author: CALLAHAN, J. BERDON, J.,

text:
    FEDERAL DEPOSIT INSURANCE CORPORATION v. PEABODY, N.E., INC., ET AL.
    (15366)
    Peters, C. J., and Callahan, Borden, Berdon, Norcott, Katz and Palmer, Js.

      Argued May 28
    officially released August 20, 1996

      Gregory T. D’Auria, assistant attorney general, with whom were Lawrence Russ, assistant attorney general, and, on the brief, Richard Blumenthal, attorney general, for the appellant (third party defendant department of transportation).

      James J. Myers, pro hac vice, with whom was Lawrence H. Dickson, for the appellees (defendants-third party plaintiffs).

      Donald E. Frechette, for the appellee (plaintiff).
   CALLAHAN, J.

The state department of transportation (state) appeals from the trial court’s denial of its motion to dismiss the complaint of the third party plaintiffs, Peabody, N.E., Inc., Peabody International Corporation and the Federal Insurance Company (collectively, Peabody), for lack of subject matter jurisdiction.

The state claims that the trial court improperly concluded that Peabody, a general contractor that had contracted with the state to reconstruct Route 8 and the Commodore Hull Bridge between the towns of Shelton and Derby, could maintain this third party action against the state, based on a subcontractor’s claim for damages, even though Peabody has not conceded liability to the subcontractor in the third party complaint. The trial court concluded that the waiver of the state’s sovereign immunity contained in General Statutes § 4-61 (a) for parties contracting directly with the state was intended also to waive the state’s sovereign immunity to allow third party actions by a general contractor, premised upon the conditional liability of the general contractor to a subcontractor. We disagree and reverse the judgment of the trial court.

The relevant facts are undisputed. On November 30, 1983, Peabody entered into a contract with the state for the reconstruction of Route 8 and the Commodore Hull Bridge between Shelton and Derby. Peabody thereafter entered into a subcontract with Standard Structural Steel, Inc. (Standard), for the supply and erection of structural steel on the project. During the course of the project, Standard allegedly incurred extra costs for labor, equipment and materials, as well as increased overhead and other assorted costs resulting from delays, work stoppages, and errors and revisions in the plans and specifications for the project. Peabody asserts that the state, not Peabody, was responsible for the delays and errors that caused Standard’s unanticipated expenses.

In May, 1993, the plaintiff, the Federal Deposit Insurance Corporation, as the receiver of the New Connecticut Bank and Trust Company and the successor in interest to Standard, brought the underlying action against Peabody, seeking approximately $14.8 million in damages allegedly suffered by Standard. Thereafter, Peabody answered the plaintiffs complaint and moved to implead the state. The trial court, L. Sullivan, J., granted Peabody’s impleader motion, and Peabody served its third party complaint upon the state. The state moved to dismiss the third party complaint and Peabody moved to amend that complaint. The trial court, Corradino, J., granted the motion to amend and denied the motion to dismiss. The state appealed from the judgment of the trial court to this court upon the granting of certification by the Chief Justice pursuant to General Statutes § 52-265a.

I

The resolution of this appeal turns upon the sufficiency of Peabody’s pleadings to survive a motion to dismiss for lack of subject matter jurisdiction. In denying the state’s motion to dismiss, the trial court took cognizance of both Peabody’s initial third party complaint and its amended third party complaint. As a preliminary matter, we must first decide which of Peabody’s two third party complaints should be considered in deciding the issue presented.

In Peabody’s answer to the plaintiffs complaint and in its initial third party complaint, Peabody denied its liability to Standard for Standard’s damages. Peabody alleged, however, that if it were hable to Standard, it should be indemnified by the state. In its amended third party complaint, Peabody admitted its liability to Standard to the extent that Peabody recovered damages from the state based upon Standard’s claims. This “admission” is, of course, actually not an admission at all, but only a statement of the obvious. Furthermore, it is merely a restatement of Peabody’s allegations in its original third party complaint to the effect that Peabody would be liable to Standard in the event that Peabody was successful in its third party action against the state based upon damages incurred by Standard.

Regardless, however, of the substantive similarity between Peabody’s two third party complaints, it was nonetheless inappropriate for the trial court to consider Peabody’s amended third party complaint, rather than its initial complaint, when acting on the state’s motion to dismiss for lack of subject matter jurisdiction. “As we have stated many times before, the doctrine of sovereign immunity implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss.” Amore v. Frankel, 228 Conn. 358, 364, 636 A.2d 786 (1994); Lussier v. Dept. of Transportation, 228 Conn. 343, 349-50, 636 A.2d 808 (1994); White v. Burns, 213 Conn. 307, 312, 567 A.2d 1195 (1990). “Itis axiomatic that once the issue of subject matter jurisdiction is raised, it must be immediately acted upon by the court. ” Gurliacci v. Mayer, 218 Conn. 531, 545, 590 A.2d 914 (1991); Statewide Grievance Committee v. Rozbicki, 211 Conn. 232, 245, 558 A.2d 986 (1989); Cahill v. Board of Education, 198 Conn. 229, 238, 502 A.2d 410 (1985). “Whenever the absence of jurisdiction is brought to the notice of the court or tribunal, cognizance of it must be taken and the matter passed upon before it can move one further step in the cause; as any movement is necessarily the exercise of jurisdiction. . . . The point has been frequently made.” (Citations omitted; internal quotation marks omitted.) Baldwin Piano & Organ Co. v. Blake, 186 Conn. 295, 297-98, 441 A.2d 183 (1982); see also Kohn Display & Woodworking Co. v. Paragon Paint & Varnish Corp., 166 Conn. 446, 448, 352 A.2d 301 (1974); Woodmont Assn. v. Milford, 85 Conn. 517, 524, 84 A. 307 (1912).

