Opinion
NNHCV156054139S
08-29-2017
Peter Torello v. John Iacobucci et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
Steven D. Ecker, J.
This is a business dispute between long-time business partners Peter Torello and John Iacobucci, both of whom wish to end their relationship as co-owners of a funeral home operating as Washington Memorial Funeral Home, located in North Haven, Connecticut. As a formal matter, the men jointly own two separate entities, P& J, Inc. (" the corporation"), which owns the funeral home business, and P& J Partnership (" the partnership"), which owns the land and building at 4 Washington Avenue, North Haven (" the property"), where the funeral home is physically located. Each man is 50% owner of each entity; that is, each owns 500 of the 1, 000 total authorized shares of the corporation's stock, and each is a general partner holding a 50% interest in the partnership. The two entities have been integrally related as part of an inter-dependent business from the time they were organized in 1992, and, unless the context requires specificity, this memorandum will refer to the corporation and partnership collectively as a single business enterprise (e.g., " the business" or " the North Haven funeral home").
Torello commenced the present litigation to terminate the business relationship between the two individual parties, but, as one might expect in a case of this nature, Iacobucci has asserted counterclaims, and both men recognize the need to disentangle their business interests and go their separate ways. In a scenario common in the break-up small businesses organized as two-person entities under equal ownership, each man blames the other for the deterioration of their personal and business relationships, and each points his finger at the other to explain why the business has failed to flourish. The allegations of fault range from neglect to intentional misconduct. Details will be addressed below to the extent relevant to the disposition of the case.
The court makes the following factual findings based on the evidence presented at trial. Torello, who is eighteen years older than Iacobucci, has been in the funeral home business his entire life. He worked for many years with his father at the Peter H. Torello & Son Funeral Home (" Torello Funeral Home"), located at 1022 Dixwell Avenue in Hamden, and then took over the operation after his father's death in 1969. Torello met Iacobucci in or about 1977, when Iacobucci, then still in high school, showed interest in the funeral business. Torello initially hired the youngster on a part-time basis to do odd-jobs at the funeral home. Iacobucci earned an embalmer's degree from the " American Academy" mortuary school in New York City in 1980. His hours and responsibilities working for Torello increased over time, especially after 1982, upon completion of a two-year apprenticeship.
Iacobucci became a licensed funeral director and gained extensive experience in the industry under Torello's guidance. Iacobucci saw Torello as a father figure, and their relationship grew close as the years passed. From time to time, Iacobucci would ask about his future, and was given cause to be optimistic when Torello responded: " Look around. You see anyone else here? There's no one else here."
Torello's son was not involved in the business at the time. The son began working with his father in the Torello Funeral Home in the late 1990s. See below at p. 4.
At some point in the early 1990s, Torello suggested the idea of opening a funeral home in North Haven. Torello expressed the view that North Haven, in contrast to the area surrounding the Torello Funeral Home in the southern part of Hamden, was a fertile area for expansion. Torello had his lawyer draft the necessary legal documents. The two " P& J" (for " Peter and John") entities, the corporation and the partnership, were thus formed in mid-1992, for the purpose of opening and operating a new funeral home in North Haven. Ultimately a suitable location was selected, the land was purchased, and a funeral home was constructed at 4 Washington Avenue, North Haven. The business, operating as the " Washington Memorial Funeral Home, " held its first funeral in late 1994. Each partner contributed approximately $200,000 toward the venture, and an $800,000 SBA loan was obtained to fund the remaining expenses required to begin operations.
With the benefit of hindsight, it seems apparent that serious problems were almost certain to arise between the partners due to the unusual structure of their overall business relationship. To begin with, Iacobucci continued to have significant job responsibilities requiring his physical presence at the Torello Funeral Home in Hamden--an entity owned solely by Torello. It was only a matter of time before issues developed as a result of Iacobucci's ongoing responsibilities as a critical employee in Hamden (and the question of his compensation for his work there) and his role (and compensation) as co-owner and funeral director at the North Haven business. Likewise, Torello's specific role and responsibilities at the new North Haven funeral home evidently were never well-defined in light of his concurrent role at his own funeral home in Hamden. Torello helped with some tasks at the North Haven location in the 1990s, but his level of participation was never anything close to full-throttled, and he devoted less and less time to North Haven until he stopped working there altogether by the mid-2000s. Washington Memorial became a one-man operation, and that one man was Iacobucci. The structural and operational asymmetries outlined in this paragraph created serious cracks to begin growing in the relationship (business and personal) between Torello and Iacobucci. These difficulties were not adequately addressed and were never resolved.
