Opinion
No. CV 01-0456013S
September 24, 2003
MEMORANDUM OF DECISION
This litigation is centered around the breakup of a law firm, DeSarbo, Reichert and Gradoville. Associated with the law firm was a pension consulting firm, known as Employee Benefits Consultants, Inc. This action was brought by DeSarbo on behalf of himself, the law firm and the pension firm. The defendants are Reichert, Gradoville, and Pension Benefits Consultants, Inc. and Leonard Brown. The plaintiffs have brought their complaint in several counts, claiming breach of fiduciary duty by the defendants, misappropriation of corporate opportunities by Reichert and Gradoville, conversion and theft by the defendants, and breach of contract by Brown. The defendants have denied the substantive allegations of these counts and have interposed special defenses as well as a counterclaim. In the special defenses, the defendants claim DeSarbo caused his own damages, breached his fiduciary duty to the two firms and to Reichert and Gradoville, increased his damages by his own conduct, failed to mitigate his damages, again breached his fiduciary duty in the way he handled the two firms, terminated the pension firm before Brown went to work for PBC, and finally, Reichert and Gradoville served a fiduciary responsibility to law firms' clients that was superior to any responsibility to the plaintiffs. In the counter claims, Reichert and Gradoville claim conversion and breach of fiduciary responsibility by Desarbo. The plaintiffs have denied the substance of the special defenses and the plaintiff DeSarbo has denied the counterclaims. This matter was tried over numerous days, with extensive exhibits and testimony. Counsel submitted briefs and proposed findings of facts to assist the court inasmuch as the evidence had extensive tedious details.
The court finds the following facts.
D. Richard DeSarbo ("DeSarbo") owns 68.3% of DeSarbo, Reichert Gradoville, P.C. ("DRG") and Employee Benefit Consultants, LLC ("EBC"). Teresa J. Reichert ("Reichert") and Robert T. Gradoville ("Gradoville") own 25% and 6.7%, respectively, of DeSarbo, Reichert Gradoville, P.C. and Employee Benefit Consultants, LLC. Teresa J. CT Page 10880-ax Reichert and Robert T. Gradoville are officers and directors of DRG and members of EBC (and have never resigned their positions). Employee Benefit Consultants, LLC was a pension administration company that had two (2) employees with restrictive covenant agreements: Leonard Brown and Amanda Wick. Leonard Brown was an actuary who had passed all 10 levels of the actuary examinations. He performed all of the key actuary work for EBC. Wielk was a pension administrator and Robin Kelly was a secretary for the pension firm.
Brown had a noncompetition and solicitation agreement with EBC.
The law firm and pension consulting firm shared offices in a condominium owned by DeSarbo. They were first floor tenants. The second floor had unrelated tenants.
DeSarbo had expressed an interest in retiring for about five years before the current controversy erupted. In early 2000, DeSarbo actively discussed with Reichert and Gradoville his desire to retire from both businesses. The discussions included merger with other firms, a buyout of him by Reichert and Gradoville or having the firm dissolve with the two of them going out on their own. DeSarbo contacted several larger firms about merger; none of those discussions bore fruit. Thereafter, in the spring of 2000, he asked Reichert and Gradoville what they wanted to do. They indicated a desire to buy him out. Somewhere on or about June 8, 2000, they presented him with a written proposal for buyout. DeSarbo did not accept the proposal.
Further discussions ensued as to particulars that would embody an agreement. DeSarbo believed that an oral agreement was reached between him, Reichert and Gradoville for their buyout of him. That agreement, in his mind, provided for his receipt of 68.2% of collected accounts receivable and cash on hand, a purchase of personalty for $25,000, a purchase of his interest in EBC over a three-year period of an amount equal to one time gross billings and medical insurance for DeSarbo through the group. While many of these terms were agreeable to Reichert and Gradoville there remained open and unagreed items. Documents were drafted for purposes of attempting to come to a full agreement. No agreement was ever reached between DeSarbo, Reichert and Gradoville on the outstanding issues. One outstanding issue was their desire for a noncompetition agreement by DeSarbo: that he would not come back and practice law in competition with them. As late as August 20, 2000, DeSarbo was negotiating with these two individual defendants through their representative, attorney William Longa.
