Opinion
No. CV-02-0563884 S
September 12, 2003
MEMORANDUM OF DECISION ON DEFENDANTS' MOTION TO STRIKE
The defendants have filed a motion to strike against several counts of the complaint. The court will attempt to discuss each of the arguments presented.
(1)
The defendants' first claim is that the allegations in Counts Four and Five based upon misrepresentation and fraud are time barred since a three-year statute of limitations applies (§ 52-577 of the General Statutes). The defendants argue that the alleged misrepresentations were communicated more than three years before the complaint was filed so that the common-law claim of misrepresentation cannot be made under the limitations statute, Miller v. Grigoli, 712 F. Sup. 1087, 1092 (S.D.N.Y., 1989). Tucker v. Bitonti, 34 Conn. Sup. 643 (1977), is also cited for the proposition that the date of the act or omission complained "of language in § 52-577, which is the benchmark for determining when the statute begins to run, is the date the conduct occurs, not the date when the plaintiff first sustains damages."
As to Count Four it is noted that paragraph 17 alleges the plaintiff based his decision to become an equity owner in the defendant company on misrepresentations made to him. But the count indicates the plaintiff became an equity owner on March 1, 1998 and the return date of this case is in October 2002. In fact paragraph 17 explicitly says that: "The plaintiff relied on each and every representation, either separately or as one to base his decision to become an equity owner in the L.L.C." (Business entity defendant.)
The Fifth Count, based on fraud alleges that the plaintiff received incorrect tax information from the defendants. But these tax documents were received in April 1999, more than three years before these claims were brought in October 2002.
In a related argument the defendants note the Seventh Count which alleges a violation of the Connecticut Unfair Trade Practices Act is also governed by a three-year statute of limitations, § 42-110g (f) of the Connecticut General Statutes. The defendants note that Fichera v. Mine Hill Corp., 207 Conn. 204 (1988), saw no difference between the "occurrence of a violation" language in § 42-110g (f) and the "act or omission" language in § 52-577 and § 52-584. The defendant goes on to argue, as to the CUTPA claim, that the activities on which it is based and which led to the March 1, 1998 agreement all occurred more than three years prior to when this suit was served. To counter this argument the plaintiff relies on the so-called "continuing course of conduct" doctrine. The court in Nieves v. Cirmo, 67 Conn. App. 576 (2002), notes that the statute of limitations may be tolled under this doctrine if the plaintiff "demonstrates evidence of a breach of duty that existed 'after commission of the original wrong related thereto.'" Id. p. 581. The court quoted from Blanchette v. Barrett, 229 Conn. 256, 275 (1994).
In a reply brief the defendants take the position that the "continuing course of conduct" is inapplicable here. The basic thrust of the defendants' position is that the revised complaint alleges that the plaintiff entered into a partnership agreement on a specific date, March 1, 1998 and the misrepresentations which led to this agreement and subsequent harm to the plaintiff all occurred on or before that date. Thus, there is not a case where equitable considerations suggest the continuing course of doctrine should operate because it presents the type of "circumstances where it may be impossible to pinpoint the exact date of a particular negligent act or omission that caused injury." Sanborn v. Greenwald, 30 Conn. App. 289, 296 (1995). Also given these allegations the defendants argue that this tolling doctrine "is better suited" to claims where the situation keeps evolving after the act complained of is complete, such as medical practice. Id. at p. 298. Here the defendants maintain there is no claim of fraudulent concealment, an evolving situation was not presented nor any subsequent false representations — as noted the representations claimed to be false all occurred on or before March 1, 1998, more than three years prior to suit being filed.
