12 Conn.App. 570, 577, 532 A.2d 1311 (1987). In ruling on a motion to strike, the court must take as admitted all well-pled facts, and those necessarily implied thereby, and construe them in the manner most favorable to the pleader. Norwich v. Silverberg, 200 Conn. 367, 370, 511 A.2d 336 (1986).
"It is incumbent on a Plaintiff to allege some recognizable cause of action" in the complaint and it is not the burden of the defendant to attempt to correct the deficiency. Brill v. Ulrey, 159 Conn. 371, 374, 269 A.2d 262 (1970). A motion to strike is an appropriate means of presenting to the court legal issues at the outset of litigation. Gordon v. Bridgeport Housing Authority, 208 Conn. 161, 170, 544 A.2d 1185 (1988). "Whenever a party wishes to contest . . . the legal sufficiency of any such complaint . . . or any count thereof, because of the absence of any necessary party . . . that party may do so by filing a motion to strike the contested pleadings or part thereof." George v. St. Ann's Church, 182 Conn. 322, 325, 438 A.2d 97 (1980).
In Counts Eleven through Fourteen the plaintiff seeks relief under Connecticut's Uniform Fraudulent Transfer Act, § 52-552e and § 52-552f ("CUFTA"). Each count alleges that "Metalpro, Abella and GC through Abella" made fraudulent transfers to the Wrights. CUFTA applies as against transferors and transferees of fraudulent transfers made by a debtor. Neither Abella nor GCI are debtors of the plaintiff. Sections 52-552e and 52-552f both state that "a transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . ." (Emphasis added). CUFTA defines a debtor as "a person who is liable on a claim." Connecticut General Statutes § 52-552b(6).
The Complaint contains no allegations that Abella or GCI are liable to the plaintiff on any claim. Neither Abella nor GCI are transferees under § 52-552h(a). According to the allegations of the Complaint, the debtor and transferor is Metalpro and the transferees are the Wrights.
As the Complaint alleges, the alleged transfers were made by Metalpro and consisted of the assets of Metalpro. Since Metalpro is a limited liability company it can only act through its members. The plaintiff has alleged that 111, LLC was the sole member of Metalpro. Abella owned 111, LLC and GCI. As a limited liability company and a corporation, respectively, those entities could only act through individual persons. Therefore, the plaintiff's allegation that GCI and Abella "acted for" Metalpro does not automatically impose any liability on those defendants.
The plaintiff can fasten liability on GCI and Abella for their actions with respect to Metalpro only if it can "pierce the corporate veil" of Metalpro.
In Zaist v. Olson, 154 Conn. 563, 573-74, 227 A.2d 552 (1967), the Connecticut Supreme Court set forth the law on piercing the corporate veil:
Courts will disregard the fiction of separate legal entity when a corporation is a mere instrumentality or agent of another corporation or individual owning all or most of its stock . . . Under such circumstances the general rule, which recognizes the individuality of corporate entities and the independent character of each in respect to their corporate transactions, and the obligations incurred by each in the course of such transactions, will be disregarded, where . . . the interests of justice and righteous dealing so demand . . . The circumstance that control is exercised merely through dominating stock ownership, of course, is not enough . . . There must be such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own and is but a business conduit for its principal.
(Citations omitted; internal quotation marks omitted.).
The doctrine of piercing the corporate veil also applies to a limited liability company. See Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 147, 799 A.2d 298, cert. denied, 261 Conn. 911, 802 A.2d 854 (2002); see also Connecticut General Statutes § 34-133.
"The concept of piercing the corporate veil is equitable in nature and courts should pierce the corporate veil only under `exceptional circumstances.'" Davenport v. Quinn, 53 Conn.App. 282, 301, 730 A.2d 1184 (1999). Such exceptional circumstances would include instances "where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice." (Internal quotation marks omitted.) SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 230, 585 A.2d 666, cert. denied, 501 U.S. 1223, 111 S.Ct. 2839, 115 L.Ed.2d 1008 (1991). "No hard and fast rule, however, as to the conditions under which the entity may be disregarded can be stated as they vary according to the circumstances of each case." (Internal quotation marks omitted.) Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 555-56, 447 A.2d 406 (1982).
