Opinion
No. X08 CV 02 0193031
June 28, 2004
MEMORANDUM OF DECISION
This divisive family saga came to the court by means of a complaint filed on behalf of Jonathan and William Stuart against their older brother Kenneth Stuart, Jr. individually and in his capacity as executor of their father's estate, as trustee of trusts established by their father and mother and as general partner of a limited partnership, Stuart Sons.
The essence of the plaintiffs' action is that the three brothers' father, Kenneth Stuart Sr., established an estate plan in 1991 by means of a will and trust, which, upon his death, would have distributed his assets equally among his three sons. However, it is alleged that in 1992 Kenneth Stuart Sr., when he was suffering from dementia and under the undue influence of Kenneth Stuart Jr., effectively changed his estate plan by placing all his assets into a partnership of which Kenneth Stuart Jr. was a general partner. It is further alleged that since Kenneth Stuart Sr.'s death in early 1993 the assets have remained tied up in the partnership and solely under the control of Kenneth Stuart Jr. who has breached his fiduciary duties by maintaining total control over, and not distributing them, and substantially dissipating the assets to his benefit.
Specifically, the Third Revised Complaint (Complaint) alleges that Kenneth Stuart, Jr. (Stuart Jr.) exercised undue influence over his father, the late Kenneth Stuart, Sr. (Stuart Sr.) at the time certain real estate was purchased and the limited partnership was created and funded, and that Stuart Sr. lacked the mental capacity to know and understand these transactions. The Complaint further alleges that Stuart Jr. breached his fiduciary duty as Trustee, as Executor and as general partner by failing to distribute assets, failing to pay estate taxes and mismanaging the assets (Count Two) by failing to maintain records and provide an accounting as Executor of Stuart, Sr.'s will and as Trustee (Count Three) by self dealing in a myriad of ways in his role as Trustee, Executor and general partner (Count Four) by violating the Connecticut Uniform Prudent Investor Act General Statutes §§ 45a-541 et seq. (Count Five) by engaging in a fraudulent transfer of real estate from the partnership to his wife Deborah Christman Stuart in violation of General Statutes §§ 52-552a et seq. (Count Six) and by committing statutory theft pursuant to General Statutes § 52-564 (Count Seven). In addition, the Complaint alleges that Stuart Jr., Christman Stuart and their jointly owned business Christman Stuart Interiors (CSI) were unjustly enriched by misappropriation of certain assets from the partnership (Count Eight) and that these three defendants violated the Connecticut Unfair Trade Practices Act, General Statutes §§ 42-110a et seq.
The defendants have generally denied the allegations. The case was initially commenced in 1993; it involved many lengthy discovery disputes, a hearing on a temporary injunction application, the appointment of a special master assigned inter alia, to take possession of voluminous partnership files and to oversee the partnership affairs. A trial to the court of nearly eight weeks in length occurred in the autumn of 2003. The parties completed the submission of post-trial memoranda and rebuttals in early March 2004.
I. Background
Stuart Sr. and his wife of over fifty years, Katherine, had three children: Stuart Jr., born in 1941, William born in 1943, and Jonathan born in 1945. Stuart Sr. was at one time the art director of Curtis Publishing Company, the publisher of the Saturday Evening Post and subsequently the art director of Readers Digest. Stuart Sr. was a strong-willed, vigorous man. He was an amateur artist with wide ranging interests which included antique and art collecting. He retired in 1978. The Stuart Sr.'s owned and resided in a home at 295 Ridgefield Road in Wilton, Connecticut.
William is a medical doctor, board certified in emergency medicine, and has practiced at various hospitals in eastern Massachusetts since the mid-1970s. Jonathan Stuart, with his wife, operates a successful business and lives primarily in New York City with other residences in Connecticut and California. William and Jonathan, by their own testimony, are high net worth individuals.
Stuart Jr. graduated from Harvard, worked in the publishing business from 1969 until October 1991 with a peak annual salary of $92,000. He lived in Wilton at 454 Danbury Road. He was divorced in 1990 from his first wife with whom he had a daughter, Leigh. In 2000 he married Deborah Christman.
In the middle of 1991, at or around the tine he suffered a mild coronary event, Stuart Sr. expressed concerns to Stuart Jr. about his wife's capacity to act as his executor. Katherine exhibited signs of Alzheimer's disease, and Stuart Sr. wanted Stuart Jr. more involved. In the summer of 1991, when Stuart Sr. was about 85 years old and Katherine ten years younger, they had wills and Trusts drawn up, with Stuart Jr. named as executor and trustee respectively. Stuart Sr.'s will directed that his entire estate go into "The Kenneth J. Stuart Living Trust." If Stuart Sr. survived Katherine, upon his death "the entire principal of the trust shall be distributed, per stirpes, to the Grantor's [Stuart Sr.'s] issue who survive him." Ex. 4. Stuart Sr. owned approximately two million dollars in securities and cash, as well as one-half of the 295 Ridgefield Road property, and he and his wife owned a sizeable collection of antique furniture. Most of this property was transferred to the Stuart Sr. Trust. In addition, Stuart Sr. owned a significant art collection the centerpieces of which were several famous works by Norman Rockwell which had appeared on the cover of the Saturday Evening Post. The originals of these paintings had been given to Stuart Sr. by the artist.
The Rockwell art included "Saying Grace," "The Gossips" and others. The collection was valued by Sotheby's at $3.5-5.2 million in 1997.
Katherine Stuart died on March 21, 1992. On June 10, 1992 the Stuart Sr. Trust acting through its Trustee, Stuart Jr., purchased real property on Hurlbutt Street in Wilton consisting of a residence and two cottages on seven and a quarter acres. The Trust paid $750,000 for the Hurlbutt property financed, in part, by a $600,000 loan which was secured by some $600,000 in securities formerly owned by Stuart Sr. which had been transferred to the Trust.
During the summer of 1992 Stuart Jr. discussed with William and Jonathan a proposal to place all of Stuart Sr.'s assets including the Rockwell art, into a so-called family limited partnership in order to decrease estate taxes. Two drafts of a proposed partnership agreement were circulated to William and Jonathan both of which named Stuart Sr. and Stuart Jr., but neither William nor Jonathan, as general partners. William and Jonathan rejected these proposals wanting more control over the partnership as general partners, and not willing to have Stuart Jr., as the sole general partner after their father died, in control of all their parents' assets. The drafts of the partnership agreement stated that the partnership would last until 2030 unless all the partners determined otherwise. See Ex. 11, § 10.1. The two younger brothers stated they did not wish to consider or contribute to the partnership as proposed, or be limited partners only.
In July 1992 Stuart Sr. was admitted to Norwalk Hospital for two weeks. He was readmitted on September 11, 1992 for seven days, on November 27, 1992 (15 days), on December 29, 1992 (19 days) and on February 17, 1993. He died at the hospital on February 27, 1993.
Less than four months before his death a series of transactions took place which materially altered Stuart Sr.'s estate plan. On November 4, 1992 Stuart Sr. and Stuart Jr. executed a Certificate and Agreement of Limited Partnership forming a limited partnership known as Stuart Sons Limited Partnership (Stuart Sons). Stuart Sr. and Stuart Jr. were the only general partners and the only Class A Limited Partners. The Norman Rockwell Museum at Stockbridge [Mass.], Inc. (Rockwell Museum) was the only Class B Limited Partner.
Also on November 4, 1992 the following transactions occurred. Stuart Jr. acting as Trustee transferred the one-half interest in 295 Ridgefield Road to Stuart Sr. who then immediately conveyed it to Stuart Sons. Stuart Jr., acting as Trustee, transferred the Hurlbutt Street property to Stuart Sr. who immediately conveyed 2.5% of it to the Rockwell Museum and 97.5% of it to Stuart Sons. Finally, Stuart Sr., by bill of sale, conveyed most of his personal property to the partnership. Subsequently, the Rockwell Museum conveyed its small interest in the Hurlbutt property to the partnership in exchange for slightly less than a one percent (.96%) limited partnership interest in Stuart Sons.
The net result of these transactions was that almost all of Stuart Sr.'s assets were then owned by Stuart Sons, L.P. The Stuart, Sr. Trust had little or no assets. Stuart Sr. became the 89.74% owner of the partnership. Stuart Jr. had a 9.30 % interest.
In December 1992 Stuart Jr., William and Jonathan met with lawyers from the New York City law firm Shearman Sterling purportedly to discuss the feasibility and advisability of creating a family limited partnership such as Stuart Sons to save on estate taxes. Shearman Sterling recommended against it. Tr. Stuart Jr., September 30, 2003, 5; Tr. William Stuart, October 9, 2003, 147-48. Stuart Jr. did not tell Shearman Sterling or his brothers that the partnership already existed. Tr. William Stuart, October 9, 2003, 48. Some time in August 1993 a number of months after Stuart Sr. had died, Stuart Jr. told his brothers about the creation and funding of Stuart Sons.
The references to "Tr." are to the transcript of the trial and further identified by name of witness, date (since several witnesses testified on multiple days) and page number.
In addition to owning Stuart Sr.'s art collection, including the Rockwell paintings, Stuart Sons owned and rented out the house and cottages on Hurlbutt Street and the residence at 295 Ridgefield Road. Subsequently, the partnership bought two smaller properties, 191 and 199 Westport Road in Wilton which were also rented out. About 1993 Stuart Sons formed a limited partnership to own Eldred Wheeler of Wilton, a furniture store on Route 7 (Danbury Road) in Wilton. Stuart Jr. was a one percent owner of that business which later severed its ties with Eldred Wheeler and became Talbot House. In 1995 Stuart Jr. hired Deborah Christman to manage the furniture business. Christman later rented the large house on Hurlbutt Street, then after a few years moved to one of the cottages. In June 2000 Stuart Jr. and Christman married. In April 2001 Stuart Sons sold the Hurlbutt property to Stuart Jr. and Christman Stuart for a stated price of $900,000.
II. Discussion of Legal and Factual Issues
The factual background recited above is largely uncontested and much of it is set forth in a stipulation of facts, which after the court's urging, the parties finally submitted in mid-trial as a trial exhibit. Ex. 90. However, the multitude of factual contentions underlying the parties' legal claims and defenses are highly disputed and cover a period of well over a decade, beginning approximately in 1990. The evidence included the testimony of numerous witnesses, some who testified for multiple days. In addition, the documentary evidence is in excess of 20,000 pages. Despite the extended pre-trial proceedings, the long trial, and voluminous amount of documents, significant gaps still remain in the information available to the court.
In the ensuing discussion the court will identify the claims and defenses, discuss the appropriate legal standards and their application and sort through the evidence to make the necessary findings of facts.
A. Count One: Legal Incapacity
The plaintiffs claim that after June 8, 1992 their father lacked the mental capacity to understand what he was doing and what was going on around him so as to make invalid the creation of Stuart Sons and the transfer of his assets, including assets in the Trust, into that entity.
1. The Evidence
As noted, Stuart Sr. was admitted to Norwalk Hospital on July 1, 1992 just a few months after his wife had died. Stuart Jr. noted that his father's physical condition deteriorated after her death in that he became bedridden, had lost weight, and was afflicted with some incontinence. Tr. Stuart Jr., September 29, 2003, 186-87.
In the hospital records it is indicated that one of the chief complaints on admission in July was "deteriorating mental status." Dr. Pitsenbarger noted that upon admission Stuart Sr. was unable to give a medical history and "the following information was given by his son" Stuart Jr.
Approximately one week prior to admission the patient became progressively weak, was noted to fall, was incontinent of urine and displayed a mental status noticeably worse than his baseline mild dementia.
Ex. 59; Dr. Pitsenbarger: Discharge Summary.
On July 8, 1992 the records note a deterioration of the patient's mental status for about a year and a sudden worsening leading to delusion. Id.; Physician's Order Sheet (Dr. Pascarelli). A CT scan was ordered. Also on July 8 the hospital progress record indicates the following during a neurology consultation
he thinks its January in PA [Pennsylvania] . . . he has no idea of what year it is.
Id., July 8, 1992 Progress Record. See also report of neurologist (Dr. Lauhan?) of same date (same observation). The neurology consultant diagnosed "communicating" or normal pressure hydrocephalus and dementia. Id., Dr. Lauhan's report, July 8, 1992. Dr. Zucker, Stuart Sr.'s regular physician, arranged a consultation with Dr. Marc Rosen, a rehabilitation specialist who examined Stuart Sr. on July 13, 2002. Dr. Rosen confirmed the neurologist's, and others' diagnosis that Stuart Sr. had normal pressure hydrocephalus. Id., Dr. Rosen consultation report, July 13, 1992.
Dr. Rosen testified at trial. He repeated his diagnosis of Stuart Sr., and explained that normal pressure hydrocephalus (NPH) literally means water in the brain and involves an excess of cerebral spinal fluid collecting in the brain's ventricles, rather than being absorbed, with the enlarged ventricles causing a compression of the brain. The three major clinical effects of this condition are impairment in memory or cognition (dementia) problems with walking, gait, or imbalance (ataxia) and incontinence of urine. All three of these conditions were present in Stuart Sr. Tr. Rosen, October 7, 2003, 16-17, 26. Dr. Rosen described dementia as memory problems and problems with higher level cognitive function and problems with agitated behavior, picking at oneself, irritability and orientation; for example, getting lost. Id., 18-19. Dr. Rosen, in reviewing the patient's history, noted the incontinence and ataxia symptoms and stated that during his examination Stuart Sr. knew his name but did not know he was in a hospital and did not know the time of day, the season or the year. Id., 24.
Dr. Rosen also testified that a person with NPH can often communicate socially and act appropriately in a familiar environment such as home. Often they can recognize family members, hold conversations and even play cards. However, reading legal or other complex documents would be very hard. Id., 19-20. NPH, according to Dr. Rosen does not wax and wane; the normal course would be not to get better, but to worsen. Id., 17, 29-30. He offered the opinion that on July 13, 1992 Stuart Sr. had a "severe" case of dementia and that it would have gotten worse as time passed. Id., 73-74. Dr. Rosen did not treat or see Stuart Sr. after the July examination.
Ken Stuart Jr. testified at some length about the planning and development of the family partnership concept which culminated in the creation and funding of Stuart Sons, as well as his father's involvement with it. Prior to 1991 his father had occasionally donated a Norman Rockwell painting and taken an income tax deduction. Stuart Jr. advised him that it would be much better to hold onto this art and allow it to appreciate. Tr. Ken Stuart Jr., September 29, 2003, 41-43. In the middle of 1991 Stuart Sr. initiated conversations with Stuart Jr. about his estate as a whole and Katherine's role. Id., 43-45. As a result Stuart Jr. testified he read thirty books on estate planning and talked to dozens of lawyers, accountants, bankers and stockbrokers. Id., 46-47. In the meantime Stuart Sr.'s and Katherine's new wills and Trusts, were executed with Stuart Jr. in the role of executor and trustee. From August 1991 to November 1992 Stuart Jr. researched and learned about estate planning and limited partnerships, according to his testimony. Id., 69. He testified that he came across the concept of a family limited partnership used by a Texas lawyer to reduce estate taxes. Id. 80-81.
Stuart Jr. testified he had many conversations with his father about the limited partnership concept. In addition, an attorney, Peter Snyder, and a financial planner, John Hirschauer, explained the partnership plan and documents to Stuart Sr. Tr. Stuart Jr., October 2, 2003, 39-40. The partnership agreement went through at least two drafts before the final version. Exs. 10, 11, 12. The process of discussion and drafting took six months. Tr. Stuart Jr., October 2, 2003, 16, 23, 40. Stuart Jr. repeatedly testified that his father asked relevant questions about the plan and participated in and understood the discussions. Id., 21-22, 40-41. Stuart Jr. also testified that following his hospital confinement in July 2002 his father was less confused and back to normal although he was a little foggy mentally when he was readmitted in September. Id., 61-62. Stuart Sr. was aware of what was going on, was able to do crossword puzzles, watch and understand television and hold conversations. Id. 55-60.
Stuart Jr. testified at considerable length during the trial. He was initially called as the first witness for the plaintiffs' case and also testified in support of his own defense. As a general matter Stuart Jr. was in some ways a quite forthcoming and amiable witness. However, there were some facts about which he professed a surprising lack of knowledge or lack of memory and his testimony evinced an inappropriately cavalier attitude about certain matters. In connection with his father's condition, Stuart Jr. said he was unaware Stuart Sr. had been diagnosed with NPH (Tr. Stuart Jr., September 29, 2003, 195) despite the fact that he consulted with Dr. Zucker and his brother William about a shunt procedure which might be considered to treat NPH — a procedure which the family chose not to employ.
