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People's United Bank v. Wetherill Asso.

Connecticut Superior Court Judicial District of Hartford at Hartford
Jan 4, 2011
2011 Ct. Sup. 2262 (Conn. Super. Ct. 2011)

Opinion

No. HHD 09-6005763

January 4, 2011


MEMORANDUM OF DECISION RE MOTION TO STRIKE (#129)


The plaintiff herein moves to strike the second and third special defenses in the defendant's answer, and to strike counts one, two, three, four, seven and eight of the defendant's counterclaim. The court will grant the motion regarding both special defenses as well as counts one, two and three. The court will deny the motion regarding counts four, seven and eight for the reasons set forth herein.

FACTS

On November 18, 2009, the plaintiff, People's United Bank (People's United), filed a seven-count declaratory judgment action against Wetherill Associates, Inc. (Wetherill); Advance Auto Parts, Inc.; Carquest Corp.; and B.W.P. Distributors, Inc. The plaintiff alleges in the complaint that pursuant to several credit arrangements between People's United and Reliance Automotive, Inc. (Reliance), People's United obtained a perfected security interest in all of Reliance's assets, inventory, accounts and contract rights. The complaint further alleges that Reliance defaulted on its agreements with People's United and that People's United sought to collect on accounts that were owed to Reliance by Reliance's debtors. On September 28, 2009, Wetherill, which had done business with Reliance, obtained a prejudgment remedy against Reliance, seeking to garnish Reliance's assets and monies owed to Reliance. In the present action, People's United seeks to establish that its rights to any of Reliance's assets are superior to those of Wetherill.

The complaint states that Reliance changed its name to "Marel Enterprises of Connecticut, Inc." Wetherill admits this in its answer. The counterclaim, however, refers to this entity as Reliance. Since the counterclaim is the subject of the motion before the court, this memorandum will address this entity as "Reliance."

On February 9, 2010, Wetherill filed an answer, in which it asserted three special defenses, and an eight-count counterclaim against People's United. Wetherill asserts the following special defenses: People's United failed to state a claim upon which relief may be granted; People's United's claims against Reliance should be subordinated to the claims of Wetherill; and People's United's claims fail under the doctrines of unclean hands, laches, waiver, and/or estoppel. No specific factual allegations were made with any of the special defenses. Wetherill alleges the following counterclaims against People's United: breach of fiduciary duty (count one); equitable subordination (count two); aiding and abetting breach of fiduciary duty (count three); tortious interference with business relations (count four); piercing the corporate veil (count five); breach of contract (count six); fraudulent conveyance (count seven); and failure to act in a commercially reasonable manner (count eight).

Wetherill alleges that count three is an alternative to count one and that count six is an alternative to count four.

In the counterclaim, Wetherill alleges the following facts. In February of 2005, Reliance obtained a multi million dollar loan from People's United. As collateral for the loan, Reliance granted a security interest in various assets to People's United. Apart from the agreement it had with People's United, Reliance, for several years, had a supply agreement with Wetherill. In 2007, Reliance became unable to pay its suppliers' invoices, including Wetherill's, as they became due.

In early 2009, aware that Reliance could not pay what it owed, People's United threatened to demand immediate payment of its loan. People's United insisted that Reliance hire Elm City Partners, LLC (Elm City) in exchange for forbearance on the loan. The counterclaim describes Elm City as a "turn around expert" hired to improve Reliance's financial condition. Wetherill alleges that through Elm City, People's United controlled Reliance. Specifically, People's United determined which of Reliance's bills would be paid and whether payroll would be funded, as well as negotiated with Reliance's customers resulting in Reliance being paid a fraction of what it was owed. Customers' payments were sent directly to People's United, which then decided how Reliance could use the money to fund its ongoing operations. Wetherill alleges that, through all of this, the money Reliance owed to it was not paid. Despite People's United's control, Reliance's financial condition did not improve and People's United demanded full payment on its loan.

During the summer of 2009, Reliance negotiated a tentative agreement with Motorcar Parts of America (Motorcar) for the sale of Reliance's assets. The proposed transaction would have provided substantial payments to People's United and to Reliance's unsecured creditors, including Wetherill. Such agreement could not be consummated without People's United's consent and it was refused. People's United subsequently entered into direct negotiations with Motorcar for the sale of Reliance's assets and reached an asset purchase agreement with Motorcar. Wetherill alleges that the terms of this subsequent agreement were far less favorable to Reliance and its creditors than the agreement originally negotiated by Reliance and Motorcar. On October 6, 2009, giving Reliance two weeks notice, People's United held a public auction of Reliance's inventory. Reliance was not given any input in how the auction was run. Wetherill alleges that, due to Reliance's large inventory, two weeks was an insufficient time to prepare for an auction or to solicit bids from Reliance's suppliers and customers. As a result, Wetherill alleges that it was injured because Reliance was not able to pay its debt to Wetherill.

On July 14, 2010, People's United filed a motion to strike the second and third special defenses in the answer as well as counts one, two, three, four, seven and eight of the counterclaim. On August 13, 2010, Wetherill filed an objection to the motion to strike. On September 13, 2010, People's United filed a reply to Wetherill's objection.

DISCUSSION

"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "[I]f facts provable in the complaint would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) American Progressive Life Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 120, 971 A.2d 17 (2009). The court must "construe the complaint in the manner most favorable to sustaining its legal sufficiency." Id. The claims are addressed in the order that People's United listed them in its motion.