However, the defendants do not take account of another aspect of the "continuing course of conduct doctrine" which is discussed in Fichera. Speaking of that doctrine as it applies to § 52-577 the court said: "Where we have upheld a finding that a duty continued to exist after the cessation of the 'act or omission' relied upon, there has been evidence of either a special relationship between the parties giving rise to such a continuing duty or some later wrongful conduct of a defendant related to the prior act," 207 Conn. at p. 210 (emphasis by court). The so-called special relationship then is a separate reason to find tolling under the doctrine apart from "later wrongful conduct." Connecticut Appellate Courts do not appear to have had occasion to define what is exactly meant by a special relationship and the full implications of finding that the limitations statute should be tolled when such a relationship is in fact found. In finding no basis for tolling the statute on the basis of this doctrine because of a mere contractual relationship Judge Beach in Partitions, Inc. v. Blumberg Associates, 2001 Ct. Sup. 1411, said: "Here, the contractual relationship was not a 'special relationship' for the purpose of the continuing course of conduct doctrine: generally these relationships have been attorney-client, physician, patient or some related sort of fiduciary type relationship in which one party reasonably reposes trust in the other to exercise continuing care on his (her) behalf." Cf. Deusen v. Dratch, 1996 Ct. Sup. 4169 (Pickett, J.). Paragraph 4 of these counts states that the individual defendants are members and owners of the defendant L.L.C. and paragraph 7 indicates that on March 1, 1998, the defendant Scroggins by means of a written agreement offered the plaintiff a partnership interest in the L.L.C. Giving the complaint every favorable inference a partnership relationship seems to have been created. In Oakhill Associates v. D'Amato, 228 Conn. 723, 727 (1994), the court said: "We have recognized that, generally partners are 'bound in a fiduciary relationship' and 'act as trustees toward each other and the partnership';" the court quoted from Konover Development Corp. v. Zeller, 228 Conn. 206, 218 (1994).
The notion of tolling the statute of limitations where a fiduciary relationship is found has been recognized but necessarily refined and limited in other jurisdictions. Thus in somewhat relevant language the "Limitation of Actions" article in 51 Am.Jur.2d at § 390 says: "In an action for the breach of a fiduciary relationship, a trustee may not take advantage of the limitation statute if he or she led the beneficiaries of a trust to believe there was no breach of the relationship by false statements or concealment of the facts, or if the fiduciary was required to give notice to the plaintiff and failed to exercise the utmost good faith in seeing that the notice was in fact received." But the article goes on to make the important point that: "A fiduciary relationship is not an independent basis for an estoppel to assert the statute of limitations, but is merely a factor to be considered on the issue." In Peterson v. Equitable Life Assurance Society, 57 F. Sup.2d 692 (W.D.Wis., 1999), the court was applying Wisconsin law to the effect that "the existence of a fiduciary relationship may estop a fiduciary from asserting the statute of limitations if the fiduciary's conduct and representations 'were so unfair or misleading as to unbalance the public's interest in setting a limitation on bringing actions.'. . . However, ( Production Credit Assoc. of West Central Wisconsin v. Vodak, CT Page 10831 441 N.W.2d 338 (Wis.Ct.App. 1989)) rejected the idea that the mere existence of a fiduciary relationship might lead to such an estoppel. ( Hester v. Williams, 345 N.W.2d 426, 431 (Wis., 1984)) makes it plain that in determining whether to estop a party from asserting a statute of limitations defense, the other party must show both that the party to be estopped engaged in fraudulent or inequitable conduct and that the delay in bringing suit was attributable to reliance on that party's representations or acts." In Tobacco and Allied Stocks v. Transamerica Corp., 143 F. Sup. 323, 329 (D.Del., 1956), admittedly applying estoppel notions to the assertion of a limitations defense, did respond to a plaintiff's argument that a fiduciary relationship and acts of concealment barred assertion of a limitations defense by observing that "the existence of a trust relation and the type of concealment, if any, are not independent basis for estoppel. A person owed a fiduciary duty or one misled by acts of concealment is still bound to exercise such proper amount of diligence as circumstances require."
Here the plaintiff in Count Four not only asserts the existence of a fiduciary relationship (partnership) but has claimed reliance on representations of the defendants that the terms of the partnership agreement were being complied with. He also requested an accounting of the L.L.C.'s operations which necessitated access to books and records in the defendants' exclusive possession, and otherwise requested information which was refused. Count Five repeats the allegations of Count Four and the court can infer that the tax returns were prepared from books and records of the L.L.C. which the defendants had "sole and exclusive access" to. The CUTPA (count) also repeats allegations made in Counts Four and Five concerning access to business records and representations regarding compliance with the partnership agreement. Cf. Green v. Conn. Disposal Service, Inc., 62 Conn. App. 83, 91 (2001).
