Opinion
No. CV X06 04 4015047 S
August 6, 2009
MEMORANDUM OF DECISION
The plaintiffs in this action are James D. Cohen and Roll-A-Cover of New Jersey, LLC (RAC-New Jersey) and the defendants are Roll-A-Cover, LLC (RAC) and Michael Morris. The First Amended Complaint contains six remaining counts. Counts one and two allege violation of the Connecticut Business Opportunity Investment Act, General Statutes §§ 36b-60 et seq. ("CBOIA"); count one seeks return of all sums paid to RAC as provided under General Statutes § 36b-74(a), and count two seeks damages and attorney fees as provided under General Statutes § 36b-74(b). Count five of this complaint alleges fraudulent inducement; count six alleges fraud; count seven alleges intentional misrepresentation; count eight alleges negligent misrepresentation; and count nine alleges violation of the Connecticut Unfair Trade Practices Act, General Statutes §§ 42-110a et seq. ("CUTPA").
When the trial began, the plaintiffs withdrew counts three and four of the First Amended Complaint alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The court also notes that after the close of evidence, the plaintiffs filed a motion to file a Second Amended Complaint. In this motion, the plaintiffs sought to eliminate formally counts three and four of the First Amended Complaint, and to change count seven from a claim for "intentional misrepresentation" to one for "reckless misrepresentation." The motion to amend was granted as to the elimination of counts three and four and was denied as to the request to assert reckless misrepresentation, rather than intentional misrepresentation. For convenience and clarity, the references to the complaint in this decision will be to the First Amended Complaint because the operative answer and the defendants' positions more specifically correspond to the allegations of that complaint.
The defendants' answer denies the substantive claims of the plaintiffs' complaint and asserts six special defenses to the remaining counts. Three special defenses are directed to counts one and two claiming violation of CBOIA: the first special defense claims that any recovery in favor of the plaintiffs under CBOIA must be reduced by any profits earned by them as provided under General Statutes § 36b-74; the second special defense claims that the plaintiffs made false statements in violation of General Statutes § 36b-80, and therefore § 36b-74 and equity bar any recovery by the plaintiffs; and the third special defense claims that the defendants are not liable under CBOIA because the business opportunity on which the plaintiffs base their complaint is exempt under the provisions of General Statutes §§ 36b-65(e)(2), 36b-74(h), and/or 36b-75(c).
The court issued a decision bifurcating discovery and adjudication of the defendant's special defense under General Statutes § 36b-65(e)(2) from this phase of the case. This provision exempts business opportunities from particular sections of the CBOIA if the purchaser-investors each has a net worth of not less the one million dollars, subject to certain exclusions. By stipulation, the parties also agreed to the bifurcation of plaintiffs' claims for attorneys fees, costs and punitive damages.
The defendants assert three special defenses against counts five through eight of the complaint. The first alleges that the parties executed a Dealership Agreement and that all representations made by the defendants prior to its execution "were cancelled and superceded by the terms of the Agreement." The second and third defenses to these counts allege that the plaintiffs failed to "mitigate" their damages and "squandered the value of leads" by "substantially discontinuing [their] marketing, selling and distributorship activities within seven months of the execution of the Distributorship Agreement."
The bench trial of this case commenced on September 30, 2008 and concluded on October 15, 2008. The parties' post-trial memoranda were completed and filed by June 2, 2009. The court makes the following findings of fact.
This controversy arises from an agreement involving the plaintiffs' purchase from RAC of a distributorship to sell retractable outside pool and spa enclosures called "Roll-A-Covers." Defendant Michael Morris is the principal owner and president of RAC. In 2003, Cohen saw in flight magazines, advertisements by RAC describing RAC products and the availability of dealerships for the sale of these products. Cohen subsequently contacted Morris about sales opportunities with RAC and visited RAC's manufacturing facility in Connecticut to acquire more information. From about November 2003 through January 2004, Cohen had numerous communications with Morris and agents of RAC about acquiring an exclusive RAC distributorship in New Jersey. Cohen formed the plaintiff RAC-New Jersey for this purpose, and in January 2003, Cohen and RAC-New Jersey entered into a Distributorship Agreement with RAC for the New Jersey territory. Pursuant to the terms of the agreement, Cohen paid RAC $75,000 for the purchase of the distributorship. The Distributorship Agreement was amended in January 2004 to include Delaware. As an exclusive distributor in New Jersey and Delaware, RAC-New Jersey would establish dealerships in these states that would market, sell and install RAC products. RAC-New Jersey formed agreements establishing three dealerships: Magic Outdoors, LLC, Roll-A-Cover of Delaware, LLC, and Atlantic Roll-A-Cover, LLC.
