Opinion
No. X05-CV04-4002447S
August 24, 2006
MEMORANDUM OF DECISION
The named-defendant, John S. Karlton ("Karlton"), is a highly successful real estate entrepreneur who conducts his business on a national scale through a series of related and/or interlocking legal entities. He makes his home in Bal Harbor, Florida, although he does have another residence as well as business interests in Connecticut. Karlton relies upon a small, select team of trusted employees to manage all of his related businesses, including financial matters related to them. Based upon the testimony offered in this case, however, it is clear to the court that he takes an interest in all aspects of his businesses, and that, notwithstanding his use of corporate "pickets," all roads lead to Bal Harbor. Karlton did not appear for trial, however, his testimony was offered through a deposition taken on August 23, 2005. (Exhibit B, "Karlton TR.")
The named-plaintiff, James R. Psaki ("Psaki"), holds a degree in business and finance from the University of Texas and an M.B.A. from St. John's University. Psaki has an extensive background in the management and development of commercial properties, and on the strength of that, in November 1998 he was hired by J.S. Karlton Company, Inc. ("Karlton Company"), headquartered in Greenwich, Connecticut, as Executive Vice President and Chief Operating Officer. He also holds a 10% share in Karlton Company. His responsibilities encompassed all of the Karlton Company and affiliated enterprises, including that of Continental Asset Management, Inc. ("Continental"), a corporation also having its principal office in Greenwich, Connecticut. He was paid a salary of $100,000.00 per annum, and, in lieu of additional salary, Karlton gave him as further compensation, a $100,000.00 stake as a limited partner in an entity known as Capital Growth of Jacksonville, Ltd. ("Capital Growth"), a Florida limited partnership also headquartered in Greenwich, Connecticut. His interest therein, which includes both a Class A (10.13%) and a Class B interest (2.67%), amounts to an 8.58% share overall. This arrangement was memorialized in a Limited Partnership Interest Subscription Agreement dated April 19, 1999 (Exhibit #502). The plaintiff received regular updates and distributions consistent with his interest in Capital Growth until the Spring of 2004, when the principal asset of the limited partnership was sold.
J.S. Karlton Company, Inc. is the parent of all of Karlton's affiliated companies and enterprises. This is not to be confused with J.S. Karlton Company of Florida, Inc., an S corporation and a manager/member of Capital Growth of Jacksonville, LLC with a 10% interest therein.
Continental Asset Management, Inc. is a Delaware corporation that was formed to manage all of John S. Karlton's assets, including those held by Capital Growth of Jacksonville, Ltd., specifically the Bell South tower, and it was already in existence at the time of the Bell South tower purchase. Under a contract with Capital Growth (Exhibit U), it receives a management fee of 3% of gross receipts. Karlton is the sole owner, Chairman, and Director. (Exhibit #501.)
Capital Growth of Jacksonville, Ltd. is a limited partnership in which Capital Growth of Jacksonville, LLC ("CG"), a Florida limited liability company was a general partner and John S. Karlton and James R. Psaki were the only limited partners at the time of formation. Later in 1999, Syd Silverman and other limited partners, sometimes referred to as the "Silverman group," were added. At that time, John S. Karlton was also a member of the limited liability company. In 2001 Karlton bought out the Silverman group (Exhibit H), which, at the time of the Bell South tower sale left him, his son Steve, and Psaki as the remaining limited partners. (TR. 56-61.)
The parties have repeatedly referred to Psaki's combined share of Capital Growth (both as a Class A and Class B limited partner) as 8.58%. However, multiplying his respective percentage interests by the respective percentage interests of each class as a whole and combining the two, results in 8.5367%. In his testimony, Lipkins attributed the variance to a slight change when the West Bay entities were created at the time of the refinance and Karlton and Psaki assigned their partnership interests to it. Psaki's agreed-upon overall share is 8.58%. (TR. 3/16/06, pp. 14-15.)
Capital Growth was formed on April 19, 1999, for the purpose of acquiring the Bell South tower in Jacksonville, Florida. The real estate is a large, thirty-story office building/parking complex in the heart of the city. The purchase price of approximately $67,000,000.00 was financed by means of a first and second mortgage. Under the terms of the Agreement, the general partner of Capital Growth was Capital Growth of Jacksonville, LLC. ("CG"), which was entitled to a 1% share of Capital Growth. The Class A limited partners are entitled to share in a 79% interest, and the Class B limited partners are entitled to share in a 20% interest. Psaki played a key role in the consummation of the transaction, including the negotiation of the Letter of Intent to purchase, financing, and leasing. He left his employment with Karlton Company in March 2000, but he retained his interest in Capital Growth. He told the court that, from that point on, he was not involved in the day to day operations of the partnership. The mortgages were later refinanced, and he told the court that he was asked to sign legal papers in July 2002, in connection with it.
The problems giving rise to the instant lawsuit occurred five years after the purchase when the Bell South tower, which had been listed for sale in the Fall of 2003 at the direction of Karlton, was ultimately sold in May 2004. The selling price for the building, approximately $90,900,000.00, should have resulted in smiles all around, however, relations quickly turned sour. To begin with, the secondary lender demanded, what all agreed was exorbitant ("tantamount to a shakedown"), an assumption fee of $4,000,000.00, later reduced to $975,000.00 after negotiations (Exhibit #531), in order to transfer the financing to the new buyer. Psaki was asked to contribute approximately $400,000.00, or roughly half, which was proportionally well in excess of his total 8.58% partnership share. The evidence demonstrated that the figure constituting Psaki's contribution came directly from Karlton, and, in fact, the latter indicated that he would let the entire sale fall apart unless Psaki went along (Exhibit #566). Psaki testified that he was told that "too much was at stake," and, "don't play brinkmanship with John [Karlton]." Reluctantly, after some discussion, Psaki agreed. The sale closed on May 21, 2004, and things went downhill from that point.
On or about June 1, 2004, following the closing of the Bell South tower, Psaki received the initial notice of his proposed distribution (Exhibit #532) in the amount of $858,965.57 based upon his interest as both a Class A and Class B limited partner of Capital Growth. This sum was less than he expected under the terms of his Partnership Agreement, and he asked for and received a copy of the closing statement (Exhibit #533) from Alan Cosby ("Cosby") on June 3, 2004, including a listing of escrowed funds. When he raised several issues about the calculations, further adjustments were made, resulting in an even smaller share for him — $525,475.80 to be precise. Continued back and forth between Psaki and Stephen Lipkins ("Lipkins") and/or Cosby resulted in further revised internal calculations within the Karlton organization, but no payments to Psaki. At issue, among other things, were the proposed deduction of a "disposition fee" and an allocation of unbilled past expenses attributable to Continental on behalf of the partners, as well as certain other adjustments. To date, no payment has been made, however, the defendant asserts that sufficient monies are being held in a separate account so as to satisfy any judgment in Psaki's favor. Karlton and all other interested parties, except Psaki, have received their respective shares outright or by way of settlement.
See Exhibit F ($945,267) and Exhibit G ($1,187,916.05).
The evidence disclosed that during the pendency of the action, without notice to the plaintiff, Karlton withdrew $300,000.00 from the account being held to satisfy any judgment of this court in favor of Psaki, and the net monies were placed in a new account at Suntrust Bank under the name of Capital Growth of Jacksonville II, LLC. The balance as of April 30, 2006, was $2,427,737.68. (Exhibit Q.)
The plaintiff instituted the present action to determine the amount of and to recover his unpaid share. Compounding the problem is the fact that it was not until November 2005, during the pendency of the lawsuit that Psaki received a 2004 Form K-1 detailing the transaction, which was mailed to the wrong address, and which reported in excess of $2,000,000.00 in gains attributable to his share of the Bell South tower sale. He contends that this untimely disclosure has resulted in additional personal federal and state tax liabilities, including principal, interest, and penalties, estimated by Psaki to be in excess of $500,000.00. The court found Psaki to be a credible witness.
At trial, the court heard from Stephen Lipkins, Executive Vice President and Chief Financial Officer of Continental Asset Management, Inc. He has been employed there for twelve years, and he described Karlton as a "big picture guy." However, after listening to Lipkins' testimony, it became apparent to the court, that Karlton took a more active interest in corporate affairs, in particular with regard to monetary decisions. For the most part, the court found Lipkins to be a credible witness, albeit one who was somewhat defensive, and who came across as very protective of Karlton and his various enterprises.
