82 CBJ 145. 2007 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAW.

AuthorBY ERNEST M. LORIMER(fn*)

Connecticut Bar Journal

Volume 82.

82 CBJ 145.

2007 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAW

Connecticut Bar Journal Volume 82, No. 2, Pg. 145 June 2008

2007 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAWBY ERNEST M. LORIMER(fn*)This article will discuss developments in 2007 relating to Connecticut business entities: corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships and statutory trusts.

  1. SECRETARY OF THE STATE'S OFFICE

    As in prior years, the bulk of new entities created in Connecticut in 2007 were limited liability companies. One could almost call the continuing pace "the rule of 100": for every 100 limited liability companies formed, 10 corporations are formed, and for every 10 corporations formed, one of all the other types of entities combined is formed. It is an exaggeration, but indicates that, for a variety of reasons, a limited liability company will generally be the preferred form of entity in any given situation, unless there is a reason why another entity is preferable. The following table sets out these statistics:(fn1)

    ENTITY Entities Created in 2007Corporation Domestic 2,913Foreign 2,402LLC Domestic 22,789Foreign 2,174LP Domestic 46 Foreign 197LLP Domestic79 Foreign 15 Statutory Trust Domestic 88 Foreign 9 These figures suggest that of corporations doing business in Connecticut, there is a comparatively even split between those being formed under Connecticut law or formed under the laws of another jurisdiction. Among limited liability companies, the vast preponderance are Connecticut entities, which suggests that the laws of other jurisdictions are not seen as having any particular advantage for entities primarily doing business in Connecticut. II.

    CASE LAW DEVELOPMENTS INVOLVING CORPORATIONS

    There was one significant appellate court decision involving Connecticut corporations in 2007, and against the continuous drumbeat of cases dealing with long-arm jurisdiction in Connecticut there were a series of decisions dealing with dissolved corporations and exploring the differences between direct and derivative actions.

    Celentano v. Rocque(fn2) expanded on a theory of liability introduced in Connecticut in 2001 and known as the "responsible corporate officer" doctrine. It holds that in certain circumstances a corporate officer may be liable personally for violations of certain public welfare statutes by corporations. In BEC Corp. v. Dept. of Environmental Protection,(fn3) the Connecticut Supreme Court had first applied the doctrine to water pollution violations. In Ventres v. Goodspeed Airport, LLC,(fn4) the Court applied it to violations of inland wetlands regulations. In Celentano it was applied to dam repairs. As articulated in BEC Corp., where a strict liability public welfare statute imposes liability on a corporation, a corporate officer may also be personally liable when: (1) the officer is in a position of responsibility that allows that officer to influence corporate policies and activities; (2) there is a nexus between the officer's actions or inactions in that position and the violations such that the corporate officer influenced the corporate actions that constituted the violation; and (3) the corporate officer's actions or inactions resulted in the violations. In this regard, it is different than holding the officer liable for the officer's own tortious (that is, negligent) conduct because negligence does not need to be proved, and it is different than piercing the corporate veil, because it reaches to officers rather than shareholders and it does not require application of equitable theories for liability. (In Celentano, there was also evidence that might have supported piercing the corporate veil.) It is also not a principle of Connecticut business entity law so much as of the underlying public welfare statute. As the principles involved are not strictly corporate principles, one should expect it to be applicable to agents of other limited liability entities, such as managers of limited liability companies.(fn5)

    Trustees of Conn. Pipe Trades v. Nettleton Mech.(fn6) illustrates another way in which personal liability of a director or officer can arise from an unexpected direction. There, a plumbing contractor, a Connecticut corporation, experienced financial difficulty and failed to make employer contributions to two multi-employer employee benefit plans, as required by its collective bargaining agreement. The issue arose whether the president of the employer, who was also a 41% shareholder, was personally liable for the unpaid contributions. The plans argued that the officer was a fiduciary with respect to the plans and therefore personally liable to pay over the unpaid contributions. The officer argued that the unpaid contributions were ordinary debts of the corporation and a corporate officer is not ordinarily liable for the debts of a corporation.

    The officer lost. The court supported its view in two ways. First, it found that the plan assets included the unpaid contributions themselves (that is, the cash in the hands of the corporation), and not merely the contractual rights to receive the contributions (which would be in the hands of the trustees of the plans). It based this on language in the employee benefit plan trust agreements reciting the assets of the plans as including sums of money that had been or would be paid over to the plan, in one case, and sums of money paid over or were owing to the plan in the other case. (These trusts were not obligations entered into by the corporation, and it would have been natural to read this language as including the receivables as plan assets. It seems a stretch to make the assets of the obligor of the receivable plan assets based on this language, and even more of a stretch when the obligor is not privy to the language.) Since the officer had the discretion to choose which corporate bills would be paid, the officer thus had discretion over whether the unpaid contributions would be paid to the trusts and therefore was a fiduciary with respect to these plan assets. Second, the officer had signed the collective bargaining agreement - although presumably as a corporate officer - and therefore, the court said, assumed a fiduciary duty to see to the making of contributions to the plan.

    If the funds involved were employee contributions that were diverted to corporate purposes this would sound straightforward. A court could apply a consistent body of agency, corporate, Article 9, conversion and insolvency principles to arrive at an understandable result. As these were employer contributions, those principles would have pointed towards treating all creditors fairly and similarly. Instead, the court applied ERISA principles, not without support, to arrive at a different result. Turning on language the obligor may not even have seen, the assets of the plan become not just the debts owed to the plan but also the assets of the obligors of the debts. Those in charge of the assets, which would presumably also include the board of directors, end up with a fiduciary duty to make fraudulent conveyances or preferential transfers to ERISA plans, in which case they could be liable to the other creditors, and failing which they could be personally liable to the plans. It is noteworthy that the court does not suggest the corporate officer made any fraudulent transfers or preferential transfers to other creditors, or favored himself or other shareholders over other creditors. As the judgment was for around 15% of the unpaid contributions, it suggests that 85% of the contributions were paid through some other means, which in turn suggests some sort of orderly resolution of the competing creditors, although that does not appear in the opinion.

    A third case in Connecticut, Metcoff v. Lebovics,(fn7) explored the duties of officers and directors of a corporation to creditors when the corporation is insolvent or in the zone of insolvency. It is one of a series of cases exploring this relatively new area in the context of questionable behavior and odd pleadings. A starting point is Credit Lyonnais Bank Nederland, N. V. v. Pathe Communications Corp.,(fn8) which held that when a firm was in the "zone of insolvency," the fiduciary duty of directors to maximize the corporation's value meant that the interests of creditors could be considered as well as that of shareholders. In effect Credit Lyonnais allows directors to pursue a less risky business strategy and be shielded from liability to shareholders seeking a more risky strategy.

    In Production Resources Group, L.L. C. v. NCT Group, Inc.,(fn9) the Delaware Chancery Court was met with the argument that since Credit Lyonnais brought creditors into the circle of interested stakeholders, creditors themselves could bring both derivative and direct actions for breach of fiduciary duties against directors and officers of an insolvent Delaware corporation. Vice Chancellor Strine thoughtfully and thoroughly explored the possible consequences of treating the erstwhile shield as a sword, including the ramifications on the business judgment rule, the role of a limitation on liability in the corporation's charter, the distinction between a direct and derivative action, the battery of traditional creditor protections, and just where the "zone of insolvency" might lie.(fn10) At issue was a frustrated creditor seeking to enforce a Connecticut judgment. Eventually...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT