Opinion
No. HHB CV07 5003896 S
December 6, 2007
MEMORANDUM OF DECISION ON APPLICATION FOR PREJUDGMENT REMEDY
On September 27 and October 18, 2007, the parties appeared in court at a prejudgment remedy hearing, concerning the plaintiff's May 16, 2007 application for supplemental prejudgment remedy (#106) (application). The court heard the testimony of witnesses and received various exhibits in evidence. After the evidentiary portion of the hearing was concluded, the parties, by agreement, presented post-hearing memoranda of law, dated November 1 and 2, 2007, in lieu of oral argument. After considering the evidence and the parties' arguments, the court issues this memorandum of decision.
I Background
In its amended complaint (#105), the plaintiff, Xerox Corporation (Xerox), alleges that, on September 22, 2005, it entered into a Managed Services Agreement (MSA) with the defendant, Addressing Services Company (ASC), a copy of which is annexed thereto. Xerox alleges that it delivered products and rendered services to ASC, at ASC's request. Xerox claims that ASC failed to make payments as they became due. It alleges that, as a result of ASC's default, the sum of $695,113.30, together with interest, costs and attorneys fees, is due and owing.
In its answer and special defenses (#108), ASC admits that it entered into the MSA with Xerox. It denies the balance of Xerox's allegations. In addition, it sets forth special defenses.
In the application, Xerox seeks an order from the court directing that a prejudgment remedy be issued to secure the sum of $700,000.00. ASC filed an objection thereto (#109), in which it notes that Xerox has not previously obtained a prejudgment remedy in this action, and it asserts that Xerox is not entitled to any supplemental remedy. It also claims that the amount sought is unreasonably high. In addition, ASC requests that Xerox post a bond in accordance with General Statutes § 52-278d, to secure it against any damages which may result from any prejudgment remedy which may be granted.
Section 52-278d(d) provides, "At any hearing on an application for a prejudgment remedy held pursuant to this section or upon motion of the defendant at any time after the granting of such application, the defendant may request that the plaintiff post a bond, with surety, in an amount determined by the court to be sufficient to reasonably protect the defendant's interest in the property that is subject to the prejudgment remedy against damages that may be caused by the prejudgment remedy. If the court grants the defendant's request, the bond shall provide that argument in the matter is rendered for the defendant or if the prejudgment remedy is dismissed or dissolved, the plaintiff will pay to the defendant damages directly caused by the prejudgment remedy."
II Standard of Review
"The purpose of the prejudgment remedy of attachment is security for the satisfaction of the plaintiff's judgment, should he obtain one . . . It is primarily designed to forestall any dissipation of assets by the defendant and to bring [those assets] into the custody of the law to be held as security for the satisfaction of such judgment as the plaintiff may recover . . . The adjudication made by the court on [an] application for a prejudgment remedy is not part of the proceedings ultimately to decide the validity and merits of the plaintiff's cause of action. It is independent of and collateral thereto." (Emphasis in original; internal quotation marks omitted.) Marlin Broadcasting, LLC v. Law Office of Kent Avery, LLC, 101 Conn.App. 638, 646-47, 922 A.2d 1131 (2007).
The standard for the granting of a prejudgment remedy is well established. "General Statutes § 52-278d (a) provides in relevant part that a hearing on a prejudgment remedy `shall be limited to a determination of . . . whether or not there is probable cause that a judgment in the amount of the prejudgment remedy sought, or in an amount greater than the amount of the prejudgment remedy sought, taking into account any defenses, counterclaims or set-offs, will be rendered in the matter in favor of the plaintiff . . . If the court, upon consideration of the facts before it and taking into account any . . . [defenses] . . . finds that the plaintiff has shown probable cause that such a judgment will be rendered in the matter in the plaintiff's favor in the amount of the prejudgment remedy sought and finds that a prejudgment remedy securing the judgment should be granted, the prejudgment remedy applied for shall be granted as requested or as modified by the court.'" (Internal quotation marks omitted.) Id., 647.
"The legal idea of probable cause is a bona fide belief in the existence of the facts essential under the law for the action and such as would warrant a [person] of ordinary caution, prudence and judgment, under the circumstances, in entertaining it . . . Probable cause is a flexible common sense standard. It does not demand that a belief be correct or more likely true than false . . ." (Emphasis in original; internal quotation marks omitted.) Id.
