Opinion
No. CV 05 4002036 S.
November 8, 2006.
MEMORANDUM OF DECISION RE MOTION TO STRIKE #111 and #113
The plaintiff, Sean P. Sullivan, filed a one-count complaint on April 19, 2006 against the defendant, Control Concepts, Inc., for its failure to pay him the remaining balance owed on a note. The defendant promised to pay the plaintiff $475,000 plus interest and any costs associated with the collection of monies owed. In his complaint, the plaintiff alleges that the defendant owes him $430,009.02, which includes the remaining balance on the principal plus interest accrued as of April 14, 2005, and any costs and attorneys fees related to this action. On June 2, 2005, the defendant filed an answer, special defenses and a six count counterclaim. The defendant alleges conversion (count one), statutory theft pursuant to General Statutes § 52-564 (count two), breach of fiduciary duty (count three), breach of implied duty of loyalty (count four), fraudulent concealment (count five) and unjust enrichment (count six) in its counterclaim. On January 30, 2006, the defendant filed seven revised special defenses including: fraud and misrepresentation in the inducement to enter into a contract (first special defense); estoppel (second special defense); waiver (third special defense); set off (fourth special defense); unclean hands (fifth special defense); payment (sixth special defense) and lack of consideration (seventh special defense).
On February 2, 2006, the plaintiff filed a motion to strike all counts of the counterclaim on the ground that "the causes of action alleged therein cannot properly be pleaded in a counterclaim to the plaintiff's complaint" because they do not relate to the same transaction, the execution of the note. The plaintiff also filed a memorandum of law in support of his motion. The defendant filed a memorandum of law in opposition on February 28, 2006. On March 3, 2006, the plaintiff filed a motion to strike the defendant's revised special defenses on the ground that "they fail to state defenses to the action" and a memorandum of law in support. The defendant filed a memorandum in opposition on March 29, 2006. "[A] counterclaim is a cause of action existing in favor of the defendant against the plaintiff and on which the defendant might have secured affirmative relief had lie sued the plaintiff in a separate action." (Internal quotation marks omitted.) Fairfield Lease Corp. v. Romano's Auto Service, 4 Conn.App. 495, 496, 495 A.2d 286 (1985). "The function of a motion to strike is to test the legal sufficiency of a pleading; it admits all facts well pleaded . . . The role of the trial court [is] to examine the [counterclaim], construed in favor of the [defendant], to determine whether the [pleading party has] stated a legally sufficient cause of action." (Citations omitted; internal quotation marks omitted.) Dodd v. Middlesex Mutual Assurance Co., 242 Conn. 375, 378, 698 A.2d 859 (1997); see also Szczapa v. United Parcel Service, Inc., 56 Conn.App. 325, 328, 743 A.2d 622, cert. denied, 252 Conn. 950, 748 A.2d 299 (2000). "If a motion to strike is directed to the entire [counterclaim], the motion must fail if any of the plaintiff's claims is legally sufficient." (Internal quotation marks omitted.) Zaborowski v. New Milford, Superior Court, judicial district of Litchfield, Docket No. CV 054002868 (March 24, 2006, Pickard, J.) ( 41 Conn. L. Rptr. 80, 81); see also Whelan v. Whelan, 41 Conn.Sup. 519, 520, 588 A.2d 251 (1991); Kovacs v. Kasper, 41 Conn.Sup. 225, 226, 565 A.2d 18 (1989). Likewise, "[a] plaintiff can [move to strike] a special defense . . ." Nowak v. Nowak, 175 Conn. 112, 116, 394 A.2d 716 (1978); see also Connecticut National Bank v. Voog, 233 Conn. 352, 354-55, 659 A.2d 172 (1995).
The court must "take the facts to be those alleged in the [counterclaim and special defenses] . . . and . . . construe [them] in the manner most favorable to sustaining [their] legal sufficiency . . . Thus, [i]f facts provable in the [counterclaim and special defenses] would support a cause of action, the motion to strike must be denied." (Internal quotation marks omitted.) Housing Authority v. Martin, 95 Conn.App. 802, 812, 898 A.2d 245 (2006).
