Opinion
FSTCV146023208
11-30-2015
French Reed-Putnam, LLC v. Spin-Reed Putnam, LLC
UNPUBLISHED OPINION
MEMORANDUM OF DECISION RE DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (No. 131)
Hon. Charles T. Lee, J.
On August 29, 2014, the plaintiff, French Reed-Putnam, LLC (French Reed), filed a three-count complaint against the defendant, Spin-Reed Putnam, LLC (Spin-Reed), seeking damages arising from the defendant's alleged contractual breaches and fiduciary misconduct, which prevented the plaintiff from obtaining its rightful share of proceeds from the sale of a mixed-use development site in Norwalk, Connecticut (the Property). The plaintiff alleges that its predecessor in interest, French Norwalk, LLC (French Norwalk), and its affiliates sold the Property to 95/7 Ventures, LLC (95/7 Ventures) pursuant to a joint venture between the French and Spinnaker real estate interests known as Spin-French Land Development, LLC (Spin-French), whereby French Norwalk reinvested a minority interest in the Property. The plaintiff further alleges that the defendant violated its obligations under the Spin-French Operating Agreement (Operating Agreement) by transferring ownership of the Property to a newly formed entity, 95/7 Enterprises, LLC (95/7 Enterprises), in which French Reed did not participate, as part of a non-arm's length transaction without giving proper notice, without obtaining the plaintiff's consent, and without providing the plaintiff with a continuing membership interest in 95/7 Enterprises, in which defendant made a multi-million dollar profit. As such, the plaintiff asserts claims of breach of contract (count one), breach of the implied covenant of good faith and fair dealing (count two), and breach of fiduciary duty (count three). The plaintiff demands compensatory and punitive damages, attorneys fees, prejudgment interest, costs, and such other relief that the court deems just and appropriate.
On May 26, 2015, the defendant filed the present motion for summary judgment as to all three counts, arguing that it performed all of its obligations under the Operating Agreement; that the plaintiff received all of the benefits that it could have reasonably expected to receive under the Operating Agreement; that it demonstrated the requisite level of honesty, fairness, and loyalty in all of its dealings with the plaintiff and did not engage in any self-dealing; and that the plaintiff has sustained no damages for the alleged breaches. In support of its motion, the defendant filed a memorandum of law, several affidavits with multiple exhibits, and excerpts from transcripts of the depositions of the principals.
Specifically, Spin-Reed argues that it is entitled to summary judgment on count one (breach of contract) because (1) paragraph 3.4 of the Operating Agreement (Vertical Development) does not apply to the sale of the Property to 95/7 Enterprises because 95/7 Enterprises is not a " Vertical Operating Entity" (VOE); (2) even if paragraph 3.4 applied to the sale, the defendant did not breach any of its provisions; (3) the defendant complied with the applicable provision, paragraph 3.5 (Restricted Actions), because it gave notice of the transaction to the plaintiff and an opportunity to participate, but plaintiff declined to participate and consented to the sale (and, nevertheless, could not have reasonably withheld its consent); (4) the plaintiff cannot claim that its alleged lack of access to financial information pursuant to paragraph 3.8 caused it to incur damages; and (5) the plaintiff has not been damaged. As to count two, alleging breach of the covenant and fair dealing, the defendant argues that it is entitled to summary judgment because it did not breach any of its contractual obligations, and the plaintiff was not deprived of any benefits it reasonably could have expected to receive under the Operating Agreement. Finally, the defendant argues that summary judgment should be entered in its favor as to count three, alleging breach of fiduciary duty, because it acted at all times with candor and good faith and did not engage in any self-dealing to the plaintiff's detriment.
On June 22, 2015, the plaintiff submitted a memorandum of law in opposition, along with an affidavit and various exhibits. Therein, the plaintiff contends that the court should not grant summary judgment, primarily because (1) the plaintiff has a reasonable conflicting interpretation of paragraph 3.4, and (2) disputed factual issues exist as to whether the defendant breached the Operating Agreement.
On July 14, 2015, the defendant filed a reply memorandum and an affidavit with additional exhibits. In its reply, the defendant maintains that (1) paragraph 3.4 is unambiguous and inapplicable because 95/7 Enterprises is not a VOE; (2) the defendant did not breach paragraph 3.5; (3) paragraph 3.8 does not apply to information relating to the sale to 95/7 Enterprises; (4) the plaintiff lacks standing because its claim is properly asserted by the joint venture 95/7 Ventures LLC and ignores the actual amount of debt on the Property in existence at the time of the sale; and (5) the plaintiff has failed to produce evidence that the defendant acted in bad faith. The motion was heard at oral argument on August 3, 2015.
As more fully discussed below, the defendant's motion for summary judgment is granted. The defendant has met its initial burden, the plaintiff fails to raise any genuine issue of material fact, and the undisputed facts as applied to the relevant law dictate that a determination be made in favor of the defendant.
FINDINGS OF FACT
The undisputed facts are as follows.