He also testified that he did not believe his father was confused when he entered Norwalk Hospital in July 1992 ( Id., 192) although, as noted, the hospital records indicate Stuart Sr. was admitted because of deteriorating mental status and Stuart Jr. had related this fact at the time of admission. See Ex. 59.
Stuart also testified that the family limited partnership concept had all been formulated and discussed with his father by early March 1992 and that he had approached his brothers with a first draft of the partnership agreement in early 1992. Tr. Stuart Jr., September 29, 2003, 80-81, 210. The evidence clearly showed that Attorney Robert Gradoville prepared the draft agreements and that Gradoville's law firm did not begin doing any work on the project until at least late July 1992. Ex. 118. As will be noted shortly, Attorney Snyder did not meet with Stuart Sr. until August.
At some point in late 1991 Stuart Jr. began to receive advice from a financial advisor John Hirschauer about estate planning. Hirschauer prepared a document summarizing the assets of Stuart Sr., certain estate planning steps, and the rough concept of a limited partnership to reduce estate taxes. Ex. 15. There is no date on this document and Stuart Jr. could not say when it was prepared. However, the document references Katherine Stuart's death and the June 1992 purchase of the Hurlbutt Street property; therefore it had to be prepared in the latter part of that month at the earliest. The basic concepts of the limited partnership as an estate planning device is to reduce the value of a person's assets (in this case Stuart Sr.) by placing them into the partnership so that the ownership and hence the value is split among various limited partners. Hirschauer's document noted that this reduction could be between 40% and 70%. If the partnership operates a business, savings may also be effected by the allowable delay in paying estate taxes. The document also noted that distribution of assets could be delayed by four years or more.
Stuart Jr. presented several witnesses to testify about Stuart Sr.'s mental condition at and before the time the family limited partnership was organized. A principal witness was Peter Snyder, an attorney specializing in tax and estate planning, whom Stuart Jr. met in June 1992. At that time Stuart Jr. described the concept of a family limited partnership and Snyder said he would research the subject. There was no evidence that Snyder had prior experience with the concept as an estate planning device (he agreed it was "novel" to him). Tr. Snyder, October 24, 2003, 12. Indeed, he relied in part on the Hirschauer plan and attorneys at another firm, Kleban Samor to draft the necessary papers.
The first time Snyder met with Stuart Sr. was in August 1992. Id., 8. The meeting took place with Stuart Sr. in his bed and lasted from 45 minutes to an hour although it might have been shorter. Id., 14, 21, 22. Snyder testified he explained the partnership concept to Stuart Sr., some estate tax ramifications and that the general partners would be in control of the assets. He did not go over any draft agreements. Snyder testified that Stuart, Sr. "comprehended what I was telling him." Id., 17. As for the basis of that conclusion, he said:
Because I explained it very clearly, as I always do, until I have a sense that the person comprehends in their colloquial way what's to happen, and he registered that, yes, that's fine, that's good.
Id., 20.
Snyder met with Stuart Sr. and Stuart Jr. again, probably in October, for about 40 minutes. Snyder testified that Stuart Sr. understood what was transpiring. Id., 30. Snyder was vague as to when Stuart Sr. knew that William and Jonathan were not going to be limited partners. Snyder said he discussed at some point that the two younger brothers would have capital participation, and be limited partners, he could not remember when it was discussed that they would not be participants at all in the partnership, although he testified Stuart Sr. knew about that development, and does not remember that Stuart Sr. commented on this. Id., 32-34.
The last time Snyder met with Stuart Sr. was November 4, 1992 when the partnership agreement was signed along with numerous other documents transferring almost the entirety of Stuart Sr.'s assets into the partnership. Snyder testified that Stuart Sr., while weak and bedridden, understood what he was doing. Id., 35-39. Essentially, Snyder testified that Stuart Sr. indicated his understanding by saying "fine, that's good." Id., 35. However, Snyder did not state directly that William and Jonathan had no connection with, nor any ownership interest in, the partnership. Id., 35-36, 91-92.
John Hirschauer was also present at the signing of the papers on November 4, 1992, and he was the notary public who took Stuart Sr.'s acknowledgment. Hirschauer testified that he had met Stuart Sr. one or two times previously and described him as "very astute." Tr. John Hirschauer, November 4, 2003, 112. At the signing he thought Stuart Sr. was mentally strong and "fully aware." Id. 115.
Stuart Jr. presented two other witnesses who were present at Stuart Sr.'s house on November 2, 1992. Ellen Strauss, an attorney, was visiting a friend of hers who was boarding in the house. Snyder testified Strauss came into the bedroom during the later stages of the signing procedure. Strauss testified that she conversed with Stuart Sr. and that he was "with it," sarcastic and made her laugh. Tr. Strauss, October 28, 2003, 7. Mr. and Mrs. Stuart Sr.'s long time housekeeper, Marie Johnson also testified but had nothing to say about the events of November 4, 1992.
Stephen Hughes a wholesale antiques dealer and writer is a friend of Stuart Jr. since the late 1970s and met Stuart Sr. on several occasions. He recalled at least one such meeting in the fall of 1992 and another shortly before Christmas that year. He was aware that Stuart Sr. was quite ill.
Their conversation at that time revolved around antiques and art. Hughes thought Stuart Sr. was deteriorating physically but thought he was mentally sharp. Attorney Gradoville, who prepared the partnership document, never met or conversed with Stuart Sr. until January 1993.
The defendant's expert on Stuart Sr.'s mental condition was Dr. Frederick Zugibe who was the Chief Medical Examiner for Rockland County in New York State for 3 years and who also carried on a family practice in internal medicine and cardiology. Dr. Zugibe also holds a Ph.D. in Human Anatomy from the University of Chicago and was clearly qualified. Dr. Zugibe's opinion was that Stuart Sr. had organic brain syndrome which caused loss of cognitive function. He opined, however, that this condition was brought on not just by normal pressure hydrocephalus but also because of Stuart Sr.'s other medical problems such as congestive heart failure, aortic insufficiency, infections, medications, kidney problems and dehydration and that Stuart Sr.'s dementia would fluctuate when these various conditions improved or ameliorated. Tr. Zugibe, October 31, 2003, 22-25. Stuart Sr.'s mental condition was the result of the above-described "multiple sources" and if certain problems were cured the mental condition fluctuates. Id. 29-35. Dr. Zugibe's opinion was that, at times, Stuart Sr. was "totally completely rational." Id., 25.
Dr. Zugibe based his opinion on the Norwalk Hospital records, the home health care records and certain "affidavits" from persons, only partially identified, who purportedly interacted with Stuart Sr.
2. Evaluation of the Evidence
Turning to an evaluation of the evidence presented on Stuart Sr.'s mental competency the court begins with Dr. Zugibe's opinion. Dr. Zugibe had a broad and interesting background and testified in a straightforward and engaging manner. However, the trust of his opinion was based on written statements by certain persons which were provided him by Stuart Jr.'s attorneys. These statements were apparently not provided to plaintiffs' attorneys until after Dr. Zugibe testified. Most importantly, they were never put, or even offered, into evidence, and there is almost nothing in the record before this court as to what was in those statements. The only evidence on this point was Dr. Zugibe's testimony about the written statements:
Dr. Zugibe characterized these as affidavits. Apparently they were signed statements, not under oath. Tr. Zugibe, October 31, 2003, 40.
. . . in the affidavits themselves the people were relating the fact that he understood the financial records, he read the New York Times, he read the Wall Street Journal, he watched Brokaw's program, would discuss the programs with them in a very, very logical manner, and this came from lawyers, nurses, financial consultants, and so forth . . ."
Id., 25-26. In the expert disclosure made by Stuart Jr. on March 3, 2003 Dr. Zugibe stated this type of information was conveyed to him by Stuart Jr.'s attorney and, indeed, the information relied upon by Dr. Zugibe in the expert disclosure is almost word for word the information set out in the attorneys letter dated December 18, 2002. Ex. F; Ex. 115.
Whether Dr. Zugibe had the actual written statements when he formed the opinion set forth in the disclosure is in doubt since his written report which was contained in the disclosure parroted he attorneys words. Apparently he reviewed the statements after his report but before his testimony. An educated guess can identify some of the persons whose statements were given to Dr. Zugibe. "Housekeeper" is Marie Johnson; "financial consultant" is Hirschauer; "lawyers" might include Snyder; "nurses" are unknown, and no nurse testified. In addition, the attorney stated in court that there were statements from "witnesses who have testified." Id., 27.
With all of the above, the fact remains the court has no evidential foundation to determine who were the makers of all the statements, and more importantly what the contents of the statements were. Although the court indicated during Dr. Zugibe's testimony that it had serious reservations about the factual underpinnings of his opinion, his testimony remains in the record to be considered.
In evaluating the weight to be given Dr. Zugibe's testimony the court notes that important parts of his opinion were based on less than definite conclusions as to whether Stuart Sr. was cogent at the time he signed the partnership papers. Dr. Zugibe said he thought there was "a good possibility." Id., 104; see also last sentence of his February 15, 2003 letter in Ex. F. Later he said it was "very reasonable that he could have been rational." Id., 109.
The persuasive weight of Dr. Zugibe's opinion is also severely undercut by his heavy reliance on the out of court written statements. On several occasions Dr. Zugibe made clear that he relied very substantially on these statements that indicated Stuart Sr. was in control of his faculties at certain periods of time. E.g. id., 25, 105-07. In fact, Dr. Zugibe states that his disagreement with Dr. Rosen's opinion that Stuart Sr.'s mental condition would not improve in a home setting
depend[ed] on the credibility of the people in that affidavit who indicated how he acted. In other words, if I did not have that if I did not have those affidavits of what these people said at home, then I would have to agree with Dr. Rosen or at least I would have a tendency to agree with him.
Id., 112.
Dr. Zugibe, of course, did not have the opportunity to evaluate Stuart Sr. in 1992, as did Dr. Rosen. Neither did he have the opportunity to see, hear and evaluate the live testimony of' some of the writers of the statements. This court did.
The court found the testimony by the defendant's witnesses on the issue of Stuart Sr.'s competency and understanding during the fall of 1992 to be less than persuasive. As a general matter the court was struck by lack of specific evidence, detail if you will, to support the testimonial conclusions that Stuart Sr. understood and comprehended all that was going on. The court understands that these events were eleven years removed in time. Nevertheless, while much was recalled by the witnesses about what was said to Stuart Sr., there seemed to be little about what was coming from him in the way of acts, words, reactions and so forth.
Peter Snyder's testimony was very short on details, and he was particularly vague about how, or even whether, Stuart Sr. knew of the changes which resulted in William and Jonathan not being part of the partnership. Marie Johnson, justifiably admiring of her employer, added nothing of substance and would not have said anything unadmiring in any event. Ellen Strauss' demeanor and testimony seemed completely contrived. John Hirschauer was present at the signing of the partnership papers and his testimony was the most effective for the defendants' position. Nevertheless, he had no medical training. Neither he nor Snyder had been told that Stuart Sr. had been diagnosed with NPH or dementia. Tr. Snyder, October 24, 2003, 69; Tr. Hirschauer, November 4, 2003, 118. Without that information it is more likely than not they were not prepared to be as observant of Stuart Sr.'s mental acuity as they might have been.
Finally, the records of the home health care providers who attended Stuart Sr. during 1992 contain substantial evidence that undercuts the picture apparently presented by the statements given to Dr. Zugibe. These notes depict a man of sharply declining health who was frequently in severe pain with bedsores flaring into continually open wounds. There are many references to Stuart Sr.'s confusion, delusion, and inappropriate actions. The notes indicate increasing instances of highly agitated behavior, a distinct symptom of NPH and dementia. They also indicate that Stuart Jr., with medical advice from Dr. William Stuart, played an active role in providing care. On October 29, 2002 the notes state:
Discussed pt's declining health, pasty appearance, abnormal lab values, poor skin integrity and possibility of hospice. Son wants to read hospice material but feels that his father would not want to "give up" and initiate hospice if he were able to make this decision.
Ex. 60, Home Health Aide Notes, October 29, 1992 (emphasis added).
The court concludes that very little weight should be given to Dr. Zugibe's opinion testimony. The evidence and the court's own evaluation of testimony belie the critical foundation for Dr. Zugibe's opinion; i.e. that Stuart was acting normally and rationally during the fall of 1992.
Jonathan Stuart testified, credibly, that in the summer of 1992, in conversation, his father was aware of who Jonathan was, but not aware of much else. He testified that he had long telephone conversations with Stuart Sr. It was impossible to make his father understand he had purchased the Hurlbutt Street property. Tr. J. Stuart, October 10, 2003, 26-27.
William Stuart who had experience treating elderly patients with dementia and memory changes in the emergency room testified that Stuart Sr. was a reasonably healthy octogenarian in 1990 who had overcome prostate cancer problems and was living with certain heart problems. Tr. W. Stuart, October 9, 2003, 10-11.
In 1990 his father, who had made semi-annual trips from Wilton to Boston for medical checkups for over ten years, got lost traveling both ways and stopped making that trip. Id., 11, 128. In 1991 his memory weakened precipitately as did his mobility. He became progressively more cognitively impaired from 1991 through November 1992 and lost his lifelong interest in discussing wines and stock portfolios. He was severely affected by the death of his late wife in March 1992. After Katherine Stuart died Stuart Sr. confused William Stuart's daughter with his late wife.
William Stuart agreed with Dr. Rosen's assessment of his father and observed progressive cognitive impairment after July 1992. Id., 30, 35. It was his opinion that Stuart Sr. could not have understood the limited partnership document, the concept behind it, nor have carried on a conversation about it. Id., 45-46.
The appropriate legal standard by which to test the plaintiffs' claim in their first count that Stuart Sr. was not mentally competent to establish the Stuart Sons limited partnership is not entirely clear. The standard for wills and other testamentary documents is well established. The maker "must have mind and memory sound enough to know and understand the business upon which he was engaged at the time of execution." Stanton v. Grigley, 177 Conn. 558, 564 (1979). The test for competency to execute contracts and business documents may differ to some degree. The Connecticut Supreme Court found no error in a jury charge stating a person
may be competent to make a will though she has not mental capacity sufficient for management or transaction of business generally, and though she is not mentally capable of making and digesting all the parts of a contract.
Doolittle v. Upson, 138 Conn. 642, 645 (1952).
The process of developing and implementing the family limited partnership was largely a business transaction carried out as part of Stuart Sr's estate plan. This was essentially agreed to by all the witnesses involved. The court concludes that the arguably less stringent test for testamentary capacity is applicable in this case.
After reviewing the totality of the evidence the court finds that based on the preponderance of the credible evidence, Stuart Sr. was not mentally competent to execute the partnership papers and the other instruments which transferred the vast bulk of his assets into the partnership on November 4, 1992. He did not have, at this late stage of his life, the mind or memory to understand what he was engaging in. This conclusion is based in part on the medical records, and in part on the testimony and conclusions of Dr. Rosen reviewed above which were more persuasive than those of Dr. Zugibe. Dr. Rosen also reviewed the home health care records around the time the partnership documents were signed and testified that these reflected Stuart Sr.'s involuntary behavior without cognitive processing, and that, with reasonable medical certainty, he was very impaired cognitively and very confused. Tr. Rosen, October 7, 2003, 49 (commenting on notes made on October 28 and November 4, 1992). Dr. Zugibe reviewed the home health records for two days about a week after November 4, 1992 and concluded that Stuart Sr. was very agitated, a classic sign of dementia, and appeared not to be knowing what he was doing. Tr. Zugibe, October 31, 2003, 101-03. The conclusion is also based in part on the court's review of Stuart Sr.'s history, lifestyle and expressed intentions. In August 1991 Stuart Sr. executed a will which, if his wife predeceased him, would pour his assets into a Trust where, upon his death, they would be divided equally between his three sons. Similarly, if he predeceased his wife his assets would pass through her Trust to the three sons equally. Fifteen months later he executed documents which essentially put all his assets into a business structure, that had no business to operate, was designed to last for twenty or thirty years and effectively, for that period of time, deprive two of his sons of control over, or access to, those assets. Stuart Sr. had never invested in real estate except for living purposes and concentrated his investments in blue chip stocks. Tr. Stuart Jr., September 30, 2003, 19. Nevertheless, within that fifteen-month span Stuart Sr.'s Trust purchased a sizeable piece of residential real estate using the majority of Stuart Sr.'s million-dollar stock portfolio as collateral and then transferred it to the partnership. Both William Stuart and Stuart Jr. agreed that their father had assiduously followed and studied his investments carefully. By 1992, however, he had stopped following his stock holdings and Stuart Jr. conceded his father had never visited or seen the Hurlbutt property, although Stuart Jr. stated he was physically able to have done so. Tr. Stuart Jr., September 30, 2003, 23.
