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McKay v. Longman

Supreme Court of Connecticut

July 23, 2019

Robert J. MCKAY
v.
Stuart L. LONGMAN et al.

         Argued November 15, 2018

         Appeal from the Superior Court, Judicial District of Stamford-Norwalk, Povodator, J.

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          James R. Fogarty, Old Greenwich, for the appellant in Docket No. SC 20013 and appellee in Docket No. SC 20014 (plaintiff).

         Gary S. Klein, Stamford, with whom was Todd R. Michaelis, Waterbury, for the appellees in Docket No. SC 20013 and appellants in Docket No. SC 20014 (named defendant et al.).

         David K. Fiveson, pro hac vice, with whom was Gerald L. Garlick, West Hartford, for the appellee in Docket Nos. SC 20013 and SC 20014 (defendant Manufacturers and Traders Trust Company).

         Robinson, C. J., and Palmer, D’Auria, Mullins, Kahn and Ecker, Js.[*]

         OPINION

         KAHN, J.

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          [332 Conn. 399] These consolidated appeals require us to consider three main issues: (1) whether a plaintiff who is neither a party to a mortgage nor an intended beneficiary thereof has standing to challenge the enforceability of that mortgage under the Connecticut Limited Liability Company Act, General Statutes (Rev. to 2017) § 34-130; [1] (2) whether specified transfers between an owner of property and the limited liability companies of which he is either an officer or equity holder constitute fraudulent transfers under the Connecticut Uniform Fraudulent Transfer Act (CUFTA), General Statutes § § 52-552e (a) (1) and (2) and 52-552f; and (3) whether this court recognizes the doctrine of reverse piercing of the corporate veil and, if so, whether the trial court properly applied the doctrine to the facts in the present case. The plaintiff, Robert J. McKay, and the defendants Stuart L. Longman and various entities related to him— Sapphire Development, LLC (Sapphire); Lurie Investments, LLC (Lurie); R.I.P.P. Corp. (R.I.P.P.); 2 Great Pasture Road Associates, LLC (Great Pasture); W.W. Land Company, LLC (W.W. Land); Solaire Development, LLC; Solaire Management, LLC; and Solaire Funding, Inc. (collectively, corporate defendants)— filed separate appeals,[2] following a bench trial, from the trial court’s judgment.

         [332 Conn. 400] The present case arises from the plaintiff’s efforts to enforce a foreign judgment. The trial court found the following facts. In July, 1996, after a falling out between the plaintiff and Longman, who were once business partners, the plaintiff obtained a judgment in New York against Longman in the amount of $3,964,046.86 on the basis of the New York trial court’s finding that Longman’s actions constituted affirmative fraud against the plaintiff and that Longman’s conduct was gross, wanton and wilful (New York judgment).[3] The plaintiff promptly filed a certified copy of

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the New York judgment in Connecticut. The plaintiff’s efforts over the years to collect on the New York judgment have been unsuccessful, including his attempts to attach Longman’s assets, which, over time, were in the form of two Connecticut properties: real property located in Ridgefield, which was the location of Longman’s family residence (Ridgefield Property), and real property located in Greenwich (Greenwich Property).

         Throughout the relevant time period, Longman transferred ownership of the Ridgefield and Greenwich Properties between himself and his various entities. Included among these land transfers are three contested transactions that "[set] the stage for ... the predominant issues [on appeal]." Those three transactions, the additional details of which we set forth as necessary, occurred on the following dates and between the following parties. First, in October, 2007, Sapphire, a real estate development business owned partly by Longman that held record title to the Ridgefield Property during that time, obtained a loan from the defendant Manufacturers [332 Conn. 401] and Traders Trust Company (M & T Bank)[4] secured by a mortgage against the Ridgefield Property. Second, in November, 2007, after Sapphire obtained the M & T mortgage and transferred title to the Ridgefield Property to Longman, Longman obtained a loan from J.P. Morgan Chase Bank, N.A. (Chase Bank), also secured by a mortgage against the Ridgefield Property (Chase Bank mortgage), and transferred title to that property back to Sapphire. Finally, in February, 2010, Longman individually acquired the Greenwich Property and transferred title of that property to Lurie, another real estate development business owned partly by him, allowing Lurie to sell the property to a bona fide purchaser several weeks later. Each of these contested transactions occurred and was recorded "prior to any filing of a lis pendens or judgment lien by the plaintiff ...."