Needless to say, the parties' business relationship under the Distributorship Agreement failed. In the fall of 2004, the parties exchanged a series of acrimonious and accusatory communications culminating in separate letters sent by each of them terminating the Distributorship Agreement. The parties have provided extensive minutiae about the facts and nature of their business relationship. The court does not find it necessary to review these detailed facts here. Cohen testified that he spoke informally to an attorney who was a personal friend. He did not, however, formally retain legal representation or engage in a sufficiently extensive, due diligence investigation of the business opportunity before executing the Distributorship Agreement. Cohen relied substantially on information and representations made to him by Morris and other agents of RAC. In promoting the business to Cohen, the defendants, particularly Morris, made some inaccurate statements. In retrospect, some of the statements may be characterized as exaggerated projections or embellishments, but not all of them. The defendants had identified an intriguing product, and they had performed extensive work to create an exciting marketing plan and business program. However, imbedded in the details of the exuberance and glitter were material untruths. The court finds that the defendants made the following factual representations to the plaintiffs that were knowingly false when made, were made with the intent to deceive, and were relied on by the plaintiffs to their detriment in their execution or performance of the Distributorship Agreement:
For example, Cohen testified that he acquired no documentation about RAC's sales history before executing the Distributorship Agreement because of RAC's position that this information was proprietary and unavailable. He relied on representations from the defendants that RAC was selling a large number of pool enclosures and that the company had many promising leads for product sales and new distributorships
The defendants represented to Cohen that to acquire a Roll-A-Cover distributorship, Cohen would have to pay a $75,000 fee and participate in the company's "multi-level partnership" marketing pyramid program. Cohen was told that a fee for at least this $75,000 amount and participation in this marketing program were the only means to acquire a distributorship, that participation in this program was required and non-negotiable, and that RAC had existing distributors and was negotiating with other potential distributors world wide. Morris communicated to Cohen that RAC had recently sold a distributorship for Singapore, Thailand, Malaysia, Indonesia and Brunei. There was no such sale. Morris communicated to Cohen that RAC had sold a distributorship in Florida. There was no such sale in Florida either. Morris communicated to Cohen that there were other people interested in purchasing the New Jersey distributorship, thereby making it urgent for Cohen to make a decision about his participation in the business, when in fact there had been inquiries, but no discussions with anyone interested in purchasing a distributorship involving or creating any urgency whatsoever. When these statements were made, RAC only had two distributors and neither had paid a fee for the distributorship as part of a program equivalent to the "multi-level partnership." RAC-New Jersey was the first and only distributorship subject to the multi-level program.
The defendants represented to Cohen that RAC had a high volume sales history and a backlog of pending sales when there was no high volume sales history or backlog of pending sales. RAC's website provided a sixty-five page list of "U.S. Dealers." The identified businesses were authorized to sell Roll-A-Covers, but the representation that they were "U.S. Dealers" gave and was intended to give the false impression that RAC had accomplished a nationwide, exclusive dealership network. None of these entities were actually "RAC dealers," meaning that none of them had executed contracts with RAC under any multi-level program. They were sellers of swimming pools who were affiliated with "San Juan Pools" and none of them had sold a RAC product.
Not only were these representations and the ones previously described false or intentionally misleading, they were made in order to convey the false impression, and did convey the impression to Cohen, that many other businessmen had examined and purchased distributorships similar to the one offered to Cohen and that the Roll-A-Cover product was being marketed and sold widely under distributorships and dealers participating in the multi-level program.
The defendants represented that RAC held patents on six of the components of its product and that RAC held at least four trademarks. These representations were made on RAC's website, in promotional materials, and in other documents presented to Cohen before or during negotiations of the Distributorship Agreement. These representations were also expressly made in the parties' Distribution Agreement. Although RAC had one trademark application pending, RAC did not have any patents or trademarks when these representations were made to and relied on by Cohen.
The Distribution Agreement was filed as Exhibit 5. This agreement includes an attachment (exhibit d) identifying RAC's patents as "roll-a-flashing, center gutter, telescopic sunroom, retractable sunroom, interlocking eave purlin and condensation gutter." The trademarks are described as "roll-a-cover, roll-a-flashing, telescopic sunroom, and retractable sunroom."
