Opinion
No. CV 04-0832477-S
January 30, 2008
MEMORANDUM OF DECISION
This is an action brought in three counts by the Cadle Company (Cadle), a judgment creditor, against John M. Zubretsky, Jr. (John Jr.), Ann Zutbretsky, his wife, and Access America-Wethersfield, formally known as Access America-Newington, Inc. and formerly known as Century 21 Zubretsky Son, Inc.
The first count alleges reverse piercing of the corporate veil. The second count alleges a fraudulent transfer and the third count alleges unjust enrichment.
Ann Zubretsky will hence forth be called (Ann) and Access America will be referred to as (the corporation). The defendants have filed an answer in which they deny all pertinent allegations in each of the three counts. In addition they have filed two special defenses. The first special defense claims laches. The second special defense was abandoned by the defendants in their briefs.
The Cadle Company is a creditor of John Jr. In 1993 Fleet Bank obtained a judgment against John Z. (the judgment). Fleet Bank assigned the judgment to the plaintiff on September 28, 1993. The plaintiff wished to initiate postjudgment proceedings against John Z. in 1996 and determined that the original assignment and all copies had been misplaced. The plaintiff obtained a second assignment from Fleet Bank dated April 17, 1996.
The plaintiff maintains that the defendants John Z. and Ann (collectively the Zubretskys) engaged in a series of transactions and business decisions since 1998 involving Access America designed and implemented to keep John Z.'s creditors, including the plaintiff, from collecting their judgments. The plaintiff maintains that the Zubretskys completely dominated the corporation's finances, policies and business practices in order to hide John Z's assets and income from his creditors.
COUNT I
In the first count plaintiff seeks a judgment against the corporation under 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. Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133, 149, cert. denied, 261 Conn. 911 (2002). 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." Litchfield, 70 Conn.App. 149-51. In 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." (Citations omitted.) LiButti v. United States, 107 F.3d 110, 119 (2d cir 1997). In Litchfield, the court stated "we consider that under the appropriate circumstances, i.e., when the elements of the identity or the 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." Litchfield 70 Conn.App. Ad. 151.
To satisfy the instrumentality rule the plaintiff must prove the following: (1) [c]ontrol not mere majority or complete stock control but complete domination; not only of finances but of policy and business practices 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) 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 plaintiffs' legal right; and (3) that the force of control and breach of duty must proximately cause the injury or unjust lost complained of. Litchfield, 70 Conn.App. 152. Quoting from Angelo Tomasso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 553 (1982).
"A key factor in making a determination of whether the corporate shield should be disregarded is the degree of control or influence exercised over the corporation by the individuals sought to be held liable." Falcone v. Knight Watchmen, Inc. 11 Conn.App. 218, 221 (1987). In determining whether an entity has been dominated or controlled, courts look for the presence of a number of factors including (1) the absence of corporate formalities; (2) inadequate capitalization; (3) where the 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, addresses, 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. Litchfield at page 152. Quoting Hale Propeller LLC v. Ryan Marine Products ety. ltd. 98 F.Sup.2d 260, 265 (D.Conn. 2000). "We note additionally 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 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." Quoting from Toshiba America Medical Systems, Inc. v. Mobile Medical Systems, Inc., 53 Conn.App. 484, 492 cert. denied, 249 Conn. 930 (1999).
"The identity rule has been stated as follows: If a 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 corporate 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, "quoting from Davenport v. Quinn, 53 Conn.App. 300-01, and Angelo Tomasso, Inc. v. Armour Corporation Paving Inc., 187 Conn. 554. Litchfield Asset Management Corp. v. Howell, 70 Conn.App. 133 (2002), is the only case in Connecticut approving reverse piercing of the corporate veil. In this case a debtor (Maryanne) transferred all of her assets to a corporation which she formed and in which she is general manager. Those who worked in conjunction with the corporation were considered general contractors. She exercised complete control over this corporation. She took no salary nor did she receive any regular distributions, but she consistently used the company's funds to pay personal expenses, gave substantial interest free loans to family and also used the assets for gifts. The court found that the corporation was but an alter ego for the debtor and thus liable for her personal debts.
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.
