Opinion
Nos. WWM CV04 4001126-S, WWM CV05 4001851-S
June 3, 2010
MEMORANDUM OF DECISION
These two actions arise out of the acrimonious termination of the parties' business relationship. In the first matter, the plaintiff alleges breach of fiduciary duty, misappropriation of corporate opportunity, conversion and CUTPA. The defendant, Robert Schmidt, denies the material allegations and counterclaims in three counts, libel and slander of credit, tortious interference and CUTPA. In the second action, the plaintiff seeks a dissolution of the limited liability company, Concepts Manufacturing, LLC. To this second action the defendants, Robert Schmidt and Concepts Manufacturing, LLC, deny the material allegations and counterclaim in three counts, breach of fiduciary duty, conversion and CUTPA. The matters were consolidated and the defendants filed an amended consolidated counterclaim which restates each of the counts set out in the prior counterclaims. The plaintiff denies the material allegations of the amended consolidated counterclaim.
The matter came before the court over five days in November and December 2009 and January 2010 for a trial on the merits. In addition to the plaintiff, Donald Wilcox, and the defendant, Robert Schmidt, witnesses included Karen Schmidt, Jill Byrne, Randolph Dittmar, Daniel Santos, Steven Sherman and David Grous. Additionally the transcript of the deposition of John Cautillo was admitted. The court finds the testimony of the plaintiff to be generally not credible, the testimony of the defendant to be credible in part and not credible in part and the testimony of K. Schmidt, Byrne, Dittmar, Santos, Sherman, Grous and Cautillo to be generally credible. Both parties have submitted memorandum of law. The court has reviewed and considered the testimony, the exhibits and the parties' memorandum of law. After applying the law to the facts, judgment enters for the plaintiff on the fifth count of the consolidated complaint (the first count in the second action) and for the defendants on the first, second and third counts of the counterclaim.
FINDINGS OF FACT CT Page 12063
Beginning in February 1998, the plaintiff was employed as the chief financial officer of Concepts Manufacturing, LLC, a limited liability company formed by William Millette and the defendant, Robert Schmidt. In April 2001, the plaintiff left Concepts to pursue other business opportunities, but in late 2002, was approached by Schmidt to return to Concepts. The plaintiff agreed to do so subject to the condition that he become a member of the company. This arrangement was acceptable to Schmidt and in November 2002, the plaintiff was hired as the chief financial officer while they negotiated the terms of his membership.
In July 2001, Millette surrendered his membership.
The plaintiff initially proposed that he be a silent partner. This proposal was rejected outright by Schmidt who wanted a working partner. After continued negotiations, Schmidt tendered a written partnership proposal to the plaintiff in February 2003, which gave the plaintiff a 40% interest in Concepts in exchange for a $75,000 contribution. The plaintiff accepted this proposal and on February 11, 2003 wired $75,000 to Concepts' corporate account. Concurrent with his tender, Schmidt drafted and signed a document entitled "Amendment to Operating Agreement, Concepts Manufacturing LLC" which reflected the plaintiff's proposed ownership share. Schmidt then forwarded a copy of this document to the plaintiff via e-mail. After becoming a member, the plaintiff continued his employment as chief financial officer. At the same time, Schmidt continued in his multiple roles as a member, the general manager and president.
According to the Operating Agreement, "the General Manager shall have the general powers and duties of management typically vested in the Office of the Chairman of the Board of Directors . . . [including the power to] . . . select and remove employees of the LLC . . .; change the principal business office from one location to another . . .; borrow money and incur indebtedness on behalf of the LLC . . .; call a meeting . . .; enter into, make and perform contracts . . . which bind the LLC . . .; open and maintain bank accounts . . .; maintain the assets of the LLC; collect sums due and owing to the LLC; pay the debts and obligations of the LLC; acquire, use and dispose of assets." Limited Liability Company Operating Agreement of Concepts Manufacturing, A Connecticut LLC, § 6.18-6.19.
The operating agreement further provides that "[t]he President shall be the general manager of the LLC and shall, subject to the control of the Managers, have general supervision, direction and control of the business and the Offices of the LLC. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have other powers and duties as may be from time to time assigned to him by the Managers or prescribed by this agreement.
Later in 2003 and continuing into 2004, Concepts began to suffer a severe decline in sales and revenue. As a result on numerous occasions, the plaintiff and Schmidt were forced to forego all or part of their weekly salary. Additionally in order to keep Concepts solvent, each of the parties loaned money to Concepts. From March — December 2003, the plaintiff loaned a total of $41,000 which was secured by on-demand promissory notes bearing interest at the rate of 12% per annum.
Thereafter, in mid 2004, the plaintiff, Schmidt and two other individuals formed a company called Core Hospitality. Whereas Concepts was solely involved in the fabrication of millwork for institutional dining uses, Core's mission was to solicit bids and be the general contractor for remodels and build-outs of institutional dining facilities. Core was formed to take advantage of the expertise of each of its four members. Accordingly, Core used Concepts as its fabricator. Over time, the plaintiff came to believe Core was not adequately compensating Concepts for its work product, its work space and the use of its employees. The plaintiff blamed Core's actions on Schmidt; additionally the plaintiff came to believe that to the detriment of Concepts, Schmidt was spending too much time on Core business.
It is unclear from the evidence what expertise the other partners brought to Core Hospitality.
On numerous occasions throughout 2004, the plaintiff sought repayment of his loan to Concepts but Schmidt would not consent to such. On August 27, 2004, the plaintiff informed Schmidt that one of its vendors, Bridges Wood Products, wanted payment of a $52,300 invoice. Accordingly Schmidt authorized the deposit of that sum into Concepts' corporate account and directed the plaintiff to pay Bridges. The plaintiff cut a check to Bridges for $52,300 but told Karen Schmidt, an employee of Concepts, to hold off mailing it.