I FIDUCIARY DUTY OWED TO CREDITORS BY DIRECTORS AND OFFICERS

Count one of the counterclaim alleges that People's United became the de facto sole director of Reliance through the control it exerted over Reliance and as de facto director, People's United owed a fiduciary duty to Reliance's creditors, including Wetherill, to maximize and protect Reliance's assets. Wetherill alleges that People's United breached this fiduciary duty in the following ways: while Reliance was insolvent or in the zone of insolvency, People's United refused to consent to the agreement between Reliance and Motorcar, which was beneficial to Reliance and to its creditors, and instead negotiated an asset sale that was less favorable to Reliance and its creditors; People's United sold Reliance's inventory at a price far below market value the auction; it allowed creditors to satisfy their debts to Reliance for amounts lower than what was owed; and it made payments to itself while refusing to fund Reliance or allow payments to be made to Reliance's creditors. Wetherill alleges that it was injured by People's United's actions because it refused to pay Reliance's debt to Wetherill, despite the prejudgment remedy Wetherill had received against Reliance.

Count three of the counterclaim alleges that no later than early 2009, Reliance's directors owed a fiduciary duty to Reliance's creditors to maximize the value of its assets while it was insolvent or within the zone of insolvency and Reliance breached this duty by entering into transactions that did not maximize its assets or benefit its creditors. Wetherill alleges that People's United knowingly and intentionally aided and abetted Reliance's directors to breach their duty by refusing to consent to the negotiated agreement between Reliance and Motorcar, by auctioning off Reliance's inventory without sufficient time to prepare for the auction and by selling Reliance's inventory at prices far below market value.

As to count one, People's United argues that Wetherill's claim for breach of fiduciary duty is legally insufficient because Connecticut law does not recognize a cause of action by a creditor against the director or officer of a corporation for breach of fiduciary duty, regardless of whether the corporation is insolvent or within the zone of insolvency. People's United further argues that even if such a cause of action did exist, Connecticut law does not and the court should not recognize a cause of action that holds a lender liable as a de facto director of a borrower. As to count three, People's United argues that, because a cause of action for breach of fiduciary duty to creditors does not exist in Connecticut, Wetherill's claim for aiding and abetting such a breach is legally insufficient. Wetherill counters by arguing that Connecticut law does recognize a cause of action for breach of fiduciary duty by creditors against directors and officers. Wetherill concedes that Connecticut has not recognized a cause of action allowing a lender to be considered the de facto owner of a debtor's business but argues that its claim should proceed because it is akin to piercing the corporate veil and courts from other jurisdictions have recognized it.

Neither the Supreme Court nor the Appellate Court have addressed the issue of whether corporate directors and officers owe fiduciary duties to creditors. The Superior Court, however, has come across the issue on at least two occasions. The first case, which Wetherill relies on, is Bennett Restructuring Fund, L.P. v. Hamburg, Superior Court, complex litigation docket at Hartford, Docket No. X02 CV 010167682 (January 2, 2003, Sheldon, J.). In Bennett Restructuring Fund, L.P., the plaintiffs, creditors of a corporation, argued that the defendants, directors and officers of the corporation, owed the plaintiffs a fiduciary duty and that the defendants had breached this duty by making misrepresentations about the corporation's finances. Although the court noted that directors and officers generally do not owe such a duty and that the rights of creditors are limited to those set forth by contract, it held that directors and officers may owe a duty to creditors in certain circumstances. Id. Relying upon Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., Court of Chancery of Delaware, Docket No. 12150, (December 30, 1991), the court recognized that when a corporation is in the "vicinity of insolvency," directors and officers owe a duty to the "corporate enterprise." Id. Continuing in its interpretation of Credit Lyonnais Bank Nederland, N.V., the court stated that "corporate officers and directors assume fiduciary duties to corporate creditors, as part of the community of interest that sustains the corporation, whenever they operate the corporation in the vicinity of insolvency." Id. The court held that when a corporation is in the "vicinity of insolvency," directors and officers owe a fiduciary duty to creditors to maximize the corporation's assets for all creditors. Id.

Wetherill also cites UBS Real Estate Securities, Inc. v. Fairmont Funding LTD., Supreme Court, New York County, New York, Docket No. 600698 (April 21, 2008), which recognized a cause of action by creditors for breach of fiduciary duty against directors and officers of a corporation.

In Credit Lyonnais Bank Nederland, N.V., a bank took control of a subsidiary corporation's shares pursuant to an agreement and, as a result of the defendant repeatedly violating a corporate governance agreement, the bank appointed directors in order to prevent the defendant from regaining control of the subsidiary. See Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., supra, Court of Chancery of Delaware, Docket No. 12150. The defendant argued that the bank and the directors breached a fiduciary duty to the parent corporation, not to a creditor. Id. In discussing whether a duty was owed to the corporation, the court spoke of the "community of interests that the corporation represents" and stated that "directors will recognize that in managing the business affairs of a solvent corporation in the vicinity of insolvency, circumstances may arise when the right (both the efficient and fair) course to follow for the corporation may diverge from the choice that stockholders (or the creditors, or the employees, or any single group interested in the corporation) would make given the opportunity to act." Id. The court further stated that the defendant "board or its executive committee had an obligation to the community of interest that sustained the corporation, to exercise judgment in an informed, good faith effort to maximize the corporation's long term-wealth creating capacity." (Emphasis added.) Id. The court suggested that, in making business decisions, directors and officers should keep in mind interests that affect the corporation's financial well being, which may include the corporation's creditors. However, the court did not state or suggest that a fiduciary duty was owed by directors or officers to creditors of the corporation. The Bennett Restructuring Fund, L.P. court's reliance on Credit Lyonnais Bank Nederland, N.V. for such a proposition is, therefore, misplaced, and a proposition this court finds inapplicable to the present case.