In the meanwhile, DeSarbo had taken steps to disengage himself from the CT Page 10880-ay practice of law and operation of the pension firm. As of the end of June, he retired from the Bar. He also purchased tail malpractice insurance for himself through the law firm. Reichert and Gradoville received notice from DeSarbo that if there was no agreement executed and in place by August 11, 2000, DeSarbo would proceed with a dissolution of the law firm. When there was no resolution of the impasse over the terms of a buy of him, DeSarbo called for a corporate meeting of the law firm in September 2000. That meeting was noticed for and held on September 15, 2000.
Meanwhile, physically, from June through the date of the meeting, Reichert and Gradoville practiced law at the DRG law firm, servicing the clients of the law firm. DeSarbo had left on a trip to California as of June 30, 2000, and was not available on a daily basis thereafter.
No agreement was ever reached for Reichert and Gradoville's purchase of DeSarbo's interest in the law firm.
There was never an agreement executed as to the pension business, either.
The law firm had historically billed its clients every five weeks. During the period from June 30 to September 15, 2000, no bills were sent out to clients of the law firm.
Prior to leaving the firm at the end of June 2000, DeSarbo instructed Gradoville and Reichert not to touch the firm checkbook. That became a problem inasmuch as employees were working and needed to be paid. Reichert made the decision to pay employees of the law firm other than herself and Gradoville and to pay necessary bills of the firm as they accrued. Between June 30, 2000, and notice of the September meeting, neither Reichert nor Gradoville received any compensation from the law firm.
On August 31, 2000, DeSarbo, as landlord, served a notice to quit on the law firm and the pension consulting firm to quit the possession of their offices. Pursuant to the notice to quit, the businesses were to quit on or before September 2000. DeSarbo was looking for another tenant for the building and wanted them out to give himself maximum flexibility in arranging a leasehold.
On September 12, 2000, after receiving the Crosby letter of intent to liquidate the firm and notice of the impending meeting, Reichert and Gradoville wrote checks for themselves for compensation for June 2000 to that date from the firm checkbook. CT Page 10880-bz
At the corporate meeting of September 15, 2000, DeSarbo, as controlling shareholder, voted himself pay from the law firm in the amount of $60,000 for services rendered in July, August and September 2000. He voted to proceed with dissolution of the firm. He also reaffirmed his intent to evict the law firm immediately. It was discussed that the law firm had not billed since the end of June 2000. DeSarbo passed a resolution that the billing should be accomplished by the three lawyers and then Reichert and Gradoville could work for the balance of the month at their new law firm and keep the receipts there for that period and forward.
Meanwhile, there was an unresolved issue as to who would pay for the malpractice tail for Reichert and Gradoville. DeSarbo felt that they should purchase it at the new law firm as a continuation of the old law firm for more advantageous rates. Reichert understood that they were not a continuation and the premium would be substantially more. This issue and DeSarbo's intent to take the $60,000 for pay after his resignation from the Bar were raised by Reichert and Gradoville as roadblocks to their billing. DeSarbo's accountant, Palsa gave them a letter on October 6, 2000, in which DeSarbo agreed to waive the compensation and purchase the malpractice tail for the firm. Reichert and Gradoville, upon receipt of that letter, agreed to prepare billing for the firm.
The law firm's past billing practice was to have the attorney who worked on a file prepare the draft bill which DeSarbo then reviewed in consultation with that attorney and decided whether to bill the whole or a portion of the hours recorded in the draft bill. This was accomplished by the three attorneys. It was delayed, however, for Reichert and Gradoville first needed the computerized time and billing summaries at the law firm office, in the computers. DeSarbo had them prepared and sent over on or about October 27, 2000. DeSarbo had the firm send out the billings after all of the preparation work was done. Meanwhile, Reichert and Gradoville were paid their salaries from DRG for the period from September 15 to September 29th, 2000.
Reichert and Gradoville had incorporated their own law firm as of September 15th and serviced clients there from that day forward. Many of the new firm's clients were also clients of the old law firm, DRG. Billing for those, as well as new clients, for work done from September 15th forward was done by Reichert Gradoville, the new law firm.
