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Whitney v. J.M. Scott Associates, Inc.

Appellate Court of Connecticut

April 12, 2016

WALTER WHITNEY
v.
J.M. SCOTT ASSOCIATES, INC., ET AL

         Argued November 30, 2015.

          Action to recover damages for, inter alia, breach of an employment agreement, and for other relief, brought to the Superior Court in the judicial district of Litchfield, where the defendants filed a counterclaim; thereafter, the matter was tried to the court, Danaher, J.; judgment for the plaintiff on the complaint in part and on the counterclaim, from which the defendant James M. Scott, Jr., et al. appealed and the plaintiff cross appealed to this court; subsequently, the court, Danaher, J., issued an articulation of its decision.

          SYLLABUS

         The plaintiff sought to recover damages from the defendants S Co. and its president and majority stockholder, S, for, inter alia, breach of contract in connection with an employment agreement and a stock option purchase agreement. Pursuant to those agreements, the plaintiff acquired twenty shares of S's stock in S Co., as well as the option to purchase S's remaining shares after the plaintiff had work for S Co. for five years. The agreements also provided that the plaintiff could be terminated from his employment only for adequate cause, and that if he was terminated without adequate cause, S Co. would pay him liquidated damages and he would be obligated to return his twenty shares of stock to S upon the defendants' payment of an agreed on purchase price. Before entering into the agreements, the plaintiff reviewed S Co.'s financial statements, tax records, and corporate records. The defendants, however, concealed certain information relating to the financial statements. Approximately three months before the plaintiff was entitled to purchase S's shares in S Co., S terminated the plaintiff's employment for his allegedly poor job performance. Two months earlier, S had sent seven memoranda to the plaintiff in one day criticizing his work. The plaintiff contested that there was adequate cause to terminate him, and the dispute was submitted to arbitration in accordance with the arbitration provisions in the agreements. After S claimed that he lacked funds to continue with arbitration, the plaintiff commenced this action and the defendants filed a counterclaim. After a trial to the court, the trial court found that the plaintiff had been terminated without adequate cause and that the defendants had engaged in fraud by deliberately concealing the financial information and by sending the memoranda criticizing the plaintiff's work in attempt to falsely establish adequate cause for his termination. The trial court rendered judgment in favor of the plaintiff on his complaint in part and on the counterclaim, and awarded the plaintiff breach of contract damages, liquidated damages, arbitration costs, punitive damages, and prejudgment interest pursuant to the statute (§ 37-3a) providing for an award of interest as an element of damages for money wrongfully withheld. On the defendant's appeal to this court, held :

         1. The defendants could not prevail on their claim that the trial court improperly applied the benefit of the bargain measure of damages in calculating the damages for the defendants' breach of the stock option purchase agreement; the trial court had broad discretion to determine the proper measure of damages, as the stock option purchase agreement did not contain a provision for liquidated damages in the event of a breach, and the court's award of damages pursuant to the benefit of the bargain measure of damages was legally correct because the award placed the plaintiff in the same position as he would have been in had the agreement been performed.

         2. The trial court improperly failed to order the plaintiff to return his twenty shares of S Co. stock to S as provided in the stock option purchase agreement: because the trial court found that the plaintiff had been terminated without adequate cause and awarded liquidated damages pursuant to the employment agreement, the plaintiff was required to return the twenty shares of stock upon payment of the liquidated damages and the defendants' payment of the agreed on purchase price for the stock as provided in the stock option purchase agreement; furthermore, the trial court's finding that the plaintiff was not required to return the stock because the plaintiff's termination was fraudulent was erroneous, as the plaintiff chose to enforce the agreement and sought damages for its breach, and, therefore, the agreement remained in force.

         3. The trial court improperly awarded the plaintiff $250,000 in punitive damages, that court having provided no numerical analysis of how it reached that amount; the trial court only had evidence of attorney's fees billings of $138,616.16, it provided no analysis of how it reached an award of an additional $111,383.81, other than stating that the award was based on reasonable attorney's fees for the entirety of the legal services provided to the plaintiff, and its analysis did not comport with the proper way of conducting a lodestar analysis to calculate reasonable attorney's fees.

         4. Because this court concluded that the trial court's punitive damages award was improper and remanded the case for a new hearing on punitive damages, the defendants' claim that the trial court improperly took evidence and made findings as to the plaintiff's litigation costs during a hearing on the defendants' motion for articulation was moot, as there was no practical relief that this court could afford the defendants regarding their claim.