On August 30, 2004, while Robert Schmidt was away on a business trip to Georgia, the plaintiff, without authorization, issued a check to himself in the amount of $52,316. At the same time, the plaintiff changed the password on Concepts' computers so that access was denied to Schmidt and Concepts' employees. Additionally he left a letter on Schmidt's desk which demanded repayment of the plaintiff's notes. Schmidt returned from Georgia on September 1 to discover the demand letter and that access to the computers was denied. Schmidt immediately went to the bank which held Concepts' accounts and discovered the plaintiff's actions. After doing so, Schmidt withdrew the balance in the account and opened a new account for which he was the only authorized signatory.
This sum includes the balance due on the promissory notes plus interest and attorneys fees.
Schmidt returned to Concepts' premises, confronted the plaintiff and demanded the return of the $52,316. The plaintiff, however, refused. Over the next two weeks, Schmidt made repeated demands of the plaintiff that he return the money and unlock the computers, but the plaintiff repeatedly refused to do so. On September 14, 2004, Schmidt demanded that the plaintiff return the money or that he leave the premises. The plaintiff again refused to return the money, but left the premises and has not returned. In his testimony, the plaintiff conceded that if all of Concepts' outstanding checks including the check to Bridges had been presented on August 30, its account would have been overdrawn.
Although the plaintiff remains a member of Concepts, he has not received any compensation or distribution since September 2004. On December 16, 2004, the plaintiff brought his action against the defendant, Robert Schmidt, individually, and thereafter, on April 4, 2005, brought his action against the defendants, Robert Schmidt and Concepts Manufacturing, LLC.
Additional facts will be discussed as necessary.
DISCUSSION I. THE COMPLAINT A. Breach of Fiduciary Duty
In the first count of the consolidated complaint, the plaintiff alleges that Schmidt, as the majority member of Concepts, breached his fiduciary duty to the plaintiff by converting funds and assets to his own use, by diverting corporate opportunities to Core Manufacturing, by managing the company for his personal benefit and by failing to make guaranteed payments to the plaintiff.
"The essential elements . . . [of] a cause of action for breach of fiduciary duty under Connecticut law are: 1. That a fiduciary relationship existed which gave rise to (a) a duty of loyalty on the part of the defendant to the plaintiff, (b) an obligation on the part of the defendant to act in the best interests of the plaintiff, and (c) an obligation on the part of the defendant to act in good faith in any matter relating to the plaintiff; 2. That the defendant advanced his or her own interests to the detriment of the plaintiff; 3. That the plaintiff sustained damages; 4. That the damages were proximately caused by the fiduciary's breach of his or her fiduciary duty." 16 Conn. Prac., Elements of an Action § 8:1.
"Members and managers of a limited liability company generally owe a fiduciary duty to other members." The Zanker Group, LLC v. Summerville at Litchfield Hills, LLC, Superior Court, judicial district of New Haven, Docket No. CV 044015238 (October 24, 2005, Munro, J.). "[General Statutes § 34-141 of the Connecticut Limited Liability Company Act] expressly establishes certain fiduciary duties of a member or manager of an LLC in exercising management authority. Pursuant to Section 34-141(a), the member or manager is required to act in good faith, with the care of an ordinary prudent person in similar circumstances, and in a manner reasonably believed to be in the best interests of the LLC . . ." Ford, M., Connecticut Corporation Law Practice, Second Edition, § 13.03, pgs. 13-12 thru 13-13.
The plaintiff claims that the parties' rights and obligations to each other are set out in the Operating Agreement (exhibit H), the Amendment to the Operating Agreement (exhibit 1) and the Partnership Proposal (exhibit G). According to the plaintiff, the salient provisions of the Amendment to the Operating Agreement (exhibit 1) provide that the plaintiff receive $1,600 per week as compensation, that Schmidt receive $2,400 per week as compensation, that semi annually all of the profits be distributed 40% to the plaintiff and 60% to Schmidt and that Karen Schmidt's compensation be no greater than $500 per week unless approved by both the plaintiff and Schmidt. The plaintiff testified that since September 2004, he has received no compensation or profit distribution and without his approval, Karen Schmidt has received annual pay increases such that by 2008, she was earning in excess of $100,000. The plaintiff submitted a damages analysis prepared by his retained accountant, Randolph Dittmar, which showed that he is owed in excess of $300,000 for the years 2004-08.
In 2003, Karen Schmidt's duties included preparation of the payroll and assorted other functions.
Schmidt does not dispute that the parties' relationship is defined by the Operating Agreement (exhibit H) and the Partnership Proposal (exhibit G). He vehemently denies, however, that the Amendment to the Operating Agreement (exhibit 1) introduced by the plaintiff at trial is the true and accurate version of this document. Schmidt contends that exhibit 1 is a fraud and that exhibit MM, also entitled Amendment to the Operating Agreement, is the true and accurate document. The court agrees with Schmidt.
Exhibit 1 and exhibit MM are identical in appearance except in one very significant respect: the bottom half of exhibit 1 sets out provisions relating to the parties' weekly compensation, a semiannual distribution of all profits and a restriction on Karen Schmidt's salary while the bottom half of exhibit MM does not contain these, or indeed any other, provisions. Instead, the bottom half of exhibit MM is blank.
Compare Appendix A (exhibit 1) to Appendix B (exhibit MM).
The Operating Agreement entered into between Schmidt and Millette in 1997 sets out, inter alia, each of the parties' membership interest — 55% for Schmidt and 45% for Millette. Nowhere, however, does it set out any sort of compensation package or a profit distribution plan for either Schmidt or Millette. Consistent with that format, exhibit MM, entitled Amendment to the Operating Agreement, sets out the percentage interest that Schmidt and the plaintiff each have in Concepts — 60% for Schmidt and 40% for the plaintiff — but makes no reference to a compensation package for Schmidt or for the plaintiff. The details regarding the parties' compensation and profit distribution are instead set out in the Partnership Proposal (exhibit G).