All of these foregoing assertions in Counts Four though Seven do not permit the court just on the face of the allegations of the complaint to decide whether or not the assertion of a fiduciary relationship would permit tolling of the limitations statute under the "continuing course of conduct doctrine." The court will deny the motion to strike Counts Four, Five, and Seven on the basis of the limitations statutes referred to but only because it must give every favorable inference to the allegations of the complaint and a more complete factual development of the issue must take place perhaps by means of a summary judgment motion.
(2)
A second argument advanced by the defendants is that "they are not liable as a matter of law for fraudulent misrepresentation because plaintiff has not identified any material false statements in Count Four or Five."
The defendants note that fraud must be proven by a higher standard than a fair preponderance of evidence; it must be shown by "clear, precise, and unequivocal evidence." Verrastro v. Middlesex Ins. Co., 207 Conn. 179, 181 (1988). Misrepresentation is just one of the ways civil fraud can be committed and the four elements of civil fraud are set forth in Billington v. Billington, 220 Conn. 212, 217 (1991).
(a)
Count Four of the revised complaint in paragraph 15 alleges four misrepresentations:
(1) That the L.L.C. would earn and be able to account for profits and losses;
(2) That the plaintiff would accrue an equity interest up to 25 percent of the defendant L.L.C.;
(3) That the defendant L.L.C. was profitable; and
(4) That the L.L.C. would account and provide accurate tax information to the plaintiff.
The defendants argue that the allegations simply do not set forth a claim for fraud or misrepresentation; they argue that "where a statement is not a representation of fact but merely a promise for the future, such statement cannot be made the basis for an action in fraud."
What is the general law in this area? Section 60 of the "Fraud and Deceit" article in 37 Am.Jur.2d reads as follows:
As a general rule to constitute actionable fraud, a false representation must relate to a matter of fact that either exists in the present or has existed in the past . . . Otherwise stated, a representation that relates to future conduct is generally not actionable.
But there is a qualification to this general statement of the law. The section goes on to say: "However, a promise to do an act in the future, when coupled with a present intent not to fulfill the promise, has been recognized as an exception to the general rule that a misrepresentation must relate to an existing or past fact. A fraud claim may arise from the intentional creation of a false impression."
Section 80 goes on to state the law in more detail and includes the just referenced qualification.
The general rule, which is supported by numerous decisions in almost all jurisdictions, is that fraud must relate to a present or pre-existing fact, and cannot ordinarily be predicated on representations or statements that involve mere matters of futurity or things to be done or performed in the future.
While great expectations often prove disappointing, they do not prove fraud. Hence, statements or representations as to future or contingent events, as to expectations and probabilities, or conditions to exist in the future, or as to what will be or is intended to be done in the future, or mere expressions of opinion about what will occur in the future or about results to be anticipated in the future from known and recognized conditions, do not constitute fraud even though they turn out to be false, at least where they are not made with intent to deceive, and where the parties have equal means of knowledge, or the subject is equally open to the investigation of both, and an examination has not been fraudulently prevented. They are generally regarded as mere expressions of opinion, or mere promises or conjectures, which must have been understood by the other party to be such and on which the other party has no right to rely.
Connecticut law agrees with these general statements of the law, see generally, Paiva v. Vanech Heights Construction Co., 159 Conn. 512, 515 (1970); Kavarco v. T.J.E, Inc., 2 Conn. App. 294, 300 (1984); cf. Lowe v. Kahn, 128 Conn. 45, 51 (1941). In Crowther v. Guidone, 183 Conn. 464 (1981), the court said that "our cases have consistently required that, as one element of fraudulent misrepresentation, a representation be made as a statement of fact . . . (this) requirement focuses on whether, under the circumstances surrounding the statement, the representation was intended to and understood as one of fact as distinguished from one of opinion." Id. pp. 467-68; see Myers v. Cornwell Quality Tools, Inc., 41 Conn. App. 19, 28-29 (1996).