A. The Property, the Parties, and the Joint Venture
The property involved in the present case consists of a 12.6-acre, mixed-use development site located along Interstate 95 and Route 7 in Norwalk, Connecticut known as the Reed-Putnam Urban Renewal Area or District 95/7. French Norwalk and its affiliated entities owned the Property up until July of 2005. At the time, Timon J. Malloy was its managing member. Clayton H. Fowler was (and is) the chief executive officer of Spinnaker Real Estate Partners, LLC (Spinnaker).
In 2004, Fowler and Malloy began to discuss a plan in which, through the creation of new entities, French Norwalk would sell the Property to a joint venture, then French Norwalk would reinvest and obtain an interest in the venture, and Spinnaker would manage the venture owning the Property thereafter. By December of 2004, three new entities were created in furtherance of the joint venture: (1) 95/7 Ventures LLC, (2) Spin-French Land Development LLC, and (3) the defendant, Spin-Reed Putnam LLC.
On January 27, 2005, 95/7 Ventures, Spin-French, French Norwalk, and the defendant executed an Agreement to Transfer Real Property and to Create a Development Joint Venture (transfer agreement). The transfer agreement contains the terms and conditions by which 95/7 Ventures purchased the Property from French Norwalk and provides that 95/7 Ventures assumed French Norwalk's obligations under the Land Disposition and Development Agreement, which controls the development of the Property.
B. The Spin-French Operating Agreement
That same day, French Norwalk and the defendant entered into the Operating Agreement of Spin-French Land Development LLC. Under the Operating Agreement, the defendant held an 80 percent managing membership interest in Spin-French, and French Norwalk held a 20 percent non-managing membership interest. Defendant Spin-Reed was the manager of Spin-French and Fowler was the managing member of Spin-Reed. Malloy was French Norwalk's managing member. In exchange for their membership interests, the defendant and French Norwalk made initial capital contributions of $2,800,000 and $700,000, respectively, for a total of $3,500,000.
The following provisions of the Operating Agreement are pertinent to this case.
This AGREEMENT is made as of January 27, 2005, between Spin-Reed Putnam LLC (" Spinnaker") . . . and French Norwalk LLC (" French").
1. INTRODUCTORY PROVISIONS
1.1. COMPANY. This is the Operating Agreement for a limited liability company (the 'Company') known as Spin-French Land Development LLC . . .
1.2 DEFINITIONS.
1.2.1. " Acquisition Agreement" means " Agreement to Transfer Real Property and to Create a Development Joint Venture, " between French Norwalk LLC and Spinnaker, dated the same date as the date of this Agreement, whereunder French Norwalk LLC and its Subsidiaries agree to sell the French Assets to the Successor Redeveloper.
1.2.9. " French Assets" means all of the real and personal Property that French Norwalk LLC and its Subsidiaries have agreed to sell pursuant to the Acquisition Agreement.
1.2.16. " Ownership Entity" means an entity that acquires any or all of the Property, including without limitation (a) the Successor Redeveloper, and (b) any Vertical Ownership Entity. The phrase " manager, " in connection with an Ownership Entity, includes a party that is " managing member" of, or serves in any similar capacity with respect to, such Ownership Entity.
1.2.20. " Property" means Reed-Putnam Urban Renewal Area Development Parcels 1, 2 and 4 as described in the [Land Disposition & Development Agreement] (or so much thereof as the Company acquires pursuant to the Acquisition Agreement, the LDA or otherwise), together with such other lands adjacent or incidental to the foregoing that the Company or its Subsidiary may acquire in furtherance of the Project.
1.2.25. " Successor Redeveloper" means 95/7 Ventures LLC, a Connecticut limited liability company that has been formed to acquire the Property and to fulfill the other purposes as described in Paragraph 3.3.
1.2.27. " Vertical Ownership Entity" means an Ownership Entity that is formed to acquire a portion of the Property from the Successor Redeveloper, as described in Paragraph 3.4.
2. MANAGER AND OFFICERS
2.2.1. Spinnaker is hereby designated as the Manager . . . 3. MANAGEMENT AND OPERATION
3.3. ACTIONS PURSUANT TO ACQUISITION AGREEMENT
3.3.1.5. French may, but need not, elect to become a member (or to cause one or more of its Member Affiliates to become members) of the Successor Redeveloper, on substantially the same economic terms as apply to the other members that are not the Company. If French does so elect, however, French's Member Affiliates must acquire not less than 10%, nor more than 20%, of the membership interests in the Successor Redeveloper that are not held by the Company.
3.4. VERTICAL DEVELOPMENT.
3.4.1. The Successor Redeveloper may undertake environmental remediation, utility relocation and other site preparation activities with respect to the Property, and may undertake construction of on-site or off-site " infrastructure" (including, by way of illustration rather than limitation, shared parking facilities) that are intended to serve two or more of the buildings proposed for the Property. Alternatively, the Successor Redeveloper may have such site preparation or construction performed by one or more Vertical Ownership Entities.
3.4.2. The Successor Redeveloper shall not undertake the construction of individual buildings on the Property; rather, construction of each such building or group of buildings shall be undertaken by a Vertical Ownership Entity, to which the Successor Redeveloper shall sell the affected portion of the Property in accordance with paragraph 3.4.8.