At the trial each of the parties' testimony consumed a day or more. Accordingly the court had ample opportunity to listen to each of them, to observe them and to judge their credibility. Having done so and having also carefully reviewed all of the exhibits, the court concludes that exhibit 1 is a fraud and that it does not accurately reflect the parties' agreement. The court further concludes that the parties' agreement consists of the Operating Agreement (exhibit H), the Amendment to the Operating Agreement (exhibit MM) and the Partnership Proposal (exhibit G).
At an evidentiary hearing, "the . . . judge is the sole arbiter of the credibility of the witnesses and the weight to be given specific testimony . . . It is within the province of the trial court, as the finder of fact, to weigh the evidence presented and determine the credibility and effect to be given the evidence." (Citation omitted; internal quotation marks omitted.) Cadle v. D'Addario, 268 Conn. 441, 462, 844 A.2d 836 (2004). Further as the trier of fact, the court "can . . . decide what — all, none or some — of a witness' testimony to accept or reject." (Internal quotation marks omitted.) Wilson v. Hryniewicz, 51 Conn.App. 627, 633, 724 A.2d 531, cert. denied, 248 Conn. 904, 731 A.2d 310 (1999).
The court's conclusion that exhibit 1 is a recent fabrication is buttressed by the fact that despite repeated discovery requests throughout this litigation, the plaintiff never alerted Schmidt to the existence of exhibit 1 or produced a copy of exhibit 1 until December 2008 — some four years after the commencement of this litigation. At trial, the plaintiff sought to explain his delay in turning over exhibit 1 by claiming he was unable to locate it until December 2008. The court finds this explanation not persuasive. Moreover, in September 2006, the plaintiff responded to an interrogatory by stating "[t]he writings evidencing what the Plaintiff claims to have been his employment arrangement with Concepts Manufacturing, LLC were previously provided and are provided again and attached hereto." In accordance with this answer, a copy of exhibit MM was appended to the plaintiff's response.
The plaintiff's claim that he is owed more than $300,000 is based on the damages analysis prepared by Randy Dittmar. On cross examination, Dittmar admitted that the conclusions set forth in his analysis were drawn from the salary and profit distribution provisions set out in exhibit 1. Specifically he testified that he used the salary limitation from exhibit 1 rather than the actual salary paid to Karen Schmidt for 2004-08. Additionally, he did not credit Robert Schmidt with the compensation Schmidt was entitled to receive during each year of the analysis but owing to a lack of operating funds, he did not. Dittmar's failure to include these sums artificially inflated Concepts' profits for the years analyzed by him. Additionally, when K. Schmidt's actual salary and the compensation owed to Robert Schmidt are properly added in, it is clear, even from Dittmar's analysis, that there was no profit available for distribution during the period 2004-08. The court, having concluded that exhibit 1 does not accurately set out the parties' agreement, thus rejects Dittmar's conclusions as not supported by the credible evidence at trial. The plaintiff accordingly has failed to prove that there is undistributed profit owed to him.
Neither exhibit MM, Amendment to the Operating Agreement, or exhibit G, Partnership Proposal, place any limit on Karen Schmidt's salary.
According to the Partnership Proposal, Schmidt was entitled to receive a base salary of $124,800 per year. Owing to Concepts ongoing financial difficulties, his salary was, however, no greater than $28,000 in any one year from 2004-08.
The plaintiff claims that the increased salary paid to K. Schmidt was nothing more than Robert Schmidt's thinly disguised effort to pay himself a profit distribution at the expense of the plaintiff's interest. Aside from this uncorroborated testimony of the plaintiff; there is no evidence to support this claim. After the plaintiff quit as chief financial officer, K. Schmidt assumed many of the duties and responsibilities previously performed by the plaintiff. Moreover, in repudiating exhibit 1, the court also rejected the plaintiff's claim that there was a cap on K. Schmidt's salary.
In addition to 40% of all profit, the plaintiff also claims that as a member of Concepts, he is entitled to receive a weekly draw of $1,600 irrespective of whether he provided any services to the company. Schmidt credibly testified that the parties agreed they would be paid solely for the work which they performed as president and chief financial officer. Thus once the plaintiff stopped rendering services as the chief financial officer, he was no longer entitled to receive weekly compensation. The court agrees with Schmidt. Accordingly, the court concludes that the plaintiff has failed to prove that he is entitled to any compensation or draw over and above what he has already been paid.
The plaintiff next claims that Schmidt converted Concepts' funds and assets to his own use and managed Concepts for his own personal benefit. Specifically the plaintiff claims that Schmidt misappropriated funds by using Concepts' revenue and receipts to pay a line of credit extended personally to Schmidt and by depositing all of Concepts' revenue into a bank account in Schmidt's sole name.
In 1997, Schmidt and Millette formed Concepts Manufacturing, LLC with Schmidt having a 55% interest and Millette a 45% interest. In 2000, Concepts experienced severe cash flow problems and was unable to pay its bills. As a result, Schmidt took out a personal line of credit with American Express in the approximate amount of $41,000 which he turned over to Concepts and which Concepts assumed as a liability. In July 2001, Concepts began to experience even more severe financial difficulties. At a special meeting of the members held on July 13, 2001, Schmidt agreed to relieve Concepts from its obligation to repay the line of credit; in exchange, Millette agreed to contribute an additional $33,133 in cash to Concepts. Shortly thereafter Millette had reservations about his decision and instead, decided to surrender his membership. Millette's withdrawal was accepted at another special meeting held July 24, 2001 and Millette never made his contribution. Millette's withdrawal left Schmidt with 100% ownership of Concepts. Despite this, Schmidt never took any formal action to rescind his assumption of the AMEX loan. The loan remained on the books as a liability of Concepts and it was eventually retired.
