Opinion
No. X04 CV 04 4003559 S
August 9, 2006
MEMORANDUM OF DECISION
This action began, insofar as the current controversy is concerned, as an action for recovery of rent. The plaintiff landlord leased premises on Murphy Road in Hartford to the predecessor of the defendant Golfers' Warehouse, Inc. ("Warehouse"). Warehouse allegedly stopped paying rent — albeit temporarily, reportedly — and moved to other quarters a short distance away. In the course of pretrial discovery the plaintiff examined some of the actions taken by Thomas DiVenere, the majority shareholder of Golfers' Clubhouse, Inc., which in turn owns all of the stock of Warehouse. The plaintiff filed an amended complaint adding DiVenere and Golfers' Clubhouse as defendants. This court dismissed the action as to Golfers' Clubhouse because of lack of personal jurisdiction, but did not dismiss as to DiVenere. DiVenere now seeks to strike Counts Ten through Twenty, which are brought against him, on the ground that they fail to allege facts on which relief can be granted. These counts are premised, at the risk of over generalizing, on the assertions that DiVenere improperly dominated the affairs of both corporations in order to force a relocation of the business, and by doing so jeopardized the financial integrity of Warehouse, to the plaintiff's detriment.
The revised complaint dated July 20, 2005, contains the eleven additional counts.
Suffice it to say that in deciding a motion to strike on the ground of whether a claim has been stated on which relief may be granted, the court must confine itself to the allegations of the pleading, both express and necessarily implied, and must accept as true those allegations. See, e.g., Gaza v. Stamford, 255 Conn. 245, 260 (2001); see also Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348 (1990). The pleadings will be construed in favor of the pleader if there is any ambiguity as to whether relief could be granted under the pleading. Doe v. Marselle, 38 Conn.App. 360, 364 (1995). Conclusions which are pled, however, need not be accepted as true for the purpose of ruling on motions to strike. Doe v. Yale University, 252 Conn. 641, 694 (2000).
The tenth count alleges that DiVenere is personally liable for the liabilities of Warehouse because of piercing of the corporate veil. It is not altogether clear whether the route chosen is the instrumentality rule or the identity rule. See, e.g., Zaist v. Olson, 154 Conn. 563 (1967). Nonetheless, the count alleges factually that DiVenere, as ultimate majority owner of Warehouse, set the policy for and directed the affairs of Warehouse (¶ 4); that he executed the relocation of Warehouse's business from 216 Murphy Road to 75-121 Brainard Road and extended to Warehouse personal loans to help with costs associated with the relocation (¶ 11); that he entered into the new lease despite the enforceability of the old lease, the need for cash and against the advice of some of warehouse's officers (¶ 12); that he never formally recorded in corporate records plans regarding the relocation nor called a meeting of shareholders to discuss same and never obtained a sub-tenant for the old premises or took any other precautionary financial measures (¶ 13); that Warehouse moved, breached the lease with the plaintiff and improperly claimed the plaintiff constructively evicted Warehouse (¶¶ 14-17); and that he "attempted to disguise the state of effective insolvency" caused by the obligation to pay two rents by adopting an accounting system which recognized rental expense "only when paid," rather than reporting the full debt owed to the plaintiff (¶ 18). Based on these factual allegations, the plaintiff concludes that all of the above factors, including adoption of a pretextual claim of constructive eviction, prosecution of the relocation plan, deviation from proper accounting principles, and "failure to protect the interests" of Warehouse show that DiVenere exercised such control and domination that Warehouse "equitably . . . had [no] separate mind, will or existence of its own with regard to this transaction . . ." (¶ 19). As a result, it is alleged, the plaintiff suffered damages including lost rent, tax payments, insurance and other expenses.
The corporate veil may be pierced when a person controls a corporation for an improper purpose, and the corporation is a mere shell primarily used for fraud or injustice. Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 557 (1982). As mentioned above, veil-piercing traditionally falls within one of two categories. The "identity rule" arises when the independent existence of the corporation does not exist, that is, the personal identity and the corporate identity are so merged that there is no significant difference between the two. The elements of the "instrumentality rule" are "(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 perpetuate 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, 575.