The Superior Court next discussed the issue of fiduciary duties owed to creditors in Metcoff v. Lebovics, 51 Conn.Sup. 68, 977 A.2d 285 [ 44 Conn. L. Rptr. 107] (2009). In Metcoff, the plaintiffs argued that the directors of a corporation owed a duty to creditors when a corporation becomes insolvent. Id., 69-70. Rejecting the plaintiffs' argument that the court should adopt the reasoning of other jurisdictions, the court followed the rule set forth by the Supreme Court of Delaware in North American Catholic Education Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) and held that direct claims for breach of fiduciary duty cannot be asserted against directors by creditors. Id. 74-75. Citing the Supreme Court of Delaware, the Metcoff court stated: "Recognizing that directors of an insolvent corporation owe direct fiduciary duties to creditors, would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interest of the insolvent corporation. To recognize a new right for creditors to bring direct fiduciary claims against those directors would create a conflict between those directors' duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors. Directors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation." Id., 74. The court went on to state that the general rule for Connecticut, regardless of the corporation's solvency, is that "directors of the corporation do not owe a fiduciary duty to a corporate creditor that would expose them to personal liability to the creditor for an alleged breach of such duty. The officers and directors of a corporation owe their fiduciary duties to the corporation and its shareholders, and corporate creditors are afforded rights and remedies under existing and extensive contract, tort and statutory protections." Id., 75.

The Metcoff court specifically declined to address whether creditors could bring a breach of fiduciary duty action as a derivative suit. Metcoff v. Lebovics, supra, 51 Conn.Sup. 84-85.

Subsequent state and federal cases have relied upon the Metcoff rule. See Master-Halco, Inc. v. Scillia, Dowling Natarelli, LLC, United States District Court, Docket No. 3:09cv1546 (D.Conn. April 5, 2010) (citing Metcoff for proposition that directors and officers do not owe fiduciary duty to corporation's creditors); All Metals Industries, Inc. v. TD Banknorth, Superior Court, judicial district of Middlesex, Docket No. CV 07 5002464 (February 27, 2008, Aurigemma, J.) (relying on Metcoff in holding directors, officers, members and shareholders of limited liability companies do not owe fiduciary duties to creditors). In Master-Halco, Inc. v. Scillia, Dowling Natarelli, LLC, supra, United States District Court, Docket No. 3:09cv1546, the United States District Court noted that no Connecticut appellate court had ruled on the issue of fiduciary duties owed by directors and officers to a corporation's creditors but believed "that Metcoff's holding [was] both well reasoned and suggests the likely trajectory of the Connecticut courts' thinking on the issue" and believed "that the Connecticut appellate courts [would not] embrace a cause of action for breach of fiduciary duty, brought directly by a creditor against corporate officers and directors, for the period in which a corporation is in the zone of insolvency."

Connecticut courts have often looked to decisions of the Supreme Court of Delaware when addressing the common law of corporations. See Katz Corp v. T.H. Canty Co., 168 Conn. 201, 208-09, 362 A.2d 975 (1974) (citing Delaware case law for guidance on doctrine of corporate opportunity); J.F.C. Endeavors, Inc. v. Pioneer Steel Ball Co., Superior Court, judicial district of Hartford, Docket No. 587083 (December 14, 1999, Hennessey, J.) ( 26 Conn. L. Rptr. 133, 136) (relying on Delaware case law on issues involving the winding up of a corporation's existence); Von Seldeneck v. Great Country Bank, Superior Court, judicial district of Ansonia-Milford at Milford, Docket No. CV 89 029886 (October 5, 1990, Meadow, J.) ( 2 Conn. L. Rptr. 548, 551) ("While there is no relevant Connecticut case law interpreting these statutes, the court looks to Delaware case law for guidance on questions of corporate law, as it is the forum where the majority of such issues are litigated"). The Supreme Court of Delaware has held that creditors cannot bring direct claims for breach of fiduciary duty against directors and officers of corporations.

In support of its argument that the court adopt a cause of action allowing for lenders to be considered de facto directors of borrowers and liable to creditors of an insolvent corporation, Wetherill cites Coppola v. Bear Stearns Co., 499 F.3d 144 (3d Cir. 2007). In Coppola, the court cited Krivo Industrial Supply Co. v. National Distillers Chemical Corp., 483 F.2d 1098 (5th Cir. 1973), for the liability theory that Wetherill relies on. Id., 148-50. In Krivo Industrial Supply Co. v. National Distillers Chemical Corp., the Fifth Circuit applied Alabama's "instrumentality doctrine" as a means of disregarding the corporate form and holding owners personally liable for the misuse of benefits of the corporate device. See Krivo Industrial Supply Co. v. National Distillers Chemical Corp., supra, 483 F.2d 1102-07. The Krivo Industrial Supply Co. court recognized that this doctrine may be applied to cases involving debtor-creditor relationships, and stated: "If a lender becomes so involved with its debtor that it is in fact actively managing the debtor's affairs, then the quantum of control necessary to support liability under the `instrumentality' theory may be achieved." Id., 1105. Connecticut recognizes the instrumentality doctrine as a means to disregard the corporate form, otherwise known as piercing the corporate veil. Breen v. Judge, 124 Conn.App. 147, 152-53, 4 A.3d 326 (2010). The lender liability theory that Wetherill relies upon in its use of Coppola is essentially the same as piercing the corporate veil. See id. Since Wetherill has alleged a count based upon piercing the corporate veil, it makes little sense to recognize a cause of action for the same result by different name.