Prior to joining Concepts as a member, the plaintiff was fully aware of the existence of the AMEX line of credit, he understood it to be a liability of Concepts and in his capacity as chief financial officer, he made monthly payments from Concepts' corporate accounts to retire the balance. At all times Schmidt was the majority member of Concepts and could have taken formal action to rescind his assumption of the AMEX loan. Based upon the totality of circumstances, the plaintiff has failed to prove Schmidt breached his fiduciary duty to Concepts or to the plaintiff when he allowed Concepts to repay the AMEX line of credit.
The plaintiff also claims that since 2006, Schmidt has deposited all of Concepts' receipts into a bank account in Schmidt's sole name. Schmidt testified that since 2006, all payments to Concepts are first deposited into its account and then immediately transferred into an account known as Robert H. Schmidt d/b/a Concepts in Vending. Schmidt then uses these funds to pay off Concepts' creditors. Schmidt adopted this practice in 2006 after at least one, still unsatisfied, court judgment was entered against Concepts. The plaintiff has failed to prove these actions advanced Schmidt's own interests or that he suffered any damages. Thus, this claim fails.
The plaintiff next claims that the Operating Agreement provides that an annual meeting of the members be held on October 1 each year and that each member shall annually receive a balance sheet and income statement within ninety days of the close of the fiscal year. After the plaintiff quit Concepts, Schmidt was the only remaining active member or manager and he was the president. Schmidt thus had a duty to hold an annual meeting and to ensure that the plaintiff received Concepts' financial statements. It is undisputed that after the plaintiff left Concepts in September 2004, he was never given notice of any annual meetings and he never received any financial statements. The plaintiff has not shown, however, that Schmidt's failure to act either advanced Schmidt's own interests or caused the plaintiff any damages. Accordingly, this claim also fails.
B. Misappropriation of Corporate Opportunity
In the second count of the complaint, the plaintiff claims that his membership interest in Concepts was rendered worthless in that Schmidt diverted business opportunities to Core Hospitality and utilized Concepts' assets for the benefit of Core Hospitality. Schmidt responds that this claim is unproven and without merit. The court agrees with Schmidt.
"[I]f a director of a corporation enters into a transaction with the corporation that will inure to his or her individual benefit, the director bears the burden of proving that the transaction is fair, in good faith and for adequate consideration . . . The framework governing a claim of usurpation of a corporate opportunity differs only in part from the basic fiduciary framework. To prevail on this kind of claim . . . a plaintiff bears the burden of establishing: (1) a fiduciary relationship between the corporation and the alleged wrongdoers; and (2) the existence of a corporate opportunity. Once a plaintiff establishes these predicates to liability, the burden then shifts to the fiduciaries to establish, by clear and convincing evidence, the fairness of their dealings with the corporation." (Citations omitted; internal quotation marks omitted.) Ostrowski v. Avery, 243 Conn. 355, 362, 703 A.2d 117 (1997).
In mid 2004, the plaintiff, Schmidt and two other individuals formed a company called Core Hospitality. Whereas Concepts was solely involved in the fabrication of millwork for institutional dining uses, Core's mission was to solicit bids and to be the general contractor for remodels and build-outs of institutional dining facilities. Core was formed to take advantage of the expertise of each of its four members. Accordingly, Core used Concepts as its fabricator. The creation of Core strained the parties' relationship in that the plaintiff came to believe Core was not adequately compensating Concepts for its product and for the use of its employees and its work space. The plaintiff further came to believe that Schmidt was spending too much time on Core business. Aside from these bare assertions, which the court finds not credible, there is no other evidence to support these allegations. Accordingly, this claim fails.
C. Conversion
In the third count, the plaintiff alleges that Schmidt converted funds and assets of Concepts to his own use. "Conversion is an unauthorized assumption and exercise of the right of ownership over property belonging to another, to the exclusion of the owner's rights." Mystic Color Lab, Inc. v. Auctions Worldwide, LLC, 284 Conn. 408, 418, 934 A.2d 227 (2007). In order to succeed on a claim for conversion a plaintiff must prove: (1) "legal ownership or the immediate superior right of possession to the [property];" (2) "that the defendant exercised unauthorized dominion over the [property] to the exclusion of the plaintiff's rights." Devitt v. Manulik, 176 Conn. 657, 662, 410 A.2d 465 (1979).
"An action for conversion of funds may not be maintained to satisfy a mere obligation to pay money . . . It must be shown that the money claimed, or its equivalent, at all times belonged to the plaintiff and that the defendant converted it to his own use . . . [ Macomber v. Travelers Property Casualty Corp., 261 Conn. 620, 650, 804 A.2d 180 (2002)] quoting National Fire Union Ins. Co. of Pittsburgh, PA v. Wilkins-Lowe Co., 29 F.3d 337, 340 (7th Cir. 1994). Thus, the requirement that the money be identified as a specific chattel does not permit as a subject of conversion an indebtedness which may be discharged by the payment of money generally . . . A mere obligation to pay money may not be enforced by a conversion action . . . and an action in tort is inappropriate where the basis is a suit in contract, either express or implied . . . Bedford Trucking Co. v. Zagar, 243 So.2d 646, 648 (Fla.App. 1970). Consistent with this rule, in our case law sustaining a cause of action wherein money was the subject of a conversion or theft, the plaintiffs in those cases at one time had possession of, or legal title to, the money. See e.g., Devitt v. Manulik, . . . 176 Conn. [657], 662-63, [ 410 A.2d 465 (1979)]; Dunham v. Cox, . . . 81 Conn. [268], 270-71, [ 70 A. 1033 (1908)]." (Internal quotation marks omitted.) Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 772, 905 A.2d 623 (2006).
The essence of the plaintiff's claim is that Schmidt has wrongfully taken money from Concepts that should have been distributed to him pursuant to their partnership agreement. This is nothing more than a claim for moneys due and owing under a contract and is in no way a claim based upon a preexisting property interest. Accordingly, the plaintiff has failed to prove conversion.