3.4.7. Whether or not French is a member of the Successor Redeveloper, French shall have the additional right, but not the obligation, to become a member (or to cause one or more of its Member Affiliates to become members) of each Vertical Ownership Entity, in manner analogous to the manner in which French is permitted to participate in the Successor Redeveloper pursuant to Paragraph 3.3.1.5. French's failure to become a member of any Vertical Ownership Entity shall not impair its right pursuant to the preceding sentence to become a member in any subsequent Vertical Ownership Entity.
3.4.8. Whether or not either of Spinnaker or French elects to participate directly or indirectly in a Vertical Ownership Entity, the portion of the Property to be developed by such Vertical Ownership Entity shall be sold by the Successor Redeveloper to such Vertical Ownership Entity, according to terms that would reasonably be expected in an " arm's-length" transaction (that is, at " fair market value, " taking due account of any work performed or infrastructure provided by the Successor Redeveloper as described in Paragraph 3.4.1), as if no Member Affiliates of Spinnaker or French had any interest in such Vertical Ownership Entity.
3.4.9. In the event of dispute between Spinnaker (or the Successor Redeveloper, if the Company does not by itself control the Successor Redeveloper's actions in such regard) and French as to the value assigned to the affected portion of the Property, the parties shall each engage a Qualified Appraiser to determine such value, taking due account of any offers received from parties who are not Member Affiliates. If the two Qualified Appraisers do not agree, and the parties cannot reach agreement on the basis of the Qualified Appraisers' determinations, then the Qualified Appraisers shall designate a third Qualified Appraiser, whose determination shall be conclusive.
3.4.10. Pursuant to the Acquisition Agreement, Spinnaker and French will record at Closing a " Notice of Participation Rights, " providing notice of French's right to participate in future " Vertical Development Phases" at the Property. Such right to participate consists entirely and exclusively of the rights set forth in this Paragraph 3.4.
3.5. RESTRICTED ACTIONS. Without limiting, and without limitation by, any of the foregoing, the following " Restricted Actions" shall require consent by French, which consent shall not be unreasonably withheld, conditioned or delayed:
3.5.6. Action by the Company causing, or consenting or assenting to, the Successor Redeveloper's sale of all or substantially all of its assets, except (a) as may be required by the Successor Redeveloper's Governing Documents; or (b) in the ordinary course of completing the sale of individual portions of the property to Vertical Ownership Entities as described in Paragraph 3.4.8.
3.8. BOOKS, RECORDS AND REPORTS.
3.8.1. The Company's books and records shall be made available to the Members, at a location known to them, for examination and copying. Records required to be maintained and made available under Section 34-144 of the Act may be maintained at such of the Company's offices as the Manager may determine from time to time.
3.8.2. Within 90 days after the close of each fiscal year, the Company shall deliver, to each of its Members, (a) statements for both the Company and the Successor Redeveloper, showing assets and liabilities as of the close of such year, financial operations for such year, and receipts and expenditures during such year in reasonable detail; and (b) Forms K-1 and other information required by the Members for income tax reporting purposes.
To paraphrase the Operating Agreement, 95/7 Ventures was to be the designated redeveloper within the meaning of the applicable urban renewal plan and was to perform " horizontal" activities, e.g., site preparation, remediation, road construction and similar activities. 95/7 Ventures was to sell off portions of the Property to Vertical Ownership Entities (VOEs) for the construction of buildings, including housing, offices and commercial space.
C. The Sale to 95/7 Ventures and the Bank Loan
On March 23, 2005, Spin-French and an additional investor, Greenfield 95/7, LLC (Greenfield), became signatories to the Operating Agreement of 95/7 Ventures, LLC (the Operating Agreement). The Operating Agreement established Spin-French and Greenfield as co-managers of 95/7 Ventures with each holding a 50 percent membership interest and a 20/80 proportional share respectively.
On the same day, 95/7 Ventures, Spin-French, Greenfield, French Norwalk, and the defendant entered into a binding VOE and Buy/Sell Agreement (VOE agreement), which set forth the parties' understanding as to French Norwalk's rights to become a member of VOEs, and how the Operating Agreements of such VOEs would be drafted and would apply to French Norwalk in such an instance. The VOE agreement reads in pertinent part: " WHEREAS, Spin-French and Greenfield intended that, if French [Norwalk] became a member in 95/7 [Ventures], that the 95/7 Agreement would serve as a template for Operating Agreements of VOE's in which French [Norwalk] became a member, but French [Norwalk] has determined not to cause a French [Norwalk] Member to join 95/7 and, thus, French [Norwalk] will not have any rights under the 95/7 Agreement . . ."