The defendants made false and misleading representations in advertising and marketing materials given to Cohen that RAC's enclosures could withstand wind velocities up to 120 miles per hour and snow loads up to 70 pounds per square foot, and that these specifications had been certified by an outside engineer. These representations were important because they supported the defendants' marketing claims that the enclosures were durable and extended the seasonal use of the enclosed areas, including swimming pools. The only engineer retained by RAC when these representations were made to Cohen testified that his work and findings could not support these wind velocities and snow load claims as advertised by the defendants. He testified that the enclosures, fully extended and without additional grounding support, could only support lower wind velocities and snow loads.
The plaintiffs prepared and utilized a marketing and sales brochure (Exhibit 3) that contained false and misleading information. This brochure contained photographs and descriptions of another manufacturer's pool enclosures and identified these pool enclosures as being RAC's products. The brochure explains how these pool enclosures are superior to the products made by RAC's competitors, when in fact the enclosures were made by RAC's competitor and not by RAC. The brochure also contains the false and misleading representations about wind velocities and snow loads discussed above. This brochure also attributes a quoted statement from Morris that RAC had a backlog of pending sales, when there was no such backlog.
To reiterate for emphasis, the plaintiffs relied on these representations in considering the quality of the product being offered as part of the distributorship purchase, as well as the potential quality and profitability of the new business venture. The specific representations about the patents and engineering specifications were relied on for these same reasons, as well as for the marketing advantages that these representations would provide in facilitating sales to customers. Additional facts will be articulated as required by the following discussion.
DISCUSSION I CBOIA
The CBOIA applies to "sellers" of "business opportunities." The Act defines a seller as a person who is engaged in the "business of selling or offering for sale business opportunities or any agent or representative of such person." General Statutes § 36b-61(4). The Act defines a business opportunity as including "the sale . . . or offer for sale . . . of any products, equipment, supplies or services which are sold or offered for sale to the purchaser-investor for the purpose of enabling the purchaser-investor to start a business and in which the seller represents . . . (D) that the seller will provide a sales program or marketing program to the purchaser-investor . . ." General Statutes § 36b-61(6). In the event of violation of certain provisions of the CBOIA, General Statutes § 36b-74(a) authorizes a purchaser-investor to void the contract and to recover from the seller "all sums paid to such business opportunity seller." Additionally, General Statutes § 36b-74(b) provides that for violation of the CBOIA, a business opportunity seller may be liable for damages, including reasonable attorneys fees.
The full text of General Statutes § 36b-74(a) reads as follows:
If a business opportunity seller uses any untrue or misleading statement in the sale of a business opportunity, or fails to give the proper disclosures in the manner required by section 36b-63, or fails to deliver the equipment, supplies or products or render the services necessary to begin substantial operation of the business opportunity within forty-five days of the delivery date stated in the business opportunity contract, or if the contract does not comply with the requirements of section 36b-66, then within two years of the date of the contract, upon written notice to such business opportunity seller, the purchaser-investor may void the contract and shall be entitled to receive from such business opportunity seller all sums paid to such business opportunity seller. Upon receipt of such sums, such purchaser-investor shall make available to such business opportunity seller at such purchaser-investor's address or at the places at which they are located at the time notice is given, all products, equipment or supplies received by such purchaser-investor. Purchaser-investors shall not be entitled to unjust enrichment by exercising the remedies provided in this subsection.
The full text of General Statutes § 36b-74(b) reads as follows:
Any purchaser-investor injured by a violation of sections 36b-60 to 36b-80, inclusive, or by a business opportunity seller's breach of contract subject to said sections or any obligation arising therefrom may bring an action for recovery of damages, including reasonable attorneys fees.
The plaintiffs have proven by a preponderance of the evidence that the parties' Distribution Agreement is subject to the CBOIA because the defendants sold and offered for sale "business opportunities" as part of RAC's regular business practice. The Distribution Agreement clearly establishes that the RAC was selling products and supplies, including retractable covers and marketing materials, as well as services, such as installation training. The Distribution Agreement also establishes that these products, supplies and services were being offered and sold as part of a sales or marketing program called the "Multi-Level Partnership Program."
The court notes that the plaintiffs filed a complaint with the Commissioner of Banking alleging the defendants' violation of the CBOIA. These administrative proceedings were resolved through the entry of a consent order executed by the defendants.
General Statutes § 36b-80 provides the following:
No person shall make or cause to be made orally or in any document filed with the commissioner or in any proceeding, investigation or examination under sections 36b-60 to 36b-80, inclusive, any statement which is, at the time and in the light of the circumstances under which it is made, false or misleading in any material respect.