MOTION TO STRIKE #111
In the plaintiff's motion to strike #111, he relies on Practice Book § 10-10 and argues that the defendant's counterclaim is an improper pleading because the causes of action contained therein do not arise from the same transaction as the plaintiff's claim. The defendant counters that the note at issue was actually executed as the plaintiff's reward for assisting and encouraging two former officers of Control Concepts, Patricia A. Morgan and John M. Morgan (former officers), in allegedly improper conduct against the corporation, resulting in damages. Practice Book § 10-10 provides: "In any action for legal or equitable relict any defendant may file counterclaims against any plaintiff . . . provided that each such counterclaim . . . arises out of the transaction or one of the transactions which is the subject of the plaintiff's complaint." In applying Practice Book § 10-10, our appellate courts have established a "transaction test . . . of practicality" in which the trial court must weigh "judicial economy, avoidance of multiplicity of litigation, and avoidance of piecemeal disposition of what is essentially one action" to determine whether a counterclaim survives a motion to strike. (Internal quotation marks omitted.) Morgera v. Chiappardi, 74 Conn.App. 442, 449, 813 A.2d 89 (2003); see also Wallingford v. Glen Valley Associates, Inc., 190 Conn. 158, 161, 459 A.2d 525 (1983).
In the present case, the transaction at issue is the execution of a note, in the amount of $475,000 plus interest, to be paid to the plaintiff in exchange for the plaintiff's shares in the defendant corporation. Count one of the defendant's counterclaim is for conversion. The defendant alleges the following in count one: "As a reward for [the plaintiff's] encouragement and substantial assistance in [the former officers'] conversion of finds from [the defendant] for their own personal use . . . [the plaintiff] was given a premium of $455,855.38 for his 16.5 shares of stock in [the defendant corporation, as approved by the former officers,] which [the plaintiff] sold to the corporation on February 28, 2003 for $475,000." While the plaintiff alleges the execution of a note in his complaint, the defendant alleges that the execution was actually conversion. This court finds that the defendant's allegations of conversion in its counterclaim arises from the same transaction as the plaintiff's cause of action for monies due and owed upon the note at issue. Therefore, the plaintiff's motion to strike the defendant's conversion claim is denied.
Our Supreme Court has "defined conversion as [a]n unauthorized assumption and exercise of the right of ownership over goods belonging to another, to the exclusion of the owner's rights . . . It is some unauthorized act which deprives another of his property permanently or for an indefinite time; some unauthorized assumption and exercise of the powers of the owner to his harm. The essence of the wrong is that the property rights of the plaintiff have been dealt with in a manner adverse to him, inconsistent with his right of dominion and to his harm." (Internal quotation marks omitted.) Macomber v. Travelers Property Casualty Corp., 261 Conn. 620, 649, 804 A.2d 180 (2002).
"If a motion to strike is directed to the entire [counterclaim], the motion must fail if any of the plaintiff's claims is legally sufficient," (Internal quotation marks omitted.) Zaborowski v. New Milford supra, 41 Conn. L. Rptr 81. In the present case, the plaintiff's motion to strike is directed at the entire counterclaim. Since the motion to strike the defendant's counterclaim, sounding in conversion, is denied, the plaintiff's motion to strike the entire counterclaim is denied.
MOTION TO STRIKE #113
The plaintiff moves to strike all of the defendant's revised special defenses on the grounds that they fail to state defenses to the plaintiff's cause of action. In response, the defendant argues that each of its special defenses are sufficiently pleaded and that the plaintiff's motion to strike therefore should be denied. "As a general rule, facts must be pleaded as a special defense when they are consistent with the allegations of the complaint but demonstrate, nonetheless, that the plaintiff has no cause of action . . . The fundamental purpose of a special defense, like other pleadings, is to apprise the court and opposing counsel of the issues to be tried, so that basic issues are not concealed until the trial is underway." (Internal quotation marks omitted.) Coughlin v. Anderson, 270 Conn. 487, 501, 853 A.2d 460 (2004). This court will examine each special defense in turn.
All revised special defenses are herein referred to as special defenses.
Both parties rely on foreclosure cases in their respective memoranda of law. While in general, these arguments are considered by the court, case law and arguments which specifically apply to foreclosure actions will not be addressed. The present case is not a foreclosure action but an action to recover monies due and owed on a note executed in return for shares of stock in the defendant corporation. Therefore, the court will not discuss case law cited by the parties addressing equitable special defenses in foreclosure actions. See Option One Mortgage Corporation v. Crouch, Superior Court, judicial district of New London, Docket No. CV 03 0566887 (March 23, 2004, Martin, J.) ("Historically, defenses to a foreclosure action have been limited to payment discharge, release or satisfaction . . . or, if there had never been a valid lien . . . Where the plaintiff's conduct is inequitable, a court may withhold foreclosure on equitable considerations and principles . . . While courts have recognized equitable defenses in foreclosure actions, they are consistent in holding that they are only proper when they attack the making, validity or enforcement of the lien.")