The court also heard from Alan Cosby, who had been employed by Continental from 1996 through 2001, most recently as Senior Vice President. After he left his employ, Cosby remained a consultant to Continental and J.S. Karlton until January or February 2006. While working for Continental, he was involved in real estate acquisitions including the Bell South purchase, and he testified that Psaki was "ultimately in charge," of that transaction. Cosby was also involved with the sale of the Bell South tower to El Ad, as well as the negotiations regarding the assumption fee. He was the one who first broached the request to Psaki to contribute $400,000.00 toward the assumption fee, which he testified was at the express direction of Karlton. He also admitted that the overall assumption fee demanded by the secondary lender was exorbitant. As to the change in the calculation of Psaki's proposed distribution, by way of explanation, he testified that, "in the beginning he did not pay attention to the partnership agreement as much as he should." He also told the court that Karlton, "knows where every penny is."
The court heard from John S. Karlton by way of his deposition taken on August 23, 2005, the transcript of which was admitted as a full exhibit (Exhibit B, "Karlton TR."). In response to a question from plaintiff's attorney, Karlton admitted that he had a fiduciary duty to his fellow limited partner, James Psaki. (Karlton TR. 39-40 and 132.) When asked why he had not paid him anything, he responded, "I don't know what to pay him." Pressed if there was any amount that Psaki was "definitely entitled to," the witness responded, "We never considered it frankly. I mean we just never considered it." (TR. 63) Later, when he was asked whether or not he and Cosby and Lipkins felt that it would be necessary to consult Psaki prior to the initial fax in June 2004 containing the proposed distribution, his response was candid: "We should have. We should have . . . Well, I mean it would have been the ethical thing to do. I don't deny that." (Karlton TR. 88-90) The evidence clearly demonstrates that on two separate occasions, the defendants proposed the payment to Psaki of $858,965.57 and $525,475.80 respectively, which the court finds to be admissions of liability for at least part of the plaintiff's claim, yet no payment was made. In fact, this court (Rogers, J.) entered a partial summary judgment (#128) in the amount of $525,475.80. The court finds that actions of the defendants in this regard to be seriously lacking in good faith toward Psaki.
Of additional significance is the colloquy between Karlton and plaintiff's attorney concerning Psaki's ultimate contribution to the assumption fee demanded by Northstar Bank ("Northstar"). (Karlton TR. 105-123.) According to the testimony of Karlton, the initial demand by Northstar was approximately $4,000,000.00, of which it was decided that Psaki should pay $400,000.00, or roughly 10%, which is more in line with his 8.58% overall interest as a limited partner. Eventually, the lender agreed to a substantial reduction to $975,000.00, of which the buyer would pick up approximately $60,000.00 of this fee, leaving a balance due at closing from Capital Growth of $915,000. After several discussions with Cosby, Psaki agreed to pay $400,000.00. Despite the reduction of the assumption fee, Psaki did not benefit from a proportional reduction in his share. When pressed by counsel for a reason that no adjustment was made to Psaki's share, all Karlton could come up with was, "But he's already signed an agreement. So I'm not — listen, he's already signed the agreement and that was the agreement." (Karlton TR. 114, 120, and 123.) The evidence clearly supports a finding that the actions of the defendants, in particular Karlton, were not taken in good faith toward Psaki.
At the heart of the case lies the dispute as to the meaning of portions of the Limited Partnership Agreement and whether or not it was properly and fairly implemented, and whether or not CG and Karlton breached their fiduciary duty toward Psaki, their partner. On the one hand, the court has been asked to decide whether or not the defendants Capital Growth, CG, and Karlton have fulfilled their obligations under Article 4.1(a) of the Partnership Agreement (Exhibit A) to, among other things, make a distribution to Psaki of his share of the "Net Sales Proceeds . . . as soon as reasonably practicable following the Partnership's receipt thereof." In addition, the court has been asked, in connection with the calculation of Psaki's share, to decide whether or not, inter alia, an adjustment should be made for a "distribution fee" to CG in connection with the sale of the Bell South tower, as well as for unitemized and unbilled overhead expenses accumulated by CG during the five years of ownership of said building.
The starting point for the calculation of the distribution to Psaki is amount of the net proceeds from the sale of the Bell South tower, which all the parties have agreed were $18,320,970.74. Likewise, as to the initial proposed distribution, they have agreed that a deduction in the amount of $3,700.00.00, entitled a "return of capital" [to Karlton], should not have been applied, but that a closing adjustment in the amount of $1,448,866.47 in favor of CSX, a Bell South tenant, could be taken. At one point, the defendant claimed a "hold back for reconciliation" of the closing costs, however, according to the testimony, the adjustments have long since taken place. At the time of trial, it was agreed that a post-closing adjustment was made in favor of the partnership in the amount of $305,594.57. (Exhibit # 568A.) Thus the net proceeds from the closing, taking into account the CSX credit, and the post-closing adjustment, were $17,177,698.84. In addition, it was agreed that Psaki is entitled to the following credits: 1) $34,897.97 as and for condemnation proceeds from the parking lot; 2) $30,000.00 for a shortfall incurred in 2002, and 3) $49,052.00 in unpaid income distributions for April and May 2004.
As indicated above, the $975,000.00 deduction for the Northstar assumption fee was reduced to approximately $915,000.00 due to a $60,000.00 contribution by the purchaser. Nevertheless, plaintiff contests any liability for his share under all the circumstances. Also in dispute are a payment to West Flagler Partners in the amount of $502,500.00, and a claim that Karlton received a preferred return on what is referred to by the plaintiff as "phantom capital" composed of a $700,000.00 letter of credit and $303,451.00 in "due diligence" expenses claimed by Karlton. In addition, the defendants seek a deduction for a "disposition fee" equivalent to 1% of the gross selling price of the Bell South tower ($90,900,000.00) in the amount of $909,000.00 to be paid to CG, the General partner, and $2,017,149 as and for an allocation of expenses incurred by Continental on behalf of the limited partners from 1999 through the closing in 2004.
The plaintiff contests the efficacy of the payment of $502,500.00 to an entity known as West Flagler Partners, Ltd. ("West Flagler"), in which Karlton's two sons Frederick and Steve have a 100% interest. In his deposition, Karlton testified that he received some advice from West Flagler in the form of a "general discussion" prior to the purchase of the Bell South tower. There was no backup and no written report, only a letter and an unitemized invoice for a "consulting fee" dated April 20, 1999 (Exhibit # 509). Lipkins corroborated Karlton's testimony in this regard, indicating that the latter had told him that his son, "had done marketing and analysis of the Florida market." He also offered the fact that at the closing for the purchase of the Bell South tower, counsel for the lender requested backup in the form of a letter and an invoice. (TR. 3/17/06, pp. 37-40.) Lipkins also admitted that certain Limited partners, known as the "Silverman group," had questioned the propriety of the payment. (Karlton TR. 84-87.) However, on the other hand, there was ample evidence before the court that Psaki was in full charge of the Bell South project and the court can infer from that fact that he was aware of this payment, both as to the source and the recipient, and that he did not make an issue of it at the time of the purchase of the building. The same can be said for the claim for the "due diligence" expenses. For the reasons set forth above, the court finds that due to his involvement in the Bell South project, Psaki was also aware of or should have been aware of Karlton's claims as to his "due diligence" expenses during that period, Psaki was provided with financial reports on a regular basis up to a time shortly before the closing of title on the Bell South sale, and that he has, therefore waived any claim for a proportional credit based upon these two issues.
In a similar vein, the plaintiff charges that Karlton received a 10% preferred capital return in excess of what he was actually entitled to, and as a result, the plaintiff is entitled to a cash adjustment in his favor. At the heart of this charge is the undisputed fact that Karlton substituted a $700,000.00 letter of credit for a portion of his initial investment in Capital Growth at the time of a refinance with GE Capital Corporation in April 2001. Under the terms of a self-serving Memorandum of Understanding (Exhibit #512) dated April 24, 2001, which Karlton signed individually, as the general partner of Capital Growth, general partner of Capital Growth of Jacksonville, LLC, and as attorney in fact for the limited partners of the latter, he purported to "clarify an ambiguity" in the original Partnership Agreement dated April 19, 1999, as amended May 5, 1999. Interestingly, paragraph 2 of the document states that: "In the event the Letter of Credit expires without being drawn upon or is released without qualification, Karlton agrees that the amount of capital specified on Schedule B to the Partnership Agreement shall be reduced in a like amount and his percentage Interest as a Class B limited partner adjusted to reflect such reduction." No evidence was presented to the court that the instrument was ever drawn upon or released without qualification prior to the sale of the Bell South tower, and, at the time of trial it had expired. (TR. 3/17/06, pp. 41-42.) Presumably, Karlton had full use of the funds from the day that he substituted the letter of credit and the evidence would support this finding.