Consequently, when the state moved to dismiss Peabody’s initial third party complaint because of a lack of subject matter jurisdiction, the trial court was obligated to construe that complaint in the manner most favorable to Peabody and to rule upon the state’s motion before considering Peabody’s motion to amend. Gurli acci v. Mayer, supra, 218 Conn. 545 (“the trial court should not have allowed the amendment [to the complaint] before ruling on the motion to dismiss [for lack of subject matter jurisdiction]”); see Antinerella v. Rioux, 229 Conn. 479, 489, 642 A.2d 699 (1994); Reynolds v. Soffer, 183 Conn. 67, 68, 438 A.2d 1163 (1981). If the state’s motion had been granted, as we are persuaded it should have been, the trial court would have been without jurisdiction to allow Peabody to amend its pleadings. Gurliacci v. Mayer, supra, 545; Woodmont Assn. v. Milford, supra, 85 Conn. 524. We must, therefore, focus on Peabody’s initial third party complaint to determine whether that complaint fits within the parameters of the limited waiver of the state’s sovereign immunity contained in § 4-61 (a).

II

The state claims that the allegations of Peabody’s third party complaint are, on their face, insufficient to allege a waiver of the state’s sovereign immunity because they fail to allege that Peabody itself has a disputed claim under its contract with the state as required by § 4-61 (a). The state argues that Peabody was required to admit liability to Standard before proceeding with an action against the state. The state claims that in the absence of such an admission, Peabody would not have a “disputed [claim] under [its] contract” with the state within the meaning of § 4-61 (a) because it would have no obligation to pay Standard. The state contends that because Peabody did not admit liability to Standard, Peabody’s third party complaint lacked an essential jurisdictional element, and the trial court was required to dismiss the complaint for lack of subject matter jurisdiction. Peabody contends, to the contrary, that it has adequately pleaded the existence of a disputed claim under its contract with the state so as to bring it within the purview of the statutory waiver of sovereign immunity provided by § 4-61 (a). We agree with the state.

Section 4-61 (a) waives sovereign immunity for any “person, firm or corporation which has entered into a contract with the state ... for the design, construction, construction management, repair or alteration of any highway, bridge, building or other public works of the state . . . .” Such an entity “may, in the event of any disputed claims under such contract . . . bring an action against the state ... for the purpose of having such claims determined.” General Statutes § 4-61 (a). The issue presented by this appeal is whether a general contractor has a “disputed [claim] under [its] contract” with the state, within the meaning of § 4-61 (a), if the general contractor’s claim against the state takes the form of a claim for indemnification that is based upon the pending claim of a subcontractor.

Our analysis of this issue is “guided by settled principles of statutory construction that assist us in ascertaining the intent of the legislature. . . . The legislative intent is to be discerned by reference to the language of the statute, its legislative history and surrounding circumstances, the policy the [statute] was designed to implement, and the statute’s relationship to the existing legislation and common law principles governing the same subject matter.” (Citation omitted; internal quotation marks omitted.) Hunte v. Blumenthal, 238 Conn. 146, 152, 680 A.2d 1231 (1996).

Our analysis is more specifically illuminated by the well settled principle that “the sovereign is immune from suit unless the state, by appropriate legislation, consents to be sued. State v. Chapman, 176 Conn. 362, 364, 407 A.2d 987 (1978); Baker v. Ives, 162 Conn. 295, 298, 294 A.2d 290 (1972); State v. Hartford, 50 Conn. 89, 90-91, 47 A. 622 (1882). When the state waives that immunity by statute ... a party attempting to sue under the legislative exception must come clearly within its provisions, because [statutes in derogation of sovereignty should be strictly construed in favor of the state, so that its sovereignty may be upheld and not narrowed or destroyed . . . .” (Internal quotation marks omitted.) Berger, Lehman Associates, Inc. v. State, 178 Conn. 352, 356, 422 A.2d 268 (1979). “Where there is any doubt about [the] meaning or intent [of a statute in derogation of sovereign immunity, it is] given the effect which makes the least rather than the most change in sovereign immunity.” White v. Burns, supra, 213 Conn. 312.

“As with any issue of statutory interpretation, our initial guide is the language of the statute itself.” (Internal quotation marks omitted.) Herbert S. Newman & Partners v. CFC Constmction Ltd. Partnership, 236 Conn. 750, 756, 674 A.2d 1313 (1996). Section 4-61 (a) expressly states that it shall apply only to “disputed claims” arising under certain types of construction contracts between the state and a party with whom the state has contracted. In this case, only Peabody, the general contractor, has a contract with the state. Standard had no contract with the state and, therefore, could not sue the state directly.

Recognizing the state’s undisputed sovereign immunity as to the subcontractor under § 4-61 (a), the plaintiff, the subcontractor’s successor in interest, brought suit against the general contractor, with whom it does have a contract. The only existing “disputed claim” at this point, therefore, is between the general contractor and the subcontractor.

In § 4-61 (a), the legislature did not, as it has done in the context of private sector claims, allow suits invoking the contingent liability of parties who “may be hable” at some point in the future. See General Statutes § 52-102a (defendant in civil suit may move court for permission to file third party complaint upon any person not party to action “who is or may be liable to him for all or part of the plaintiffs claim against him” [emphasis added]). Thus, under the plain language of § 4-61 (a), and applying the strict construction that we must apply to statutory language in derogation of sovereign immunity; see Struckman v. Burns, 205 Conn. 542, 558, 534 A.2d 888 (1987) (clear intent to waive sovereign immunity must be disclosed “ ‘by the use of express terms or by force of a necessary implication’ ”); we are persuaded that a general contractor who has entered into a contract with the state cannot bring a third party action against the state based on the mere prospect that the contractor may be liable to a subcontractor at some point in the future. That scenario does not constitute a disputed claim by the contractor against the state.