Stuart Sr.'s regular physician Dr. Zucker has passed away. His records would have been invaluable to the court, but were not available.
While there was evidence that Stuart Sr. was mostly bedridden after Katherine died in March 1992 it is hard to believe that this intelligent and ardent investor would allow $750,000 to be invested in property less than three miles away — property which was distressed and about which the lender was nervous ( id., 12-13, 17) without laying eyes on it, unless by June 1992 his mental capabilities had largely failed. The Court credits the testimony of William and Jonathan Stuart that Stuart Sr. did not even know or understand that it had been purchased.
Similarly, there is practically no credible evidence that Stuart Sr. understood the effect that setting up the limited partnership had on William and Jonathan's share of his estate. As noted above there was no direct testimony that Stuart Sr. was told and understood by November 1992 that William and Jonathan no longer had any role in the partnership which would own all his property and that the partnership might last as long as twenty or thirty years and only after that period of time elapsed would his estate be able to distribute the remaining assets to the Trust and then to William and Jonathan. In the meantime the assets would be under the sole control of Stuart Jr.
Stuart Jr. testified on two different occasions during the trial that his father, when informed of William's and Jonathan's unhappiness with the structure of the proposed partnership, responded with comment "F____ them cut them down to ten percent." See Tr. Stuart Jr., October 2, 2003, 34; November 14, 2003, 73.
This is hardly persuasive evidence that Stuart Sr. understood the ramifications of the establishment of the partnership. On the one hand the statement may evince no more than the outburst of a proud, but frustrated, man who no longer had control over his bodily functions, his life or his sons. On the other hand it certainly does not support the contention that Stuart Sr. was prepared to go forward with the partnership without all his sons participating in some fashion.
In sum, the court concludes that Stuart Sr. did not have the requisite mental capacity to establish and transfer his assets into Stuart Sons and that these actions must be declared void.
B. Count One: Undue Influence
The plaintiffs also claim that Stuart Jr. exercised undue influence over Stuart Sr. in connection with the establishment of Stuart Sons and the transfer of assets to that partnership. Undue influence is the exercise of sufficient control over the person, whose act is brought into question, to destroy that person's free agency and constrain him to do what he would not have done if such control had not been exercised. Reynolds v. Molitor, 184 Conn. 526, 528 (1981). Undue influence has the following four elements: (1) a person who is subject to influence, (2) an opportunity to exert undue influence, (3) a disposition to exert undue influence, and (4) a result indicating undue influence. Pickman v. Pickman, 6 Conn. App. 271, 275 (1986). The factors to be considered in determining a claim of undue influence are the allegedly influenced person's mental and physical health, his dependence on the person alleged to have influenced him, and the opportunity to exercise influence. Reynolds v. Molitor, supra. Undue influence may be proven by circumstantial evidence. Salvatore v. Haydon, 144 Conn. 437, 440 (1957).
Undue influence is shown by all the facts and circumstances surrounding the [donor], the family relations, the [gift], her condition of mind, and the body as affecting the mind, her condition of health, dependence upon and subjection to the control of the person influencing, and the opportunity of such person to wield such an influence. Such an undue influence may be inferred as a fact from all the facts and circumstances aforesaid, and others of like nature that are in evidence in the case, even if there be no direct and positive proof of the existence and exercise of such an influence. The ultimate question is, upon the evidence could the [fact finder] reasonably have drawn the inference of undue influence?
Lee v. Horrigan, 140 Conn. 232, 235-39 (1953) (citations omitted; internal quotation marks omitted).
At the time the partnership was established and the assets transferred — November 1992 — the court concludes that Stuart Jr. had a fiduciary relationship with Stuart Sr. and with his brothers, William and Jonathan, arising out of the existence of the Stuart Sr. Trust. Therefore the burden of proving by clear and convincing evidence that no undue influence was exercised by clear and convincing evidence may fall on Stuart Jr. See Cadle Company v. D'Addario, 268 Conn. 441, 456-57 (2004); Murphy v. Wakelee, 247 Conn. 396, 405-06 (1998); see discussion infra, Part II.C. In this case, however, even if the plaintiffs must establish their claim of undue influence by the preponderance of the evidence standard, see Hills v. Hart, 88 Conn. 394, 396 (1914), they have succeeded.
As discussed at length in Part II.A. of this memorandum Stuart Sr.'s physical and mental condition in the later half of 1992 was poor and deteriorating. He was almost completely dependent on Stuart Jr. who lived perhaps two or three miles away and who arranged for his home health care, bought and sometimes administered his medications, and handled his finances. Stuart Jr. testified that his father was "too physically weak" even to go down to the bank to clip bond coupons. Tr. Stuart Jr., November 13, 2003, 112. He answered affirmatively when asked whether he was doing everything for his father. Id., 113.
The concept of a family limited partnership to hold Stuart Sr.'s assets sprang entirely from Stuart Jr. Tr. Stuart Jr., September 29, 2003, 80. The professionals who assisted in planning and drafting the partnership documents were working at Stuart Jr.'s behest and direction, not his father's. Attorney Gradoville and his law firm, Kleban Samor, understood Stuart Jr. to be their client and sent correspondence to Stuart Jr.'s address. Exs. 117, 118. The financial planner, Hirschauer was "introduced" to Stuart Sr.'s assets by Stuart Jr. Ex. 15. The attorney, Peter Snyder, met with Stuart Jr. and discussed and formulated the legal strategy long before ever meeting or talking to Stuart Sr. Tr. Snyder, October 24, 2003, 3-9. Stuart Jr. was in charge of putting the partnership together. Snyder testified that discussions with his brothers and obtaining a charitable foundation as a participant — an IRS requirement — were all up to him. Id., 32-33.
As discussed earlier, the partnership and the Hurlbutt investment did not really fit Stuart Sr.'s investment philosophy. Furthermore, the court determines from the evidence presented that Stuart Sr.'s desire to have Stuart Jr. more involved in the handling of his estate was satisfied when the latter was appointed as Executor and Trustee in 1991. There was no evidence that Stuart Sr. independently sought any greater involvement for his oldest son, and, as discussed earlier, no evidence that he understood or contemplated his other two sons would have no role in the partnership or access to the assets.
The major reason for the partnership's formation was to dilute Stuart Sr.'s ownership of assets to lower their valuation in his estate. The dilution concept was probably de minimis from the beginning once two of the prospective limited partners — William and Jonathan — opted not to participate. In fact, the IRS audit of the Estate did not allow any reduction of value. Ex. 89.
The person most likely to benefit from the formation of the partnership and his installation as general partner was Stuart Jr. The position obviously gave him something to do since his last employment-related income ceased in early 1992. Moreover, the partnership gave him access to relatively unsupervised cash flow which as discussed in subsequent portions of this decision, he was already availing himself of and would do more so in the future.
The court has considered the relevant factors set forth above and the evidence described in this and the preceding section and concludes that the creation of the partnership and resulting transfer of assets was the result of Stuart Jr.'s undue influence over his father. For that reason, as well as those stated in Section II.A., the creation of the partnership should be deemed void.
C. Counts Two, Three and Four: Breach of Fiduciary Duties
Counts Two through Four of the Complaint allege that Stuart Jr. breached fiduciary duties in various ways. In Count Two the plaintiffs allege that Stuart Jr. breached the fiduciary duties he owed to his brothers as follows: (1) as Trustee of the Stuart Sr. Trust, Stuart Jr. misappropriated to himself over $171,500; (2) as Executor of Stuart Sr.'s will, Stuart Jr. failed to distribute Stuart Sr.'s assets to his Trust and failed to pay estate taxes in a timely fashion resulting in penalties and interest and (3) as Trustee of the Trust failing to distribute the Trust assets to its beneficiaries.
In Count Three it is alleged that as Executor and Trustee, Stuart Jr. has failed to maintain complete and accurate books and records and to provide a proper accounting.
In Count Four Stuart Jr. is charged with many instances of self-dealing including the aforementioned misappropriation of over $171,500 from the Trust, borrowing money from the Trust, by using funds of the estate and partnership to pay significant personal expenses, by using the funds of the estate and partnership to set himself up in business, to pay his mortgage and to assist in purchasing a house.
Because many of these of the allegations overlap and because Stuart Jr.'s position as Trustee, as Executor, and as General Partner of Stuart Sons tended to overlap as well, these claims will be discussed together.
It is useful at this point to identify the relevant fiduciary relationships. As of August 10, 1991 when Stuart Sr. executed his revocable Trust (which was never revoked) Stuart Jr. concedes that, as Trustee, he owed a fiduciary duty to the Trust beneficiaries, other than himself, meaning the plaintiffs William and Jonathan Stuart. Ex. 90 (Stipulation) ¶¶ 46-49, 152. As of Stuart Sr.'s death on February 27, 1993, Stuart Jr. as Executor of his father's estate also concedes he owed a fiduciary duty to the Trust as the beneficiary of the Estate. Id., ¶ 38. Upon the death of Stuart Sr., Stuart Jr. became the sole general partner of Stuart Sons, which had been created in November 1992, and the Estate of Stuart Sr. became a limited partner of that entity. Id., ¶ 141. A general partner of a limited partnership owes a fiduciary duty to the limited partners. See Konover Development Corp. v. Zeller, 228 Conn. 206, 218, n. 9 and accompanying text, (1994).
The fiduciary duties of a trustee and of an executor of an estate are quite similar. These duties include the duty of loyalty and the duty to avoid self-dealing, the duty to be diligent in the management of the Trust or Estate and the duty of impartiality towards beneficiaries and heirs. Wilhelm, Settlement of Estates in Connecticut, 2d., (2003) § 7.17. The duty of loyalty includes a prohibition on the fiduciary using trust or estate assets for personal use or to pay personal obligations and a prohibition against commingling estate or trust assets with the fiduciary's personal property. Id., §§ 7.18-7.20.
The duties of a trustee, and an executor include managing the assets of the trust or estate so as to protect the interests of a beneficiary, heir or legatee. New Haven Savings Bank v. LaPlau, 66 Conn. App. 1 (2001). In sum, the Connecticut Supreme Court has stated:
"[i]t is a thoroughly well-settled equitable rule that any one acting in a fiduciary relation shall not be permitted to make use of that relation to benefit his own personal interest. This rule is strict in its requirements and in its operation. It extends to all transactions where the individual's personal interests may be brought into conflict with his acts in the fiduciary capacity, and it works independently of the question whether there was fraud or whether there was good intention . . . The rule applies alike to agents, partners, guardians, executors and administrators."
Murphy v. Wakelee, 247 Conn. 396, 401-02 (1998).
In Dunham v. Dunham, 204 Conn. 303 (1987) the Connecticut Supreme Court also summarized additional burdens on fiduciaries:
Proof of a fiduciary relationship therefore imposes a two fold burden upon the fiduciary. 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 fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence.
Id., 322-23 (citations and quotation marks omitted).
To partially recapitulate, Stuart Jr., as general partner of Stuart Sons, owed a fiduciary duty to the beneficiaries of Stuart Sr.'s estate which, after Stuart Sr.'s death was a limited partner but remained owning almost 90% of the partnership. In addition, as executor of that estate and trustee of Stuart Sr.'s Trust, Stuart Jr. owed a fiduciary duty respectively to the Trust and his brothers.
Stuart Jr. contends that the fiduciary duty mostly relevant in this case is that owed by him as the general partner of Stuart Sons. He argues that the Stuart Sr. Trust was largely unfunded after November 4, 1992 when many of its assets were transferred to the partnership. He further points out that Stuart Sr.'s estate as a limited partner had no operating control over the partnership. Stuart Jr. then argues that Konover Development Corp. v. Zeller, supra, imposes a different kind of fiduciary duty on him, a "commercial" type of fiduciary duty akin to that placed on a board of trustees which allows him a presumption that he acted legally and properly. See Stuart Jr. Brief, February 4, 2004, 17-19.
The court agrees that Konover Development Corp. v. Zeller, supra, recognized that differing circumstances can impose different fiduciary standards and that where a fiduciary relationship arises from a contract of partnership between relatively sophisticated parties, the parties have a certain freedom to craft their own relationship. Id., 228 Conn. 224-28, see also Spector v. Konover, 57 Conn. App. 121, 129, cert. denied, 254 Conn. 913 (2000). However, as noted above, Konover Development Corp. did not extinguish, but rather reaffirmed, that fiduciary principles apply between partners and that the burden shifting and higher standards of proof set forth in Dunham also apply. Id., 228-30.
More importantly for this case, there was no partnership agreement between Stuart Jr. and his brothers because William and Jonathan did not enter the partnership and did not sign the agreement. Their relationship to the inaptly named Stuart Sons was as heirs of their father's estate and equal beneficiaries under the Trust, and neither status would provide them any benefit until and unless the partnership terminated. The court concludes that the arguably lesser fiduciary standard set forth in Konover Development does not apply to this case.
That standard was that the obligation of a fiduciary to prove a transaction was fair should be considered in light of all the circumstances including the following factors (1) fiduciary had made full and frank disclosure of all information, (2) adequate consideration, (3) the fiduciary had competent and independent advice (4) the relative sophistication and bargaining power of the parties. Id. 228.
The fact that Stuart Jr. was general partner of Stuart Sons does not negate the fact that he was a Trustee and an Executor. As pointed out in Murphy v. Wakelee, supra, the duties imposed on a fiduciary are strict and extend "to all transactions where the [fiduciary's] personal interests may be brought into conflicts with his acts in the fiduciary capacity." Id., 247 Conn. 402.
Having set out the relationships, the duties and the relevant legal standards the court turns to the daunting task of reviewing and in large part unraveling the various activities and transactions undertaken by Stuart Jr. as Trustee, as Executor and as general partner of Stuart Sons.
The plaintiffs have presented a variety of claims against Stuart Jr. These include inter alia alleged misappropriations of funds and other assets, expenditures for his own personal gain and self-dealing, from the year 1991 until the time of trial. During this period of more than a dozen years there were tens of thousands of transactions the bulk of which occurred as part of the operations of Stuart Sons and some of which occurred in the Trust. The very volume of these matters, the concededly poor record keeping of Stuart Jr., and the total lack of records in some case precludes anyone, including the plaintiffs and defendants, as well as this court, from making total sense of it all.
To assist in presenting their case the plaintiffs engaged a certified public accountant, John Dempsey, to review the multitude of documents concerning the Trust, the estate and the partnership. Dempsey, who specializes in forensic accounting, gave lengthy testimony detailing his findings and opinions which were also presented in exhibits. On several occasions Dempsey described the difficulties in ascertaining the necessary information because of the lack of documentation. Dempsey testified that he reviewed roughly 15,000 transactions. Tr. Dempsey, October 15, 2003, 106. He also compiled a summary of documents reviewed, the source of the documents and a list of critical documents that did not exist or were not made available or produced by the defendants. Exs. 75-77. His testimony and presentation were highly credible, as were the exhibits prepared by him or under his direction.
Stuart Jr. also testified on these matters. As stated before he was occasionally very forthcoming and while he had strong convictions about the correctness of some of his positions, he prepared and presented considerably less in the way of documentation.
1. Record Keeping: Accounting
Count Three of the Complaint alleges that Stuart Jr. as Executor and Trustee, failed to keep adequate records and provide accountings for the Estate and Trust.
Stuart Jr.'s record keeping was haphazard at best. John Slade, an accountant hired by Stuart Jr. to assist with the books and records of the Trust and partnership from early 1992 to early 1994, told Stuart Jr. that he had to be more organized in keeping records. Tr. Stuart Jr., September 30, 2003, 54. The plaintiffs' expert, John Dempsey, a CPA, found that the lack of record keeping was notable and that he had never seen a case where the books were so incomplete and funds so commingled. Testimony: Dempsey, October 21, 2003. Dempsey also described the work of Richard Freiberg, a CPA who worked for Stuart Jr. from 1994 to 2001, as designed to hide, rather than disclose the truth. Id.