The Coppola court also cites A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285 (Minn. 1981) and Martin v. Peyton, 246 N.Y. 213, 158 N.E. 77 (1927) for lender liability principles. In A. Gay Jenson Farms Co. v. Cargill, Inc., supra, 291, the court focused on creditors being liable for the acts of a debtor based on agency law and in Martin v. Peyton, supra, 78-80, the court analyzed whether lenders became members of a partnership, and therefore personally liable, based on the conduct between the parties.

"The instrumentality rule requires, in any case by 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 aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of." Breen v. Judge, supra, 124 Conn.App. 152-53.

To be liable for aiding and abetting a breach of fiduciary duty, the individual whom the party aids must perform a wrongful act that causes injury, the party must be generally aware of his role as party to an illegal or tortious act at the time he provides assistance and the party must knowingly and substantially assist the principal violation. Efthimiou v. Smith, 268 Conn. 499, 505, 846 A.2d 222 (2004). Since directors of a corporation do not owe creditors a fiduciary duty, regardless of the corporation's solvency, Wetherill cannot assert that People's United aided and abetted Reliance in breaching the fiduciary it owed to Wetherill as there was no duty for Reliance to breach. See Hartley v. Boyd, Superior Court, complex litigation docket at Waterbury, Docket No. X02 CV 03 4004679 (February 4, 2008, Eveleigh, J.) ("A civil action for aiding and abetting a breach of fiduciary duty depends upon the existence of a valid underlying cause of action for breach of fiduciary duty"). Therefore, Wetherill cannot assert a claim for aiding and abetting the breach of a fiduciary duty.

For the foregoing reasons, People's United's motion to strike as to counts one and three of the counterclaim are hereby granted.

II EQUITABLE SUBORDINATION

Wetherill's second special defense asserts that People's United's claim against Reliance should be equitably subordinated to Wetherill's. Wetherill expands on this claim in count two of the counterclaim, in which it alleges that People's United, in its position of control over Reliance, had a duty to ensure that transactions entered into by Reliance were made in good faith and were fair to both Reliance and its creditors. Wetherill argues that, in exercising control over Reliance, People's United breached this duty because it forced Reliance to act in a manner beneficial to People's United and against the interest of Reliance's creditors. As a result, People's United unfairly received profits and precluded Wetherill from collecting on its prejudgment remedy. Wetherill therefore asserts that any claims People's United may have against Reliance or its accounts receivable should be equitably subordinated to Wetherill's claims.

People's United argues that Wetherill's claim for equitable subordination is legally insufficient because the theory of equitable subordination put forth by Wetherill is exclusive to federal bankruptcy law. Wetherill acknowledges that, although the form of equitable jurisdiction it asserts is the one used by the Bankruptcy Court, the court should apply this form of equitable subordination through its equitable powers in order to prevent an injustice to Wetherill. Under this theory, Wetherill asserts that it has alleged a claim of equitable subordination.

Connecticut's doctrine of equitable subordination applies to cases where there are multiple releases of mortgages on a piece of property and a mortgage is renewed while a prior lien is released in ignorance of intervening rights. See Connecticut National Bank v. Chapman, 153 Conn. 393, 397-400, 216 A.2d 814 (1966) (discussing court's equity power to preserve original party's rights); Sobol Family Partnership v. Cushman Wakefield, Superior Court, judicial district of Middlesex, Docket No. CV 04 4003559 (August 9, 2006, Beach, J.) ("The case law on [equitable subordination] appears to be limited to the areas of the priority of liens and mortgages"); Haydu v. Wellner, Superior Court, judicial district of Bridgeport, Docket No. CV 93 0301689 (April 29, 1994, Vertefeuille, J.) (applying equitable subordination to release of mortgages based on the reasoning of the CT Page 2282 Connecticut National Bank court).

The Supreme Court of the United States affirmed the doctrine of equitable subordination in Pepper v. Litton, 308 U.S. 295, 310-12, 60 S.Ct. 238, 84 L.Ed. 281 (1939), noting the equitable power of the Bankruptcy Court to protect creditors against fraud and breach of fiduciary duty by debtors. The court noted that, in light of equitable considerations, the Bankruptcy Court may subordinate a claim of an individual to another's. Id., 305. Equitable subordination "derives from the Bankruptcy Court's role as administrator of the debtor's estate for the equal benefit of all creditors." HBE Leasing Corp. v. Frank, 48 F.3d 623, 634 (2d Cir. 1005). The doctrine has been codified at 11 U.S.C. § 510(c) (2006). "Equitable subordination is an unusual remedy which should be applied only in limited circumstances" and, if applied, such subordination must "not be inconsistent with other aspects of the Bankruptcy Code." In re Mr. R's Prepared Foods, Inc., 251 B.R. 24, 28-29 (Bankr.D.Conn. 2000).

11 U.S.C. § 510(c) (2006) provides in relevant part: "Notwithstanding subsections (a) and (b) of this section . . . the court may . . . (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or . . . (2) order that any lien securing such a subordinated claim be transferred to the estate."