First Special Defense: Fraud and Misrepresentation
The parties' arguments for this special defense assume that case law in relation to foreclosure actions is applicable here. As stated previously, this court does not agree. Thus, this memorandum of decision does not address these arguments.
The defendant's first special defense alleges fraud and misrepresentation in the inducement to enter into a contract. "Fraud in the inducement to enter a contract is a well established equitable defense . . . Fraud and misrepresentation cannot be easily defined because they can be accomplished in so many different ways. They present, however, issues of fact." (Citations omitted; internal quotation marks omitted.) Barasso v. Rear Still Hill Road, LLC, 81 Conn.App. 798, 806, 842 A.2d 1134 (2004). "[I]t is well settled that the essential elements of fraud are: (1) a false representation was made as a statement of fact; (2) it was untrue and known to be untrue byte 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." (Internal quotation marks omitted.) Ferris v. Faforo, 93 Conn.App. 679, 692, 890 A.2d 602 (2006). "All of these ingredients must be found to exist; and the absence of any one of them is fatal to a recovery." (Internal quotation marks omitted.) Harold Cohn Co. v. Harco International, LLC, 72 Conn.App. 43, 51, 804 A.2d 218, cert. denied, 262 Conn. 903, 810 A.2d 269 (2002).
In the present case, the defendant alleges the following facts in its first special defense. The plaintiff was aware of, gave assistance to and encouraged the former officers in intentionally depriving the defendant corporation of its money and assets totaling more than $700,000. As a reward for his actions, the plaintiff was given a premium of $455,855.38 for his shares of stock, which were sold back to the defendant corporation for $475,000 on February 28, 2003. The defendant was prevented from discovering this misconduct because the former officers had full and complete control over the records and books of the defendant corporation until June 1, 2004. The plaintiff substantially benefitted from this misconduct to the detriment of the defendant corporation. From these allegations, this court finds that the defendant has sufficiently asserted a counterclaim of fraud and misrepresentation in the inducement to enter into a contract to purchase the plaintiff's shares of stock. Therefore, the plaintiff's motion to strike the defendant's fast special defense is denied.
Second Special Defense: Estoppel
See footnote 4 of this memorandum.
The defendant's second special defense is estoppel. "There are two essential elements to an estoppel: the party must do or say something which is intended or calculated to induce another to believe in the existence of certain facts and to act upon that belief; and the other party, influenced thereby, must actually change his position or do something to his injury which he otherwise would not have done. Estoppel rests on the misleading conduct of one party to the prejudice of the other. In the absence of prejudice, estoppel does not exist." (Internal quotation marks omitted.) Lombardo's Ravioli Kitchen, Inc. v. Ryan, 268 Conn. 222, 236, 842 A.2d 1089 (2004).
Here, the defendant incorporates the facts alleged in its first special defense into its second special defense, as stated above. The defendant has alleged that the plaintiff engaged in misleading conduct and that the defendant corporation relied on this conduct when it executed a note in exchange for the plaintiff's shares in the corporation. This court finds that the defendant has alleged facts sufficient to establish the equitable defense of estoppel. The plaintiff" s motion to strike the defendant's second special defense is, therefore, denied.
Third Special Defense: Waiver
See footnote 4 of this memorandum.
The third special defense asserts that the plaintiff waived his right to collect monies due and owed on the note between the plaintiff and the defendant and, thus, the defendant is relieved from paying the note in full. "Waiver is the intentional relinquishment of a known right . . . A waiver occurs, therefore, only if there is both knowledge of the existence of the right and intent to relinquish it . . . [Waiver] involves the idea of assent, and assent is an act of understanding . . . Intention to relinquish [must] appear, but acts and conduct inconsistent with intention [to assert a right] are sufficient." (Internal quotation marks omitted.) Schreck v. Stamford, 72 Conn.App. 497, 500, 805 A.2d 776 (2002).
In the present case, the defendant argues that the court should allow the special defense to stand because the defendant has not benefitted from discovery to determine additional facts surrounding the execution of the note and any subsequent events which occurred. The court does not find this argument persuasive and finds that the defendant has not sustained its burden of proving waiver because it has simply alleged a legal conclusion with no allegations of fact to support its claim. There are no allegations of the "intentional relinquishment of a known fight" in the defendant's third special defense. See id. "A motion to strike admits all facts well pleaded; it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Emphasis in original; internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997). Accordingly, because the defendant has only alleged a legal conclusion, the plaintiff's motion to strike the third special defense of waiver is granted.