The plaintiffs have proven by a preponderance of the evidence that the defendants violated the CBOIA as follows:
By failing to register the business opportunity with the Banking Commissioner as required by General Statutes §§ 36b-62(a) and 36b-67(1).
By failing to provide the plaintiffs with a disclosure document containing all the information required by General Statutes § 36b-63.
By failing to provide the balance sheets, income statements and changes in financial condition as required by General Statutes § 36b-65(b).
By representing income or earning potential of the business opportunity without documenting and disclosing data to the plaintiffs substantiating the representation in violation of General Statutes § 36b-67(2).
By making untrue statements of material fact in connection with the sale and offer of sale of the business opportunity in violation of General Statutes § 36b-67(6)(b).
The defendants' arguments that the parties' transaction was not covered by the CBOIA are rejected. The defendants first argue that paragraph 49 of the Distribution Agreement operates to exclude the contract from the provisions of the CBOIA. This provision provides that a franchise is not created by the agreement and that the "Distributor represents that the Products are one of several products or services sold by Distributor and these Products do not constitute the sole or substantial source of sales by the Distributor." According to the defendants, this language in some way indicates that the plaintiffs were not starting a new business within the meaning of the CBOIA. The court rejects this argument because there is simply no rational basis for such an interpretation of this language. "It is well settled that where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms . . ." (Internal quotation marks omitted.) Electric Cable Compounds, Inc. v. Seymour, 95 Conn.App. 523, 528-29, 897 A.2d 146 (2006).
The defendants also argue that the Distribution Agreement is not subject to the CBOIA because the $75,000 fee was paid by Cohen and the agreement was signed only by RAC-New Jersey, through Cohen acting as its managing member. More specifically, the defendants apparently argue that RAC-New Jersey cannot assert any claims under the agreement because it did not pay the $75,000 distributor fee, and Cohen cannot assert any claim under the agreement because he is not a signatory to the agreement. It follows under this reasoning that RAC received $75,000 as a distributor fee, but did not execute an enforceable contract under the CBOIA with anyone in consideration for its receipt of this fee. The court must reject such sophistry. The law is well established that the existence and terms of a contract are to be determined from the intent of the parties as manifested by their words and acts. See generally MD Drilling Blasting, Inc., v. MLS Construction, LLC, 93 Conn.App. 451, 454-55, 889 A.2d 850 (2006). The first paragraph of the Distributor Agreement states that the contract is between RAC and the "Distributor." The Distribution Agreement defines "Distributor" as "Roll-A-Cover of New Jersey, LLC and Mr. James D. Cohen." The evidence clearly establishes that Cohen negotiated the terms of the agreement, initialed each page, and paid the $75,000 on behalf of himself and RAC-New Jersey. The evidence also indicates that the parties worked under the agreement consistent with the conclusion that both plaintiffs were treated as the distributor under the terms of the agreement. Moreover, the CBOIA applies to both the sale and the "offer of sale" of a business opportunity. General Statutes § 36b-61(4). The evidence is undisputed that the defendants offered the distributorship to both plaintiffs.
In their answer to the complaint, the defendants have formally asserted three special defenses directed to the CBOIA counts of the complaint. The first special defense is based on General Statutes § 36b-74(a) which provides in relevant part that "[p]urchaser-investors shall not be entitled to unjust enrichment by exercising the remedies provided in this subsection." The defendants claim that any profits earned by the plaintiffs from their operation of the distributorship should be set off against any damages recovered by them under § 36b-74 so that the plaintiffs will not be unjustly enriched. The plaintiffs do not contest the existence or availability of the defense under § 36b-74, but they contest the applicability of this defense to the facts of this case and the basis of the defendants' assertion of the defense. The court will address the parties' positions regarding the amount of this set off as part of its award of damages under the CBOIA.
In their second special defense, the defendants allege that the plaintiffs are precluded from recovering under the CBOIA because the plaintiffs made false statements to the Banking Commissioner in violation of General Statutes § 36b-808. The defendants have failed to prove by a preponderance of the evidence that the plaintiffs made any statement to the Banking Commissioner that was false or misleading in any material respect. The court further notes that the defendants have not shown that any provision of the CBOIA precludes the private right of recovery under the Act as a penalty for a violation of General Statutes § 36b-80.