To determine whether equitable subordination of a claim is justified, courts generally apply "the three-prong Mobile Steel test, which requires (1) inequitable conduct by the creditor whose claim is to be subordinated (2) resulting in unfair advantage to the malefactor and/or harm to the debtor or its other creditors, and (3) that equitable subordination would not be inconsistent with other aspects of the Bankruptcy Code." In re Mr. R's Prepared Foods, Inc., supra, 251 B.R. 28-29.

Whether the doctrine of equitable subordination may be used outside of bankruptcy proceedings is an issue of first impression for Connecticut. Some jurisdictions have held that equitable subordination is only applicable to bankruptcy proceedings. See Gaymar Industries, Inc. v. Firstmerit Bank, N.A., United States District Court, Docket No. 5:07CV02023 (N.D. Ohio March 10, 2008), aff'd, 311 Fed.Appx. 814 (6th Cir. 2009) ("Equitable subordination is a bankruptcy-specific concept, and its application is limited to that context"); In re Poughkeepsie Hotel Associates Joint Venture, 132 B.R. 287, 292 (Bankr.S.D.N.Y. 1991) ("The notion of equitable subordination, as embodied in [ 11 U.S.C. § 510], is peculiar to bankruptcy law and an issue which can only be decided in a bankruptcy setting"); Schwender v. Jupiter Electric Co., 358 Ill.App.3d 65, 72, 829 N.E.2d 818 (2005) ("equitable subordination is a federal statutory creation available only in bankruptcy proceedings"); PCL/Calumet v. Entercitement, LLC, 760 N.E.2d 633, 640 (Ind.Ct.App. 2001) (declining to use equitable subordination to subordinate mortgage lien because doctrine relies on bankruptcy code); Milliken Co. v. Duro Textiles, LLC, Superior Court of Massachusetts, Docket No. BRCV2002-1364 (June 10, 2005), aff'd, 451 Mass. 547, 887 N.E.2d 244 (2008) (stating equitable subordination is a benefit to those who are in bankruptcy proceedings); see also HBE Leasing Corp. v. Frank, CT Page 2272 supra, 48 F.3d 634 (Emphasis added.) ("Equitable subordination is distinctly a power of federal bankruptcy courts, as courts of equity, to subordinate the claims of one creditor to those of others"). Others, however, have recognized that the doctrine may be applied outside of a bankruptcy setting. See In re Paolella Sons, Inc., 85 B.R. 965, 970 (Bankr.E.D.Pa. 1988), aff'd, American Cigar Co. v. MNC Commercial Corp., 37 F.2d 1487 (3d Cir. 1994) ("equitable subordination . . . matters may be brought in a nonbankruptcy forum"); Parkersburg v. Carpenter, 203 W.Va. 242, 245, 507 S.E.2d 120 (1998) (implying equitable subordination may be applied outside of bankruptcy context); HNY Holdings, Inc. v. Danis Transportation Co., Rhode Island Superior Court, Docket No. PB 02-6561 (September 9, 2004) (analyzing equitable subordination claim based on bankruptcy law).

In PCL/Calumet v. Entercitement, LLC, supra, 760 N.E.2d 640, the court noted that "reliance on [equitable subordination] in a priority dispute unrelated to bankruptcy proceeding is unwarranted because all three of the conditions that must be met in order for the doctrine to apply hinge in great part upon the Bankruptcy Code itself." Given that equitable subordination is an unusual remedy that should be applied only in limited circumstances, it follows that this remedy should be limited to benefit only those parties that are burdened with bankruptcy and not applied to any case where inequitable conduct may lead to unfairness. Although equitable subordination is a remedy that has its basis in equity, the use of the doctrine was derived from and is unique to bankruptcy actions. Further, satisfaction of the elements of equitable subordination in a bankruptcy action requires consistency with the Bankruptcy Code. While Wetherill has alleged in the counterclaim that People's United acted inequitably, the fact that the present action is not one of bankruptcy should limit the court in how far it goes in fashioning relief. The court is persuaded by the reasoning of courts that have declined to use equitable subordination outside of a bankruptcy context.

For the foregoing reasons, People's United's motion to strike as to the second special defense and as to count two of the counterclaim are granted.

III TORTIOUS INTERFERENCE WITH BUSINESS RELATIONS

Count four of the counterclaim alleges that Wetherill had an agreement to supply parts to Reliance on a credit basis and that Reliance would make periodic payments to Wetherill. After taking control of Reliance in 2009, People's United became aware of Reliance's agreement with Wetherill. Wetherill alleges that People's United forced Reliance to enter transactions solely for the benefit of People's United and that it improperly exerted control over Reliance, furthering its own interests to the detriment of Wetherill and Reliance's other creditors. People's United argues that this count fails to state a claim upon which relief can be granted because Wetherill did not allege fraud, misrepresentation, molestation or malice by People's United or that the alleged interference occurred during the commission of a tort. Wetherill responds that in order to sufficiently plead a claim of tortious interference, it needs only to plead facts that establish that the opposing party interfered by some improper means.

A valid claim for tortious interference with business relations requires a claimant to "prove that the defendant's conduct was in fact tortious. This element may be satisfied by proof that the defendant was guilty of fraud, misrepresentation, intimidation or molestation . . . or that the defendant acted maliciously . . . [A]n action for intentional interference with business relations . . . requires the plaintiff to plead and prove at least some improper motive or improper means . . . The plaintiff in a tortious interference claim must demonstrate malice on the part of the defendant, not in the sense of ill will, but intentional interference without justification." Daley v. Aetna Life and Casualty Co., 249 Conn. 766, 805-06, 734 A.2d 112 (1999).