The transcript of this testimony is not available to the court, but the court's notes indicated the testimony occurred before the morning recess on the date indicated.
Furthermore, Stuart Jr. failed to produce the annual accountings required by the Stuart Sr. Trust. Although certain partial information was given out from time to time it was incomplete and unverified. The court was never shown a complete Trust accounting for any period of time.
2. The Trust
The affairs of the Stuart Sr. Trust, created in 1991, were disorganized and poorly documented from the start. Its purpose was to avoid much of the costs of probate, to hold a significant portion of Stuart Sr.'s assets and to distribute them equally to his three sons after his death. Because of the creation of the partnership this has never been accomplished. Stuart Jr. testified that the plan was to assign most of the assets to the Trust immediately and there is evidence that Stuart Sr.'s half of the 295 Ridgefield Road residence, and some cash and securities were placed in the Trust. In addition, the Hurlbutt Street property was purchased by the Trust in June 1992. The testimony of Stuart Jr. and the records available to Dempsey were very unclear as to what assets were in the Trust and when. See Tr. Dempsey, October 15, 2003 154-86. In November 1992, however, the half share of the house and the art collection were transferred to the Stuart Sons partnership along with the Hurlbutt Street property. Since 1993 the Trust has been, relatively speaking, less active and there was little testimony about it. However, the Trust continued to hold certain assets. A document prepared by one of the accountants indicates that at the end of 1994 the Trust had assets of over $350,000 including $280,000 booked as loans to Stuart Sons and Stuart Sr.'s estate. Ex. 79, Bates No. 100266.
In 1991 and 1992 Stuart Jr. deposited liquid assets of the Trust into an account at Union Trust Bank commingling them with his personal assets and using the commingled assets for his own and Trust expenses. Indeed, this account was referred to by Slade, and during the trial, as the "mixed" account. There are no bank statements, cancelled checks or deposit detail for this account. Exs. 75-76.
There are various documents which purport to be "accountings," or status reports, on the Trust. Some of these were prepared by John Slade and some by Richard Freiberg. One Slade report as of the end of 1993 notes a "loan" to Stuart Jr. of $83,267, and Stuart Jr. concedes that in 1992 he used Trust funds for his personal benefit in this amount. Ex. 16; Ex. 90, ¶ 162. Indeed, Stuart Jr. executed a promissory note to the Trust in January 1993 (before his father died) in the amount of $85,000. Ex. 9.
Stuart Jr. testified candidly that certain funds in the Trust were used to pay his personal expenses. See e.g., Tr. Stuart Jr., September 30, 2003, 36, 37; October 2, 2003, 111; Ex 90, ¶¶ 161, 162. Dempsey's arduous review of available documentation confirms this fact. Working from documents prepared by Slade, Dempsey compiled a listing of transactions in the "mixed" Union Trust account. This illustrates income deposits from Stuart Sr.'s social security benefits, pension payments (Stuart Sr. pension payments were received by the Trust well into 1994; Ex. 79, Bates No. 100261) and interest from investments. Income into the account also came from Stuart Jr.'s severance payments from his last employer and two $10,000 gifts from his parents and a $10,000 gift from Stuart Sr. to Stuart Jr.'s daughter. Exs. 95, 110. Expenditures included numerous automatic teller withdrawals to Stuart Jr. which Slade's documents attribute to Stuart Jr.'s personal expenditures, payments to home health care personnel and a payment of $108,000 as part of Stuart Jr.'s investment in Stuart Sons. Id.
In addition, Dempsey compiled data from records of Merrill Lynch and A.G. Edwards which held Stuart Sr.'s securities investments. Using the Merrill Visa card, Stuart Jr. made numerous purchases of an undeniably personal nature. Between May 1992 and the end of October 1992, for instance, when these assets were in the Trust, the Visa card paid over twenty restaurant bills. Ex. 96.
Dempsey testified that the Trust had loaned Stuart Jr. or paid on his behalf $138,569.77 through the end of 1993. Tr. Dempsey, October 16, 2003, 3. The figure was drawn from documents and summaries prepared by the accountants working for Stuart Jr. Ex. 79, Bates Nos. 100229, 101495; see also Ex. 91. This amount is in addition to the credit card expenditures detailed in Exhibit 96.
Among the payments from the Trust made for personal expenditures of Stuart Jr. were alimony payments to his former wife (approximately $1,200 per month) payments on behalf of his daughter, Leigh, personal mortgage payments ($1907.11 per month) and the painting of his personal residence. Ex. 91.
Based on the evidence set forth above which is largely from Stuart Jr.'s testimony and documents prepared at his behest the court determines that Stuart Jr. breached his fiduciary duties through the commingling of funds and assets to such an extent as to hinder any proper accounting, by failure to maintain and keep adequate records of his stewardship and by using Trust assets for his own benefit.
3. Stuart Sons Partnership
Upon his father's death on February 27, 1993 Ken Stuart Jr. became the sole general partner of Stuart Sons partnership. At the time of Stuart Sr.'s death he owned 89.74% of Stuart Sons and this interest was converted to a limited partnership interest which was an asset of his estate. The Norman Rockwell Museum at Stockbridge (Mass.) owned .96% of the partnership as a limited partner and Stuart Jr.'s limited partnership interest was 9.30%. Ex. 90, ¶ 119, 127, 141. The plaintiffs, Stuart Sons and Stuart Jr. have stipulated that on November 4, 1992 Stuart Jr. transferred "virtually all of his assets" in to Stuart Sons. Id., ¶ 118. In addition, the Hurlbutt property was transferred to the partnership and two-thirds of the Stuart Sr. residence at 295 Ridgefield Road was transferred to the partnership.
One half of the ownership was in the Stuart Sr. Trust. One sixth had been inherited by Stuart Jr. from his mother, and he contributed this to the partnership.
According to the Stuart Son's 1993 tax return the partnership had $1.309 million in assets as of the end of 1992. Tr. Dempsey, October 16, 2003, 13-15; Ex. 79, Bates No. 100541. This included $1,200,683 in real estate and $108,000 cash. Id. For some reason, this figure does not reflect the value of the Rockwell art or the cash and securities owned by Stuart Sr. or the Trust at his death.
Stuart Jr. spent most of his time on the partnership business from 1993 on. This business consisted mainly of managing and renting out the Hurlbutt property, 295 Ridgefield Road and certain properties located on Westport Road in Wilton which were subsequently purchased. At a later date the partnership owned a furniture store called Eldred Wheeler of Wilton, subsequently named Talbot House Interiors on Route 7 in Wilton, of which more later. Finally, Stuart Jr. and the partnership dealt with the increasingly valuable Rockwell art.
The partnership "office" was located in a barn on Stuart Jr.'s personal residence located at 454 Danbury Road in Wilton. There was also kept some furniture and collectibles from his parents. Through the civil discovery process the plaintiffs and Dempsey reviewed the business and financial records of Stuart Jr. and the partnership. Significantly, Dempsey was never provided and could not locate any information that Stuart Jr. kept a personal bank account after 1994. Tr. Dempsey, October 15, 2003, 117. Stuart Jr. conceded he had no personal checking account for several years. Tr. Stuart Jr., November 18, 2003, 101. It maybe that Stuart Jr. had no need for one because the evidence shows that from 1993 on he used Stuart Sons, and to a lesser extent the Trust, as his personal bankers. As will be detailed shortly, the regularity and extent that Stuart Jr. directed the use of partnership funds for his personal benefit is staggering. This course of action was explicitly articulated by both Richard Freiberg and Stuart Jr. In a letter dated February 26, 1998 Freiberg advised New Milford Savings Bank, (which held one or more mortgages on partnership property) that Stuart Jr. received from the Stuart Sr. Estate and Trust from Stuart Sons and from Eldred Wheeler "non-taxable funds related to executive perks, deferred compensation and loans." Ex. 84, Bates No. 400151. About two weeks later, Freiberg elaborated:
Basically all of Ken's living expenses are paid from the above reference entities [Estate, Trust, partnership, Wheeler] and are charged or reclassified at the end of each year. These amounts have been in excess of $90,000 per annum.
Id., Bates No. 400152. Stuart Jr. also sent the bank copies of checks evidencing personal expense payments, with the notation that "company pays all mortgages . . . all college education expenses for daughter . . . all automobile expenses." Id., Bates No. 400154.
Based on the findings in Sections II.C.1, C.2 and C.3 set forth above, the court finds that Stuart Jr. breached his fiduciary duties by failing to account and keep records, by commingling funds and by self dealing. The court now turns to calculating the amounts involved.
4. Expenditures of Trust Estate and Partnership Assets for Stuart's Personal Use
The plaintiffs, William and Jonathan Stuart, presented evidence through Dempsey of the extent of Stuart Jr.'s use of funds from Stuart Sons, the Estate and Trust, for personal purposes. Dempsey prepared a schedule of transactions drawn from his review of those financial records of the various entities provided through discovery from Stuart Jr. In Dempsey's opinion these records showed personal expense payments from bank accounts for the Katherine M. Stuart Trust, the Kenneth Stuart Sr. Trust, the Kenneth Stuart Sr. Estate, Stuart Sons and Talbot House funds in the amount of $1,227,144.71. Tr. Dempsey, October 16, 2003, 87; Exs. 91, 111.
Exhibits 91 and 111 are summaries of information gleaned from the financial records contained in Exhibits 79-85. The Bates Numbers of the individual documents containing the information are indicated on the first page of Exhibits 91, 111 and other similar exhibits.
Dempsey also produced a schedule showing personal expenditures for Stuart Jr. from various investment accounts holding Trust or Estate assets in the amount of $52,561.69. Exs. 96, 112. As noted before, these were largely credit card charges.
In addition, Dempsey produced and testified about a schedule of "questionable expenses." Ex. 97. This schedule was largely made up of information drawn from the financial records showing payments for which there was no explanation or documentation to support its purpose. The total amount on this schedule was $237,771.
Once the fiduciary relationship has been established the burden is on the fiduciary to establish that he dealt fairly and that burden is not the usual burden in civil cases of preponderance of the evidence but the higher standard of clear and convincing evidence. Dunham v. Dunham, supra, 204 Conn. 322-23.
For the most part Stuart Jr. has not contested that significant sums were spent for his benefit. He testified that if the accountants Slade and Freiberg classified or marked certain payments as being for his personal benefit, they probably were. Tr. Stuart Jr., November 18, 2003, 96. Many of the items which Dempsey identified as personal expenditures for Stuart Jr.'s benefit were classified as exactly that on the relevant ledgers. See Ex. 91 and the multitude of references to "Leigh" (daughter) "advances to KS Jr.," "personal," "loan to KS Jr." and the like.
Stuart Jr. challenges a small portion of the over $1.2 million plaintiffs claim to be personal expenditures from bank accounts. He claims that a payment to Academic Management Services by Talbot House and classified on the ledger as a loan to Stuart Sons should be viewed as an intercompany loan. There was no testimony about this, or any explanation as to what Academic Management's relationship to Stuart Sons was, as far as the court can recall. Stuart Jr. has not met the clear and convincing burden of proof established in Dunham v. Dunham. On a second item there was considerable testimony and evidence, much of it contradictory. This item involved a payment by Talbot House to Adessi Jewelers in Ridgefield, Connecticut of $5050.00 for a Rolex watch which was given to Deborah Christman in December 1999, about the time they became engaged to marry. Stuart Jr. testified this was a bonus she had earned under her contract with Talbot House. However, the purchase was recorded under "books" on the Talbot House ledger. Ex. 85, Bates No. 500494. Deborah Christman Stuart testified at her deposition before trial that she had paid for the watch herself. This was clearly untrue as reflected in the Talbot House records. See id. and Exhibit 46. At trial she testified that she did not remember what she said at her deposition and that she had no independent recollection of how she came into possession of the watch. Tr. Christman Stuart, November 7, 2003, 127, 128. Later she said her husband had reminded her it was a bonus. Tr. Christman Stuart, November 12, 2003, 79-81; November 7, 2003, 130. She also testified that she did not know whether she had earned a bonus and had no knowledge whether she reported the watch as income on her tax return. Id. 81-82; see Ex. 50, ¶ 3(vi).
In short, this transaction does not pass the smell test. Six months before they are married Stuart Jr. gives an expensive watch to his future wife and records it as an asset purchase for the furniture business. There is a striking lack of clear and convincing evidence that this was a legitimate Talbot House expense.
Stuart Jr. presented a small pile of American Express card bills, Exhibit NN, to show that certain expenses included in Dempsey's list of personal or "questionable" expenses were legitimate expenses incurred in furtherance of Stuart Sons' business. Some of these were irrelevant since they were incurred in 2002 and no American Express bill payments were allocated to the personal or questionable category by Dempsey after 2000. Exs. 111, 113. During his testimony Stuart Jr. identified certain American Express charges which he had circled on Exhibit NN as being business-related. He conceded at counsel's urging the uncircled items were personal in nature. Tr. Stuart Jr., November 14, 2003, 3. Shortly thereafter, however, Stuart Jr.'s counsel urged that the circled items were "meaningless" in that Stuart Jr. would claim more than the circled items as business expenses. Id., 5. This type of confusing testimony and argument permeated the entire trial.
As to Exhibit NN, Stuart Jr. testified that all Staples, Radio Shack and Mailbox charges were business-related. He further testified that he took a trip to Staten Island to meet with a Lehman Brothers broker but was not sure Stuart Sons or the Estate had an account with that firm. He testified about trips to buy and pick up furniture for Eldred Wheeler or Talbot House. He testified about a meeting with a Norman Rockwell painting dealer and a meeting at the Rockwell Museum in Philadelphia, AOL expenses, car expenses, and meetings with his brothers to discuss the Estate. Id., 5-13.
The court finds the evidence convincing about the following items set forth in Exhibit NN as being legitimate partnership business expenses:
Alpine Motors $889.66
North Carolina trip $873.78
Philadelphia trip $236.91
Newport, RI trip $225.89
Ryder Truck $191.03
The court finds the remaining claims in Exhibit NN unconvincing, particularly the restaurant bill at Stonehenge in January 1993 when Stuart Jr. claimed he, William and Jonathan discussed their father's (still living) Estate. As noted before, whatever was discussed at that expensive dinner, it did not include giving any information to his brothers about the already formed Stuart Sons.
In his post-trial brief Stuart Jr. claims a number of expenses set forth in Dempsey's schedule of personal expenses (Exs. 91, 111) should be deemed business expenses of the partnership, the Estate or the Trust. For the most part these claims are not based on any testimony or documentary evidence at trial and appear to be the result of counsel setting forth arguments based on hypotheses. For instance, the fact that certain cash withdrawals are charged on Stuart Son's books as maintenance for the rental properties does not rise to clear and convincing evidence. There is no invoice pointed out or specific testimony to support this conjecture. Similarly, it is argued that two American Airlines tickets purchased in February and March 1992 were business-related because the ledgers indicated they related to "art" or "art purchase." These arguments, without specific evidence to support them, and in light of the many instances where ledger entries were incorrect (e.g. the Rolex watch) fall far short of the clear and convincing level.
There is another item outside of Exhibit NN which the court concludes was business-related and not personal to Stuart Jr. The February 1997 Hampton Inn charge of $200 appears to be another furniture purchasing trip to North Carolina. Ex. 111, p. 12.
In addition, Dempsey's analysis of personal expenditures included certain payments out of the Katherine M. Stuart Trust. Some of these payments are clearly personal, but some are not, such as $3,500 to paint the 295 Ridgefield Road residence. In any event the Complaint includes no allegations against Stuart with regard to his mother's Trust. Therefore, $15,594.56 of such items are not charged to Stuart Jr. Finally, after consultation during trial with Charles Bliss, an accountant for Stuart Jr., Dempsey agreed that $22,000 of the amount he had classified as personal expenses were incorrect.
The remaining claims by Stuart Jr. as to the personal charges against him are not proven by the requisite standard. As to the personal expense payments out of the investment accounts, Stuart Jr. does not contest any of the items identified by Dempsey as such.