         After learning of these and other transactions entered into by either Longman or the entities he purportedly controlled, in October, 2010, the plaintiff filed an eight count complaint against Longman and twenty entities affiliated with him, M & T Bank, and The Savings Bank of Danbury. See footnote 2 of this opinion. The action by the plaintiff included, inter alia,[5] three main claims [332 Conn. 402] that are before us on appeal. First, the plaintiff alleged that various land transfers from Longman to entities he controlled— including his November, 2007 transfer of the Ridgefield Property to Sapphire and his February, 2010 transfer of the Greenwich Property to Lurie— violated § § 52-552e (a) (1) and (2) and 52-552f of CUFTA, and requested that the trial court impose constructive trusts on the Ridgefield Property and the

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proceeds from the sale of the Greenwich Property. Second, the plaintiff alleged that the M & T mortgage was unenforceable under § 34-130 and requested that the trial court declare it void in order to render the Ridgefield Property "unencumbered" by that mortgage when the plaintiff enforced the New York judgment against Longman and the corporate defendants. Third, the plaintiff alleged that the corporate defendants constituted alter egos of Longman and requested that the trial court apply reverse veil piercing to the corporate defendants "to the extent necessary to satisfy the [New York] judgment."

          After an eight day bench trial, the trial court rendered judgment relevant to the issues on appeal in the following manner. The trial court rendered judgment as to counts one, three, and four in favor of M & T Bank, holding, inter alia, that the plaintiff lacked standing to challenge the M & T mortgage. The trial court rendered judgment as to counts three through eight in favor of the plaintiff as against Longman, Sapphire, Lurie, R.I.P.P., and Great Pasture. As against W.W. Land and Solaire Development, LLC, Solaire Management, LLC, and Solaire Funding, Inc. (Solaire entities), however, the trial court rendered judgment as to counts seven and eight in their favor. These consolidated appeals followed.

         In order to place the parties’ arguments on appeal in the proper context, we begin by outlining the trial court’s decision. First, the trial court rendered judgment [332 Conn. 403] in favor of the plaintiff as to counts three and four of his substituted complaint in the form of a declaratory judgment avoiding and setting aside the fraudulent transfer of the Ridgefield Property by Longman to Sapphire. Second, the court imposed a constructive trust on the Ridgefield Property, subjecting it to all postjudgment remedies that may be applicable. Third, the trial court rendered judgment in favor of the plaintiff as to counts five and six of his substituted complaint in the form of a declaratory judgment avoiding and setting aside the fraudulent transfer of the Greenwich Property by Longman to Lurie. Fourth, the trial court imposed a constructive trust on all moneys received from or other items of value acquired through the transfer of the Greenwich Property. Fifth, in addition to this constructive trust, the trial court entered an award of $250,000 in damages in favor of the plaintiff and against Lurie. Sixth, the trial court rendered judgment in favor of the plaintiff as to counts seven and eight of his substituted complaint in the form of a judgment declaring that Sapphire, Lurie, R.I.P.P., and Great Pasture are alter egos of Longman, and, as such, "their separate corporate existence shall be disregarded for purposes of satisfying the debt of ... Longman to the plaintiff," and enjoined those defendants from disposing of any assets prior to the satisfaction of the plaintiff’s foreign judgment. Seventh, the trial court rendered judgment in favor of M & T Bank as to all the claims asserted against it, including the plaintiff’s claim under counts one, three, and four that a mortgage on the Ridgefield Property between M & T Bank and Sapphire (M & T mortgage) should be declared void. Eighth, the trial court rendered judgment in favor of the Solaire entities and W.W. Land as to all counts asserted against them.[6]

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          [332 Conn. 404] The plaintiff appeals from the trial court’s judgment in favor of M & T Bank as to its claim under counts one, three, and four that the M & T mortgage should be declared void. The plaintiff claims that the trial court incorrectly determined that he lacked standing to challenge the enforceability of that mortgage under § 34-130 (b), (c) and (d), because those subsections are silent as to who may bring a claim under them. M & T Bank responds that the trial court properly held that, as neither a party to nor an intended beneficiary of the mortgage between it and Sapphire, the plaintiff lacked standing to challenge it.[7]

         [332 Conn. 405] Longman and the corporate defendants appeal from the trial court’s judgment as to counts three through six whereby that court rendered two declaratory judgments avoiding and setting aside two specified transfers— one between Longman and Sapphire and the other between Longman and Lurie— under § § 52-552e (a) (1) and (2) and 52-552f of CUFTA, and imposed constructive trusts on the Ridgefield Property and the proceeds from or other items acquired through the sale of the Greenwich Property. Those defendants claim that, with respect to both transfers at issue, Longman did not transfer an "asset," which is required in order to find that a transfer is fraudulent under CUFTA. In response, the plaintiff claims that Longman and the corporate defendants misconstrue the facts and case law applicable to the question of whether the transfers were fraudulent and asks this court to uphold the trial court’s determination.