Wetherill alleges that People's United was aware of the business agreement between Wetherill and Reliance and that People's United interfered with that agreement when it took control of Reliance by refusing to pay the money Reliance owed to Wetherill. Wetherill further alleges that such interference was improper because it furthered the interests of People's United to the detriment of Wetherill. Since malice is defined as intentional interference without justification, the court finds that Wetherill has pleaded a proper claim of tortious interference of business relations in its counterclaim as it has alleged facts which establish that People's United improperly interfered with Wetherill's relationship with Reliance.

People's United's motion to strike count four of the counterclaim is therefore denied.

CT Page 2274

IV FAILURE TO ACT IN A COMMERCIALLY REASONABLE MANNER

Count eight of the counterclaim alleges that People's United failed to act in a commercially reasonable manner in violation of General Statutes § 42a-9-610. Wetherill claims that, as a secured creditor of Reliance, People's United failed to provide Reliance with sufficient time to prepare for the disposition of its inventory. Wetherill alleges that this prevented more favorable bids for Reliance's inventory and that the inventory was auctioned off at a price far below its fair market value. As a result, Wetherill alleges, People's United is liable for Wetherill's damages under General Statutes § 42a-9-625. People's United argues that the court should strike count seven of the counterclaim because Wetherill has failed to plead sufficient facts to establish that People's United acted in a commercially unreasonable manner, and has merely asserted legal conclusions. People's United maintains that it did in fact comply with the requirements of the statute. Wetherill claims that, although People's United technically complied with the statute, the sale of Reliance's inventory was still commercially unreasonable because there was inadequate notice of the sale given the size of Reliance's inventory, which led to the inventory being sold at far less than market value.

Connecticut has adopted the provision of the UCC that covers secured transactions through General Statutes § 42a-9-101 et seq. When a debtor defaults on an account that is secured by collateral, a creditor may dispose of that collateral to satisfy the account as long as every aspect of the disposition is commercially reasonable. See General Statutes § 42a-9-610(a) and (b). General Statutes § 42a-9-627(b) provides that "[a] disposition of collateral is made in a commercially reasonable manner if the disposition is made: (1) In the usual manner on any recognized market; (2) At the price current in any recognized market at the time of the disposition; or (3) Otherwise in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition."

Regarding notice of the disposition of collateral, a creditor must send the debtor and any secondary obligor a reasonable authenticated notification of disposition. See General Statutes § 42a-9-611(b) and (c). Since Connecticut courts have not addressed the requirements of notice for the disposition of collateral, it is proper to look to other jurisdictions' interpretations and commentary on the relevant UCC provisions. See Roy v. Stephen Pontiac-Cadillac, Inc., 15 Conn.App. 101, 104, 543 A.2d 775 (1988) "The purpose of this notification is to give the debtor an opportunity to discharge the debt, arrange for a friendly purchaser, or to oversee the sale to see that it is conducted in a commercially reasonable manner." Federal Deposit Ins. Co. v. Lanier, 926 F.2d 462, 464 (5th Cir. 1991). "The notification must be reasonable as to the manner in which it is sent, its timeliness (i.e., a reasonable time before the disposition is to take place), and its content." General Statutes § 42a-9-611, comment 2. "The rule for determining whether notification under U.C.C. § [9-611] is reasonable is whether the notice was sent in sufficient time to enable those entitled to notice to take appropriate steps to protect their interest in the collateral." Chemlease Worldwide, Inc. v. Brace, Inc., 338 N.W.2d 428, 434 (Minn. 1983). Instead of specifically defining a specific time frame that amounts to reasonable notification, General Statutes § 42a-9-612(a) provides: "Except as otherwise provided in subsection (b), whether a notification is sent within a reasonable time is a question of fact."

In the memorandum in support of its motion, People's United claims that General Statutes § 42a-9-611 requires only ten days notice in order for a notification to be commercially reasonable. None of the provisions that relate to ten days, however, are applicable to the present case.
General Statutes § 42a-9-611(c) lists which individuals a secured creditor must send notice to. Subsection (c)(3)(B) requires notice be given to "[a]ny other secured party or lienholder that, ten days before the notification date, held a security interest in or other lien on the collateral perfected by the filing of a financing statement . . ." Although Wetherill did obtain a prejudgment remedy upon Reliance's assets, it has not been alleged that Wetherill filed a financing statement to perfect its security interest.
Subsection (c)(3)(C) requires notice be given to "[a]ny other secured party that, ten days before the notification date, held a security interest in the collateral perfected by compliance with a statute, regulation or treaty described in subsection (a) of section 42a-9-311." Like the previous statutory provision, it has not been alleged that Wetherill had a perfected security interest pursuant to compliance with General Statutes § 42a-9-311. People's United's claim that a ten-day notification is automatically commercially reasonable under § 42a-9-611 is, therefore, incorrect.

General Statutes § 42a-9-612(b) provides: "In a transaction other than a consumer transaction, a notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition." Although the transaction between People's United and Reliance is not a consumer transaction, People's United did not plead facts which allege that it gave notice to Reliance after it defaulted. As a result, it is submitted that the court cannot rule, as a matter of law, that People's United's notification of disposition to Reliance was reasonable.

