Opinion
No. HHD CV-05-4015888S
January 5, 2009
MEMORANDUM OF DECISION
I STATEMENT OF CASE
This case is based on theories of piercing the corporate veil brought by the plaintiffs, the commissioner of environmental protection (commissioner), the town of Hamden and its zoning enforcement officer, against the defendants, State Five Industrial Park, Inc. (State Five) and Jean L. Farricielli, who is currently State Five's president.
In September 2001, the plaintiffs obtained a judgment against Joseph J. Farricielli, Jean Farriciell's husband, and various companies owned or controlled by him for violations of state environmental laws and local zoning regulations (the 2001 judgment). The named defendants in that case were Joseph J. Farricielli, Hamden Salvage, Inc. (Hamden Salvage), Tire Salvage, Inc. (Tire Salvage), North Haven Tire Disposal, Inc. (Tire Disposal), Quinnipiack Real Estate and Development Corp. (QRED), and Hamden Sand Stone, Inc. (Hamden Sand). The 2001 judgment required the defendants to close two landfills located in Hamden and North Haven, and to pay the plaintiff's $3.8 million in civil penalties. The 2001 judgment also required the defendants to post a $1 million bond to cover work at one of the two landfills — the "Tire Pond" — as well as post a $45,000 bond to cover some dike stabilization work at the Tire Pond. The 2001 judgment also made the defendants personally liable for any amounts the commissioner expended in addressing the environmental conditions at the two landfills.
In the amended complaint in this case, dated September 15, 2005, the plaintiffs allege several claims based on piercing and reverse-piercing of the corporate veil. The first and second counts of the amended complaint seek reverse veil piercing under the instrumentality and identity rules against State Five. The plaintiffs claim that the defendant State Five is the alter ego of Joseph J. Farricielli, such that State Five should be held liable for the obligations imposed by the 2001 judgment. Counts three and four seek veil piercing under the instrumentality and identity rules against Jean Farricielli. The plaintiffs also allege that State Five is the alter ego of Jean Farricielli, and, therefore, she should be held liable for the obligations imposed by the 2001 judgment, assuming the corporate veil of State Five is first pierced, imposing upon State Five the obligations of the 2001 judgment. Based upon theories of veil piercing, the plaintiffs seek to impose upon the defendants the monetary aspects of the 2001 judgment as well as prohibitory injunctions.
"In the usual veil piercing case, a court is asked to disregard a corporate entity so as to make available the personal assets of its owners to satisfy a liability of the entity. In this case, an instance of what is known as "reverse piercing," the plaintiff argues the opposite, that the assets of the corporate entities should be made available to pay the personal debts of an owner." Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 149, 799 A.2d 298, cert. denied, CT Page 45 261 Conn. 911, 806 A.2d 49 (2002). "The fact pattern before us has been more specifically described as `outsider reverse piercing' in that an outside third party pursuing a claim against a corporate insider is attempting to have the corporate entity disregarded. Conversely, in an `insider reverse piercing' claim, a corporate insider attempts to have the corporate entity disregarded." Id., 149 n. 13, citing G. Crespi, "The Reverse Pierce Doctrine: Applying Appropriate Standards," 16 J. Corp. L. 33, 37 (1990).
The defendants deny that State Five and Joseph Farricielli are alter egos of one another. The defendants further deny that State Five and Jean Farricielli are alter egos of one another. The defendants also maintain that, as a matter of physics and law, Joseph Farricielli and Jean Farricielli are not alter egos of one another. The defendants argue that, as a matter of law, Jean Farricielli cannot be liable on the 2001 judgment because the plaintiffs cannot pierce the corporate veil from Joseph Farricielli, an individual, through the corporation to Jean Farricielli, another individual, to make Jean Farricielli responsible for Joseph Farricielli's personal judgment debts. In their amended answer, dated February 12, 2008, the defendants raise four special defenses: abandonment, failure to mitigate damages, estoppel and lack of clean hands.
This matter was tried to the court on February 13-15, 2008, February 20-21, 2008 and March 5-6, 2008. The last post-trial brief was filed on October 14, 2008.
II FINDINGS OF FACT
The following facts were proved at trial by a fair preponderance of the evidence.
"The [fact-finding] function is vested in the trial court with its unique opportunity to view the evidence presented in a totality of circumstances, i.e., including its observations of the demeanor and conduct of the witnesses and parties . . ." (Internal quotation marks omitted.) Cavolck v. DeSimone, 88 Conn.App. 638, 646, 870 A.2d 1147, cert. denied 274 Conn. 906, 876 A.2d 1198 (2005).
"It is well established that in cases tried before courts, trial judges are the sole arbiters of the credibility of witnesses and it is they who determine the weight to be given specific testimony . . . It is the quintessential function of the fact finder to reject or accept certain evidence . . ." (Internal quotation marks omitted.) In re Antonio M., 56 Conn.App. 534, 540, 744 A.2d 915 (2000). "The sifting and weighing of evidence is peculiarly the function of the trier [of fact] . . . [N]othing in our law is more elementary than that the trier [of fact] is the final judge of the credibility of witnesses and of the weight to be accorded to their testimony. The trier is free to accept or reject, in whole or in part, the testimony offered by either party." (Citation omitted; internal quotation marks omitted.) Smith v. Smith, 183 Conn. 121, 123, 438 A.2d 842 (1981). "That determination of credibility is a function of the trial court." Heritage Square, LLC v. Eoanou, 61 Conn.App. 329, 333, 764 A.2d 199 (2001).
"[T]he trier is free to juxtapose conflicting versions of events and determine which is more credible . . . It is the trier's exclusive province to weigh the conflicting evidence and to determine the credibility of witnesses . . . The trier of fact may accept or reject the testimony of any witness . . . The trier can, as well decide what — all, none, or some — of a witness' testimony to accept or reject." (Citations omitted; internal quotation marks omitted.) State v. Osborn, 41 Conn.App. 287, 291, 676 A.2d 399 (1996).
The trial court's function as the fact finder "is to draw whatever inferences from the evidence or facts established by the evidence it deems to be reasonable and logical." (Internal quotation marks omitted.) In re Christine F., 6 Conn.App. 360, 366, 505 A.2d 734, cert. denied, CT Page 46 199 Conn. 808, 508 A.2d 770 (1986).
"[T]riers of fact must often rely on circumstantial evidence and draw inferences from it . . . Proof of a material fact by inference need not be so conclusive as to exclude every other hypothesis. It is sufficient if the evidence produces in the mind of the trier a reasonable belief in the probability of the existence of the material fact." (Citations omitted; internal quotation marks omitted.) Coville v. Liberty Mutual Ins. Co., 57 Conn.App. 275, 285, 748 A.2d 875 (2000).
"While a plaintiff is entitled to every favorable inference that may be legitimately drawn from the evidence, and has the same right to submit a weak case as a strong one the plaintiff must still sustain the burden of proof on the contested issues in the complaint and the defendant need not present any evidence to contradict it . . . The general burden of proof in civil actions is on the plaintiff, who must prove all the essential allegations of the complaint." (Citation omitted; internal quotation marks omitted.) Gulycz v. Stop Shop Cos., 29 Conn.App. 519, 523, 615 A.2d 1087, cert. denied, 224 Conn. 923, 618 A.2d 527 (1992), citing Lukas v. New Haven, 184 Conn. 205, 211, 439 A.2d 949 (1981).
The standard of proof, a fair preponderance of the evidence is "properly defined as the better evidence, the evidence having the greater weight, the more convincing force in your mind." (Internal quotation marks omitted.) Cross v. Huttenlocher, 185 Conn. 390, 394, 440 A.2d 952 (1981).
A Parties and Nonparties
The plaintiff Gina McCarthy is the commissioner of environmental protection of the state of Connecticut (commissioner). The commissioner is charged with the supervision and enforcement of environmental laws and is generally empowered by General Statutes § 22a-6(a)(3) to institute all legal proceedings necessary to enforce statutes, regulations, permits or orders administered, adopted or issued by her. The plaintiff town of Hamden is a Connecticut municipality. The plaintiff Bruce E. Driska is the zoning enforcement officer of the town.
The defendant State Five is a Connecticut corporation that both owns and has listed 2895 State Street, Hamden, Connecticut (Parcel C) as its business address with the secretary of state. Parcel C abuts Parcel B on the north and Parcel A on the south. State Five is a closely held corporation, which is typically a corporation organized under state law with a few shareholders intimately involved in running the business. It is a small business engaged primarily in leasing out its property to tenants. As a landlord, it has ordinary expenses for property tax, utilities, snowplowing and landscaping. Prior to January 27, 2003, State Five's name was Look Investment Agency, Inc. (Look). Joseph Farricielli was president of Look prior to February 2001. He ran all aspects of the company, the stock of which was owned by Recycling Enterprises, Inc. (Recycling Enterprises). Recycling Enterprises is a Connecticut company owned 80 percent by defendant Jean Farricielli and 20 percent by the Farriciellis' two sons. The evidence demonstrates that the Farriciellis' two sons had no real involvement with Look/State Five or Recycling Enterprises. They did not make any decisions necessary to run the business and did not make any suggestions that things be done any differently. Before February 2001, State Five was in the business of being a landlord, receiving income from the commercial tenants on Parcel C.
The defendant Jean Farricielli is currently president and sole officer and director of State Five. She is the majority stockholder of Recycling Enterprises, which owns 100 percent of the stock of State Five. Jean has been married to Joseph Farricielli for approximately forty years. They reside together at 108 Cherry Hill Road in Branford, Connecticut. Jean Farricielli has owned the home since 1969. While the residence was owned debt-free in the 1990s, it now carries a $650,000 mortgage. Joseph Farricielli is an obligor on the mortgage.
Joseph Farricielli has operated a number of businesses over the last thirty years or so. He was president of Look from 1967 through 2001. Look underwent several name changes during this period. On October 3, 1967, the Hemingway Realty Company was changed to Joseph Farricielli Real Estate Insurance Company, Inc. On January 26, 1973, it became Look Insurance Agency, Inc. The name changed to Look Investment Agency, Inc. on November 15, 1985. In the late 1980s, Joseph Farricielli transferred all of the stock of Look to Recycling Enterprises, which was owned by his wife and two sons. Over the years, Joseph Farricielli transferred several parcels of property to Look by quitclaim deed. On February 29, 1996, Joseph Farricielli transferred Parcel C to Look.
William LaVelle is a long-time friend of Jean and Joseph Farricielli. Before his involvement with State Five, LaVelle owned and ran several businesses. LaVelle had prior business dealings with Joseph Farricielli. During 2001, LaVelle became president and then owner of Look.
Alan Mandell is a certified public accountant (CPA). He testified at trial and was qualified as an expert in certified public accounting and forensic accounting.
Phil DeCaprio is also a CPA. He is Joseph Farricielli's first cousin. DeCaprio provided accounting services to Jean and Joseph Farricielli and their business for many years.
B The Rocque Action and the 2001 Judgment
By complaint dated July 9, 1999, the plaintiff commissioner commenced Rocque v. Farricielli, Superior Court, judicial district of Hartford, Docket No. CV 99 0591020 (the Rocque action), which resulted in the 2001 judgment. The original named defendants in that case were Joseph Farricielli, Hamden Salvage, Tire Salvage, and North Haven Tire Disposal. On October 14, 1999, the commissioner moved to add Look as a defendant to the Rocque action. The defendants objected to the motion. After oral argument on the motion, the court (Booth, J.) denied the motion on December 20, 1999. On January 13, 2000, the commissioner moved to add Hamden Sand as a defendant to the Rocque action. By stipulation dated March 8, 2000, in the Rocque action, the commissioner and the defendants in the Rocque action agreed to add Hamden Sand as a defendant. Hamden Sand was formerly Hamden Storage and Trucking, Inc. (Hamden Storage). On March 22, 2000, the commissioner, the town and the town's zoning enforcement officer filed a fourth amended complaint in the Rocque action. The defendants were Joseph Farricielli, Hamden Salvage, Tire Salvage, Tire Disposal, QRED and Hamden Sand.
After the Rocque action was commenced, Joseph Farricielli caused Hamden Sand to go out of business. Jean Farricielli was personally liable for six notes payable as of June 1, 2000. Jean and Joseph Farricielli caused State Five to assume, without consideration, debt of Hamden Sand, debt that had been personally guaranteed by Jean and Joseph Farricielli. The Hamden Sand debt assumed by Look was later refinanced. State Five remains liable on this debt. Assets were also transferred from Hamden Sand to Look, including a large quantity of topsoil. The topsoil was eventually sold for $20,000 in July 2007
Trial of the Rocque action was held in September and October 2000. Additional testimony was heard in March 2001. Post-trial briefing occurred in April and May 2001.