Four months later, on July 25, 2005, several significant events occurred. First, the sale of the Property to 95/7 Ventures closed. Second, in accordance with the transfer agreement and pursuant to an Assignment and Assumption Agreement, French Norwalk assigned to the plaintiff its membership interest in Spin-French and its rights and obligations under both the Operating Agreement and the VOE agreement. Third, 95/7 Ventures (through Spin-French and Greenfield) and French Norwalk through a related entity executed a Notice of Participation Rights, as contemplated by paragraph 3.4.10 of the Operating agreement, which was filed on the Norwalk land records and provided that particular " Agreements" grant certain rights to the plaintiff " to participate in development projects undertaken on the . . . Property . . ." Section C.4 of the Notice of Participation Rights, entitled " Restriction on Real Property, " states in pertinent part: " In addition, if any portion of the Real Property is sold to an entity in which either of Owner or Spinnaker Real Estate Partners, LLC has an interest, direct or indirect, French [has] the right to participate as a member in either or both of the ownership entity and/or the entity which is the manager of said ownership entity, on terms set forth in the Agreements." The " Agreements" referred to consist of the transfer agreement, the Operating Agreement, and the VOE agreement. Fourth, 95/7 Ventures entered into a loan agreement for $16.5 million with Bank of America, N.A. (the bank) in order to finance the acquisition of the Property (bank loan). The bank loan was secured by a first mortgage on the Property and a guaranty agreement executed by Fowler in which he personally guaranteed up to $6.6 million of the outstanding principal of the bank loan together with interest and enforcement costs.
On or about December 7, 2007, the bank loan was increased to $33 million with a maturity date of December 17, 2009. 95/7 Ventures failed to pay back the bank loan by the maturity date. On April 20, 2010, the bank declared 95/7 Ventures in default and demanded payment. At the time, 95/7 Ventures owed approximately $32 million in principal and interest on the bank loan. The indebtedness ultimately grew to $39.6 million in 2013.
D. The Discounted Payoff and the Sale to 95/7 Enterprises
By late 2012, after much discussion, negotiation, and a failed attempt by the bank to sell the loan, the bank agreed to accept $18 million as a discounted payoff of the loan and to permit a short sale of the collateral, including the Property. The bank also agreed to conditionally release Fowler's guaranty as part of the payoff. Fowler thereafter negotiated and entered into an agreement with Edgewood Capital Advisors, LLC (Edgewood) whereby Edgewood would provide short-term financing in the form of a $17.5 million loan that would be used to fund (1) the purchase of the Property for the amount of the discounted payoff of the bank loan and (2) certain site development costs (Edgewood Agreement). The Edgewood Agreement required that an equity investment of approximately $5 million be made by a " to-be-formed single purpose bankruptcy remote limited liability company, corporation or limited partnership." Per advice from tax counsel, Fowler decided to structure the discounted payoff as a sale from 95/7 Ventures to a newly formed entity for $18 million.
Douglas A. Bora, Jr., a managing director at Spinnaker, prepared an offering statement or summary outlining the proposed transaction. By e-mail on December 10, 2012, Bora sent a copy of the document to Malloy, the principal of French, along with Edgewood's short-term financing proposal and an excel spreadsheet that contained statements regarding sources and uses of funds and cash flow. The transaction summary stated that Spinnaker " plans to acquire the Property's existing 33.0M note and first mortgage from its existing lender, Bank of America, for a discounted price of $18.0M." The transaction summary also stated that the estimated land value of the Property was $32 million.
In the e-mail cover message, Bora explained that " [t]he note purchase price has been negotiated with the bank to be $18.0M and the equity co-investment is projected to be $5.25M . . . The business plan is to finalize the deal with the bank this week and close it as soon as possible thereafter . . . We have a $17.5M non-recourse bridge loan with a 2-year term . . . and we already have $125K of money at risk with the lender . . . Although the new ownership structure has not yet been finalized, it will be done with the goal of minimizing adverse tax implications for the existing members of 95/7 Ventures LLC. However, as you are aware, all prior equity capital of 95/7 Ventures LLC will be discounted down to zero. Regarding the opportunity to invest in a different, newly recapitalized project with a significantly lower debt loan, we'd like to know if you'd be interested in co-investing. Time is critical since we need to move extremely fast to take advantage of this opportunity with Bank of America . . ."
Malloy responded to Bora's December 10 e-mail on December 12, 2012, stating in relevant part that " [n]o one here is interested in investing." Later, when asked during his deposition what the basis was for his decision not to invest, Malloy replied: " As I say, the only real estate deal we had invested in run by other people in decades was 95/7 Ventures. It had, I thought, been very badly handled and resulted in a complete loss as had been represented to me, and therefore we had no interest in doing that or anything similar." Malloy further explained that he had not analyzed the submission closely because " [w]e didn't want to waste time on something we weren't interested in . . ." and stated that he did not communicate any objection as to the proposed transaction to Bora or any other party.
On February 15, 2013, 95/7 Ventures sold the Property to 95/7 Enterprises for $18 million, which resulted in a discounted payoff of the bank loan, a conditional release of Fowler's guaranty, and a release of the mortgage on the Property. At the time of the closing, the amount of principal and interest due on the bank loan exceeded $39.6 million, and all equity investors in 95/7 Ventures lost their entire investment. Pursuant to the Operating Agreement of 95/7 Enterprises, Fowler was designated as the company's initial manager; French Norwalk and the plaintiff were not involved. The 95/7 Operating Agreement also provided:
2.3. Purpose. The purposes for which the Company is formed are (i) to enter into the Contract, (ii) to acquire the Property pursuant to the Contract and thereafter to own, finance, refinance, dispose of and otherwise deal with the Property, (iii) to execute the Horizontal Project and, subject to the provisions of this Agreement, to engage in any related activities (provided that the Company shall not engage in any activities constituting part of any Vertical Project), and (iv) to engage in other activities as the Manager may determine. 10.1. Development of the Project. The Company shall undertake Revised Plan approval, environmental remediation, utility relocation and other site preparation activities with respect to the Horizontal Project in accordance with the Business Plan and the Horizontal Project Budget, but the Company shall not commence any Vertical Project (including the commencement of construction of any Building on the Property); it being agreed that any Vertical Project (including the construction of any Building) shall be undertaken only by the Vertical Ownership Entity that has acquired from the Company the affected portion of the Property in accordance with Section 10.2 below or by a Third Party Purchaser.