Fourth Special Defense: Setoff
The defendant's fourth special defense is for setoff. The plaintiff argues that the defendant's claim of setoff should be stricken because it does not comply with Practice Book § 10-50 and General Statutes § 52-139, because there must be mutual debts between the parties for setoff to apply. The defendant argues in response that it has properly pleaded setoff. Specifically, the defendant argues that its counterclaim against the plaintiff for several causes of action including, inter alia, conversion, theft, fraudulent concealment and unjust enrichment should be offset from any recovery the plaintiff might receive in his collection action.
"In Connecticut, a setoff may be legal or equitable in nature." OCI Mortgage Corp. v. Marchese, 255 Conn. 448, 463, 774 A.2d 940 (2001). "General Statutes § 52-139 and Practice Book § 10-54 furnish our rules for pleading the right of setoff. Setoff is the right to cancel or offset mutual debts or cross demands . . . The concept of setoff allows [parties] that owe each other money to apply their mutual debts against each other, thus avoiding the absurdity of making A pay B when B in fact owes A . . . A set-off is made where the defendant has a debt against the plaintiff arising out of a transaction independent of the contract on which the plaintiff sues, and desires to avail himself of that debt, in the existing suit, either to reduce the plaintiff's recovery, or to defeat it altogether, and, as the case may be, to recover a judgment in his awn favor for a balance . . . Setoff may be employed only when a defendant requests that the court set off a judgment against a debt owed to the defendant by the plaintiff . . . It is the defendant's burden to demonstrate its right of setoff by affirmatively and adequately alleging such a claim in the pleadings." (Citations omitted; emphasis added; internal quotation marks omitted.) Mariculture Products Ltd. v. Certain Underwriters Lloyd's of London, 84 Conn.App. 688, 703-04, 854 A.2d 1100, cert. denied, 272 Conn. 905, 863 A.2d 698 (2004).
In the present case, the defendant incorporates the allegations alleged in its first special defense into its fourth special defense and claims that "[t]he defendant owes the plaintiff nothing, in that the plaintiff is indebted to the defendant by way of an offset or setoff in an amount equal to or greater than any amounts claimed against the defendant." "A condition precedent to the application of the set off statute, General Statutes § 52-139, is that the defendant's claim arises from a debt due from the plaintiff." Lind-Larsen v. Fleet National Bank of Connecticut, 84 Conn.App. 1, 22, 852 A.2d 799, cert. denied, 271 Conn. 940, 861 A.2d 514 (2004). Here, the defendant has not alleged that the plaintiff owes it a debt. This court finds that the defendant has not adequately alleged facts sufficient to meet its burden of establishing its right of setoff. Therefore, the plaintiff's motion to strike the defendant's fourth special defense of setoff is granted.
Fifth Special Defense: Unclean Hands
The defendant's fifth special defense asserts that the plaintiff's claims are barred by the doctrine of unclean hands. The plaintiff argues that the defendant's fifth special defense should be stricken as legally insufficient. The defendant counters that it has alleged facts sufficient to establish that the plaintiff comes to the court with unclean hands and, accordingly, should be barred from recovery.
"Our jurisprudence has recognized that those seeking equitable redress in our courts must come with clean hands. The doctrine of unclean hands expresses the principle that where a plaintiff seeks equitable relief, he must show that his conduct has been fair, equitable and honest as to the particular controversy in issue . . . The party seeking to invoke the clean hands doctrine to bar equitable relief must show that his opponent engaged in wilful misconduct with regard to the matter in litigation . . . The trial court enjoys broad discretion in determining whether the promotion of public policy and the preservation of the courts' integrity dictate that the clean hands doctrine be invoked." (Internal quotation marks omitted.) Emigrant Mortgage Corp. v. D'Agostino, 94 Conn.App. 793, 804, 896 A.2d 814, cert. denied, 278 Conn. 919, A.2d (2006).
Here, the defendant has alleged wilful misconduct on the part of the plaintiff by "diverting [and converting] corporate funds for his own personal purposes . . . stealing funds belonging to the . . . corporation, utilizing corporate assets [and employees] for his own personal use and benefit . . . in an amount in excess of . . . $190,000 . . ." The defendant also alleges that the plaintiff assisted and encouraged the corporation's former officers in various misconduct, similar to his own misconduct. Accordingly, the defendant has alleged facts sufficient to establish that the plaintiff has unclean hands and the plaintiff's motion to strike the defendant's fifth special defense is denied.