EBC continued to operate as a pension consulting firm in the offices leased from DeSarbo. DeSarbo looked for a buyer for EBC after September 2000, and entered into serious negotiations with Mark Wells, a principal of Wells Lamoriello for the purchase of EBC. After Wells put a purchase proposal together, DeSarbo notified Reichert and Gradoville of Wells' CT Page 10880-ba letter of intent, which was dated December 1, 2000. This notice was provided in a meeting of EBC which DeSarbo, as controlling shareholder convened on December 1, 2000. Reichert and Gradoville raised questions about the sale: would they be competing with Wells, who was also an attorney, for their clients' business, and, inasmuch as Wells did not disclose his firm's balance sheet was the buyout worth the risks attendant? Both Reichert and Gradoville followed up the meeting with a phone call to Wells in which these issues were discussed. Neither were satisfied with their ability to provide future legal and related services to their clients, thinking they both would be bound by non-competes. Notwithstanding that, in a letter of December 5, 2000, they reminded DeSarbo that as controlling partner they could not block his sale to Wells if he desired. Wells would not have been interested in buying on those terms and therefore the sale did not occur. A follow up meeting was held of EBC on December 6, 2000. Neither Reichert nor Gradoville attended that meeting.
Over the next few weeks Reichert and Gradoville communicated with DeSarbo's accountant Joe Palsa about their potential purchase of EBC. In early January, DeSarbo had heart surgery. While DeSarbo was out from his heart condition in January, his attorney asked Reichert and Gradoville to oversee EBC. There was no agreement on how that could be accomplished given the deteriorating relationship of the parties. DeSarbo's attorney, by letter dated January 31, 2001, notified Reichert and Gradoville that a new tenant was coming into the EBC space and that they would have a little time to clear out the EBC files. This was against the backdrop of the eviction.
Meanwhile, traditionally February is a very busy month in the pension administration business because of all the forms to be prepared for clients. On February 9, 2001, Sally Haveran who had DeSarbo's power of attorney telephoned the actuary and told him that DeSarbo wanted the billing done and wanted to know if Brown had completed it. Brown said he was too busy. Aware of the plans to evict EBC, he asked when the business would be out of the premises and, also, informed Haveran he would stay there to the last day doing the pension work and then do his billing on the very last day. Brown was handling essentially the same work load EBC had done in the past without Haveran, Gradoville or Reichert helping out with the busy season. His work time was, however, recorded in the computer current to January 27, 2001.
In February 5, 2001, Reichert wrote to DeSarbo's attorney offering to purchase the EBC computers and other equipment for $3500 in the event DeSarbo followed through on his plans to liquidate EBC. CT Page 10880-bb
After the Haveran conversation with Brown on Friday, February 9, 2001, DeSarbo made the decision to terminate all of the EBC employees immediately. Over that weekend, on February 11, 2001, Brown and Wielk were terminated by a telephone call from Haveran on behalf of DeSarbo.
On Monday, February 12, 2001, Gradoville, Lenny Brown and others under Gradoville's direction went to the EBC office in the DeSarbo building and removed hundreds of EBC files to the law offices of Reichert and Gradoville. They also took the computers and other equipment that they were purchasing. With the computers was the software for the running of EBC files and programs. DeSarbo has remained steadfast that the software was not a part of the $3500 price and Reichert maintains it was. The poor communication that ensued between the parties here is indicative of this entire chronology of the demise of their business relationships. Reichert's position is that for sure she would not have bought the computers, the real value being in the software that is why she needed them because they had the software loaded on them. DeSarbo, on the other hand, thought $3500 reasonable if it did not include the software, which he perceived to be of greater value. While the testimony is not entirely clear, it appears that the software was loaded on the computers and not separate on CDs or diskettes. The court must analogize it to the sale of realty where the fixtures, that is the attached things go along for the price but not the unattached price. Since the software was apparently attached to — recorded on the hard drive — the court finds that Reichert and Gradoville bought it with the computer for the $3500. In any case, even if it were not and it was separate CDs or diskettes, DeSarbo provided no evidence to the court of damages, that is the value of this software and therefore he fails on any legal theory when it comes to damages on this issue.
Brown joined Reichert and Gradoville on February 22, 2001, in the formation of PBC, a pension consulting firm which immediately commenced to serve the clients of EBC. Brown also, as a part of that, acquired an ownership interest in PBC.
Although Brown had already been terminated effective February 9, by the weekend telephone call on February 11, DeSarbo's attorney sent Brown a letter dated February 13, 2001, which charged him with insubordination. That same day, he also sent a communication that all of the EBC employees were going to be let go, though they had already been terminated.