The instant case requires an analysis of the facts adduced at trial to determine whether or not the plaintiff has fulfilled the requirements of either the instrumentality rule or the identity rule. The pertinent facts adduced at trial are the following: Ann Z. owns all the stock in the corporation. John Z. is the president of the corporation. Although John Z. earned approximately $660,000 in gross commissions from the sale of the properties over the last nine years all of this was retained in the corporation although a substantial portion of this would ordinarily be paid to the realtor who earned it. No credible explanation as to why he failed to take a salary or his net commission was introduced. The statement offered by the defendant to the effect that he didn't deserve to take any remuneration was not credible. John Z. has been President and Treasurer of the corporation since 1990 and Ann Z. has been Vice President and Secretary. Ann Z. was the office manager of the corporation as indicated by the corporate United States tax returns and by her salary until 2003 when the plaintiff became active in pursuing the judgment. John Z. wrote checks payable to himself against the corporation's checking account over a seven-year period. These checks which total approximately $145,000 were eventually characterized as loans by the corporation and were repaid without interest by Ann Z. with "bonus money" that she received in 2003 for that express purpose. The corporation provides John Z. with medical and dental insurance which are benefits that the corporation provides to no employee other than Ann Z. The corporation made contributions to two IRA accounts on behalf of John Z. for six years, a benefit provided to no employee of the corporation other than Ann Z., the last payment having been made September 15, 2003 a date just several months after the plaintiff took John Z.'s deposition within its postjudgment proceedings on May 29, 2003. The corporation pays 100% of John Z.'s personal use of a luxury company car (a 2005 Cadillac STS with a sticker price of $57,016). This includes loan payments, gas and maintenance. Ann Z. is the only other employee with use of a company car. The corporation pays $6,000 each year in premiums for Key-man insurance on the life of' John Z. valued at one million dollars, although the beneficiary of the policy is Ann Z. rather than the corporation. The company cars driven by John Z. and by Ann are used for personal rather than strictly business purposes despite the fact that the corporation's income tax return states that the cars are used 100% of the time for business purposes. John Z. devotes 100% of his time to the business of the corporation and to other corporations closely related to the defendant corporation. John Z. appears and speaks on behalf of the corporation regarding the real estate trends. John Z.'s name and photograph appears at the top of the corporation's website. His photo is out of alphabetical order where the website displays the name and photo of the agents affiliated with the corporation. John Z. has signed important contracts for the corporation such as a guarantee for a line of credit, car purchase and a lease extension. John Z. has attended local and national meetings, conferences and events related to Access America, LLC and Century 21 on behalf of the corporation. John Z. is the president of Access America LLC, the umbrella organization for a number of real estate offices that, like the corporation, are affiliated with Century 21. John Z. is licensed as a realtor in Connecticut, Ann is not. He is the broker for Access America LLC. He signs the licensing paperwork for every real estate agent affiliated with each of the real estate offices connected with Access America LLC. John Z. earned over $100,000 of his gross commissions in 2006. Approximately 8% of the gross commissions earned by John were paid in franchise and advertising fees to the national office of Century 21. The balance was retained by the corporation. The checks written by John Z. to himself on the corporate account were carried on the books as loans. In 2003 when it became obvious that the plaintiff was pursuing the judgment, the corporation gave Ann Z. a "bonus" of $120,000 in additional salary to pay off all the loans. Her total salary in 2003 was $238,400 substantially above her highest salary of $90,100 in 2002. John Z. had no bank account, no assets in his name, but received an "allowance" from the corporation and/or Ann Z. No records were kept of these "allowances." John Z. had no other source of pocket money. Ann Z.'s yearly salary from the corporation remained well above what she had received in 2002. After 2003 when John Z. could no longer write checks to himself Ann Z. would simply give him an "allowance" and pay herself a substantial salary increase. The Zubretskys, both John and Ann, freely used the corporations credit cards to pay for personal expenses. The corporation paid American Express a total of $583,139.34 from the corporation's two checking accounts between 1998 and 2000, an average of $64,793 a year over nine years. While the Zubretskys maintain that all the charges reflected in the account statements were business related charges and therefore there was no need to reimburse the corporation for their personal charges on these credit accounts, their testimony as to what is and what is not a legitimate expense contradicts the statements. Vacations and frequent restaurant expenses were personal expenses. This payment of personal expenses with corporate funds rendered indirect income from the corporation to replace the salary and commissions that should have been paid to John Z. Ann, sole owner and bookkeeper or office manager for the corporation, and John, as president, were unable to produce any corporate documents supporting Ann Z.'s contention that she owns 100% of the shares of the corporation. The Zubretskys failed to make records of corporate meetings, corporate bylaws, stock transactions, elections and a list of all the stock owners.
The defendants compare some of the facts in this case with those in the case of KLM Industries v. Tylutki, 75 Conn.App. 27 (2002), in which a reverse piercing was denied. They point out 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.
The 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.
The 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.
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. 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 corporations 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 entirely 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.
Judgment on count one may enter for the plaintiff against Ann Zubretsky and Access America in the amount of the original debt, $33,333.13, plus interest and costs from the date of the judgment to the present.