          Additionally, Longman and the corporate defendants appeal from the trial court’s judgment as to counts seven and eight whereby that court rendered a judgment declaring that Sapphire, Lurie,

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R.I.P.P., and Great Pasture constitute alter egos of Longman and, as such, applied the doctrine of reverse piercing of the corporate veil to reach their assets to satisfy the plaintiff’s foreign judgment. Those defendants claim that the reverse piercing doctrine conflicts with Connecticut law and that, in the alternative, the evidence in the present case does not support the application of reverse piercing. The plaintiff responds that this court should recognize reverse veil piercing as a viable remedy and conclude that the trial court properly applied the doctrine in the present case with respect to Sapphire, Lurie, R.I.P.P., and Great Pasture.

         [332 Conn. 406] The plaintiff appeals separately, however, from the trial court’s judgment as to counts seven and eight rendered in favor of the Solaire entities and W.W. Land with respect to that court’s refusal to declare those entities alter egos of Longman. The plaintiff claims that the trial court’s findings supported reverse piercing as to those entities. Longman and the corporate defendants respond that, if this court were to adopt reverse veil piercing, the trial court properly declined to apply it with respect to these four entities, because these entities are engaged in legitimate businesses and the application of reverse piercing would affect nonculpable parties who have an interest in those companies. We affirm the judgment of the trial court.

          I

          STANDING

         Because the question of standing implicates subject matter jurisdiction, we first consider the plaintiff’s claim that the trial court improperly held that he lacked standing to bring an action under § 34-130,[8] challenging [332 Conn. 407] the sufficiency of Longman’s authority, as a member of Sapphire, to bind the company to the mortgage agreement between it and M & T Bank. The plaintiff challenges the trial court’s determination that he lacked standing to challenge the M & T mortgage, because, although he was a stranger to the

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transaction, he claims that the trial court did not analyze whether he lacked standing specifically under § 34-130, a statute that he claims was intended by the legislature to authorize third parties like him to bring claims. The threshold issue we must address, therefore, is whether the plaintiff is an individual who can challenge an alleged failure by Longman to comply with the requirements of § 34-130 when entering into a contract, when the plaintiff is neither a party to nor an intended beneficiary of that contract. We conclude that the trial court correctly determined that the plaintiff lacked standing to challenge the M & T mortgage.[9]

         The record reveals the following additional facts that are relevant to our resolution of this claim. In October, 2007, Sapphire entered into a loan agreement with M & T Bank, secured by the $2.5 million M & T mortgage on the Ridgefield Property. Longman, acting as one of Sapphire’s members,[10] executed the mortgage documents. [332 Conn. 408] At the time he executed those documents, however, Longman owned only a 5 percent interest in Sapphire, with the remaining 95 percent interest owned almost exclusively by his wife, Gayla Longman (Gayla). Longman did not request Gayla’s approval before executing the M & T mortgage.

         Among its provisions, Sapphire’s operating agreement vested in the operating manager the authority to manage the company, "[e]xcept for actions requiring the approval of the [m]embers pursuant to the provisions of the [Connecticut Limited Liability Company] Act, the [a]rticles [of organization], or this [operating] [a]greement ...." Under the same section, the operating agreement noted that the operating manager "shall not have the authority" to mortgage any property of Sapphire without the approval of a supermajority of Sapphire’s members, which was defined as "[m]embers holding an aggregate of ... 100 [percent] or more of the [p]ercentage [i]nterests held by all [m]embers."[11]

          At trial, M & T Bank introduced into evidence Sapphire’s 2008 statement of annual resolutions, which was signed by Gayla on January 27, 2008, a few months after Sapphire entered into the M & T mortgage, and contained a provision resolving "that all prior acts of the officers ... including but not limited to entering into agreement[s] and executing documents prior to the adoption of said resolutions ... are hereby ratified." Gayla testified at trial that, upon signing the document, she intended to ratify all the acts taken by Longman on behalf of Sapphire prior to January, 2008.