On September 21, 2001, the court (Hale, J.) entered the 2001 judgment in the Rocque action. The plaintiffs obtained a judgment against Joseph Farricielli and five companies owned and/or controlled by him: Hamden Salvage; Tire Salvage; Tire Disposal; QRED; and Hamden Sand. The 2001 judgment concerned the property known as the Tire Pond and Parcel A. The 2001 judgment required the defendants to comply with a February 1998 consent order issued by the commissioner against all the defendants except QRED and Hamden Sand, and to fund the closure of two illegal solid waste areas on land located in Hamden: the Tire Pond, on Parcel B, owned by Joseph Farricielli; and the Q-Park landfill on Parcel A, owned by QRED. It required the defendants to comply with a March 1997 stipulated judgment between the town and all the defendants except QRED and Hamden Sand. The 2001 judgment also required the defendants to pay a civil penalty to the commissioner of $2,336,800 and a civil penalty to the town of $1,416,910. Certain work was required to be performed on the Tire Pond and Parcel A. The 2001 judgment also required that the defendants in that action post a $1 million bond to cover the work to be performed at the Tire Pond and a $45,000 bond to cover dike stabilization work to be performed at the Tire Pond. The defendants were also made liable for any sums expended by the commissioner to address environmental conditions at the site. Joseph Farricielli appealed the judgment of the trial court. On June 1, 2004, the Supreme Court affirmed the judgment of the trial court. Rocque v. Farricielli, 269 Conn. 187, 190, 848 A.2d 1206 (2004).
The following has been done in furtherance of the work required to be performed at the Tire Pond pursuant to the 2001 judgment.
Pursuant to a memorandum of understanding dated May 13, 2002 (May 13, 2002 MOU), between the defendants to the Rocque action, the commissioner, Northridge Enterprises, Inc., and Gateway Terminal (Gateway), the Tire Pond was partially filled with acceptable material and a portion of the exposed tires was covered.
Pursuant to a memorandum of understanding dated April 24, 2003 (April 24, 2003 MOU), between the commissioner and Gateway, the Tire Pond continued to be partially filled with acceptable material and an additional portion of the exposed tires were covered.
Pursuant to a first supplementary postjudgment order on consent in the Rocque action, dated and entered by the court (Sheldon, J.) on October 3, 2007, and a first stipulated order on consent in this action, also dated and entered by the court (Sheldon, J.) on October 3, 2007, Joseph Farricielli, Tire Disposal, 2803 State Street, Inc., and State Five entered into an agreement with Gateway (the Gateway Agreement) concerning additional work at the Tire Pond. Pursuant to the Gateway Agreement, a closure plan for the Tire Pond was prepared by Gateway and approved by the commissioner.
Pursuant to the closure plan, Gateway has continued to fill the Tire Pond with acceptable material and to cover the exposed tires. Four hundred thousand dollars of the $1 million bond required by the 2001 judgment has been deposited into an account with the commissioner. The amount of $450,000 has been paid by Gateway into an account with the court (trust account). These monies may be disbursed only upon order of the court. Of the funds deposited to the trust account, $167,589.83 has been paid by the court to attorneys representing the Hamden Economic Development Corporation. Pursuant to the October 3, 2007 orders in this action and in the Rocque action, this amount "shall serve as a dollar-for-dollar credit against the civil penalty obtained by Hamden in the 2001 judgment." Pursuant to the Gateway Agreement, Gateway may, without the necessity of additional court orders, deposit to the trust account an additional amount up to $750,000. On September 16, 2005, the commissioner executed on a Bank of America account of Joseph Farricielli in the amount of $4,367.15 in partial satisfaction of the 2001 judgment.
Gateway provided 1.2 million cubic yards of acceptable fill for the Tire Pond pursuant to the May 13, 2002 MOU and the April 24, 2003 MOU. Gateway did not pay any fees under the two MOUs. The plaintiffs did not try to garnish $250,000 that Gateway paid Joseph Farricielli to dump 100,000 cubic yards of fill on Parcel A. On Parcel B, Gateway was putting fill and had generated $1 million in tipping fees. The defendants argue that if Gateway were allowed to proceed, Gateway would have generated millions of dollars in tipping fees. Gateway was not allowed to go beyond the first 400,000 cubic yards because there were no further agreements or court orders. The department of environmental protection put out a request for proposals for the rest of the fill. Bids were due by April 21, 2008.
C LaVelle and State Five
LaVelle began his involvement with State Five before the 2001 judgment was entered. He had known the Farriciellis for years. The Farriciellis had allowed LaVelle to share office space, rent-free, at State Five's office. During this time, LaVelle came up with the idea of developing Parcel C as an industrial park. He had successfully developed other commercial property and planned to use his experience in business and government to help develop the State Five property. LaVelle discussed his plans with the Farriciellis. On February 15, 2001, LaVelle was elected president of Look. His election was reflected on an annual report filed with the secretary of the state dated May 14, 2001. The report indicated that LaVelle was president of Look and Jean Farricielli was vice president/secretary/director. Joseph Farricielli was no longer reported as a director, officer or stockholder of Look.
After LaVelle became president of State Five, he ran into difficulties trying to develop Parcel C into an industrial park. LaVelle became convinced that the state of Connecticut and the town would not allow development of Parcel C because of Joseph Farricielli's ties to the property. LaVelle had discussions with the Farriciellis about the difficulties developing the property and the possibility of becoming owner of Look.
Three months after the 2001 judgment was entered, Joseph Farricielli negotiated the transfer by Recycling Enterprises of all the stock of Look to LaVelle. At that time, Joseph Farricielli was not a stockholder, director, or officer of Look or Recycling Enterprises. The agreement was entered into on December 1, 2001, by Jean Farricielli, as president of Recycling Enterprises, and LaVelle. Pursuant to the agreement, LaVelle purchased all the assets of Look, in return for assuming obligations of Look and Hamden Sand. LaVelle gave no legal consideration to Recycling Enterprises for the stock. The agreement stated that LaVelle was interested in developing the property for commercial use. LaVelle became president, secretary, director and sole stockholder of Look. As part of the agreement, Jean Farricielli and LaVelle entered into an installment sale and promissory note for a sale price of $2.5 million. The parties agreed that LaVelle would split with the Farriciellis any profits from the development of Parcel C. After the transfer of the stock, LaVelle came up with the idea of changing the name of Look to State Five to further distance the company and Parcel C from Joseph Farricielli.
LaVelle's control of State Five, however, was significantly restricted. Pursuant to the sales agreement, he was not able to mortgage or sell any of State Five's assets. The agreement basically says that LaVelle was going to receive stock, for which he did not pay anything, and take on debt. Even though LaVelle was the "owner," he did not have authority to draw on State Five's credit line with Citizen's Bank; only Jean Farricielli had authority to draw. From January 2001 through August 2004, LaVelle had limited dealings, only a few conversations, with State Five's bookkeeper and accountant. It was Jean Farricielli who dealt with State Five's bookkeeper and accountant on a regular basis. Although LaVelle was the president and sole stockholder of State Five from December 2001 to August 2004, he never put any of his own money into State Five. He never received any wages from State Five. Contrary to LaVelle's testimony that Joseph Farricielli was not allowed to have anything to do with State Five's checking account while LaVelle was in charge, Joseph Farricielli continued to write checks on State Five's checking account. LaVelle, however, did sign the corporate tax returns for State Five from 2001 through August 2004.
During LaVelle's tenure at State Five, several new tenants signed leases for Parcel C, including Cardinal Trucking, Newbridge Enterprises, Inc., and Modern Materials, Corp/Inc. (Modern Materials). When State Five was transferred to LaVelle, Joseph Farricielli had agreed to assist LaVelle with the "old" tenants. LaVelle asked Joseph Farricielli to negotiate the lease between Look and Modern Materials. As a result of the lease agreement negotiated by Joseph Farricielli, State Five received monthly rent from Modern Materials of between $5,000 and $8,000. Look also continued to receive rental income from the "old" tenants on Parcel C.
After the transfer of ownership, LaVelle continued to run into roadblocks in developing the property. No significant progress was made. LaVelle grew frustrated with the lack of progress in developing the property. In August 2004, after the 2001 judgment had been affirmed and while contempt proceedings were pending against Joseph Farricielli for his noncompliance with the 2001 judgment, LaVelle transferred the stock of State Five back to Recycling Enterprises. No payments were ever made on the installment sale and promissory note signed in December 2001.
D State Five's Financial Condition
Before LaVelle became involved with State Five, the financial records show that the business was operating profitably as a landlord. There were no notes payable to lending institutions for 1998 through 2000, and no loans related to Hamden Sand were on the books during this period.
The financial picture of Look/State Five changed dramatically after LaVelle became president and then owner. Starting in 2001, the company took on substantial debt while the core business remained the same. On June 4, 2001, while LaVelle was president, Look and Hamden Sand entered into an agreement by which Look assumed a $150,000 debt of Hamden Stone and received 20,000 cubic yards of topsoil located adjacent to the Tire Pond (Parcel B). Jean Farricielli signed the agreement for Look, while Joseph Farricielli signed for Hamden Sand. As a result, State Five assumed debt of Hamden Sand that Jean Farricielli had personally guaranteed. Joseph Farricielli had also guaranteed the debt. Although debt was supposedly assumed with accompanying assets, it was unclear whether all the assets actually came over to the business. The topsoil asset was actually located on Joseph Farricielli's property, not on property of State Five. The records show that equipment associated with debt never came into the business, nor were the proceeds of any sale of assets reflected in the books. Later, State Five assumed additional debt relating to Newbury and Anthony Garcia. Garcia had agreed to take over the crushing operations and assumed the business debts and assets of Newbury. When Garcia went out of business on or about May 5, 2003, State Five assumed the debts and assets of Newbury, which Jean and Joseph Farricielli had personally guaranteed. Jean and Joseph Farricielli both benefited financially from State Five's assumption of debt.
State Five was always in need of funds. It was unable to borrow funds on its own because it did not have sufficient income and unencumbered assets. When State Five did not have enough money from rents to pay bills, Jean Farricielli would finance State Five by borrowing money on her personal assets and Joseph Farricielli's assets. She also borrowed money from her mother-in-law, Josephine Farricielli.
When Joseph Farricielli was still president of Look, he negotiated a lease with Nextel to build a cell phone tower on Parcel C. The cell tower was to be placed partly on property of one of the defendants in the 2001 judgment (the strip) in order to create a fall zone for the cell tower. On January 25, 2000, Joseph Farricielli, as president of Look, transferred the strip to Look, without consideration, to create a fall zone for the Nextel cell tower. Look entered into a lease with Nextel for the cell tower and subsequently received rental payments. In March 2006, after this lawsuit was commenced, Jean Farricielli sold the rights to rent from the cell tower lease to a third party for a present payment, which she used to fund State Five.
During this period, State Five's financial condition worsened. It was unable to meet its financial needs during this period. Most of State Five's debt had nothing to do with its core business. The business was thinly capitalized. State Five was involved in several transactions that lacked legitimacy or a real business purpose.
CT Page 10
F State Five and the Farriciellis' Personal Expenses
Despite State Five's financial condition, it has paid thousands of dollars of the Farriciellis' personal expenses. These payments provided, directly or indirectly a benefit to both Joseph and Jean Farricielli. The personal expenses paid included the following: Joseph Farricielli's legal bills relating to the 2001 judgment and a state environmental criminal action against Joseph Farricielli arising out of the same facts that gave rise to the 2001 judgment; the mortgages on the Farriciellis' residences in Connecticut and Florida; taxes on the Branford residence; fees and taxes on the Florida condominium; lawn care for the Farriciellis' residence in Branford; a club membership used by Jean and Joseph Farricielli; payments for a car for Joseph Farricielli; payments on State Five credit cards used by Jean and Joseph Farricielli; health insurance for the Farriciellis; and taxes on the Hamden portion of the Tire Pond owned by Joseph Farricielli and subject to the 2001 judgment.State Five's financial records show that personal expenses were not handled consistently from year to year. In some years, mortgage payments were classified as officer loans, thus, maintaining corporate formalities. In other years, the mortgage payments were not so recorded and were deducted as management fees, treated as interest payments, or only the tax escrow was treated as an officer loan. Legal fees were charged to an officer loan account in some years and as corporate expenses in other years.