Under cross examination, Lipkins was asked about Exhibit K entitled "Capital Growth of Jacksonville, Ltd. Partners Capital Accounts — 12/31/99" prepared by John Skeen, the Chief Financial Officer of Karlton's businesses. The first page clearly shows an item entitled "LESS: Cash Withdrawn (L/C sub." in the amount of $700,000.00 and a corresponding reduction in John Karlton's capital investment to $1,021,696.79. The second page of the exhibit is more revealing. According to the testimony of Lipkins (TR. 3/17/06, pp. 42-44.) this "Worst Case Scenario" was prepared by Norman Levine, Karlton's CPA. Not only does it start with the assumption that Karlton's invested capital in Capital Growth is $1,021,696.79, it also contemplates one or more possible challenges to his capital account, including his claim for a credit for his due diligence ($303,451.00), and the West Flagler payment ($502,500.00). Should those challenges have been actively pursued and upheld, the evidence shows that they, together with the substitution of the letter of credit ($700,000.00), would result in an overpayment to Karlton of his 10% preferred return in the amount of $115,000.00. The cumulative effect would be to reduce his capital account to $100,745.79. (Exhibit K.)
This also includes a credit in the amount of $303,451.00 for Karlton's "due diligence," in other words, his "sweat equity" in the Bell South project. The evidence supports a finding that Karlton's initial investment was in excess of $1,700,000.00. In addition, Exhibit K also has an entry entitled "LESS: Cash Partnership Reduct'n" in the amount of $37,254.21, implying that Karlton withdrew additional cash from the partnership.
However, the issue is not that simple. All of the limited partners, including Karlton, except Psaki, settled their differences ("Silverman Group") or received their distribution (Steve Karlton), so any contemplated challenges became moot until later raised by Psaki in this action. (Exhibit H.) The court must turn to the Partnership Agreement, in particular ¶ 3.1.1 entitled "Capital Contributions by All Partners" which provides: "Each partner shall make cash Capital Contributions in an aggregate amount equal to that Partner's Capital Commitment." Capital Contributions are defined as those made "pursuant to Article III," and a Capital Commitment is defined as "the amount set forth opposite its name in the books and records of the Partnership." These provisions, taken together, clearly and unambiguously contemplate that only cash contributions and not those "in kind" were acceptable. However, it is just as clear to this court that this provision was "observed in the breach" right from the start. A prime example is the contribution made by Karlton on behalf of Psaki himself. The evidence is clear that Karlton treated all of his many entities just like different pockets in the same pair of pants. If he wanted cash for whatever reason, he withdrew it from the most convenient pocket. A case in point is the SunTrust account, where it is likely that until Lipkins stopped him, he would have continued to withdraw funds from the account set aside specifically for the payment of any judgment in this case. The substitution of the $700,000.00 letter of credit was another example.
The court has not lost sight of the fact that there were sophisticated businessmen on all sides, and that Psaki was, or should have been well aware of the way Karlton conducted his business. It should have been clear that Karlton was using largely unitemized "due diligence" expenses as part of his capital contribution. The same can be said with regard to the contribution of $502,500.00 to the West Flagler bill, which was, more likely than not, a method of transferring a large sum of cash to his two sons. Psaki was instrumental in setting up the deal and was willing to partake in the extreme good fortune that came his way. He should not be heard to cry foul at this late stage. The failure to assert a right or make a timely objection to a course of action is considered a waiver. Abrogast v. Bryan, 393 So.2d 606, 608-09 (Fla.App. 4 Dist. 1981).
The defendants assert the right of Capital Growth of Jacksonville, LLC. ("CG"), as General Partner, to deduct from the net proceeds of the Bell South sale the sum of $2,017,149.40, by way of reimbursement, as an allocation of overhead expenses generated by Continental Asset Management ("Continental") for the years 1999 through 2004 at the request of for services rendered on behalf of the partners in Capital Growth of Jacksonville, Ltd. The defendants distinguish these expenses from those overhead expenses for related to maintaining the office ("bricks and mortar"). They point to Article 5.6.1 of the Partnership Agreement for authority to do so. Psaki argues that Continental was already well compensated for its efforts by contract, amounting to 3% of Capital Growth's annual receipts, or in dollars, approximately $400,000.00 per annum. When asked on direct examination why these expenses were not allocated annually, Lipkins equivocated, telling the court that it, "if it had been in the monthly reports it would have reduced the distributions to the partners . . ." (TR. 3/16/06, p. 52.) Lipkins further testified that they kept no time sheets and had no "ability to allocate the hours," so he and Cosby had to resort to rough percentages based upon the time spent by Continental on the project in comparison with time spent on other projects. (TR. 3/16/06, pp. 55-56.) Karlton himself testified that the expenses were "arbitrary" and that they had, "no way of doing an accurate determination other than to estimate the time applicable and the various costs applicable to this particular property." (Karlton TR. 88-89.)
Accordingly, in the absence of time records or other contemporaneous records of expenses, the lack of any timely or periodic billing for such expenses, and the fact that Continental charges (i.e., the benchmark) were based upon a flat percentage and not time spent, the court is not satisfied that the methodology adopted by the defendants is a reliable indicator of the time spent by Continental to, among other things, prepare periodic reports and to otherwise keep the partners informed with respect to their interests, and, therefore, said charges should be disallowed as a deduction.
Furthermore, this court finds that the position taken by the defendants, in particular their reliance solely upon ¶ 5.6.1, is based upon a misreading of that paragraph and of the Partnership Agreement as a whole. For one thing, 5.6.1 provides that, "the Partnership shall promptly reimburse the General Partner for such Partnership Expenses." This clearly contemplates a more contemporaneous payment, that is, one made closer to the time when the expense was incurred, and certainly not years later. Further support for this position is found in the definitions of "Cash Flow" which is tied to the fiscal year, and "Net Cash Flow" which is defined as, "an amount equal to Cash Flow reduced by Partnership Expenses." The latter term is defined in ¶ 5.6. In contrast, "Net Sales Proceeds" is defined as, "the net proceeds from the sale or other disposition of Partnership assets by the Partnership, after deduction for (I) any expenses incurred with respect to such sale or other disposition, and (ii) reserves which the General Partner may deem reasonably necessary for the discharge of the obligations and liabilities of the Partnership in connection with such sale or other disposition." (Emphasis added.) Perhaps it was wishful thinking on their part, but there is no credible evidence that the expenses which the defendants propose to deduct from the proceeds of the Bell South sale, were incurred in connection with that sale, or had been set aside as a reserve. Taken as a whole, the terms of the Partnership Agreement are clear and unambiguous — The Partnership Expenses claimed are, by the terms of the Partnership Agreement, to be used as offsets against income and not against capital.
The true picture emerged upon cross examination. What the evidence demonstrates is the fact that the idea for an allocation of expenses came after the closing of the Bell South tower and after the initial proposed distribution was rejected by Psaki. The timing was never the result of an affirmative business decision to defer the expense in order to maximize the income distributions to the partners. In fact, Lipkins testified that after Psaki questioned the offer, he and Cosby "read the partnership agreement" because they "felt Jim was being arbitrary." (TR. 3/16/06, pp. 75-76.) The duo then reviewed their findings with Karlton indicating that, "we have a right to recover expenses and we're going to compute and see what that looks like." Lipkins quoted Karlton: "Go ahead. If he won't take the $869,000 then go ahead and follow the limited partnership to the letter of the way it's written." (TR. 3/16/06, pp. 76-77.) The next day, during the continuation of his cross examination, Lipkins admitted that Karlton was upset when Psaki rejected the initial offer. (TR. 3/17/06, pp. 35-36.) Lipkins further testified that to his knowledge, he was unaware of any other Karlton partnership where the expenses were treated in this fashion. (TR. 3/17/06, 95.)
The evidence supports a finding that the actions of the defendants were done to punish the plaintiff, and that the proposed deductions were not taken in connection with any other distribution or settlement. It is clear that the only person who suffers a significant financial loss is Psaki. Due to the interlocking nature of all of Karlton's enterprises, a personal expense or one charged to one of his businesses is likely to be treated as income by another one, and at the very least, have a neutral result. That is not the case with Psaki. This is a breach of the duty of good faith and fair dealing inherent in every contract masquerading as a business decision. For the reasons set forth above, it should, therefore be disallowed.
Psaki also questions the claim by CG as General Partner for a "distribution fee" in the amount of $909,000.00 which it claimed was authorized by Article 5.1.1(j)(ii) of the Partnership Agreement. (Exhibit #535.) According to the testimony of Lipkins, the charge is a customary one. However, for the reasons articulated in the preceding paragraph regarding delayed deduction for expenses, this, too, is an even clearer breach of their common-law and statutory duty of good faith and fair dealing toward Psaki. For that reason, the court finds that it should be disallowed.
On July 14, 2005, during the pendency of the matter, this court (Rogers, J.) granted Psaki's motion for a partial summary judgment (#109) and entered judgment in the amount of $525,475.80 on the Fifth Count (Breach of Contract) against Capital Growth of Jacksonville Ltd. and Capital Growth of Jacksonville, LLC. By way of a Judgment File (#128) dated July 27, 2005, the court excepted West Bay Investors, LLC. That decision was appealed, and the Appellate Court dismissed the appeal as not ripe. Psaki v. Karlton, 97 Conn.App. 64 (2006). Later, on December 29, 2005, Psaki made an offer of judgment (# 132) in the amount of $1,450,000.00. This was not accepted by the defendants.
