Business Litigation: 2019 in Review
| Publication year | 2021 |
| Pages | 60 |
By William J. O'Sullivan [*]
In 2019, Connecticut's appellate courts decided numerous cases of interest to business litigators. Following is a summary of the year's most noteworthy decisions.
I. Remedies and Defenses
A. Judgment Creditor Seeks to Unwind Questionable Real Estate Transactions
The Connecticut Supreme Court case McKay v. Longman[1] involved a labyrinthine series of real estate transactions by a judgment debtor and entities that he controlled. The court evaluated various remedies pursued by his judgment creditor.
Among the transactions attacked by the plaintiff was a mortgage to M&T Bank, given by a limited liability company controlled by the defendant, on property owned by the company. The plaintiff sought to execute on the property, claiming it had been fraudulently transferred by the defendant, and aimed to void the mortgage and thereby free up equity for the plaintiff to pursue.
The plaintiffs attack on the mortgage was based on the fact that the LLC did not internally obtain proper approvals before entering into the mortgage transaction. Specifically, the defendant purported to own only a five percent membership interest in the LLC - his wife owned most of the balance -but had acted unilaterally in binding the LLC to the transaction, contrary to the company's operating agreement. The plaintiff relied on General Statutes Section 34-130, a provision of Connecticut's now-repealed Limited Liability Company Act,[2] which defined the agency powers of LLC members and managers.
The trial court had dismissed this claim, holding that the plaintiff lacked standing to attack the mortgage on this basis. The Supreme Court agreed, noting that the plaintiff did not claim to be a member or manager of the LLC, did not claim to be a party to the mortgage, and did not establish status as an intended third-party beneficiary of the transaction. The court concluded that the plaintiff did "not fall within the zone of interests that § 34-130 was meant to protect,"[3] and thus lacked standing to seek recourse under that statute.
The trial court had ruled in favor of the plaintiff on claims of fraudulent transfer. Two properties had been repeatedly transferred among the defendant and entities controlled by him. The defendant claimed that neither property had been an "asset" of his within the meaning of the Uniform Fraudulent Transfer Act, General Statutes Section 52-550a et seq. As to one property, he claimed he had held title only temporarily as the facilitator for the LLC to obtain a loan. As to the other, he claimed that an LLC had supplied the funds for the down payment, that he had held title to the property on the LLC's behalf, and that his subsequent transfer of title to the entity was not fraudulent.
As to both these claims, the trial court conducted an exhaustive analysis of the chains of title, loan transactions and banking records, and rejected the defendant's explanations. Noting that "fraudulent intent is 'almost always proven by circumstantial evidence,'"[4] the Supreme Court found the trial court's conclusions were not clearly erroneous, and affirmed the judgment below.
Finally, the court addressed the trial court's application of the doctrine of "reverse veil piercing," an alter ego theory by which, under certain circumstances, the creditor of a person who controls an entity can disregard the corporate form and reach the assets of the entity.[5] The Supreme Court had discussed reverse veil piercing in an earlier case, Commissioner of Environmental Protection v. State Five Industrial Park, Inc.,[6] finding the doctrine unsuited to the facts of the case but not clearly stating whether or not Connecticut recognizes the doctrine at all. In McKay, the court concluded after a detailed analysis that the doctrine indeed exists under Connecticut law - but acknowledged the extremely limited reach of this conclusion, given that effective July 9, 2019, by operation of Public Act No. 19-181, Connecticut's General Assembly expressly abolished the reverse veil piercing doctrine.[7] The court determined that the General Assembly intended the act to operate prospectively only.[8]
B. Supreme Court Parses "Continuing Course of Conduct" Tolling Doctrine
The Connecticut Supreme Court's decision in Essex Insurance Company v. William Kramer & Associates, LLC,[9] features an extensive examination of the continuing course of conduct doctrine, by which the running of a statute of limitations may under some circumstances be tolled.
