Litchfield Asset Management Corp. v. Howell

LITCHFIELD ASSET MANAGEMENT CORPORATION v MARY ANN HOWELL ET AL.

No. AC 21465

THE COURT OF APPEALS OF THE STATE OF CONNECTICUT

Argued November 27, 2001

June 4, 2002

(Appeal from Superior Court, judicial district of Litchfield, Gill, J.)

Scott M. Charmoy, for the appellants (named defendant et al.).

J. Daniel Sagarin, with whom was Margaret E. Haering, for the appellant (defendant Jon Howell).

Michael S. McKenna, for the appellee (plaintiff).

Lavery, C. J., and Schaller and Peters, Js.

Lavery, C. J.

Opinion

The defendants ¹ appeal from the trial court's judgment awarding damages and injunctive relief to the plaintiff, Litchfield Asset Management Corporation. The defendants claim that the court improperly (1) awarded damages to the plaintiff after concluding that the defendants Mary Ann Howell and Jon Howell, by transferring Mary Ann Howell's personal funds to and between the defendant corporate entities, engaged in a conspiracy to defraud the plaintiff by preventing it from collecting on an earlier judgment against Mary Ann Howell and (2) disregarded the separate existence of the corporate entities so as to hold them liable for the individual debt of Mary Ann Howell. We affirm the judgment of the trial court insofar as it holds the corporate entities liable for the personal debt of Mary Ann Howell, but reverse the judgment as to the finding of a conspiracy and the award of damages thereon.

The following facts and procedural history are relevant to our disposition of the appeal. Mary Ann Howell has worked for approximately thirty years in the field of interior design. In 1993, operating through the now defunct Mary Ann Howell Interiors, Inc. (Interiors), she entered into an agreement to perform services for the plaintiff at its facilities in Texas. In 1995, the plaintiff brought an action in a Texas court against Mary Ann Howell and Interiors based on disputes arising from the agreement. Mary Ann Howell and Interiors unsuccessfully objected to the Texas court's jurisdiction and, thereafter, failed to defend against the plaintiff's claims. In July, 1996, the Texas court entered a default judgment against Mary Ann Howell and Interiors in the amount of $657,207 plus interest. In December, 1996, the plaintiff brought an action in the Connecticut Superior Court to enforce the Texas judgment. In February, 1997, the Connecticut trial court rendered a judgment in favor of the plaintiff in the amount of $657,207 plus interest. That judgment was affirmed on appeal in December, 1997. Litchfield Asset Management Corp. v. Howell, 47 Conn. App. 920, 703 A.2d 1192 (1997).

While the aforementioned proceedings were unfolding, Mary Ann Howell and her family members formed two new limited liability companies, Mary Ann Howell Interiors and Architectural Design, LLC (Design), and Antiquities Associates, LLC (Antiquities). In May, 1996, Mary Ann Howell contributed $144,679, which she obtained by borrowing against her life insurance policies, in exchange for a 97 percent ownership interest in Design. Jon Howell and the couple's two daughters, Marla Howell and Wendi Howell, each contributed $10 in exchange for a 1 percent ownership interest. In November, 1997, Design contributed $102,901 for a 99 percent interest in Antiquities, and Mary Ann Howell contributed $10 for the remaining 1 percent.

On May 11, 1998, the plaintiff commenced the present action against Mary Ann Howell, Jon Howell, Design and Antiquities. The plaintiff alleged that Mary Ann Howell and Jon Howell had formed Design, a ''mere shell,'' and used it ''to perpetrate a fraud or promote injustice by preventing the plaintiff from collecting on its judgment against Mary Ann Howell.'' It also alleged that Mary Ann Howell and Jon Howell, by forming Antiquities and causing Design to transfer $102,901 to Antiquities, created another entity that ''serv[ed] no legitimate purpose'' but fraudulently or unjustly to prevent the collection of the plaintiff's judgment. Last, the plaintiff alleged that Mary Ann Howell and Jon Howell, by forming Design and Antiquities, and transferring Mary Ann Howell's personal assets into and between them, wilfully, wantonly and maliciously conspired to fraudulently divert those assets beyond the plaintiff's reach as a judgment creditor, resulting in monetary damage to the plaintiff.

On the first and second counts, the plaintiff sought a judgment declaring that Design and Antiquities were alter egos of Mary Ann Howell, ''established and operated so as to avoid the just debt owed the plaintiff,'' and enjoining Design and Antiquities from transferring or encumbering their assets until the plaintiff's judgment is satisfied. On the third count, the plaintiff sought damages, punitive damages, attorney's fees and an order enjoining Mary Ann Howell and Jon Howell from transferring or encumbering the assets of, or income or profits derived from, Design or Antiquities.