Our conclusion finds support in the legislative history of § 4-61. That history reflects the narrow and limited purpose for the exception to sovereign immunity contained in § 4-61 (a), and indicates that impleaders like that in the present appeal were not contemplated. At the time § 4-61 (a) was enacted, suits against the state by contractors were not countenanced because of sovereign immunity. Individualized legislative authorization to sue was required to be sought by petition before an action could be brought against the state. The legislature enacted § 4-61 in 1957 because of the mounting prevalence of these petitions for permission to sue the state. 7 S. Proc., Pt. 3, 1957 Sess., p. 1636. “The legislature wanted to reduce the number of petitions for permission to sue the state that it received involving suits over state construction contracts. 7 H.R. Proc., Pt. 4, 1957 Sess., p. 1937.” DeFonce Construction Corp. v. State, 198 Conn. 185, 189, 501 A.2d 745 (1985). Another reason for allowing parties who had contracted with the state to sue the state directly without seeking legislative authorization was the hope that affording contractors the right to sue would reduce the costs of construction projects to the state by ehminating the cost of the lengthy legislative authorization process that was often built into state construction contracts. Conn. Joint Standing Committee Hearings, General Law, Pt. 2, 1957 Sess., p. 436, remarks of Representative Merrill S. Dreyfus. Nothing, however, in the 1957 legislative history of § 4-61 or in the legislative history of the subsequent revisions to that statute; see 34 S. Proc., Pt. 6, 1991 Sess., p. 2165; 34 H.R. Proc., Pt. 22, 1991 Sess., pp. 8531-35; hints at the possibility that the legislature intended to allow a general contractor to implead the state in a suit between the contractor and a subcontractor, and thereby to permit the subcontractor to do indirectly what it could not do directly.

If general contractors on state construction projects were allowed to deny liability to subcontractors and then simply implead the state each time a subcontractor brought suit against them, the subcontractors effectively would be able to prosecute their claims against the state indirectly through the general contractors, increasing the complexity and volume of litigation against the state. Section 4-61 (a) expressly grants the right to sue the state only to contractors who have “entered into a contract with the state” and who have a dispute “under such contract.” Nowhere in § 4-61 or elsewhere in the General Statutes is there any provision that grants a subcontractor, who does not have a contract with the state, the right to sue the state.

“[T]he state’s sovereign right not to be sued without its consent is not to be diminished by statute, unless a clear intention to that effect on the part of the legislature is disclosed, by the use of express terms . . . .” (Internal quotation marks omitted.) White v. Burns, supra, 213 Conn. 312-13. In the absence of an expressed legislative intent to the contrary, it would be incongruous for the legislature in enacting § 4-61 (a) to have limited the right to sue the state to contractors having a direct contract with the state, but to allow subcontractors who have no contract with the state to sue the state indirectly through the procedural vehicle of a third party complaint. We conclude, therefore, that a contractor cannot implead the state in an action against the contractor by a subcontractor unless the contractor admits liability to the subcontractor and incorporates the subcontractor’s claim into its own, so that the contractor then has a disputed claim under its own direct contract with the state.

The judgment is reversed and the case is remanded with direction to grant the state’s motion to dismiss the third party complaint and to render judgment thereon.

In this opinion PETERS, C. J., and BORDEN, NORCOTT, KATZ and PALMER, Js., concurred.

BERDON, J.,

dissenting. Reminiscent of eighteenth century common law pleading, the majority concludes that a third party complaint cannot be amended to allege facts sufficient to establish a court’s jurisdiction. It was my understanding that Connecticut had abandoned this archaic legalism upon entering the twentieth century.

It is certainly true that once a court’s subject matter jurisdiction is challenged a court cannot proceed on the merits until the issue of jurisdiction is resolved affirmatively. Castro v. Viera, 207 Conn. 420, 429, 541 A.2d 1216 (1988) (“the court must ‘fully resolve [any jurisdictional challenges] before proceeding further with the case’ ”). Nevertheless, a court always has jurisdiction to determine whether it has jurisdiction. Golden Hill Paugussett Tribe of Indians v. Southbury, 231 Conn. 563, 570, 651 A.2d 1246 (1995). “A finding of jurisdiction is not a matter within the discretion of a court but a legal determination to be reached upon the facts and the pleadings.” Chrysler Credit Corp. v. Fairfield Chrysler-Plymouth, Inc., 180 Conn. 223, 230, 429 A.2d 478 (1980) (Loiselle, J., concurring). As such, if there is a defect, mistake or informality in the pleading, which is determinative of the jurisdictional challenge, the plaintiff should be permitted to amend his or her complaint as allowed by the rules of practice. See Practice Book §§ 175 and 176.

Similarly, this court has held that when a court’s subject matter jurisdiction is contingent on the finding of certain facts, the court must conduct an evidentiary hearing before dismissing the action for lack of jurisdiction. Standard Tallow Corp. v. Jowdy, 190 Conn. 48, 56, 459 A.2d 503 (1983) (“[w]hen issues of fact are necessary to the determination of a court’s jurisdiction, due process requires that a trial-like hearing be held”). It should then follow that, if a court’s subject matter jurisdiction is dependent upon a plaintiffs pleadings, and those pleadings are insufficient, a corrective amendment to the pleading should be allowed before ruling on the motion to dismiss. Accordingly, I would decide the issue on appeal in light of the amended third party complaint as the trial court did below.

Nevertheless, the initial third party complaint provides the trial court with jurisdiction. Pursuant to General Statutes § 4-61, “[a]ny person, firm or corporation which has entered into a contract with the state . . . for the design, construction, construction management, repair or alteration of any highway, bridge, building or other public works of the state ... in the event of any disputed claims under such contract . . . [may] bring an action against the state to the superior court for the judicial district of Hartford-New Britain . . . .” (Emphasis added.) In this case, the relevant allegations in the initial third party complaint against the state are as follows: “To the extent [the] plaintiff [Standard Structural Steel, Inc. (Standard), a subcontractor] incurred the damages and expenses as alleged, such damages and expenses were caused by [the] acts and/ or omissions of the State of Connecticut and not by any acts and/or omissions of [the defendants and third party plaintiffs Peabody International Corporation and Peabody, N.E., Inc. (collectively, Peabody), the general contractor]. ... To the extent that [Peabody is] found responsible to Standard for all or part of the claims set forth in [the Federal Deposit Insurance Corporation’s] Complaint asserting Standard’s claims, [Peabody is] entitled under the law and under the terms and conditions of [its] Contract with the State of Connecticut to recover all such sums from the State of Connecticut Department of Transportation.” In other words, Peabody alleges that if it is held liable to Standard, then the state is liable for those damages sustained by Standard pursuant to Peabody’s contract with the state. Albeit contingent, Peabody surely alleges a “disputed claim” with the state.

