Bernard Hernandez v. Clearview Construction et al. (2011)

MEMORANDUM OF DECISION

The plaintiff, Bernard Hernandez, brings this action against the defendants, Clearview Construction, LLC and Marco Roy, its sole member, seeking damages relating to an alleged monetary loan between the parties.   Clearview Construction has stipulated to a judgment against it on the first count of the complaint alleging a claim for breach of contract.   Additionally, the parties have stipulated to certain facts material to the remaining issues in this case.   The parties agree that the only issues to be decided are whether Clearview Construction is liable to the plaintiff for a breach of the covenant of good faith and fair dealing, and whether Marco Roy is individually liable to the plaintiff on a theory of piercing the corporate veil.

The court will decide this action as framed by the parties' agreement on certain facts and issues.   For the reasons hereinafter discussed, the court concludes that Roy is personally liable to the plaintiff under the instrumentality rule for “piercing the corporate veil,” and Clearview Construction is liable to the plaintiff for a breach of the covenant of good faith and fair dealing.

The parties have stipulated to the following facts.   On May 12, 2004, the plaintiff loaned Clearview Construction the sum of $209,606.84.   The loan was to be “provided” by a refinance of the plaintiff's principal residence,¹ and it was to be paid “as soon as possible.”   Clearview agreed to service the debt relating to the plaintiff's refinance by paying the monthly interest due to the lender.

The loan proceeds were used to purchase real property located on Chapel Street in Stratford, Connecticut that consisted on sixteen acres of undeveloped land.   The plaintiff was not to receive any profit associated with the transaction.

From June 2004 through June 2006, Clearview Construction failed to pay the debt service as agreed.   From July 2006 to February 2008, Clearview Construction made eight payments of accrued interest in the total amount of $10,295.80.   The total amount of the unpaid interest owed on the refinance through February 2008 was $42,160.66, which amount the plaintiff paid to the lender.   Clearview has not paid any portion of the principal balance of the note that is due and owing.   The loan was reaffirmed in writing in July 2007.

The court finds the following additional facts based on the evidence.   The plaintiff first met Marco Roy in 1992, and their relationship grew to the point where they thought of each other as brothers.   The plaintiff was aware that Roy operated two businesses;  a drywall company named Lynmarc Drywall & Construction, LLC, and Clearview Construction, a real estate development and a general contracting company.   Clearview Construction is a single member limited liability company in which Roy is the sole and managing member.   Lynmarc Construction is a limited liability company in which Roy's ex-wife, Linda, is the managing member.   As the sole member of Clearview Construction, Roy made all the decisions on behalf of the entity.   Roy also made all the business and financial decisions concerning Lynmarc Construction, although at times his ex-wife shared the authority to write checks.   The companies had separate checking accounts, but both accounts were opened at the same Bank of America branch.

The evidence shows the complete absence of adherence to corporate formalities by Clearview Construction and Lynmarc Drywall.   Tax returns have not been filed on behalf of either company since 2005.   The entities failed to deal with each other at arm's length, but were used interchangeably by Roy, including his commingling of funds and property.   This fact is particularly shown by a series of checks that the plaintiff submitted into evidence.   The majority of the checks are dated in 2007, but a few are dated in 2006.   All of the checks are drawn on the Bank of America account of Clearview Construction.   A number of the checks are payable to various contractors, as would be expected from the business of general contracting.   A number of the checks are payable to cash and were endorsed by Roy in his individual capacity.   Roy testified that those checks were reimbursement to him for out-of-pocket expenses that he incurred for permits, materials and other related items.   Roy did not present any backup documents to substantiate his claim.   Roy further testified that he did not normally write checks from his business accounts to pay himself salary or wages.   He wrote some checks payable to “Lynmarc Drywall/cash,” and “Lynmarc Drywall/Marco Roy.” For example, Roy drafted a check payable to “Lynmarc Drywall/cash,” in the amount of $5,000 that he claims represented payment for drywall work performed for Clearview Construction, and he wrote a check payable to “Lynmarc Drywall/Marco Roy” in the amount of $4,600 that notes in the lower part of the check represented Lynmarc repaying a loan to Clearview Construction.   When asked by his counsel why he made checks payable in that way, Roy responded it was “so ․ [he] could cash the check and not have to wait for them to clear, so I could put them back in their rightful account.”   This explanation is contrasted with the fact that both business accounts were with Bank of America.²

In or about 2004, the plaintiff on several different occasions provided loans to Roy, individually, in amounts ranging from ten thousand dollars to twenty-five thousand dollars.   The loans were repaid to the plaintiff with interest, “usually by a check from Lynmar[c] Drywall.”   Additionally, on April 19, 2004, the plaintiff loaned to Roy, individually, the amount of one hundred thousand dollars.   The transaction was evidenced by a purported note in which Roy agreed to pay back the money within ninety days with interest at a twelve percent rate.   The note was satisfied in June 2006 by Roy issuing to the plaintiff a check in the amount of one hundred thousand dollars drawn on an account of Clearview Construction.   The loan in the amount of one hundred thousand dollars and the prior loans were made by the plaintiff to Roy, individually.   The plaintiff did not know for what purpose Roy was going to use the funds.   Roy “often” paid the plaintiff back by checks written on the account of either Clearview Construction or Lynmarc Drywall.