The court finds that Wetherill has pleaded sufficient facts. Wetherill alleges that Elm City, as an agent of People's United, directed the preparation of the sale of Reliance's inventory and that Reliance was not allowed any input on the time, place, scope or management of the sale. Wetherill also alleges that Reliance had a large inventory and that two weeks was insufficient time to prepare the sale and solicit adequate bids from Reliance's suppliers. Wetherill maintains that Reliance was not given the opportunity to discharge the debt it owed to People's United, Wetherill, or its other creditors, that Reliance was unable to arrange a purchase that met its needs. Pursuant to General Statutes § 42a-9-612(a), the issue of whether People's United's disposition of Reliance's inventory was commercially reasonable is a matter of fact, not law, and the facts as alleged could support a finding that the auction for Reliance's inventory was not commercially reasonable.

Therefore People's United's motion to strike count eight of the counterclaim is denied.

V THIRD SPECIAL DEFENSE CT Page 2276

The third special defense asserts that the complaint fails under the doctrines of unclean hands, laches, waiver and/or estoppel. People's United argues that the third special defense should be stricken because it alleges no facts in support of the defenses claimed. Wetherill argues that this defense should not be stricken because the counterclaim alleges numerous facts which show that People's United acted with unclean hands regarding its relationship with Reliance.

Practice Book § 10-1 provides in relevant part: "Each pleading shall contain a plain and concise statement of the material facts on which the pleader relies . . ." Practice Book § 10-50 provides in relevant part: "Facts which are consistent with [the plaintiff's] statements but show, notwithstanding, that the plaintiff has no cause of action, must be specially alleged." "The fundamental purpose of a special defense, like other pleadings, is to apprise the court and opposing counsel of the issues to be tried, so that basic issues are not concealed until the trial is under-way." Almada v. Wausau Business Ins. Co., 274 Conn. 449, 456, 876 A.2d 535 (2005). Further, motions to strike test the sufficiency of specific pleadings. Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252, 990 A.2d 206 (2010).

Several Superior Court cases have held that a defendant's failure to specially allege facts in support of a special defense is a ground for that defense to be stricken. See Lamothe v. Midstate Medical Center, Superior Court, judicial district of New Haven, Docket No. CV 05 4002893 (April 10, 2006, Taylor, J.) (failing to plead specific facts in support of special defense is ground for special defense to be stricken); McRea v. Davis, Superior Court, judicial district of Fairfield, Docket No. CV 02 0401037 (May 5, 2004, Dewey, J.) (holding allegation of mere legal conclusions without specifically pleaded facts is not properly pleaded special defense). In Senise v. Merritt Seven Venture, LLC, Superior Court, judicial district of Fairfield, Docket No. CV 02 0397413 (February 17, 2006, Rodriguez, J.) ( 40 Conn. L. Rptr. 770, 771), the defendant asserted a special defense that simply stated: "The claims set forth in the third party's complaint are barred by the doctrine of laches." The court granted the plaintiff's motion to strike that special defense because no facts were pleaded to support the elements of the defense. Id. The court stated that "[e]xplicit in [Practice Book § 10-50] is that a party pleading a special defense must plead CT Page 2277 facts, consistent with the special defense they are alleging." Id. The court further recognized that a special defense must be stricken if it fails to plead facts to support the legal conclusion it purports to assert. (Emphasis in original.) Id.

The Practice Book and cases discussing the issue of pleading facts in support of special defenses strongly suggest that Wetherill may not rely on facts alleged in its counterclaim to support special defenses it asserted in its answer. Practice Book § 10-1 contemplates this principle by stating that each type of pleading requires facts to be pleaded specific to such pleading. Practice Book § 10-50 states that special defenses require a party to allege facts specific to that special defense. Based on the requirements of Practice Book §§ 10-1 and 10-50, it may be inferred that a party must always plead facts when it asserts a special defense and that it may not merely state that such facts are scattered throughout another pleading. An answer and a counterclaim are separate and distinct pleadings, and a challenge to either, by way of motion to strike, should be directed to a specific pleading. The above noted cases recognize that mere legal conclusions cannot be asserted as special defenses and that facts must be pleaded to support the elements of those defenses.

A deficiency in a pleading cannot be cured by reference to another. People's United's motion to strike the third special defense is granted.

VI FRAUDULENT TRANSFER

Count seven of the counterclaim alleges that Reliance's assets were sold and its inventory was auctioned off at prices far below their fair market value. Wetherill alleges that the asset sale and the inventory auction were conducted for the benefit of People's United and that Reliance did not receive a reasonably equivalent value from either disposition. Wetherill alleges that since it was a creditor of Reliance before the asset sale and the auction, Wetherill was injured because Reliance was not able to pay its debts to Wetherill. In the alternative, Wetherill alleges that Reliance believed or reasonably should have believed that it would incur debt that it would not be able to pay back. With respect to either argument, Wetherill alleges that the asset sale and auction were fraudulent and that it is entitled to judgment against People's United pursuant to General Statutes § 52-552i(b) for the amount of Wetherill's claim against Reliance, and to have an execution levied pursuant to General Statutes § 52-552h(b) against the proceeds of the asset sale and auction retained by People's United.