West Bay Investors, Inc. is a corporation in which John S. Karlton is the president and majority shareholder. It is the manager and a member of West Bay Investors, LLC, a Delaware limited liability company. Psaki also has a 8.58% interest in the West Bay Investors, LLC by virtue of an assignment of his Class A and Class B interests in Capital Growth of Jacksonville, Ltd. (Exhibit #504). These entities, along with Pearl Jacksonville, Inc. and Pearl Jacksonville, LLC, at the request of the lender to form "bankruptcy remote" entities, and they have no significant bearing on the underlying Partnership Agreement.
The plaintiff's Complaint is set forth in ten counts, claiming statutory theft (General Statutes § 52-564), conversion, breach of fiduciary duties, breach of contract, and CUTPA. He also seeks to pierce the corporate veil as to several affiliated entities in order to hold John S. Karlton personally liable, as well as an accounting and a writ of mandamus ordering disclosure of certain records. As part of its relief sought, the plaintiff is looking for interest. The Complaint has been amended twice. Prior to trial the defendants filed a Motion for Summary Judgment as to all ten counts of the Complaint. After hearing, the court granted the motion as to the Seventh Count (CUTPA), but denied the motion as to First through Sixth Counts. In addition, the court agreed to reserve judgment on the counts seeking a writ of mandamus (Eighth, Ninth, and Tenth).
The case was tried to the court over the course of four days. At the request of the parties, the evidence was opened, and a further hearing was held on May 22, 2006. The parties also agreed that, under the terms of the Limited Partnership Agreement, any questions of interpretation of the agreement or the rights and duties of the parties would be determined in accordance with Florida law. The case remained open for further filings until July 5, 2006.
FINDINGS
1. Defendant John Karlton is an individual who is a resident of Bal Harbor, Florida. He is the owner of several real estate investment entities, including the defendant entities and others not involved in this litigation.
2. Defendant Capital Growth of Jacksonville, Ltd. ("Capital Growth") is a limited partnership, with a principal place of business in Greenwich, Connecticut.
3. For approximately fourteen months commencing in early 1999, James Psaki was Executive Vice President and Chief Operating Officer of all of John Karlton's entities, including defendant Continental Asset Management, Inc. ("Continental"). Although he was compensated by Continental, Psaki managed all of the entities in which Karlton had an interest. All employees and consultants of Karlton's businesses reported to him and he was closely involved with the acquisition of Bell South by Capital Growth, the building which is at issue in this case.
4. Psaki was compensated with an annual cash salary of $100,000.00.
5. As an additional part of his compensation, Psaki was allocated an interest in Capital Growth in the amount of $100,000.00 and became a limited partner, owning 10.13 percent of the Class A interest and 2.67 percent of the Class B interest, for a total of 8.58 percent interest in Capital Growth as a whole.
6. Defendant Capital Growth of Jacksonville, LLC ("CG") is a Florida limited liability company that served as the general partner of Capital Growth, owning a one percent interest. Psaki's interest in CG is through his stock ownership in J.S. Karlton Company of Florida, Inc.
7. J.S. Karlton Company of Florida, Inc. ("Karlton Co."), a Florida corporation, was a member of CG. Psaki holds a 10 percent interest and Karlton owns a 90 percent interest in this entity.
8. Capital Growth purchased, with financing, a commercial office building located in Jacksonville, Florida, known as the Bell South tower in April 1999 for $67 million.
9. Psaki signed Capital Growth's "Agreement of Limited Partnership," dated April 19, 1999 ("Partnership Agreement"), and Karlton also signed the Partnership Agreement both in his capacity as a member of the General partner and individually as a limited partner. 10. After he left his employment with J.S. Karlton, Psaki had no further management role with Capital Growth or its related entities, and he became a passive investor and played no role in the later refinancing and sale of the building.
11. That until approximately April 2004, Psaki received monthly reports showing the cash flow for the Bell South tower, as well as annual financial reports and tax returns from CG.
12. That West Bay Investors, LLC ("West Bay") served as the borrower for the secondary debt for the 2002 refinancing, and that Psaki assigned his interests in Capital Growth of Jacksonville, Ltd. to West Bay and holds an 8.58 percent interest therein.
13. The sale of the Bell South tower and the distribution of the net sales proceeds therefrom are governed by the Partnership Agreement. ¶ 4.1.
14. That, by its terms, the Partnership Agreement gives the General Partner the power to, "sell all or any part of the Partnership's assets whether for cash or securities and on such reasonable terms as the General Partner shall determine to be appropriate." ¶ 5.1.1(a).
15. In early 2004, Capital Growth undertook efforts to sell the Bell South tower.
16. The buyer — the El Ad Group — agreed to purchase the property, but wanted to assume the existing primary and secondary mortgages.
17. That in order to complete the transaction, the mezzanine or secondary lender (North Star) required payment of an assumption fee to allow the El Ad Group to assume the existing mortgage; that North Star initially demanded a significant fee of several million dollars; and that after negotiations the fee was reduced.
18. That North Star and Capital Growth agreed to a $975,000.00 assumption fee; and that of the total fee, $915,000.00 was payable by Capital Growth as seller.
19. That the Partnership Agreement expressly allowed CG as General Partner to sell the assets of the partnership upon terms it deemed reasonable; that all parties agreed that the original request by the secondary lender for an assumption fee in the approximate amount of $4,000,000.00 was unreasonable; that through negotiation the amount was reduced to $975,000.00 (of which the new buyer agreed to pay $60,000.00) and that pressure was brought to bear upon Psaki to pay $400,000.00 from his share of the net proceeds; and that sum amounted to a disproportionate share of the expense.
20. Cosby met with Psaki to discuss North Star's demand for this assumption fee. He explained that Karlton sought a contribution toward this fee from Psaki and indicated that without his contribution, the sale would not occur.
21. That in the absence of any consideration, Psaki agreed to pay $400,000.00 of this fee.
22. That an assumption fee of $915,000.00 was paid at closing by Capital Growth; that sum was deducted at closing and used to arrive at the calculation of net proceeds prior to distribution; that the partners are in a fiduciary relationship and they owe a common-law and statutory duty of good faith and fair dealing toward each other; that Psaki's agreement to pay $400,000.00 was not entirely voluntary and free from undue pressure; that by attempting to impose a disproportionate obligation upon Psaki to pay $400,000.00 toward the assumption fee, Karlton, Capital Growth, and CG breached that duty of good faith and fair dealing toward him; and that in any event, Psaki's fair share of the expense should have been in direct proportion to his 8.58% share of the net proceeds; that based upon all the facts and circumstances, a fair contribution by Psaki to the assignment fee would be $77,721.93 ($915,000.00 less $9,150.00 x .0858); and that since that would be in proportion to Psaki's overall share, there is no need to adjust Psaki's distribution in this regard.
23. The building was sold on May 21, 2004 for approximately $90.9 million. After adjustments made at closing, the proceeds of the sale for Capital Growth totaled $18,320,970.74.
24. That the Bell South property constituted substantially all of the assets of the Partnership within the meaning of the Partnership Agreement.
25. That the Partnership Agreement provides, inter alia, that the "Net Sales Proceeds shall be distributed as soon as practicable following the Partnership's receipt thereof," upon the sale of partnership assets such as the BellSouth tower in proportion to each partner's interest. ¶¶ 4.1, 4.3.
26. From the sales proceeds, Karlton made a payment in the amount of $1,448,866.47 to CSX, a tenant in the Bell South tower, due as a result of earlier lease negotiations, which the parties agree was a proper deduction.
27. That Capital Growth retained a portion of the proceeds from the sale in order to reconcile any debts or obligations of the Partnership after the date of the closing; that at the time of the proposals to Psaki, this deduction in the amount of $500,000, was noted as a "Holdback for Reconciliation;" that at initially the time of trial, the evidence shows that the partnership was entitled to a credit in the amount of $161,361.00. (Exhibit #568); and that later at trial, the parties agreed that the actual amount of post-closing expenses was a positive adjustment $305,594.57 (Exhibit #568A) in favor of Capital Growth and should be added to the closing proceeds from the Bell South tower.
28. That the net proceeds from the sale of the Bell South tower, after adjustments are $17,177,698.84; and that Psaki was entitled to his share as of May 21, 2004.
29. That on or about June 1, 2004, Capital Growth, acting through Alan Cosby, sent to Psaki, without any prior consultation with him, a calculation of a proposed distribution to him in the amount of $858,965.57. (Exhibit #532.)
31. That at the same time the proposal was sent to Psaki, the same formula was used to calculate Karlton's share of the proceeds; and that a calculation was also given to him reflecting the proposed distribution.