The majority narrowly construes the term “disputed claim,” and adopts a definition that is not in the best interest of the state. Specifically, the majority holds that a “disputed claim” exists, thereby allowing a general contractor, who has contracted with the state and who is being sued by its subcontractor for damages for which the state would alternatively be responsible, to implead the state as a third party defendant, only if the general contractor admits liability in the action brought by the subcontractor. I disagree. This decision will likely encourage general contractors to increase their rates when contracting with the state, so that they may insure themselves against the burden the court now imposes.

The majority’s holding places a general contractor in an unacceptable “catch-22” situation. The general-contractor must either defend against the subcontractor with the hope that the statute of limitations provided for in § 4-61 does not expire before any adverse judgment is rendered against it, or admit liability to the subcontractor in the hope that it will be able to recover against the state.

“In construing a statute, common sense must be used and courts must assume that a reasonable and rational result was intended.” Kron v. Thelen, 178 Conn. 189, 192, 423 A.2d 857 (1979); see also State v. Roque, 190 Conn. 143, 153, 460 A.2d 26 (1983) (“ ‘[t]hereisno canon against using common sense in construing laws as saying what they obviously mean’ ”). This principle is equally applicable to statutes that constitute a waiver of sovereign immunity. In this case, common sense dictates that the legislature did not intend to exclude disputes involving contingent liability from the term “disputed claims” as it is used in § 4-61.

Accordingly, I dissent.

       The Federal Insurance Company is the surety on the payment bond secured by Peabody International Corporation and Peabody, N.E., Inc., to guarantee payment for all materials and labor used by subcontractors in the execution of the contract of Peabody International Corporation and Peabody, N.E., Inc., with the state.

       General Statutes § 4-61 provides in relevant part: “Actions against the state on highway and public works contracts. Arbitration, (a) Any person, firm or corporation which has entered into a contract with the state, acting through any of its departments, commissions or other agencies, for the design, construction, construction management, repair or alteration of any highway, bridge, building or other public works of the state or any political subdivision of the state 'may, in title event of any disputed claims under such contract or claims arising out of the awarding of a contract by the commissioner of public works, briny an action against the state to the superior court for the judicial district of Hartford-New Britainforthepurpose of having such claims determined . . . .” (Emphasis added.)

       In the only reported decision in the state discussing this issue, Walter Kidde Constructors, Inc. v. State, 37 Conn. Sup. 50, 72, 434 A.2d 962 (1981), the trial court concluded that “the first condition precedent to [a general contractor] successfully suing on behalf of its subcontractors [is] an allegation of its own liability to them for the claimed damages.”

       General Statutes § 52-265a provides in relevant part: “Direct appeal on questions involving the public interest, (a) . . . [A]ny party to an action who is aggrieved by an order or decision of the superior court in an action which involves a matter of substantial public interest and in which delay may work a substantial injustice, may appeal under this section from the order or decision to the supreme court within two weeks from the date of the issuance of the order or decision. The appeal shall state the question of law on which it is based.
      “(b) The chief justice shall, within one week of receipt of the appeal, rule whether the issue involves a substantial public interest and whether delay may work a substantial injustice.
      “(c) Upon certification by the chief justice t hat a substantial public interest is involved and that delay may work a substantial injustice, the trial judge shall immediately transmit a certificate of his decision, together with a proper finding of fact, to the chief justice, who shall thereupon call a special session of the supreme court for the purpose of an immediate hearing upon the appeal.
      “(d) The chief justice may make orders to expedite such appeals, including orders specifying the manner in which the record on appeal may be prepared.”

       Peabody’s initial third party complaint against the state alleges in relevant part: “(2) On or about November 30, 1983 . . . Peabody entered into combined Contracts Nos. 126-119 and 36-137 with . . . the [sjtate of Connecticut [djepartment of [tjransportation for the reconstruction of Route 8 and the Commodore Hull Bridge over the Housatonic River from Shelton to Derby.
      “(3) On or about February 8, 1984 . . . Standard entered into a subcontract with Peabody to furnish and erect structural steel and related miscellaneous items in furtherance of Peabody’s aforesaid contract with the [sjtate of Connecticut [djepartment of [tjransportation.
      “(4) To the extent [that the] plaintiff incurred the damages and expenses as alleged, such damages and expenses were caused by acts and/or omissions of the [sjtate of Connecticut and not by any acts and/or omissions of Peabody.

      “(5) To the extent that [Peabody is] found responsible to Standard for all or part of the claims set forth in [the plaintiff's cjomplaint asserting Standard’s claims, [Peabody is] entitled under the law and under the terms and conditions of their [cjontract with the [s]tate of Connecticut to recover all such sums from the [sjtate of Connecticut [djepartment of [ transportation. . . .” (Emphasis added.)

       Peabody’s amended third party complaint alleges in relevant part: “(14) To the extent that Standard incurred damages as alleged, all such damages were caused by the acts, omissions, interferences and delays of [the state] which constituted breaches of [the state’s] contract with Peabody. There is due to Peabody from [the state] such amount as Peabody may be found liable to Standard plus overhead and profit due to [the state’s] contract breaches and delays, disruptions and interferences with Peabody and Standard’s performance of the structural steel and miscellaneous iron work of Peabody’s contract with [the state]. To the extent that Peabody recovers from [the state], except for Peabody’s overhead and profit, Peabody is liable to Standard.” (Emphasis added.)

       We realize that § 4-61 requires the general contractor to give notice of a factual basis for its claims against the state within two years of the completion of the contract or the execution of the certificate of acceptance, whichever is earlier. Section 4-61 also requires that a suit be initiated within three years of the earlier of those events. As Peabody points out, these limitation periods impose significant constraints on general contractors. This argument, however, does not change our interpretation of the statute and is more appropriately addressed to the legislature.