There would appear to be no facts alleged sufficient to assert a violation of the identity rule. For example, there is no such merger of accounts or payment of personal expenses by the corporate entity as are frequently associated with violations of the identity rule. A loan, in itself, is not evidence of a violation of the identity and may indeed be evidence of the contrary.
It is difficult to see how the allegations of Count Ten jibe with the elements of the instrumentality rule. The count does allege that DiVenere directed the operations of Warehouse, but that in itself is not especially meaningful: a chief executive officer is supposed to direct the operations of the business entity. There is nothing to suggest the crux of the wrong that the rule is designed to address: that DiVenere essentially used a corporate shell for the purpose of visiting an injustice on the plaintiff, and thus should be personally liable for the consequences. Warehouse may be liable to the plaintiff, and DiVenere may have, as a practical matter, directed the affairs of Warehouse, but instrumentality nexus is missing from the allegations. The motion to strike the tenth count is granted.
The eleventh count seeks to allege that DiVenere tortiously interfered with the contractual arrangements between the plaintiff and Warehouse. The count incorporates the factual allegations of the tenth count and adds that DiVenere's "domination and control" of Warehouse "was a tortious interference" with the plaintiff's contractual rights (¶ 20). DiVenere, in seeking to strike the count for failure to state a claim on which relief can be granted, argues that for interference to be actionable, it must be tortious in the sense of fraudulent, deceptive or the like, and there must be improper motive or means. See, e.g., Daley v. Aetna Life Casualty Co., 249 Conn. 766, 805-06 (1999); Blake v. Levy, 191 Conn. 257, 262 (1983).
Although those arguments may have merit, I find the simpler and more persuasive argument to be the proposition that an agent cannot logically interfere with a contract entered into between his or her principal and another, for the same reason that one cannot logically interfere with one's own contract. Wellington Systems, Inc. v. Redding Group, Inc., 49 Conn.App. 152, 168 (1998). As the complaint is pled, DiVenere's identity either is muddled into that of Warehouse, such that DiVenere was the real contracting party and thus would be interfering with himself, or DiVenere is an agent of Warehouse, which contracted with the plaintiff. Either way, DiVenere cannot be a third-party interloper interfering with the contractual relationship between Warehouse and the plaintiff. The motion to strike is granted as to the eleventh count.
The twelfth count purports to allege that DiVenere breached a fiduciary duty that he owed to the plaintiff. The count incorporates the factual allegations of the tenth count and adds that DiVenere's domination and control of Warehouse rendered Warehouse "in a state of effective insolvency" and unable to meet its financial obligation to the plaintiff. DiVenere seeks to strike the count for failure to state a ground on which relief can be granted.
The count appears to bootstrap itself into existence. It alleges in conclusory fashion that Warehouse is effectively insolvent, and then suggests that as a result DiVenere has a fiduciary duty to the plaintiff as a creditor. It appears to be true that in a bankruptcy or similar setting a debtor may have a fiduciary duty to creditors in general to treat them fairly and not, for example, advance one claim improperly over another, but ordinarily a commercial debtor and a commercial creditor are simply not in such a position of trust, confidence and inequality that a fiduciary relationship exists. See Konover Development Corporation v. Zeller, 228 Conn. 206, 219 (1994); see also Bennett Restructuring Fund, L.P. v. Hamburg, 2003 Ct.Sup. LEXIS 61. The duty is extraordinarily narrow: in order for the duty to exist, the venture must be either formally insolvent or so close to insolvent that conflicts are created between competing interests for the relatively minuscule available assets; additionally, the duty created is not for the benefit of a particular creditor but rather for the entire class of creditors. Bennett Restructuring, supra, *63-66.