In their third defense, the defendants allege that the parties' transaction is exempt from the protections of the CBOIA under General Statutes §§ 36b-74(h), 36b-75(c), and 36b-65(e). The first provision, Section 36b-74(h), prohibits any person who has made or engaged in the performance of any contract in violation of the provisions of the CBOIA from basing any cause of action on the contract. The defendants' specific argument is that the plaintiffs falsely represented under paragraph forty-nine of the Distributor Agreement that the RAC products would not represent the "sole or substantial" sales of the plaintiffs' distribution business, and that Cohen falsely represented that he consulted with an attorney regarding the negotiation or terms of the Distributor Agreement. Assuming, without finding, that these misrepresentations were made, the defendants fail to indicate that these misrepresentations violated any provision of the CBOIA.
General Statutes § 36b-74(h) provides the following:
No person who has made or engaged in the performance of any contract in violation of any provision of sections 36b-60 to 36b-80, inclusive, or any regulation or order adopted or issued under said sections, or who has acquired any purported right under such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any cause of action on the contract.
The defendants' next defense is premised on General Statutes § 36b-75(c), which defines when an offer to sell or buy a business opportunity is made in this state. The defendants have not based any arguments on this provision. The court finds this defense legally abandoned and factually meritless. As to the defendants' defense under General Statutes § 36b-65(e)(2), this defense has been bifurcated from the present adjudication and will be addressed in subsequent proceedings. See n. 2.
General Statutes § 36b-75(c) provides the following:
For the purposes of this section, an offer to sell or to buy is accepted in this state when acceptance is communicated to the offeror in this state and has not previously been communicated to the offeror, orally or in writing, outside this state; and acceptance is communicated to the offeror in this state, whether or not either party is then present in this state, when the offeree directs it to the offeror in this state reasonably believing the offeror to be in this state and it is received at the place to which it is directed or at any post office in this state in the case of a mailed acceptance.
In summary, the court finds that the plaintiffs have proven by a preponderance of the evidence that the defendants violated the CBOIA as alleged in counts one and two of the complaint. The defendants have failed to meet their burden of proving by a preponderance of the evidence any of their special defenses addressed as part of this phase of the case. The court will schedule further evidentiary proceedings to be held on the defendants' special defense based on General Statutes § 36b-65(e)(2).
II TORT CLAIMS A.
Counts five, six and seven of the complaint alleges fraudulent inducement, fraud and intentional misrepresentation.
Fraud and misrepresentation cannot be easily defined because they can be accomplished in so many different ways. They present, however, issues of fact. The trier of facts is the judge of the credibility of the testimony and of the weight to be accorded it.
The essential elements of a cause of action in fraud are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue by the party making it; (3) it was made to induce the other party to act upon it; and (4) the other party did so act upon that false representation to his injury. All of these ingredients must be found to exist; and the absence of any one of them is fatal to a recovery . . .
Additionally, the party asserting such a cause of action must prove the existence of the first three of [the] elements by a standard higher than the usual fair preponderance of the evidence, which higher standard we have described as clear and satisfactory or clear, precise and unequivocal.
(Citation omitted; internal quotation marks omitted.) Harold Cohn Co. v. Harco International, LLC, 72 Conn.App. 43, 51, 804 A.2d 218 (2002).
As articulated previously as part of the court's findings of fact, the plaintiffs have proven that the defendants made representations to the plaintiffs as statements of fact that were knowingly false and misleading when made, were made by the defendants with the intent to deceive and to induce the plaintiffs to rely on them, and were relied on by the plaintiffs to their financial detriment in their execution and performance of the Distributorship Agreement. Although the defendants point to contrary or conflicting evidence, the court, in considering the entire record, finds that the plaintiffs have satisfied the elements proving the causes of action alleged in counts five, six and seven of the complaint by clear, precise and unequivocal evidence.
B
In count eight, the plaintiffs allege negligent misrepresentation. "Traditionally, an action for negligent misrepresentation requires the plaintiff to establish (1) that the defendant made a misrepresentation of fact (2) that the defendant knew or should have known was false, and (3) that the plaintiff reasonably relied on the misrepresentation, and (4) suffered pecuniary harm as a result." Nazami v. Patrons Mutual Ins. Co., 280 Conn. 619, 626, 910 A.2d 209 (2006).
Based on the court's findings that the plaintiffs have proven intentional misrepresentation, the court further finds that the plaintiffs have proven negligent misrepresentation by a preponderance of the evidence. More specifically, the plaintiffs proved that the defendants made misrepresentations of fact that the defendants knew or should have known were false, and the plaintiffs further proved that under all the circumstances presented, they reasonably relied on the misrepresentations to their financial detriment.