Sixth Special Defense: Payment
The defendant's sixth special defense is for payment. In its counterclaim, the defendant alleges that the plaintiff has received payment for his claim and he, therefore, has no cause of action. The plaintiff argues that the defendant has not sufficiently alleged payment of the note because the alleged conduct, which the defendant asserts constitutes payment, occurred several months before the execution of the note. The defendant does not specifically respond to the plaintiff's arguments. Instead, it states that the plaintiff admitted in his complaint that partial payment was made and that this constitutes a judicial admission. Therefore, the defendant argues that the plaintiff's motion to strike the sixth special defense should be denied.
Practice Book § 10-50 provides: "No facts may be proved under either a general or special denial except such as show that the plaintiff's statements of fact are untrue. Facts which are consistent with such statements but show, notwithstanding, that the plaintiff has no cause of action, must be specially alleged. Thus, . . . payment (even though nonpayment is alleged by the plaintiff) . . . must be specially pleaded . . ."
In the present case, the defendant incorporates the allegations in its first special defense into its sixth special defense and adds that "[t]he plaintiff's claims are barred in that the plaintiff has received payment for his claims." Although the defendant argues that its partial payment of the note, as alleged in the plaintiff's complaint, is a judicial admission, "payment must be specially pleaded." Practice Book § 10-50. "The burden of pleading and proving the special defense of payment rests on the defendant." Atlantic National Trust, LLC v. Van Eck, 89 Conn.App. 200, 209, 873 A.2d 179 (2005). Because the defendant has not alleged facts in its special defense to establish payment, the defendant has not met its burden. Accordingly, the plaintiff's motion to strike the defendant's sixth special defense of payment is granted.
Seventh Special Defense: Lack of Consideration CT Page 21294
In the defendant's seventh special defense, it asserts lack of consideration. The plaintiff argues that a lack of consideration is not a valid defense to enforce a negotiable instrument. Specifically, the plaintiff contends that under General Statutes § 42a-3-305, the right of a holder in due course to enforce an obligation of a payor is not subject to a defense for lack of consideration. The defendant does not specifically address the plaintiff's arguments. In response, the defendant argues that for a contract to be enforceable, it must be supported by "valuable consideration." Since there is a lack of consideration here, the defendant concludes that the note is, therefore, unenforceable."To be enforceable, a contract must be supported by valuable consideration . . . The doctrine of consideration is fundamental in the law of contracts, the general rule being that in the absence of consideration an executory promise is unenforceable." (Internal quotation marks omitted.) Connecticut National Bank v. Voog, supra, 233 Conn. 366. "In defining the elements of the rule, [our Appellate Court has] stated that consideration consists of a benefit to the party promising, or a loss or detriment to the party to whom the promise is made . . . An exchange of promises is sufficient consideration to support a contract." (Internal quotation marks omitted.) Keefe v. Norwalk Cove Marina, Inc. 57 Conn.App. 601, 606, 749 A.2d 1219, cert. denied, 254 Conn. 903, 755 A.2d 881 (2000). "[T]he doctrine of consideration does not require or imply an equal exchange between the contracting parties . . . The general rule is that, in the absence of fraud or other unconscionable circumstances, a contract will not be rendered unenforceable at the behest of one of the contracting parties merely because of an inadequacy of consideration." (Internal quotation marks omitted.) Christian v. Gouldin, 72 Conn.App. 14, 23, 804 A.2d 865 (2002).
In the present case, the defendant has alleged fraud or other unconscionable circumstances. Specifically, the defendant alleges that the plaintiff "engaged in a pattern and practice of improper, unlawful and/or illegal activities, including, but not limited to: diverting [and converting] corporate funds for his own personal purposes, stealing funds belonging to the [defendant] corporation [and] utilizing corporate assets [and employees] for his own personal use and benefit, in an amount in excess of . . . $190,000." This court finds that the defendant has made sufficient allegations to support a special defense of lack of consideration. Therefore, the plaintiff's motion to strike the defendant's seventh special defense is denied. In conclusion, the court finds the following:
1. The plaintiff's motion to strike the defendant's counterclaim is denied in its entirety.
2. The plaintiff's motion to strike the defendant's first special defense of fraud and misrepresentation in the inducement to enter a contract is denied.
3. The plaintiff's motion to strike the defendant's second special defense of estoppel is denied.
4. The plaintiff's motion to strike the defendant's third special defense of waiver is granted.
5. The plaintiff's motion to strike the defendant's fourth special defense of setoff is granted.
6. The plaintiff's motion to strike the defendant's fifth special defense of unclean hands is denied.
7. The plaintiff's motion to strike the defendant's sixth special defense of payment is granted.
8. The plaintiff's motion to strike the defendant's seventh special defense for lack of consideration is denied.