Based on the foregoing the court cannot grant the motion to strike the Fourth Count. Paragraph 16 specifically refers to the above-referenced misrepresentations in paragraph 15 and states as follows:
16. Each of defendants' representations was false or inaccurate and the defendants herein knew this or should have known it, each time the representation was made.
(Emphasis added by court.)
In other words the allegation made includes a claim that at the time some of the representations were made the defendant knew they were false and had no intention with complying with the requirements imposed by such representations — providing accurate accounting and tax information.
(b)
The court agrees with the defendants that Count Five alleging fraud must be stricken. Our court has noted that it has "repeatedly" held that one of the necessary elements of "fraudulent misrepresentation" is that a "false representation (2) . . . was untrue and known to be untrue by the party making it." Miller v. Appleby, 183 Conn. 51, 54 (1981), Maturo v. Gerard, 196 Conn. 584, 587 (1985); Billington v. Billington, 220 Conn. 212, 217 (1991).
Count Five repeats allegations concerning the March 1, 1998 agreement and the plaintiff's request that they be given an accounting of the business operations of the L.L.C. specific to this count in paragraphs 13 through 14. The plaintiff indicates the defendant Scroggins, one of the L.L.C. owners, delivered a federal tax document to him setting forth the plaintiff's purported share of the operating income of the L.L.C. Paragraph 16 alleges the tax form contained incorrect data, and in paragraph 17 it states Scroggins "prepared these tax documents recklessly and without reasonable grounds" although Scroggins "had the best means to obtain the data to prepare accurate tax and accounting records for the L.L.C."
The legal sufficiency of this claim presents, at least for the court a difficult question. In this count only recklessness is alleged with regard to the preparation of the tax return. There is no allegation of intentional misrepresentation. As noted our court has repeatedly said the defendant must know that any representation he or she makes, orally or by way of a document, is untrue. Thus in Kashetta v. Robertucci, 1995 Ct. Sup. 12318, noted that "fraud requires an allegation of intent or scienter rather than recklessness as pleaded by Kashetta." But this view of the law of fraud does not appear to comport with most jurisdictions. In "Fraud and Deceit," 37 Am.Jr.2d § 120 p. 153 et seq. it says: "False statements that are made recklessly without knowing or caring whether they are true or false will support an action for fraud or deceit. Accordingly, the scienter or intent to deceive requirement for purposes of a fraud claim can be satisfied by a showing of recklessness." There are some states coming closer to Connecticut's apparent view of the issue; the article goes on to say of these states: ". . . Negligence or misjudgment, however gross, does not satisfy the knowledge element of a fraud claim and a defendant is liable in a tort action of fraud or deceit only if the defendant knows that a representation is false or is recklessly indifferent to in the sense that the defendant knows that he or she lacks knowledge as to its truth or falsity." But even if this were to be viewed as the rule in our state, which it is not, the allegations of this complaint do not satisfy it. In any event language has meaning and this is a trial court and our court has "repeatedly" held a defendant must know what he or she represents as true is not true. A reckless allegation will not suffice.
Interestingly this characterization of fraud as requiring "intent" when a civil fraud claim is being made conflicts with the language of the courts defining the scienter requirement of fraud in other areas of the law. Thus when a plaintiff asserts that a defendant should be estopped from asserting a statute of limitations defense the court said, "There must generally be some intended deception in the conduct or declarations of the party to be estopped, or such gross negligence on his (her) part as amounts to constructive fraud, by which another has been misled to his injury." Green v. Conn. Disposal Service Inc., 62 Conn. App. 83, 92 (2001). In the ancient case of Essex v. Day, 52 Conn. 483 (1885), the court held that the negligence of town officials in not reciting the text of bonds prior to their being issued did not bar the town from seeking a reformation of the bonds. The court said that: "This negligence is not of that extremist kind which the courts sometimes characterize as the equivalent of fraud . . . it was not recklessness it was mere want of care." Id. p. 492, quoted with approval in Voll v. Lafayette Bank Trust, 223 Conn. 419, 428 (1992).