          The plaintiff asked the trial court to declare the M & T mortgage unenforceable under § 34-130, because Sapphire’s operating agreement did not authorize Longman, a 5 percent shareholder, to obtain a mortgage from M & T Bank without approval from Gayla, and because [332 Conn. 409] M & T Bank had failed to confirm whether the mortgage to Sapphire had been approved according to the terms of that operating agreement. Although, ultimately, M & T Bank argued that Gayla ratified Longman’s

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actions, it first claimed that the trial court lacked subject matter jurisdiction over the plaintiff’s claim, because the plaintiff, who was neither a party to nor a third party beneficiary of the mortgage, lacked standing to challenge its enforceability.

          The trial court determined that, "[a]bsent a viable claim that the mortgage transaction was a fraudulent transfer ... the plaintiff [lacked standing] to challenge the sufficiency of the ratification process." The court reasoned that "the plaintiff ... provided no authority that a third-party stranger to a transaction has the right to challenge the ratification of the transaction ... when the actual parties have done everything possible to show consent and have engaged in substantial performance."

          On appeal, we begin with the general principles governing standing to assert a claim. "If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause.... A determination regarding a trial court’s subject matter jurisdiction is a question of law. When ... the trial court draws conclusions of law, our review is plenary and we must decide whether its conclusions are legally and logically correct and find support in the facts that appear in the record....

          "Standing is not a technical rule intended to keep aggrieved parties out of court; nor is it a test of substantive rights. Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions [that] may affect the rights of others are forged in hot controversy, with each view fairly and [332 Conn. 410] vigorously represented.... These two objectives are ordinarily held to have been met when a complainant makes a colorable claim of direct injury he has suffered or is likely to suffer, in an individual or representative capacity. Such a personal stake in the outcome of the controversy ... provides the requisite assurance of concrete adverseness and diligent advocacy.... The requirement of directness between the injuries claimed by the plaintiff and the conduct of the defendant also is expressed, in our standing jurisprudence, by the focus on whether the plaintiff is the proper party to assert the claim at issue....

          "Two broad yet distinct categories of aggrievement exist, classical and statutory.... Classical aggrievement requires a two part showing. First, a party must demonstrate a specific, personal and legal interest in the subject matter of the [controversy], as opposed to a general interest that all members of the community share.... Second, the party must also show that the [alleged conduct] has specially and injuriously affected that specific personal or legal interest.... Statutory aggrievement [however] exists by legislative fiat, not by judicial analysis of the particular facts of the case. In other words, in cases of statutory aggrievement, particular legislation grants standing to those who claim injury to an interest protected by that legislation." (Internal quotation marks omitted.) PNC Bank, N.A. v. Kelepecz, 289 Conn. 692, 704-705, 960 A.2d 563 (2008).

         "In order to determine whether a party has standing to make a claim under a statute, a court must determine the interests and the parties that the statute was designed to protect.... Essentially the standing question in such cases is whether the ... statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff’s position a right to judicial relief.... [Stated differently, the] plaintiff must be within the zone of interests protected by

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the statute." (Citation omitted; internal quotation [332 Conn. 411] marks omitted.) McWeeny v. Hartford, 287 Conn. 56, 65, 946 A.2d 862 (2008).

          The issue of whether an individual who was neither a party to nor an intended third-party beneficiary of a mortgage between a limited liability company and a bank falls within the zones of interests protected by § 34-130 so as to afford him standing to challenge whether a member of the limited liability company that executed the mortgage agreement as the company’s agent possessed sufficient authority to bind the company through his actions presents a question of statutory interpretation, over which we exercise plenary review, guided by well established principles regarding legislative intent. See, e.g., Kasica v. Columbia, 309 Conn. 85, 93, 70 A.3d 1 (2013) (explaining plain meaning rule under General Statutes § 1-2z and setting forth process for ascertaining legislative intent).

         On the basis of the plain language of this statute, only members and managers— who represent either their own interests as agents or those derivative of the limited liability company— and the parties with whom those members or managers contract fall within the zone of interests protected by § 34-130. We begin by noting that the statutory language found in § 34-130 (b), (c) and (d) governs the agency powers of members and managers to execute legal instruments in different contexts, including ordinary business transactions, extraordinary business transactions, transactions entered into under a member-managed limited liability company, and transactions entered into under a manager-managed limited liability company. A limited liability company may be "member-managed" or "manager-managed." See General Statutes (Rev. to 2017) § 34-140 (a) and (b). By default, the members of a limited liability company manage the company’s affairs. The members, however, may, in the articles of organization, vest management of the business in a manager or managers. See General Statutes (Rev. to 2017) § 34-140 (a) and (b).