Among the allegations in support of their tort claims is the plaintiffs' claim that the defendants stated that upon the execution of the Distributorship Agreement, RAC would share with the plaintiff 1400 sale leads located in the New Jersey territory. The plaintiffs allege that the defendants made false, factual representations concerning the quality of these leads. These leads had been characterized by the defendants as being "hot leads," when in fact the leads were aged and none of the contacts had been pre-qualified. Many of the leads actually involved "cold calls" and were compiled from mailing lists purchased from organizations.
This issue presents a close question. After considering the evidence as a whole, the court finds that the plaintiffs have not proven by clear and convincing evidence that the defendants' statements about these sale leads were of such a nature that they constitute fraudulent misrepresentations. The court does find, however, that the plaintiffs have proven by a preponderance of the evidence that RAC committed negligent misrepresentations in its statements about these sale leads. Specifically, RAC made representations of fact concerning the quality of these sale leads when it should have known under all the circumstances that these representations were false and misleading. The plaintiffs reasonably relied on these representations in the execution and performance of the Distribution Agreement because the plaintiffs were falsely led to believe that the list of sale leads would provide a lucrative, quality source for product sales. "One who, in the course of his business, profession or employment . . . supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information." D'Ulisse-Cupo v. Bd. of Directors of Notre Dame High School, 202 Conn. 206, 217-18, 520 A.2d 217 (1987).
In their post-trial memorandum, the defendants refer to the comparative negligence statute, General Statutes § 52-572h. See Defendants' Post-trial Memorandum, p. 23. The plaintiffs object to the defendants' assertion of this defense because contributory negligence must be pleaded affirmatively as a special defense, and the defendants did not do so. See Practice Book §§ 10-50, 10-53. The court agrees with the plaintiffs and sustains their objection because this defense was not alleged in the pleadings or addressed by the parties as part of the evidence.
III CUTPA
In the last count of the complaint, the plaintiffs allege that the defendants violated CUTPA. The purposes of CUTPA and the standards or criteria utilized to determine whether conduct violates CUTPA are well established and will not be repeated here. See Willow Springs Condominium Assn., Inc. v. Seventh BRT Development Corp., 245 Conn. 1, 42-44, 717 A.2d 77 (1998). CUTPA provides a private cause of action to "[a]ny person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a method, act or practice prohibited by section 42-110b . . ." General Statutes § 42-110g(a). General Statutes § 42-110b(a) provides that "[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." CUTPA is remedial in nature and is to be liberally construed consistent with its legislative design. Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480, 492, 656 A.2d 1009 (1995). For violating CUTPA, a defendant may be held liable for actual damages, punitive damages, costs and attorneys fees. General Statutes § 42-110g.
The standard necessary to prove a CUTPA violation is less than that required to prove fraud because CUTPA does not require proof of an intent to deceive. See Normand Josef Enterprises, Inc. v. Connecticut National Bank, 230 Conn. 486, 522-23, 646 A.2d 1289 (1994). Thus, it would be difficult to conceive of a case in which fraud is found to have been committed in a business transaction involving trade or commerce and a CUTPA claim would not be sustained. This case does not present that rare situation in which fraud is found and CUTPA is inapplicable. On the basis of the court's findings that the defendants engaged in fraud and misrepresentations as alleged in counts five, six and seven of the plaintiffs' complaint, the court also finds that the defendants violated CUTPA.
The defendants argue that CUTPA is inapplicable to this case because the plaintiffs' residency is in New Jersey and their injuries occurred there. The defendants' specific contention is that the plaintiffs must sustain an ascertainable loss in Connecticut in order to trigger an actionable CUTPA claim. The defendants do not cite any persuasive or controlling authority to support this contention, and the argument is squarely at odds with the statutory language. CUTPA prohibits "unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110b(a). Trade or commerce is defined as "the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state." (Emphasis added.) General Statutes § 42-110a(4). Thus, according to this statutory language, CUTPA applies to unfair trade practices occurring in this state and authorizes a private right of action to persons injured by this conduct. There is no dispute that the plaintiffs allege injury caused by unfair trade practices committed by the defendants in Connecticut.
Morris next argues that the CUTPA claims asserted against him individually must fail. He insists that his conduct was committed in his capacity as a member or principal of RAC, and therefore, his actions do not involve trade or commerce. Morris apparently relies on this court's recently published decision in Metcoff v. Lebovics, 51 Conn.Sup. 68, 84-90 (2009), to support this argument. The court finds Metcoff distinguishable and rejects Morris' argument.
