Opinion
Nos. CV05 400 76 90 S, CV05 400 76 91 S, CV05 401 28 05 S
May 14, 2008
MEMORANDUM OF DECISION
FACTS
The plaintiff Barry Saunders (Saunders) and the defendant Burton Firtel (Firtel) began a profitable business relationship, and a strong personal friendship, in the mid-1980s.
Adco Medical Supplies, Inc. (Adco), was formed by Burton Firtel, as a Connecticut corporation on or about 1970. Prior to his involvement with the plaintiff, Firtel was the sole owner of Adco, and used the corporation to engage in the sale of pharmaceuticals.
Prior to embarking upon a joint venture with Firtel in the mid-1980s, Saunders was employed as a sales representative for a medical supply company known as General Medical. He had extensive training and sales experience in the medical supply business.
The initial venture involving Firtel and Saunders concerned the purchase and resale of ostomy products. The products were purchased from a New Jersey concern for $15,000, and ultimately generated a profit of approximately $400,000 to Firtel and Saunders.
In 1986, Saunders and Firtel determined to formalize their business relationship, and Saunders became a part of Adco, Saunders obtained a 49% shareholder interest in Adco (499 shares), while Firtel retained a controlling 51% interest in the company he had founded.
In September 1986, Saunders and Firtel executed a document entitled "Operational Agreement Regarding Adco Corporation" (Ex. 5). The document was signed by Burton Firtel as President of Adco, and by Firtel and Saunders, individually.
The agreement provided that Saunders desired to become a stockholder of Adco, and to be "employed by the corporation." (Ex. 5 ¶ 3.)
The operational agreement did not commit either Saunders or Firtel to rigidly perform work on behalf of the corporation. Nor did it prohibit either of the individual signatories from pursuing other business ventures, separate and apart from Adco. Saunders continued to be employed by General Medical until 1987.
Paragraph 8 of Exhibit 5 accentuated the freedom and flexibility enjoyed by both Firtel and Saunders. The paragraph reads, in part:
The parties agree that they shall devote such of their time and efforts to the business of the corporation as shall be reasonably necessary. Saunders acknowledges, understands and agrees, that Firtel may and shall spend considerable time and often for extended periods of time away and apart from the business of the corporation and waives any objections thereto. Each of Firtel and Saunders shall received an equal combination of compensation and fringe benefits as the Board of Directors shall from time to time determine . . .
The closely held nature of the corporation, and the "family" atmosphere surrounding the business dealings, were specifically announced in paragraph 8: "For purposes of this paragraph, "Firtel" and "Saunders" shall also include their respective parents, spouses and children.
Firtel, in addition to being the majority shareholder, was assigned control of the Board of Directors, through the appointment process. The agreement reads:
There shall be a Board of Directors initially consisting of Firtel and Saunders, PROVIDED HOWEVER, the parties agree that Firtel may elect to increase the number of directors to three (3) in which event two (2) of said Directors shall be selected by Firtel, and one (1) of said Director shall be selected by Saunders.
Additional agreements (Ex. 6, 7, 8) were executed subsequent to Exhibit 5, although none altered the ownership interest in Adco held by Saunders or Firtel.
From 1986 through July of 2004, Saunders was in charge of virtually all of Adco's day-to-day operations. Adco was very successful during the years immediately following the agreement (Ex. 5), and both of the principals were well compensated (Ex. NNNN).
When new federal legislation was enacted, concerning the re-importation of pharmaceutical products, the portion of Adco's business which involved pharmaceuticals decreased, and eventually ended. This was the facet of the business in which Firtel enjoyed a particular expertise.
In July of 1992, Adco was presented with an opportunity to assume control of Plastic Fabricators, a division of Starter Corporation (Ex. 62). Plastic Fabricators was a funeral supply business.
While both Saunders and Firtel now claim to have been primarily responsible for securing this business opportunity, both were acquainted with the owner of Plastic Fabricators, David Beckman. All three were members of the Woodbridge Country Club.
The current business of Adco can be attributed, almost exclusively, to the purchase of Plastic Fabricators by the corporation. This has been the case for many years.