E. The Sale to General Growth Properties
On May 24, 2013, General Growth Properties, Inc. submitted a letter of intent offering to purchase the Property from 95/7 Enterprises for $30 million. The offer was declined. General Growth Properties submitted a second letter of intent on June 4, 2013, offering $35 million, which was eventually accepted by Fowler. The sale of the Property to General Growth Properties' ultimate assignee, Norwalk Land Development, LLC, closed on November 21, 2013. As a result, the Spinnaker interests purchased the Property for $18 million in February and sold it for $35 million in November 2013. On November 27, 2013, Malloy sent an e-mail message to Fowler congratulating him on the sale.
On December 17, 2013, Fowler sent an e-mail to Malloy as a follow-up to a previous discussion and attached, among other things, a consent form and a summary letter, which stated, " The attached consent has been prepared on the recent realization that in our efforts to avoid foreclosure and significant economic and tax liability and to enter into a settlement with the Bank of America N.A. we inadvertently neglected to formally document the consent of the members of Spin-French." Fowler continues, " [W]e believe and continue to feel certain that French Norwalk LLC ('French') provided tacit approval of and informal consent to all of my actions as Manager of Spin-French. This understanding is based both on your clear statement that French would not invest further capital in Spin-French (as further evidenced by a failure to remit capital in response to calls) and your decision not to object to or invest in the transaction described in the correspondence from Doug Bora dated December 10, 2012 which included an Offering Memorandum of 95/7 Enterprises LLC comprehensively detailing the discounted payoff of the Bank of America note, the transfer of the Property to a new company and the obtaining of bridge loan in connection with such transfer."
Malloy refused to sign the attached consent form and, instead, commissioned an appraisal to obtain the value of the Property at the time of the sale to 95/7 Enterprises. According to the appraisal, the market value of the Property on February 1, 2013, was $34.3 million. The present suit followed.
DISCUSSION
A. Standard of Review
" Practice Book [§ 17-49] provides that summary judgment shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law . . . In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party . . . The party seeking summary judgment has the burden of showing the absence of any genuine issue [of] material facts which, under applicable principles of substantive law, entitle him to a judgment as a matter of law . . . and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact . . . A material fact . . . [is] a fact which will make a difference in the result of the case." Stuart v. Freiberg, 316 Conn. 809, 820-21, 116 A.3d 1195 (2015).
B. Contract Interpretation
In construing a contract, where there exists definitive contract language, the determination of what the parties intended is a question of law. See Afkari-Ahmadi v. Fotovat-Ahmadi, 294 Conn. 384, 985 A.2d 319 (2009). " [T]he language used [in a contract] must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract . . . Where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms. A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity . . . Moreover, the mere fact that the parties advance different interpretations of the language in question does not necessitate a conclusion that the language is ambiguous . . . Finally, in construing contracts, we give effect to all the language included therein, as the law of contract interpretation . . . militates against interpreting a contract in a way that renders a provision superfluous . . . Therefore, [w]hen interpreting a contract, we must look at the contract as a whole, consider all relevant portions together and, if possible, give operative effect to every provision in order to reach a reasonable overall result." (Citations omitted; internal quotation marks omitted.) Id., 390-91. Accord, Awdziewicz v. City of Meriden, 317 Conn. 122, 129-30, 115 A.3d 1084 (2015).
Notably, " a presumption that the language used is definitive arises when . . . the contract at issue is between sophisticated parties and is commercial in nature . . . [And] when there are multiple writings regarding the same transaction, the writings should be considered together in construing the contract." (Citations omitted; internal quotation marks omitted.) United Illuminating Co. v. Wisvest-Connecticut, LLC, 259 Conn. 665, 670-71, 791 A.2d 546 (2002).
C. Covenant of Good Faith & Fair Dealing
In Magnan v. Anaconda Industries, Inc., 193 Conn. 558, 566-67, 479 A.2d 781 (1984), our Supreme Court recognized the covenant of good faith and dealing, saying, " The Restatement (Second) of Contracts . . . recognizes an implied covenant of good faith and fair dealing in every contract without limitation. See 2 Restatement (Second), Contracts § 205 (1979); see also General Statutes § 42a-1-203. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party . . . 2 Restatement (Second), Contracts § 205, comment a (1979) . . . Essentially it is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended. The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy." (Citations omitted; internal quotation marks omitted.) See Brule v. Nerac, Inc., 127 Conn.App. 315, 322 n.4, 13 A.3d 723 (2011) (where no contractual obligation exists, the covenant does not apply).