One might question whether the insolvency situation is a true fiduciary relationship. There undoubtedly are duties to creditors which arise from bankruptcy and perhaps similar straits, and they may resemble the duties created by a fiduciary relationship. But there would appear to be a qualitative difference between the relationship of commercial debtor and creditor and the traditional fiduciary relationship, such as attorney-client or trustee-beneficiary. The former does not contemplate that the nature of the relationship envisions trust and confidence.
This question has been answered, to a degree, by the Delaware courts, which may impose a constructive trust upon existing assets in an insolvency situation such that assets receive greater protection than otherwise. See, e.g., Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Chancery 1991).
In the circumstance of this complaint, I believe that neither the necessary level of insolvency nor the breach of a generalized duty to creditors has been alleged. Because the circumstances in which such a fiduciary duty may arise are limited, in essence, to those justifying imposition of a constructive trust, and because the resulting burdens of proof are dramatically reversed, I believe that some particularized facts detailing insolvency and inability to pay need to be alleged to sustain the cause of action. There are no particularized facts alleged in this case other than an allegation that the transaction in question imposes a financial burden on the defendants and that accounting irregularities were employed. In the absence of specific facts supporting the narrow factual situation giving rise to a constructive trust, the motion to strike the twelfth count is granted.
The thirteenth and fourteenth counts allege "equitable subordination": incorporating the allegations of the twelfth count, they suggests that repayment of loans to DiVenere and consulting fees to DiVenere should be subordinated to payment of the debt to the plaintiff. The case law on the subject appears to be limited to the areas of the priority of liens and mortgages. The motion to strike is granted as to the thirteenth and fourteenth counts.
The fifteenth count purports to allege civil theft in violation of General Statutes § 52-564. The count incorporates allegations from prior counts and claims that DiVenere's "receipt of compensation for unspecified services categorized as consultation fees as aforesaid constitutes civil theft . . ." A claim for civil theft requires theft from the plaintiff. The motion to strike is granted.
Counts sixteen, seventeen, eighteen and nineteen purport to allege violations of the Connecticut Unfair Trade Practices Act, General Statutes §§ 42-110(b) et seq. The sixteenth count claims that DiVenere committed civil theft, and as such is liable under CUTPA. Because the fifteenth count was stricken, so is the sixteenth. The seventeenth count alleges that DiVenere violated CUTPA by asserting a pretextual claim of constructive eviction. Ordinarily a claim in a lawsuit is not a violation of CUTPA, and even if a claim has no merit it ordinarily may not be attacked until the first litigation has terminated. See Ventres v. Goodspeed Airport, LLC, 275 Conn. 105, 155-56 (2005). Insofar as the claim might be read to encompass only the claim asserted in correspondence between the parties prior to any actual litigation, the count is defective because there is no allegation that the claim itself of constructive eviction, as perhaps opposed to the actual relocation caused any harm. The eighteenth and nineteenth counts claim that DiVenere's tortious interference with contractual relationships and breach of fiduciary duty violated CUTPA. Because the underlying claims have been stricken, so are the eighteenth and nineteenth counts.
The twentieth count alleges a violation of the Connecticut Fraudulent Transfer Act, General Statutes § 52-552e. It asserts that subsequent to DiVenere's domination and control, he received consultation fees from Warehouse. Those payments, it is alleged, were fraudulent transfers in that they were made with the intent to hinder or delay payment to the plaintiff; without receipt of fair value in return; that the assets of Warehouse were small in relation to the services claimed to have been provided; and that payments were made to DiVenere when Warehouse was unable to pay the plaintiff. I find that this claim, though stated in somewhat conclusory fashion, alleges the bare allegations sufficiently: the arguments marshaled against the claim are primarily factual and must await further development at this point.
It should be stressed that Counts Eleven through Nineteen are, by their terms, dependent on the sufficiency of the allegation of veil piercing asserted in Count Ten. Because the tenth count was stricken, the reasons previously recited in this memorandum for striking the following nine counts are, to that extent, redundant.
The motion to strike (#147) is granted as to the tenth through the nineteenth counts and denied as to the twentieth count.