The plaintiffs assert that Brown has violated his noncompetition agreement with EBC in working at PBC. Further they argue that Brown, Reichert and Gradoville always planned for Brown to come over and that they intentionally undermined EBC's operation, particularly during a CT Page 10880-bc period that DeSarbo was homebound convalescing from his heart surgery.
As of February 22, 2001, once DeSarbo had terminated all employees and ceased all operations of EBC, EBC no longer had any business interest to protect by the enforcement of Brown's covenant not to compete.
After February 22, 2001, the present litigation ensued.
Breach of Fiduciary Duty Claims
The plaintiffs allege a breach of fiduciary duty claim, including misappropriation of corporate opportunities, in its First, Second, Third and Fourth Counts.
The plaintiffs argue that the burden of proof in these claims shifts to the defendants Reichert and Gradoville to prove by clear and convincing evidence that they did not breach their fiduciary duty to the business and DeSarbo. These defendants argue that the burden has not shifted and remains at all times on the plaintiffs.
In the First and Third Counts, DeSarbo claims on behalf of himself and the law firm that Reichert and Gradoville breached their fiduciary duty and misappropriated corporate opportunities to themselves rather than to the law firm by failing or refusing to cooperate in the generation, collection and accounting in the law firm for billings through September 30, 2000. The count goes on to six other sub-parts all relating to the billing and collections.
The fiduciary relationship alleged regarding the law firm is that of a directors and officers to act in good faith, exercise the care of an ordinarily prudent person in a like position under similar circumstances and in a manner she believes to be in the best interest of the corporation. Conn. Gen. Stat. §§ 33-765 and 33-756. It is plaintiffs' position that this allegation is sufficient to shift the burden of proof under Connecticut law.
Our law on the obligations of a fiduciary is well settled. "[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." (Internal quotation marks omitted.) Konover Development Corp. v. Zeller, 228 Conn. 206, 219, 635 A.2d 798 (1994). "Once a [fiduciary] relationship is found to exist, the burden of proving CT Page 10880-bd 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." (Citations omitted; internal quotation marks omitted.) Dunham v. Dunham, 204 Conn. 303, 322-23, 528 A.2d 1123 (1987). "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 (Conn. 1998).
These claims of breach of fiduciary relationship are all made by the majority shareholder of the law firm corporation, DeSarbo. It is DeSarbo who was in the position of dominance, not Reichert or Gradoville. All three of them, DeSarbo, Reichert and Gradoville are directors and shareholders. The duties of Reichert and Gradoville in those capacities where they are in the minority could not possibly be what the Supreme Court had in mind with this burden shifting scheme. Instead, it is DeSarbo who was in the position of dominance which he exercised. He passed votes at meetings with his sole vote alone, over dissenting votes — at times by Reichert and Gradoville.
Our Supreme Court has recently explained that "the application of . . . traditional principles of fiduciary duty" has historically been confined to cases involving "fraud, self-dealing or conflict of interest." Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998). For this reason, "it is only when the `confidential relationship is shown together with suspicious circumstances, or where there is a transaction, contract, or transfer between persons in a confidential or fiduciary relationship, and where the dominant party is the beneficiary of the transaction, contract or transfer, that the burden shifts to the fiduciary to prove fair dealing.' Id. at 405-06 (citation omitted)." Welty v. Criscio, No. 426110 (May 16, 2000) 2000 Ct. Sup. 5914, 27 Conn.L.Rptr. 253 (Blue, J.).
In the matter at hand, DeSarbo argues that he has claimed self-dealing by Reichert and Gradoville in deferring work to their new law firm and in billing for their work of DRG. The court finds, specifically, as to these claims that they are supported only by innuendo, and, that Reichert and Gradoville have proven by clear and convincing evidence that the work was commenced at RG because of the clients' choices, not theirs. There was, on the other hand, no evidence challenging the defendants' credible testimony that delays in commencement or completion of estate planning was for any reason other than working on a time line dictated by CT Page 10880-be the clients' various actions, not the choice of the attorneys.
Self-dealing was also claimed regarding the billing practices of Reichert and Gradoville. The evidence showed, to a clear and convincing standard that these defendants retained no DRG funds for their own benefit. Instead, they provided an accounting of funds held for the benefit of the corporation when DeSarbo refused to do so.