Shortly after loaning Roy money in April 2004, the plaintiff made the loan that is the subject of the present action.   The net proceeds of the plaintiff's refinance in the amount of $209,606.84 were paid to the order of the plaintiff on a trustee account check, dated May 12, 2004, of the law firm that closed the loan.   The plaintiff endorsed the check in blank, presented it to Roy and he endorsed it as payable to the order of Clearview Construction.   As stipulated, the plaintiff was not to realize profit from the transaction.   The purpose of the loan was to assist Roy in purchasing the Chapel Street property, which piece of raw land was adjacent to his residence.   He desired to hunt and hike on the property.   Roy told the plaintiff that he would repay the loan through a refinancing of his property or through his sale of a property.

The Chapel Street property was purchased by Clearview Construction by way of warranty deed dated June 14, 2003 and recorded on June 25, 2004 in Volume 2444 at Page 328 of the Stratford land records.   Clearview Construction obtained a loan from G.T. Company in the amount of $143,500 that was secured by a mortgage on the property.   The mortgage deed was recorded immediately following the recordation of the warranty deed.   The plaintiff was unaware of the mortgage transaction at the time, and the mortgage proceeds were not used to repay all or a portion of the plaintiff's loan to Clearview.

Also as stipulated, Clearview Construction was to service the loan to the plaintiff by making interest only payments to the lender on a monthly basis, which the company failed to do from the first payment that was due in June 2004 through June 2006.   As shown on a spreadsheet created by the plaintiff's wife, the plaintiff made the required payments during that time period.   As stipulated, and as shown on the spreadsheet, Clearview Construction made eight payments on the loan between July 2006 and February 2008.   Those payments totaled the amount of $10,295.   Roy presented Hernandez with a check drawn on an account of Lynmarc Drywall, dated October 27, 2006, payable to Bernard Hernandez and in the amount of $3,932.   The notation on the check indicated the following:  “Chapel Street land interest.”   Roy asked the plaintiff to wait on cashing the check.   Apparently, the check was tendered as a partial repayment of the Chapel Street loan made to Clearview Construction and was never cashed by the plaintiff.   Roy repaid the prior loans made by the plaintiff by way of a check from a company that did not owe the debt.   Ultimately, the plaintiff paid the balance of the interest in the amount of $42,160.66 to the lender.

Roy had an American Express card opened by Lynmarc Construction.   In addition to using the card in furtherance of the business of Lynmarc Construction, he used the card to make purchases on behalf of Clearview Construction.   Similarly, Roy testified that he routinely paid obligations of Clearview Construction from the account of Lynmarc Drywall.   He testified that he considered the payments loans made by Lynmarc Drywall to Clearview Construction that were ultimately repaid.

I

The plaintiff claims that Roy may be held personally liable to the plaintiff for damages under the instrumentality rule for “piercing the corporate veil.”   An analysis involving two legal theories, referred to as the instrumentality rule and the identity rule, has been developed in this area of law.  Morris v. Cee Dee LLC, 90 Conn.App. 403, 414, 877 A.2d 899 (2005).  “Pursuant to Connecticut case law ․ a court may properly disregard a corporate entity if the elements of either the instrumentality rule or the identity rule are satisfied.”  Litchfield Asset Management Corporation v. Howell, 70 Conn.App. 133, 148 n.11, 799 A.2d 298, cert. denied, 261 Conn. 911, 806 A.2d 49 (2002).

“A corporation is a separate legal entity, separate and apart from its stockholders ․ It is an elementary principle of corporate law that a corporation and its stockholders are separate entities and that ․ corporate property is vested in the corporation and not in the owner of the corporate stock ․ That principle also is applicable to limited liability companies and their members.”  (Citations omitted;  internal quotation marks omitted.)   Litchfield Asset Management Corporation v. Howell, supra, 70 Conn.App. 147.   See also, General Statutes § 34–133.

“In the usual veil piercing case, a court is asked to disregard a corporate entity so as to make available the personal assets of its owners to satisfy a liability of the entity ․ [I]n Connecticut a court will disregard the corporate structure and pierce the corporate veil only under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice ․ A court may properly disregard a corporate entity that satisfied the elements of either the “instrumentality rule” or the “identity rule ․

Under the instrumentality rule, a shareholder, director, or officer of a corporate entity can be held personally liable for corporate actions that, in economic reality, are those of the individual ․ We have consistently held that the instrumentality rule requires proof of three elements:  (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;  (2) that such control must have been used by the defendant 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 plaintiff's legal rights;  and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”  (Citation omitted;  internal quotation marks omitted.)   Utzler v. Braca, 115 Conn.App. 261, 274–75, 972 A.2d 743 (2009), cert. denied, 298 Conn. 928, 5 A.3d 488 (2010).

