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Therapy Kinections, LLC v. Clough

Superior Court of Connecticut, Judicial District of Waterbury, Waterbury

August 21, 2015

Therapy Kinections, LLC et al.
v.
David F. Clough

MEMORANDUM OF DECISION RE MOTION TO STRIKE (#137)

Andrew W. Roraback, J.

I

ISSUES

Whether to strike the second, third, fourth, fifth, and sixth counts of the plaintiffs' second revised complaint on the grounds that the second, third, and sixth count are merely negligence claims recast as contract-related claims and that the fourth and fifth counts are insufficient as a matter of law and identical to the plaintiffs' negligence claim in count one.

II

FACTS

The plaintiffs, Therapy Kinections, LLC (Therapy Kinections), Lynn M. Friebel (Lynn), and David Friebel (David), filed a six-count second revised complaint against the defendant, Attorney David F. Clough, on December 3, 2014. In their second revised complaint, the plaintiffs allege the following. Lynn and David organized Therapy Kinections on January 29, 2004, with Lynn as the managing member in charge of professional services and David in charge of managing the business. Around March 2007, Elizabeth Daniels, a certified occupational therapy assistant working for Therapy Kinections, agreed to invest $44, 500 in Therapy Kinections in exchange for an equivalent percentage of equity in the company. Daniels did not want to be an individual member of Therapy Kinections but wanted a limited liability company, Daniels' Designs, LLC (DDLLC), which was owned by her and her husband, to make the investment and be the member of Therapy Kinections. In June 2007, the Friebels hired the defendant to perform a valuation of Therapy Kinections to determine Daniels' equity percentage, prepare a new operating agreement reflecting Therapy Kinections' new structure, represent them regarding a Small Business Administration loan, and prepare an operating agreement for Land Connections, LLC, the entity that owns the office condominium units where Therapy Kinections operates. The defendant represented that he was experienced in forming business entities, preparing government documents, and counseling small businesses, and that he could competently represent the Friebels regarding the issues for which he was hired.

Daniels wished to be paid as an employee rather than receive profit distributions because her professional registrations were in her own name and all of her income from occupational therapy assistant services is paid directly to her for tax accounting purposes. The Friebels informed the defendant of the following: they had organized Therapy Kinections themselves, Therapy Kinections was in the business of providing occupational therapy, Lynn is a licensed occupational therapist, neither David nor Daniels is a licensed occupational therapist, DDLLC was to be a junior partner, Daniels was to be paid as an employee, DDLLC would not receive profit distribution while Therapy Kinections paid Daniels as an employee, and Therapy Kinections would compensate the Friebels for services provided to Therapy Kinections with periodic profit distributions.

Upon reviewing the draft operating agreement that the defendant had emailed him on August 27, 2007, David " responded by asking whether certain language in the draft contemplated profit distributions to DDLLC according to its membership percentage." The defendant did not respond to David's concerns or modify the operating agreement to reflect that DDLLC would not receive distributions of net profits. On November 19, 2007, DDLLC invested $44, 500 in Therapy Kinections. The defendant determined the value of Therapy Kinections to be $225, 000, making DDLLC's contribution equal to 19.78% of Therapy Kinections. On December 11, 2007, the Friebels and DDLLC executed the operating agreement that the defendant prepared.

By letter dated April 25, 2012, Daniels' counsel, Mark Pancrazio, demanded that the Friebels perform a valuation of Therapy Kinections. Attorney Pancrazio calculated DDLLC's capital account to include allocations of net profits in proportion to its equity ownership, " exploit[ing the defendant's] errors in drafting the operating agreement." The defendant agreed to represent the Friebels concerning DDLLC's demands and communicated with Attorney Pancrazio on their behalf.

In June 2012, Therapy Kinections, based on fewer patient appointments from June through August, reduced its patient hours. Daniels objected, arguing her tenure with Therapy Kinections had earned her the work schedule of her choice and the smallest reduction in work hours. Therapy Kinections explained that it always made across-the-board reductions, that it would not alter the way it reduced schedules, and that Daniels's hours were comparable to what she worked the year before. Daniels was not satisfied and, on July 12, 2012, she gave Therapy Kinections two weeks' notice of her resignation. After Daniels gave notice of her resignation, the Friebels attempted to work with her to transition her patients to another therapist. When Daniels refused, Therapy Kinections terminated her employment on July 17, 2012.

Under the operating agreement, Therapy Kinections was required to buy back DDLLC's interest upon Daniels's resignation. Attorney Pancrazio, by letter dated July 13, 2012, demanded payment of $234, 816 to DDLLC based on a $122, 786 unpaid share of net profit and the then-current $112, 030 value of the investment. The defendant acknowledged, in a letter dated July 25, 2012, that Daniels's resignation was a withdrawal event under the operating agreement and informed Attorney Pancrazio that the Friebels had hired a certified valuation analyst to determine the value of DDLLC's equity.

By email to the defendant dated August 22, 2012, David expressed his dissatisfaction that section eight of the operating agreement did not reflect what the Friebels had told the defendant was their financial arrangement with DDLLC. The defendant responded by " claiming that his role was limited, blaming the Friebels for having not had their accountant work around his drafting errors, and misstating and/or misconstruing the law." In his next communication with the Friebels, a letter dated August 27, 2012, the defendant withdrew as the Friebels' attorney. The defendant's only explanation was that Rule 3.3 of the Rules of Professional Conduct prevented him from assisting their defense. The defendant's withdrawal left the plaintiffs " without representation in the midst of active negotiations with DDLLC." The defendant did not communicate further with the Friebels.

After her termination, Daniels filed a claim for unemployment benefits. Had she been a member of Therapy Kinections rather than DDLLC, she would not have had a basis to claim unemployment, and Therapy Kinections would not have had to incur legal fees to appeal her unemployment reward and an increased unemployment tax rate. On July 27, 2012, Daniels filed a claim with the Connecticut Human Rights and Opportunities Commission claiming Therapy Kinections retaliated against her by decreasing her hours because she advocated on behalf of disabled patients. Daniels's complaint was dismissed, but Therapy Kinections incurred " substantial legal fees to defend against her spurious claims." If DDLLC were not a member, the precipitating causes to Daniels's resignation, her refusal to cooperate, and her retaliation complaint would not have happened.

Therapy Kinections never reached an agreement regarding DDLLC's withdrawal, and DDLLC filed a demand for arbitration under the operating agreement. During the arbitration, the Friebels learned that Therapy Kinections was not lawfully formed because General Statutes § 34-119 only permits a limited liability company to render occupational therapy services if each member is licensed or otherwise authorized by law to render such professional services and David and DDLLC are not licensed occupational therapists. The defendant did not research the relevant statutes, did not recognize they applied to Therapy Kinections, or did not advise the plaintiffs concerning the relevant issues. DDLLC exploited the defendant's failure by threatening to pursue claims against the Friebels with the State Police, Attorney General, Internal Revenue Service and other state agency and insurance carriers based on the fraud it believed Therapy Kinections had perpetrated by operating the unlawful limited liability company. The operating agreement also prevented the Friebels from bringing the occupational therapy practice into compliance with § 34-119 because Lynn was prohibited from competing with Therapy Kinections. DDLLC remained a member until the Friebels paid the arbitration award. " Imprecise draftsmanship made it unclear whether the Friebels' right to transfer their interests between each other 'without the consent of any other member' as set forth in Section 20 of the Operating Agreement" meant David could transfer his interest to Lynn without allowing DDLLC its ...


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