The court finds that DeSarbo could have billed all the clients independent of Reichert and Gradoville if he would have liked the billing accomplished in a more timely manner. Further, the billing was ultimately accomplished. DeSarbo has presented no evidence to support a conclusion that harm occurred because the billing was delayed. Further, part of the delay at least was his responsibility because of the time delay in getting Reichert and Gradoville the records they needed for billing.
As to the time recordation, billing and collections, DeSarbo presented evidence regarding the work in process for the law firm clients. He color coded his claims on exhibits, as to what conduct of Reichert and Gradoville constituted a breach of fiduciary responsibility. Those coded claims were as follows;
1) failed to bill;
2) the firm of Reichert Gradoville billed for time that those two lawyers did work while they were attorney employees of DRG, specifically September 15 through October 1;
3) the two attorneys delayed work until after they left DRG so they could do it and bill it at RG;
4) work was billed by DRG and the two defendant attorneys, Reichert and Gradoville did not help collect the bills;
5) fees were collected by RG and it refused to turn them over to DRG; and
6) the work in progress narrative of RG was the same as DRG and, therefore, the defendant firm must have misappropriated the work for billing.
The court does not find a failure to bill by Reichert and Gradoville. The plaintiffs have failed to prove that Reichert and Gradoville delayed work for any client until they were at their new firm. The court has already specifically found that DeSarbo for himself, and as majority CT Page 10880-bf owner of DRG, that Reichert and Gradoville's new firm could own work they did from September 15 to October 1, as long as they billed their DRG work through September 15, which they did do.
These defendants did not refuse to help collect bills. The evidence adduced at trial is that some clients paid lesser amounts, same clients' bills, as sent by DeSarbo, were sent at a higher amount than Reichert or Gradoville recommended under all of the circumstances, and some clients paid their bills in full. No conduct of either attorney could lead the court to conclude that either of them undermined the collection of bills.
Those clients who paid their bills to the new firm erroneously did not have their funds misappropriated by Reichert and Gradoville. Instead, they recorded the client and the amount paid. Disclosure and account was made. They have never upon inquiry refused to account for said sums. Since in a winding up of corporate affairs, a full accounting would properly include these sums, no corporate opportunity, nor funds themselves had been misappropriated.
Finally in the first count, the plaintiffs claim breach of fiduciary obligation in the association that the new firm billed for time owed by DRG. This association is inferred by the plaintiffs from the fact that both firms' work-in-progress narratives for particular clients has virtually identical language. This in itself does not constitute proof of these assertions. The court can draw no such inferences when it is logically plausible that the second firm is completing a project started by the first firm and so the work description would be virtually identical.
The plaintiffs have the burden of proof of their claims in Count One except where the court found a burden shifting as stated earlier. The court's findings of facts support no conclusion of wrongdoing by the defendants, in any case.
The Second Count and Fourth Count addressed to the defendants Gradoville and Reichert are breach of fiduciary claims and misappropriation of LLC opportunities claims regarding EBC. This claim of breach of fiduciary responsibilities by these defendants was: (1) failure to cooperate in all respects with the billings of EBC for the period from June 2000, through February 2001; (2) file removal of EBC files; (3) failure to cooperate in a sale to Wells' business, or in the alternative keep the EBC business going; and (4) by forming PBC to do the same business as EBC, for EBC's clients, and for taking on Lenny Brown at PBC, knowing he had a covenant not to compete with EBC. CT Page 10880-bg
The burden of proof as to all of these claims is on the plaintiffs. The claims do not invoke any of the factual circumstances which would trigger a shift of the burden.
There was no meeting of the minds between Wells Lamoriello and Reichert and Gradoville. They were concerned about their future ability to provide legal advice in the future to clients under the sales terms prepared by Wells. Therefore, while they would not specifically sign covenants, individually, neither did they block the LLC sale. Wells, however, wanted their individual signatures as well. It is DeSarbo's claim that neither Reichert nor Gradoville would cooperate because all along they wanted to open their own business as they ultimately did, with PBC. A member of a limited liability company has no individual, personal duty to sacrifice individual economic interests in another arena to promote a sale.