It is a somewhat different story with respect to the "questionable expenses." Dempsey testified that in very large part the items were listed as questionable because there were no documents, bills or any other support or justification for the expenditures. Stuart Jr. vociferously contested the plaintiffs' claims on many of these items. During his testimony he presented large packets of bills and other pieces of paper which he testified showed that certain expenditures were legitimate payments of business expenses of Stuart Sons and the furniture business, such as maintenance, lawn mowing, electric, refuse collection, telephone, and insurance premium bills. See e.g. Exs. FF, OO, PP. This part of the parties' dispute illustrates to some degree the problems engendered by Stuart Jr.'s lack of record keeping and lack of discipline. First, the documents he presented are, according to the defendants, documents that have never been produced before and which were not available for Dempsey's review. The plaintiffs disagree with this. Second, the documents are incomplete, showing perhaps a year or more of expenses. See e.g. Ex. V. Third, the bills include expenses which might be business expenses but also include Stuart Jr.'s personal expenses. For instance, refuse collection, mowing and homeowner's insurance bills would cover Stuart Sons property (arguably legitimate expenses) and Stuart Jr.'s personal residence (not legitimate). Fourth, as a result of the foregoing, the court, without much assistance from the parties or counsel must scrutinize, and, assign accountability to, perhaps 900 transactions.
Stuart Jr. presented a number of invoices issued by James Lind. Ex. JJ. Lind apparently did carpentry and general handyman work at the Hurlbutt property, 191 Westport Road and the Talbot House store. Lind was a tenant at 199 Westport Road. Apparently his bills were paid by reducing his unpaid rent balance. Lind's tenacy was eventually ended through eviction by a summary process action for non-payment of rent. Id. Interestingly, Dempsey did not list any payments to Lind as questionable even though subsequently, at trial, Stuart Jr. testified that one bill, for $1250, was for work Lind did at Stuart Jr.'s residence. Tr. Stuart Jr., November 13, 2003, 165.
In the questionable category Dempsey listed numerous payments to CLP for electricity bills, from 1993 to 2001, totaling $36,913. Tr. Dempsey, October 28, 2003, 47; Exs. 97, 113. Stuart Jr. presented Exhibit V which was an amalgam of electricity bills and shut-off notices dated 1992 through 1994 which tended to show that many electricity bills included in Dempsey's total were bills for 295 Ridgefield Road, the Westport Road properties, the furniture store and the barn on Stuart Jr.'s property partially used for Stuart Sons offices. A review of the large stack of bills in Exhibit V shows that roughly 15% to 20% of the amounts were for Stuart Jr.'s residence. The evidence clearly shows that a significant portion of the electric bills were allocable to Stuart Sons rental properties or the furniture store and Exhibit V provides a basis for making that allocation. Based on the number of buildings involved, the court concludes that Stuart Jr. has proven by clear and convincing evidence that 85% of the $36,913 are not personal expenses. Therefore $5,536.95 of the payments represent improper expenditures.
Dempsey included $46,512.00 of telephone charges as questionable. Tr. Dempsey, October 28, 2003, 40; Ex. 97, 113. In Exhibit FF Stuart Jr. presented hundreds of telephone bills in an effort to establish that much of what Dempsey deemed questionable were legitimate business expenses of Stuart Sons or the furniture business. It is notable that Stuart Jr. made no effort to sort these bills or categorize them as business or personal. In post-trial papers counsel submits that all the questionable items are business expenses. This is not the case. Stuart Jr. did not offer any proof that he personally paid his own telephone bills. Included in Exhibit FF were numerous bills for his residence telephone (203) 762-2975. Tr. Stuart Jr., November 13, 2003, 153, 154. The court has reviewed a sampling of bills in Exhibit FF for Stuart Jr.'s personal residence telephone. These average about $150 per month. Having reviewed the contents of the bills and aware that Stuart Jr. had numerous business telephones available, including one in his barn, the court believes no more than a third of the charges can be allotted to business calls. Therefore, for the nine years covered by Dempsey's analysis (March 1993 — February 2001) the court concludes that $10,800 of the telephone bills are personal charges and that Stuart Jr. has proven by clear and convincing evidence that the remainder are business related.
These include TMC bills for August and September 1998 and SNET bills dated September 1993, January and May 1994.
Stuart Jr. conceded that 15-20% of the telephone charges were his personal expenses. Tr. Stuart Jr., November 5, 2003, 84.
Stuart Jr. also claims that all insurance premiums classified as questionable by Dempsey should be seen as a business expense. The court agrees that much of the insurance expense is clearly business related. However, Stuart Jr. was strikingly uninformed about the insurance expenses. He did not know what insurance company provided his personal homeowner's policy and could not identify what Hartford Insurance Company insured even though eleven payments were made to that company between 1998 and 2000. Tr. Stuart Jr., November 5, 2003, 97, 98; November 6, 2003; Ex. 113. Stuart Jr. also conceded that his personal homeowners policy cost $600 per year and his automobile policy cost $1000 per year. Tr. Stuart Jr., November 5, 2003, 98. The court notes that in 1993 Stuart Jr.'s own records reflect that Stuart Sons paid Liberty Mutual $634 for Stuart Jr.'s homeowners policy. Ex. 113. The court concludes that the average premium for 1993-2001 was likely to be $750 per year given rising real estate values and insurance premiums. Therefore while he claims that all "questionable" items are business expenses he has all but conceded that $9,000 (automobile) and $6,750 (homeowners) are payments for his personal benefit.
Dempsey's questionable category also included well over 250 payments to Sam and Marie Johnson, Stuart Sr.'s former housekeeper and her husband These payments were made usually between two to five times a month from 1994 to the end of 2000 and ranged from as little as $10 to as much as $300 and totaled over $41,000. Tr. Dempsey, October 28, 2003, 78. These payments were made for cleaning services and small work projects. Stuart Jr. testified he paid Mr. and Mrs. Johnson $60 per week to clean his personal residence. Tr. Stuart Jr., November 5, 2003, 89. This amounts to $21,840 from 1994 through 2000.
Stuart Jr. also challenges "questionable" charges relating to heating fuel deliveries, refuse removal and lawn services, and he presented certain bills to show that some of the expenses related to the upkeep and maintenance of the Stuart Sons properties. Nevertheless they also included certain personal expenses.
The court has calculated that expenses included in Dempsey's "questionable" compilation are $34,656.32 for the following service or product providers: Economy Fuel, Leahy Gas, Levco Oil, New England Carting, Petro, Sabato Refuse and Tony's Lawn Service. The court, again somewhat arbitrarily, finds 20% of this amount, $6,931.26, is attributable to Stuart Jr.'s personal expenses.
Therefore the court determines that $60,858.21 of the more than $237,000 deemed "questionable" were, in fact, personal expenses of Stuart Jr. improperly paid by the Trust, Estate or Stuart and Sons.
To sum up, the court finds that Stuart Jr. received improper payments for personal expenses of $1,186,932.88 (Ex. 91 total, less $40,211.83) and $60,858.21 (Ex. 97, "questionable" expenses) from Stuart Sons and $52,561.69 from the investment accounts (Ex. 96).
5. Sale of Hurlbutt Property to Mr. and Mrs. Stuart Jr
A significant claim by the plaintiffs against Stuart Jr. involves the sale by Stuart Sons of the Hurlbutt Street property to Stuart Jr. and his wife Deborah Christman Stuart in April 2001 for the price of $900,000. Jonathan and William Stuart claim this sale by Stuart Jr., as general partner, to Stuart Jr., individually, and his wife was at a price far below market value and was improper self-dealing.
There are other claims arising out of this transaction which will be discussed later. See Sections II.C.9 and II.E. of this memorandum.
The property was originally purchased in June 1992 by the Stuart Sr. Trust for $750,000 and was transferred to Stuart Sons in November of that year. Stuart Jr. testified that between $100,000 and $130,000 of repairs and improvements were made after the purchase in order to make the main house and two cottages rentable. Tr. Stuart Jr., September 30, 2003, 31. Stuart Jr. provided little documentary support for these repairs, but neither the original purchase price, nor the repairs have been seriously contested by the plaintiffs.
The crux of the plaintiffs' claim is that $900,000 was far below market value in April 2001. In support the plaintiffs offered the testimony and appraisal report of Peter Hastings that as of April 2001 the Hurlbutt property was worth $1,600,000, $700,000 above the sale price. This appraisal was done in August 2002. Ex. 29. The defendants offered two appraisals. One appraisal was made by John Lutter at the request of Stuart Sons. He appraised the Hurlbutt property in March 2001 at a value of $970,000. Ex. DDD. The second appraisal was done by Larry Kelly and reviewed by Ralph Bowley in March 2001 at the request of New Milford Bank which was considering a mortgage application from Deborah Christman Stuart. Ex. EEE; Tr. Bowley, November 7, 2003, 5, 11. This appraisal valued the property at $950,000.
The wide disparity in the appraisers' valuations of the Hurlbutt property concerned the court. See Tr. November 5, 2003, 49-50; November 7, 2003, 37-39. Two of the appraisers had no answer for the disparity. Id.
Stuart Jr. testified that he, as Trustee and then as General Partner, attempted to subdivide the property without success. In late 1999 the Wilton Planning and Zoning Commission denied an application to subdivide the property into two lots. Ex. 74. During this process the property was listed for sale at $1,550,000 (Exhibit 131) and then at $1,200,000 but no concrete offers were received at those prices. Tr. Stuart Jr., November 7, 2003, 47-53. In October 1996 the New Milford Bank received an appraisal report on the Hurlbutt property with a value of $1,250,000. In 2000 Stuart Jr. and Christman Stuart filed a financial disclosure with New Milford Bank listing the property value at $1,500,000.
In condemnation cases the trial judge or referee is more than a trier of facts or arbiter of differing appraisals. He is to make an "independent determination of value." Bowen v. Ives, 171 Conn. 231, 239 (1976) [quoting Birnbaum v. Ives, 163 Conn. 12, 21 (1972)]. This is not a condemnation case, and the court inquired of counsel during trial whether this court was bound to accept one of the three appraisal figures or whether it could make an independent determination of value. Counsel agreed that the court was not bound to accept a specific appraised value, and there seems to be some support for this proposition found in tax assessment appeals. See Madison Beach Club, Inc. v. Board of Assessment Appeals, Superior Court, judicial district of New Haven at New Haven, D.N. 400680 (May 11, 2001, Blue, J.); City of New Haven v. PMG Associates, Superior Court, judicial district of New Haven at New Haven, CV 98 0410089 (February 5, 2001, DeMayo, J.T.R.); Corbin Russwin v. Town of Berlin, Superior Court, judicial district of Hartford-New Britain at New Britain, CV 94 0461772 (February 7, 1996, Handy, J.).
All three appraisals were based on the sales comparison approach. The Lutter and Kelly/Bowley appraisals included the same two sales (163 Westport Road and 468 Belden Hill Road) which had occurred in 2000 among their comparable sales analyses. Exs. DDD, EEE. Both these appraisals used sales of 18th century vintage residences as the main Hurlbutt residence was originally constructed in 1762. The Hastings appraisal used as comparable sales homes built in the 19th century, which were considerably larger than the 3410 square foot main house at Hurlbutt. One of the sales used by Hastings was of a ten-acre property located at 36 Seeley Road in January 2001 for $3,100,000 originally built in 1870 consisting of 8000 square feet of living space and including a guest house and barn. Ex. 29.
The court determines that the Lutter and Kelly-Bowley appraisals are more accurate indicia of the actual market value of the Hurlbutt property than is the Hastings appraisal. This determination is based on more persuasive comparable sales analyses, the fact that Lutter and Kelly saw the interior of the house at the time of the appraisal whereas Hastings had only been inside six years prior to his appraisal, and the fact that Hastings did not take into account that the Town of Wilton assessment of the property had been lowered about 1999, presumably to take into account the inability to subdivide.
The court declines the option to arrive at a market price of its own. This court had an initial impression that property bought in 1992 at a price which together with improvements approaches $900,000 would ordinarily, through average or even below average appreciation, attain a market value in excess of $1 million over the span of nine years. Such an impression, however, is based on little more than conjecture. The court has not visited the premises, nor has it any information on the conditions that pertain there. Furthermore there was simply no evidence whatsoever that the original purchase price represented fair market value at the time. It is at least possible that Stuart Jr., relying on brokers' information paid $750,000 believing that the property could be subdivided when, as it turned out, it could not.
In conclusion, the court accepts the Lutter appraised value of $970,000. The court also notes that a broker's commission was not paid, a commission that might have ranged from a little less than $40,000 to a little less than $60,000. The sales price of $900,000 was not so low as to be the product of improper self-dealing.
There is, however, a serious question of whether Stuart and Sons received the $900,000 which it accepted as the sales price. This subject is dealt with in Part II.C.9 of this memorandum.
6. Sale of 295 Ridgefield Road
The residential property at 295 Ridgefield Road had originally been owned jointly by Katherine Stuart and Stuart Sr. Mrs. Stuart Sr.'s half interest passed through her Trust and was divided equally among Stuart Jr., William and Jonathan. Stuart Sr.'s half interest, as noted, was transferred to Stuart Sons. Following the death of Stuart Sr. in February 1993 the residence was rented to various tenants. Stuart Jr.'s one-sixth interest was also transferred to Stuart Sons.
The property was put on the market and sold for $1,575,000 in October 2000. Ex. 25; Ex. A. According to snippets of testimony the disposition of the proceeds from this sale were the result of discussions between the three brothers which were part of an effort to settle the spectrum of differences between them. For unknown reasons full settlement was not achieved; nevertheless the sales proceeds were distributed equally. After the payment of certain closing costs including past due real estate taxes the remaining funds were $1,538,714.34. Following closing, payment was made to the Internal Revenue Service of $359,969.12 representing the final payment of taxes on Stuart Sr.'s Estate. Additional payments were made to Freiberg for accounting services, to persons for services provided in assessing whether the property could be subdivided and to an attorney, leaving an amount of $1,172,825.11, including escrow account interest, to be distributed equally to Stuart Jr., William and Jonathan. Apparently by agreement, part of Stuart Jr.'s share of $390,940.70 was paid to the Wilton Tax Collector for real estate taxes due on Stuart Son's properties ($45,106.51) and to New Milford Bank ($182,572.50) and others with the remainder of $159,524.37 going to Stuart Jr. Ex. A. Tr. Stuart Jr., September 30, 2003, 87-90.
Stuart Jr. testified that the payment to New Milford Bank paid down that bank's mortgages on the Hurlbutt and Westport Road properties owned by Stuart Sons and the remaining payment to him was transferred to Stuart Sons to reduce his outstanding loan. Tr. Stuart Jr., September 30, 2003, 87-90; October 2, 2003, 169-73.
Of course, in dividing the net proceeds of the sale of 295 Ridgefield Road on an equal basis (albeit Stuart Jr.'s share went to pay off some partnership obligations) the three brothers essentially ignored the existence of Stuart Sons and its record ownership of two-thirds of the property. According to the record ownership two-thirds of the net proceeds belonged to the partnership and half the remaining one-third (one-sixth) belonged to William and the other half to Jonathan. Taking the analysis another step the two-thirds allotted to Stuart Sons should eventually be allocated among the partnerships' Class A partners owners; i.e. 89.7% to the Stuart Sr. estate and 9.30% to Stuart Jr.
The court declines to attempt to rearrange the actual disposition of proceeds because, first, of its finding above invalidating the partnership, second, the existing arrangement was the result of an agreement among all interested parties, third, William and Jonathan have benefitted by receiving a one-third rather than a one-sixth share, and fourth it represents, in a "rough justice" fashion, the appropriate result.
7. Other Claims By Plaintiff
The plaintiffs also claim that the assets rightfully belonging to the Estate or Trust have been depleted by Stuart Jr. in other ways. First they allege that Stuart Jr. simply stole certain bearer bonds held by his father and put them in his personal investment account. This amount is claimed to be $24,500. Stuart Jr. testified that the bonds were given to him to equalize gifts that his parents had given to his family and the families of William and Jonathan. Because Jonathan had more offspring, his family for instance, had received $30,000 more than Stuart Jr. and his daughter had received. Tr. Stuart, Jr., October 2, 2003, 81-85. While this testimony has a degree of plausibility, and it was not contradicted by either William or Jonathan who testified later in the trial, it is simply not sufficient to meet the heavy burden of clear and convincing evidence placed on a fiduciary. This is especially so since Stuart Jr. conceded that his father did not know of the imbalance in gifts and one has to infer that he did not authorize Stuart Jr. to take the bonds. Id., 85.
