As the recession recedes, courts are busy sifting through the remnants of construction projects that were impacted by the hard times we all faced. Shady deals and disreputable conduct often come to light in times like this, and can present opportunities for judges to hold bad actors personally accountable for unscrupulous behavior, under the right circumstances. Two recent cases in Connecticut illustrate how the creation of business entities don’t always shield their owners from liability for egregious conduct.
One case (Valencis v. Nyberg) arose out of a sale and renovation to a corporate headquarters, where the company that sold the property and the company that served as the general contractor were controlled by the same person, N. Before beginning, N told the buyer he could lock in discounted labor and materials if construction funds were advanced, and that he would pay his subs weekly, so the buyer made several advance payments. Within months, amid concern that work had not begun, the buyer found that subs had not been paid, materials had not been ordered, and the contractor had failed to even obtain the required building permit. The buyer finished the project with another contractor and sued the original contractor and N on a number of legal theories, including fraud, theft and breach of fiduciary duty. N argued that he shouldn’t be held personally liable because corporate names were used in the various contracts memorializing the deal, but the judge saw things differently. The construction contract was unsigned, and it was unclear from its wording whether the contractor or N was intended as the contract party. Undermining his position even more, N testified that he was “a handshake kind of business person” – which the judge took as a personal guaranty of reliability. Choosing to remain silent didn’t help N either, as he learned when he took the Fifth Amendment in response to questions about how the advances had been used. He had the right to remain silent to avoid incriminating himself in a criminal trial, but the judge in this civil lawsuit drew an “adverse inference” from his silence – in other words, the judge assumed the facts weren’t favorable. The judge found N personally liable, and the Appellate Court affirmed the judge’s decision.
The other case (Joseph General Contracting v. Couto) involved a deal to build a new home on a turnkey basis. The contractor, who owned some shoreline property and had developed other nearby properties, contracted with a couple to finance and build a home on the property to their specifications. They promised to buy the property when the work was finished. Shortly into project, the contractor became over-extended and the bank cut off its credit. The contractor’s principal owner, S, lied to the couple and said the bank was worried because they didn’t own the property, and he said they would lose their down payment if the closing weren’t to happen. So the couple borrowed the money, bought the property, and began funding the construction. When S pushed even further, insisting on advances for unperformed work, the couple refused. The contractor walked off the job, and in the course of finishing the project the couple made some unpleasant discoveries. S had welded the sewer access closed, buried trash in the back yard, and had failed to inform them that the project violated zoning restrictions. The couple sued the contractor and S on assorted theories, including fraud, trespass and unfair trade practices. In this case, the contracts withstood scrutiny, so S wasn’t found personally liable on the contract. But the judge found alternate grounds to hold S individually accountable. Like many states, Connecticut has prohibited unfair trade practices by statute (CUTPA), which generally regulates the conduct of commercial parties in contract with one another. An individual who either participates directly in or can control the bad acts of a company can, however, be held personally accountable under CUTPA, as the Supreme Court confirmed in this case. Based on that rule, the judge, the Appellate Court and the Supreme Court were all satisfied that S was directly involved in the fraud, the sewer obstruction and the trash burying, and he was held personally liable to the couple.
These cases remind us that there are multiple ways for rogues and troublemakers to lose the protection of their corporate shells. By honoring corporate procedures and formalities, they can protect against a piercing of the corporate veil, but when they lie, cheat and steal their way through a construction project (or other business venture), they lower corporate shields all by themselves. And when presented with such opportunities, judges are quite prepared to take aim.