Other factors contributed to the deterioration of the relationship. Torello's son joined him in the Hamden location beginning in the late 1990s. From the evidence before the court, it is fair to infer that Torello, as he grew older and realized that his son would be joining him belatedly in the family business, began to think that the Iacobucci partnership, with its northward trajectory, might not prove to be as beneficial to his family's long-term interests as he had believed a decade earlier. Hamden and North Haven are neighboring towns, and inevitably the two funeral homes, Torello's and Washington Memorial, would need to manage the very real potential for business competition between them. The two enterprises could either work together, cooperatively and synergistically, or they could treat one another as adversaries. The latter course seems to have been chosen by Torello as Torello's son--who was not a partner with Iacobucci in North Haven--took on a greater presence at his father's funeral home in Hamden over time. The competition did not develop into open warfare, but its looming shadow no doubt fueled tensions as the years passed. Iacobucci helped train Torello's son, and remained on good terms with the son, but he realized that the dynamics in his relationship with Torello had changed.
Additional problems existed from the outset at the level of financial planning. The partnership was burdened by an $800,000.00 loan taken out to fund the purchase of the land and construction of the North Haven funeral home. Until the loan was paid off in 2014, the payment of this expense alone was over $6,000 per month. The partnership also paid approximately $4,000 per month for other basic property-related costs (taxes, insurance, maintenance) associated with ownership, landscaping and maintenance. These expenses alone saddled the new business with payment obligations of approximately $10,000 each month before it left the starting gate to deal with the many other operating expenses attributable to items such as the cost of goods sold (caskets, vaults, flowers etc., ), advertising, utilities, and many other basic expenses--including, not incidentally, wages and/or salaries. Unless the business was lucky enough to experience an unusually strong revenue stream very quickly, this was not a formula for success, particularly given the structural asymmetries mentioned above. But a strong start was unlikely because Washington Memorial was a stand-alone venture intended to operate unaided by the revenues generated by the Torello Funeral Home. Worse still, the owners of the North Haven business (Torello and Iacobucci, ) evidently intended to operate the Torello Funeral Home in Hamden at the same time that Washington Memorial was being launched. In retrospect, it should have been apparent that the arrangement was unlikely to succeed without substantial modification of the business plan. It also should come as no surprise that some or all of the foregoing factors led to a deteriorating level of trust, loyalty and cooperation between Torello and Iacobucci as Washington Memorial struggled to remain afloat in the late 1990s and thereafter. The men had a major disagreement in 2000, which may have marked a permanent change in their relationship. Iacobucci's salary for his work in Hamden was slashed by Torello. Iacobucci was unable to support operations in North Haven, and faced personal financial difficulties due to his insufficient income. It is clear to the court that Iacobucci struggled mightily to keep the business alive from the early 2000s until approximately 2014, when he finally paid off the commercial loan taken out at the outset of the venture. The business survived only as a result of his hard work. And it did so without any meaningful assistance from Torello at any time over the past ten to fifteen years. Far from helping Iacobucci, it appears that Torello very likely began to direct business away from Washington Memorial when the opportunity to do so presented itself. Based on the more credible evidence at trial, the court finds that a number of such diversions occurred over the past fifteen years. The number of these instances may have been small, but they happened.
Relatedly, the court also finds that Torello actively planned to open a competing funeral home business in the northern part of Hamden. This conduct took place within the past five years, and probably beginning in 2007 or even earlier. For obvious reasons, Torello never told Iacobucci about these plans or the actions undertaken to implement the plans, but the court finds that Torello in fact took concrete steps (selecting a location and having blueprints drawn) with the goal of establishing a business in northern Hamden to compete with Washington Memorial. Whatever else it shows, this conduct lends strong support to Iacobucci's claim that Torello did not contribute in any meaningful way over the past ten or more years to the operation or success of Washington Memorial. It would not have been in his interest to help Washington Memorial succeed when he was intending to compete against it.