The inconsistent treatment was evident in the payments of the Branford and Florida (Sun Trust) mortgages. State Five's records for 1999 indicate that payments were made to Sun Trust, but the Florida mortgage was not listed as a liability on the books. The records for 2000 reflect that State Five made payments on the Branford mortgage, the Florida condominium mortgage and condominium fees. Payments on the Branford mortgage were treated as personal expenses of the officer. The Florida condominium mortgage and fee payments were not listed under officer loans. The two Branford and Florida mortgages were not listed as notes payable/loans from lending institutions on State Five's books. Starting in 2001, mortgage payments were recorded as corporate expenses, not as officer loans. In 2001, five payments were made toward the Branford mortgage.
In 2002, the first mortgage on the Branford residence, $236,906, was shown on State Five's books for the first time. The evidence is unclear as to what happened to the proceeds.
An opening balance in the 2002 general ledger reflecting Jean Farricielli's loan account shows that the company owed Jean Farricielli $48,833.82. The closing balance reflected that Jean Farricielli owed the company $105,069.53. Even though Jean Farricielli owed State Five over $100,000 at the end of 2002, there was no promissory note. The Fleet note was supposedly secured by equipment but the records do not show where the equipment was or whether it was sold. The 2002 general ledger reflects that State Five paid Joseph Farricielli's legal expenses, but these payments were not reflected in either Jean or Joseph Farricielli's loan account. They were treated as corporate expenses. The evidence was unclear as to whether the legal fees were actually repaid.
The 2003 financial records reflect that while Jean Farricielli owed the company substantial funds, she was receiving large sums from the company characterized as loan repayment. Money was withdrawn from State Five's checking account and paid to Jean Farricielli. These payments were characterized as loan repayment when they actually increased the loan from the company to Jean Farricielli. The 2003 general ledger reflects that State Five paid Joseph Farricielli's legal bills to the Santos Seeley Law Firm, but these payments were not reflected in Joseph or Jean Farricielli's loan accounts. These payments were treated as corporate expenses. There was no specific evidence that these legal fees were repaid.
The records for 2004 reflect mortgage payments on the Branford and Florida properties, but the transactions were not reflected on the loan accounts of Jean or Joseph Farricielli. For 2004, the payment of legal fees was not reflected in any loan account. In May 2004, State Five purchased a GMC pickup truck with a down payment on the Farriciellis' Discover card. The 2004 records reflect that the company owed Josephine Farricielli $27,000. The 2005 records reflect that State Five made property tax payments for the Tire Pond property.
Overall, the financial records reflect that State Five ran a great deal of transactions in and out of loan accounts with little documentation to explain the transactions. Prior to 2001, there was no loan account for Jean Farricielli on the books. The books reflect a significant number of loans to and from Jean and Joseph Farricielli during the period in question. The records indicate that many of these transactions lacked a legitimate business purpose.
Since the transfer back of the State Five stock from LaVelle to Recycling Enterprises in August 2004, many of these transactions have continued, including: Joseph Farricielli and Jean Farricielli have continued to write checks on State Five's bank account; State Five has continued to pay the personal expenses of Joseph Farricielli and Jean Farricielli, including the Florida condominium fees and lease payments for Joseph Farricielli's vehicle; State Five has continued to pay the taxes on Parcel B and the debt of Hamden Sand; Jean Farricielli has continued to transfer funds to the company to pay for the aforesaid items; and Joseph Farricielli has continued to hold himself out as an agent of State Five. In addition, Joseph Farricielli and Jean Farricielli have caused State Five to make payments to one or more of the following: Joseph Farricielli himself; Jean Farricielli's brother; Joseph Farricielli's mother; QRED; and a lawyer doing work in connection with developing Parcel B, a parcel owned by Joseph Farricielli. While State Five has paid thousands of dollars towards Joseph Farricielli's personal expenses during this period, State Five has not paid any of the 2001 judgment for which he is personally responsible.
F Jean Farricielli and State Five
As discussed above, the evidence shows that Jean Farricielli continued to play a major role in State Five after ownership was transferred to LaVelle. Under the sales agreement, State Five was required to pay thousands of dollars of debt that Jean Farricielli had personally guaranteed. She borrowed on personal assets that she and her husband owned to fund the company. Jean Farricielli was frequently in the office and often dealt with State Five tenants. She wrote numerous checks on State Five's checking account during LaVelle's involvement with the company. She did not talk to LaVelle about every check she signed for State Five and did not get specific authority for each check. During this period State Five opened a credit line with Citizens Bank on which only Jean Farricielli had authority to draw. The line of credit established with Citizens Bank was secured by Jean Farricielli's certificates of deposit, part of her inheritance from her parents. Jean Farricielli allowed Joseph Farricielli to write checks on State Five's checking account, even though he no longer had the authority to do so.
G Joseph Farricielli and State Five
The evidence also demonstrates that Joseph Farricielli continued to play a major role in State Five. Joseph Farricielli negotiated the transfer agreement with LaVelle, even though he was not an officer of Look or Recycling Enterprises. He maintained office space at State Five and on occasion received wages from State Five during this period. He continued to deal with State Five's tenants. State Five paid many of his personal expenses including thousands of dollars in legal fees.
Joseph Farricielli remained directly involved in the company's financial matters. He gave instructions to State Five's accountant and bookkeeper about how transactions should be characterized. For example, Joseph Farricielli wrote a memorandum to DeCaprio dated April 19, 2002, notifying DeCaprio that LaVelle had become owner of Look and that the tax returns should reflect LaVelle as president, secretary, director and sole stockholder. He instructed the bookkeeper to record the checks he wrote on State Five's account as a loan from Jean Farricielli. On or about June 12, 2002, Joseph Farricielli sent a memorandum to DeCaprio asking Look to pay a debt for which he was personally responsible. There was also a memorandum between Joseph Farricielli and DeCaprio indicating how State Five's line of credit was distributed. Joseph Farricielli also sent letters to Hudson United Bank regarding debt for which State Five was liable and/or paying.
During LaVelle's tenure, Joseph Farricielli wrote checks on State Five's account without LaVelle's authorization. Joseph Farricielli also wrote personal checks to State Five. Joseph Farricielli continued to be listed as an obligor on the Branford mortgage. Hudson United Bank issued invoices on the Branford Mortgage listing both Joseph and Jean Farricielli as obligors. In May of 2004, Joseph Farricielli wrote a check on the couple's Discover Card for a down payment on a GMC pickup truck for State Five.
On June 11, 2003, Joseph Farricielli entered into a license agreement with State Five to allow Modern Materials to become a tenant. State Five then entered into an assignment of license agreement with Modern Materials. The rent Modern Materials is paying to State Five covers the part of Parcel B subject to the license.
Joseph Farricielli testified that he had over one million dollars in debt relating to Hamden Stone which was not assumed by Look and not guaranteed by Jean Farricielli. Most of the debt was held by CIT, GE Credit and Mack Truck and was for heavy equipment used for the business. There was no evidence that Joseph Farricielli was ever sued on the CIT, GE Credit and Mack Truck debt. Moreover, in July 2004, Joseph Farricielli completed a Hudson United Bank personal financial statement and did not list any liabilities to CIT, GE or Mack Truck. The accountant's work papers indicated that on about June 12, 2002, Joseph Farricielli asked Look to make payments on debt for which he was personally responsible.
After State Five was transferred back to Recycling Enterprises Joseph Farricielli continued to write checks on State Five's checking account. Joseph Farricielli's mother, Josephine Farricielli, loaned money to Jean Farricielli for State Five. On March 3, 2005, Joseph Farricielli wrote a check for $30,000 to pay back his mother. The check was made out to "J. Farricielli." According to Joseph Farricielli, his mother told him to keep the money and he subsequently endorsed and cashed the check.
The court will provide additional facts, as needed, which are proved by a fair preponderance of the evidence.
III DISCUSSION A Veil Piercing Law
"Pursuant to Connecticut case law . . . a court may properly disregard a corporate entity if the elements of either the instrumentality rule or identity rule are satisfied." (Citations omitted.) Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 148 n. 11, 799 A.2d 298, cert. denied, 261 Conn. 911, 806 A.2d 49 (2002). The fair preponderance of the evidence standard applies to veil piercing cases. Id., 148 n. 12.
Our Supreme Court discussed the concept of piercing the corporate veil in the seminal case of Zaist v. Olson, 154 Conn. 563, 573, 227 A.2d 552 (1967). In Zaist, the question before the court was the plaintiffs' right to look beyond the corporate entity with which they dealt, The East Haven Homes, Inc. (E Co.) to the controlling officer and stockholder, Martin Olson (O) and a related corporation, Martin Olson, Inc. (O Co.) for a recovery of the amount due them. Id. The court concluded that O and O Co. were liable under an "alter ego" theory concluding that the corporate structure of the defendant in that case could properly have been disregarded under the instrumentality or identity rule. Id., 578. In reaching this conclusion the Supreme Court expounded on the law of corporate veil piercing. "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, as here, 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.) Id., 573-74.
In Zaist v. Olson, supra, 154 Conn. 563, O Co. owned none of the stock of E Co., but O held a dominating stock interest in both E Co. and O Co. and was president, treasurer and a director of both corporations. The court held that "it is not the fact that [the defendant] held these positions which is controlling but rather the manner in which he utilized them. The essential purposes of the corporate structure, including stockholder immunity, must and will be protected when the corporation functions as an entity in the normal manner contemplated and permitted by law. When it functions in this manner, there is nothing insidious in stockholder control, interlocking directorates or identity of officers. When, however the corporation is so manipulated by an individual or another corporate entity as to become a mere puppet or tool for the manipulator, justice may require the courts to disregard the corporate fiction and impose liability on the real actor . . ." (Citations omitted; internal quotation marks omitted.) Id., 574-75.
The Supreme Court then set forth the instrumentality and identity rules for evaluating corporate veil piercing cases. "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 the plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of . . ." Zaist v. Olson, supra, 154 Conn. 575-76.
"Complementing the instrumentality rule is the identity rule . . . The proposition has been otherwise expressed 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 . . ." Zaist v. Olson, supra, CT Page 16 154 Conn. 575-76. In KLM Industries, Inc. v. Tylutki, 75 Conn.App. 27, 815 A.2d 688, cert. denied, 263 Conn. 916, 821 A.2d 770 (2003), citing Zaist, the Appellate Court noted: "Although the identity rule primarily applies to prevent injustice where two corporations are controlled as one enterprise . . . it has been applied to hold an individual liable for a corporate obligation." (Citations omitted.) KLM Industries, Inc. v. Tylutki, supra, 75 Conn.App. 33 n. 3.
In finding for the plaintiffs and piercing the corporate veil, the court in Zaist considered the following factors: (1) O caused the creation of both companies; (2) after incorporation O had completely dominated and controlled not only them but his other corporate creations; (3) all shared the same office; (4) all the work performed by the plaintiffs went into property which, after being juggled about came to rest in O or O Co.; (5) there was a lack of formal corporate action by the directors or stockholders of the corporations; (6) E. Co. had no sufficient funds of its own and acquired no funds for the work on its own initiative; (7) E Co. had no proprietary interest in the property on which the work was done and apparently gained nothing from whatever part it played in the transaction; and (8) E Co. was used by O for the benefit of O and O Co. Zaist v. Olson, supra, 154 Conn. 576-77.
The Supreme Court cautioned: "We do not wish to be understood to countenance, by anything we have said here, the imposition of the legitimate indebtedness of a corporation upon a majority stockholder in derogation of his legal immunity merely because of the corporate control inherent in his stock ownership." Zaist v. Olson, supra, 154 Conn. 577-78.
(1) Veil Piercing Applicable
A review of the pertinent caselaw reveals a number of different factual scenarios where veil piercing was found applicable. In Saphir v. Neustadt, 177 Conn. 191, 209-12, 413 A.2d 843 (1979), the Supreme Court found no error in the referee's conclusion that the defendant Candlewood Lake Estates Service Corporation (C Co.) was a corporation in name only and that it operated as the instrumentality of the defendant Egon Neustadt (N) subject to his sole control, and in the imposition of liability on both C Co. and N. In that case, the plaintiff home owners sought damages and equitable relief from the defendant individual (N) and company (C Co.) relating to the failure to properly construct and maintain roads in a development. Id., 194-96. The court concluded that N could properly have been held liable, and the corporate structure of C Co. disregarded, under either the instrumentality or identity rule. Id., 210. "The record before us reasonably supports a conclusion that [C Co.] was a corporation in name only and that it was operated as the instrumentality or alter ego of [N], subject to the sole control of [N]; as such [C Co.]'s activity was not indicative of corporate activity, but was symptomatic of the business operations of an individual." Id., 210-11.
In finding support for piercing the corporate veil, the court considered the following factors: (1) N was the sole shareholder of C Co.; (2) N was the president of C Co.; (3) N held the only proprietary interest in C Co.; (4) no minutes were kept of the meetings of C Co.'s directors; (5) no records existed of annual elections of C. Co.; (6) other officers of C. Co. existed solely to accommodate N; (7) N solely directed C. Co.'s affairs; (8) only N could deal with corporate funds; and (9) C Co. had never filed a business tax return. Id., 211.