"[T]he probable cause hearing is not a full-scale trial on the merits. The plaintiff does not have to establish that he will prevail, only that there is probable cause to sustain the validity of the claim . . . The court's role in such a hearing is to determine probable success by weighing probabilities . . . [T]his weighing process applies to both legal and factual issues." (Internal quotation marks omitted.) Doe v. Rapoport, 80 Conn.App. 111, 116-17, 833 A.2d 926 (2003). "It bears reemphasis, however, that the burden of proof at a probable cause hearing is a low one . . ." 36 DeForest Avenue, LLC v. Creadore, 99 Conn.App. 690, 698, 915 A.2d 916, cert. denied, 282 Conn. 905, 920 A.2d 311 (2007).
"[A]t a prejudgment remedy hearing a good defense . . . will be enough to show that there is no probable cause that judgment will be rendered in the matter in favor of the plaintiff . . . Thus the court, at the hearing on an application for a prejudgment remedy, must evaluate the arguments and evidence produced by both parties." (Citation omitted; internal quotation marks omitted.) Augeri v. C.F. Wooding Co., 173 Conn. 426, 429, 378 A.2d 538 (1977).
The determination is to be based on the court's assessment of the legal issues and the credibility of the witnesses. See Nash v. Weed Duryea Co., 236 Conn. 746, 749, 674 A.2d 849 (1996). The court has "broad discretion to deny or grant a prejudgment remedy . . ." State v. Ham, 253 Conn. 566, 568, 755 A.2d 176 (2000).
"[I]n an application for a prejudgment remedy, the amount of damages need not be determined with mathematical precision . . . A fair and reasonable estimate of the likely potential damages is sufficient to support the entry of a prejudgment attachment . . . Nevertheless, the plaintiff bears the burden of presenting evidence which affords a reasonable basis for measuring [its] loss." (Citations omitted; internal quotation marks omitted.) Rafferty v. Noto Bros. Construction, LLC, 68 Conn.App. 685, 693, 795 A.2d 1274 (2002). "[A] finding of probable damages . . . is an integral part of the probable cause determination." Id., 694.
III Discussion
ASC provides full direct mail production services, such as data processing; printing of personalized letters; bindery services, such as folding; inserting services; sorting of mail; and mailing. See transcript of hearing, September 27, 2007, pp. 63-64. Andrew Perelson, a business development executive for Xerox, testified that ASC is one of the top providers of mail services in Eastern Connecticut, doing bulk mailing for clients, which reduces the cost of large shipments. Tr., September 27, 2007, p. 24.
In September 2005, Xerox and ASC entered into the MSA. See Plaintiff's Exhibit 1. That agreement called for Xerox to provide digital printing equipment and related services to ASC, for which ASC was required to make payments. The MSA is a commercial transaction between sophisticated parties.
The court addresses below ASC's contention, as part of its defense of fraudulent inducement, that the MSA in its entirety was never shown to ASC prior to the delivery of the Xerox equipment.
At page 6 of 6 of the MSA, the final paragraph, which appears just above the signatures of the parties, provides, "This MSA, its attachments and any Order hereunder constitutes the entire agreement between the parties as to its subject matter and supersedes all prior and contemporaneous oral and written agreements." Above, on the same page, paragraph 21a provides, "This MSA and any Order hereunder shall be construed under the laws of the State of New York (without regard to conflict-of law principles)." ASC's president, Michael Rittlinger, testified that he signed the MSA on behalf of ASC. Tr., September 27, 2007, p. 11.
The portion of the MSA entitled MSO Details, which also was signed by Rittlinger, provides that the term of the MSA was sixty months, and that ASC agreed to pay a monthly minimum charge of $30,753.88, or a minimum total of $1,845,232.80. See Plaintiff's Exhibit 1. While Rittlinger testified that he did not read the MSA before signing it, he acknowledged that the obligation to make the monthly payments was stated in the MSA at the time he signed it. See Tr., September 27, 2007, p. 15.
The MSA, paragraph 8a, page 2 of 6, defines the monthly minimum charge or MMC.