" To constitute a breach of [the implied covenant of good faith and fair dealing], the acts by which a defendant allegedly impedes the plaintiff's right to receive benefits that he or she reasonably expected to receive under the contract must have been taken in bad faith . . . Bad faith in general implies both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some 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 . . . [B]ad faith may be overt or may consist of inaction, and it may include evasion of the spirit of the bargain." (Citation omitted; internal quotation marks omitted.) Keller v. Beckenstein, 117 Conn.App. 550, 563-64, 979 A.2d 1055 (2009).
D. Fiduciary Duty
A determination as to whether a fiduciary duty exists is a question of law. See Iacurci v. Sax, 313 Conn. 786, 796, 99 A.3d 1145 (2014). " It is axiomatic that a party cannot breach a fiduciary duty to another party unless a fiduciary relationship exists between them." Sherwood v. Danbury Hospital, 278 Conn. 163, 195, 896 A.2d 777 (2006). The " Supreme Court has chosen to maintain an imprecise definition of what constitutes a fiduciary relationship in order to ensure that the concept remains adaptable to new situations . . . Consequently, under Connecticut law, a fiduciary or confidential relationship is broadly defined as a relationship that 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.'" (Citation omitted.) Ahern v. Kappalumakkel, 97 Conn.App. 189, 194, 903 A.2d 266 (2006); see also Falls Church Group, Ltd. v. Tyler, Cooper & Alcorn, LLP, 281 Conn. 84, 108-09, 912 A.2d 1019 (2007) (same); Sherwood, supra, 278 Conn. 195-96 (same). " Once a [fiduciary] relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary . . . [T]he 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." (Citation omitted; internal quotation marks omitted.) Cadle Co. v. D'Addario, 268 Conn. 441, 455-56, 844 A.2d 836 (2004).
Whether a member of a limited liability company (LLC) owes a fiduciary duty towards other members is not clearly established under Connecticut jurisprudence at this time. There appears to be no appellate authority directly addressing the issue, and a split of authority exists among the trial courts. Compare Clinton v. Aspinwall, Superior Court, judicial district of Hartford, Docket No. CV-13-6042758-S, (February 24, 2014, Peck, J.) (57 Conn. L. Rptr. 710) (noting Connecticut courts have interpreted General Statutes § 34-141 and concluded members and managers of LLCs owe a fiduciary duty to other members); Yavarone v. Jim Moroni's Oil Service, LLC, Superior Court, judicial district of Middlesex, Docket No. CV-03-0102318-S (February 18, 2005, Aurigemma, J.) (" [L]ike a partner in a partnership . . . a member of a limited liability company has a fiduciary duty to the other members"), with Kasper v. Valluzzo, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV-07-5004383-S (December 23, 2011, Tierney, J.T.R.) (determining member of LLC not similar to partner in partnership and member of LLC does not owe fiduciary duty to another member, but manager of manager-managed LLC owes fiduciary duty to LLC and its members); Calpitano v. Rotundo, Superior Court, judicial district of New Britain, Docket No. CV-11-6008972-S, (August 3, 2011, Swienton, J.) (52 Conn. L. Rptr. 464) (" General Statutes § 34-141 set forth a duty of good faith which is not the same as the duty of a fiduciary, which goes beyond good faith . . . Reading § 34-141, it is clear that the intention was that a limited liability corporation more closely resembles a business corporation than a partnership, and the members' relationship to each other is more akin to shareholders than partners, " where " shareholders owe no particular duty to each other because of their status as fellow shareholders"). Because this court's determination with respect to the plaintiff's breach of fiduciary duty claim would be the same regardless of whether or not it were to find that a fiduciary duty exists between the plaintiff and the defendant, the court declines to reach this issue at this time.
ANALYSIS
A. Breach of Contract
1. Paragraph 3.4 (Vertical Development)
The defendant argues that paragraph 3.4 of the Operating Agreement does not apply to the sale of the Property to 95/7 Enterprises because 95/7 Enterprises is not a Vertical Ownership Entity (VOE). The court agrees with the defendant. A fair reading of paragraph 1.2.27, in conjunction with paragraphs 1.2.16, 1.2.25, 3.4.1, and 3.4.2, makes clear that a VOE means an entity that is formed for the purpose of acquiring a portion of the Property and constructing one or more buildings thereupon, although it is also permitted to engage in related site improvement activities. 95/7 Enterprises was formed for the acquisition of the Property in its entirety and not for its development.
The plaintiff argues that paragraph 3.4.1 " expressly contemplates that the entire Property could be acquired by one VOE (i.e., 95/7 Enterprises, LLC)" pursuant to the language of the last sentence therein, which provides, " Alternatively, the Successor Redeveloper may have such site preparation or construction performed by one or more Vertical Ownership Entities." The court finds this argument unconvincing. Read in its entirety, paragraph 3.4.1 provides that 95/7 Ventures will undertake the horizontal activities discussed above but may delegate some of the activities to one or more VOEs. Paragraph 3.4.1 neither expressly states nor fairly implies that a VOE could acquire the whole Property.