D. Violation of the Connecticut Unfair Trade Practices Act
In the fourth count of the complaint, the plaintiff avers that Schmidt's actions, as alleged in the first three counts of the complaint, consist of unfair trade practices in violation of the Connecticut Unfair Trade Practices Act (CUTPA), Gen. Stat. § 42-110b, et seq. "CUTPA provides that `[n]o person shall engage 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). In order to enforce this prohibition, CUTPA provides a private cause of action to `[a]ny person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a [prohibited] method, act or practice . . .' General Statutes § 42-110g(a)." (Citations omitted.) Stevenson Lumber Co.-Suffield, Inc. v. Chase Associates, Inc., 284 Conn. 205, 213-14, 932 A.2d 401 (2007).
Purely corporate acts, however, do not constitute CUTPA violations. Ostrowski v. Avery, 243 Conn. 355, 379, 703 A.2d 117 (1997); see also, Fink v. Golenbock, 238 Conn. 183, 212, 680 A.2d 1243 (1996). Nor do acts which solely involve the internal workings of a partnership, Brunette v. Bristol Savings Bank, Superior Court, judicial district of Hartford/New Britain at Hartford, Docket No. 453957 (April 7, 1995) (Holzberg, J.); Lapuk v. Simons, Superior Court, judicial district of Hartford/New Britain at Hartford, Docket No. 704542 (January 3, 1995) (Corradino, J.); Lougee v. Tanner, Superior Court, judicial district of New London, Docket No. 523840 (December 20, 1993) (Hurley, J.); Chester v. Schatz Schatz Ribicoff Kotkin, 6 Conn. L. Rptr. 526 (1992); Heller v. North American Rock Co., 3 Conn. L. Rptr. 215 (1991).
In the present case, the CUTPA count is nothing more than a reformulation of the claims and allegations set forth in the previous three counts which are nothing more than grievances by the plaintiff regarding the internal workings of Concepts. As such these activities were not undertaken in the conduct of the Schmidt's trade or commerce and therefore are not covered by CUTPA.
Even if it could be said that CUTPA applies to the present case, for the reasons previously set out in this opinion, the plaintiff has failed to prove that Schmidt breached his fiduciary duty, usurped any corporate opportunity, misappropriated the plaintiff's property or engaged in any prohibited practices. The plaintiff has additionally failed to show that any such act of the defendant was the proximate cause of any loss to him. Stevenson Lumber Co.-Suffield, Inc. v. Chase Associates, Inc., supra, 284 Conn. 214 (a plaintiff must establish both that the defendant has engaged in a prohibited act and that as a result of this act, the plaintiff suffered injury.) The plaintiff therefore has failed to prove his CUTPA claim.
E. Application for a Dissolution of the Company
In the fifth count of the consolidated complaint (the first count in the plaintiff's second cause of action), the plaintiff alleges that as a result of Schmidt's personal use of Concepts' assets and funds, his lock-out of the plaintiff, his refusal to allow the plaintiff to review the records of Concepts, his failure to make required payments to the plaintiff and his diversion of business to Core Hospitality, it is not reasonably practical for Concepts to carry on its business in conformance with its articles of organization and its operating agreement. Thus the plaintiff seeks a dissolution of Concepts.
General Statutes § 34-206 of the Connecticut Limited Liability Company Act provides: "A limited liability company is dissolved and its affairs shall be wound up upon the happening of the first to occur of the following: (1) At the time or upon the occurrence of events specified in Writing in the articles of organization or operating agreement; (2) unless otherwise provided in writing in the articles of organization or operating agreement, upon the affirmative vote, approval or consent of at least a majority in interest of the members; or (3) entry of a decree of judicial dissolution under section 34-207." (Emphasis added; internal quotation marks omitted.) Connors v. Howe Elegant, LLC, Superior Court, judicial district of Ansonia-Milford, Docket No. CV 4003783 (January 8, 2009, Levin, J.) ( 47 Conn. L. Rptr. 107).
General Statutes § 34-207 of the Connecticut Limited Liability Company Act provides: "On application by or for a member, the superior court for the judicial district where the principal office of the limited liability company is located may order dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement." (Internal quotation marks omitted.) Saunders v. Firtel, 293 Conn. 515, 536, 978 A.2d 487 (2009).
In the present case, each party has made accusations against the other for breach of fiduciary duty, conversion and CUTPA. Moreover since at least September 2004, the parties have had no business or personal relationship and at trial, the antipathy toward each other was palpable. To state the obvious, such ill will is not conducive to a working business relationship, nor is it conducive to the joint decision making required by Concepts' Operating Agreement. Accordingly the court concludes that it is no longer practicable for Concepts to carry on in conformance with the terms of its Operating Agreement and it should be dissolved. It is ordered, therefore, that the business of Concepts Manufacturing, LLC be wound up in accordance with Section 11 of its Operating Agreement.
II. THE COUNTERCLAIM A. Breach of Fiduciary Duty
In the first count of the counterclaim, Schmidt alleges that the plaintiff, in his capacity as chief financial officer of Concepts, paid himself sums without authority, worked for a competitor while a member of Concepts, informed vendors that Concepts was unable to honor its obligations, wrongfully charged personal expenses to his company credit card, sought services from Concepts employees, locked Schmidt out of the Concepts computer system and failed to keep proper books.
"[A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other . . . The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him." (Citations omitted; internal quotation marks omitted.) Konover Development Company v. Zeller, 228 Conn. 206, 218-19, 635 A.2d 798 (1994).