Concerning termination fees, the MSA provides, in paragraph 11a, page 3 of 6, "If any Staffing and Management Services are terminated by Xerox due to Customer's default or by Customer, Customer agrees to pay all amounts due Xerox as of the termination date, together with liquidated damages, for loss of bargain and not as a penalty [in the form of Early Termination Charges (`ETCs')], equal to the then current MMC for said terminated Staffing and Management Services multiplied by the number of months remaining in the term, not to exceed six (6) months." See Plaintiff's Exhibit 1. The MSA also contains a provision, in paragraph 11b, page 3 of 6, calling for the payment of liquidated damages, "for loss of bargain and not as a penalty," if the customer requests a change in any of the services that leads to a reduction in the MMC for staffing and management services.
Similarly, the MSA's Equipment Lease/Software Terms Conditions Addendum, which is part of Plaintiff's Exhibit 1, and which modifies and amends the MSA, provides, on page 1, paragraph 6, for "liquidated damages for loss of bargain and not as a penalty . . ." In addition, this paragraph provides, at pages 1-2, that a defaulting customer shall either make the equipment or third-party hardware available for removal by Xerox when requested by Xerox or purchase the same. See Plaintiff's Exhibit 1.
Paragraph 12 of the MSA, page 3 of 6, provides that Xerox may charge collection costs and interest if a payment is late, and states that, if ASC defaults, ASC agrees to pay all of the costs Xerox incurs to enforce its rights, including reasonable attorneys fees and actual costs. See Plaintiff's Exhibit 1.
By July 2006, ASC had incurred a substantial balance. Plaintiff's Exhibit 2, a letter which was signed on July 25, 2006 by Nicholas Martinelli, ASC's vice president of operations, who was in charge of production and accounting, confirms a payment arrangement, and reflects that $101,077.77 had been billed for January 2006 through April 2006 monthly minimums. A monthly payment schedule, to which ASC agreed, was set forth, commencing on August 5, 2006 and running through May 2007, for an anticipated outstanding balance of $301,564.76. While Martinelli asserted that ASC would owe the money to Xerox as long as Xerox provided the work to be able to enable ASC to make the payments, Plaintiff's Exhibit 2 does not contain such terms. See Tr., September 27, 2007, pp. 80-81.
At the hearing, Jorge Rovirosa, a field manager for Xerox Managed Services, testified that the outstanding balance owed to Xerox by ASC was $661,191.84, which included $392,672.14 in early termination charges (ETCs) or cancellation fees. See Tr., September 27, 2007, p. 4; Plaintiff's Exhibit 3 (invoices), in particular the invoice dated February 6, 2007, which lists cancellation fees. ASC presented no evidence to show that payments had been made for the balances claimed to be due or that the invoices were inaccurate. In its brief, page 7, Xerox argues that the early termination charges and taxes amounted to only $249,190.06 of the total due, making the non-ETC portion of the balance $412,001.78, as evidenced by the invoices. Xerox took back the equipment.
In its post-hearing memorandum of law, ASC argues that the amount claimed by Xerox for liquidated damages constitutes an unenforceable penalty. It also contends that it has proven its defense of fraudulent misrepresentation, in that it was misled into entering into the MSA. The court addresses each of these arguments below.
ASC does not present arguments based on its other special defenses. Accordingly, the court does not consider them.
CT Page 22247
A Liquidated Damages
As discussed above, the MSA, Plaintiff's Exhibit 1, paragraph 21a provides that it shall be construed according to New York law. ASC argues that Xerox presented no evidence to show that the amount which it is seeking as liquidated damages is in proportion to its probable loss and the amount of loss is incapable or difficult of precise estimation. ASC contends that neither of Xerox's witnesses, Rovirosa or Perelson, testified that the returned equipment was unused or remained idle after it was removed. It claims that the liquidated damages clauses cited above are unenforceable as penalties.ASC's argument mischaracterizes which party bears the burden of showing that a liquidated damages provision amounts to an unenforceable penalty. According to New York law, even though it is the defendant here, the burden is on ASC, as the party challenging the contractual provision. "Whether the early termination fee represents an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances . . . The burden is on the party seeking to avoid liquidated damages — here, [ASC] — to show that the stated liquidated damages are, in fact, a penalty." (Citations omitted; internal quotation marks omitted.) JMD Holding Corp. v. Congress Financial Corp., 4 N.Y.3d 373, 379-80, 795 N.Y.S.2d 502, 828 N.E.2d 604 (2005).