In Angelo Tomasso, Inc., supra, at 553-54, the Connecticut Supreme Court recognized the instrumentality rule and the identity rule as grounds for piercing the corporate veil:
The instrumentality rule requires, in any case but an express agency, proof of three elements: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
(Internal quotation marks omitted.)
"[T]he key factor in any decision to disregard the separate corporate entity is the element of control or influence exercised by the individual sought to be held liable for corporate actions." Christian Bros., Inc. v. South Windsor Arena, Inc., 7 Conn.App. 648, 651, 509 A.2d 1095 (1986).
The identity rule has been stated as follows:
If plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation conducted by one corporation for the benefit of the whole enterprise.
Angelo Tomasso, Inc., supra, at 554, (Internal quotation marks omitted.)
The identity rule primarily applies to prevent injustice in the situation where two corporate entities are, in reality, controlled as one enterprise because of the existence of common owners, officers, directors or shareholders and because of the lack of observance of corporate formalities between the two entities.
Id., 560.
"Although the `identity' or `alter-ego' doctrine has been primarily applied to reach beyond the veil to another corporation, it may also be employed to hold an individual liable." Klopp v. Thermal-Sash, Inc., 13 Conn.App. 87, 89 n. 3, 534 A.2d 907 (1987).
The plaintiff has made no attempt to allege any elements of the identity rule. Although it has pleaded that GCI through Abella "controlled and/or managed Metalpro," the plaintiff has failed to allege the sort of complete domination required by the first element of the instrumentality rule as well as the second and third elements, that such control was used to perpetrate a fraud and that the fraud caused the injuries alleged. Absent such allegations, Counts Eleven through Fourteen allege conduct by Metalpro as transferor and the Wrights as transferees. There is no actionable conduct by GCI or Abella and no cause of action stated as to those two defendants. Therefore, Counts Eleven through Fourteen are hereby stricken.
Count Fifteen alleges that "as employees, agents, managers, directors and/or officers of Metalpro, Abella and GC through Abella breached their fiduciary duty to the plaintiff as creditors of Metalpro." A creditor of an insolvent corporation cannot assert a direct claim against the corporation's directors. Metcoff v. Lebovics, Superior Court Judicial District of Waterbury, CLD, Number 06CV055000521S, 2007 Conn.Super. LEXIS 2245, *10 (August 16, 2007, Stevens, J.) [44 Conn. L. Rptr. 107], citing North American Catholic Educ. Programming Foundation, Inc. v. Cheewalla, 930 A.2d 92, 2007 Del. LEXIS 227 (Del. 2007).
Connecticut General Statutes § 33-673(b) acts to exempt shareholders of a corporation from personal liability and provides in relevant part that "a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct." KLM Industries, Inc. v. Tylutki, 75 Conn.App. 27, 31, 815 A.2d 688 (2003). Similarly, Connecticut General Statutes § 34-133 provides that, "a person who is a member or manager of a limited liability company is not liable, solely by reason of being a member or manager . . . for a debt, obligation or liability of the limited liability company, whether arising in contract, tort or otherwise or for the acts or omissions of any other member, manager, agent or employee of the limited liability company." There is no statutory or case law which imposes any fiduciary duty to creditors on the members, shareholders, officers or directors of a corporation or limited liability company. Therefore, Count Fifteen is ordered stricken. Count Sixteen alleges a civil conspiracy against Abella and GCI. A claim for civil conspiracy is insufficient unless based on some underlying cause of action. Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 140, 799 A.2d 290 (2002). For reasons stated above, the plaintiff has not stated a viable cause of action against GCI and Abella under CUFTA or for breach of a fiduciary duty. However, the plaintiff has stated a viable claim against Metalpro and the Wrights for violation of CUFTA. The allegations of Count Sixteen, construed in a manner most favorable to the plaintiff, allege that Abella and GCI conspired with Metalpro and the Wrights in their violation of CUFTA. Count Sixteen is not stricken.
Count Seventeen alleges violations of CUTPA by Abella and GCI. Absent allegations sufficient to permit a disregard of Metalpro's status as a limited liability company, the Complaint (except Count Sixteen) states claims only against Metalpro and the Wrights. To the extent Metalpro's transfers of assets to the Wrights were unfair or deceptive, then those transfers might fasten CUTPA liability on Metalpro or the Wrights, but not on Abella or GCI. Count Seventeen is hereby ordered stricken.