Conn. SC: Trial court shouldn't have applied reverse veil piercing

By Jessica M. Karmasek | Mar 15, 2012


HARTFORD, Conn. (Legal Newsline) - The Connecticut Supreme Court called a lower court's decision to apply reverse corporate veil piercing in a lawsuit over solid waste disposal "clearly erroneous."

Defendants State Five Industrial Park Inc. and Jean Farricielli appealed from the judgment of a trial court holding them liable for a $3.8 million judgment.

The judgment, rendered in 2001 against Jean Farricielli's husband, Joseph, and five corporations he owned and/or controlled, was the result of an environmental enforcement action brought by the state Commissioner of Environmental Protection, the town of Hamden and the town's zoning enforcement officer.

Former Attorney General Richard Blumenthal represented the plaintiffs in the case.

The commissioner sued Joseph Farricielli and the five corporations -- Hamden Salvage Inc., Tire Salvage Inc., North Haven Tire Disposal Inc., Quinnipiak Real Estate and Development Corp., and Hamden Sand and Stone Inc. -- alleging egregious violations of state statutes regulating solid waste disposal.

The 2001 judgment required Farricielli and his corporations to post bonds, fund the closure of two illegal solid waste landfills, and pay about $3.8 million in civil penalties to the commissioner and the town.

The judgment also required Farricielli and his corporations to reimburse the commissioner for amounts expended in addressing environmental conditions at the landfills.

Although the bonds have been posted, in part, and substantial remediation work has been done at the properties since the 2001 judgment, the civil penalties largely have gone unpaid, the state's high court noted.

As a result, in 2005, the plaintiffs initiated the current action, alleging that Jean Farricielli and State Five also should be held liable for all of the obligations imposed upon Joseph Farricielli and his corporations pursuant to the 2001 judgment.

Specifically, they alleged that reverse veil piercing should apply to hold State Five liable for the 2001 judgment against Joseph Farricielli and that traditional veil piercing thereafter should apply to hold Jean Farricielli liable for the resulting judgment against State Five.

The trial court considered, but rejected, the defendants' argument that reverse veil piercing should not apply because the plaintiffs had adequate remedies at law that they had not pursued, including filing a fraudulent transfer action.

The court concluded that reverse veil piercing was warranted because the parties, following the 2001 judgment, "were occupied with the appeal and remediation efforts" and because Jean and Joseph Farricielli made unspecified misrepresentations in postjudgment interrogatories, "attempted to use State Five to hide assets" and used State Five "funds to pay thousands of dollars in personal expenses, complicating any normal collection efforts."

The defendants claim the trial court improperly employed reverse veil piercing to hold them liable for the 2001 judgment.

That remedy, they argue, should not be recognized at all in Connecticut or, alternatively, that the trial court should not have applied it given the facts of the present case.

The Supreme Court, in its opinion to be officially released March 20, said it agreed that the facts that were proven in the case do not warrant reverse veil piercing, and reversed the trial court's judgment.

"We conclude that in the present matter, the trial court should not have applied reverse veil piercing, regardless of whether it is a viable theory in Connecticut," Chief Justice Chase T. Rogers wrote for the Court.

"Certain of the trial court's subsidiary factual findings lacked evidentiary support and, therefore, were clearly erroneous. Those findings related to crucial factors that necessarily render reverse veil piercing inequitable.

"Additionally, after reviewing the trial court's application of the identity and instrumentality rules, although we conclude that the court's findings have some basis in the evidence, we nevertheless are left with the definite and firm conviction that a mistake has been made."

Among the errors, the Court said the plaintiffs failed to demonstrate that the sons, indirect owners of a 20 percent interest in State Five, were participants in any wrongdoing in relation to State Five's affairs.

"Moreover, there was no evidence indicating that their ownership interests in State Five somehow were illusory. The sons were not made parties to the present action; nor were they called to testify about their knowledge or activities regarding State Five," Rogers wrote.

"No testimony or other evidence was presented that tended to show that the sons were aware of, and acquiesced in, any of the conduct that the trial court found objectionable."

Evidence of the son's lack of involvement in running State Five, making necessary business decisions or suggesting any changes simply does not support the trial court's finding that they were complicit in Joseph Farricielli's activities, which the court relied on to justify a reverse veil pierce, the Court said.

Also, the plaintiffs did not demonstrate that nonparty creditors of State Five would not be harmed by making all of the corporation's assets available to satisfy the 2001 judgment by way of a reverse veil pierce, the Court said.

"Permitting direct attachment of corporate assets to satisfy an individual insider's debt undermines corporate viability, reasonably relied upon by creditors, with no forewarning," Rogers wrote.

"To justify any veil pierce, it is not enough for the plaintiff merely to prove that the insider debtor exercised complete control over the subject corporation. It further must be shown that the debtor used that control 'to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of (the plaintiffs') legal rights; and that the aforesaid control and breach of duty proximately cause(d) the injury or unjust loss complained of."

Simply put, the Court said, the segregation of assets within State Five and the control of Joseph and Jean Farricielli over the family-owned corporation, standing alone, cannot constitute the basis for veil piercing.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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