The plaintiffs also claim that over $70,500 of proceeds from the sale of two Stuart Sons' residential properties on Westport Road in 1997 and 1998 were improperly diverted. Dempsey testified that his examination had identified the gross sale proceeds and been able to trace the bulk thereof to Stuart Sons' bank accounts or payments made on behalf of the partnership. However, his expert opinion was that $70,584.64 of these proceeds were not accounted for. Tr. Dempsey, October 17, 2003, 102. Dempsey did not have any information about brokers commissions. Id., 103.
Stuart Jr. failed to produce any evidence to explain the unaccounted for sums. Merely the production of the two closing statements would have been sufficient to establish that commissions, lawyers' fees and conveyance taxes had been paid, but even this was not available. The court finds that the amount of $70,584.64 is unaccounted for and chargeable to Stuart Jr.
8. Stuart Jr. Claims for Compensation
Stuart Jr. has contended that he is, and was, entitled to compensation for his services as general partner of Stuart Sons. In his testimony he spent considerable time describing his work managing the partnership assets including attempts to enhance or develop the value of the Rockwell art. He argues in his post-trial papers that his work as general contractor in rehabilitating the real estate purchased for rental, the purchase and sale of properties, his work as property overseer, and his work as chief executive officer of the furniture businesses entitles him to substantial compensation. Stuart Jr. has not been clear whether the source of such compensation should be the Trust, or Estate assets, or Stuart Sons.
Stuart Jr. presented Edward Pratesi who gave evidence as to what he believed were standard rates of remuneration for asset managers, retail store operators and the like. This evidence was presented in Mr. Pratesi's testimony and his report, Exhibit G. Pratesi examined compensation paid to general partners in real estate investment partnerships and retail furniture stores. Ex. G, p. 10. He opined a management fee of 5-6% of gross rental income and a fee of 3-5% of sales proceeds were reasonable for real estate managers and a fee of 3.6-4% of store revenues was reasonable for retail operations. A 1-1.5% fee was reasonable for assets under management. Id., 11.
Charles Bliss, a CPA, made certain calculations based on Mr. Pratesi's recommendations. He calculated that using the low end of the Pratesi fees, reasonable compensation to Stuart Jr. from 1992 through 2002 was $1,060,579.41. This consisted of $49,363.75 based on rents at 5%, $41,928.75 based on sales of property at 3%, $198,188.17 based on furniture store sales at 3.6% and $771,098.73 for asset management at 1.0%. Exs. J, K. Mr. Bliss gave no opinion as to the validity of Mr. Pratesi's commission ranges.
The court has several difficulties with this claim. As an initial matter it was not pleaded as a counterclaim, set-off, special defense or anywhere in the pleadings of Stuart Jr. or Stuart Sons. Therefore, there is no basis for the court to subtract all or part of this claim from the plaintiffs' claims or to award any sum as damages.
Stuart Jr. makes no argument or contention in this regard. In his post-trial papers he simply assumes his claim for compensation reduces any damages claimed by the plaintiffs. The only rationale for this approach, as far as the court can see, is that Stuart Jr.'s expenditure of partnership funds for his own personal expenses were justified in his eyes as compensation for his services. That concept was alluded to by Stuart Jr. when he testified that, at the time he took the $490,755 credit on his loan account with Stuart Sons to pay for a share of the Hurlbutt property, (see Section II.C.9.) he did not know what the balance on that account was.
At that time, I don't know what the balance was, but I had not — I was very aware that at that time I had not taken any compensation for what I had done except for what Rich [Freiberg] backed me into at the end of the year, which totaled a couple hundred thousand dollars. So I figured we were in pretty safe territory there. CT Page 10405
Tr. Stuart Jr., September 30, 2003, 96.
How Stuart Jr. purported to pay for his share of the Hurlbutt Street property is discussed in Sections II.C.9. and II.E. of this memorandum.
However, Stuart Jr. has offered no authority to support his theory of compensation. The partnership agreement of Stuart Sons does not contain any provision authorizing compensation for the general partner. Section 8 of the agreement provides that the general partner is allocated 4% of the partnership's annual net gain or loss as determined for federal income tax purposes and 4% of net cash flow. Ex. 12, §§ 8.1(b), 9.1(b). This is a return on investment, not compensation, and in any event, the partnership tax returns show that the partnership reported a net profit in only one year — 1999 — and that was in the amount of $18,452. Ex. 79, Bates Nos. 100349-100544.
While it is conceivable that the members of the partnership could have agreed that its general partner be compensated, there was no amendment of the partnership agreement offered, and there is not one iota of evidence that such an agreement existed. The court declines to accept the claim for compensation.
Although not agreeing with his contentions in this regard, the court recognizes that at least in one area Stuart Jr. has taken steps to protect to Stuart family's interests in the Rockwell art pieces. There is presently pending in the United States District Court for the District of Connecticut an action challenging Stuart Sr.'s ownership of the Rockwell art. This court has no information about the merits of the claim. However, Stuart Jr. has taken the lead in developing and marshaling the evidence, as well as obtaining legal representation to defend against the claim.
9. Stuart Jr. Loan Account and His Contribution to the Purchase of Hurlbutt
According to the testimony of Stuart Jr., Dempsey and Bliss as well as the documentary evidence, Stuart Sons kept certain records purporting to record and reflect the status of the account between the partnership and Stuart Jr. Stuart Jr. claimed that he made certain payments on behalf of, or contributions to, Stuart Sons and that Stuart Sons made certain payments on his behalf. This was referred to, during the trial as the "Stuart Jr. loan account." As noted above, there was also a loan account under the Stuart Sr. Trust.
At trial Stuart Jr. presented little in the way of documenting the transactions in the loan account. On the other hand, Dempsey, on behalf of the plaintiffs, made an exhaustive review of the available records and presented his findings through exhibits and testimony.
Dempsey testified that the Stuart Sons records showed that at the end of 1993 Stuart Jr. owed $7,222.74 to the partnership and at the end of 2001 the partnership owed Stuart Jr. $13,560.75. During that span of years there were recorded transactions on the partnership books which increased the amount Stuart Jr. owed by $1,157,805.24 and transactions which decreased the amount owed by $1,178,591.73. Of this latter amount Dempsey found $485,035.53 was supported by documentation and records; $90,000 was classified as "commissions" owed to Stuart Jr. and $502,984.36 was not supported or substantiated. Tr. Dempsey, October 21, 2003; Ex. 92.
Some of Dempsey's specific findings are worthy of note. Among the charges to Stuart Jr.'s loan account were a number of payments to or on behalf of Leigh Stuart, his daughter, from 1994 through 1999, most significantly an expenditure by wire transfer of $44,562.50 for the purchase of a cello and bow. Ex. 92, Tr. Dempsey, October 21, 2003 (Stuart Jr. confirms this). Among the offsets, or reductions, to the loan account were various contributions made by Stuart Jr. over the years.
At the outset Dempsey reviewed the "mixed account" in Stuart Jr.'s name and concluded that a substantial amount of the original cash contribution of $108,000 by Stuart Jr. to Stuart Sons did not come from his own funds. As pointed out before, a significant portion of the income into the account from Mr. and Mrs. Stuart, Sr. in the form of Medicare reimbursements, social security benefits, investment income and pension payments. Dempsey's analysis showed that $128,951 went into the mixed account from his parents and about $20,000 was paid out for their benefit. Prior to December 1992 the mixed account received about $78,000 from sources attributable to Stuart, Jr. and about $55,000 was paid out for his personal expenses. It was Dempsey's analysis that a `substantial amount" of the $108,000 that was contributed to Stuart Sons from that account represented Mr. and Mrs. Stuart Sr.'s money and not that of Stuart Jr. Tr. Dempsey, October 16, 2003, 151, 161. The court questioned Dempsey closely on this conclusion because of the fact that Stuart Jr. had received $108,000 from his mother's trust after her death in March 1992. See Id., 151-58. In response, Dempsey pointed out that the money from his mother's trust had been deposited in a Merrill Lynch account and that $108,000 had been distributed by Stuart Jr. to each of his brothers and that he had spent his $108,000 share. Id., 156-58; Ex. 80, Bates Nos. 202244-202362. The court therefore concludes that, at best, Stuart Jr. initially invested only $40,000 in cash in the partnership, not $108,000 as claimed.
In his analysis of the Stuart Jr. loan account with Stuart Sons, Dempsey only credited Stuart Jr. with a payment of $194,035.53 to Stuart Sons out of his share of the net proceeds of the sale of the 295 Ridgefield Road property. Ex. 92. While Dempsey's calculations are technically correct, for the reasons stated earlier the court believes Stuart Jr. should be credited with the full amount of his one-third share of the proceeds, $390,940.70.
For the reasons stated in Part II.C.8. of this memorandum Stuart Jr. should not be credited with any "commissions," some $90,000 of which were credited to his loan account over the years.
With the above adjustments and using the figure computed by Dempsey of $694,955 as the total of contributions and repayments made by Stuart Jr. (see p. 137, Plaintiffs' Post-Trial Brief) the court arrives at a figure of $823,860.17 as the total amount of contributions and repayments by Stuart.
This figure is arrived at by starting at $694,955 and then subtracting $68,000 and adding $196,905.17 (the difference between the court's and Dempsey's evaluation of the 295 Ridgefield Road contribution). It is not clear whether Dempsey's figure includes any reduction of the claimed initial $108,000 contribution, and the court assumes it did not.
Even though Stuart Jr. is credited with a larger amount of contributions to Stuart Sons he did not have anywhere near a sufficient credit balance in his loan account to pay his $490,755 share of the purchase price for the Hurlbutt Street property. By the partnership's own records (which credited Stuart Jr. with $390,000 of the 295 Ridgefield Road proceeds) he had a positive balance of under $403,000 at the time he purchased his share of Hurlbutt. Of this amount on the books over $225,000 of supposed contributions to the partnership had no documentation or other support, $90,000 were fictitious "commissions" and, as shown earlier at least several hundred thousand dollars of personal expenditures had been booked as partnership expenses. The court concludes that Stuart had no positive balance in the Stuart Sons' loan account in April 2001 and that the partnership never received the $490,755 it purportedly was paid for Stuart Jr.'s 5/9s share of the Hurlbutt Street property. The above amount must be added to the damages resulting from Stuart Jr.'s breaches of fiduciary duty.
To summarize, the court has determined that Stuart Jr. breached his fiduciary duties in several ways and that the damages flowing from those breaches are calculated as follows:
Improper payments of Stuart Jr.'s personal expenditures: $1,300,352.78 (Section II.C.4.)
Improper appropriation of bearer bonds untraced proceeds of sales: $95,084.64 (Section II.C.7.)
Failure of consideration for Stuart Jr.'s share of Hurlbutt Street: $490,755 (Section II.C.9.)
These damages of $1,886,192.42 are reduced by the amount found to have been contributed by Stuart Jr. $823,860.17, leaving net breach of fiduciary duty damages of $1,062,332.25.
D. Count Five — Prudent Investor Act
The plaintiffs allege that Stuart Jr.'s actions as Trustee after October 1, 1997 violated the Connecticut Uniform Prudent Investor Act, General Statutes §§ 45a-541 et seq. That statute provides that
a trustee who invests and manages trust assets owes a duty to the beneficiaries of the trust to comply with the prudent investor rule as set forth [in this statute]
General Statutes § 45a-541a(a). The statute states that a trustee shall invest and manage trust assets as a prudent investor would and shall exercise reasonable care, skill and caution. Section 45a-541b(a). A trustee is required to consider certain generalized circumstances, such economic conditions, taxes, liquidity, effects of inflation, deflation etc. Stuart Jr. contends that all trust investments were made before 1997 and therefore the statute does not apply. This is incorrect as the statute applies to managing as well as investing. Section 45a-541l.
The statute does not add anything in particular to the common law of fiduciary responsibility as it applies to this case. Section 45a-541e requires that the trustee manages assets solely in the interest of the trust beneficiaries. Because there has been no accounting rendered as to the Trust, the sparse evidence available shows that the Trust had assets in 1997 which have been intermingled with Stuart Sons' assets, including a loan to the partnership. For the reasons stated in Part II.C of this decision, the court finds Stuart Jr. in violation of General Statutes, § 45a-541e.
E. Count Six: Fraudulent Transfer
In April 2001 Stuart Sons, acting through Stuart Jr., transferred the Hurlbutt property to Christman Stuart and Stuart Jr. A deed transferring a 5/9ths interest in the property to Stuart Jr. and a second deed transferring the remaining 4/9ths interest to Christman Stuart were executed by Stuart Jr. on behalf of the partnership. Stuart Sons received about $409,000 from Christman Stuart through a mortgage she obtained from New Milford Bank. Stuart Jr. issued himself a $490,755 credit from Stuart Sons to pay for his share of the property. According to the books and records of Stuart Sons it received $400,000 plus in cash and debited Stuart Jr. loan account $490,755, thus changing that account from a payable to Stuart Jr. in excess of $400,000 to a receivable from Stuart Jr. Ex. 25, ¶¶ 17-20, 23-25; Tr. Stuart Jr., September 30, 2003, 95-96; Tr. Dempsey, October 28, 2003, 165-68. Immediately thereafter Stuart Jr. transferred his 5/9th interest in the Hurlbutt property to his wife, Christman Stuart. Ex. 25, ¶¶ 21-22. All of these transactions were done pursuant to an agreement between Stuart Jr., as general partner, and Christman Stuart. Ex. 26.
The plaintiffs allege in Count Six of their complaint that the transfer of Hurlbutt for substantially less than its actual value constituted "a fraudulent conveyance pursuant to" General Statutes § 52-552e(a)(1) et seq. Complaint, Count Six, ¶ 92. The Connecticut Fraudulent Conveyance Act defines a fraudulent conveyance in three ways. First, a fraudulent conveyance occurs if a person (including a partnership) who is liable on a claim transfers property with "actual intent to hinder, delay or defraud" a creditor. General Statutes § 52-552e(a)(1). Second, a fraudulent transfer occurs when a person who is liable on a claim transfers property "without receiving reasonably equivalent value in exchange" and that person is left with assets unreasonably small for his remaining business, or that debts would be incurred which were not able to be paid as they came due. Id., § 52-552e(a)(2). Third, it is a fraudulent conveyance when a transfer is made without receiving reasonably equivalent value leaving a person liable on a claim insolvent. Id., § 52-552f.
This court, in Part II.C.5 of this memorandum has determined that the fair market value of the Hurlbutt property was $970,000. Thus, the conveyance of the property for a purported $900,000 would have been for reasonably equivalent value because the evidence shows that no real estate commission was paid by Stuart Sons, and Christman Stuart paid certain conveyance taxes and closing costs. Ex. III.
However, as pointed out in Section II.C.9. above Stuart Sons did not receive the $490,755 portion of the purchase price from Stuart Sons from Stuart Jr., and hence, the partnership arguably did not receive equivalent value. The plaintiffs have not pursued the claim in this form, but have based their lack of equivalent value claim on the contention that the Hurlbutt Street property had a true market value of $1.6 million. Whether this is lack of equivalent value or failure of agreed-upon consideration the court will address the issue in the context of a fraudulent conveyance claim. The court finds that Stuart Sons, owning several million dollars worth of Rockwell art, was neither insolvent nor unable to meet its debts as they came due and concludes that the plaintiffs have not met their burden of proving a violation of Section 52-552e(a)2 or Section 52-552f.
Therefore, the plaintiffs must show that the defendant made the transfer with "actual intent to hinder, delay or defraud." This claim must be proven by clear and convincing evidence. Tyers v. Coma, 214 Conn. 8, 11 (1990); Dietter v. Dietter, 54 Conn. App. 481, 488 (1999). The Fraudulent Conveyance Act sets forth certain considerations which may be weighed in determining actual intent.
In determining actual intent under subdivision (1) of subsection (a) of this section, consideration may be given, among other factors, to whether: (1) The transfer or obligation was to an insider, (2) the debtor retained possession or control of the property transferred after the transfer, (3) the transfer or obligation was disclosed or concealed, (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit, (5) the transfer was of substantially all the debtor's assets, (6) the debtor absconded, (7) the debtor removed or concealed assets, (8) the value of the consideration received by the amount of the obligation incurred, (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred, (10) the transfer occurred shortly before or shortly after a substantial debt was incurred, and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
General Statutes § 52-552e(b).