       I recognize that Woodmont Assn. v. Milford, 85 Conn. 517, 524, 84 A. 307 (1912), decided eighty-four years ago, supports the majority’s holding today. Interestingly, however, in that case, Justice Wheeler in dissent a1 tempted to usher the court into the twentieth century: “A complaint, defective for lack of a jurisdictional fact, and capable of amendment, should not be dismissed, but the defect left to be met by plea or demurrer which admit of amendment. Our statutes of amendment, as construed by our decisions, invite the amendment of every form of defect which will make apleading good. We make no exception where the defects are jurisdictional.” Id., 530.
      The majority also relies on Gurliacci v. Mayer, 218 Conn. 531, 545, 590 A.2d 914 (1991), for its holding with respect to this issue. The statement cited by the majority, however, is pure dicta because in Gurliacci, the court determined that the trial court had subject matter jurisdiction. Id.

       See footnote 6 of the majority opinion.

       As noted in the majority opinion, “the Federal Deposit Insurance Corporation as the receiver of the New Connecticut Bank and Trust Company and the successor in interest to Standard, brought the underlying action against [the defendants-third party plaintiffs], seeking approximately $14.8 million in damages allegedly suffered by Standard.”


source: Caselaw Access Project

author: BORDEN, J. BERDON, J.,

license: Public Domain

text:
    WENDELL CORPORATION TRUSTEE v. MARISA I. THURSTON ET AL.
    (15367)
    Callahan, Borden, Berdon, Norcott, and Palmer, Js.
    Argued June 4
    officially released August 20, 1996

      Karl Fleischmann, with whom was Elizabeth B. Leete, for the appellant (plaintiff).

      Richard E. Hayber, for the appellee (named defendant).

      Andrew Brand, with whom was Eileen Duggan, for the appellees (defendant Martin Gottesdiener and Company et ai.).
   BORDEN, J.

The plaintiff appeals from the judgment of the trial court, rendered after a court trial, rejecting the plaintiffs claim for the imposition of a constructive trust on certain property owned by one of the defendants and subject to a mortgage in favor of the other defendant. The case was tried pursuant to a three count amended complaint. In the first count, the plaintiff, Wendell Corporation Trustee (Wendell), sought foreclosure of a mortgage from the defendant trustee Martin Gottesdiener (trustee), on property located in Meriden that secured a promissory note executed by the trustee. The second count, alternatively, was against the trustee seeking payment of the promissory note. The third count was against the named defendant Marisa I. Thurston and the defendant Martin Gottesdiener and Company (Gottesdiener and Company), for a constructive trust on certain property located in West Springfield, Massachusetts, and for subordination of a mortgage on that property held by Gottesdiener and Company. At the commencement of trial, Wendell withdrew the first count, namely, for foreclosure of the mortgage on the Meriden property, and proceeded only on the other two counts.

The trial court, on the second count, rendered judgment against the trustee on the promissory note in the amount of $774,715.72. On the remaining count, under which Wendell sought a constructive trust on the Massachusetts property owned by Thurston and subordination of the mortgage held by Gottesdiener and Company, the trial court rendered judgment for Thurston and Gottesdiener and Company.

On appeal, Wendell claims that the trial court misapplied the law of constructive trusts, and that the applicable law requires the conclusions that: (1) Thurston holds the property in constructive trust for the benefit of Wendell; and (2) the mortgage of Gottesdiener and Company is subordinated to Wendell’s constructive trust. We agree and, accordingly, we reverse the judgment.

The following facts are undisputed. Martin Gottesdiener is an accountant doing business as Gottesdiener and Company. He is also a trustee of the Marisa I. Thurston Trust (trust), of which Thurston is the beneficiary. In 1990, the trustee executed on behalf of the trust, a promissory note in the amount of $509,049, to Meadow Haven, Inc., and secured that note by a mortgage on property located in Meriden that was owned by the trust. On March 9, 1990, Wendell purchased the note and mortgage from Meadow Haven, Inc., for $400,000, and, in connection with that transaction, Carabetta Enterprises, Inc., guaranteed the note. The trustee paid the interest on the note through August, 1990, and Carabetta Enterprises, Inc., paid the interest on the note through August, 1991. Since that date, however, no payments have been made on the note, and the note is in default. As of the date of the commencement of the trial, the amount of principal and interest due on the note was $748,585.

On November 1,1990, the trustee, in accordance with his power to distribute trust principal to the beneficiary, transferred to Thurston, without consideration, several parcels of real estate, including a parcel located at 855 Riverdale Road in West Springfield, Massachusetts. The transfer left the trust with assets of approximately $100. At the time of the transfer, Thurston gave Gottesdiener and Company a note in the amount of $230,275, secured by a mortgage on the Massachusetts property. The principal of the note was for past accounting services rendered by Gottesdiener and Company to the trust and to various business entities in which Thurston was a stockholder. In addition, the mortgage also secured any obligation for accounting services rendered in the future by Gottesdiener and Company to those business entities.

Wendell sought to have the trial court (1) impose a constructive trust in its favor on the Massachusetts property, and (2) subordinate Gottesdiener and Company’s mortgage on that property to that constructive trust. The trial court declined to impose a constructive trust, reasoning in part that Wendell had not proven a pecuniary loss because it had not offered evidence that the equity in the Meriden property that secured the note was insufficient to satisfy the debt. Accordingly, the trial court did not reach the question of subordination of Gottesdiener and Company’s mortgage, and rendered judgment for Thurston and Gottesdiener and Company. Thereafter, Wendell moved to open the judgment to offer evidence regarding the value of the Meriden property. The trial court denied the motion, and this appeal followed.

I

Wendell claims that, on the basis of the undisputed facts, a constructive trust in its favor must be imposed on the Massachusetts property, as a matter of law, and that the mortgage of Gottesdiener and Company on that property must be subordinated to the constructive trust. We agree.