In the Defendants' Post-trial Memorandum, defense counsel uses extensive, verbatim quotes from the decision in Metcoff v. Lebovics, supra, 51 Conn.Sup. 68, but very curiously fails to cite the case itself or use any quotation marks in order to identify or attribute the cited material.
The holding in Metcoff is narrow and must be viewed in the context of the facts presented in that case. In Metcoff, the plaintiffs argued that CUTPA applied to the defendants' conduct because their primary business, trade or commerce involved "performing the functions of a director and/or officer" of the defendant corporation. Id., 85-86. The plaintiffs reasoned that trade or commerce under CUPTA was implicated because the claims of the complaint concerned the defendant corporation's "relationship with its creditors, and in particular, [the corporation's] ability to pay [the] plaintiffs." Id., 87. The plaintiffs in Metcoff did not allege that the individual defendants personally engaged in any conduct against them directly. Id., 88-89. Consequently, based on these claims and the allegations of the complaint, the court's decision in Metcoff was confined to considering the applicability of CUTPA to decisions made by the defendants in their capacities as officers or directors of a corporation directing the corporation to take or not to take certain actions regarding the corporation's contract with the plaintiffs. The case did not involve tortious actions personally committed by the defendants against the plaintiffs as part of their own business activities or affairs. It was in this context that the court held that the defendants could not be held personally liable under CUTPA because their actions involved corporate acts concerning the corporation's contract with the plaintiffs and did not involve personal acts of these officers or directors sufficient to implicate trade or commerce within the meaning of CUTPA. The court emphasized that although the status of the defendant is "relevant in determining whether his actions implicate trade or commerce, [this] factor [is] not controlling — the controlling consideration is the defendant's conduct." Id., 88; accord, Fink v. Golenbock, 238 Conn. 183, 214, 680 A.2d 1243 (1994); see also Larsen Chelsey Realty Co. v. Larsen, supra, 232 Conn. 490-99.
As compared to the facts of Metcoff, the plaintiffs in the present case have alleged, and the court has found, that both Morris and RAC (through Morris and other agents) made fraudulent representations to the plaintiffs. Moreover, the court finds that as compared to the defendants' acts in Metcoff, Morris' conduct implicates trade or commerce under CUTPA because his conduct is more analogous to the defendants' actions in Fink v. Golenbock, supra, 238 Conn. 183, and Larsen Chelsey Realty Co. v. Larsen, supra, 232 Conn. 480, where CUTPA violations were found. The law in Connecticut is well established that a corporate officer cannot use the corporate shield to protect himself from liability for his own tortious conduct, and in light of the broad, remedial purposes of CUTPA, no such protection should be provided under its provisions either. "It is black letter law that an officer of a corporation who commits a tort is personally liable to the victim regardless of whether the corporation itself is liable." Kilduff v. Adams, Inc., 219 Conn. 314, 331-32, 593 A.2d 478 (1991). "Thus, a director or officer who commits the tort or who directs the tortious act done, or participates or operates therein, is liable to third persons injured thereby, even though liability may also attach to the corporation for the tort." 18B Am.Jur.2d 607, Corporations § 1629 (2004). Although the following discussion in Scribner v. O'Brien, Inc., 169 Conn. 389, 404, 363 A.2d 160 (1975), was made in a negligence case, the Supreme Court's reasoning is entirely applicable here:
It is true that the agent is not liable where, acting within the scope of his authority, he contracts with a third party for a known principal . . . It is also true that an officer of a corporation does not incur personal liability for its torts merely because of his official position. Where, however, an agent or officer commits or participates in the commission of a tort, whether or not he acts on behalf of his principal or corporation, he is liable to third persons injured thereby . . .
(Citations omitted.) Id.
IV SPECIAL DEFENSES
The defendants' three remaining special defenses are directed to the plaintiffs' tort and CUTPA claims. The first defense is based on paragraph forty-seven of the Distribution Agreement. This provision provides that the Agreement embodies the entire agreement of the parties and "cancels and supercedes any and all prior or contemporaneous oral or written understandings, negotiations or communications on behalf of such parties." According to the defendants, this contractual provision operates to "destroy all early representations defeating any claims of misrepresentations." Defendants' Post-Trial Memorandum, p. 20. The defendants do not cite any authority to support this proposition. Indeed, this court recently rejected an identical argument in Ridgefield Prof'l Office v. ASML US, Inc., Superior Court, Complex Litigation Docket, Judicial District of Waterbury, Docket No. X06 CV 06 5007184 S (Dec. 8, 2008; Stevens, J.) [ 46 Conn. L. Rptr. 758], relying on the Appellate Court's decision in Martinez v. Zovich, 87 Conn.App. 766, 867 A.2d 149 (2005):
A claim that a seller's intentional, reckless or negligent misrepresentations caused a buyer to enter into a contract for the sale of property is a valid cause of action, even if the contract that the parties entered into constituted the entire agreement between the parties and the contract included a clause disclaiming any representations by the seller as to the condition of the property.