There is no evidence that such a business was ever actually established by Torello or anyone working with him.
The court heard evidence regarding valuation of the partnership and the corporation. With respect to the partnership, the parties stipulated that the property, which is the only asset of the partnership, had a fair market value of $1,040,000 as of the date of the appraisal, June 13, 2014. See Pl. Ex. 11. Iacobucci's expert at one point had argued for a lower " fair value, " see Def. Ex. A at pp. 17-24, but that position appears to have been abandoned by Iacobucci. See Defendant's Trial Br. dated 4/24/17, at 22-23 (asking court to find the value of the partnership to be $1,040,000, and seeking " adjustment" of Torello's 50% share based on equitable grounds but not on the grounds advocated by plaintiff's expert).
The court finds that the value of each partner's respective interest in the partnership is $520,000, which is one-half of the total value. The court recognizes that this finding is based on the value as of June 13, 2014, but neither party has offered any evidence of any other value, nor has either party offered any evidence that the value of the property is different today than it was when it was appraised in 2014, nor did either party raised any date-of-valuation issue regarding the partnership. The court assumes that the reason the parties stipulated to this value of the property, and presented it to the court in lieu of any other property valuation, is because they intended the court to rely on it in its disposition of the case.
In arriving at this finding, the court is aware of the analysis and holding in Brooks v. Brooks, 121 Conn.App. 659, 668-71, 997 A.2d 504 (2010), cited in the report prepared by defendant's expert, see Def. Ex. A at n.1. The Appellate Court in Brooks points out the difference that can exist between the value of the assets owned by a business entity and the value of a partial interest in the entity itself. The distinction made in Brooks is important in cases where that distinction is implicated by the facts, but it is inapplicable to the valuation of the partnership in the present case. No party has suggested otherwise.
Valuation of the corporation is slightly more complicated. Torello and Iacobucci each presented expert testimony on the issue. William Gunville testified on behalf of Torello. Gunville is not a certified public accountant, has not received a formal education in accounting, does not have the traditional training or background of the usual expert in business valuation, does not appear to be accredited in business valuation by any recognized trade association, and has never been qualified as an expert in a Connecticut judicial proceeding or testified as an expert in a Connecticut court. He does, however, possess extensive experience in Connecticut (and elsewhere) in the valuation and sale of one particular type of business--funeral homes. Although Gunville's specific area of expertise might have been helpful, his testimony in the present case proved to be of no use.
Gunville testified that the value of a 100% interest in the funeral home owned by the corporation is $425,238. It is unnecessary to review each aspect of Gunville's methodology in detail. Suffice it to say that the engine driving that methodology was, in the court's view, fatally flawed. A crucial step in Gunville's valuation was the use of a " multiplier" derived by Gunville from his analysis of twenty-five " representative" funeral home sale transactions from around the country over the past two decades. See Pl. Ex. 12, at p. 26. Gunville's " multiplier" is a ratio that expresses the relation between a " representative" funeral home's selling price and that funeral home's annual adjusted net sales. For example, if a funeral home with annual sales of $2 million sold for $6 million, then the " multiplier" for that sale transaction is 3.0. Gunville arrived at his valuation of the North Haven business at issue in here by (1) calculating the multiplier for each of the twenty-five " representative" sale transactions, (2) calculating the average of those twenty-five multipliers (which turned out to be 2.5), and then (3) multiplying the North Haven funeral home's adjusted annual sales by that average multiplier. The court finds this methodology to be entirely unreliable. Among other things, there is no good reason to believe that the " representative" sale transactions used by Gunville involve funeral homes in a financial condition comparable to the North Haven funeral home. The use of a multiplier derived by averaging a wide range of multipliers from twenty-five other sales also seems unjustifiable. There are more reasons to reject the Gunville analysis, but these two are sufficient.