The court reluctantly grants the motion to strike the Fifth Count.
(3)
The defendants move to strike the Sixth Count which alleges they "acted in bad faith or tortiously breached the implied covenant of good faith and fair dealing implicit in every contract."
In Habetz v. Condon, 224 Conn. 231, 238 (1992), the court said that: "Every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement." What then is "bad faith?" At page 237 Habetz said "bad faith in general implies both actual or constructive fraud, or a neglect or refusal to fulfill some duty or contractual obligation; not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive . . . Bad faith means more than mere negligence; it involves a dishonest purpose." Cf. Hartford National Bank Trust Co. v. Credenza, 119 Conn. 368, 371 (1935). The court in Buckman v. People's Express Inc., 205 Conn. 166 (1987), approved similar language in a jury instruction which said, among other things that bad faith is "the opposite of good faith, generally implying a design to mislead or deceive another" . . . "it contemplates a state of mind affirmatively operating with a furtive design or ill will." Id. page 171.
The Sixth Count incorporates the allegations of the first twelve paragraphs of the First Count. There is no allegation such as that made in paragraph 16 of Count Four that the defendants intentionally and knowingly made misrepresentations to the plaintiff. The court must determine whether Count Six makes out a bad faith claim. Amodio v. Cunningham, 182 Conn. 80, 82 (1980), makes clear that when a complaint is under attack by means of a motion to strike it must be given every favorable inference. The court has also noted that "what is necessarily implied (in an allegation) need not be expressly alleged." Lombard v. Edward Peters, 252 Conn. 623, 626 (2000).
What are the relevant allegations of Count Six? Paragraph 7 alleges that there was a written agreement between the parties to the effect that plaintiff would have a 25 percent partnership interest in the L.L.C. Paragraph 11 states that during and after his employment at the L.L.C. the plaintiff requested that the defendant Scroggins provide an accounting of the L.L.C's net profits and the equity the plaintiff had earned which was based primarily on net profits The defendants have exclusive access to the L.L.C.'s books but Scroggins "has refused to provide said accounting." Paragraph 13 states that the plaintiff has also requested information about "the accounting procedures used to calculate his equity interest and the charter operation's net profits." To date there has been a refusal to supply such information.
From all this the plaintiff argues bad faith can be inferred.
This inference logic cannot be carried so far that trial judges could turn our fact pleading jurisdiction into a notice pleading jurisdiction. In other words one of the implications that can be drawn from these paragraphs is that the requested information was not turned over because of some dishonest purpose — for example, concealing the true net profit picture to bilk the plaintiff out of what was due him. But this is not a necessary implication of the allegations. The defendants could have refused to turn over the information for a variety of reasons having nothing to do with a nefarious purpose. As the defendants suggest the failure to comply with the plaintiff's request could be based on the fact that the books were not complete, or on a disagreement over the requirements of the agreement or simple miscommunication.
Interestingly, paragraph 13 of the First Count, not made part of Count Six goes part way toward pleading that sinister or dishonest motive for the defendant's refusals — a significant annual profit was being earned — but even there no claim is made that the defendants' alleged failure to provide the financial information as requested was based on a motive to mislead the plaintiff and thereby prevent him from receiving contract benefits.
As pled the allegations here set forth nothing more than an ordinary contract dispute. For example, if a contractor builds an addition to someone's house and is not paid he/she has expended time and material for another's benefit. If those straightforward allegations are made they can support a simple breach of contract claim. But can we infer from those allegations alone that the homeowner by not paying from the initiation of relations between the parties meant to secure work on his/her house with the intent never to pay, or refused to pay believing the contractor did not have the resources or sophistication to bring suit? By applying the plaintiff's logic, any breach of contract claim can be made into a bad faith claim — a court would just speculate as to the worse possible though unstated motive for the breach.
The court will strike Count Six.
(4)
Finally the court will address the legal sufficiency of the Seventh Count which alleges a violation of the Connecticut Unfair Trade Practices Act (§ 42-110b et. seq.) CUTPA.
The ambit of CUTPA is set forth in subsection (a) of § 42-110b of the general statutes:
(a) No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.