         5. The trial court abused its discretion in awarding prejudgment interest on the damages for the defendants' breach of the stock option purchase agreement and their breach of the arbitration provisions in that agreement and in the employment agreement, as § 37-3a did not authorize an award of prejudgment interest on those damages; the award of prejudgment interest under § 37-3a is appropriate only when liquidated damages are involved, and because the subject damages awarded to the plaintiff here were for his loss of the benefit of the bargain and did not involve liquidated damages, § 37-3a did not apply and the plaintiff was not entitled to prejudgment interest on the subject damages.

         Kenneth J. Bartschi, with whom were Karen L. Dowd and, on the brief, Bruce L. Elstein, for the appellants-appellees (defendant James M. Scott, Jr., et al.).

         Ann H. Rubin, with whom were Sarah Healey, and, on the brief, Anne D. Peterson, for the appellee-appellant (plaintiff).

         Lavine, Keller and Pellegrino, Js. PELLEGRINO, J. In this opinion the other judges concurred.

          OPINION

          [164 Conn.App. 422] PELLEGRINO, J.

          The defendants James M. Scott, Jr., and Scott Swimming Pools, Inc. (corporation),[1] appeal from the judgment of the trial court rendered in favor of the plaintiff, Walter Whitney. We affirm in part and reverse in part the judgment of the trial court.

         On appeal, the defendants claim that the trial court (1) improperly determined the measure of damages for breach of the parties' stock option purchase agreement, (2) erroneously failed to order the plaintiff to return his shares of stock as provided in that agreement, (3) erroneously based its award of common-law punitive damages on a lodestar analysis, (4) improperly altered [164 Conn.App. 423] its decision in response to a motion for articulation by taking evidence and making new findings, and (5) improperly ordered prejudgment interest pursuant to General Statutes § 37-3a. We conclude that the trial court properly determined the measure of damages for breach of the stock option purchase agreement, but that the court erroneously failed to order the plaintiff to return his shares of stock, calculated punitive damages, and ordered prejudgment interest. We also conclude that the defendants' articulation claim is moot.

         The following facts as found by the trial court inform our review. This case arises out of a business relationship between Scott and the plaintiff. Scott is the president and the majority stockholder of the corporation. On March 20, 2002, the plaintiff entered into three agreements with the defendants: (1) an employment agreement; (2) a stock option purchase agreement; and (3) a supplemental letter agreement. The agreements documented an arrangement under which the plaintiff became the owner of twenty shares of corporation stock and he would work for the corporation for five years, after which time Scott would retire and the plaintiff would have the right to purchase the remainder of Scott's shares in the corporation. The employment agreement set out the plaintiff's duties at the corporation and his compensation structure. The employment agreement provided that beginning July 1, 2002, the plaintiff could be terminated from employment only for adequate cause, which was defined in the agreement.[2] [164 Conn.App. 424] If the plaintiff were terminated for adequate cause and he disputed the termination, the employment agreement provided that the dispute shall be settled by arbitration. The employment agreement also provided that if the plaintiff was terminated without adequate cause, the corporation would pay liquidated damages and buy back the plaintiff's twenty shares of stock for $26,000.[3]

         Under the stock option purchase agreement, after five years of employment with the defendants, the plaintiff would acquire the right to purchase the balance of the corporation stock from Scott for $1.27 million, payable over ten years at 7 percent interest. That agreement provided that the plaintiff would employ Scott as a consultant for up to five years. Both the employment agreement and the stock option purchase agreement were supplemented by a letter setting forth additional terms. Before entering into the agreements, the plaintiff reviewed the corporation's financial statements, tax returns, and corporate records. The defendants, however, concealed information relating to the financial statements, including deferred compensation liabilities owed to Scott, which exceeded $1.6 million.

         The agreements were executed in March, 2002, and the plaintiff began his employment for the corporation. The plaintiff received bonuses throughout his employment, but he was never given a performance review or evaluation. In August, 2006, Scott informed the plaintiff that he no longer intended to sell the corporation stock to the plaintiff. In October, 2006, over the course of one day, Scott sent seven memoranda to the plaintiff, all criticizing the plaintiff's work. In December, 2006, approximately three months before the plaintiff was to [164 Conn.App. 425] have purchased the corporation stock, Scott terminated the plaintiff's employment. Scott used the memoranda sent to the plaintiff in an effort to establish that the defendants had adequate cause to terminate the plaintiff's employment for poor job performance.

         In January, 2007, the plaintiff claimed a right to arbitrate the dispute with the defendants, pursuant to the employment agreement and the stock option purchase agreement. Arbitration began in September, 2007, and continued until August, 2009, when Scott claimed that he lacked funds to continue arbitration. The plaintiff then commenced the present action and filed the operative complaint in June, 2012.

         The complaint alleged, inter alia, common-law fraud, breach of contract, breach of the covenant of good faith and fair dealing, and a violation of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq. In response, the defendants' alleged multiple special defenses and a multicount counterclaim, which alleged claims of, inter alia, ...


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