During each of the years between 1986 and 2004, Adco paid expenses incurred by both Firtel and Saunders, in addition to their salaries. These expenses benefitted both of the shareholders, and included medical and health expenses, automobile expenses, professional services, and related expenses. During this time, Saunders was in operational control of the corporation, but Firtel had access to all of the books and records of Adco (Ex. 5 ¶ 5(c), (D) (E); Ex. 5. ¶ 6).
Saunders acknowledges becoming somewhat disenchanted concerning the business arrangement after 2000. Adco profits suffered a decline during this period (EX. NNNN).
Perceiving that he was performing most of the work necessary to guarantee a profit for Adco, while dividing compensation and fringe benefits equally with Firtel, Saunders sought a change in the Operational Agreement in March of 2003. He submitted a "proposal," suggesting that he be paid 50% of the income for running the business, and that the next 50% would be equally divided between the shareholders (Ex. 58).
Firtel did not engage in any meaningful discussions concerning the suggested change, because he was apparently satisfied with the status quo. Both Saunders and Firtel engaged in business pursuits outside of Adco in 2003. Saunders engaged in the sale of pharmaceuticals by purchasing goods with his own funds and reselling them, while Firtel spent time and Adco resources soliciting investors on behalf of a concern known as Pro Pharmaceuticals.
Saunders purchased medical supplies during 2003 and 2004 at a cost of $89,377.00 (Ex. FF), and realized a net profit estimated at $100,062.68. (See Ex. 38, 39, 40, 41, 44 for monies received by Saunders).
On May 19, 2004, Saunders formally advised Firtel that operating Adco in accordance with the 1986 Operational Agreement was no longer acceptable. He offered, though his attorney, to submit the dispute to arbitration and indicated an intention to file suit seeking a termination of the business relationship, should an agreement not be forthcoming (Ex. 59).
Two months later, Firtel, acting in his capacity as President of Adco and majority stockholder, responded to the attorney's letter of May 19, 2004 (Ex. 67). Firtel instructed Saunders to turn in all of his keys to the office, as well as any company credit cards.
The July 23, 2004 memo (Ex. 67) said the corporation would continue to pay health insurance premiums for corporate officers "until further notice." Furthermore, all "payment of telephone and cell phone charges, car leases and gas expenses, car insurance subscriptions, and other expenses previously paid by Adco . . ." became the personal obligations of any individual who had been so benefitted.
Saunders did no work for Adco after July of 2004. He received no salary for 2004, and since the July 23, 2004 memo, has not been compensated by Adco either in the form of salary, or most fringe benefits.
Firtel, as President and majority shareholder, assumed operational control of Adco. Saunders has not engaged in any business which has competed with Adco since July of 2004.
The Operational Agreement (Ex. 5), when signed, was an agreement between a corporation and two individuals who liked each other, and were about to embark upon a mutually profitable venture. Flexibility was encouraged, and for purposes of compensation and fringe benefits, which were available "Firtel" and "Saunders" also included their respective parents, spouses and children (Ex. 5, ¶ 8).
In July of 1999, during their era of good feeling, Saunders and Firtel formed Barbur Associates, LLC (Barbur), a limited liability company of which each was a 50% owner.
Barbur owns real estate located at 555 Sherman Avenue, Building D, Hamden, at which site Adco conducts its business. The property is leased to Adco pursuant to an oral month-to-month lease.
Prior to 2004, an annual rent of $18,000 per year was paid from Adco to Barbur. The lease was the equivalent of a "net/net" lease, which obligated Adco to pay taxes, insurance and maintenance to the property (Ex. 53 54).
Subsequent to July of 2004, Firtel reduced the rental payments, without consulting Saunders. Adco paid $12,000 in both 2004 and 2005, and $15,000 in 2006 (Ex. 4, 52 66). Firtel continues to manage Barbur and to maintain the Barbur checkbook.
In the aftermath of the May 19, 2004 (Ex. 59) and July 23, 2004 (Ex. 67) exchanges, any business and/or personal relationship between Saunders and Firtel ended.
These actions, which have been consolidated for trial, were instituted by Barry Saunders, individually and derivatively on behalf of Adco Medical Supplies, Inc., d/b/a Adco Corporation, and Barbur Associates, LLC. A third action is a summary process action, brought against Adco by Barbur, acting through Saunders.