The Supreme Court held: "In view of those facts the court could reasonably conclude that [N] completely dominated the corporation to the point where [C Co.] had no separate existence and that such control was used for the purpose of diverting [N]'s `positive legal duty' . . . [and] there existed a unity of interest and ownership between [C Co.] and [N] such that the purposes of justice would be served by disregarding the shield of [C Co.]'s corporate structure." Id.
The Supreme Court again cautioned: "We do not wish to be understood to countenance, by anything we have said here, the imposition of the legitimate indebtedness of a corporation upon a majority stockholder in derogation of his legal immunity merely because of the corporate control inherent in his stock ownership. To do so would be to act in opposition to the public policy of this state as expressed in legislation concerning the formulation and regulation of corporations." Id., 212.
In Toshiba America Medical Systems, Inc. v. Mobile Medical Systems, Inc., 53 Conn.App. 484, 730 A.2d 1219, cert. denied, 249 Conn. 930, 733 A.2d 851 (1999) the Appellate Court affirmed the trial court's piercing of the corporate veil. There, the plaintiff brought a breach of contract action against a corporation and its sole stockholder. Id., 486-87. The trial court had concluded from the intermingling of funds and monetary exchanges between the corporation and the sole stockholder that the company was the alter ego of the stockholder. Id., 488. The court found sufficient evidence to pierce the corporate veil under both the instrumentality rule and the identity rule. Id., 489.
The court considered the following facts in applying the instrumentality rule: (1) the stockholder had received lease payments from third parties for products manufactured by the company from equipment purchased from the plaintiff; (2) the stockholder transferred over a million dollars in lease payments from the defendant company to another company owned by the stockholder; (3) after its incorporation, the defendant corporation failed to hold any corporate meetings to approve the transfers, file any tax returns, or file any corporation documentation with the secretary of state; and (4) the defendant corporation had no employees. Id., 490.
In rejecting the defendants' argument that "the trial court improperly pierced the corporate veil because it did not find that the defendants' breaches of contracts rose to the level of deceptive, unethical or immoral acts," the Appellate Court held that "[t]he instrumentality rule merely requires the trial court to find that the defendants committed an unjust act in contravention of the plaintiff's legal rights . . . When the statutory privilege of doing business in the corporate form is employed as a cloak for the evasion of obligations, as a mask behind which to do injustice, or invoked to subvert equity, the separate personality of the corporation will be disregarded." (Citations omitted; internal quotation marks omitted.) Id., 491-92.
In applying the identity rule, the court considered the following facts: (1) defendant company operated from the same premises of the other company owned by the shareholder; (2) the defendant company had no employees and no equipment or property other than an automobile for the stockholder's use; (3) the stockholder used the defendant corporation's funds to pay his federal personal income tax and permitted his son to write checks on the corporate account; and (4) the defendant corporation existed as a shell that permitted the stockholder to make unsupported withdrawals and payments to the other corporation owned by the stockholder. Id., 490-91.
In rejecting the defendants' claim that "that the trial court improperly imposed liability on him as the sole shareholder on the basis of the payments made by [the defendant corporation] to [the other corporation] a corporation that is not a party to this lawsuit," the Appellate Court held that "[t]he identity rule . . . applies to the situation . . . where the facts demonstrate that [the stockholder] was the common owner and officer of both [corporations] and there was a failure to observe corporate formalities between the two entities." Id., 492. The court further disagreed that the other corporation "had to be a party to the present litigation in order to pierce [the defendant corporation's] corporate veil to impose liability on the [stockholder.]" Id., 493.
In Davenport v. Quinn, 53 Conn.App. 282, 730 A.2d 1184 (1999), the Appellate Court found that the trial court had properly allowed the plaintiff to pierce the corporate veil. There the plaintiff sought to satisfy a default judgment, claiming that the defendant sole shareholder/officer/director was the alter ego of the defendant corporation. The defendant individual was also the sole shareholder/officer/director of another company as well as the owner of a sole proprietorship. Id., 295. The trial court employed both the instrumentality and identity rules to determine that the plaintiff could successfully pierce the corporate veil. Id., 301.
The Appellate Court determined that all three prongs of the instrumentality rule were satisfied. Id., 302-03. As to the first prong, control, the following facts were considered: (1) the defendant individual maintained exclusive control over both companies; (2) he allowed and authorized one corporation to pay for the debts of another; (3) he controlled all financial transactions; (4) in essence, there was no separate account for each corporation; (5) if one corporation needed funds, he authorized a transfer of funds from either the other corporation or his sole proprietorship; and (6) he was fully involved in each of the business transactions of each of his entities. Id., 302.
The second prong, breach, was met by the following facts: (1) the defendant individual transferred assets out of the defendant corporation, after the plaintiff had filed his original complaint; (2) the defendant corporation had notice of the lawsuit; (3) he continued his practice of commingling funds and removing assets out of the corporate defendant's account to pay the other corporation's expenses and his salary, even after the bar had ceased operations; and (4) the defendant corporation's account balance was less than 1 percent of the judgment against it. Id., 302.
Finally as to the third prong, proximate cause the following facts were dispositive: (1) the plaintiff attempted a property execution on the defendant corporation, but was unsuccessful; and (2) if the defendant corporation had sufficient funds to satisfy the judgment, the plaintiff would not have had to bring the action. Id., 302-03.
The Appellate Court determined that the identity rule was also satisfied based on the following facts: (1) the evidence showed a complete lack of corporate formality, which was approved by the defendant individual; (2) the defendant corporation paid the defendant individual's personal bills and the other corporation's bill; and (3) when the defendant corporation ceased doing business, it never dissolved, and it paid the individual defendant thousands of dollars in income. Id., 303.
In Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 149-52, the Appellate Court considered the doctrine of reverse piercing of the corporate veil. There in 1993, the plaintiff had entered into an agreement with Mary Ann Howell (H) operating through the now defunct corporation, Mary Ann Howell Interiors, Inc. (I Co.). Id., 135. The plaintiff filed suit in Texas against H and I Co. and was awarded a default judgment in July 1996 (Texas Judgment). Id. In December 1996, the plaintiff brought an action in Connecticut to enforce the Texas Judgment. Id. The plaintiff obtained a judgment in Connecticut in its favor in February 1997, which was affirmed on appeal. Id. While these actions were pending, H and her family members formed two new limited liability companies, Mary Ann Howell Interiors and Architectural Design, LLC (D Co.), and Antiquities Associates, LLC (A Co.). Id., 135-36. In May 1996, H contributed nearly $150,000, which she borrowed against her life insurance policies, for a 97 percent ownership interest in D Co. Id., 136. Her husband and two daughters each contributed $10 in exchange for a 1 percent ownership interest. Id. In November 1997, D Co. contributed just over $100,000 for a 99 percent interest in A Co., and H contributed $10 for the remaining 1 percent. Id. On May 11, 1998, the plaintiff commenced a veil piercing and civil conspiracy action against H, her husband, D Co. and A Co. Id. H was general manager of both D Co. and A Co. Id., 137. D Co. and A Co. did not have any employees and operated out of a garage at the H's personal residence. Id. No rent was paid to H's husband who was owner of the residence. Id. H controlled D Co. and A Co. Id. H's family members did not participate in any significant way in the companies' operations. Id.
The Appellate Court concluded that the assets of the corporate entity were available to pay personal debts of the owner. Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 158. In reaching this conclusion, the court considered that "[a] corporation is a separate legal entity, separate and apart from its stockholders . . . It is an elementary principle of corporate law that a corporation and its stockholders are separate entities and that . . . corporate property is vested in the corporation and not in the owner of the corporate stock . . . That principle also is applicable to limited liability companies and their members . . . The assets of a corporation or limited liability company, therefore, typically are not available to creditors seeking to recover amounts owed by a stockholder or member of that corporation or limited liability company. Nonetheless, [c]ourts will . . . disregard the fiction of a separate legal entity to pierce the shield of immunity afforded by the corporate structure in a situation in which the corporate entity has been so controlled and dominated that justice requires liability to be imposed . . ." (Citations omitted; internal quotation marks omitted.) Id., 147.
The Appellate Court explained: "In the usual veil piercing case, a court is asked to disregard a corporate entity so as to make available the personal assets of its owners to satisfy a liability of the entity. In this case, an instance of what is known as `reverse piercing,' the plaintiff argues the opposite, that the assets of the corporate entities should be made available to pay the personal debts of an owner . . . Many of the reverse pierce cases . . . involve similar circumstances, that is, a creditor of an individual debtor is seeking to reach the assets of an entity controlled by that debtor . . . We discern from these cases a growing recognition of the doctrine of reverse piercing of the corporate veil . . . A guiding concept behind both standard and reverse veil piercing cases is the need for the court to avoid an over-rigid preoccupation with questions of structure . . . and apply the preexisting and overarching principle that liability is imposed to reach an equitable result . . . We consider this directive to be sensible and therefore recognize that under the appropriate circumstances, i.e. when the elements of the identity or instrumentality rule have been established, a reverse pierce is a viable remedy that a court may employ when necessary to achieve an equitable result and when unfair prejudice will not result. Id., 149-51.
The Appellate Court next reviewed the trial courts application of the instrumentality rule's three elements. Id., 152-56. In evaluating the first element, control the following factors were considered: "(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." Id., 152-53.
The Appellate Court found that there was evidence of dominance and control based on the following facts: third factor — use of company funds to pay personal expenses, purchase of gifts for family members, interest-free loans to family members, and payoff of a loan of a family member; fourth factor — overlapping ownership, officers, directors and personnel; fifth factor — operation out of the same office space; seventh factor — lack of arm's length dealings between companies; eighth factor — failure to treat the company as an independent profit center; and ninth factor — use of property by other of the corporations as if it were their own. Id., 153.
The court next found evidence of use of control and dominance to perpetrate a wrong, based on the following facts: (1) use of personal funds; (2) listing of relatives as officers, directors or members who had no involvement in the company, other than to sign the paperwork for its formation, and who did not make any decisions necessary to run the business and did not make any suggestions that things be done any differently; (3) the individual in question was the only party with signatory powers on the company's bank account; (4) causing an existing company to fund the start-up of a new company after an out of state was obtained and just before that judgment was recognized by the Connecticut court; (5) continued use of transferred funds as if they were her own; and (6) payment of personal expenses directly from company funds, instead of payment of a salary or providing regular cash distributions, thereby depriving the plaintiff of any means of collecting its judgment. Id., 154-55.
Finally, in finding that the last element of the instrumentality rule, proximate cause, was satisfied, the following facts were considered: (1) the individual defendant knew that the plaintiff was pursuing a claim against her, and she chose not to defend against that claim; and (2) she transferred personal assets to the company that prevented the plaintiff from securing collection of the judgment it eventually obtained. Id., 156.
The Appellate Court next reviewed the trial court's application of the identity rule. After stating the identity rule, the court noted that "[t]he 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 . . . 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.) Id., 156.
In applying the identity rule, the court found that there was unity of interest based on the following factors: (1) the individual's large ownership interests in both companies; (2) "how she used her complete control of each company to manage their assets as if they were her own;" (3) the use of "company funds extensively to pay personal expenses, to make casual loans to family members and to buy gifts for family members;" (4) and that the individual "conducted the operations of the companies without any input from the other members;" (5) the lack of adherence to any corporate formalities other than some segregation of expenses for tax purposes; (6) the use of "the same checking account and credit cards for both personal and business purposes;" (7) the lack of reimbursements; (8) the fact that "regular distributions were not made to members;" (9) the lack of meetings held; (10) the fact that "neither company leased office space, but operated out of the same area of the [individual's] home" (11) the treatment of one company as an adjunct of the other company, not as an independent entity with its own distinct interests; and (12) the fact that the individual "conducted the business of the two companies no differently from the way she conducted her personal affairs." Id., 157-58.
The Appellate Court recognized "that the separate existence of a corporate entity for liability purposes represents a public policy choice as expressed in Connecticut's legislation governing the formulation and regulation of corporations and limited liability companies, and that the corporate or limited liability form should not be disregarded lightly." (Citations omitted; internal quotation marks omitted.) Id., 158. The court further noted "that of the many factors underlying a finding that the instrumentality or identity rule has been satisfied, no one factor or group of factors is necessarily dispositive of the inquiry. However, [w]hen the statutory privilege of doing business in the corporate [or limited liability company] form is employed as a cloak for the evasion of obligations, as a mask behind which to do injustice, or invoked to subvert equity, the separate personality of the corporation [or limited liability company] will be disregarded." (Citations omitted; internal quotation marks omitted.) Id., 158.