Id., 778; accord Dalton v. Dampf, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 04 0199611 (April 12, 2005; Nadeau, J.) [ 39 Conn. L. Rptr. 81] ("[a] party cannot induce another to contract by [negligent] misrepresentation of a material fact, then shield itself from the consequences with a general disclaimer"). Similarly, the Supreme Court in Warman v. Delaney, 148 Conn. 469, 172 A.2d 188 (1961), explained its position on this issue as follows:
In making such a claim, the defendant overlooks the fact that in this action the plaintiffs are not seeking to add to, subtract from or alter the terms of the written contract itself. They are claiming that they were induced to enter into the contract by misrepresentations of material facts. This action is concerned solely with material misrepresentation in the inducement of the contract.
Id., 474.
The second and third special defenses, also directed to the tort and CUTPA claims, allege that the plaintiffs failed to "mitigate" their damages and "squandered the value of leads" by "substantially discontinuing [their] marketing, selling and distributorship activities within seven months of the execution of the Distributorship Agreement." See generally Vanliner Ins. Co. v. Fay, 98 Conn.App. 125, 145-47, 907 A.2d 1220 (2006). "We have often said in the contracts and torts contexts that the party receiving a damage award has a duty to make reasonable efforts to mitigate damages. What constitutes a reasonable effort under the circumstances of a particular case is a question of fact for the trier. Furthermore, we have concluded that the breaching party bears the burden of proving that the non-breaching party has failed to mitigate damages." (Citation omitted; quotation marks omitted.) Id., 145.
The court agrees with the plaintiffs that there is no legally cognizable defense called "squandering of leads"; this defense will be treated as a "failure to mitigate" claim.
After a review and consideration of the record as a whole, the court finds that the defendants have failed to meet their burden of proving the second and third special defenses by a preponderance of the evidence. Particularly in light of the nature and scope of the fraudulent and negligent representations committed by the defendants going so directly to the heart of the represented quality and profitability of the business opportunity, the court cannot find that the plaintiffs' efforts to make the business work constituted a failure to mitigate as alleged by the defendants. The law requires only that a plaintiff take such actions that are reasonable in order to mitigate damages, and the court cannot find that the plaintiffs' efforts to pursue or promote the business, or their decision to curtail these efforts after discovering the scope of the defendants' false representations, were unreasonable under the circumstances. "What constitutes a reasonable effort under the circumstances of a particular case is a question of fact for the trier." Id.
As Judge Hastie wrote in In re Kellett Aircraft Corp., 186 F.2d 197, 198-99 (3d Cir. 1950): "Where a choice has been required between two reasonable courses, the person whose wrong forced the choice cannot complain that one rather than the other was chosen. [Citing McCormick on Damages, § 35 (1935).] The rule of mitigation of damages may not be invoked by a contract breaker as a basis for the hypercritical examination of the conduct of the injured party, or merely for the purpose of showing that the injured person might have taken steps which seemed wiser or would have been more advantageous to the defaulter. One is not obligated to exalt the interest of the defaulter to his own probable detriment."
In summary, the court finds in favor of the plaintiffs on the counts of the complaint alleging common-law torts and against the defendants on their special defenses to these claims.
SUMMARY
In summary, the court finds in favor of the plaintiffs on all counts of the complaint. Thus, the court must proceed to consider the defendants' special defense under General Statutes § 36b-65(e)(2), which was bifurcated from the present proceedings. The court also must consider the following claims asserted by the plaintiffs that also were bifurcated: attorneys fees under the CBOIA and CUTPA; common-law punitive damages based on the findings of fraud, fraudulent inducement and intentional misrepresentation; and punitive damages and costs under CUTPA. A hearing will be held in order for the parties to be heard on the scheduling of these matters for disposition. The court will defer the determination of compensatory and actual compensatory damages until final adjudication of these remaining claims.
A scheduling hearing shall be held on September 14, 2009, at 11:30 a.m.
So ordered this 6th day of August 2009.