Burton Firtel, his wife Norma Firtel, and Adco Medical Supplies, Inc., have been named as defendants. Counterclaims have also been filed against Saunders.
Where, at one time, Exhibit 5 was loosely administrated and utilized to the mutual benefit of Adco, its shareholders, and their families, the good times which produced the corporate agreement have been replaced by accusations and countercharges. Firtel and Saunders now charge the other with theft, breach of fiduciary duty, self-dealing, larceny, and other allegedly improper and felonious conduct. These allegations are accompanied by cries of outrage.
The action instituted by Barry Saunders, individually, and on behalf of Adco and Barbur, names Burton and Norma Fidel as defendants. The operative pleading (CV05 40076 90S) consists of eighteen counts.
The claims include breach of contract, failure to pay wages as required by statute, tortious interference with contract, breach of fiduciary duty, theft, and conversion.
Saunders has also sued Burton Firtel and Barbur Associates, LLC (CV05 400 7691S). He seeks a judicial dissolution of Barbur Associates, LLC, pursuant to § 34-207 of the General Statutes, and an order winding up the business and affairs of the limited liability company, along with a division of the assets following a sale of the real property.
Section 34-207, C.G.S.-"On application by or for a member, the superior court . . . may order dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement."
There is also a summary process complaint which has been filed, seeking a judgment of immediate possession of the premises at 555 Sherman Avenue, Building D, Hamden.
In the counterclaim, Adco seeks the return of commissions and other business it claims was wrongfully taken by Saunders, recoupment of salaries and benefits paid to Saunders in 2003 prior to his termination, and interest.
THE OPERATIONAL AGREEMENT (EXHIBIT 5), WAS TERMINATED IN 2004 AS TO SAUNDERS' RIGHT TO RECEIVE COMPENSATION AND FRINGE BENEFITS
Subsequent to its execution in 1986, the Operational Agreement regarding Adco Corporation (Ex. 5) provided the parameters for the operation of Adco.
Saunders claims, in his proposed findings of fact, that the agreement terminated in March of 2003, when he indicated his intention to renegotiate the business arrangement (Ex. 58). Therefore, it follows, neither he nor Firtel would have enjoyed rights under the agreement, when Firtel took his unilateral action in July of 2004. This claim is not well taken.
Following Saunders' 2003 communication, Adco continued to operate much as it had in prior years. Both shareholders, and the members of their families, received monies from Adco. Saunders regarded the Operational Agreement as being in effect in May of 2004, when he threatened legal action to terminate the relationship (Ex. 59).
Exhibit 5 speaks of Saunders' desire to "be employed by" Adco, and acknowledges Firtel's absence from the business for extended periods of time. It also expressly sanctions the ability of members of the Firtel and Saunders families to receive payments from Adco.
Pursuant to the agreement between the two shareholders, transparency was assured, in that each had ". . . the right to inspect and examine all bank books, bank accounts, bank statements and canceled checks of the corporation," and ". . . access to said books and records and to all papers, documents and writings belonging to the corporation." (Ex. 5 ¶ 5 (D) ¶ 5(E)).
While Exhibit 5 provides that Saunders and Firtel shall receive ". . . an equal combination of compensation and fringe benefits as the Board of Directors shall from time to time determine," (¶ 8), the agreement also provides.
10. Notwithstanding any other provision hereto to the contrary, the parties may distribute available cash flow of the corporation at any time or times of such other greater or lesser amount or amounts as the Board of Directors shall from time to time designate.
The parties agree, and the evidence reveals, that Saunders exercised day-to-day operational control over Adco until July of 2004. Although able to do so, given his status as President and majority shareholder, Firtel did not seem to question Saunders's business decisions.
An examination of Exhibit 5 supports a finding that Saunders, during the period between 1986 and July 2004, was an employee of Adco, and that the parties contemplated that he would remain employed during the course of the agreement. No covenant not to compete was ever executed by Saunders and/or Firtel, and the testimony at trial revealed that both had business interests and investments separate and apart from Adco, between 1986 and 2004.