In Cadle Co. v. Zubretsky, Superior Court, judicial district of Hartford, Docket No. CV 04 0832477 (January 30, 2008, Hale, J.T.R.) ( 44 Conn. L. Rptr. 843), the plaintiff sought to reverse pierce the corporate veil and brought claims of fraudulent transfer and unjust enrichment. Pursuant to an assignment from Fleet Bank, the plaintiff was a creditor of John Zubretsky (John Z) based on a 1993 judgment. Id., 844. The plaintiff maintained that defendants John Z and his wife Ann Zubretsky (Ann) engaged in a series of transactions and business decisions after the judgment entered involving the defendant Access America (Access) designed and implemented to keep John Z's creditors including the plaintiff from collecting their judgments. Id.
The court citing Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 149-52, reviewed the doctrine of reverse piercing of the corporate veil. "In the usual case of piercing the corporate veil a plaintiff seeks the assets of stock holders to satisfy a judgment against the corporation. In a case of reverse piercing of the corporate veil the plaintiff seeks the assets of a corporation to satisfy the liability of the owner or insider . . . Although reverse veil piercing has not been addressed with any frequency by Connecticut Appellate Courts the Appellate Court in Litchfield made it clear that reverse veil piercing is common in numerous other jurisdictions where as in the matter before the court a creditor of an individual debtor [is] seeking to reach the assets of an entity controlled by that debtor." (Citation omitted; internal quotation marks omitted.) Cadle Co. v. Zubretsky, supra, 44 Conn. L. Rptr. 844. The court noted that "[i]n both standard and reverse veil piercing a court should avoid an over rigid preoccupation with questions of structure . . . and apply the preexisting and overreaching principle that liability is imposed to reach an equitable result." (Internal quotation marks omitted.) Id.
The court reviewed the instrumentality and identity rules. "In examining the application of each of these rules, instrumentality and identity, the court is mindful that both involve fact based determinations; that the ultimate issue of whether corporate veil should be pierced presents a question of fact." Id., 845. The court in Litchfield stated that of the many factors underlining a finding that the instrumentality or identity rule has been satisfied, no one factor or group of factors is dispositive of the inquiry. Id., 846.
In Cadle Co., the defendants citing KLM Industries, Inc. v. Tylutki, supra, 75 Conn.App. 27, argued against reverse piercing based on the following facts: "that John was not an owner or shareholder of the corporation in question, although he was president; that Ann claimed to be the sole owner of the corporation and had nothing to do with the debt to Fleet which Cadle now owns and which debt was unrelated to the corporation; that the books of the corporation are kept separately from their personal books; that there was no massive cash flow from one corporation to another by John; that the corporation in Tylutki and in this case were created prior to the debt in each case; and that the Tylutki court found it significant that the Voloshins, the husband and wife who operated the corporation in that case maintained the separate corporate existence by filing corporate tax returns, and by filing their required reports with the Secretary of the State's office." Cadle Co. v. Zubretsky, supra, 44 Conn. L. Rptr. 846.
The court found that "[t]he Tylutki case is clearly distinguishable by the fact that the doctrine of piercing the corporate veil and also reverse piercing of the corporate veil is an equitable doctrine. The argument that the debt was incurred subsequent to the formation of the corporation and that the corporation had existed for a substantial period of time but before and since the debt is of no consequence whatsoever. The fact remains that a legitimate debt authorized by the Superior Court of the State of Connecticut remains unpaid by a person who has been proven capable of earning substantially more than the amount of the debt by divesting himself of any earnings of assets, not by the payment of other debts, but by refusing to accept salary or commissions and allowing them to be taken by the corporation yet managing to live well supposedly by the largesse of his wife and/or the corporation." Id.
The court in Cadle Co., found that "[t]he essence of this case is that the plaintiff and his wife acted jointly and in concert to bring about the result of protecting him from the payment of his debts. For all practical purposes he was as much an owner of the corporation as his wife. He was an owner in essence. He is an equitable owner of the corporation. To any member of the public dealing with the corporation he was the owner. For all practical purposes he and his wife were the joint owners of the corporation . . .
"This court finds that there is more than sufficient evidence of complete domination of the corporation's finances, policy and business practice so that the corporate entity as to this case had no separate mind, will or existence of its own and that this situation existed because of the joint actions and understanding of the Zubretskys acting in concert. Note the Zubretskys' two homes, one in Wethersfield and one at the Connecticut shore, were owned in Ann's name. In the opinion of this court the only reasonable explanation for the [corporation's] failure to pay John Z., that John Z. had no bank account, that he had no real estate, no income is that it was part of an overall scheme to put essentially every dollar of John Z.'s current and future assets and income out of the reach of his creditors. Note, John Z. was the `face' of the corporation. Rather than pay John Z. duly earned commissions and/or a salary for his contributions to the overall running of the real estate operation the Zubretskys jointly decided to have the corporation retain these commissions, thus keeping yet more of John Z.'s earnings out of the reach of creditors. Having retained John Z.'s commissions within the corporation the Zubretskys applied these funds towards Ann Z's salary, John Z.'s perks and benefits, John Z.'s loans, John Z.'s allowance and the assumption of the Zubretskys personal travel, meals, entertainment and household items charged to the credit card accounts yet paid entirety by the corporation. In this way the Zubretskys were able to hold John Z.'s creditors at bay yet maintain a comfortable lifestyle of two homes including a home at the Connecticut shore, luxury cars, a boat, frequent restaurant meals and regular expensive family vacations. There is no documentation of the loans and no interest paid on same. With respect of the second element of the instrumentality rule it is the opinion of this court that the control and domination of the corporation has been used by the defendants to commit wrong. Their actions were unjust and in contravention of the plaintiff's legal right to collect its debt. It is the opinion of the court that the aforesaid control and breach of duty has ultimately caused the unjust loss complained of. Thus it is the opinion of this court that the plaintiff has proven each of the three elements of the instrumentality rule and that it also qualifies under the identity rule and has qualified for a reverse piercing of the corporate veil.
"All the evidence at trial leads to the conclusion that the Zubretskys jointly manipulated the corporation to keep John Z.'s income and assets out of the hands of his creditors including plaintiff and into their own pockets via the corporation." Id.
In Miller v. Guimaraes, 78 Conn.App. 760, 772, 829 A.2d 422 (2003), the trial court had pierced the corporate veil. There, the defendant Peter Guimaraes had treated his two companies, Guimaraes Development, Inc., and Guimaraes Construction, Inc., as if they were the same entity. Guimaraes Construction, Inc., did not have a bank account and, as a result, Guimaraes, as its president, deposited the plaintiffs' check into the account of Guimaraes Development, Inc. Guimaraes Development, Inc., had no assets in its name. Guimaraes had exercised complete domination over the policy and business of Guimaraes Construction, Inc. Id. Based on the appellate record, the Appellate Court held that the trial court's basis for its conclusion was not clearly erroneous and affirmed the trial court's determination to pierce the corporate veil. Id.
In Connecticut Light Power Co. v. Westview Carlton Group, LLC, 108 Conn.App. 633, 637, 950 A.2d 522 (2008), the trial court invoked the instrumentality rule to pierce the corporate veil. There, the court found that the defendant Howard S. Sousa was the sole owner, member and manager of Westview Carlton Group, LLC (Westview), which he formed for the sole purpose of owning the two buildings in question; Sousa's residence was Westview's principal place of business; Sousa was in total control of all of Westview's operations and made all the decisions involving finances, policy and business practices; No state or federal tax returns were filed by Westview for the three tax years that Westview owned the buildings, and Sousa intentionally failed to preserve Westview's financial records so that there was inadequate documentary support for his claim that Westview was a losing venture; Sousa's control and domination of all of Westview's affairs was such that as to the obligation to the plaintiff, Westview had no separate mind, will or existence of its own. Id., 633.
The Appellate Court, citing Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 148, held: [t]here was more than ample evidence to support the court's determination that under the instrumentality test, the corporate veil should be pierced in this case. In addition to, and in support of, the numerous specific factual findings made by the trial court, there was evidence that Westview lacked an agent for service as required by General Statutes §§ 34-121 and 34-104, filed no annual reports with the secretary of the state as required by General Statutes § 34-106 and lacked any of the documentation required for a limited liability corporation, as required by General Statutes § 34-144. In addition, there was evidence that Westview failed to maintain any business records for the property, failed to file tax returns for any of the years involved and was undercapitalized. There was also evidence that Sousa commingled Westview funds for his own benefit, by transferring funds from Westview to a different entity controlled by him, namely, the Clyde Group, for purported payment of undocumented and unsubstantiated loans. Finally, there was evidence that when Westview sold the property, Sousa, not the plaintiff, Westview's creditor, was the beneficiary of the $74,000 net proceeds of the sale.
"Thus, we reject the defendants' suggestion that this was simply a case of a single shareholder being charged with a corporate debt solely because of his ownership status. There was ample evidence that Westview had no separate existence, that Sousa treated it as such and that Sousa used it to perpetrate an unjust act in contravention of the plaintiff's legal rights. The evidence in this case amply supports the court's determination that the corporate veil should be pierced." Id., 641.
(2) Veil Piercing Inapplicable
The caselaw also reveals a number of factual scenarios where veil piercing was found not applicable. In Vogel v. New Milford, 161 Conn. 490, 290 A.2d 231 (1971), the Supreme Court concluded that the record did not support the application of the instrumentality or identity rules to permit the corporate form to be disregarded. Id., 494. In that case the plaintiff contested the application of defendant William E. Thomas (Thomas) to the board of selectman for a change of name for his business, Bill's Garage, a sole proprietorship, to Bill's Auto Wrecking, Inc. a corporation. Id., 491. In finding error in the trial court's dismissal of the appeal, the Supreme Court emphasized the following factors: (1) the record did not support that defendant Thomas was the dominant shareholder of Bill's Auto Wrecking, Inc.; and (2) "nor is there anything to indicate that if he was, his control was being used in this case to commit a fraud or to perpetuate a dishonest or unjust act." Id., 494.
In Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 447 A.2d 406 (1982), the Supreme Court considered a situation where an "insider" attempted to pierce the corporate veil to reach an "outsider" who, personally and not through another corporate entity, exercised a great deal of control over corporate affairs. Id., 555. The court distinguished the case from "the ordinary situation in which a corporate veil is pierced by a creditor suing an individual who has used a corporation as an instrument of fraud. See Saphir v. Neustadt, supra [ 177 Conn. 191]; Zaist v. Olson, supra [ 154 Conn. 563]. Nor is this a `reverse pierce' situation where an `insider' is attempting to pierce the corporate veil from within the corporation." Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., supra, 187 Conn. 555.
The court in Angelo Tomasso, Inc., explained: "The concept of piercing the corporate veil is equitable in nature . . . 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 . . . 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.) Id., 555-56.
"The circumstances which have been considered significant in an action to disregard the corporate entity have rarely been articulated with any clarity. Perhaps this is true because the circumstances necessarily vary according to the facts of the particular case. Therefore, each case in which the issue is raised should be regarded as sui generis, to be decided in accordance with its own underlying facts. Since the issue is thus one of fact, its resolution is particularly within the province of the trial court and such resolution will be regarded as presumptively correct and will be left undisturbed on appeal unless it is clearly erroneous. (Footnotes omitted.) 1 Fletcher, Cyc. Corp. (Perm. Ed. 1981 Sup.) 41.3, p. 38." Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., supra, 187 Conn. 556 n. 7.
In concluding against veil piercing, the court noted the following factors: (1) "stock ownership, while important, is not a prerequisite to piercing the corporate veil but is merely one factor to be considered in evaluating the entire situation;" (2) "we have never required that an individual be an officer or director of the pierced corporation in order to hold him liable for the debts of the corporation;" and (3) "[i]t is clear that the 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 over corporate affairs." Id., 556-57.
The court held that there was insufficient evidence to pierce the corporate veil. Id., 557-58. In so holding, it explained: "Ordinarily the corporate veil is pierced only under exceptional circumstances, for example, where the corporation is a mere shell serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice . . . Even though the evidence, when viewed in the light most favorable to the third party plaintiffs, demonstrates that [the individual] did indeed exercise a considerable amount of control (although he was not a director, officer or shareholder) over the business affairs of [the corporation], with respect to the specific transaction attacked there is insufficient evidence of [the individual's] dominance or influence such as is required to disregard the separate legal entity of the corporation.