"An agent is a fiduciary with respect to matters within the scope of his agency . . . The very relationship [between principal and agent] implies that the principal has reposed some trust or confidence in the agent and that the agent or (employee) is obligated to exercise the utmost good faith, loyalty and honesty toward his principal or employer." News America Marketing v. Marquis, Superior Court, complex litigation docket at Stamford, Docket No. X00 CV 00 0177440 S (October 23, 2003 Rogers, J.). "The general principle for the agent's duty of loyalty according to the Restatement [(Second), Agency] is that the agent must act solely for the benefit of the principal in matters connected with the agency." News America Marketing v. Marquis, 86 Conn.App. 527, 535, 862 A.2d 837 (2004), cert. granted, 273 Conn. 905, aff'd, 276 Conn. 310 (2005).
"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 . . . Proof of a fiduciary relationship, therefore, generally imposes a twofold burden on the fiduciary. First, the burden of proof shifts to the fiduciary; and second, the standard of proof is clear and convincing evidence." Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998).
"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." Stuart v. Stuart, Superior Court, complex litigation docket at Stamford, Docket No. X 08 CV 02 0193031 (June 28, 2004, Adams, J.) ( 37 Conn. L. Rptr. 367). Simply, "[t]he plaintiff may recover his or her actual damages on a claim for breach of fiduciary duty." 16 Conn. Prac., Elements of an Action § 8:3.
In the present case, Concepts began to suffer cash flow problems beginning in 2003 which required the plaintiff and Schmidt to loan the company money to stay afloat. From March-December 2003, the plaintiff loaned Concepts $41,000 which was secured by on-demand promissory notes. On numerous occasions throughout 2004 the plaintiff requested repayment of his loans, but Schmidt refused to authorize such a payment. In late August 2004, the plaintiff informed Schmidt that one of Concepts vendors, Bridges Wood Products, was "looking to get paid." Accordingly, Schmidt authorized the plaintiff to make a $52,000 payment to them. The plaintiff cut a check to Bridges in that amount but then told Karen Schmidt to hold off mailing it. In the interim, Schmidt traveled to Georgia on Concepts business and the plaintiff issued a check to himself for $52,316. The evidence also shows that simultaneous with his issuance of the check to himself, the plaintiff changed the password on Concepts' computer system thus preventing Schmidt from discovering the plaintiff's actions until after the unauthorized check had been deposited to the plaintiff's personal account. As a result of the plaintiff's actions, Concepts was deprived of a corporate asset in the amount of $52,316, was unable to pay the AMEX line of credit and was unable to pay Bridges who eventually sued and obtained a $49,000 judgment against Concepts. Additionally, Schmidt was forced to devote large amounts of time to shoring up Concepts' finances and reassuring his creditors.
The Operating Agreement provides that "the Chief Financial Officer shall cause the funds of the LLC to be disbursed as he or she may be properly directed from time to time . . ." Operating Agreement, § 6.34(i)(2). No provision in the Operating Agreement, however, authorizes the chief financial officer to issue checks on his own authority, nor did anyone with that authority authorize the plaintiff to issue a $52,316 check to himself. By so doing, the plaintiff acted in his own best interest but against the best interest of Concepts. As such he violated his duty to act solely in Concepts' interests as well as breached his duty of good faith, loyalty and honesty. The burden of proof thus shifts to the plaintiff to prove fair dealing which he has not done, by any standard — either clear and convincing evidence or otherwise. The court finds, therefore, that the plaintiff breached his fiduciary duty to Schmidt and to Concepts. As a result, Schmidt and Concepts suffered the loss of $52,316 for which they are entitled to recover.
The operating agreement of Concepts Manufacturing, LLC provides that only the Managers and the President have authority to authorize the payment of any funds. The defendant, Robert Schmidt, is the President and sole Manager of Concepts. See footnote 2.
The evidence also shows that the plaintiff voluntarily left his employment at Concepts and joined American Architectural Interiors, Inc. as its chief financial officer; that the plaintiff telephoned Jill Byrne of Prime Plywood and Panel and informed her that he had evidence the defendant was funneling money out of the business; that he phoned John Cautillo of Chartwells Dining Services and informed him that there may be financial trouble with Concepts and that Chartwells should be careful about payments to Concepts; that the plaintiff used his Concepts' credit card for personal expenses; that he solicited services from Concepts' employees and that he failed to keep proper books and file tax returns. While Schmidt and Concepts may have proven one or more of these allegations, they have failed to prove that they suffered any economic loss therefrom. Accordingly, Schmidt and Concepts have failed to prove that they are entitled to damages for these claims.
The credit card receipts show that the plaintiff stopped using his company card on September 1 but that thereafter, he may have made three phone calls for which Concepts was not charged by its carrier.
B. Conversion
In the second count of the counterclaim, Schmidt and Concepts allege that the plaintiff's conduct in issuing a check to himself and in charging personal expenses to Concepts' credit card constitutes conversion. Conversion is an unauthorized assumption and exercise of the right of ownership over property belonging to another, to the exclusion of the owner's rights." Mystic Color Lab, Inc. v. Auctions Worldwide, LLC, 284 Conn. 408, 418, 934 A.2d 227 (2007). In order to succeed on a claim for conversion a defendant must prove: (1) "legal ownership or the immediate superior right of possession to the [property];" (2) "that the [plaintiff] exercised unauthorized dominion over the [property] to the exclusion of the [defendant]'s rights." Devitt v. Manulik, 176 Conn. 657, 662, 410 A.2d 465 (1979).
See footnote 12.
In the present case, the defendants have proven the two elements of the tort of conversion, that the plaintiff had no authority or authorization to pay himself $52,316 from Concepts' corporate account and that they had legal ownership of these funds as well as a superior right of possession. Inasmuch as the court has already awarded restitution for these funds, the defendants are only entitled to nominal damages.
C. Libel and Slander of Credit
In the third count of the counterclaim, the defendants allege that the plaintiff informed Concepts' vendors that Schmidt is dishonest and that Concepts was unable to pay its bills. The defendants additionally allege that the allegations contained in the plaintiff's consolidated complaint have defamed them.