The plaintiff, an insurance company, hired the defendant, an independent claims adjuster, to adjust the loss arising from damage to an apartment complex in Florida caused by a hurricane in 2005. The plaintiff had issued second-layer insurance coverage for the property. As part of its duties to perform a "full adjustment" of the property, the defendant was required to identify any mortgages on the property, given that any mortgagees could have claims to the insurance proceeds.[10]
The defendant had also been hired by the issuer of the first layer of insurance, Aspen Specialty Insurance Company.[11] The defendant opened a separate file for its work on behalf of Aspen related to the property (the Aspen file).[12]
In 2006, the defendant received a document that identified the mortgage holders on various of the property owner's properties, including a mortgage to Intervest National Bank on the subject property. That document was placed into the Aspen file. But the defendant's employees who were involved in adjusting the loss for the plaintiff were unaware of that document, believed the property was mortgage-free, and communicated that belief to the plaintiff.[13] In March of 2007, the plaintiff issued a claim payment check to the property owner, without listing Intervest as a payee or informing Intervest about the payment.[14] Two months later, the defendant closed its file.
After that, the parties had contact about the matter on three occasions. First, in August or September 2007, an employee of the defendant contacted the plaintiff to inform it that another insurance company, which had issued third-layer coverage for the property, had inquired about the identity of the payee of the plaintiffs payment check. Second, in 2009, after Intervest brought an action against third parties for failure to preserve its mortgage interest in the property, the defendant notified the plaintiff that it had been served with a document subpoena. The defendant produced certain documents - although not the Aspen file - and Intervest in turn cited the plaintiff into the case as an additional defendant. And third, in 2012, the defendant informed the plaintiff that one of its employees was about to be deposed in the Intervest action. At that time, in connection with preparing for the deposition, the defendants' employees reviewed the Aspen file, noticed the mortgage schedule, and disclosed it to the plaintiff.[15] The defendants also produced the file to Intervest.
The plaintiff paid $1 million to settle Intervest's claim against it. In October 2013, the plaintiff sued the defendant for negligence, in the United States District Court for the District of Connecticut. The defendant raised, as a special defense, the 3-year statute of limitations that applies to negligence actions of this type, General Statutes Section 52-577.[16] The plaintiff replied that the statute had been tolled, by operation of the continuing course of conduct doctrine.[17]
The jury rendered a verdict for the plaintiff, expressly finding, in jury interrogatories, that the continuing course of conduct doctrine applied.[18] But the District Court judge disagreed, and granted the defendant's motion for judgment notwithstanding the verdict.[19] The plaintiff appealed to the U.S. Court of Appeals for the Second Circuit, which certified to the state supreme court the question "Is the trial evidence legally sufficient to support the jury's finding that the statute of limitations was tolled at least through October 21, 2010 [three years before the action was commenced and thus] rendering [the plaintiffs] claim timely?"[20]
The court noted that the continuing course of conduct doctrine applies if there is "evidence of the breach of a duty that remained in existence after commission of the original wrong related thereto."[21] A "continuing duty" may exist if there is evidence of "either a special relationship between the parties giving rise to such a continuing duty or some later wrongful conduct of a defendant related to the prior act."[22]
The court examined the plaintiffs argument that the defendant, having been hired as an adjuster by the plaintiff, was the plaintiffs agent and therefore had a special relationship of trust with the plaintiff. More precisely, the court framed the question as "not whether an agency relationship existed, but whether an existing agency relationship and any attendant fiduciary duties continued after the final claim check was issued."[23]
The issue was not limited to whether the relationship between the parties had terminated completely. "That a relationship of agency exists does not foreclose the possibility that it may be preceded or followed by another type of legal relationship between the same parties, nor does it foreclose the possibility that another type of legal relationship may exist contemporaneously between the same parties or that the character of a relationship may evolve over time."[24]
The court noted that not all business relationships give rise to fiduciary duties. "[T]he mere fact 'that one business person trusts another and relies on [the person] to perform [his obligations] does not rise to the level of a confidential relationship for purposes of establishing a fiduciary duty.... [N]ot all business relationships implicate the duty of a fiduciary... [A]...
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