Our general standards governing the imposition of a constructive trust are well established. “[A] constructive trust arises contrary to intention and in invitum, against one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in anyway against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. 76 Am. Jur. 2d, Trusts, § 221, p. 446; see VanAuken v. Tyrrell, 130 Conn. 289, 291-92, 33 A.2d 339 [1943], . . . Zack v. Guzauskas, 171 Conn. 98, 103, 368 A.2d 193 (1976); see also Brown v. Brown, 190 Conn. 345, 349, 460 A.2d 1287 (1983) (constructive trust based upon unjust enrichment).” (Internal quotation marks omitted.) Aetna Life & Casualty Co. v. Union Trust Co., 230 Conn. 779, 791, 646 A.2d 799 (1994). Moreover, the party sought to be held liable for a constructive trust must have engaged in conduct that wrongfully harmed the plaintiff. Id.

Although we have not specifically determined our scope of appellate review of a trial court’s determination of whether to impose a constructive trust, we have determined that scope in the closely related context of unjust enrichment. In that context, we have held that the trial court’s determination must stand unless it is clearly erroneous or involves an abuse of discretion. Hartford Whalers Hockey Club v. Uniroyal Goodrich Tire Co., 231 Conn. 276, 283, 649 A.2d 518 (1994). “This limited scope of review is consistent with the general proposition that equitable determinations that depend on the balancing of many factors are committed to the sound discretion of the trial court.” Id. Considering the similarities between the equitable doctrine of unjust enrichment and the equitable remedy of constructive trust, we conclude that the same deferential scope of review applies to a trial court’s determination of whether to impose a constructive trust.

Applying that limited scope of review, we conclude, nonetheless, that the trial court abused its discretion in declining to impose a constructive trust. Two lines of authority, applied to these particular facts, persuade us to reach that conclusion.

The first line of authority emanates from the Restatement (Second) of Trusts, and from respected treatises. Section 279 of the Restatement (Second) of Trusts (1959), provides: “If a creditor is entitled by a proceeding in equity to reach trust property and apply it to the satisfaction of his claim, and the trustee conveys the trust property to the beneficiary before the claim has been paid, the creditor can by a proceeding in equity hold the beneficiary personally liable for the claim to the extent of the value of the trust property so conveyed, unless the beneficiary is a bona fide purchaser or has so changed his position that it is inequitable to hold him personally liable.”

Professors Scott, Fratcher and Bogert take the same view. “The beneficiaries of a trust may be personally liable to a third person to whom an obligation is incurred by the trustee in the administration of the trust, if the third person was entitled to satisfaction of his claim out of the trust estate and the trust estate was distributed among the beneficiaries before the claim was paid. In such a case a beneficiary is not liable beyond the value of the property that he has received, and he is not liable if he is in the position of a bona fide purchaser or has so changed his position that it would be inequitable to compel him to make the payment.” 3A A. Scott, Trusts (4th Ed. Fratcher 1988) § 279, p. 532. “The view has been expressed that if a trustee has properly incurred a contract liability, and thereafter distributes trust property to a beneficiary, and the creditor is unable to collect from the trustee, he may sue the beneficiary in equity and recover from him to the extent of the distribution which he has received, unless the beneficiary was a bona fide purchaser of the distribution or has so changed his position after the distribution as to make it inequitable to enforce liability against him.” G. Bogert & G. Bogert, Trusts and Trustees (2d Ed. Rev. 1982) § 721, p. 341.

It is true, as Thurston argues, that we have never specifically adopted these statements as authoritative. It is also true, however, that these authorities state principles that are consistent with established Connecticut law. In the area of fraudulent conveyances, we have held that “[t]he party seeking to set aside a conveyance as fraudulent bears the burden of proving either: (1) that the conveyance was made without substantial consideration and rendered the transferor unable to meet his obligations; or (2) that the conveyance was made with a fraudulent intent in which the grantee participated. Bizzoco v. Chinitz, 193 Conn. 304, 312, 476 A.2d 572 (1984); Zapolsky v. Sacks, 191 Conn. 194, 200, 464 A.2d 30 (1983). The party seeking to set aside the conveyance need not satisfy both alternatives. Bizzoco v. Chinitz, [supra, 312].” (Emphasis added.) Tyers v. Coma, 214 Conn. 8, 11, 570 A.2d 186 (1990); see also Virginia Corp. v. Galanis, 223 Conn. 436, 443-44 n.10, 613 A.2d 274 (1992). General Statutes § 52-552f, which is part of the Uniform Fraudulent Transfer Act; General Statutes §§ 52-552a through 52-5521; expresses the same principle.

The second line of authority emanates from our own case law. Our cases establish the principle that, in real estate mortgage law, “the plaintiff is entitled to pursue its remedy at law on the notes, or to pursue its remedy in equity upon the mortgage, or to pursue both. A note and a mortgage given to secure it are separate instruments, executed for different purposes and in this [s]tate action for foreclosure of the mortgage and upon the note are regarded and treated, in practice, as separate and distinct causes of action, although both may be pursued in a foreclosure suit. Mechanics Bank v. Johnson, 104 Conn. 696, 701, 134 Atl. 231 [1926]; German v. Gallo, 100 Conn. . . . [708], 711, 124 Atl. 837 [1924]; Staples v. Hendrick, 89 Conn. 100, 93 Atl. 5 [1915], Atlas Realty Corporation v. House, 120 Conn. 661, 670, 183 A. 9 [1936]; New Haven Savings Bank v. Warner, 128 Conn. 662, 666, 25 A.2d 50 [1942], If, by an action solely on the note, the owner secures full payment on the debt, his right to enforce the mortgage is gone, or, if he secures payment in part, he can enforce the mortgage only to secure the payment of the balance. New Haven Savings Bank v. Warner, supra [466]. Where such a procedure is followed, the extent of the recovery, however, should not in any event exceed the amount of the debt. [Id.] Little v. United Investors Corporation, 157 Conn. 44, 48, 245 A.2d 567 (1968).” (Internal quotation marks omitted.) Hartford National Bank & Trust Co. v. Kotkin, 185 Conn. 579, 581-82, 441 A.2d 593 (1981). Under this line of authority, therefore, Wendell was not barred by the availability of foreclosure of the mortgage on the Meriden property from seeking payment of the underlying debt by proceeding on the note secured by that mortgage. Similarly, Wendell should not be barred by that same availability from seeking the imposition of a constructive trust in order to seek payment of the same underlying debt.