(Emphasis by court.)
The allegations of this complaint concern purportedly unfair or deceptive acts or practices in a partnership or employer-employee relationship. By definition this falls outside the scope of CUTPA protection. Subsection (b) of § 42-110b directs our courts in interpreting the act to interpretations given by the Federal Trade Commission (FTC) and the federal courts to Section 5(a)(1) of the Federal Trade Commission Act (Clayton Act). As noted in FTC v. Colgate-Palmolive Co., 380 U.S. 374, 384 (1964).
When the Commission (FTC) was created in 1914, it was directed by § 5 to prevent unfair methods of competition or commerce. Congress amended the Act in 1938 to extend the Commission's jurisdiction to include 'unfair or deceptive acts, or practices in commerce' — a significant amendment showing Congress' concern for consumers as well as competitors.
The purpose of the 1914 Clayton Act, the 1938 Wheeler Act and our act was to control and sanitize the activity of businesses vis-a-vis other competitors and consumers with the ultimate welfare of the consumer in mind. That was the whole universe meant to be covered by CUTPA. Internal partnership, corporate, or employer-employee disputes are not disputes between competitors or between a business entity and a consumer. In other words, the plaintiff here was not a consumer vis-a-vis the other defendants; he was allegedly a partner and/or employee at the time the claimed unfair or deceptive acts occurred so he was also not a competitor in the sense of a separate business entity — his dispute revolves around how that business entity in which he was a partner and/or employee treated him apart how it may have conducted its affairs in relation to other business competitors.
The Appellate Court relying on Quimby v. Kimberly Clark Corp., 28 Conn. App. 660, 669 (1992), held: "To state a claim under CUTPA, the plaintiff must allege the actions of the defendant were performed in the conduct of 'trade or commerce'. . . The trial court properly held that an employment relationship does not constitute trade or commerce for purposes of CUTPA." Muniz v. Kravis, 59 Conn. App. 704, 711 (2000). Why should a partnership's internal disputes be treated differently? Judge O'Neill reached that conclusion in Chester v. Schatz Schatz, Ribicoff Kotkin, 6 Conn.L.Rptr. 526 (1992), where he said the "internal strife of a partnership . . . does not arise in trade or commerce and does not cause substantial demonstrable injury to consumers, competitors or other businessmen." Id. p. 527; see also Moran, Schuster, Carigan Knierim v. August, 43 Conn. Sup. 431 (1994).
Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480 (1995), which predates Muniz leads to no different result. There the court found the defendant Larsen's activities implicated trade and commerce. The court explicitly based this conclusion on its finding that: "The plaintiff presented evidence showing that Larsen, while still the president of the plaintiff, was offered and subsequently accepted a position at a real estate brokerage firm which was an acknowledged competitor of the plaintiff. Both companies were in the business of selling and leasing real estate to the public." Id. p. 494.
Similarly in Spector v. Konover, 57 Conn. App. 121 (2000), the court said at pp. 133-34:
While 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],'. . . Here, the defendants diverted partnership funds to benefit other Konover owned properties. The defendants delayed the disbursement of Tri Town profits to the plaintiff so that those funds could be used to finance Konover's other entities. Those actions clearly placed the defendants in direct competition with the interests of the Tri Town partnership and are, therefore, a violation of CUTPA.
Also see Fink v. Golenbock, 238 Conn. 183, 213 (1996); Ostrowski v. Avery, 243 Conn. 355, 379 (1997).
In Larsen and Spector the defendants aligned themselves with competitors of entities with which they were associated, that put their actions into the field of trade and commerce and subjected those actions to the scrutiny of CUTPA.
According to the allegations of the complaint none of this is the situation here. The dispute does not arise out of a competitive relationship or consumer relationship between the parties which envisages separate entities — the dispute arises out of an internal partnership and/or employer-employee relationship. The Seventh Count is stricken.
* * * *
The court grants the motion to strike Counts Five, Six, and Seven and also the punitive damages and the attorneys fee requests for relief since they are based on an alleged CUTPA violation.
By the Court,
Thomas Corradino Judge of the Superior Court