32. That Psaki rejected the initial proposed distribution, based upon his clear understanding that no deduction for a return of the capital contributions, described as a "return of equity" was authorized by the Partnership Agreement; that his position was determined to be correct; that a "return of equity" had not been deducted in the settlement of Karlton and his other partners (Exhibit H); that on or about July 12, 2004, Capital Growth later sent a distribution proposal to Psaki, reflecting a revised distribution of $525,475.80. (Exhibit # 535) 53; and that Psaki again objected to this distribution, and instead, requested a distribution in the amount of $1,105,217.00.
33. That the defendants have failed to distribute to Psaki, a Limited Partner, his share of the Net Sales Proceeds from the Bell South tower sale, despite receipt thereof, and are, therefore in breach of the terms of the Partnership Agreement.
34. That the evidence supports a finding that Karlton was angry with Psaki for rejecting the first proposed distribution and authorized Lipkins and Cosby to strictly apply (i.e., selectively enforce) the terms of the partnership Agreement in retaliation for the rejection.
35. That on or about July 12, 2004, in its second proposal to Psaki, Capital Growth adjusted Psaki's distribution to reflect the 1999 withholding taxes that would be payable on the $100,000 capital contribution made by Karlton's companies on Psaki's behalf which would have substantially decreased Psaki's partnership interest; that the tax obligation was Psaki's; and that the defendants agreed not to make the deduction in calculating Psaki's share.
36. That on or about July 12, 2004, in its second proposal to Psaki, Capital Growth also deducted a "disposition fee" in the amount of $909,000.00 (1% of sales price) which it claims was authorized by ¶ 5.1.1(j)(ii) of the Partnership Agreement; and that said fee was neither invoiced to nor paid by Capital Growth and is, in fact, not authorized by the terms of the Partnership Agreement (¶¶ 5.5.1 and 5.6); and that the attempt by Capital Growth, CG, and Karlton to claim said fee amounted to a breach of their duty to act with good faith and fair dealing inherent in the Partnership Agreement.
37. The defendants claim that the Partnership Agreement, ¶ 5.6, authorizes CG as the General Partner to seek reimbursement from Capital Growth for its "rent and general office overhead" in the provision titled "Allocation of Expenses." In ¶ 5.1.1, and that it also authorizes CG as the General Partner to employ consultants, attorneys or other persons in connection with the "Management and Administration" of the Partnership.
38. The Partnership Agreement authorizes the General Partner to be compensated for any "Partnership Expenses" pursuant to ¶ 5.6.1(b). These expenses specifically include "the General Partner's rent and general office overhead," for which "the Partnership shall promptly reimburse the General Partner for such Partnership Expenses."
39. That on or about July 12, 2004, in its second proposal to Psaki, Capital Growth proposed to deduct the expenses incurred by the Partnership over the course of its ownership of the Bell South tower, referred to as the "allocation of expenses;" that this deduction totaled $2,017,149.40 and covered the five-year ownership period; that the General Partner did not maintain time records or other evidence of these claimed expenses; and that the claimed expenses were not invoiced at the time they were incurred.
40. That Continental Asset Management served as the property manager for the building, handling all administrative tasks such as collection of rent, administration of leases and operations of the building, and that for these property management functions, it was compensated at the rate of three percent (3%) of the annual rent of the Bell South tower pursuant to a written agreement (Exhibit U).
41. That as the General Partner, CG was also responsible for managing the building from an investment standpoint; that during the course of the ownership of the Bell South tower, it was not compensated for these activities; that no time records were maintained of these activities; that no invoices were ever sent to Capital Growth; that the methodology employed by the defendants to calculate same was unreliable; that said expenses were not charged against the distributive share of any other limited partner; that under the terms of the Partnership Agreement, such charges are to be offset against income; and that said expenses were claimed in bad faith and as a retaliation against Psaki for his refusal to accept the initial offer of his proposed distributive share.
42. That the various legal entities involved in this lawsuit are, for all intents and purposes, wholly owned or controlled by Karlton; that the deduction for said expenses was not applied in any calculation regarding settlement with the Silverman Group; that the deduction for such expenses was based upon estimates and not upon actual expense records; that said expenses were not invoiced to Capital Growth or the partners; that the sole purpose of the using such expenses was to reduce the share paid to Psaki; and that any reduction in Psaki's share would ultimately redound to the benefit of Karlton or one of his entities. 43. That the actions of Capital 1 Growth, CG, and Karlton in claiming the "disposition fee," a deduction of 25% for estimated taxes on Psaki's contribution, and the five years of "allocated expenses" were in breach of the covenant of good faith and fair dealing inherent in the Partnership Agreement.
44. That the parties have agreed that Psaki is entitled to certain monies, including: (1) condemnation proceeds of $34,897.97; (2) 2002 shortfall of $30,000.00; and (3) income for April and May 2004 of $49,052.00.
45. That Capital Growth designated an interest-bearing bank account with a portion of the net sales proceeds to cover the distribution to Psaki when the proper amount is decided by this court; that during the litigation, Karlton removed $300,000.00 from said account for his own use; and that he later opened a new account which, at time of trial contained $2,427,737.68.
46. The payment of $502,500.00 to West Flagler Partners at the time that the Bell South tower was acquired, as documented by an invoice sent to Capital Growth, and is reflected on the April 1999 "Sources and Uses" statement. (Exhibit #506.)
47. That Psaki was in charge of the Bell South purchase and was familiar with the financial details in connection therewith; and that there is sufficient evidence to support a finding that at the time of that transaction Psaki acquiesced in said payments by Karlton and his claimed capital contributions, including the $303,451.00 in "due diligence" expenses.
48. That the evidence supports a finding that neither Karlton nor Psaki fully funded their respective Capital Commitments to Capital Growth with cash contributions as called for in ¶ 3.3.1 of the Partnership Agreement.
49. That under the terms of the Partnership Agreement, CG as the General Partner was obligated to send an annual report, including financial statements, to the partners within 120 days after the end of the fiscal year (¶ 12.1.3), and a Form K-1 and other tax information within 90 days after the end of the fiscal year (¶ 12.2).
50. In August 2005, the 2004 partnership tax return and accompanying K-1 was sent to Psaki by Steve Lipkins at the address Capital Growth had on file as well as the address listed for Psaki in the telephone directory, and that said address was incorrect.
51. Despite Psaki's move in May or June 2004, he did not notify anyone of his address.
50. That Psaki owes interest and penalties on his 2004 state and federal income tax returns due to the additional income disclosed on the Form K-1.
52. That Capital Growth is no longer a valid legal entity, its certificate to transact business was revoked by the Florida Secretary of the State due to its failure to file an annual report.
53. That the return date for the case was December 14, 2004; that on December 29, 2005, within eighteen months from the return date, the plaintiff made an offer of compromise in the amount of $1,450,000.00; that the judgment in favor of the plaintiff exceeds said offer; and that the plaintiff is entitled to simple interest on said award at the rate of 8% per annum commencing December 14, 2004.
54. The Partnership Agreement contains a choice of law provision dictating that it is to be governed by Florida law as to "the validity of the Agreement, the construction of its terms and interpretation of the rights and duties of the Partners;" and that there was no fraud or undue influence underlying the choice of law.
DISCUSSION CHOICE OF LAW:
In general, where the parties to a contract have chosen the law of a particular state to govern their dealings, that choice is honored by the court of the forum state. This basic principal is articulated in the § 187(1) Restatement (Second) Conflict of Laws. The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue. When presented with a similar issue, in the case of Elgar v. Elgar, 238 Conn. 839 (1996), the Connecticut Supreme Court resolved it by upholding the parties' choice of law. At issue was the disposition of assets at the death of the spouse. There, the case was heard by an attorney trial referee, who made certain findings, inter alia, that the wife, also unrepresented at the signing, would have signed in any case, and that " there was no evidence of misrepresentation, fraud or undue influence underlying the parties' choice of New York law." (Emphasis added.) That conclusion having been reached, the court was in a position to interpret the contract and the circumstances of its execution under New York law.
In the instant case, ¶ 17.2 of the Partnership Agreement provides in relevant part that "It is the intention of the parties that the internal laws of Florida and, in particular, the provisions of the Act shall govern the validity of this Agreement, the construction of its terms and interpretation of the rights and duties of the Partners . . ." The court finds that there was no misrepresentation, fraud, or undue influence in connection with the parties' choice of law, and, therefore, the court will look to Florida law regarding a construction of any specific term of the Partnership Agreement and an interpretation of any specific right or duty of a partner thereto arising from the provisions of the agreement, in particular the Fourth and Fifth Counts of the Complaint. Accordingly, the choice of law applies to the substantive law of Florida as to the provisions of the Partnership Agreement, and for all other general law and procedural issues, the court intends to apply Connecticut law. Zenon v. R.E. Yeagher Management Corp., 57 Conn.App. 316, 322-23 (2000).