COUNT II
The plaintiff in its second count alleges a fraudulent transfer from John Z. to Ann Z. in the form of an extra high salary, the corporation's payment of the Zubretskys' personal credit card charges and personal use of the company cars as well as failure to take a salary. The defendant counters by maintaining that any transfer was made by the corporation not by John. The court agrees with the allegations of the plaintiff to the effect that although the corporation was a conduit for the final transfer of assets to the Zubretskys, it was John Z. who initially transferred his assets to the corporation for laundering so that these assets would be hidden from the creditors including plaintiff. Those assets include both the salary that John Z. should have earned for his services to the corporation and the commissions that he earned from the sales of real estate that were never paid to him. Conn. Gen. Stat. § 52-552e(b) sets forth eleven different factors that a court may consider in determining whether the transfer was made with actual fraudulent intent. The facts in this case include number 1-5 and 7, 8 and 9 of these factors.
Support for the plaintiff's view can be found in a recent decision of Judge Arterton in Cadle v. Ogalin, 495 F.Sup.2d 278 (2007).
Although the defendants argued in that case that the fraudulent transfer claim should fail because the debtor was never a shareholder of the business and had no direct control over the allegedly excessive salaries paid to the shareholder, the District Court ruled in favor of the plaintiff based on the plaintiff's history that the debtor was the equitable owner of the business and the transfer of stock and excessive salaries were part of a fraudulent scheme to divert assets from the debtor's creditors:
Plaintiff stresses the defendants' line of argument misapprehends the theory of its case: that Frank Ogalin [the debtor] was the equitable owner of the DCC stock, that he and defendants fraudulently transferred stock and salaries as part of a scheme of indirect transfers intended to divert assets from Frank Ogalin's creditors, and that thus the transfers of stock and company money were fraudulent diversions of property owned to [the debtor's] creditors . . . The evidence showed that when WC was dissolved, Frank and Jeffrey [the debtor's brother] Ogalin, who had substantial customer and industry contacts and relationships, became the sole officers of DCC, whose sole shareholders, Verna and Marie Ogalin, had little or no experience in the industry. From these facts, the jury could have reasonably concluded that [the debtor], while not the record-incorporator of DCC, although an officer from DCC's formation in 1991 until 1994, was in fact controlling the enterprise along with Jeffrey, as they alone among their family members had the experience, connections, and business reputation necessary to run such a business, which they acquired from working with their father.
"The status of record title to [a] property is certainly not determinative of equitable ownership." In re Vecchione, 407 F.Sup. 609, 616-17 (E.D.N.Y. 1976); In re Gugliada, 20 B.R. 524, 533 (Bankr. S.D.N.Y. 1982). Instead, a debtor may be found "to enjoy at least an equitable interest in a company that for all practical purposes is a family enterprise orchestrated by the debtor, "where he, inter alia, oversees the close corporation's daily affairs and participates in decision-making, and where family members are involved in the business. Id. From the evidence of how DCC's business was handled in this family setting, the jury could have found that [the debtor] held an equitable interest in DCC and that the initial issuance of 50% of DCC stock to [the debtor's] wife, defendant Verna Ogalin, in 1991, as well as the subsequent transfers of stock and the payments of excess salary were all fraudulent conveyances by him of his interest in violation of Conn. Gen. Stat. §§ 52-552 and 52-552e(a)(1).
Id. at 282-83.
There are numerous parallels between the Ogalin decision and the matter before this Court. As in Ogalin, the debtor, John Z. owns no shares in the Corporation, as the shares were diverted to a family member who, the facts at trial demonstrate, had no prior experience or training in the real estate business prior to joining the Corporation and who has never had a license. Also as in Ogalin it is the debtor, John Z., whom the evidence shows is the personification of the Corporation, and who had the expertise, connections, and business reputation necessary to run the Corporation as an ongoing business.
As the evidence at trial shows, it is John Z. who attends Century 21 national meetings, it was John Z. who appeared before the Wethersfield Zoning Board, it is John Z. who is listed as an owner of the Corporation's website, it is John Z.'s picture who appears at the top of the listing of agents on the same website, it is John Z. who speaks to the media on behalf of the corporation, and it is John Z. who sees himself as following in his father's footsteps as the corporation's "ambassador." To be sure, it is no mistake that John Z. remains the president of the corporation, as it is a befitting title for the person who is the "face" of the business. It is also no mistake that it was not until the middle of 2003, when the corporation joined with other Connecticut Century 21 offices to come under the Access America, LLC umbrella, that the corporation changed its name from "Century 21 Zubretsky Son Realty, Inc." The corporation has been and remains under the control of John Z. regardless of who has legal ownership of the corporation's stock.
Plaintiff has proven its claim of a fraudulent transfer by clear and convincing evidence. Judgment may enter for the plaintiff against the corporation and Ann Zubretsky on the second count in the amount of the original debt plus interest and costs.