A review of the above factors shows that the transfer was to an insider. See General Statutes § 52-552b(7)(C). The second factor, debtor retains control of property after transfer, exists if one considers Stuart Jr. and Stuart Sons alter egos, and on the same basis the fourth factor also exists. Whether the transfer was concealed is arguable: the plaintiffs contend they were not informed of the sale by the defendants; on the other hand the transactions were recorded on the land records and were apparently reported to them a month or two later. The fifth through eleventh factors set out in Section 52-552(b) do not support a finding of fraud.
After review of all the evidence the court concludes that plaintiffs have not met the heavy burden of proving actual intent to hinder, delay or defraud. This conclusion is buttressed by the fact that there was no proof that Christman Stuart knew that there was a failure of consideration in connection with Stuart Jr.'s payment and no clear and convincing evidence that Stuart Jr. who was claiming a right to be compensated for running the partnership, understood that his $490,755 credit was worthless.
F. Count Seven: Statutory Theft, Section 52-564
In their seventh count the plaintiffs seek treble damages pursuant to General Statutes § 52-564 which reads: "A person who steals any property of another, or knowingly receives and conceals stolen property shall pay the owner treble his damages."
As the Connecticut Appellate Court has stated, this "is an extraordinary statutory remedy." Schaffer v. Lindy, 8 Conn. App. 96, 104 (1986). A cause of action under § 52-564 is synonymous with the crime of larceny. See Hi-Ho Tower v. Com-Tronics, Inc., 255 Conn. 20, 44 (2000). A person commits larceny when, with intent to deprive another of property or to appropriate the same to himself or a third person, that person takes, obtains or withholds such property from an owner. See General Statutes § 53a-119.
As set forth at length above, the plaintiffs have established their claim to substantial damages as a result of Stuart Jr.'s breaches of fiduciary duties. In those cases, however, the burden was on Stuart Jr. to prove his fair dealing. In this count the plaintiffs are seeking additional recovery and the burden of proving their entitlement, i.e. that Stuart Jr. intended to deprive them of their property, is on them. The question of the correct standard of proof required for a claim under Section 52-564 is vexing. In Schaffer v. Lindy, supra, 8 Conn. App. 105, the Appellate Court, concluding that a high standard was required to sustain claims which have serious consequences or harsh or far-reaching effects on individuals, held that "clear and convincing proof . . . is required in order to assess damages pursuant to § 52-564." Several years later the Connecticut Supreme Court considered the burden of proof required for double damages under General Statutes § 47a-46 in an action for unlawful entry and detainer pursuant to General Statutes § 47a-43(a)(3). Freeman v. Alamo Management, 221 Conn. 674 (1992). The Appellate Court had held that the appropriate burden was clear and convincing evidence. Freeman v. Alamo Management, 24 Conn. App. 124, 131 (1991). The Supreme Court reversed, stating:
We disagree . . . with the Appellate Court's conclusion in this case and in its earlier case of Schaffer v. Lindy . . . that clear and convincing proof is an appropriate standard of proof whenever claims of tortious conduct have serious consequences or harsh or far-reaching effects on individuals, or require the proof of willful, wrongful and unlawful acts. Absent evidence of legislative intent to the contrary, we continue to presume that when a statutory private right of action includes multiple damages, the plaintiff's burden of proof is the same as that in other cases.
Id., 682-83 (citations omitted).
The Connecticut Supreme Court did not explicitly overrule Schaffer and one can read Freeman as disagreeing only with the rationale of Schaffer that the clear and convincing evidence standard applies "whenever" tort claims have "serious consequences." Freeman, supra, 221 Conn. 683. On the other hand, the Supreme Court did overrule the Appellate Court in Freeman and the presumption stated that statutory causes of action which include multiple damages (such as § 52-564) are proven by the preponderance of the evidence standard is pretty clear.
The vexing part comes later. Six years after Freeman the Appellate Court upheld a trial court's decision to award treble damages under Section 52-564, noting, without mention of Freeman, that the trial court
properly recognized that the plaintiff was required to satisfy the higher standard of proof by clear and convincing evidence to be entitled to an award of treble damages pursuant to § 52-564. See Schaffer v. Lindy . . .
Suarez-Negrette v. Trotta, 47 Conn. App. 517 (1998).
Coincidentally, the trial judge in Suarez-Negrette was the trial judge in Freeman.
This court cannot divine from Suarez-Negrette whether the Appellate Court concluded that Schaffer v. Lindy, had not been overruled, or whether it simply overlooked Freeman. In recent years various Superior Courts have applied the clear and convincing standard of proof without making reference to Freeman. See e.g. Reynolds v. Smith, Superior Court, judicial district of Ansonia/Milford at Milford, CV 980062195 (October 11, 2002, Curran, J.); General Tech v. New England Drywall, Superior Court, judicial district of New Haven at New Haven, CV 01 0449507 (July 29, 2002, Robinson, J.). One trial court, Howard v. MacDonald, Superior Court, judicial district of Stamford/Norwalk at Stamford, CV 99 0173842 (July 8, 2003, D'Andrea, J.T.R.) ( 35 Conn. L. Rptr. 60), found Freeman not applicable.
Faced with this somewhat murky situation this court determines that the Freeman language quoted above disagrees with the statement in Schaffer that the clear and convincing standard applies "whenever" the consequences are harsh or have "far-reaching consequences," but not necessarily with the Schaffer holding. This conclusion is based on a close reading of the subject opinions and on the recognition that Section 52-564 has been held to be synonymous with the crime of larceny and the larceny statute. General Statutes § 53a-119 defines larceny as including many instances of fraudulent behavior. See Section 53a-119(2)(3)(6)(7)(11)(16). Proof of fraudulent activity in a civil case requires clear and convincing evidence. Alaimo v. Royer, 188 Conn. 36, 39 (1982). For these reasons the court will apply the clear and convincing standard.
Proof of intent is usually established by circumstantial evidence from which the trier of fact can draw logical and reasonable inferences. In this case the court believes the existence of a loan account between Stuart Jr. and Stuart Sons is relevant. While the loan account was clearly not properly debited and credited and did not accurately reflect Stuart Jr.'s contributions to and personal withdrawals from the partnership, its existence and continued use is indicative, to some extent, of an intent to document transactions that shows a lack of larcenous intent. On the other side of the coin, however, the long practice of recording personal payments as business-related expenditures is indicative, also to some extent, of intent to hide or mask the true nature of the payments which is consistent with larcenous intent. In this regard the court returns to the subject of Stuart Jr.'s contention that he was entitled to compensation for his services as Trustee, Executor and general partner. While the court has disallowed most of these claims, see Part II.C.8., it does not ignore the fact that Stuart Jr. appears to have believed, perhaps encouraged by the accountants, that he was entitled to some payment and took that payment in the form of partnership and Trust expenditures for some personal expenses. While these personal expenditures were in some cases clearly beyond any conception of proper compensation, in other cases the acceptance by Stuart Jr. of these payments does not indicate a larcenous intent.
One large caveat to this observation is a trust accounting purportedly tracking a loan to Stuart Jr. from the Stuart Sr. Trust which offsets every personal expenditure for Stuart Jr. with an entry in the same amount designated "commission earned." Ex. 79, Bates Nos. 100267-100287.
Finally, an additional factor to be considered is the somewhat languorous approach of William and Jonathan Stuart to their brother's actions. William and Jonathan were aware of Stuart Jr.'s spending what they considered to be their father's money on himself early on. Tr. William Stuart, October 9, 2003, 75, 77. Yet while a suit was filed in 1993 no further action was taken to stop the spending until an injunction proceeding in 2002. Indeed, William asked Stuart Jr. why he did not put all the money in one account and spend it on himself out of that account! Id., 75. While not amounting to a waiver, it was some basis for Stuart Jr. to believe they did not object strenuously to his using the money for basic living expenses.
After what can only be called an exhaustive, and exhausting, review of several thousand transactions the Court concludes that the following claims qualify for trebling of damages pursuant to Section 52-564.
(1) The purchase of the Rolex watch. $5050.
The contradictory testimony and clear misidentification on the books of this purchase are clear and convincing evidence.
(2) The purchase of a cello and cello bow for Leigh Stuart. $44,562.50 (3) The payment of Leigh Stuart's tuition and other direct payments to her. $52,148.68While Stuart Jr. may be credited as a responsible, even doting father, these expenditures clearly were intended to deprive the plaintiffs of property, and were far in excess of basic living expenses.
(4) Payments for a time-share residence in New Orleans. $17,230.21
Much of this expenditure was booked as a loan. Nevertheless, it was purchased when Stuart Sr. was still alive and no discernible effort was made to pay it back in almost twelve years.
(5) Alimony payments. $19,490. (6) Point of Sale Purchases. $17,244.86.
The total of such debit or credit card purchases was $21,556.08. The vast majority paid bills at restaurants, book stores or wine stores. The court somewhat arbitrarily assigns 80% of this amount to § 52-564 damages.
(7) Bearer Bonds. $24,500.
This was done in secret.
(8) Money Incorrectly Reported as Contributed to Partnership. $68,000.
This lack of contribution was covered up.
The parties may have greatly varying views on the correctness of the court's evaluation of what items of damages qualify for Section 52-564 treatment. In one's eyes an expenditure may be clearly larcenous while in another's eye it was an error in judgment or accounting practice without the intent to deprive. However, the above listing is the product of the court's best judgment in light of the available evidence and the high standard of proof. As an example the plaintiffs have calculated that Stuart Sons and TH have paid almost one hundred American Express bills amounting to $161,793.78. These payments were largely denominated business expenses. Only a very few of the American Express bills are in evidence. A review of those bills available show many of these bills contained substantial amounts of Stuart Jr.'s personal expenses. See Ex. NN. The court could make an educated guess that a similarly substantial amount of the missing American Express bills contain personal Stuart Jr. expenses that might be subject to treble damages, but that would be improper speculation.
The issue of the proper standard of proof to establish entitlement to Section 52-564 damages is presently before the Connecticut Supreme Court in Howard v. MacDonald, SC 17136/17137, although it is not known whether a decision in that appeal will reach or discuss the standard of proof. However, in the event that this court is incorrect in applying the clear and convincing standard and in an effort to avoid the necessity of another trial, the court has reviewed the evidence to determine what additional damages should be assessed applying the preponderance of the evidence standard. The court determines that under the lesser standard the amount of $490,755 in non-existent credit which Stuart Jr. had applied to pay for his share of the Hurlbutt Street residence (see Sections II.C.5 and 9) would qualify as damages to be trebled. The court concluded they did not qualify for § 52-564 treatment under the clear and convincing standard because it was not entirely clear that Stuart Jr. who might have been operating under the impression he was entitled to compensation for managing Stuart Sons, had the required larcenous intent. If, however, the plaintiffs only have to present the more weighty credible evidence, they would succeed.
G. Count Eight: Unjust Enrichment
Some time in 1994 Stuart Jr., through Stuart Sons, entered into the retail furniture business. A limited liability company was formed known as Eldred Wheeler of Wilton, LLC (EW) which was 99% owned by Stuart Sons and 1% owned by Stuart Jr. As the court understands it, EW was, in a sense, a franchise of a national furniture company, Eldred Wheeler. EW had a place of business at 444 Danbury Road (Route 7) in Wilton. Stuart Jr. was in charge of the business. Around 1995 EW hired Deborah Christman to take over much of the management of the store including purchases and sales. In 1996 EW severed its ties with Eldred Wheeler and began doing business as Talbot House at a new location, 426 Danbury Road. Talbot House (TH) did not change its formal name of Eldred Wheeler of Wilton. Ex. 90, ¶¶ 12-16.
EW and subsequently TH were only marginally profitable between 1994 and 2000. There were innumerable transactions between Stuart Sons and the furniture business which are mostly indecipherable but involved various loans between the two entities carrying no interest.
In June 2000 Deborah Christman married Stuart Jr. At about that time TH began going out of business and Christman Stuart and Stuart Jr. opened a new business in Ridgefield, Connecticut known as Christman Stuart Interiors (CSI). William Stuart testified that Stuart Jr. described CSI as a "sister" store of TH. Tr. William Stuart, October 10, 2003, 9. In fact it was owned solely by Stuart Jr. and his wife and had no connection with Stuart Sons, the Estate or Trust. Tr. Christman Stuart, November 7, 2003, 137-38.
In April 2001 Freiberg sent to the Ridgefield Bank certain financial information in connection with a loan application by CSI including tax returns for Stuart Sons, Eldred Wheeler of Wilton, LLC and CSI, along with financial statements for the Estate of Kenneth Stuart [Sr.] and "affiliates," including CSI, for the year end of 2000. Ex. 82, Bates No. 300009. The year end financials were addressed to the "beneficiaries" of the Stuart Sr. Estate. Id., Bates No. 300011. This inclusion of CSI within the umbrella of the Estate entities reinforced the false impression that it was related to Stuart Sons.
The plaintiffs claim that a significant amount of the furniture inventory of TH was transferred to CSI without payment therefore and that Stuart Sons or TH paid certain expenses on behalf of CSI. The plaintiffs seek $288,635.60 from Christman Stuart, CSI and Stuart Jr. under a theory of unjust enrichment. This amount is made up of a claim for $208,671 based on the alleged diversion of the TH inventory to CSI and the alleged payment of CSI expenses of $79,964.60. Ex. 103.
The plaintiffs also seek damages from Christman Stuart, on a theory of unjust enrichment, for the Hurlbutt property transaction. This claim is denied for the reasons stated in Part II.C.5, supra.
The evidence presented on the inventory issue is not entirely clear. Dempsey testified, based on the accounting records prepared by Freiberg and presented to two banks as support for a loan to CSI, that an "elimination" entry in the amount of $208,671 reflected the transfer of that amount of inventory to CSI without consideration from CSI. Tr. Dempsey, October 17, 2003, 92-95. He testified that an elimination entry is used to record transfers between related entities presumably so that assets are not reflected twice. Id. He concluded that in his opinion this entry reflected the transfer of inventory to CSI as TH was going out of business. He supported this conclusion by noting that the general ledgers of CSI reflected sales of $431,000 in 2000 but the cost of sales was only about 15% of that, a very low number. Tr. Dempsey, October 29, 2003, 35-40. See Ex. 86, Bates Nos. 600131-600132. Counsel for Christman Stuart made a well considered and forceful cross examination of Dempsey on this point but was unsuccessful in efforts to back him off his opinion. Dempsey also testified that the CSI tax return for 2000 reflected that it had $208,671 in inventory from TH. Tr. Dempsey, October 29, 2003, 66-67.
Christman Stuart acknowledged that CSI had some TH inventory. However, her testimony was that the cost value of the inventory transferred to CSI was about $82,000 and that TH was more than compensated for this asset by sales proceeds generated by CSI during the first four months it was in business. Christman Stuart testified that during that period, July through October 2000, CSI did not have credit card verification equipment and that over $200,000 of CSI sales were either processed through TH's credit card machine and deposited in TH's account or customer checks were directly deposited into the TH account. Tr. Christman Stuart, November 7, 2003, 149-52, 159-60.
The court's determination must be based on its overall assessment of the persuasiveness of the evidence. Dempsey's conclusion is supported by the available evidence. It bears noting that the general ledgers of TH for the year 2000, which were under the control of the defendants and might have shed light on what happened to the TH inventory, are missing. On the other hand, the court found Christman Stuart's testimony to be not credible on several occasions, including this one. In general, she came across as cocksurely certain as to facts which the circumstances indicated she might not have much information about and profoundly unknowledgeable about facts she ought to have known. The testimony about the Rolex watch has been reviewed previously. At her deposition Christman Stuart said when CSI opened its doors it had some TH inventory. At trial, she denied CSI had any TH inventory at that time. Tr. Christman Stuart, November 12, 2003, 96-98. She also appeared to be far less than candid about the identity of former TH employees who switched to work for CSI. Id., 91. Her testimony was very murky as to exactly what inventory of TH CSI really had, saying at first that it was inventory purchased before she joined EW and TH and that CSI "got stuck with" unsaleable goods. Id., 99; Tr. Christman Stuart, November 7, 2003, 159. Later it appeared that most of the inventory she "got stuck with" were items she had purchased while at TH and many of them in 1999 and 2000. Tr. November 12, 2003, 99-103. In short, much of the evidence she gave about the amount of TH inventory at CSI and how and what was paid for it was not believable. In addition the document presented as a list of the inventory transferred to CSI does not have any indicia of authenticity, completeness or accuracy.