"Defamation is comprised of the torts of libel and slander . . . Slander is oral defamation . . . Libel . . . is written defamation." (Internal quotation marks omitted.) Mercer v. Cosley, 110 Conn.App. 283, 297, 955 A.2d 550 (2008). "A defamatory statement is defined as a communication that tends to harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him . . . To establish a prima facie case of defamation, the [defendant] must demonstrate that: (1) the [plaintiff] published a defamatory statement; (2) the defamatory statement identified the [defendant] to a third person; (3) the defamatory statement was published to a third person; and (4) the [defendant]'s reputation suffered injury as a result of the statement." (Internal quotation marks omitted.) Gambardella v. Apple Health Care, Inc., 291 Conn. 620, 627-28, 969 A.2d 736 (2009).
"Defamation or disparagement of a business' goods and services may be considered trade libel . . . and is recognized by Connecticut . . . courts as a species of defamation." (Citations omitted; internal quotation marks omitted.) QSP, Inc. v. Aetna Casualty Surety Co., 256 Conn. 343, 358, 773 A.2d 906 (2001). "The torts of trade libel and commercial disparagement, like defamation, require that the alleged damaging statement be made concerning the [defendant] . . . This is consistent with our treatment of business disparagement like defamation, requiring that the statement that disparages a person's goods or services be made `of and concerning' the person stating the cause of action." (Citations omitted; internal quotation marks omitted.) Id., 359-60.
"When the defamatory words are actionable per se, the law conclusively presumes the existence of injury to the [defendant]'s reputation. He is required neither to plead nor to prove it . . . The defendant is entitled to recover, as general damages, for the injury to his reputation and for the humiliation and mental suffering which the [defamation] caused him." (Citations omitted; internal quotation marks omitted.) Torosyan v. Boehringer Ingelheim Pharmaceuticals, Inc., 234 Conn. 1, 35, 662 A.2d 89 (1995). "To recover special damages, however, the [defendant] must prove that he suffered economic loss that was legally caused by the [plaintiff]'s defamatory statements, even where the defamation is per se. See 3 Restatement (Second), Torts § 622 (1977). General and special damages together comprise compensatory damages. See 4 Restatement (Second), Torts, § 904 (1979)." Devito v. Schwartz, 66 Conn.App. 228, 235, 784 A.2d 376 (2001). "[D]efamation is actionable per se if it charges improper conduct or lack of skill or integrity in one's profession or business and is of such a nature that it is calculated to cause injury to one in his profession or business." Moriarty v. Lippe, 162 Conn. 371, 384, 294 A.2d 326 (1979).
In late 2004, the plaintiff telephoned Jill Byrne of Prime Plywood and Panel and informed her that he had evidence Schmidt was funneling money out of the business. The plaintiff warned Byrne that Prime should be careful about extending credit to Concepts. According to Byrne, for the next eight months, Prime tightened its credit line with Concepts. The plaintiff also told John Cautillo, chief financial officer of Chartwells Dining Services, that there may be financial trouble with Concepts and that Chartwells should be careful about payments to Concepts. According to Cautillo, this information did not cause Chartwells to deal any differently with Concepts.
In no uncertain terms, the plaintiff's statement to Byrne accused Schmidt of stealing money from Concepts. The evidence at trial shows, however, that this statement was false. Based on the totality of the evidence, the court finds the plaintiff's statement was made intentionally and maliciously and was calculated to cause financial harm to Concepts' business and to undercut Schmidt personally. The plaintiff's false statement to Byrne constitutes slander per se for which the court, in the present case, awards general damages in the amount of $5,000.
The defendants have failed to prove any economic loss or injury. Accordingly, the court may not award special damages.
The defendants next claim that the factual allegations contained in the plaintiff's consolidated complaint constitute defamation. "It is well settled that communications uttered or published in the course of judicial proceedings are absolutely privileged [as] long as they are in some way pertinent to the subject of the controversy . . . The effect of an absolute privilege is that damages cannot be recovered for the publication of the privileged statement even if the statement is false and malicious . . . The absolute privilege for statements made in the course of a judicial proceeding applies . . . to defamation claims . . .
"The policy underlying the privilege is that in certain situations the public interest in having people speak freely outweighs the risk that individuals will occasionally abuse the privilege by making false and malicious statements . . . The rationale underlying the privilege is grounded upon the proper and efficient administration of justice . . . Participants in a judicial process must be able to testify or otherwise take part without being hampered by fear of [actions seeking damages for statements made by such participants in the course of the judicial proceeding] . . . Put simply, absolute immunity furthers the public policy of encouraging participation and candor in judicial . . . proceedings. This objective would be thwarted if those persons whom the common law doctrine was intended to protect nevertheless faced the threat of suit." (Citations omitted; internal quotation marks omitted.) Gallo v. Barile, 284 Conn. 459, 465-66, 935 A.2d 103 (2007).
"The absolute privilege for communications made in a judicial proceeding is not confined to the testimony of a witness but extends to any statement made in the course of a judicial proceeding, whether or not given under oath, as long as it is pertinent to the controversy. In addition, "[c]ommunications made in a judicial proceeding will not serve as the basis of a civil action for libel or slander, regardless of the negligence or malice with which they are made." 50 Am.Jur.2d Libel and Slander § 279. Words written or spoken in the course of a judicial proceeding are absolutely privileged, and all communications pertinent to any stage of judicial proceedings are accorded an absolute privilege." 50 Am.Jur.2d Libel and Slander § 280. "The doctrine of absolute privilege applies to defamatory statements made in the institution or conduct of litigation or in conferences or other communications preliminary to litigation." 50 Am. Jur.2d Libel and Slander § 282. For the foregoing reasons, this claim of the defendants fails.