As Wendell acknowledged in oral argument in this court, however, application of the Kotkin line of authority to the present case constitutes an extension of that authority. Whereas, under Kotkin, the mortgagee may either bring an action against the obligor on the note, or foreclose against the owner of the property subject to the mortgage, or both, in this case, Wendell seeks a different remedy, namely, the imposition of a constructive trust against a different obligor, namely, the beneficiary of the trust, who is neither liable on the note nor is the owner of the property subject to the mortgage. We conclude, nonetheless, that the extension of Kotkin to this case is appropriate.

Although the language of Kotkin suggests a separation of legal and equitable doctrines; see id., 581 (“the plaintiff is entitled to pursue its remedy at law on the notes, or to pursue its remedy in equity upon the mortgage, or to pursue both”); the ensuing discussion in that case makes clear that the doctrine permitting both remedies, or a combination thereof, is grounded in equitable principles permitting procedural flexibility while at the same time prohibiting double recovery. See id., 581-82 (if owner secures full payment by action on note, no further right to enforce mortgage; if owner secures payment in part, owner can enforce mortgage only for balance; extent of recovery in any event not to exceed amount of debt).

Thus, permitting the Kotkin doctrine to operate so as to impose a constructive trust on Thurston is consistent with the equitable principles underlying the doctrine. This extension of the Kotkin rule is consistent with procedural flexibility and, as we point out later in this opinion, on remand the trial court will retain sufficient discretion in the enforcement of the constructive trust to avoid double recovery, and appropriately to take into account the availability of payment from the Meriden property, if any.

Having articulated the two lines of authority that, we conclude, would permit the imposition of a constructive trust in this case, it remains for us to apply those authorities to the facts of this case. The authorities articulated in the Restatement (Second) of Trusts, and the treatises by Professors Scott, Fratcher and Bogert, are phrased in permissive, rather than mandatory, terms. That is, whether a constructive trust should be imposed under those authorities depends on a consideration of all of the facts of the case.

The facts persuade us that, as a matter of law, both lines of authority should be applied to require the imposition of a constructive trust on the Massachusetts property. The underlying debt, which Wendell seeks to satisfy, was incurred on behalf of the trust of which Thurston was the beneficiary. Therefore, we can presume that the trustee borrowed the money, he applied it on behalf of the trust and that, therefore, Thurston benefited from it. Having enjoyed the benefit of the funds that the trustee borrowed, and having received a distribution without consideration from the trustee that left the trust effectively without funds, it is only fair that Thurston’s ownership of an asset so distributed not be shielded from satisfaction of the debt that produced those funds in the first place. Moreover, there is no evidence that Thurston changed her position subsequent to the distribution to her, so as to preclude the imposition of a constructive trust. In effect, Thurston should not be permitted to reap the benefits of the trustee’s actions without also shouldering a fair proportion of the burdens. Furthermore, as we stated previously, under the Kotkin doctrine, Wendell should be permitted to seek satisfaction of the debt, by way of a constructive trust, without necessarily foreclosing on the mortgage on the Meriden property that secured it.

The trustee and Thurston argue, however, and the trial court concluded, that Wendell should not be permitted to obtain a constructive trust in this case without first establishing that there is insufficient equity in the Meriden property to satisfy the debt, a task that Wendell failed to perform in the trial court. Although this argument has considerable weight, we conclude that it is misplaced. Although the potential of equity in the Meriden property is relevant, we conclude that it is appropriately taken into account not in the decision regarding whether there should be a constructive trust on the Massachusetts property, but in the decision regarding the monetary extent of that trust, and the extent and timing of its enforcement.

The determination that a constructive trust could be imposed on the Massachusetts property is, in a sense, the beginning of the inquiry, not the end. A constructive trust is a flexible equitable remedy whose enforcement is subject to the equitable discretion of the trial court. See Connecticut Bank & Trust Co. v. Winters, 225 Conn. 146, 162, 622 A.2d 536 (1993) (“ ‘equitable power must be exercised equitably . . . [but] [t]he determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court’ ”). The trial court may recognize the existence of the constructive trust and, nevertheless, decline to order the conveyance or other disposition of the property in satisfaction of the debt. For example, “[i]n some cases [in which a constructive trust has arisen] . . . where a proceeding at law can be maintained for the property or its value and where the legal remedy is adequate, a proceeding in equity cannot be maintained. The refusal of the court to permit specific recovery of the property in a proceeding in equity, however, does not necessarily mean that there is no constructive trust.” Restatement, Restitution § 160, comment (e) (1937); 5 A. Scott, supra, § 462.3. To say that the Massachusetts property is subj ect to a constructive trust in Wendell’s favor is not to say that Wendell owns the property. On the contrary, it is to say only that Wendell may seek satisfaction of its debt, and no more, out of that property even though the owner of the property, Thurston, personally does not owe Wendell anything on the note. The extent to which Wendell may actually appropriate the property to satisfy its debt, the timing of such appropriation, and the extent to which there are other available assets, such as the Meriden property, from which Wendell may be able to and may be required first to satisfy its debt, are matters left to be decided on remand by the trial court in the exercise of its discretion.

II

Gottesdiener and Company claims that, if a constructive trust is imposed on the Massachusetts property, we should either remand the case for consideration of whether the mortgage to Gottesdiener and Company should be subordinated to the constructive trust, or decide on the facts as found by the trial court that no such subordination is appropriate. We disagree. We conclude that, on the basis of the undisputed facts of this case, the mortgage to Gottesdiener and Company should be subordinated to the constructive trust.