"[L]iquidated damages [are] in effect, . . . an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of the breach of the agreement . . . [T]he distinction between liquidated damages and a penalty [is] well established: [a] contractual provision fixing damages in the event of a breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced." (Citation omitted.) Id., 4 N.Y.3d 380.
"Absent some element of fraud, exploitive over-reaching or unconscionable conduct . . . to exploit a technical breach, there is no warrant, either in law or in equity, for a court to refuse enforcement of the agreement of the parties . . . [I]t has become increasingly difficult to justify the peculiar historical distinction between liquidated damages and penalties. Today the trend favors freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation . . . The rule (against penalty clauses) hangs on, but is chastened by an emerging presumption against interpreting liquidated damages clauses as penalty clauses." (Citations omitted; internal quotation marks omitted.) Id., 4 N.Y.3d 380-81.
Even if the challenged clauses were construed under Connecticut law, the burden would be on ASC, not on Xerox. "A breaching party seeking to nullify a contract clause that fixes an amount as damages bears the burden of proving that the agreed upon amount so far exceeds any actual damages as to be in the nature of a penalty." American Car Rental, Inc. v. Commissioner of Consumer Protection, 273 Conn. 296, 314, 869 A.2d 1198 (2005).
Here, ASC has not presented evidence to show that the damages flowing from an early termination of the MSA were readily ascertainable in September 2005, when it entered into the agreement with Xerox. Similarly, it has not presented evidence to show that the amount claimed by Xerox for early termination charges is disproportionate to the probable losses. For example, as noted above, the monthly minimum charges for the sixty-month term amounted to a total of $1,845,232.80. The amount sought by Xerox for early termination charges is far less. ASC has not met its burden to show that the challenged liquidated damages clauses are unenforceable. Whether, after discovery, it can marshal evidence to support such a defense at trial, remains to be determined.
The court addresses below ASC's claim that it was drawn into the agreement with Xerox by fraudulent misrepresentation.
B Fraudulent Misrepresentation
In its memorandum of law in opposition to Xerox's application, ASC contends that it has proved that it was misled into the MSA. Connecticut law and New York law concerning fraud in the inducement require the same essential elements of proof. Accordingly, the court's analysis of ASC's defense is the same, regardless of which state's law is applicable.
In Connecticut, "[f]raud in the inducement to enter a contract is a well established equitable defense . . . Fraud and misrepresentation cannot be easily defined because they can be accomplished in so many different ways. They present, however, issues of fact." (Citation omitted; internal quotation marks omitted.) Barasso v. Rear Still Hill Road, LLC, 81 Conn.App. 798, 806, 842 A.2d 1134 (2004). "The party claiming fraud has the burden of proof . . . Fraud consists in deception practiced in order to induce another to part with property or surrender some legal right, and which accomplishes the end designed . . . The elements of a fraud action are: (1) a false representation was made as a statement of fact; (2) the statement was untrue and known to be so by its maker; (3) the statement was made with the intent of inducing reliance thereon; and 4) the other party relied on the statement to his detriment." (Citation omitted; internal quotation marks omitted.) Terry v. Terry, 102 Conn.App. 215, 223, 925 A.2d 375, cert. denied, CT Page 22249 284 Conn. 911, 931 A.2d 934 (2007). "[T]he appropriate standard of proof for the party who seeks to prevail in a civil fraud action is clear and convincing evidence." Black v. Goodwin, Loomis and Britton, Inc., 239 Conn. 144, 163, 681 A.2d 293 (1996).
Under New York law, the essential elements for a fraudulent misrepresentation claim are "representation of a material existing fact, falsity, scienter, deception and injury . . . Accordingly, one who fraudulently makes a misrepresentation of . . . intention . . . for the purpose of inducing another to act or refrain from action in reliance thereon in a business transaction is liable for the harm caused by the other's justifiable reliance upon the misrepresentation." (Citations omitted; emphasis omitted; internal quotation marks omitted.) Channel Master Corp. v. Aluminum Limited Sales, Inc., 4 N.Y.2d 403, 407, 176 N.Y.S.2d 259, 151 N.E.2d 833 (1958). Proof by clear and convincing evidence is required. See Gaidon v. The Guardian Life Insurance Co. Of America, 94 N.Y.2d 330, 349-50, 704 N.Y.S.2d 177, 725 N.E.2d 598 (1999).