People's United asserts two arguments as to why count seven of the counterclaim should be stricken. First, People's United claims that in order for a transfer of property to be considered fraudulent, the property must qualify as an "asset" under General Statutes § 52-552a et seq. People's United argues that Wetherill has failed to allege that there was equity in Reliance's assets that were sold to Motorcar or in Reliance's inventory that was auctioned off. Since there was no equity, Reliance's property cannot be considered an asset under the statute and Wetherill's fraudulent transfer claim is insufficient. Second, People's United maintains that the auction of Reliance's inventory cannot be considered a fraudulent transfer because it was a non-collusive Article 9 secured party sale. It argues that, as a result, reasonably equivalent value was deemed to have been received in the disposition of Reliance's inventory, thus rendering Wetherill's claim legally insufficient. Wetherill claims that a fraudulent transfer occurred because Reliance, which was insolvent, did not receive a reasonably equivalent value in exchange for its assets and inventory. Wetherill further asserts that the sale of Reliance's inventory cannot be considered a secured party sale because it acted as the de facto director of Reliance.

General Statutes § 52-552 et seq. is Connecticut's version of the Uniform Fraudulent Transfer Act. Section 52-552e provides in relevant part: "(a) A transfer made . . . by a debtor is fraudulent to the creditor, if the creditor's claim arose before the transfer was made . . . and if the debtor made the transfer . . . (2) without receiving a reasonable equivalent value in exchange for the transfer . . . and the debtor . . . (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. Section 52-552f provides in relevant part: "(a) A transfer made . . . by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made . . . if the debtor made the transfer . . . without receiving a reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent at that time . . ." A "transfer" under the statute is defined as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset . . ." General Statutes § 52-552b(12). An "asset" is defined, inter alia, as "property of a debtor, but . . . does not include: (A) Property to the extent it is encumbered by a valid lien . . . General Statutes § 52-552b(2). "[A] transfer cannot be considered fraudulent if, at the time of the transfer, the transferred property is encumbered by valid liens exceeding the property's value because the property would no longer be considered an asset under § 52-552(b)(2), and only assets may be transferred fraudulently." National Loan Investors, L.P. v. World Properties, LLC, 79 Conn.App. 725, 732, 830 A.2d 1178 (2003), cert. denied, 267 Conn. 910, 840 A.2d 1173 (2004).

In Cooke v. Cooke, Superior Court, judicial district of Fairfield, Docket No. CV 06 5001276 (April 23, 2007, Matasavage, J.), the defendant moved to strike two counts of a complaint based on fraudulent transfer arguing that the plaintiff did not properly allege the transfer of an asset under the statute because the plaintiff needed to plead facts that the asset at issue was not encumbered. Relying on National Loan Investors, L.P., the Cooke court stated: "Although it is clear that the amount of a valid lien would reduce the value of an asset transferred, and that property may be encumbered to such an extent that it loses its value as an asset, the statute does not require a plaintiff in a fraudulent transfer action, to plead the amount of any liens on the property transferred." Id. In holding that the value of all liens do not need to be pleaded in the complaint, the court noted that "[a]lthough evidence of the value of any lien must be considered in determining the value of any asset transferred, either as part of a summary judgment determination or at the time of trial, the value of all liens need not be pleaded in the complaint. A defendant can always introduce evidence of the value of liens in excess of the value of the property transferred to support an argument that the property is not a viable asset. This, however, is an evidentiary matter and not a pleading requirement." Id. There is nothing in General Statutes §§ 52-552e or 52-552f that requires a creditor to allege the value of a transferred asset in order to sufficiently plead a fraudulent transfer claim. Further, as noted by the Cooke court, evidence of the value of a lien may be presented by a motion for summary judgment or at trial. Accordingly, the court finds that pleading the value of a transferred asset is not an essential element of a fraudulent transfer claim.

People's United's argument, that count seven should be stricken with regard to the sale of Reliance's inventory because it was sold pursuant a non-collusive Article 9 secured party sale, is not properly raised by a motion to strike. A motion to strike challenges the sufficiency of allegations made in a pleading. Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, supra, 295 Conn. 252. People's United's argument does not challenge the sufficiency of Wetherill's counterclaim. A non-collusive secured party sale pursuant to General Statutes § 52-552d would, as a matter of law, establish that People's United gave reasonably equivalent value for its inventory. People's United's argument is therefore more akin to a special defense, which requires the proponent of such defense to allege facts in support of it. See Almada v. Wausau Business Ins. Co., supra, 274 Conn. 456 ("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"). People's United's argument is consistent with the facts alleged in Wetherill's counterclaim and it seeks to destroy Wetherill's cause of action. Establishing whether a sale is a non-collusive secured party sale requires facts to be alleged. Accordingly, it is improper to argue on a motion to strike that a claim is barred because a disposition of assets is valid pursuant to General Statutes § 52-552d(b).

General Statutes § 52-552d(b) provides: "For the purposes of subdivision (2) of subsection (a) of section 52-552e and section 52-552f, a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, non-collusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust or security agreement."

The motion to strike count seven of the counterclaim is denied.

CONCLUSION

The motion to strike as to the second and the third special defenses and counts one, two and three of the counterclaim is granted. The motion with respect to counts four, seven and eight of the counterclaim is denied.


Summaries of

People's United Bank v. Wetherill Asso.

Connecticut Superior Court Judicial District of Hartford at Hartford
Jan 4, 2011
2011 Ct. Sup. 2262 (Conn. Super. Ct. 2011)
Case details for

People's United Bank v. Wetherill Asso.

Case Details

Full title:PEOPLE'S UNITED BANK v. WETHERILL ASSOCIATES ET AL

Court:Connecticut Superior Court Judicial District of Hartford at Hartford

Date published: Jan 4, 2011

Citations

2011 Ct. Sup. 2262 (Conn. Super. Ct. 2011)
51 CLR 377

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