Gottesdiener and Company relies on the following findings of the trial court regarding the good faith acquisition of the mortgage to it. The court found that, although Gottesdiener and Company acquired the mortgage in November, 1990, Wendell’s note was not in default until September, 1991. Further, the trustee did not condition the distribution to Thurston of the Massachusetts property on Thurston’s providing a note and mortgage to Gottesdiener and Company. Gottesdiener and Company also argues that, in the absence of a showing by Wendell that it will be harmed by having to rely on the mortgage of the Meriden property to satisfy its debt, Wendell “has not demonstrated that it has or will be harmed by maintaining a position junior to that of . . . [Gottesdiener and Company] in the Massachusetts property.” We are persuaded, nonetheless, that the remaining undisputed facts compel the conclusion that the mortgage of Gottesdiener and Company should be subordinated to a constructive trust in favor of Wendell.

When the trustee distributed the property to Thurston without providing for the payment of the trust’s obligation to Wendell, thus leaving the trust without adequate funds to satisfy that obligation, he left Wendell, the trust’s creditor, with only two possible sources of satisfaction of its debt: the equity in the Meriden property; and a potential constructive trust on any property so distributed. Nonetheless, the trustee simultaneously arranged for a mortgage on the distributed property. The necessary effects of that mortgage were to benefit the trustee individually, by securing underlying obligations, past and future, to his accounting firm, Gottesdiener and Company, and to undermine the value of one of the only two possible sources of satisfaction of the trust’s obligation to Wendell. Regardless of the intentions or good faith of Thurston and the trustee, therefore, the effect of the mortgage to Gottesdiener and Company is to benefit the interests of the trustee and to burden the interests of Wendell. Given the functionally equivalent identities of the trastee and Gottesdiener and Company, we conclude, as a matter of law, that Wendell’s constructive trust should be prior to Gottesdiener and Company’s mortgage.

If, as Gottesdiener and Company suggests, Wendell’s note may be satisfied out of the Meriden property, and if the trial court on remand requires Wendell to follow that route before enforcing the constructive trust, then the subordination that we mandate will not harm Gottesdiener and Company. To the extent, however, that the Meriden property is not sufficient to satisfy the trust’s obligation to Wendell, then Gottesdiener and Company should not be benefited at the expense of Wendell.

The judgment is reversed and the case is remanded to the trial court with direction to render judgment for Wendell imposing a constructive trust on the Massachusetts property, subordinating the mortgage of Gottesdiener and Company to that trust, and for further proceedings according to law.

In this opinion CALLAHAN, NORCOTT and PALMER, Js., concurred.

BERDON, J.,

concurring. If the corpus of a trust has been distributed to its beneficiary by the trustee, and the trustee is not personally liable for the debts of the trust, then a constructive trust may be imposed on those distributed assets, subject to certain exceptions. “If the trustee is personally liable on the claim, however, and is solvent so that the [creditor of the trust] could enforce the claim against the trustee personally, he cannot bring a suit in equity against the beneficiaries, since his legal remedy against the trustee is adequate.” 3A A. Scott, Trusts (4th Ed. Fratcher 1988) § 279, p. 533. In this case, neither party raises the issue of the trustee’s liability or solvency.

Accordingly, I agree with the majority opinion.

       The plaintiff appealed from the judgment of the trial court to the Appellate Court, and we transferred the appeal to this court pursuant to Practice Book § 4023 and General Statutes § 51-199 (c).

       From this finding of the trial court, we presume that “Gottesdiener and Company” is merely a trade or professional name for Martin Gottesdiener, the individual. Nonetheless, because the trial court and parties have referred to the individual by the professional name, we do so as well.

       Neither the amount of the debt nor the liability of the trustee on the note is challenged in this appeal.

         Thurston conceded that if Wendell established that it is entitled to a constructive trust, the constructive trust could be applied to any of the former assets of the trust.

       The trial court also found that Wendell had not proved that the transfer from the trustee to Thurston was made with the actual intent to defraud creditors, and Wendell does not challenge that finding on appeal.

       Wendell also claims that the trial court improperly denied its motion to open the judgment in order to offer evidence of the value of the Meriden property. In light of our conclusion that a constructive trust must be imposed, we need not consider this claim.

       General Statutes § 52-552f provides: “Transfers fraudulent as to present creditors, (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
      “(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.”

       The record does not reflect whether Thurston owns the Meriden property as a result of the distribution of the capital assets of the trust. Our analysis, however, does not turn on whether she owns that property.

       For example: “the creditor can by a proceeding in equity hold the beneficiary personally hable”; 2 Restatement (Second), supra, Trusts, § 279; the “beneficiaries of a trust may be personally hable to a third person”; 3A A. Scott, supra, § 279, p. 532; and the creditor “may sue the beneficiary in equity.” G. Bogert & G. Bogert, supra, § 721, p. 341.

       In this connection, we are not persuaded by the trustee’s and Thurston’s reliance on Aetna Life & Casualty Co. v. Union Trust Co., supra, 230 Conn. 792, for the proposition that no constructive trust may be imposed on Thurston because she did not engage in wrongful or unconscionable conduct. In Aetna Life & Casualty Co., we stated that the equitable remedy of constructive trust requires that “the party sought to be held liable has engaged in conduct that wrongfully has harmed the plaintiff.” (Emphasis in original.) Id., 791. In that case, we held that the remedy of constructive trust was not appropriate because the bank was not legally liable “under Connecticut law regarding the specific obligations of a bank as applied to [that] case.” Id., 792. That specific holding, however, does not preclude a conclusion in the present case that Thurston’s conduct, in taking the benefits of the trustee’s actions without also shouldering a fair proportion of the burdens of those actions, would wrongfully harm Wendell.

       It is also true, however, that Carabetta Enterprises, Inc., which guaranteed the promissory note in connection with the transfer of the mortgage to Wendell, is, at least theoretically, a possible source of satisfaction of the debt. None of the parties, however, has suggested that this theory is a reality. If it is, Gottesdiener and Company, Thurston and the trustee remain free to suggest it to the trial court on remand.

       Beneficiaries of a trust will not be personally liable, and therefore their assets will not be subject to a constructive trust, if either (1) they are a bona fide purchaser, or (2) they have so changed their position that it would be inequitable to compel payment from them. 3A A. Scott, Trusts (4th Ed. Fratcher 1988) § 279, pp. 533-34.