STATUTORY THEFT (FIRST COUNT):
Under General Statutes § 52-564, statutory theft constitutes the same act as larceny under General Statutes § 53a-199. Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 44 (2000). Larceny occurs when a person wrongfully takes, obtains or withholds property from the owner with the intent to deprive that owner of the property. In order to prevail, a person alleging statutory theft must prove intent. Suarez-Negrete v. Trotta, 47 Conn.App. 517, 520-21 (1998). Moreover, where a party can prove the theft by clear and convincing evidence, he is entitled to treble damages pursuant to General Statues § 52-564. Schaffer v. Lindy, 8 Conn.App. 96, 104-05 (1986). An essential element of statutory theft is intent. Suarez-Negrette v. Trotta, supra, 521. Under the facts and circumstances of this case, the court finds that the plaintiff has failed to meet his burden of proof by clear and convincing evidence that the defendants, who came into possession of the property lawfully as the result of the sale of a partnership asset, have withheld from the plaintiff his share of the proceeds from said sale with the intent to permanently deprive him of it.
CONVERSION (SECOND COUNT):
Conversion occurs when there is "an unauthorized assumption and exercise of the right to ownership over goods belonging to another to the exclusion of the owner's rights." Suerrez-Negrete v. Trotta, 47 Conn.App. at 520-21. An essential element of conversion that differs from statutory theft is the requirement that the property owner suffer harm. Id., 521. In the instant case, the evidence does not support a cause of action for conversion, in that under the terms of the Partnership Agreement, the General Partner, CG, had control of the management and disposition of the partnership assets, as well as the power to distribute the net proceeds from the sale of assets to the respective partners. The plaintiff has never had possession of the property. The parties have been unable to reach an agreement as to the amount of Psaki's share, and the defendant has set aside in an interest-bearing account, what it believes are sufficient funds to satisfy a judgment of this court. Although the plaintiff can prove harm, he has failed to demonstrate that the defendant intended to assume ownership of the property to the exclusion of the plaintiff. To the contrary, the defendant acknowledges that the plaintiff is, in fact, entitled to the ultimate use and possession of whatever the court ultimately determined Psaki's share to be. As an aside, this position is in accord with the Supreme Court of Florida which has held that, ". . . any wrongful exercise or assumption of authority over another's goods, depriving him of the possession, permanently or for an indefinite time, is a conversion." Star Fruit Company v. Eagle Lake Growers, Inc., 33 So.2d 858 (1948). (Emphasis added).
While the court has applied Connecticut law to this count, it is interesting to note the similarity with Florida law which defines conversion as, "an unauthorized act which deprives another of his property." Senfeld v. Bank of Nova Scotia Trust, 450 So.2d 1157, 1160-61 (Fla.App. 3 Dist. 1984).
BREACH OF CONTRACT (FIFTH COUNT):
The courts of both Connecticut and Florida apply identical legal principles in an action for breach of contract and the construction and interpretation of contracts. "The elements of an action for breach of contract are: (1) the existence of a contract, (2) a breach of the contract and (3) damages resulting from the breach." Rollins, Inc. v. Butland, 2D05-368 (Fla.App. 2 Dist. 2006); Rosato v. Mascardo, 82 Conn.App. 396, 411 (2004). "A contract is ordinarily to be construed as a matter of law by giving effect to the intent of the parties as expressed by the terms of the agreement . . . Words and phrases should be given their natural meaning or a meaning most commonly understood in relation to the subject matter and circumstances." [Internal citations omitted.] In Re Guardianship of Sapp, 868 So.2d 687, 691 (Fla.App. 2 Dist. 2004); Sturman v. Socha, 191 Conn. 1, 10 (1983); Leonard Concrete Pipe Co. v. C.W. Blakeslee Sons, Inc., 178 Conn. 594, 598 (1979); Ginsberg v. Mascia, 149 Conn. 502, 506 (1962). "When the terms of a contract are clear and unambiguous, the contracting parties are bound by those terms." Morgan v. Herff Jones, Inc, 883 So.2d 309, 313 (Fla.App. 2 Dist. 2004). "When faced with an unambiguous provision, the trial court cannot give it any meaning beyond that expressed by the language utilized and must construe the provision in accord with the ordinary meaning of the language." Paoli v. Natherson Company, 750 So.2d 46, 48 (Fla.App. 2 Dist. 1999). Connecticut courts hold likewise. "Where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms. A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity and words do not become ambiguous simply because lawyers or laymen contend for different meanings." Downs v. National Casualty Co., 146 Conn. 490, 494 (1959); Collins v. Sears, Roebuck Co., 164 Conn. 369, 374 (1973); see Reese v. First Connecticut Small Business Investment Co., 182 Conn. 326, 327 (1980); Barnard v. Barnard, 214 Conn. 99, 110 (1990). "[W]hen the plain meaning and intent of the language is clear, a clause . . . cannot be enlarged by construction." Gager v. Gager Peterson, LLP, 76 Conn.App. 552, 556-57 (2003); Hudson United Bank v. Cinnamon Ridge, 81 Conn.App. 557, 580-81 (2004). In order to determine the measure of damages for a breach of contract, "the object of the parties ought to be attained as nearly as possible." Southern New England Contracting Co. v. State of Connecticut, 165 Conn. 644, 661 (1974).
However, where the terms of a contract are, "ambiguous so that the intent of the parties cannot be understood from an inspection of the instruments" the court may resort to extrinsic or parol evidence. American Quick Sign v. Reinhardt, 899 So.2d 461, 467 (Fla.App. 5 Dist. 2005). Under such circumstances, "a contract is to be construed as a whole and all relevant provisions will be considered together." Lar-Rob Bus Corporation v. Fairfield, 170 Conn. 397, 407 (1976); see Blatt v. Star Paper Co., CT Page 15526 160 Conn. 193, 200 (1970); 17 Am.Jur.2d, Contracts 258. In ascertaining intent, "we consider not only the language used in the contract but also the circumstances surrounding the making of the contract, the motives of the parties and the purposes which they sought to accomplish." Connecticut Co. v. Division 425, 147 Conn. 608, 616 (1960); Marcus v. Marcus, 175 Conn. 138, 141 (1978). "The intention of the parties to a contract is to be determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction. The question is not what intention existed in the minds of the parties but what intention is expressed in the language used." Ives v. Willimantic, 121 Conn. 408, 411 (1936); Leonard Concrete Pipe Co. v. C.W. Blakeslee Sons, Inc., supra; Powel v. Burke, 178 Conn. 384, 387 (1979).
It hardly needs saying, but the Agreement of Limited Partnership dated April 19, 1999, is a valid contract, a fact that is undisputed by any party to this action. The principal parties thereto are Capital Growth of Jacksonville, LLC as the General Partner and John S. Karlton and James R. Psaki as Limited Partners. ¶ 4.1(a) of the Partnership Agreement requires that "Net Sales Proceeds" as defined in Article I, "shall be distributed as soon as reasonably practicable following the Partnership's receipt thereof." Likewise, "Net Sales Proceeds" is defined as, 'The net proceeds from the sale or other disposition of Partnership assets by the partnership, after deduction for (I) any expenses incurred with respect to such sale or other disposition . . ." Furthermore, the court finds that with the exception of a hold back for adjustments post-closing, substantially all of the net proceeds from the sale of the Bell South tower had been received by the Partnership at the time of the closing on May 21, 2004 and that distributions were subsequently made to all partners but Psaki. Accordingly, after a review of the Partnership Agreement, the court finds that the meaning of ¶ 4.1(a) is clear and unambiguous, and that the question of the timing of the distribution is one of fact, that a period of more than twenty-eight months is not "as soon as reasonably practicable" within the meaning of the Partnership Agreement, and that under all of the facts and circumstances the General Partner, Capital Growth of Jacksonville, LLC, along with Capital Growth of Jacksonville, Ltd. and John S. Karlton are in breach of the Partnership Agreement in that each bears responsibility for the failure to make a timely distribution to Psaki. In addition, the plaintiff claims that the defendants breached the partnership Agreement in that they failed to provide him with a timely copy of the 2004 Federal Income Tax return for Capital Growth, along with Form K-1 outlining any income attributable to his share. Specifically, ¶ 12.2 entitled "Tax Information" provides: "Within ninety (90) days after the end of each Fiscal Year, the General Partner will cause to be delivered to each Person who was a Partner at any time during such Fiscal Year a Form K-1 and such other information, if any, with respect to the partnership as may be necessary for the preparation of such Partner's income tax returns, including a statement showing such Partner's shares of income, gain or loss and credits for such Fiscal Year for income tax purposes." Furthermore, ¶ 5.3.3 of the Partnership Agreement requires the General Partner, "to prepare or cause to be prepared, and shall file on or before the due date (or any extension thereof), any tax returns required to be filed by the Partnership."