Although ASC contends that the MSA, Plaintiff's Exhibit 1, was never shown to ASC in its entirety, ASC admitted, in its answer (#108) to Xerox's amended complaint (#105), that it entered into a Managed Services Agreement with Xerox, a copy of which is annexed to the amended complaint as Exhibit A. At the hearing, the version of the MSA which was presented in evidence contained additional pages, which appear largely to represent pages added for Xerox's internal use. See Tr., September 27, 2007, p. 7. As noted above, Rittlinger acknowledged, in his hearing testimony, that the obligation to make the monthly payments was stated in the MSA at the time he signed it. The internal documents are not the basis of Xerox's breach of contract claims.
After consideration of the testimony and exhibits, the court is unpersuaded by ASC's contention that Xerox represented to ASC that if ASC agreed to enter into the MSA and ASC then did not have enough work for the Xerox equipment, either Xerox or its employee, Andrew Perelson, would take the equipment back or sell it, without any expense to ASC. See ASC's memorandum of law, p. 18. In essence, ASC asserts that the contractual relationship was represented by Xerox to ASC as one that would be risk-free for ASC.
No credible particulars underlying this claimed representation were presented. For example, how much work for ASC would have been enough? Rittlinger testified that ASC paid Xerox between $90,000.00 and $100,000.00. See Tr., September 27, 2007, p. 14. Was "enough" the amount required to make the minimum monthly payments, but no more, every month? In addition, Plaintiff's Exhibit 2, to which ASC agreed in July 2006, months after it signed the MSA and months after the delivery of the Xerox equipment, reflects ASC's agreement to a payment arrangement. This subsequent agreement undermines ASC's defense that it was misled into entering into the MSA. No mention is made in this document of a minimum amount of work for ASC.
Also unpersuasive was the vague evidence offered concerning the potential, start-up business, Dynamic Print Technologies Inc. or DP Tech, which was discussed as a vehicle to retain customers which did business with Source One, ASC's employee, Thomas Hill's former employer. Hill explained that since ASC's moving of its plant was not completed until January 2006, Source One's customers found other providers. See Tr., October 18, 2007, p. 20. ASC has not presented evidence of sufficient weight to overcome the evidence of the contractually incurred balance due shown by Xerox.
"The plaintiff is not required to establish [its] case by a fair preponderance of the evidence but need only show the probable validity of [the] claim . . . The court, in making its determination of probable cause, does so on the basis of the facts before it." (Citations omitted; internal quotation marks omitted.) McCahill v. Town Country Associates, Ltd., 185 Conn. 37, 39, 440 A.2d 801 (1981).
Taking into account the evidence presented by the parties, and ASC's arguments in support of its defenses, that the liquidated damages clauses are unenforceable penalties, and that it was misled, the court finds that there is probable cause that a judgment, in an amount which is greater than the amount of the requested prejudgment remedy, will be rendered in favor of Xerox. The evidence at the hearing is sufficient to establish probable cause as to a debt owed by ASC, as of the time of the hearing, in the amount of $661,191.84. As set forth above, the MSA also provides for Xerox to recover interest and reasonable attorneys fees. Adding estimated sums for these items to the debt at the time of the hearing results in a finding of probable damages in an amount which is greater than $700,000.00, the amount sought in the application.
CONCLUSION
For the foregoing reasons, the application for prejudgment remedy is granted, in part, as set forth below, in the amount of $700,000.00.
1. The plaintiff, Xerox Corporation, may attach sufficient assets, real or personal, of the defendant, Addressing Services Company, to secure the sum of $700,000.00. In the absence of a proposed garnishee, the application to garnish the defendant's assets is denied, without prejudice. See General Statutes § 52-278c(b) and (f).
2. In the event that any property is attached pursuant to this order, the court will consider, pursuant to General Statutes 52-278d(d) and (e), the defendant's request that the plaintiff be ordered to post a bond, with surety, to reasonably protect the defendant's interest in the property that is subject to the prejudgment remedy against damages that may be caused by the prejudgment remedy.
It is so ordered.