Roy wrongfully exercised dominating control over Clearview Construction and Lynmarc Drywall.   The entities were mere shells, or conduits, used by Roy to conduct his business affairs.   His business practices evince the fact that the entities had no separate will or existence of their own, but were operated as his alter ego.   Roy shared his view of his entities with the plaintiff when he stated in a telling moment of candor that “to absolve yourself or to remove yourself from liability ․ you can bury companies so deep into each other that you'd never be able to figure out who they belong to and basically not have any liability.”

The following are examples of Roy promoting fraud, ignoring corporate formalities and promoting injustice through his shell entities.   Roy paid back a loan in the amount of one hundred thousand dollars made by the plaintiff to him, personally, by a check drawn on the account of Clearview Construction.   He frequently used a credit card in the name of Lynmarc Drywall to purchase items for Clearview Construction.   Roy additionally cashed checks written on the account of Lynmarc Drywall and payable to cash to periodically pay to himself monies to be used for his living expenses.³  Roy knowingly used his unlawful control of his entities to, among other things, breach the agreement to repay to the plaintiff the loan.

Roy's conduct during the relevant time period must necessarily be viewed and considered in light of the fact that he was suffering severe hardships.   Simply put, his world was falling apart at that time.   The real estate market was in a downturn, and his residence, business warehouse and the Chapel Street property were foreclosed.   He became divorced.   Roy was using his business entities during this time period as money conduits to try and stay afloat, and without thought or regard to their existence separate and distinct from him.

The record, including the reasonable inferences drawn from the stipulated facts, amply support the court's findings that Roy's continual monetary exchanges and intermingling of funds between Clearview Construction and Lynmarc Construction in furtherance of his personal and business purposes, and total lack of adherence to any corporate formalities, proximately caused the loss to the plaintiff's loan of his loan to Clearview Construction.   Therefore, Roy may be held personally liable to the plaintiff for damages under the instrumentality rule for “piercing the corporate veil.”

II

Next, the court will address the plaintiff's claim that Clearview Construction breached the covenant of good faith and fair dealing.   The plaintiff claims that the fact that Clearview Construction failed to pay the debt service on the loan that was due in June 2006, the very first month a payment was owed, “can lead to no other conclusion than Roy, having received the benefit of the bargain in full, never intended to satisfy Clearview's reciprocal obligations under the agreement” and, therefore, constitutes bad faith.   The plaintiff similarly asserts that the fact that Clearview Construction failed to repay all or any portion of the principal balance on the loan evinces bad faith.   The court disagrees.

“[I]t is axiomatic that the ․ duty of good faith and fair dealing is a covenant implied into a contract or a contractual relationship ․ In other words, every contract carries an implied duty requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement ․ The covenant of good faith and fair dealing presupposes that the terms and purpose of the contract are agreed upon by the parties and that what is in dispute is a party's discretionary application or interpretation of a contract term ․

“To constitute a breach of [the implied covenant of good faith and fair dealing], the acts by which a defendant allegedly impedes the plaintiff's right to receive benefits that he or she reasonably expected to receive under the contract must have been taken in bad faith ․ Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive ․ Bad faith means more than mere negligence;  it involves a dishonest purpose.”  (Citations omitted;  internal quotation marks omitted.)  Rafalko v. University of New Haven, 129 Conn.App. 44, 51, 19 A.3d 215 (2011);  De La Concha of Hartford, Inc. v. Aetna Life Ins. Co., 269 Conn. 424, 432–33, 849 A.2d 382 (2004).

The plaintiff has demonstrated evidence of bad faith;  that is, the plaintiff has proven that the failure by Clearview Construction to pay the debt service on the plaintiff's loan, or to repay all or any portion of the principal amount of the loan, involved a dishonest purpose.   In part I, the court discussed the reasons in support of its conclusion to pierce the corporate veil of Clearview Construction and hold Roy individually liable to the plaintiff.   Those same reasons support the court's conclusion that Clearview Construction breached the covenant of good faith and fair dealing.

III

In view of the foregoing, judgment is rendered in favor the plaintiff on the second count and on the fourth count of the plaintiff's complaint.

TYMA, J.

FOOTNOTES

FN1. Although inartfully set forth in the stipulation of the parties, the loan proceeds were generated from the plaintiff's refinance of his residence..  FN1. Although inartfully set forth in the stipulation of the parties, the loan proceeds were generated from the plaintiff's refinance of his residence.

FN2. Roy failed to offer bank statements or other documents to corroborate the credibility of his statement.   On cross examination, Roy admitted that the fact that both businesses had their bank accounts at the same institution meant that the funds were readily available to be immediately transferred from one account to another..  FN2. Roy failed to offer bank statements or other documents to corroborate the credibility of his statement.   On cross examination, Roy admitted that the fact that both businesses had their bank accounts at the same institution meant that the funds were readily available to be immediately transferred from one account to another.

FN3. The court rejects Roy's testimony that those checks represented reimbursement to him for out-of-pocket expenses..  FN3. The court rejects Roy's testimony that those checks represented reimbursement to him for out-of-pocket expenses.

Tyma, Theodore R., J.