The record reflects that Steve Karlton had a very small percentage interest as a Class B Limited Partner of Capital Growth. He is not part of the present lawsuit and the court presumes that he received his distributive share. Likewise, the "Silverman Group" settled with Karlton prior to the institution of the present action.
The evidence is undisputed that, under an extension, the defendant CG had prepared a partnership tax return Form 1065 for Capital Growth of Jacksonville, Ltd. dated August 19, 2005 (Exhibit # 560), and that it also had prepared a similar return for West Bay Investors, LLC. (including a K-1 addressed to Psaki) dated August 26. (Exhibit #561.) It is also undisputed that the K-1 and copies of the returns were mailed to Psaki at his old address, 77 Maple Avenue, Greenwich. He never received the mailing. As a result, Psaki did not receive a copy until November 10, 2005, when the documents were faxed to his attorney by counsel for the defendants. The K-1 showed a net § 1231 gain of $2,513,726. By that time, Psaki had already filed his tax returns. As a result he anticipates interest and penalties amounting to $109,341.00.
See footnote #8.
The defendants have breached the Partnership Agreement in that they have failed to provide the plaintiff with the tax documents in a timely manner, and they cannot shift that burden entirely to the plaintiff. Psaki, himself has a responsibility to file his tax returns in a timely manner, and given the fact that the parties were in the middle of a lawsuit, it would not be unreasonable to suggest that he should have made reasonable inquiries. After considering the testimony of Lipkins, the court concludes that more likely than not the breach was caused by carelessness and not malice. Under all circumstances, Psaki owes the underlying amount of tax regardless of the outcome. However, more problematic is his professed inability to pay it at this time due to lack of sufficient funds. In addition, as the court has observed, he is an experienced and sophisticated businessman, and given the magnitude of the deal, he knew or should have known that he would have a sizeable tax bite taken, both state and federal. Out of his control are the interest and penalties. Accordingly, under all the fact and circumstances, the court finds it fair and equitable to award him the sum of $65,605.00 as damages for this breach.
As an element of contract law, both Florida and Connecticut recognize the concept of "good faith and fair dealing." A recent decision has held that "Florida contract law recognizes the implied covenant of good faith and fair dealing in every contract. This covenant is intended to protect the reasonable expectations of the contracting parties in light of their express agreement." Southern Internet v. Pritula, 856 So.2d 1125, 1127 (Fla.App. 4 Dist. 2003); Sepe v. City of Safety Harbor, 761 So.2d 1182, 1184 (Fla.App. 2 Dist. 2000); Gaudio v. Griffin Health Services Corp., 249 Conn. 523, 564 (1999) (Callahan, C.J., dissenting). The concept has been expressly incorporated into the limited partnership law in Florida. Specifically, the Florida Revised Uniform Limited Partnership Act of 2005 § 620.1408 ("FRULPA") sets forth the duties of the general partner to the partnership and the other partners, including the following: "(4) A general partner shall discharge the duties to the partnership and the other partners under this act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing." The rule is not invoked to overrule an express provision of an agreement, nor is it invoked where there has been no "allegation that an express term of the contract has been breached." Southern Internet v. Pritula, supra, 1127; Avatar Dev. Corp. v. De Pani Constr., 834 So.2d 873, 876 (Fla.App. 4 Dist. 2002).
The same language is found in the Florida Revised Uniform Partnership Act § 620.8404. Section (4) reads: "A partner shall discharge the duties to the partnership and the other partners under this act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing." (Emphasis added.)
"Bad faith means more than mere negligence; it involves a dishonest purposes . . . Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive." (Citation omitted; internal quotation marks omitted.) Hudson United Bank v. Cinnamon Ridge, 81 Conn.App. 557, 576-77 (2004); Cadle Co. v. Ginsberg, 70 Conn.App. 748, 768, cert. denied, 262 Conn. 905 (2002). "The concept of good faith and fair dealing is [e]ssentially . . . a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended. The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy." [Internal quotation marks omitted] Verrastro v. Middlesex Insurance Co., 207 Conn. 179, 190 (1988).
Under the facts and circumstances of this case, based upon the testimony and evidence, the court finds that the defendants Capital Growth of Jacksonville, Ltd., Capital Growth of Jacksonville, LLC, and John S. Karlton have breached the covenant of good faith and fair dealing toward Psaki in one or more respects, including (1) in that they failed to distribute to the plaintiff his share of the net proceeds from the sale of a substantial partnership asset (i.e., the Bell South tower) "as soon as reasonably practicable" following receipt, (2) in that they have failed to deal fairly and ethically with Psaki in negotiating his contribution to the assignment fee to the secondary lender with respect to the sale of the Bell South tower, (3) in that they have wilfully and with malice treated him in a punitive and discriminatory fashion regarding the calculation of his distributive share, and (4) in that they negligently failed to deliver to Psaki the 2004 K-1 despite their obligation to do so pursuant to the Partnership Agreement, and that the plaintiff has been damaged thereby.
The court specifically finds, inter alia, that they were in receipt of the proceeds from the Bell South closing on May 21, 2004, and that they have made distributions to all of the limited partners, save the plaintiff; that they had the means to make a partial distribution to the plaintiff, in particular following the entry of partial summary judgment and they failed to do so; and that in particular, John S. Karlton, who, having a controlling interest in the partnership and related entities, has acted with extreme bad faith toward the plaintiff, in that he arbitrarily and with malice, directed his employees to treat the plaintiff, another limited partner, in a discriminatory fashion in calculating his share of the Northstar assignment fee and the net proceeds from the Bell South sale, contrary to his customary practice in this and other similar ventures, and that he either acquiesced in the decision to or directed his employees to withhold Psaki's distributive share in breach of the Partnership Agreement.
That based upon all the facts and circumstances, the calculation of Psaki's share of the net proceeds is as follows:
The defendants claim additional adjustments in the form of a disposition fee in the amount of $909,000.00 and a claim for five years of unbilled expenses in the amount of $2,017,149.40. For reasons set forth elsewhere in this opinion, the court has disallowed these claims.
The evidence supports a finding that under all the facts and circumstances, it would be inequitable to enforce Psaki's agreement to pay $400,000.00 as and for his share of the assumption fee, that all parties agreed was exorbitant. The court further found that a fee of $975,000.00 had already been deducted at the time of closing and that the purchaser agreed to pay $60,000.00 of that fee leaving a net fee of $915,000.00. Thus, this amount had been used in arriving at the calculation of the net proceeds. Because of the fiduciary relationship involved, and the duty of the partners to deal fairly with each other and in good faith, the court has found that Psaki's fair share of the $905,850.00 ($915,000.00 less $9,150.00 for the 1% interest of CG) would be $77,721.93 or approximately 8.58%.
BREACH OF FIDUCIARY DUTIES (FOURTH COUNT):
The Florida Revised Uniform Limited Partnership Act of 2005 ("FRULPA") sets forth the fiduciary duties of the general partner to the partnership and the other partners in relevant part as follows:
§ 620.1408 General standards of conduct for general partner.
(1) The only fiduciary duties that a general partner has to the limited partnership and the other partners are the duties of loyalty and care under subsections (2) and (3).
(2) A general partner's duty of loyalty to the limited partnership and the other partners is limited to the following: (a) To account to the limited partnership and hold as trustee for it any property, profit or benefit derived by the general partner in the conduct and winding up of the limited partnership's activities or derived from a use by the general partner of limited partnership property, including the appropriation of a limited partnership opportunity. (b) To refrain from dealing with the limited partnership in the conduct or winding up of the limited partnership's activities as or on behalf of a party having an interest adverse to the limited partnership. (c) To refrain from competing with the limited partnership in the conduct of the limited partnership's activities.
(3) A general partner's duty of care to the limited partnership and the other partners in the conduct and winding up of the limited partnership's activities is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Clearly, both Connecticut and Florida recognize that relationship between partners is a fiduciary one. In fact, in his deposition, Karlton admitted that he has a fiduciary duty toward Psaki. "A fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other." Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 38 (2000). The Connecticut Supreme Court has "recognized that general and limited partners are 'bound in a fiduciary relationship' and, as such, must act as trustees and represent the interests of each other." Konover Development Corp. v. Zeller, 228 Conn. 206, 218-19 (1994). Morever, once such a relationship is established, "the burden of proving fair dealing properly shifts to the fiduciary." Id., at 219. Courts should not consider "sophisticated partners in a business venture" to be the same as "lay people who are wholly dependent upon the expertise of a fiduciary." Id., at 222. Upon dissolution of a partnership, it has been held that the partners are entitled to, "a proportionate share of the net profits realized on the completion of projects which were commenced or planned prior to the dissolution of the partnership . . ." Wellington Systems, Inc. v. Redding Group, Inc., 49 Conn.App. 152, 172 (1998). "Once a fiduciary relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary . . . Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of proof of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence." Spector v. Konover, 57 Conn.App. 121, 127 (2000). Put another way, "when the fiduciary has a 'dominant and controlling force or influence' over his principal, or the transaction at issue, the burden shifts to the fiduciary to prove the 'fairness, honesty and integrity in the transaction.'" Cadle Co. v. D'Addario, 268 Conn. 441, 460 (2004). However, where the parties are involved in a "sophisticated business venture," the fiduciary may seek to "justify the fairness of a particular transaction" through the application of the "Zeller standard." In brief, the fiduciary must show "(1) that the fiduciary made a free and frank disclosure of all the relevant information he had, (2) that the consideration was adequate, (3) that the principal had competent and independent advice before completing the transaction, and (4) the relative sophistication and bargaining power among the parties." Konover Development Corp. v. Zeller, 228 Conn. 206, 228 (1994).