PBC was not formed until DeSarbo had terminated all of EBC's employees. From the time that Reichert and Gradoville left in September to form their own law firm, they were available to Lenny Brown on an `as needed' basis for consultation. As a practical matter, they were as available as DeSarbo to run EBC for most of the disputed time. It was DeSarbo who took over its day to day management, and did not consult them after September 15.
When DeSarbo was unavailable in January because of his heart condition, he had given power of attorney to an employee and operating authority to his attorney. The attorney directed Reichert and Gradoville to take over the operation during that time. However, they sought a hold harmless provision (which was not given) before undertaking that responsibility. By this time the parties' ability to work together with trust was gone. DeSarbo was evicting EBC to be able to rent the place out to a third party. He was not functioning as if he thought EBC would be an ongoing entity.
Ultimately, the time of all of the employees of EBC were not billed from late December 2000, to February 9, 2001, when DeSarbo terminated its operation. DeSarbo has adduced absolutely no proof that this was the result of any malfeasance or nonfeasance exclusive to Reichert and Gradoville.
After DeSarbo fired the employees, no one took further steps to see that bills were sent out. All of the limited liability members failed to act, not one more exclusively than another. The court finds DeSarbo has failed to prove his claim that Reichert and Gradoville misappropriated this opportunity. CT Page 10880-bh
Breach of Contract: Leonard Brown Theft Claims and Tortious Interferences with Contract Clause
The court has already found the EBC was not in business when Brown became an owner and employee of PBC. Therefore, the covenant not to compete is not enforceable by EBC, inasmuch as it has no cognizable business to protect. Further, the delay of over two years in its claim provides further recognition that no harm was occurring to EBC because it had ceased to operate. All claims derivative of the covenant not to compete, therefore, also fail.
Conversion
The plaintiffs claim conversion by the defendants Reichert and Gradoville for failure to account and turn over funds received for payment to DRG and EBC.
"Conversion is an unauthorized assumption and exercise of the right of ownership over goods belonging to another, to the exclusion of the owner's rights." Discover Leasing, Inc. v. Murphy, 33 Conn. App. 303, 309 635 A.2d 843 (1993). "To establish a prima facie case of conversion, the plaintiffs had to establish that (1) the deposit given to the defendant belonged to the plaintiffs, (2) the defendant deprived the plaintiffs of their funds for an indefinite period of time, (3) the defendant's conduct was unauthorized and (4) the defendant's conduct harmed the plaintiffs." Aubin v. Miller, 64 Conn. App. 781, 796, 781 A.2d 396 (2001).
Accountings have been provided. The funds have been held by them awaiting an accounting back from DeSarbo which came, also, through this litigation and a set off back and fourth of sums due.
The court finds no wrongful withholding of funds occurred. As the accounting later in this opinion shows, those funds ultimately will, after attribution to each party of percentage ownership interests, belong to Reichert and Gradoville. They have not harmed plaintiffs, always only awaiting a full accounting. The plaintiff's causes of action have failed. The proper remedy for all is a winding up of DRG and EBC with an accounting and attendant payment as may result therefrom.
Counterclaims
The defendants, Reichert and Gradoville have counterclaimed in counts sounding in conversion and breach of fiduciary duty. [U]nder Connecticut law, the definition of a fiduciary relationship is a flexible one. See CT Page 10880-bi Konover Dev. Corp. v. Zeller, 228 Conn. 206, 222-23, 635 A.2d 798 (Conn. 1994) (noting that equity has carefully refrained from defining precisely a fiduciary relationship in detail).
Connecticut courts have stated that "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 [such that] once a [fiduciary] relationship is found to exist, the burden of proving fair dealing shifts to the fiduciary . . . and the standard of proof is clear and convincing evidence." Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (Conn. 1998) (internal quotations and citations omitted). Connecticut case law additionally recognizes that which qualifies as a fiduciary relationship is ever-evolving and the fiduciary law has expanded in recent years to include even controlling shareholders. See Konover, 228 Conn. at 221 n. 11 Travelers Cas. Sur. Co. v. Irex Corp., 2002 U.S. Dist. LEXIS 11934, 9-11 (U.S. Dist., 2002)
The court has concluded that at all times, DeSarbo was the dominant shareholder of DRG and, member of EBC. As such, he at all times owed a fiduciary obligation to Reichert and Gradoville.