"The specific transaction out of which the third party plaintiffs' liability arises is the signing of the plaintiffs' guarantee. There was simply no evidence presented which could show that, with respect to the signing of the guarantee, [the individual's] control was used . . . 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 [the third party plaintiffs'] legal rights; and . . . that the aforesaid control and breach of duty . . . proximately cause[d] the injury or unjust loss complained of." (Citations omitted; internal quotation marks omitted.) Id., 557-58.
Under the identity rule, the court in Angelo Tomasso, Inc., held that "[t]he evidence presented does not show that there was such a unity of interest and ownership that the independence of the corporation had in effect ceased or had never begun, [such that] 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 . . . 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 . . . The third party plaintiffs have neither claimed nor presented evidence that [the corporation] and [another corporation], the company of which [the individual] was president, were actually one enterprise. Therefore, the identity rule cannot avail the third party plaintiffs of the relief they seek." (Citations omitted; internal quotation marks omitted.) Id., 559-60.
In Hersey v. Lonrho, Inc., 73 Conn.App. 78, 807 A.2d 1009 (2002), the trial court had concluded that the facts failed to support piercing the corporate veil. There, the plaintiff sought to recover for personal injuries suffered while a guest at a resort in the Bahamas owned and promoted by out-of-state corporations. Id., 79-80. The Appellate Court noted: "When determining whether piercing the corporate veil is proper, our Supreme Court has endorsed two tests: the instrumentality test and the identity test." (Internal quotation marks omitted.) Id., 87. In affirming the decision of the trial court, the Appellate Court noted, among other factors, that "[e]ven 100% stock ownership and commonality of [officers and directors] are not alone sufficient to establish an alter ego relationship between two corporations," and that "there had been adherence to the corporate formalities between the defendant and its subsidiaries." (Citations omitted; internal quotation marks omitted.) Id., 88.
The Appellate Court in KLM Industries, Inc. v. Tylutki, supra, 75 Conn.App. 27, reversed a court's decision ascribing liability to an individual by piercing the corporate veil. In that case, the plaintiff brought an action against a company and its president to recover for materials furnished by the plaintiff in connection with home construction. Id., 29. In reversing the trial court's decision to pierce the corporate veil, the Appellate Court considered the following factors: (1) the president was not the sole shareholder and, in fact, held no corporate shares, the president's spouse was sole shareholder and director of the company; (2) the president exercised no more control over the company than that of any president of a closely held corporation; (3) the president and his spouse treated the company as a distinct entity as evidenced by them having informal discussions concerning company activities from time to time, the spouse consenting to corporate activities from time to time, and the company maintaining its returned checks and statements, filing and maintaining corporate tax returns, and filing its biannual report. Id., 34-35.
B, Postjudgment Collection Efforts (1) Adequate Remedy at Law
The defendants, in addition to denying the plaintiffs' claims, contend that the plaintiffs are not entitled to equitable relief through veil piercing because the plaintiffs have adequate remedies at law in seeking to collect on the 2001 judgment. They argue that the plaintiffs have not fully pursued normal statutory judgment collection procedures, including garnishments, attachments and executions. Although the plaintiffs have a lien on Parcel A pursuant to General Statutes § 52-380a, they have not attempted to foreclose that lien. A judgment lien has not been filed on Parcel B. The plaintiffs have not realized on assets disclosed pursuant to postjudgment discovery. Nor have the plaintiffs filed a fraudulent transfer action under General Statutes § 52-552a et seq. The defendants also contend that the plaintiffs have lost an opportunity to collect tipping fees for filing activities from Gateway.
General Statutes § 52-380a provides in relevant part: "(a) A judgment lien, securing the unpaid amount of any money judgment, including interest and costs, may be placed on any real property by recording, in the town clerk's office in the town where the real property lies, a judgment lien certificate . . .
(b) From the time of the recording of the judgment lien certificate, the money judgment shall be a lien on the judgment debtor's interest in the real property described . . .
(c) A judgment lien on real property may be foreclosed or redeemed in the same manner as mortgages on the same property . . ."
In opposition, the plaintiffs argue that no Connecticut court has ever denied a plaintiff's equitable request for veil piercing based on the failure to pursue postjudgment collection remedies. Moreover, the Farriciellis have used State Five to hide the fact that Joseph Farricielli had assets. Noting that this action was filed on August 24, 2005, the plaintiffs contend that it was reasonable to start extensive collection efforts after the Supreme Court decided Joseph Farricielli's appeal of the 2001 judgment on June 1, 2004. See Rocque v. Farricielli, 269 Conn. 187, 848 A.2d 1206 (2004). Contempt proceedings were also pending to prevent Joseph Farricielli from interfering with remediation efforts. The plaintiffs also accuse the Farriciellis of not truthfully responding to postjudgment interrogatories served by the commissioner in the fall of 2004. They argue that the Farriciellis have greatly overestimated the value of Parcel A and B. The plaintiffs also contest the defendants' argument regarding the generation and use of tipping fees.
In seeking guidance on this issue, the parties have cited several Connecticut cases. The Supreme Court in Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., supra, 187 Conn. 555, noted the general principal that "[o]rdinarily the corporate veil is pierced only under exceptional circumstances for example, where the corporation is a mere shell serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice." Id., 557. In Stocker v. Waterbury, 154 Conn. 446, 226 A.2d 514 (1967), the court explained that "`[a]dequate remedy at law' means a remedy vested in the complainant, to which he may, at all times resort, at his own option, fully and freely, without let or hindrance . . . If the plaintiffs have an adequate remedy at law then they are not entitled to the injunction." Id., 449.
In Connecticut Light Power Co. v. Westview Carlton Group, LLC, supra, 108 Conn.App. 641-42 the Appellate Court held that the evidence demonstrated that the corporate veil should have been pierced. The defendants claimed on appeal that the trial court improperly concluded that the plaintiff was not obligated to mitigate its damages by pursuing the statutory remedy of a receiver of rents pursuant to General Statutes § 16-262f. Id. The Appellate Court disagreed. Id. The court held that, under the facts of the case, the plaintiff had to make reasonable efforts. Id. There, the "plaintiff was not obligated to mitigate its damages by resorting to a rent receivership, which would have itself been expensive, time-consuming, and might well have resulted in tenants declining to pay rent at all. Furthermore, there was evidence that [the sole shareholder] misrepresented to the plaintiff that he was working on a long-term solution that would have afforded payment to the plaintiff. Instead, he sold the property without notifying the plaintiff and pocketed the net proceeds of the sale for himself." Id., 642-43.
The Appellate Court in Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 133, found that the plaintiff was not required to try an attachment before pursuing a reverse veil piercing. The court noted: "Another concern in reverse piercing cases is that they result in the bypass of normal judgment collection procedures, for example the charging of a member's interest in the limited liability company pursuant to General Statutes § 34-171 . . . In this case however, Mary Ann Howell did not receive regular distributions but rather, paid her personal bills directly using limited liability company funds. Any attempt by the plaintiff to attach distributions, therefore, would have been fruitless." (Citation omitted.) Id., 151 n. 14.
Although the defendants raise a valid concern it is not implicated by the particular facts of this case. After the 2001 judgment was entered, the parties were occupied with the appeal and the remediation efforts. Before the Appellate Court's decision in All Seasons Services, Inc. v. Guildner, 89 Conn.App. 781, 782-83, 878 A.2d 370 (2005) (denying motion to enforce automatic stay of judgment), the law was unclear as to whether the plaintiffs were able to start collection procedures during the pendency of the appeal.
Contrary to the defendants' assertions, the plaintiffs did not make an "end run" around normal collection efforts. Under the extraordinary circumstances of this case, the plaintiffs made reasonable efforts to collect on the 2001 judgment. The evidence demonstrates that the Farriciellis attempted to use State Five to hide assets. The Farriciellis made misrepresentations in the postjudgment interrogatories. See Connecticut Light Power Co. v. Westview Canton Group, LLC, supra, 108 Conn.App. 633. The defendants used corporate funds to pay thousands of dollars in personal expenses complicating any normal collection efforts. See Litchfield Asset Management Corp. v. Howell, supra, 70 Conn.App. 133.
C Plaintiffs' Claims (1) State Five
The First and Second Counts allege claims of reverse veil piercing against State Five based on the instrumentality and identity rules. The plaintiffs claim that the defendant State Five is the alter ego of Joseph Farricielli, such that State Five should be held liable for the obligations imposed by the 2001 judgment.As previously-stated, the instrumentality rule requires: "(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." Zaist v. Olson, supra, 154 Conn. 575. The identity rule requires "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." Zaist v. Olson, supra, 154 Conn. 576. "The instant case requires an analysis of the facts adduced at trial to determine whether or not the plaintiff[s have] fulfilled the requirements of either the instrumentality rule or the identity rule." Cadle Co. v. Zubretsky, supra, 44 Conn. L. Rptr. 846.
Contrary to the defendants' denial that State Five and Joseph Farricielli are alter egos of one another, the evidence demonstrates that the defendant State Five is the alter ego of Joseph Farricielli, such that State Five should be held liable for the obligations imposed by the 2001 judgment.
The first prong of the instrumentality rule, control, is met based on the following. During this period, Joseph and Jean Farricielli continued to make or be involved in making decisions necessary to run State Five. Joseph Farricielli created the defendant company. Even after stock ownership was transferred to Recycling Enterprises, which was owned by Jean Farricielli and their two sons, Joseph Farricielli controlled the defendant company. Over the years, he transferred property to the defendant company for no consideration. Joseph Farricielli transferred Parcel C to the defendant company by quitclaim deed. He negotiated a lease agreement for the Nextel cell tower on State Five property which, to create a fall zone, required the transfer of a parcel of property from one of the defendant corporations subject to the 2001 judgment. The defendant company then received the lease payments for the cell tower without paying anything for the property.
Joseph Farricielli negotiated the terms of LaVelle's involvement with the defendant company. After LaVelle became president of the defendant company, Joseph Farricielli continued to use office space there. Later in 2001, Joseph Farricielli negotiated the transfer of ownership of the defendant company to LaVelle. LaVelle did not pay anything for his stock ownership. The sale was not properly reflected in the defendant company's books. The transfer of ownership included a "side deal" by which LaVelle and the Farriciellis would equally split profits from the development of Parcel C as an industrial park. The sale did not rise to the level of a real sale from an economic standpoint.
During and after LaVelle's tenure, Joseph Farricelli continued to exercise power and influence over the defendant company's affairs, even though he was no longer an officer or director. Joseph Farricielli remained involved in State Five's business transactions. He continued to deal with the old tenants and negotiated at least one lease with a new tenant. Joseph Farricielli wrote and signed checks on State Five's account on a regular basis. He continued to direct the defendant company's accountant and bookkeeper. Joseph Farricielli maintained direct or indirect power to control the management and policies of State Five with his wife.
LaVelle was not in full control of the defendant company while he was president or owner. Under the sales agreement, he was not able to sell or mortgage any of the corporate property. He was not able to draw on State Five's line of credit. LaVelle did not pay anything for his stockholdings in the defendant company. He did not receive any income.
The sale of State Five to LaVelle did not rise to the level of a bona fide sale from an economic point of view. The seller bound the buyer from engaging in necessary or desirable transactions. Although the main asset of the company was its approximately seventeen acres of property, LaVelle was prohibited from mortgaging or selling any property to finance the development of Parcel C as an industrial park. If the seller was looking for protection, the seller could have secured a note rather than place restrictions on buyer's ability to sell and mortgage the property. The documentation for the $2.5 million sale consisted only of a few pages. The agreement called for the sale price to be paid in installments but it was not recorded in the books. The sale was not booked as a liability. There was a lack of evidence that the transaction rose to the level of a real sale from an economic point of view.
While State Five's core business was being a landlord for commercial tenants on its property, Parcel C, it assumed substantial debts transferred from 2001 judgment corporate defendants. These debts had nothing to do with State Five's core business. State Five's financial situation worsened dramatically after the 2001 judgment was entered. State Five assumed more and more debt personally guaranteed by the Farriciellis. The debts were assumed with insufficient assets. The defendant company was not adequately capitalized; it had insufficient funds to pay the assumed debt. State Five paid the debts of Joseph Farricielli's other companies that were liable for the 2001 judgment.
State Five was used to pay personal expenses of Joseph and Jean Farricielli and used to make interest-free loans to family members. Funds were put in and taken out of State Five for personal rather than corporate purposes. There was an absence of corporate formalities. The defendant company was not treated as an independent profit center. State Five's account was treated as a personal account. State Five had no full-time employees. State Five paid the debts of other corporations. The corporate defendants that were subject to the 2001 judgment and State Five did not deal with each other at arm's length as evidenced by the transfer of property for the cell tower lease. For all of these reasons the first prong of the instrumentality rule, control, is met.