The court has carefully reviewed the bank statements of TH for July though October 2000 and finds no evidence of over $200,000 being deposited in the TH account by CSI. Indeed a comparison of the CSI sales records, Exhibits AAA, GGG and the TH bank statements shows only a smattering of deposits in the TH account which might have reflected CSI sales, certainly less than $10,000. Ex. 82, Bates Numbers 300595-300614. However, Dempsey testified that he had verified that $90,000 of CSI sales had been transferred into the TH bank account. Tr. Dempsey, October 29, 2003, 48, 51. Whether Dempsey reviewed other documents than the court did, or just has a more discerning eye, is a moot question since the court will accept his testimony that $90,000 was given to TH by CSI. Therefore, the court will credit that amount to CSI's favor.
Dempsey explained that he did not credit CSI with this $90,000 because TH was paying furniture suppliers at that time, when in fact it was going out of business, and while he did not know what those payments were for there was a possibility TH was paying CSI furniture supplier.
The plaintiffs failed to prove that the $79,964.60 alleged to have been paid by TH or Stuart Sons for CSI expenses actually occurred.
CSI and Christman Stuart have alleged in a special defense a set-off for monies expended on behalf of Stuart Sons. For the reasons set forth shortly there is no damage award against Christman Stuart against which a set-off might be had. However, evidence was presented through documents and testimony that CSI paid certain expenses properly attributable to Stuart Sons. Tr. Christman Stuart, November 7, 2003, 181-95; Ex. CCC-86. Apparently Stuart Jr. urged these payments be made or wrote the checks himself. Tr. Christman Stuart, November 7, 2003, 185. There is some evidence that this loan balance was adjusted for unknown reasons. See Ex. 86, Bates No. 600150. There were no checks produced to substantiate the accounting records shown in Exhibit CCC-86. Nevertheless, the plaintiffs did not seriously rebut the evidence and the court will allow CSI a set-off in the amount of $68,621.48. This amount reflects expenses paid by CSI shown on Exhibit CCC-86, less $900 paid to Attorney Snyder who represented Christman Stuart at the Hurlbutt Street closing in April 2001 and $2,000 to Richard Freiberg who was doing the accounting for CSI.
No party has briefed the issue, nor was it brought up in any fashion during the lengthy trial, but the court does not perceive any basis for a claim against the individual members of CSI — Stuart Jr. and Christman Stuart. The unjust enrichment claim is essentially one pursued by the plaintiffs on behalf of Stuart Sons against CSI. No evidence was produced to justify a piercing the corporate veil claim, and no such claim was made. Furthermore the CSI operating agreement was not introduced. The unjust enrichment claims against Stuart Jr. and Christman Stuart are dismissed. See General Statutes §§ 34-133(a), 34-134.
On this count the court determines that CSI was unjustly enriched by the amount of $118,671 and has a set-off of $68,621.48.
H. Count Nine: Connecticut Unfair Trade Practices Act
In the Ninth and last count of their complaint, William and Jonathan Stuart allege that Stuart Jr., CSI and Christman Stuart violated the Connecticut Unfair Trade Practice Act, General Statutes § 42-110a et seq. (CUTPA). CUTPA prohibits a person from engaging "in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110b(a).
The plaintiffs' CUTPA count realleges all the prior allegations of the Complaint and then states the conduct of the defendants was violative of CUTPA in that it was "immoral, oppressive, unscrupulous" and caused ascertainable loss to the plaintiff. Complaint, Count Nine, ¶ 93.
The quoted allegations track part of the Federal Trade Commission's so-called "cigarette rule" which the Connecticut Supreme Court has set out as establishing what is unfair.
(1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise — whether, in other words, it is within at least the penumbra of some common law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers [competitors or other businessmen.]
Conaway v. Prestia, 191 Conn. 484, 492-93 (1983); McLaughlin Ford, Inc. v. Ford Motor Co., 192 Conn. 558, 568 (1984) (both quoting FTC v. Sperry Hutchinson Co., 405 U.S. 233, 244-45, n. 5).
The allegations of the Complaint are woefully bereft of any specifications spelling out the unfair or deceptive acts relied upon. This is a significant failing. In their post-trial memorandum the plaintiffs essentially argue that the defendants' conduct as set forth in the Complaint as a whole violates CUTPA, not a particularly helpful guide post.
CUTPA defines "trade" and "commerce" as
the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real personal or mixed, and any other article, commodity or thing of value in this state.
General Statutes § 42-110a(4).
The allegations of the Complaint are largely directed against Stuart Jr.'s actions in his role as a Trustee, Executor and as the general partner of Stuart Sons. For the most part those allegations directed toward Stuart Jr.'s actions at Stuart Sons involve his handling of assets that belonged to the Stuart Sr. Estate as owner of almost 90% of the partnership. The court determines that such claims are not covered by CUTPA. First, these claims do not arise out of the conduct of any trade or commerce. While they may have arisen in the context of the operation of the business of Stuart Sons, the claims actually arise out of Stuart Jr.'s conduct as a fiduciary in handling assets entrusted to him. The court does not believe that a Trustee or Executor, acting as a holder of assets, should be deemed to be in the conduct of trade or commerce. Second, as has been seen above, a fiduciary is bound by strict rules of conduct and is faced with heavy burdens of proof if accused of wrongdoing. There seems to be no persuasive policy reason to add the regulation provided by CUTPA on top of the already very stringent standards of our existing laws governing fiduciaries. In this position the court finds support in the decisions of the Connecticut Supreme Court exempting, for policy reasons, the professional aspects of the practice of medicine and law. See Haynes v. Yale- New Haven Hospital, 243 Conn. 17 (1997); Heslin v. Connecticut Law Clinic of Trantolo Trantolo, 190 Conn. 510 (1983).
The court also notes that two of the claimed events for which the plaintiffs seek a CUTPA remedy: the sale of Hurlbutt and the alleged theft of bonds have, in connection with other claims, been found not proven.
With all of the above being said, the court does find that the plaintiffs have stated and proven a CUTPA claim against CSI arising out of the transfer of inventory to CSI.
The evidence shows that the transfer was the product of both deception, CSI being initially described as a sister store; its financials being distributed to Stuart Sr. Estate beneficiaries; and the absence of the TH general ledgers leaving as the only documentation of the whereabouts of the TH inventory in the TH records, the "elimination" entry, and unfair business practices which resulted in a diminution of TH, and by definition, Stuart Sons' assets.
For the reasons stated in the discussion of Count Eight, the CUTPA claims against Stuart Jr. and Christman Stuart are dismissed. The actual damages are the same damages as awarded under the unjust enrichment count $118,671, and CSI is entitled to the same set-off, $68,621.48.
III. Remedies A. Stuart Sons
The court, having found that Kenneth Stuart Sr. was not competent to engage in the transactions which formed Stuart Sons and which transferred his assets to that entity, and having further found that Kenneth Stuart Jr. exercised undue influence over his father in the process of forming and funding Stuart Sons, declares that the creation of the partnership is null and void. All assets and liabilities of Stuart Sons shall be transferred to the Estate of Kenneth Stuart Sr. at a time to be set by the court. In the meantime, the plaintiffs shall have a constructive trust over an undivided two-thirds of the assets and liabilities.
B. Fiduciary Duty
For the reasons set forth in Part II.C. the court finds that Stuart Jr. violated his fiduciary duty. The measure of damages for breach of fiduciary duties is the amount required to restore the value of what was lost by the breach, and to prevent the fiduciary from benefitting personally from the breach. Restatement (3rd) of Trusts. § 205 cited in Efthimiou v. Smith, Superior Court, judicial district of Stamford/Norwalk at Stamford, Complex Litigation Docket, X05 CV 00018 0898 (June 6, 2002, Rogers, J.); see also Oakhill Associates v. D'Amato, 228 Conn. 723, 727-28 and n. 3. The actual damages resulting from this violation are $1,062,332.25 which include the damages determined in Parts II.C.4, 7 and 9, less the contributions he made of $823,860.17. These damages are payable to the Estate of Kenneth Stuart Sr.
C. Prudent Investor Act
The court found a violation of this statute but determines that any damages resulting therefrom are duplicative of those assessed because of the violation of fiduciary duty. Therefore, no additional damages are assessed.
D. Fraudulent Transfer
The claim of a violation of the Connecticut Uniform Fraudulent Transfer Act is dismissed.
E. Statutory Theft
Based on the findings in Section II.F., $248,226.25 of the $1,880,655.21 breach of fiduciary duty damages shall be trebled. Therefore, Stuart Jr. shall pay an additional $496,452.50 in damages to the Estate of Stuart Sr.
F. Unjust Enrichment
CSI shall pay $50,049.52 to the Estate on the unjust enrichment claim. The claims against Stuart Jr. and Christman Stuart are dismissed.
G. CUTPA CT Page 10422
CSI has been found in violation of CUTPA. However, the actual damages are duplicative of the unjust enrichment claim and no additional damages are ordered. The claims against Stuart Jr. and Christman Stuart are dismissed.
The court will award appropriate attorneys fees. A hearing will be scheduled on the issue of attorneys fees. The court, in its discretion, will not award further punitive damages.
H. Interest
The plaintiffs seek prejudgment interest at ten percent pursuant to General Statutes § 37a-3.
To award § 37-3a interest, two components must be present. First, the claim to which the prejudgment interest attaches must be a claim for a liquidated sum of money wrongfully withheld and, second, the trier of fact must find, in its discretion, that equitable considerations warrant the payment of interest.
Ceci Brothers, Inc. v. Fire Twenty-One Corp., 81 Conn. App. 419, 428 (2004). The court concludes that the breach of fiduciary duty actual damages are a liquidated sum representing monies wrongfully withheld, and that the equities tilt toward imposition of an award of prejudgment interest. The plaintiffs also contend that the additional double damages assessed pursuant to General Statutes § 52-564 should also be subject to pre-judgment interest. The court agrees that there is authority for this. See Suarez-Negrette v. Trotta, supra, 47 Conn. App. 522 ("we see no reason to carve out those damages, as a matter of law"). However, Suarez-Negrette also recognized that the matter was within the court's discretion. In this case the court concludes that the equities do not favor adding interest to an amount that was not actually wrongfully withheld but in fact represents a type of punitive damage award that only becomes due at the time of this decision. See Middlebury Surgical v. Tadros, Superior Court, judicial district of Waterbury, Complex Litigation Docket, X02 CV 02 0170802 (August 26, 2003, Schuman, J.).
Because of the many transactions that occurred over more than a decade giving rise to the breach of fiduciary duty damages, e.g. the personal expenses paid over the years, the diversion of funds in 1997 and 1998 and the contributions of Stuart Jr. which began in 1992 and were made sporadically to 2002, the court does not have the facility to calculate how much was owed at any specific time. The plaintiffs attempted to do this in their post-trial memorandum but the court has not accepted all their figures so the calculations are not useable. See Plaintiffs' Post-Trial Brief, February 4, 2004, Schedule 1. However, the amounts that the court has concluded to be breach of fiduciary duty damages grew to its present amount in fairly regular increments over the years and the court determines that it is fair and equitable to divide that figure into twelfths and assess interest on one twelfth beginning at the end of 1991, on two twelfths at the end of 1992 and continuing on to the whole amount, $1,062,332.25 at the end of 2002 and thereafter. While this approach might have too high a figure for one year and too low a figure for another, the court concludes that the overall result will be as accurate and fair as circumstances permit.
The court also concludes that a fair and equitable interest rate is seven and one-half percent based on the fact that the maximum interest rate allowable is ten percent; General Statutes § 37a-3; see Sears, Roebuck Co. v. Board of Tax Review, 241 Conn. 749, 765-66 (1997), and interest rates have generally dropped since 1991. See Federal Reserve Board, Selected Interest Rates Release H, 15, Six-month C.D. Rate, Prime Loan Rate (June 7, 2004) found at www.federalreserve.gov/releases/h15. That calculation results in a total prejudgment interest figure as of the date of this decision of $636,743.63.
The calculations are as follows:
INTEREST DATE AMOUNT AT 75%
December 31, 1991 $ 88,527.69 $ 6,639.58 December 31, 1992 177,055.38 13,279.15 December 31, 1993 265,583.07 19,918.73 December 31, 1994 354,110.76 26,558.31 December 31, 1995 442,638.45 33,197.88 December 31, 1996 531,166.14 39,837.46 December 31, 1997 619,693.83 46,477.04 December 31, 1998 708,221.52 53,006.60 December 31, 1999 796,749.21 59,756.19 December 31, 2000 885,276.90 66,395.77 December 31, 2001 973,804.59 73,035.34 December 31, 2002 1,062,332.25 79,674.92 December 31, 2003 1,062,332.25 79,674.92 June 28, 2004 1,062,332.25 39,291.74 ___________ $636,743.63
The plaintiffs are also entitled to prejudgment interest on the amount of $50,049.52 assessed as damages against CSI. The court determines that a 6% rate is appropriate for the period 2001 to date; id.; and that amount is $10,489.67.
The calculation is as follows:
INTEREST DATE AMOUNT AT 7.5%
December 31, 2001 $50,049.52 $ 3,002.97 December 31, 2002 50,049.52 3,002.97 December 31, 2003 50,049.52 3,002.97 June 28, 2004 50,049.52 1,480.76 __________ $10,489.67
I. Accountants Fees
Plaintiff presented evidence that the fees of Dempsey and his firm, Dempsey Meyers Co., LLC for investigation, preparation of reports and trial testimony amounted to a little less than $200,000 through the end of October 2003. Ex. 144. Dempsey testified on eight separate trial days. His work was essential to the plaintiffs' ability to unravel the sporadic and confusing records of the Estates Trust and partnership. In a sense, Dempsey provided at least a partial accounting of the Trust and Estate which had never been supplied by Stuart Jr. The plaintiffs seek to recover their expenses payable to Dempsey Meyers as an element of damages. While they have not presented any Connecticut authority for this, and the court has not discovered any, there is, as plaintiffs point out, some support elsewhere. In In Re Spilka's Will, 250 Iowa 121 (1959), the Iowa Supreme Court held that a trustee, rather than the trust or beneficiaries, should bear the expense of accountant's fees necessary to make trustee's reports and accounts understandable. In Miller v. Pender, 93 N.H. 1 (1943), the New Hampshire Supreme Court upheld a trial court's determination that a trustee should bear the expense of an accountant when the trustee's accounts were inadequate.
This court concludes that Dempsey's fees are a proper element of the plaintiffs' damages in connection with the breach of fiduciary claims. These costs would not have been incurred except for Stuart's breach of fiduciary duty, particularly the commingling of funds and the lack of adequate records. However, they are not necessarily a part of the damages caused by CSI. The court is not aware of any authority to assess accountants' fees as damages against CSI, and the plaintiffs have not presented any. While Stuart Jr. is co-owner of CSI and he has a fiduciary duty to the plaintiffs to properly account for Stuart Sons' and TH's assets he is not, technically, the defendant which owes the damages.
Therefore, the court determines that ninety percent of the Dempsey fees are damages and this amount, $180,000, is added to the amount owed by Stuart Jr. to the Estate. No accountants' fees are assessed as damages against CSI. This ninety-ten split appears to be a rough approximation of the fees attributable to the work on the claim against Stuart Jr. on one hand and against CSI on the other.
CONCLUSION
For the reasons stated above, and upon the calculations therein, the court finds that a judgment for money damages should enter against Stuart Jr. in the amount of $2,375,528.38 and a judgment for money damages should enter against CSI in the amount of $60,539.19. These damages are payable to the Estate of Stuart Sr. In addition the creation of, and transfers of assets to, Stuart Sons is declared void.
The Special Master overseeing the affairs of Stuart Sons, Peter L. Truebner, Esq., shall undertake all reasonable efforts to wind up the business of the partnership as soon as possible, particularly the payment of all outstanding liabilities and shall make a written report to the court on the progress in this regard by July 31, 2004. The parties and counsel shall cooperate with, and provide all necessary information to the Special Master to assist in this process.
While the court understands that many issues may arise and be unresolved as a result of this decision, i.e. the status of the Stuart Sr. Estate tax return, and the status of the Estate itself, it believes all of the issues before the court presented by the complaint and other pleadings are resolved by this decision. To the extent the parties disagree they may make appropriate motions or applications.
TAGGART D. ADAMS SUPERIOR COURT JUDGE