D. Tortious Interference
The defendants next claim that the plaintiff unjustly and improperly interfered with the business expectations and contracts of Schmidt and Concepts. "It is well established that the elements of a claim for tortious interference with business expectancies are: (1) a business relationship between the [defendant] and another party; (2) the [plaintiff]'s intentional interference with the business relationship while knowing of the relationship; and (3) as a result of the interference, the [defendant] suffers actual loss." Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 28, 761 A.2d 1268 (2000). See also Rossman v. Morasco, 115 Conn.App. 234, 244, 974 A.2d 1 (2009).
"Our case law has recognized that not every act that disturbs a business expectancy is actionable. [A] claim is made out [only] when interference resulting in injury to another is wrongful by some measure beyond the fact of the interference itself . . . Accordingly, the [defendant] must plead and prove at least some improper motive or improper means . . . [F]or a [defendant] successfully to prosecute such an action it must prove that . . . the [plaintiff] was guilty of fraud, misrepresentation, intimidation or molestation . . . or that the [plaintiff] acted maliciously . . . In the context of a tortious interference claim, the term malice is meant not in the sense of ill will, but intentional interference without justification . . . In other words, the defendant bears the burden of alleging and proving lack of justification on the part of the plaintiff." (Internal quotation marks omitted.) In Energy Solutions, Inc. v. Realgy, LLC, 114 Conn.App. 262, 272, 969 A.2d 807 (2009).
"[T]he proper measure of damages in an action for tortious interference with a business expectancy is not the profit to the [plaintiff] but rather the pecuniary loss to the [defendant] of the benefits of the prospective business relation." American Diamond Exchange, Inc. v. Alpert, 101 Conn.App. 83, 103, 920 A.2d 357 (2007).
In the present case, the factual allegations of tortious interference are nothing more than a restatement of the previous three counts. The credible evidence at trial shows that, the plaintiff intentionally and maliciously informed Byrne that Schmidt was stealing from Concepts and informed Cautillo that he should be careful about paying Concepts. The defendants have, however, failed to prove that as a result of the plaintiff's actions, they have suffered any economic loss. Accordingly, this claim fails.
E. CUTPA
The defendants next claim that the plaintiff violated CUTPA by all of his actions as described in the first four counts of the counterclaim. "CUTPA provides a private cause of action to `[a]ny person who any person who suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment of a [prohibited] method, act or practice . . .' General Statute § 42-110g(a). Although CUTPA does not apply to purely intracorporate conflicts, our Supreme Court has stated that CUTPA does apply where one's actions go `well beyond governance of the [partnership], and [place] him in direct competition with the interests of the [partnership].' Fink v. Golenbock, 238 Conn. 183, 213, 680 A.2d 1243 (1996)." Spector v. Konover, 57 Conn.App. 121, 133, 747 A.2d 39, cert. denied, 254 Conn. 913, 759 A.2d 507 (2000).
Aside from the evidence of slander, the defendants' allegations of CUTPA violations are nothing more than grievances against the plaintiff for his corporate acts. This court need not decide, however, whether the plaintiff's slander also amounts to an intracorporate conflict. Notwithstanding its classification, the defendants have failed to prove that it was the proximate cause of any economic loss to them. Stevenson Lumber Co.-Suffield, Inc. v. Chase Associates, Inc., supra, 284 Conn. 214. The defendants, therefore, have failed to prove their CUTPA claim.
CONCLUSION
For the foregoing reasons, judgment enters:
1. In favor of the plaintiff, Donald Wilcox, on the fifth count of the consolidated complaint (the first count in the second action). The court orders that the business of Concepts Manufacturing, LLC be wound up in accordance with Section 11 of its Operating Agreement;
2. In favor of the defendant, Concepts Manufacturing, LLC, on the first count of the amended consolidated counterclaim. The court orders the plaintiff to pay $52,316 to the defendant;
3. In favor of the defendant, Concepts Manufacturing, LLC, on the second count of the amended consolidated counterclaim. The court orders the plaintiff to pay $1.00 to the defendant;
4. In favor of the defendant, Robert Schmidt, on the third count of the amended consolidated counterclaim. The court orders the plaintiff to pay $5,000 to the defendant.
APPENDIX A ADMENDMENT to OPERATING AGREEMENT CONCEPTS MANUFACTURNING LLC
Change in LLC interest to read as follows:
Name: LLC Interest Robert H. Schmidt 60% Donald E. Wilcox 40%IN WITNESS WHEREOF, the parties hereto have caused this Agreement/Amendment to be duly executed as of this 1st day of February 2003.
Robert H. Schmidt, Member
Agreement
60% RS /40% DW
DW to make contribution to company of $75,000.
Compensation:
• RS-$2,400.00 wk
• DW-$1,600.00 wk
Distribution as follows:
• 50% ($1,200.00) to RS and 50% ($1,200.00) to spouse.
• 40% ($640.00) to DW and 60% ($960.00) to spouse.
• Karen Schmidt's base pay set as $500.00 per week. No future increases unless approved by RS and DW jointly.
• Full benefits, family plan, (Health, Dental and Life) paid by company.
• Key Man life insurance $ 500,000.00 each, paid by company. Beneficiary as 60% company and 40% spouse.
• Distribution of Profits to be made semi-annual by agreement or at least annually based upon the company Income Statement. Distribution to be made based upon owner percentages and paid within 90 days from the close of the period or year.
• Taxes on company profits will be paid by the company through a bonus paid to the owners at the 60% RS and 40% DW distribution.
APPENDIX B ADMENDMENT to OPERATING AGREEMENT CONCEPTS MANUFACTURNING LLC CT Page 12082
Change in LLC interest to read as follows:
Name: LLC Interest Robert H. Schmidt 60% Donald F. Wilcox 40%IN WITNESS WHEREOF, the parties hereto have caused this Agreement/Amendment to be duly executed as of this 1st day of February 2003.
ROBERT H. SCHMIDT, Member