The second prong of the instrumentality rule, 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, is satisfied based on the following. A few months after the 2001 judgment was entered, Joseph Farricielli negotiated the transfer of State Five to LaVelle. Joseph Farricielli and his companies did not have sufficient funds or assets to satisfy the 2001 judgment, yet financial resources were transferred to the defendant company. The defendant company's funds were increasingly commingled with the Farriciellis' personal funds, and State Five assets were diverted for personal use. Joseph Farricielli used his direct or indirect control or influence over State Five to pay personal expenses while he avoided satisfying the obligations of the 2001 judgment. In addition State Five paid the property taxes of one of the corporate defendants that were subject to the 2001 judgment. State Five paid Joseph Farricielli's personal expenses including attorneys fees when he was no longer an officer or director. Joseph Farricielli's direct and indirect control or influence over the defendant company was used to avoid funding the obligations under the 2001 judgment. Joseph Farricielli committed an unjust act by using the defendant company to evade satisfying the 2001 judgment. Accordingly, the second prong of the instrumentality rule is satisfied.
The third prong of the instrumentality rule, proximate cause, is met based on the following. Joseph Farricielli and the corporate defendants have not complied with the 2001 judgment; specifically, they have not funded the closure of the Tire Pond or the Q-Park landfill, nor have they paid the assessed penalties. Joseph Farricielli's direct or indirect control or influence over State Five was used to avoid funding the obligations under the 2001 judgment, including the obligation to pay the civil penalties assessed. Joseph Farricielli was responsible for transferring assets and funds out of the 2001 judgment corporate defendants, thereby depriving the plaintiffs of means to collect the 2001 judgment. Joseph Farricielli commingled his personal funds with the defendant company to evade the 2001 judgment.
The plaintiffs attempted property executions but they have not been able to satisfy the 2001 judgment. They have been deprived of the means of collecting the 2001 judgment. The actions of Joseph Farricielli were a substantial factor in the failure to satisfy the 2001 judgment and were the proximate cause of the plaintiffs' loss. As a result, Joseph Farricielli and the other defendants to the 2001 judgment have not funded the obligations under the Judgment and have not paid the civil penalties.
Under the instrumentality rule, there is sufficient evidence of Joseph Farricielli's control or influence over State Five such as is required to disregard the separate legal identity of the corporation. During the period in question, State Five had no separate mind, will or existence of its own; it was merely a business conduit for the Farriciellis.
The evidence also demonstrates that the identity rules requirement, unity of interest and ownership, is met based on the following facts. There was a unity of interest and ownership between Joseph Farricielli and State Five. Joseph Farricielli created the defendant corporation. He transferred ownership to Recycling Enterprises, which was owned by his wife and his two sons. Over the years, he transferred property and assets to the defendant company, including Parcel C, without consideration. He was the president of the defendant company for over thirty years.
During and after LaVelle's tenure, Joseph Farricielli was intimately involved in the business of State Five. Joseph Farricielli continued to write checks on State Five's account, even though he was no longer an officer or director or on the signature card. He dealt with old tenants and negotiated a lease with at least one new tenant. He continued to direct the defendant company's accountant and bookkeeper. He used State Five's office space.
Joseph Farricielli did not treat State Five as a distinct entity. Personal and business funds were commingled. Corporate funds were used to pay personal expenses. The defendant company assumed thousands of dollars of debt that Joseph and Jean Farricielli had personally guaranteed. The debt was assumed with insufficient assets and had nothing to do with the core business of State Five. The Farriciellis' personal assets were used to fund the defendant company. Company funds were used extensively to pay personal expenses. State Five paid thousands of dollars of Joseph and Jean Farricielli's personal expenses, including his legal bills relating to the 2001 judgment. Joseph Farricielli made purchases on the corporate credit card. The defendant company was not fully reimbursed for the payment of personal expenses. Interest-free loans were made to family members. There was a lack of corporate formalities, including Joseph Farricielli being able to write checks on the corporate account when he was no longer president and when LaVelle was owner. The defendant company was not adequately capitalized. The defendant company had a lack of economic resources.
In addition, corporate formalities were not observed, and the separate corporate existence was ignored in the following ways: shareholders' or directors' meetings were not held regularly; no sharp distinction was drawn between corporate property and personal property; improper accounting was employed; transactions between the defendant company and the 2001 judgment corporate defendants were not conducted on an arm's length basis; State Five failed to receive consideration for stock transfer to LaVelle; and undocumented loans were made.
At all times relevant to this litigation, there was such a unity of interest and control among Joseph Farricielli and the defendant company that the independence of State Five had in effect ceased or never began. Joseph Farricielli, directly or indirectly so controlled the finances, policies, and practices of State Five that "an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting" Joseph Farricielli and the defendant company to escape liability for the obligations of the 2001 judgment. See Zaist v. Olson, supra, 154 Conn. 575-76.
Under both the instrumentality and identity rules, the evidence supports the conclusion that the defendant State Five is the alter ego of Joseph Farricielli, such that State Five should be held liable for the obligations imposed by the 2001 judgment.
(2) Jean Farricielli
The Third and Fourth Count allege claims of veil piercing against Jean Farricielli based on the instrumentality and identity rules. The plaintiffs allege that State Five is the alter ego of Jean Farricielli, and, therefore, she should be held liable for the obligations imposed by the 2001 judgment, assuming the corporate veil of State Five is first pierced, imposing upon State Five the obligations of the 2001 judgment.
Contrary to the defendants' denial that State Five and Jean Farricielli are alter egos of one another, the evidence demonstrates that State Five is the alter ego of Jean Farricielli, and, therefore, she should be held liable for the obligations imposed upon State Five by reverse-piercing the corporate veil. It is axiomatic that many of the factors relevant to the prior claims are relevant to these claims as well.
The first prong of the instrumentality rule, control, is met based upon the following facts. During this period, Jean and Joseph Farricielli continued to make or be involved in making decisions necessary to run State Five. Jean Farricielli maintained direct or indirect control and influence over the management, finances, policies and business practices of the defendant company before, during and after LaVelle's tenure. She continually utilized her authority over State Five regardless of her status as shareholder, director or officer. She was involved in almost all of the defendant company's business transactions. This control and influence was clearly evident in the fact that only Jean Farricielli was able to draw on the defendant company's line of credit, not LaVelle.
Jean Farricielli commingled personal and business funds. Jean Farricielli borrowed money on personal assets, put the money into State Five, then State Five paid off debt she had personally guaranteed. Jean Farricielli authorized State Five to pay the Farriciellis' personal expenses. Jean Farricielli failed to maintain corporate formalities when she used State Five to pay her personal obligations.
Jean Farricielli returned as president and majority stockholder after LaVelle left in August 2004. Jean Farricielli had, by far, the largest ownership interest in State Five. Jean Farricielli continued to use her control and influence over State Five to pay her and Joseph Farricielli's personal expenses. She used her authority of State Five to do her bidding.
State Five was used to pay personal expenses of Jean and Joseph Farricielli and used to make interest-free loans to family members. Funds were put in and taken out of State Five for personal, rather than corporate, purposes. There was an absence of corporate formalities.
The second prong of the instrumentality rule, breach, is satisfied by the following. A few months after the 2001 judgment was entered, Jean Farricielli transferred her majority ownership of the defendant company to LaVelle for no consideration. The defendant company was required to assume thousands of dollars of debt that Jean and Joseph Farricielli had personally guaranteed. The debt was assumed with insufficient assets. State Five funds were increasingly commingled with the Farriciellis' personal funds and State Five funds and assets were diverted for personal use. Jean Farricielli used her direct or indirect control or influence over the defendant company to pay the Farriciellis' personal expenses, including the mortgages and taxes on the residence in Branford and Florida. State Five was used to pay these personal expenses, while Joseph Farricielli avoided satisfying the obligations of the 2001 judgment.
Jean Farricielli used her direct and indirect control or influence over State Five to help her husband and his companies evade funding the obligations under the 2001 judgment. Jean Farricielli committed an unjust act by using the defendant company to evade satisfying the 2001 judgment.
The third prong of the instrumentality rule, proximate cause, is satisfied by the following. Joseph Farricielli and the corporate defendants have not complied with the 2001 judgment; specifically, they have not funded the closure of the Tire Pond or the Q-Park landfill, nor have they paid the assessed penalties. Jean Farricielli's direct or indirect control or influence over State Five was used to assist her husband to evade satisfying the obligations under the 2001 judgment, including the obligation to pay the civil penalties assessed. Jean Farricielli participated in transferring assets and funds out of the 2001 judgment corporate defendants, thereby depriving the plaintiffs of means to collect the 2001 judgment. Jean Farricielli was responsible for commingled personal funds with the defendant company to evade the 2001 judgment.
The plaintiffs attempted property executions, but they have not been able to satisfy the 2001 judgment. They have been deprived of the means of collecting the 2001 judgment. The actions of Jean Farricielli were a substantial factor in the failure to satisfy the 2001 judgment and were the proximate cause of the plaintiffs' loss. As a result, Joseph Farricielli and the other defendants to the 2001 judgment have not funded the obligations under the judgment and have not paid the civil penalties.
Under the instrumentality rule, there is sufficient evidence of Jean Farricielli's control or influence over State Five such as is required to disregard the separate legal identity of the corporation. During the period in question, State Five had no separate mind, will or existence of its own; it was merely a business conduit for the Farriciellis.
The evidence also demonstrates that the identity rule's requirement, unity of interest and ownership, is met based on the following facts: There was a unity of interest and ownership between Jean Farricielli and State Five. Jean Farricielli is the majority shareholder of Recycling Enterprises, which has owned the defendant company except for the period of LaVelle's involvement.
During and after LaVelle's tenure, Jean Farricielli was intimately involved in the business of the defendant company. She wrote numerous checks on State Five's account. She used office space. Jean Farricielli did not treat State Five as a distinct entity. Personal and business funds were commingled. Corporate funds were used to pay personal expenses. The defendant company assumed thousands of dollars of debt that Jean and Joseph Farricielli had personally guaranteed. The debt was assumed with insufficient assets and had nothing to do with the core business of State Five. The Farriciellis' personal assets were used to fund the defendant company. Company funds were used extensively to pay personal expenses. State Five paid thousands of dollars of Jean and Joseph Farricielli's personal expenses, including the mortgages on the family residences and Joseph Farricielli's legal bills relating to the 2001 judgment. The defendant company was not fully reimbursed for the payment of personal expenses. Interest-free loans were made to family members. Jean Farricielli used State Five to pay her personal expenses. Jean Farricielli made unsupported withdrawals from and payments to State Five's account. The defendant company was not adequately capitalized to pay these debts and personal expenses. State Five lacked economic resources.
In addition, corporate formalities were not observed, and the separate corporate existence was ignored in the following ways: Shareholders' or directors' meetings were not held regularly; no sharp distinction was drawn between corporate property and personal property; improper accounting was employed; transactions between the defendant company and the 2001 judgment corporate defendants were not conducted on an arm's length basis; State Five failed to receive consideration for stock transfer to LaVelle; and undocumented loans were made.
At all times relevant to this litigation, there was such a unity of interest and control between Jean Farricielli and the defendant company that the independence of State Five had in effect ceased or never began. Jean Farricielli, directly or indirectly, so controlled the finances, policies, and practices of State Five that "an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting" Jean Farricielli and the defendant company, having pierced the corporate veil through her husband, to escape liability for the obligations of the 2001 judgment. See Zaist v. Olson, supra, 154 Conn. 575-76.
Under both the instrumentality and identity rules, the evidence supports the conclusion that State Five is the alter ego of Jean Farricielli, and, therefore she should be held liable for the obligations of the 2001 judgment, which are, as stated previously, to be imposed upon State Five by reverse-piercing the corporate veil.
D Special Defenses
In their amended answer, dated February 12, 2008, the defendants raise four special defenses: abandonment; failure to mitigate damages; estoppel; and "lack of clean hands."
As to abandonment, the defendants allege the following. "1. The plaintiffs are seeking to enforce a 2001 Judgment against the defendants based solely on corporate veil-piercing theories. 2. The plaintiffs have been aware of the facts and circumstances that they rely on to support their veil-piercing claims in this action for many years. 3. The plaintiffs' delay in bringing this action against the defendants was unreasonable. 4. The plaintiffs' unreasonable delay in asserting their rights in this action amounts to a voluntary and intentional relinquishment of those rights. 5. The plaintiffs have lost their right to assert claims against the defendants, and are therefore barred from asserting the same based on the doctrine of abandonment." Amended Answer, dated February 12, 2008.