The court finds that DeSarbo's decision to terminate all of EBC's employees and, thus, cease doing business, with no provisions made for billing and transition of clients was done only to accommodate his desire as landlord to relet the premises housing EBC. DeSarbo put his self-interest ahead of EBC and its other members.
The court finds that the defendants have proven no damages accruing to them resulting specifically from this conduct. The court finds, as well, that defendants have proven only that an accounting was due in the windup of the two business, from which the parties and the court could find sums due. As a result of a review of the accounting that has occurred is through this litigation, the court can preview whether either party has converted funds of the other. DeSarbo has not breached his fiduciary duty regarding DRG. The doors closed, clients were billed, bills were paid, and sums were collected by DeSarbo and by Reichert and Gradoville.
The court finds no allocation is due in an accounting for the payment of malpractice premiums by DRG. The business decisions made by all regarding this issue do not raise themselves to any actionable level.
As discussed earlier, no attribution is due from the RG law firm CT Page 10880-bj to DRG with the exception of the receipts of DRG fees in the amount of $18,358.00. The court, finding plaintiffs have failed to prove the breach of fiduciary duty, breach of contract conversion and theft claims and is therefore due no damages for the same.
EBC's doors were shut February 9, 2001. Neither DeSarbo nor Reichert and Gradoville had accomplished the billing to that date. It was a business opportunity passed up by all of them, but none exclusively. No rights accrue to one side or the other sufficiently for the court to find breach of fiduciary duty as alleged.
The following sums have been collected by DRG and EBC that need to be accounted.
October-December 2000 $180,768.17
received income of DRG and EBC
2001 DRG income 87,308.00
2001 EBC 34,149.00
2002 DRG Income 3,372.00
2001 DRG Income Held by DG 18,358.00
$323,955.17
Against the total income of $323,955.17 attributable to DRG and EBC, the court finds a proper account upon dissolution would allow legitimate expenses incurred.
Defendants assert Palsa and Crosby's bills should not be allowed as legitimate expenses because some of the work was for DeSarbo individually. In an accounting upon dissolution liquidation those bills would be examined to determine that. Similarly, expenses chargeable to the tenancies would be allowable, if allowable under the leases — or if they are silent as to sums due after a Notice to Quit — then under the law of use and occupancy payments due from EBC to DeSarbo through February 15, 2001.
Because the claims before the court were not brought under LLC and corporate dissolution statutes these matters were not presented. A proper account would consider them. CT Page 10880-bk
DeSarbo's health insurance would not be a proper expense of liquidation. It is not clear whether those services of the contract labor were or were not necessary.
The expenses listed in the ledger account are all allowed since neither party was successful in its claims. (For instance, the cleaning bill challenged: defendants failed to prove cleaning was not an obligation imposed on tenants pursuant to lease after vacating premises.) Therefore, from combined DRG and EBC income of $323,955.17, expenses in the amounts listed should be allowed in dissolution accounting. The expenses claimed legitimate for deductions against gross income, by the defendants Gradoville and Reichert total $118,589.00. The additional expenses are difficult to quantify because of the account problems discussed above. With expenses of at least $118,589.00, it appears an accounting would provide $205,366.17 for shareholders and members, to which DeSarbo is entitled to 68.3%, or, $140,265.09 and Reichert and Gradoville jointly are entitled to 31.7% or $65,101.07. They currently retain $18,358.00, therefore under dissolution accounting; without consideration of the questioned expenses, there is due $46,743.07 from DeSarbo to Reichert and Gradoville (who would then divide the sum according to their ownership percentages.) There remains the issue of attribution of expenses of the challenged sums.
Since this litigation did not encompass any accounting/dissolution claims, there is no basis for this court to order the same. Further litigation between these parties would not be useful. It is recommended that the corporate and LLC dissolution accountings be accomplished expeditiously.
All other claims of the parties not proven are disallowed and this straight accounting should prevail. Any further receipts of DRG should be divided by percentage ownership on an as received basis client by client.
While it is highly speculative whether EBC bills for the period of December 20, 2000, to February 9, 2001, would ever be paid if the parties were to decide to be cooperatively issued by them, the receipts should be divided on an ownership percentage basis with no further costs deducted.
Judgment for the defendants on all counts of the complaint.
Judgment for the plaintiffs on all counts of the counterclaim.
Munro, J. CT Page 10880-bl