In that he was an employee, Saunders was subject to the general rule in Connecticut, that an employment contract of infinite duration may be terminated by either party, employer or employee, at any time, without cause, or even for a cause which is morally wrong. Magnan v. Anaconda Industries, Inc., 193 Conn. 558, 562-63 (1989). The exception to this rule provides that an employee who is dismissed for a reason whose impropriety is derived from some important violation of public policy, may maintain a common-law action for wrongful discharge. Morris v. Hartford Courant Co., 200 Conn. 676, 678-79 (1986); Sheets v. Teddy's Frosted Foods, Inc., 179 Conn. 471, 475 (1980). No claim of wrongful discharge has been made here.
It is therefore found that Adco terminated its employment relationship with Saunders in July of 2004, notwithstanding Saunders's status as a minority shareholder, and membership on the corporation's Board of Directors.
Because Saunders enjoyed no right to continued employment, he cannot clam any right to receive compensation pursuant to the agreement, for the period of time during which he was not an Adco employee.
He should therefore be compensated pursuant to Exhibit 5, for the year 2004, but not for subsequent years, as claimed in this action.
CLAIMS OF BREACH OF FIDUCIARY DUTY ARE NOT APPLICABLE TO EITHER PARTY BASED ON AN EXAMINATION OF THEIR RELATIONSHIP
Both Firtel and Saunders, in addition to charging the other with theft, larceny and associated disreputable activities, claim that the other breached a fiduciary duty which was owned. As a result of these claims of breach of fiduciary duty, each claims to have suffered damages.
It should be noted that neither Saunders or Fidel acknowledges that he owned any fiduciary duty to his business associate.
A fiduciary or other 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 other. Konover Development Corp. v. Zeller, 228 Conn. 206, 219 (1994). Breach of a fiduciary duty does not involve the failure to adhere to an applicable standard of care. Rather, it implicates a duty of loyalty and honesty. Beverly Hills Concepts, Inc. v. Schatz, Schatz, Ribicoff Kotkin, 247 Conn. 48, 52 (1998).
Courts have been reluctant to define, or to establish hard and fast rules, concerning what constitutes a fiduciary relationship. Rather than setting forth criteria in precise detail, courts have chosen to leave the bar down for situations in which there is a justifiable trust and confidence on one side, and a resulting superiority and influence on the other. Elm City Cheese Co. v. Federico, 251 Conn. 59, 99 (1999) (Berdon, J. concurring); Alaimo v. Royer, 188 Conn. 36, 41 (1982). The determination of whether a fiduciary relationship exists between the parties is a question of fact. Dunham v. Dunham, 204 Conn. 303, 320 (1987).
In such a relationship, it is the superior position of the fiduciary, or dominant party, which affords him great opportunity for abuse of the confidence reposed in him. Konover Development Corp. v. Zeller, supra, 219.
Saunders claims that Firtel, in his capacity of majority shareholder of Adco and president of the corporation, breached the fiduciary duty when he owned to Saunders, a minority shareholder and employee of the corporation. He claims to have sustained damage as a result of the breach.
It is of course proper to expect that Firtel, as the majority shareholder, and the founder of Adco, would be the dominant influence, Angelo Tomaso, Inc. v. Armor Construction Paving, Inc., 187 Conn. 544, 568 (1982). Even a cursory examination of Exhibit 5 leaves little question concerning Firtel's right of control.
Firtel was not only the majority stockholder, he possessed the ability to appoint additional directors if he desired (Ex. 5, ¶ 3). The corporation employed Saunders, and his employment could be terminated even in the absence of good cause.
However, the determination that Firtel enjoyed a superior position, with greater power and authority than Saunders, does not end the inquiry concerning whether a fiduciary duty to Saunders was owed. Further reference to all of the surrounding circumstances is required.
Here, we are confronted with a business relationship between two very successful and very astute businessmen. Each entered into the business relationship fully aware of the contents of all of the signed agreements, and the personal needs, desires and talents of the other.
Both Saunders and Firtel knew that the other pursued activities in business separate and apart from Adco, and Saunders was well aware of his status as a minority shareholder, who desired to "be employed" Adco.
In fact, Saunders, recognizing and appreciating his situation, suggested a renegotiation of his status, and threatened legal action if his demands were not addressed. This dissatisfaction was communicated to Firtel over one year prior to Saunders's termination in July of 2004.
The court cannot rescue him from a business relationship entered into freely and voluntarily, because of actions taken by Firtel which were consistent with the negotiated business relationship.