The case was tried to the court on May 25, 2000, and May 31, 2000. The following facts were admitted, stipulated to by the parties or reasonably found by the court on the basis of the evidence presented. Mary Ann Howell is the general manager of both Design and Antiquities. Neither company has any employees; those who provide services for the companies have independent contractor status. Both companies operate out of a loft space above the garage at Jon Howell and Mary Ann Howell's personal residence. Neither company pays any rent to Jon Howell, owner of the premises, for its use. Mary Ann Howell exercised complete control over the policies, finances and business practices of Design and Antiquities; there is no indication in the record that Jon Howell, Wendi Howell or Marla Howell participated in their operation in any significant way.

Mary Ann Howell has never drawn a salary or received regular distributions from either Design or Antiquities, but consistently has used company funds to pay for many personal expenses and to provide substantial, interest free loans or gifts to family members. For example, between 1997 and 2000, Design or Antiquities funds were used to pay more than $17,000 of Mary Ann Howell's medical expenses; to pay $11,450 of Mary Ann Howell's brother's personal expenses, of which only $2200 has been reimbursed; to purchase a $1489 computer for Marla Howell; to pay Mary Ann Howell's $3500 credit card bill; and to loan $5000 to Wendy Howell and $1500 to Jon Howell. Company funds also were used to repay an $8247 loan on a vehicle to which Jon Howell held title and to purchase a pool table for $4000 that was given to Jon Howell.

Although Design and Antiquities maintained separate bank accounts, payments for Antiquities' sales were deposited into Design's account without a corresponding reimbursement from Design to Antiquities. The records of the two companies were segregated to some extent for tax purposes, though tax returns were not filed for either company for the two years preceding trial.

After considering the evidence, the court concluded that the requisite legal tests had been satisfied such that Design and Antiquities were but alter egos of Mary Ann Howell and thus were liable for her personal debt owed to the plaintiff. It also found that there was ''credible'' evidence to support the plaintiff's claim of civil conspiracy, holding that ''Mary Ann Howell and Jon Howell had conspired to shield their assets from the plaintiff and did so by transferring assets to Design and Antiquities, and that the plaintiff was damaged because it was unable to collect upon its judgment.'' The court granted the equitable relief requested by the plaintiff and awarded the plaintiff $163,260 in monetary damages ² and $21,682 in punitive damages. ³ Additional facts will be set forth as necessary.

I.

The defendants claim that the court improperly awarded damages after concluding that they had conspired to commit fraud against the plaintiff. The defendants make a number of arguments in this regard. ⁴ Because we agree with and find dispositive their claim that the court applied the wrong standard of proof in evaluating the plaintiff's conspiracy claim, we need not address the remainder of the defendants' arguments. We will, however, also address briefly the defendants' claims that the court improperly held Jon Howell liable for damages resulting from the alleged conspiracy and improperly awarded punitive damages, because those issues are likely to arise in a retrial.

A.

The defendants claim that the court applied the wrong standard of proof to the plaintiff's conspiracy claim. We agree.

We note at the outset our standard of review. ''The issue of whether the court held the parties to the proper standard of proof is a question of law. When issues in [an] appeal concern a question of law, this court reviews such claims de novo.'' (Internal quotation marks omitted.) Selvaggi v. Miron, 60 Conn. App. 600, 601, 760 A.2d 539 (2000); Satti v. Kozek, 58 Conn. App. 768, 771, 755 A.2d 333, cert. denied, 254 Conn. 928, 761 A.2d 755 (2000); see also South Windsor v. South Windsor Police Union Local 1480, 57 Conn. App. 490, 500, 750 A.2d 465 (2000), rev'd on other grounds, 255 Conn. 800, 770 A.2d 14 (2001).

''The contours of a 'civil action for conspiracy are: (1) a combination between two or more persons, (2) to do a criminal or an unlawful act or a lawful act by criminal or unlawful means, (3) an act done by one or more of the conspirators pursuant to the scheme and in furtherance of the object, (4) which act results in damage to the plaintiff.' Williams v. Maislen, 116 Conn. 433, 437, 165 A. 455 (1933).'' Marshak v. Marshak, 226 Conn. 652, 665, 628 A.2d 964 (1993), overruled on other grounds, State v. Vakilzaden, 251 Conn. 656, 660, 742 A.2d 767 (1999).

Under Connecticut law, technically speaking, ''there is no such thing as a civil action for conspiracy. The action is for damages caused by acts committed pursuant to a formed conspiracy rather than by the conspiracy itself.''...