COUNT III
In its third count plaintiff alleges that Ann Z. was unjustly enriched from her receipt of her grossly inflated salary and the corporation's payment of personal and family expenses, all of which resulted from the transfer to her of salary and commissions that should have been paid to John Z. The essence and purpose of a claim for unjust enrichment is well settled. "As we have recognized often, [a] right of recovery under the doctrine of unjust enrichment is essentially equitable, the basis being that in a given situation it is contrary to equity and good conscious for one to retain a benefit which has come to him at the expense of another. With no other test than what, under a given set of circumstances, is just or unjust, equitable or inequitable, conscionable or unconscionable, it becomes necessary in any case where the benefit of the doctrine is claimed to examine the circumstances of the parties and apply this standard." Gagne v. Vaccaro, 255 Conn. 390, 409-09 (2001).
The defendants' defense to the plaintiff's allegations of the third count is essentially "as a corporation owner, by definition Ann owns its assets and by virtue of her ownership of all of its assets her enrichment is just." Plaintiff has shown, however, that while Ann may be the legal owner of the corporation she is not the sole equitable owner. The facts in evidence demonstrate that Ann Z.'s salary did not increase to its current level until the plaintiff initiated its postjudgment activities in earnest in mid 2003 and file the instant lawsuit in early 2004. At that point all outward indications of alternative compensation to John ceased. John Z. stopped writing checks to himself. John Z.'s "loans" were paid off in the form of "bonus" compensation to Ann Z.; and the corporation stopped making contributions to John Z.'s IRA account. These actions permitted the corporation to increase Ann Z.'s salary. The defendants were only able to pay Ann Z. her exorbitant salary because defendants deliberately chose not to compensate John Z. for his ongoing efforts as president and "ambassador" and not to pay John Z. the commissions he earned on sales of real estate. Ann Z. was not only unjustly enriched in terms of her salary but she and John Z. were indirectly and unjustly compensated through their personal use of company cars and their corporation-funded family vacations and restaurant meals. In the court's opinion Ann Z. was unjustly enriched at the expense of the plaintiff.
Judgment may enter against Ann Z. and the corporation in the amount of the original debt with interest and costs from the date of the judgment for Fleet Bank to the present.
SPECIAL DEFENSE
The defendants have interjected the special defense of laches pointing out that the judgment was rendered in favor of Fleet Bank in 1993 and the plaintiff took no serious action until 2003 and actually only brought suit in 2004.
In the opinion of this court this defense must fail. "The purpose of a special defense is to plead facts that are consistent with the allegations of the complaint but demonstrate none the less that the plaintiff has no cause of action. Practice Book § 10-50." Grant v. Bassman, 221 Conn. 465, 472-73 (1992).
"Laches consist of two elements. First there must have been a delay that was inexcusable, and second that delay must have prejudiced the defendant. The mere lapse of time does not constitute laches; unless it results in prejudice to the defendant as where, for example, the defendant is led to change his position with respect to the matter in question." Bozzi v. Bozzi, 177 Conn. 232, 239 (1979).
As found by the court both the first and third counts are founded upon the defendants' inequitable conduct in hiding John Z.'s income and assets from his creditors. The delay in initiating an action was caused by the defendants' own misconduct in hiding John Z.'s income and assets. There has been no evidence offered to indicate that the defendants have been in any way prejudiced by the bringing of this action. First, they were well aware that the judgment against John was unsatisfied. Secondly, there was a 20-year statute of limitations. Thirdly, their conduct in jointly hiding John's assets was a cause of any delay and also it was not until 2002 that the Appellate Court ruled in favor of reverse piercing of the corporate veil opening a means of recovering the debt.
The plaintiff claims attorneys fees as punitive damages. The defendant argues that the plaintiff is not entitled to either punitive damages or attorneys fees because such relief is not requested in the prayer for relief noting that the court did not permit plaintiff to amend his complaint at the beginning of the trial regarding the possibility of attorneys fees and that no amendment of the pleadings to ask for this relief was sought since that time. However, the plaintiff noted at the beginning of the trial that it would be seeking attorneys fees pursuant to paragraph 8 and in its prayer for relief "such other and further relief as the court deals just and equitable." The plaintiff pointed out in trial that it would be entitled to the court's consideration of an award of attorneys fees should it succeed on its claim for equitable relief set forth in the first and third counts.
Having ruled in favor of the plaintiff on the first and third counts this court will apply its equitable powers to award plaintiff punitive damages in the form of attorneys fees. Plaintiff's entitlement to attorneys fees falls within the exception of the general (or "American") rule regarding an award of punitive damages in the form of attorneys fees when the losing party acted with reckless indifference or with intentional or wanton violation of the opposing party's rights: "the general rule that prevents a party from recovering attorneys fees does not apply however, to a situation in which the opposing party has acted in bad faith, viciously, wantonly or for oppressive reasons." See FM of Connecticut Inc. v. Chowdhury, 239 Conn. 375, 394 (1996).
Plaintiff is awarded its attorneys fees based upon its attorney's normal billable hours at the time of the beginning of trial.