The plaintiff also argues that consideration should be given to the text of the Notice of Participation Rights, and section C.4 in particular. Though there is no need to examine additional writings associated with the joint venture because paragraph 3.4 of the Operating Agreement is unambiguous, the court, nevertheless, would arrive at the same conclusion upon review of the notice. Section C.4 of the notice provides in part that " if any portion of the Real Property is sold to an entity in which either of Owner or Spinnaker Real Estate Partners, LLC has an interest, direct or indirect, French [has] the right to participate as a member in either or both of the ownership entity and/or the entity which is the manager of said ownership entity, on terms set forth in the Agreements." The " Agreements" are identified as the transfer agreement, the Operating Agreement, and the VOE agreement.
In light of the language in paragraph 3.4.10 of the Operating Agreement, which specifically states that " [s]uch right to participate consists entirely and exclusively of the rights set forth in Paragraph 3.4, " there can be no doubt that the notice was simply meant to provide notice to the public of French Norwalk's right to participate in future so-called " Vertical Development Phases" at the Property and that the provisions of the identified agreements are those which govern the parties' actions. In short, the Notice of Participation filed on the land records is analogous to a notice of lease, which directs third parties to the lease itself and does not confer any rights additional to those in the lease.
Accordingly, because 95/7 Enterprises is not a VOE and because the provisions of paragraph 3.4 apply only to VOEs, the court concludes that paragraph 3.4 does not apply to the sale to 95/7 Enterprises. Plaintiff also claims that factual issues are raised by other purported breaches, such as a failure to give notice of closing of the 95/7 Enterprises acquisition under paragraph 3.4.3, the right of a carried interest under paragraph 3.4.4, the lack of an arm's length transaction under paragraph 3.4.8, and the right of an appraisal under 3.4.9. See Plaintiff's Memorandum in Opposition, at 17-22. However, all of these alleged breaches are based on provisions in paragraph 3.4, which, as discussed above, applies to transactions with Vertical Ownership Entities and not to the sale to 95/7 Enterprises. As a result, the court concludes that defendant did not breach paragraph 3.4 of the Operating Agreement.
2. Paragraph 3.5 (Restricted Actions)
Paragraph 3.5 specifies certain transactions which require " consent by French, which consent shall not be unreasonably withheld, conditioned or delayed." Among those transactions is causing 95/7 Ventures to sell all or substantially all of its assets, which is what happened with the sale to 95/7 Enterprises. The defendant maintains that plaintiff consented to the sale because the facts establish that (1) the plaintiff understood, among other things, that the discounted payoff of the bank loan would result in title passing to the new entity and that it would lose its entire equity investment in 95/7 Ventures, (2) Malloy was offered an opportunity to invest in the new entity that was to be formed to facilitate the transaction by which the bank loan was paid off, (3) Malloy specifically informed Bora that the plaintiff was not interested in investing in the new entity, and (4) Malloy never advised anyone associated with the defendant that he objected to the proposed transaction in any way. The defendant further argues that the plaintiff could not reasonably have withheld its consent, primarily, because all of the parties involved, including the plaintiff, understood that the value of 95/7 Ventures' equity in the Property was zero.
In response, the plaintiff argues that a genuine issue of material fact exists as to whether the plaintiff consented to the sale because Fowler contacted Malloy a year after the sale was completed seeking formal consent from Malloy. The plaintiff contends that this suggests that the defendant did not believe that the plaintiff's response to Bora's December 10 e-mail constituted consent to the sale.
The defendant's argument is strongly supported by the facts. Indeed, Bora's December 10 e-mail to Malloy clearly provided notice to Malloy that the Property would be sold to a new entity and that the plaintiff's equity investment in 95/7 Ventures would be nonexistent after the sale. Furthermore, Malloy's December 12 e-mail sent to Fowler affirmatively states that " [n]o one is interested in investing." In Malloy's deposition testimony, responding to a question regarding his evaluation of the prospects for the new investment, Malloy stated: " As far as I could see, it projected buying a bunch of land and waiting around to see if they were going to be successful in selling it off. I already knew that we were not interested in investing new money in any other deals run by anyone. So we didn't spend a lot of time on it." Further, Malloy's deposition testimony confirms that he did not voice any objection to the transaction proposed in Bora's December 10 e-mail. Coupled with Malloy's e-mail in November 2013 congratulating Fowler on the sale to General Growth, there is no room for doubt as to whether the plaintiff consented to the proposed transaction.
The plaintiff's argument that Fowler's December 17, 2013 e-mail to Malloy creates a genuine issue of material fact is unpersuasive. The summary letter clearly states that defendant was looking for formal documentation of what it believed to be plaintiff's " tacit approval of and informal consent to" all of defendant's actions as the manager of Spin-French because of Malloy's statement in his December 12 e-mail that the plaintiff would not invest and his failure to object to the proposed transaction, which was outlined in detail by the various documents attached to Bora's December 10, 2010 e-mail. Further, statements in a letter dated December 17, 2013 cannot change the facts indicating plaintiff's consent approximately a year earlier.
Accordingly, because the relevant facts are not at issue, the plaintiff has not presented evidence sufficient to establish a genuine issue of material fact on the issue of consent. The facts and circumstances support the conclusion that the plaintiff clearly consented to the sale, and, thus, the defendant did not breach paragraph 3.5.
