Business Litigation: 2017 in Review

JurisdictionConnecticut,United States
Publication year2021
CitationVol. 91 Pg. 249
No. 91 CBJ 249
Connecticut Bar Journal

By William J. O'Sullivan. [*]

In 2017, Connecticut's appellate courts decided numerous cases of interest to business litigators. Following is a summary of some of the year's most noteworthy decisions.

I. Remedies and Defenses

A. Equitable Forfeiture in Employee Disloyalty Claims

The Connecticut Supreme Court's decision in Wall Systems, Inc. v. Pompa[1] features an exhaustive discussion of the equitable remedy of forfeiture of compensation paid to an employee who breaches the duty of loyalty to his or her employer. The plaintiff employer, a building contractor, contended that this remedy was mandatory upon proof of a breach. The trial court had found that the defendant employee breached his duty by demanding kickbacks from one subcontractor and moonlighting for another,[2] but declined to order the remedy of equitable forfeiture.

The Supreme Court agreed with the defendant and the trial court that equitable forfeiture is a discretionary remedy, not a mandatory one. The trial court noted that the plaintiff had failed to prove damage from the defendant's actions, or that the defendant's moonlighting activities had been on company time, and these factors weighed heavily in the court's ruling.[3] The Supreme Court held that while equitable forfeiture may be ordered in a proper case even absent proof of actual damage,[4] the trial court properly acted within its discretion in denying that remedy in the case in question.

The court went on to broadly discuss the parameters of the equitable forfeiture doctrine. Responding to the plaintiffs contention that the defendant should have forfeited every dollar of compensation he received during his term of employment, the court noted that normally, forfeiture should be "limited to the period of time during which the employee engaged in disloyal activity... [I]f an employee's disloyalty is confined to particular pay periods, so is the required forfeiture of compensation."[5] The court provided a non-exhaustive list of the factors that a trial court should consider in determining whether to order forfeiture:

the employee's position, duties and degree of responsibility with the employer; the level of compensation that the employee receives from the employer; the frequency, timing and egregiousness of the employee's disloyal acts; the effect of the disloyal acts on the value of the employee's properly performed services to the employer; the potential for harm, or actual harm, to the employer's business as a result of the disloyal acts; the degree of planning taken by the employee to undermine the employer; and the adequacy of other remedies.[6]

B. Attorney's Fees Awards Arising from Litigation with a Third Party

In Chicago Title Insurance Co. v. Accurate Title Searches, Inc.,[7] the Connecticut Appellate Court explained some limits on the "American rule" that parties ordinarily bear their own legal expense. The plaintiff, a title insurance company, brought a negligence action against a title-search company it had retained. The defendant's title search failed to pick up two recorded encumbrances against the property, and in reliance upon the faulty title report, the plaintiff issued a title-insurance policy. The plaintiff paid sums of money to investigate and settle those encumbrances, and incurred legal expense in the process of doing so.

The trial court awarded the plaintiff damages equal to the settlement sums, but denied the plaintiffs request to include, as an element of damage, the legal fees that it incurred in connection with settling the underlying claims (as opposed to its legal expense incurred in the suit before the court). The court cited the "American rule" as grounds for denying the latter element of the plaintiffs damages claim.

The Appellate Court reversed, citing a prior decision of our Supreme Court holding that "attorney's fees incurred in other litigation against a third party, which are awarded as an element of compensatory damages, do not fall within the contemplation of the American [r]ule."[8]

C. Post-Judgment Enforcement Procedures

1. Wages Deposited into Bank Account No Longer Entitled to Protection from Garnishment

In Cadle Company v. Fletcher,[9] the Connecticut Supreme Court examined the issue of whether a judgment debtor's wages, once deposited into a bank account, are still protected by General Statutes Section 52-361a(f), which limits the portion of wages that may be garnished.[10] The judgment debtor, who had been subject to a garnishment order, had been depositing his residual wages into a bank account owned by his wife, transactions that the judgment creditor deemed fraudulent transfers. The judgment debtor countered that "if the earnings were subject to garnishment before being deposited, as they were in the present case, the judgment creditor is not entitled to execute against any portion of the deposited funds."[11]

The Supreme Court agreed with the judgment creditor, holding that "wages that a judgment debtor has deposited into a bank account do not constitute a debt payable by the employer," and thus no longer qualify as earnings or wages protected by the statutory garnishment cap.[12] The court observed "if a judgment creditor were permanently barred from executing against the residual wages of a judgment debtor, the judgment debtor could accumulate large amounts of money in cash or in a bank account while his debt to the judgment creditor remained unsatisfied."[13] The court found that construction of Connecticut's statutory scheme illogical.