The relationship, personal and business, between two sophisticated and talented business associates, as described at trial and attested to in various exhibits, was one in which each had extensive knowledge and skill. This precludes a finding of unequal bargaining position, or an inability to clearly appreciate the rights of each of the parties.
Once a fiduciary relationship is found to exist, the burden of proving fair dealing shifts to the fiduciary. The standard of proof required to establish fair dealing is that of clear and convincing evidence. Dunham v. Dunham, supra, 322-23; Pergament v. Green, 32 Conn.App. 644, 651 (1993).
This rule is designed to provide additional protection to one disadvantaged through lack of knowledge, expertise or confidence. However, it is also a reason why courts should not lightly find a fiduciary relationship to exist, based upon the commercial and personal interactions of two educated and competent businessmen.
It is found that a fiduciary relationship did not exist between Firtel and Saunders based upon the testimony presented, and a review of the exhibits.
Likewise, Firtel's claims that Saunders, either as an employee of Adco or as a minority shareholder and director, breached a fiduciary duty to Firtel and/or Adco, must also fail.
Saunders, as an employee at will, was not protected by a "no termination except for good cause" requirement in a contract, or other guarantee of employment.
Although Firtel may have taken a passive approach for many years, it is clear that Saunders had no right of control or management concerning Adco, a fact unambiguously demonstrated by Firtel in July of 2004. While it is questionable whether a minority shareholder can ever be a fiduciary in a closely held corporation; Lux v. Environmental Warrant, Inc., 59 Conn.App. 26, 39 (2000); Banks v. Vito, 19 Conn.App. 256, 262 (1989); the facts provided here do not demonstrate any such fiduciary relationship or obligation by Saunders.
Nor did Saunders breach any duty owed to Adco or Fidel, by engaging in business outside of Adco, while he was operating Adco on a day-to-day basis. Both Saunders and Firtel knew of business dealings outside of Adco by the other. Although the specifics may have been unknown, there was never any objection to the activities prior to July of 2004. Firtel had constant access to the papers, records and financial statements of Adco, based on the transparency provisions contained in Exhibit 5.
Both Saunders and Firtel used Adco, between 1986 and 2004, to pay expenses not only for themselves, but for members of their immediate families. Based upon the course of conduct in which both openly engaged, Firtel and Adco are not entitled to retain any of the monies taken by Saunders as commissions while employed at Adco, or any monies expended for personal use.
As a corollary to that finding, Saunders is not entitled to the realm of monies paid to Norma Firtel, monies which were disbursed during the time he was in charge of the day-to-day operation of Adco. Furthermore, Firtel's self-serving "repayment" of $37,000 to a corporate entity which he controls, fails to impress. It does nothing to either enhance or to detract from his credibility.
Saunders's claim that Firtel improperly wrote off $75,000 in inventory, and the claimed debt of $90,000 from Metro Medical have not been proven. Even if the evidence could support a finding that the $90,00 allegedly due Adco from Firtel's son Adam and Metro Medical was not pursued, such inaction would not be inconsistent with the provision of paragraph 8, which specifically references the "children" of Saunders and Firtel.
It must also be noted that Firtel did not terminate his relationship with Saunders, because he believed that Saunders had done anything improper in the running of Adco. He only learned of Saunders' business dealings with LaMexco after he had already taken action designed to terminate Saunders, in July of 2004.
It is found that Saunders is entitled to retain all commissions which he earned, and that his retention of those commissions is neither wrongful, or felonious, as claimed by Firtel. Therefore, any claims made by Firtel or Adco for the repayment of "stolen" money must also fail.
Neither Saunders nor Firtel can not be heard to complain of practices, customs or traditions in which both engaged, and which both now characterize as criminal, nefarious, and a breach of the fiduciary duty owned by one to the other.
The hysterical cries of "stop thief" uttered by both Saunders and Firtel are sad, and somewhat comical at the same time. The court is reminded of the feigned indignance of Captain Louis Renault in Casablanca. The law enforcement official declared himself "shocked" at the gambling activities prevalent at Rick's Place, while simultaneous stuffing his winnings in his pockets.
SAUNDERS MAY RECOVER FOR MONIES NOT PAID TO HIM FOR WORK WHICH HE PERFORMED IN 2004
Saunders was terminated from Adco on July 23, 2004. He was never paid any compensation, pursuant to Exhibit 5, for work performed on behalf of Adco during 2004.