3. Paragraph 3.8 (Books, Records and Reports)
The court also agrees with the defendant's argument that paragraph 3.8 does not apply to information relating to the sale of the Property. Paragraphs 3.8.1 and 3.8.2 only apply to the books, records, financial statements, and the like, of the " Company, " which is identified as Spin-French in paragraph 1.1 of the Operating Agreement. Further, plaintiff received the offering statement for the transaction and Malloy candidly stated at his deposition that the French entities were not interesting in wasting any more time on analyzing the proposed transaction. Plaintiff does not put forth any argument or evidence that calls this interpretation into question. Accordingly, the court finds that defendant has not breached paragraph 3.8 of the Operating Agreement, or any other provision of the Operating Agreement as alleged in the First Count.
B. Breach of the Implied Covenant of Good Faith & Fair Dealing
Plaintiff pleads the basis of its claim for breach of the covenant of good faith and fair dealing in Paragraph 49 of the Complaint:
Spin-Reed acted in bad faith by failing to inform Plaintiff of the 95/7 Enterprises Acquisition, failing to obtain French Norwalk's consent to the transaction or allow it to invoke its rights to acquire an interest in 95/7 Enterprises, by failing to obtain fair market value and by failing to provide French Reed with access to books and records related to the Property.
The court has discussed each of these contentions above and found that they do not constitute a breach of the Operating Agreement. Accordingly, the alleged behavior cannot have defeated plaintiff's legitimate expectations under the contract. Brule v. Nerac, Inc., supra, 127 Conn.App. at 322 n.4 (2011).
In its opposition to the present motion for summary judgment, plaintiff raises a number of issues not pleaded in its complaint, which it claims constitute breaches of the covenant of good faith and fair dealing. Plaintiff faults defendant for not providing documentation or adequate notice of the sale, not buying out the plaintiff's interest, and seeking the plaintiff's consent to the transaction a year after it was completed. The plaintiff argues further that the defendant acted in bad faith by failing to keep the plaintiff informed as it negotiated the discounted payoff of the bank loan to avoid obligations under Fowler's guaranty and then, without the plaintiff's consent, structuring the transaction in such a manner as to create a windfall for its principals; by making a dishonest representation that the Property was not worth more than $18 million at the time of the sale; and by falsely asserting that the issue of consent was moot because Greenfield had the sole authority to agree to the sale under the Ventures Operating Agreement.
As discussed above, the defendant did not breach any of the identified provisions of the Operating Agreement. Thus, the plaintiff's arguments with respect to notice and consent hold no merit. Moreover, the facts support the defendant's argument that it did not act in bad faith. In particular, accepting as true Malloy's assertion that Fowler represented to him that the property was not worth more than the amounts offered to buy out the note, there is nothing in plaintiff's submissions to indicate falsity on the part of Fowler. Further, the offering statement attached to Bora's email of December 10, 2012 states that the estimated value of the land could be $32 million. As a result, Malloy was on notice of a possible upside appreciation, which he chose to ignore. Additionally, the plaintiff's claim with respect to Greenfield is irrelevant because it allegedly occurred a year after the closing, is not to be found in the December 17, 2013 letter to Malloy as claimed, and, as actually recited by Malloy, is not inaccurate. Greenfield as the other member of 95/7 Ventures had the right to veto the sale to 95/7 Enterprises. Accordingly, the court finds that defendant did not breach the Operating Agreement's implied covenant of good faith and fair dealing.
C. Breach of Fiduciary Duty
In its memorandum in opposition (at 26), plaintiff states, " Defendant correctly notes that Plaintiff's two other causes of action, breach of the covenant of good faith and fair dealing and breach of fiduciary duty, are predicated on the same factual allegations." Here, the same allegations lead to the same conclusion as to this cause of action.
The undisputed facts demonstrate that the defendant dealt fairly with the plaintiff because (1) it fulfilled its obligations under the Operating Agreement by (i) notifying the plaintiff of the proposed discounted payoff of the bank loan, (ii) providing the plaintiff with detailed information concerning the structure and financing of that transaction, and (iii) explicitly advising the plaintiff that the transaction would result in a liquidation of the equity of all of the investors in 95/7 Ventures; (2) offering the plaintiff the opportunity to participate as an equity investor in 95/7 Enterprises; and (3) the defendant lost its equity position in 95/7 Ventures in the same way as plaintiff lost its interest.
Assuming, without deciding, that there exists a fiduciary relationship between the plaintiff and the defendant as members of Spin-French, the court finds that the defendant did not engage in improper self-dealing to the detriment of the plaintiff nor did it act in bad faith. As previously discussed, the salient facts establish that the defendant notified and informed the plaintiff about the proposed sale, offered the plaintiff the opportunity to invest in 95/7 Enterprises, and made it very clear that the plaintiff would no longer hold any of its equity investment in 95/7 Ventures after the closing of the sale. Therefore, the defendant did not breach any fiduciary duty it may have owed to the plaintiff in regards to the sale.
CONCLUSION
For the foregoing reasons, the defendant's motion for summary judgment is granted as to all three counts of the complaint.