2. Inapplicability of the Homestead Exemption to Certain Lien Foreclosures

In Rockstone Capital, LLC v. Sanzo,[14] the plaintiff recorded judgment liens against the defendants' primary residence, and brought an action to foreclose the liens. The parties then entered into a forbearance agreement, by which the liens were rolled into a mortgage, with the plaintiff agreeing to refrain from foreclosing so long as the defendants abided by a payment plan.

The defendants defaulted, and the plaintiff sought to foreclose the mortgage. The defendants challenged the enforceability of the mortgage, arguing that it was the product of a de facto waiver of their homestead exemption under General Statutes Section 52-352b, and therefore void as a matter of public policy.

The Appellate Court rejected the homeowners' argument. The court found that the mortgage was a consensual lien and therefore outside the application of the homestead exemption. The circumstances leading up to the execution of the mortgage played no apparent role in the court's decision.

3. Levying "Out-of-State" Assets by Turnover Order to a Connecticut Financial Institution

In JPMorgan Chase Bank, N.A. v. Herman,[15] the Appellate Court addressed jurisdictional issues pertaining to the levy of execution on securities in satisfaction of a foreign judgment. The plaintiff obtained a judgment of $259,539.96 against the defendant, in the courts of Florida. The plaintiff then learned that the defendant had a brokerage account with the Westport, Connecticut office of UBS Financial Services, Inc. Accordingly, the plaintiff registered its Florida judgment in the courts of Connecticut, and successfully sought a turnover order directed to UBS. The defendant appealed from that order.

The defendant argued that because he had no nexus with Connecticut other than his broker's office being situated here, it was constitutionally improper for the Connecticut courts to exercise jurisdiction over him. The Appellate Court disagreed, noting that the U.S. Supreme Court had rejected a similar argument in its decision in Shaffer v. Heitner.[16] In Shaffer, the Supreme Court observed "we know of nothing to justify the assumption that a debtor can avoid paying his obligations by removing his property to a State in which his creditor cannot obtain personal jurisdiction over him. ... Once it has been determined by a court of competent jurisdiction that the defendant is a debtor of the plaintiff, there would seem to be no unfairness in allowing an action to realize on that debt in a State where the defendant has property, whether or not that State would have jurisdiction to determine the existence of the debt as an original matter."[17]

The defendant further argued that it was improper for the court to direct a turnover order to the Connecticut broker, in light of the fact that the actual documents for the underlying securities were held for UBS by a custodian in New York. The court rejected that argument, finding that UBS was a "securities intermediary" as defined by Article 8 of the Uniform Commercial Code, and that under relevant provisions of that article - General Statutes Section 42a-8-112 and accompanying commentary - process had been properly served on UBS in that capacity.

D. Res Judicata and Collateral Estoppel Effect of a Foreign Veil-Piercing Judgment

The Connecticut Appellate Court's decision in Deutsche Bank AG v. Sebastian Holdings, Inc.,[18] includes a detailed discussion of the doctrines of res judicata and collateral estoppel in the context of an alter ego claim. Before beginning an action in Connecticut, the plaintiff had sued Sebastian Holdings, Inc. ("Sebastian") in the courts of England, claiming breach of contract. The plaintiffs claims arose from trading losses that Sebastian had incurred through accounts it had opened with the plaintiff, which led to unpaid margin calls and closeouts of its accounts. The plaintiff obtained a judgment against Sebastian in the amount of $243 million in the English courts.

The plaintiff then brought suit in Connecticut against Sebastian and its principal, Alexander Vik, seeking to pierce Sebastian's corporate veil. The parties filed cross motions for summary judgment, both of which were denied. Both sides appealed.[19]

The defendants contended that the...

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