As to failure to mitigate damages, the defendants claim the following. "1. The plaintiffs in this action were the plaintiffs in an action entitled Arthur J. Rocque, Jr., Commissioner of Environmental Protection, et al v. Joseph J. Farricielli, et al, HHD CV 99-0591020 S. 2. On September 21, 2001, the Court (Hale, J.) entered judgment (the "2001 Judgment") in favor of the Rocque plaintiffs against Mr. Farricielli and the other defendants (the " Rocque defendants"). 3. The 2001 Judgment required the Rocque defendants to perform environmental remediation to close certain parcels of land referred to as the "Tire Pond," including stabilization of an embankment along the Quinnipiac River. The 2001 Judgment also required the Rocque defendants to post a $1,000,000 bond to cover the remediation work. The 2001 Judgment further imposed a civil penalty in favor of the plaintiff Commissioner in the amount of $2,336,880 and a civil penalty in favor of the plaintiff Town of Hamden in the amount of $1,416,910 against the Rocque defendants. 4. Prior to September 20, 2007, the Rocque defendants had not performed, in whole or in part, the terms of the 2001 Judgment requiring said defendants to post the bond, stabilize the embankment, remediate the Tire Pond, or pay the civil penalties. 5. On September 20, 2007, the Commissioner of Environmental Protection issued an Authorization to Waterfront Enterprises, Inc., d/b/a Gateway Terminal ("Gateway") to close the Tire Pond in accordance with the Tire Pond Closure Plan, which plan would fulfill the obligations of the Rocque defendants in closing the Tire Pond and stabilizing the embankment. 6. On or about September 20, 2007, the Rocque defendants negotiated an agreement with Gateway pursuant to which Gateway would perform the obligation of the Rocque defendants for the closure of the Tire Pond and the stabilization of the embankment. Pursuant to said agreement, Gateway agreed to pay $4 for every ton of materials that Gateway delivered to the Tire Pond and fill the same and to spread on the surrounding land. 7. The plaintiff Commissioner of the Department of Environmental Protection and the plaintiff Town of Hamden in the instant action agreed to allow the Rocque defendants to utilize Gateway as aforesaid and the plaintiffs established with the Superior Court of the State of Connecticut at the Hartford Judicial District an account to allow the Court to accept funds paid by Gateway to be used to fund the obligation of the Rocque defendants under the 2001 Judgment. The plaintiffs herein further agreed that the Rocque defendants would have no liability for the materials managed or placed at the Tire Pond pursuant to the Commissioner's authorization to allow Gateway to fulfill the obligations of the Rocque defendants under the 2001 Judgment. 8. On or about October 3, 2007, the plaintiffs herein, the Rocque defendants and the defendant State Five Industrial Park, Inc. among others, entered into an agreement, which was issued as an Order in the 2001 Judgment entitled First Supplementary Postjudgment Order on Consent, which was adopted by the Court (Sheldon, J.) as a modification of the 2001 Judgment. A copy of said Order is attached hereto as Exhibit A and incorporated herein. Said Order authorized Gateway to perform the activities referenced therein and stated above. 9. Gateway has been performing its obligations and delivering materials to the Tire Pond for many months. Gateway has further tendered $600,000 to the Commissioner of Environmental Protection pursuant to the filling effort, which sums have been deposited into the Court. Additionally, Gateway has paid $400,000 to the Department of Environmental Protection against the $1,000,000 bond that is the obligation of the Rocque defendants. 10. On or about February 8, 2008, the plaintiff Commissioner advised Gateway that Gateway will no longer be authorized to supply any further fill materials to the Tire Pond after Gateway completes the initial 400,000 ton delivery that is currently in process. The Commissioner advised Gateway of this fact despite the fact that the Commissioner has already tested and approved as much as 800,000 tons of material, and possibly 1,000,000 tons of material proposed by Gateway to deliver to the Tire Pond as authorized and approved by the Commissioner under the Closure Plan. 11. As a result of the actions of the Commissioner terminating Gateway's authority to deliver up to 1,000,000 tons of material to the Tire Pond in accordance with the approved Closure Plan, the Commissioner has prevented the Rocque defendants from receiving the full benefit of $4,000,000, which sums were to be used to fully fulfill the $1,000,000 bond obligations and the vast majority of the civil penalty imposed upon the Rocque defendants, which the plaintiffs herein seek to impose upon the instant defendants under theories of vicarious liability. 12. As a result of the aforesaid, the plaintiffs have failed to mitigate damages." Amended Answer, dated February 12, 2008.
As to estoppel, the defendants allege the following. "1-11 Paragraphs 1 through 11 of the Second Special Defense are hereby incorporated as Paragraphs 1 through 11 of this, the Third Special Defense, as if fully set forth herein. 12. As a result of the aforesaid, the plaintiffs should be estopped from imposing the full liability against the defendants, as the plaintiffs have prevented the Rocque defendants from substantially satisfying the 2001 Judgment, yet the plaintiffs now seek to impose the entirety of said Judgment that is remaining against the defendants herein." Amended Answer, dated February 12, 2008.
As to unclean hands, the defendants claim the following: "1-11 Paragraphs 1 through 11 of the Second Special Defense are hereby incorporated as Paragraphs 1 through 11 of this, the Fourth Special Defense, as if fully set forth herein. 12. As a result of the aforesaid the plaintiffs are barred from recovery for lack of clean hands." Amended Answer, dated February 12, 2008.
Ordinarily, a special defense is analyzed in the following way. "[A] special defense is not an independent action; rather, it is an attempt to "plead facts that are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action." Valentine v. LaBow, 95 Conn.App. 436, 447 n. 10, 897 A.2d 624, cert. denied, 280 Conn. 933, 909 A.2d 963 (2006). "Generally speaking, facts must be pleaded as a special defense when they are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action. Practice Book § 10-50." Almada v. Wausau Business Ins. Co., 274 Conn. 449, 456, 876 A.2d 535 (2005). Practice Book § 10-50, entitled "Denials; Special Defenses" provides: "No facts may be proved under either a general or special denial except such as show that the plaintiff's statements of fact are untrue. Facts which are consistent with such statements but show, notwithstanding, that the plaintiff has no cause of action, must be specially alleged." "Under our practice, when a defendant pleads a special defense, the burden of proof on the allegations contained therein is on the defendant." DuBose v. Carabetta, 161 Conn. 254, 262, 287 A.2d 357 (1971). "Whoever asks the court to grant judgment regarding any legal right or liability has the burden of proving the existence of the facts essential to his or her claim or defense." C. Tait E. Prescott, Tait's Handbook of Connecticut Evidence (4th Ed. 2008) § 3.3.1, p. 114.
"Piercing the corporate veil is not a cause of action; it is an equitable remedy. Strictly speaking, then, it may be wrong to speak of `defenses' to an action to pierce the corporate veil. The best `defense' is simply that the doctrine is inapplicable on the facts of the case and this is primarily a matter of ascertaining the plaintiff's theory and negating the plaintiff's allegations." 45 Am.Jur. 3d, Proof of Facts § 16 (1998).
Under common law, "[a]bandonment is a question of fact . . . It implies a voluntary and intentional renunciation, but the intent may be inferred as a fact from the surrounding circumstances." (Citation omitted.) Pizzuto v. Newington, 174 Conn. 282, 285, 386 A.2d 238 (1978). See also, State v. Zindros, 189 Conn. 228, 240 (1983), cert denied, 465 U.S. 1012, 104 S.Ct. 1014, 79 L.Ed.2d 244 (1984), and Stankiewicz v. Hawkes, 33 Conn.Sup. 732, 369 A.2d 253 (App.Sess., Super.Ct., 1976).
Ordinarily, a party receiving a damage award has a duty to make reasonable efforts to mitigate damages. See Cweklinsky v. Mobile Chemical Co., 267 Conn. 210, 223, 837 A.2d 759 (2004). "Although . . . failure to mitigate damages is not one of the enumerated defenses listed in [Practice Book] § 10-50, Superior Court cases have approved the use of a special defense to plead this claim . . .
Moreover, by allowing the failure to mitigate damages to be pled as a special defense, it is clear that the defendant bears the burden of proof on this issue." (Citations omitted.) Profitec, Inc. v. FKI Industries, Inc., Superior Court, judicial district of New Haven Docket No. CV 99 0427490 (November 24, 2000, Devlin, J.) ( 28 Conn. L. Rptr. 619, 620).
"Equitable estoppel is the effect of the voluntary conduct of a party whereby he is absolutely precluded, both at law and in equity, from asserting rights which might perhaps have otherwise existed . . . as against another person, who has in good faith relied upon such conduct and has been led thereby to change his position for the worse . . . Its two essential elements are that one party must do or say something which is intended or calculated to induce another to believe in the existence of certain facts to act on that belief, and that the other party, influenced thereby, must change his position or do some act to his injury which he otherwise would not have done." (Citations omitted; internal quotation marks omitted.) Bozzi v. Bozzi, 177 Conn. 232, 241-42, 413 A.2d 834 (1979). "Estoppel rests on the misleading conduct of one party to the prejudice of the other." W. v. W., 248 Conn. 487, 496, 728 A.2d 1076 (1999); Remkiewicz v. Remkiewicz, 180 Conn. 114, 119, 429 A.2d 833 (1980).
The clean hands doctrine is "[t]he principle that a party cannot seek equitable relief or assert an equitable defense if that party has violated an equitable principle such as good faith. Such a party is described as having `unclean hands.'" Black's Law Dictionary (8th Ed. 2004). In evaluating the issue of clean hands, the court must consider "the equitable maxim that one who seeks to show that he is entitled to the benefit of equity must demonstrate that he comes to court with `clean hands.'" Cohen v. Cohen, 182 Conn. 193, 201, 438 A.2d 55 (1980). The clean hands doctrine "is a legal euphemism which expresses the principle that where a party comes into equity for relief he must show his conduct has been fair, equitable and honest as to the particular controversy in issue." Collens v. New Canaan Water Co., 155 Conn. 477, 492, 234 A.2d 825 (1967). "The trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the courts' integrity dictate that the clean hands doctrine be invoked." Polverari v. Peatt, 29 Conn.App. 191, 202, 614 A.2d 484, cert. denied, 224 Conn. 913, 617 A.2d 166 (1992). "Application of the doctrine of unclean hands rests within the sound discretion of the trial court . . . The doctrine generally should not be employed to insulate the party who asserts it from the consequences of his own wrongdoing." (Citations omitted; internal quotation marks omitted.) AB Auto Salvage, Inc. v. Zoning Board of Appeals, 189 Conn. 573, 578, 456 A.2d 1187 (1983). The party who seeks to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in willful misconduct with regard to the matter in litigation. DeCecco v. Beach, 174 Conn. 29, 35, 381 A.2d 543 (1977).
The court has analyzed the defendants' special defenses to the veil piercing claims. As to abandonment, the evidence shows that the plaintiffs never renunciated any right or interest in pursuing this matter. The defendants' arguments for abandonment and failure to mitigate damages are similar to the postjudgment collection efforts arguments which were rejected by this court. The facts fail to show that the plaintiffs did anything to invoke the equitable estoppel doctrine. Contrary to the defendants' contentions, the plaintiffs' conduct was not misleading. Finally, there is no evidence that the plaintiffs acted in bad faith. The unclean hands doctrine should not be employed to insulate the defendants from the consequences of their own wrongdoing.
As previously stated, "[t]he concept of piercing the corporate veil is equitable in nature . . . 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." Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., supra, 187 Conn. 555-56. Based on the evidence presented the defendants have failed to demonstrate that veil piercing is inapplicable to the facts of this case. Accordingly the special defenses must fail.
IV CONCLUSION AND ORDER
Based on the foregoing, defendant State Five is liable on the 2001 judgment, and defendant Jean L. Farricielli is liable on the 2001 judgment.
For the above-stated reasons, Judgment shall enter in favor of the plaintiffs and against the defendants as follows:
1. The prohibitory injunctions issued in the September 21, 2001 Memorandum of Decision and the October 7, 2004 Memorandum of Decision in Rocque v. Farricielli, No. HHD CV 99 0591020 S, shall be binding on State Five Industrial Park, Inc., and on Jean L. Farricielli.
2. Judgment shall enter against State Five Industrial Park, Inc., and Jean L. Farricielli, jointly and severally, in the amount of $4,164,317.22 plus interest at ten percent (10%) per annum calculated from September 21, 2001.
3. The obligations to reimburse the plaintiff commissioner of environmental protection for costs incurred, as set forth in paragraphs 6 and 7 on pages 32 and 33 of the September 21, 2001 Memorandum of Decision in Rocque v. Farricielli, No. HHD CV 99 0591020 S, shall be binding, jointly and severally, on State Five Industrial Park, Inc. and on Jean L. Farricielli.