         [332 Conn. 412] General Statutes (Rev. to 2017) § 34-130 (b), which addresses situations in which the limited liability company is manager-managed, provides in relevant part that a "manager ... execut[ing] ... any instrument, for apparently carrying on in the usual way the business or affairs of the ... company ... binds the limited liability company, unless the manager so acting has, in fact, no authority to act for the ... company in the particular matter and the person with whom he is dealing has knowledge of [that] fact ...." On its face, this subsection deals with protecting the interests of the party with whom the agent of a limited liability company contracts when that party is unaware that the agent lacks authority and seeks to enforce an agreement made between it and the agent. See 2 Restatement (Third), Agency § 6.01, comment (b), p. 4 (2006) ("[a]n agent has power to make contracts on behalf of the agent’s principal when the agent acts with actual or apparent authority").

          Section 34-130 (c), by contrast, addresses situations in which a member or manager acts as an agent and that member or manager "is not apparently ... carrying on in the usual way the business or affairs of the ... company," in which case his actions "[do] not bind the ... company, unless authorized in accordance with the operating agreement ...." Subsection (c) appears to create a protection for the limited liability company itself, by restricting agents of the limited liability company from binding the limited liability company to extraordinary dealings, unless previously agreed on in the operating agreement.

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          Finally, § 34-130 (d), which also governs actions by the managers and members as agents of the limited liability company, provides that "[a]n act of a manager or member in contravention of a restriction on authority shall not bind the limited liability company to persons having knowledge of that restriction." (Emphasis [332 Conn. 413] added.) Unlike subsections (b) and (c), which protect the contracting parties when the agent does not have actual authority to act on behalf of the limited liability company, § 34-130 (d) addresses situations in which the agent has apparent authority to act on behalf of the limited liability company. On the one hand, this subsection protects the unknowing party with whom the agent contracts, as it prevents the limited liability company from subsequently avoiding liability by alleging that the agent lacked authority to enter into the agreement. On the other hand, it also protects the limited liability company from being bound to transactions in which the party with whom the agent is contracting knows of a restriction on the agent’s authority to enter into an agreement on behalf of its principal. See 3 Am.Jur.2d 516, Agency § 74 (2013) ("[t]he doctrine ... may not be invoked by one who knows or has good reason to know the limits and extent of an agent’s authority").

         We conclude that the plaintiff in the present case, who was neither a party to the M & T mortgage nor a third-party beneficiary of it, does not fall within the zone of interests that § 34-130 was meant to protect.[12] The plaintiff does not claim that he was either a member or manager of Sapphire; nor does he claim that he was a party to the mortgage agreement. Additionally, the plaintiff failed to establish that he was an intended third-party beneficiary of the mortgage. At the time Sapphire [332 Conn. 414] and M & T Bank entered into the mortgage agreement, the plaintiff had not yet recorded a lis pendens on the land records and, therefore, had no recorded title interest in the property.[13]

         The plaintiff asks this court, however, to interpret the statute’s silence as to who may bring an action under § 34-130 as an indication of the legislature’s affirmative intent to allow persons other than members or managers of the limited liability company or the party with whom its agent contracts to bring a claim challenging the enforceability of an agreement between those two parties. That interpretation is inconsistent with the general contract

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principle, articulated by this court, that "one who [is] neither a party to a contract nor a contemplated beneficiary thereof cannot sue to enforce the promises of the contract ...."[14] (Internal quotation marks omitted.) Tomlinson v. Board of Education,226 Conn. 704, 718, 629 A.2d 333 (1993). We observe that other courts have applied this proposition in the context of mortgages. See, e.g., [332 Conn. 415] In re Espanol, 509 B.R. 422, 429 (Bankr. D. Conn. 2014) (citing Tomlinson and holding that "[o]nly a party to the contract or intended [third-party] beneficiary has standing to challenge or seek to enforce the terms of [a] mortgage"); Cimmino v. Household Realty Corp.,104 Conn.App. 392, 393, 395-96, 933 A.2d 1226 (2007) (citing Tomlinson and holding that plaintiff lacked standing to request that judgment of strict foreclosure on residence in which he lived be set aside because he was not party to mortgage on which bank ...


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