In the present case, there is sufficient evidence that the defendants Capital Growth, CG, as the General Partner, and John S. Karlton, as a Limited Partner with a controlling interest in the General Partner, motivated by greed and malice, treated James R. Psaki with what the court can only describe as an appalling lack of good faith, and that their actions have resulted in substantial damage to the plaintiff. Nevertheless, the court finds that the plaintiff has failed to demonstrate that such behavior fits into any or all three of the specific categories of actions constituting a breach of fiduciary duty under § 620.1408 of FRULPA.
ACCOUNTING (THIRD COUNT):
"To support an action of accounting, . . . there must be a fiduciary relationship, or the existence of a mutual and/or complicated accounts, or a need of discovery, or some other special ground of equitable jurisdiction such as fraud." Mankert v. Elmatco Products, Inc., 84 Conn.App. 456, 460 (2004). In a suit between former partners, the Connecticut Supreme Court has held that as a fiduciary, a partner has the duty, "of rendering true accounts and full information about anything which affects the partnership." Konover Development Corp. v. Zeller, 228 Conn. 206, 218-19 (1994).
Under the facts and circumstances of this case, the court declines to enter an order for an accounting, since the plaintiff has had ample discovery during the course of the litigation and has an adequate remedy at law.
MANDAMUS (EIGHTH, NINTH, and TENTH COUNTS):
The Supreme Court recently articulated the standards for a mandamus action in AvalonBay Communities, Inc. v. Sewer Commission of City of Milford, 270 Conn. 409, 416-17 (2004). Characterizing mandamus as "an extraordinary remedy," the Court noted that the writ was only appropriate when the following three circumstances are satisfied:
(1) the law imposes on the party against whom the writ would run a duty the performance of which is mandatory and not discretionary; (2) the party applying for the writ has a clear legal right to have the duty performed; and (3) there is no other specific adequate remedy. Id.
It further highlighted that even when a party satisfies this test, a writ of mandamus is not automatically granted by the court. Id. (citing Miles v. Foley, 253 Conn. 381, 391 (2000)).
Under the facts and circumstances of this case, the court finds that the plaintiff has an adequate remedy at law, and therefore declines to order a writ of mandamus.
CORPORATE VEIL (SIXTH COUNT):
The Connecticut courts have adopted two tests to determine whether it is appropriate to pierce the corporate veil under certain circumstances. The instrumentality rule considers three elements to reach a decision:
(1) control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Morris v. Cee Dee, LLC, 90 Conn.App. 403, 414 (2005).
The second test, known as the identity rule, requires a showing that "there was such a unity of interest and ownership that the independence of the corporation had in effect ceased or had never begun, an adherence to the fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability . . ." Morris v. Cee Dee, LLC, 90 Conn.App. at 414-15. Generally, the identity rule is applicable when multiple entities are involved, but it may be used to hold an individual liable. Klopp v. Thermal-Sash, Inc., 13 Conn.App. 87, 89 n. 3 (1987).
Under the facts and circumstances of this case, the court finds that it is unnecessary to resort to piercing the corporate veil, since the plaintiff's claims can be satisfied without doing so. Klopp v. Thermal-Sash, Inc., supra., 89-90. In particular, as to Capital Growth of Jacksonville, LLC and John S. Karlton, for reasons set forth elsewhere in this opinion, each has both a statutory and a common-law duty of good faith and fair dealing vis a vis their partner, James Psaki.
PREJUDGMENT INTEREST:
Plaintiff herein claims prejudgment interest. General Statutes § 37-3a provides in part:
a) Except as provided in sections 37-3b, 37-3c and 52-192a, interest at the rate of ten percent a year, and no more, may be recovered and allowed in civil actions or arbitration proceedings under chapter 909, including actions to recover money loaned at a greater rate, as damages for the detention of money after it becomes payable. Judgment may be given for the recovery of taxes assessed and paid upon the loan, and the insurance upon the estate mortgaged to secure the loan, whenever the borrower has agreed in writing to pay such taxes or insurance or both. Whenever the maker of any contract is a resident of another state or the mortgage security is located in another state, any obligee or holder of such contract, residing in this state, may lawfully recover any agreed rate of interest or damages on such contract until it is fully performed, not exceeding the legal rate of interest in the state where such contract purports to have been made or such mortgage security is located.
Prejudgment interest is awarded by the court, "to compensate the prevailing party for a delay in obtaining money that rightfully belongs to him . . . The detention of the money must be determined to have been wrongful . . . Its detention can only be wrongful, however, from and after the date on which the court, in its discretion, determines that the money was due and payable." [Internal citations omitted.] Northrop v. Allstate Insurance Company, 247 Conn. 242, 254-55 (1998). "Basically, the question is whether the interests of justice require the allowance of interest as damages for the loss of use of money." Southern New England Contracting, supra, 654. The award of such interest is within the discretion of the court. Noreaster Group, Inc. v. Colossale, 207 Conn. 468, 482 (1988).
Under the facts and circumstances of this case, the court finds that it is equitable and appropriate to award to the plaintiff prejudgment interest at the rate of 10% per annum on the plaintiff's share of the net proceeds from the sale of the Bell South tower from and including May 21, 2004 to and including the date of this Memorandum of Decision.
In addition to prejudgment interest, where, as here, an offer of compromise has been made by the plaintiff, the court must consider whether or not it must also award additional interest. General Statutes ¶ 52-192a provides in relevant part as follows:
(c) After trial the court shall examine the record to determine whether the plaintiff made an offer of compromise which the defendant failed to accept. If the court ascertains from the record that the plaintiff has recovered an amount equal to or greater than the sum certain specified in the plaintiff's offer of compromise, the court shall add to the amount so recovered eight per cent annual interest on said amount. The interest shall be computed from the date the complaint in the civil action was filed with the court if the offer of compromise was filed not later than eighteen months from the filing of such complaint. If such offer was filed later than eighteen months from the date of filing of the complaint, the interest shall be computed from the date the offer of compromise was filed. The court may award reasonable attorneys fees in an amount not to exceed three hundred fifty dollars, and shall render judgment accordingly. This section shall not be interpreted to abrogate the contractual rights of any party concerning the recovery of attorneys fees in accordance with the provisions of any written contract between the parties to the action.
In making a determination as to whether or not such interest must be awarded, the court must take into consideration any prejudgment interest as part of the total damages awarded, in order to see if the, "plaintiff recovered an amount equal to or greater than the sum stated in the plaintiff's offer of judgment except in the event that the trier finds special circumstances of inequity." Flynn v. Kaumeyer, 67 Conn.App. 100, 106 (2001). The court finds no such inequity under all of the facts and circumstances of this case. Moreover, the award of interest pursuant to General Statutes § 52-192a is mandatory, and the clear public policy inherent in the statute is to encourage pretrial resolution of disputes. Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc., 239 Conn. 708, 742-43 (1997).
Accordingly, the court has found the total award of damages to be $2,017,658.24, which exceeds the offer of compromise, and that, that the offer was made within eighteen months from the date of filing the complaint (12/2/04), therefore, the plaintiff is entitled to interest at the rate of 8% from 12/2/04 as and for interest pursuant to General Statutes § 52-192a. The court makes no award of statutory attorneys fees pursuant thereto. CT Page 15537
ORDER
The court having heard the parties and considered the evidence, hereby orders that as to the FIFTH COUNT judgment shall enter in favor of the plaintiff, James R. Psaki, against the defendants Capital Growth of Jacksonville, Ltd., Capital Growth of Jacksonville, LLC, and John S, Karlton, in the sum of $2,017,658.24 (including prejudgment interest), together offer of compromise interest per General Statutes § 52-192a from 12/2/04 at $442.23 per day, together with costs.As to the remaining counts, Judgment may enter for all defendants for the reasons set forth elsewhere herein.
Each party shall be responsible for their own attorneys fees incurred in connection herewith.