Gunville calculated the adjusted annual net sales figure in North Haven in 2014 to be $606,144. That amount multiplied by his average " multiplier" (2.5) equals $1,515,360. Because this value includes the entire enterprise (including the real estate), Gunville then backed out the stipulated value of the real estate ($1,040,000), to arrive at an asset value of $475,000. He refined this figure to arrive at a " total equity value" of $425,238. See Pl. Ex. 12, at p. 35.
The valuation of the corporation provided by Iacobucci's expert, John DelGrego, arrives at a fair value of $22,309 for a 100% equity interest, and a fair value of $11,155 for a 50% interest. This valuation will be used by the court because, in the court's judgment, it represents the best available evidence of the fair value of the business enterprise.
Turning to the legal claims made by the parties, Count One of Torello's complaint seeks a corporate dissolution pursuant to General Statutes § 33-896(a)(1). Iacobucci has asked the court to reject this request, and instead to enter an order pursuant to General Statutes § 33-900, allowing him to purchase Torello's shares at fair value. See Notice of Election to Purchase, dated March 20, 2017 (#117.00). The court has determined that it is fair, just and appropriate under all of the circumstances to permit Iacobucci to purchase Torello's shares at fair value under his late-filed notice of election. Torello objects on the ground that the notice of election was filed by Iacobucci long past the ninety-day period prescribed in § 33-900(b). But the statutory ninety-day deadline, by its own terms, is not mandatory, and the court will exercise its discretion, conferred by statute, to allow the late notice of election under the circumstances of this case.
In the court's view, Torello has failed to articulate any persuasive reason why the late election should be disallowed. Only two shareholders are involved here. To the court's knowledge, Torello has never sought to purchase the corporate shares himself, and, as recited above, he has shown no interest in the business itself for many years. Torello's desire is to sell the business. Selling the business has been his desire since at least 2013. See, e.g., Pl. Ex. 2, 5. Iacobucci, for his part, wants to buy the business. This desire is understandable in light of the fact that he has worked day and night since 1992 to keep the business alive. In the court's view, assuming that Iacobucci has the financial wherewithal to buy the business on fair terms, it would be a shame to deny him the opportunity to doso.
With respect to the lateness of Iacobucci's election, it should be made clear that the delay in filing, though unfortunate, to the court's knowledge has not deprived Torello of the ability to introduce evidence or otherwise respond, by words or action, to the notice of election. Torello never requested additional time to respond, and never requested a continuance of the trial to allow him to do whatever he deemed necessary to respond adequately.
Count Two of Torello's complaint seeks the expulsion of Iacobucci from the partnership (partner dissociation) under General Statutes § 34-355. This claim is rejected. Torello has failed to establish the predicate facts necessary to establish any entitlement to relief under this count. As the court's findings of fact make clear, the court does not consider Iacobucci to have acted wrongfully under the circumstances. With respect to Torello's allegations regarding unpaid rent, there is no lease and apparently no set rent. Perhaps more importantly, there was no understanding regarding the corporation's rental obligations upon termination of the mortgage obligation. The rent issue cannot be considered in isolation from the many other financial issues relating to operation of the business. By way of illustration, the corporation evidently has been paying the partnership's property-related obligations since 2014. Finally, Torello is not in a position to accuse Iacobucci of misconduct in the operation of the business, in light of Torello's own acts and omissions over the past ten or more years.
Count Three of Torello's complaint seeks dissolution of the partnership. Both of the partners agree at this point that the partnership is no longer viable and should be dissolved. Based on the complete breakdown in the relationship between the partners, and for numerous other reasons discussed in the court's factual findings, the court finds that it is not reasonably practicable to carry on the partnership business in conformity with the partnership agreement. The court will enter orders, below, for the liquidation of the partnership asset and distribution of the proceeds.
The court has considered and rejected all of Torello's remaining requests for relief, including his claim for adjustments to the amounts he is owed upon distribution. See Plaintiff's Br. dated 4/21/17, at 6-7.