The evidence revealed that Firtel was paid $50,126 as compensation during 2004. The compensation was not pro rated, but was disbursed at the end of the year.
Saunders now seeks to recover for compensation he should have received in 2004, pursuant to the provisions of § 31-72 of the General Statutes. That section reads:
When an employer fails to pay an employee wages in accordance with the provisions of 31-70a to 31-70i inclusive, such employee may recover . . . twice the full amount of such wages with costs and such reasonable attorneys fees as may be allowed by the court.
It is found that Saunders is entitled to recover of Adco the sum of $50,126, for wages due for calendar year 2004.
It is further found that the refusal of Adco to pay wages was wilful, and that Saunders shall recover twice the full amount of such wages, of $100,252.
The award of double damage, or attorneys fees is a matter of discretion. Commissioner of Labor v. Wall, 69 Conn.App. 450, 461 (2002).
The court declines to award attorneys fees.
BARBUR SHOULD BE DISSOLVED, AND RENT PAID AT THE FAIR RENTAL VALUE OF $18,000 PER YEAR FOR 2004, 2005 AND 2006
Saunders and Firtel each own 50% of Barbur Associates, LLC. The limited liability company owns the real estate at 555 Sherman Avenue, Building D, Hamden, Adco's place of business.
The rental payments were unilaterally changed by Firtel in 2004. Instead of Adco paying $18,000 to Barbur, it paid $12,000 for 2004, $12,00 for 2005, and $15,000 for 2006.
During that time, Firtel authorized the repair of the floor of 555 Sherman Avenue, at a cost of $8,480.
Saunders has requested that Barbur be dissolved, and that the proceeds of the sale of Barbur's assets be equally divided between the two principals in the limited liability company.
He also seeks, on behalf of Barbur, the sum of $15,000, representing the difference between the fair rental value of the property in 2004, 2005, and 2006 and the amount actually received. Adco paid $39,000, rather than $54,000, which represents a rental of $18,000 per year.
In addition to the rental payments and the expenditure for repair of the floor, Firtel also arranged for a $5,000 loan from Barbur to Adco during that period.
It is found that the fair rental value of the property located at 55 Sherman Avenue, Building D, Hamden, is $18,000 per year and that Firtel unilaterally reduced the rent during the years following Saunders' termination from Adco.
It is therefore found that Barbur should recover from Adco, the sum of $15,000, representing the difference between the fair rental value of the property, and the rental charged by Fidel during 2004, 2005 and 2006.
Although the terms of the lease required Adco to be responsible for maintenance and repair, it is found that the expenditure of $8,480 to defray the cost of the new floor represents a capital investment in the property, and is not an item of maintenance or repair for which the tenant would be responsible.
Although Saunders and Firtel have been equally compensated for distributions made on behalf of Barbur (Ex. 50b Ex KKKK), it was not until December of 2007 that Firtel determined to distribute $9,500 to Saunders. Furthermore, Firtel, without consulting Saunders, reduced the yearly rental payments by one-third, and arranged for a loan to Adco, a corporation which he controls.
It is therefore found that Saunders is entitled to a judicial dissolution of Adco, pursuant to § 34-207 of the General Statutes.
It is further ordered, that the business of Barbur Associates, LLC, shall be wound up, and the proceeds of the sale of the assets of Barbur shall be divided equally between Saunders and Firtel, pursuant to § 34-208 of the General Statutes.
CT Page 8163
CONCLUSION
Judgment may enter in favor of the plaintiff, Barry Saunders, as against the defendant, Adco Medical Supplies, Inc., d/b/a Adco Corporation, in the amount of $102,252.Judgment may enter in favor of the plaintiff, Barry Saunders, defendant on the counterclaims, on each of the counterclaims filed by Adco and Burton Firtel.
Judgment may enter in favor of Barbur Associates, LLC, against the defendant Adco Medical Supplies, Inc., d/b/a Adco Corporation, in the amount of $15,000.
A dissolution of Barbur Associates, LLC is ordered, in accordance with and pursuant to the provisions of § 34-207, et. seq. of the General Statutes.
Costs are awarded to neither party.