With respect to the counterclaims filed by Iacobucci, the findings of fact made in this memorandum should make it clear that Torello's conduct in certain particular respects could be considered a breach of his duties owed to the corporation and to Iacobucci personally. Neither the corporate bylaws nor the partnership agreement gave Torello a right to compete with the North Haven funeral home business. Of course, it was plainly understood that the Torello Funeral Home would continue to operate from its location in Hamden, but the credible evidence establishes that no one envisioned that Torello would seek to compete directly with the new business operation in North Haven, and there most certainly is no basis to suggest that Torello was permitted to develop a new competing business on the northern side of Hamden. The court also is persuaded that Torello failed to fulfill his duties to the business when he stopped doing any work of any kind in any capacity on behalf of the North Haven business.
That having been said, the court cannot find that Torello's acts and omissions in this regard caused Iacobucci any determinable damages, and no such damages are awarded. Nor is any award of punitive damages warranted. At the end of the day, this is a business enterprise that simply did not work out as intended. The partners started out with somewhat different interests, and those interests failed to merge, but instead diverged as time passed. Both men felt ill-served by the other. Torello presumably came to believe that Iacobucci should have been more grateful for the opportunities that Torello made available to the younger man. Iacobucci presumably felt used and taken for granted as he worked harder and harder without reward. On these facts, the court believes that the parties need to part ways without either one getting his " pound of flesh" from the other. The property itself has value, and Torello is entitled to one-half of that value. By contrast, the business itself has little value presently, but Iacobucci has earned the right, if he so chooses, to attempt to make the business profitable in the future.
ORDERS
The court hereby orders as follows:
1. In accordance with General Statutes § 33-900, Iacobucci is hereby ordered to honor his election to purchase all 500 shares in P& J, Inc. (" the corporation") owned by Torello. The purchase price shall be $11,155.00 ($22.31 per share). The purchase price shall be paid to Torello, in a single lump sum payment, no later than December 31, 2017. The court hereby dismisses the petition to dissolve the corporation, and Torello shall no longer have any rights or status in the corporation, except the right to receive the amount of $11,155.00 as set forth herein.
2. P& J Partnership shall be dissolved and its sole asset (the real estate located at 4 Washington Avenue, North Haven (" property") shall be liquidated and distributed in accordance with the terms of paragraphs 3 and 4 below.
3. All right, title and interest in the property shall be transferred to Iacobucci upon payment to Torello of $520,000.00. The transfer shall take place no later than December 31, 2017 (" the closing date"). If Iacobucci requires additional time to arrange financing for this transaction, he may file an appropriate motion with the court seeking a reasonable extension of the closing date, not to exceed sixty (60) days. Any such motion must be filed no later than December 22, 2017. If the payment required under this paragraph is not made by the closing date (or the extended closing date, if an extension of the closing date is granted), then the property shall be listed, marketed and sold through a licensed broker to be selected by the parties, said efforts to be undertaken by the broker with the goal of achieving the best available sale price and terms in accordance with the usual and customary manner for the marketing and sale of like properties. The net proceeds of any such sale shall be divided equally between Torello and Iacobucci.
4. The parties shall cooperate fully to facilitate the logistics and processes set forth in paragraph 3 above in all respects. They shall each perform (or cause to be performed) all acts reasonably necessary to effectuate the terms of paragraph 3, and shall forbear from any conduct that would frustrate, impede or unduly delay the effectuation of such terms.
5. The court notes that neither party's post-trial submissions address any tax issues that may be implicated in connection with any aspect of the relief or remedial orders that may be entered in a case involving the dissolution of business entities and associated asset distributions. This point is not in any way intended as a criticism of counsel. It is mentioned only as a candid acknowledgment by the court that the foregoing orders conceivably could trigger unintended and avoidable adverse tax consequences for one or more parties, as can occur sometimes in connection with the transfer of assets undertaken without the benefit of professional tax advice. The court has no particular reason to raise this concern, and is not inviting or encouraging any problems of this nature, but if any party concludes that the court's orders create such tax consequences, a motion for reconsideration can be filed to raise the issue.
Judgment shall enter in accordance with the foregoing. No costs.