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Papallo v. Lefebvre

Court of Appeals of Connecticut

April 25, 2017


          Argued December 6, 2016

         Appeal from Superior Court, judicial district of Litchfield, Shah, J.

          Charles F. Brower, for the appellants (plaintiffs).

          Alvord, Keller and Gruendel, Js.


          KELLER, J.

         The named plaintiff, Shirley Papallo (plaintiff), held a 50 percent membership interest in Big Dog Entertainment, LLC (LLC). The LLC is the other plaintiff in this matter. The defendant, Ronald D. Lefebvre, held the other 50 percent membership interest. The LLC was in the sole business of operating a bar-Central Cafe-in Plainville. During the relevant time period, the defendant managed the bar, while the plaintiff had limited involvement in its operations. In 2013, the plaintiff and the LLC (collectively plaintiffs) brought suit against the defendant alleging breach of fiduciary duty to the plaintiff, statutory theft on behalf of the LLC, and violations of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq., on behalf of both plaintiffs. The plaintiffs also sought an accounting from the defendant. See, e.g., Zuch v. Connecticut Bank & Trust Co., 5 Conn.App. 457, 460-63, 500 A.2d 565 (1985). These counts all stemmed from the defendant's alleged misappropriation and misuse of LLC assets. Specifically, the plaintiffs alleged that the defendant misappropriated LLC revenues and also participated in a "barter exchange" program through which the defendant traded food and drinks from the bar for services rendered by other participants in the barter program for his own benefit or otherwise to the exclusion of the LLC. After a trial to the court in which the plaintiffs were represented by counsel and the defendant represented himself, the court concluded that the defendant breached his fiduciary duty to the plaintiff by misusing the barter agreement, but determined that the defendant did not breach that duty through his handling of the LLC revenues. Accordingly, the court rendered judgment for the plaintiff on the breach of fiduciary duty count, but awarded compensatory damages only for the defendant's misuse of the barter agreement. The court determined that those damages amounted to $10, 191.25. The court rendered judgment in favor of the defendant on the remaining counts.

         On appeal, the plaintiffs claim that the court erred by concluding that (1) the defendant did not breach his fiduciary duty to the plaintiff through his handling of the LLC revenues; (2) the defendant did not have the intent necessary to be found liable for statutory theft; (3) an accounting was not warranted; and (4) the defendant's conduct did not violate CUTPA. The defendant did not participate in this appeal. We agree with the first claim but disagree with the remaining ones. Accordingly, we affirm in part and reverse in part the judgment of the court.

         The following facts, as found by the court, provide additional background to the underlying dispute. "The plaintiff and the defendant met when they both worked for Associated Spring. They were colleagues and friends at the time they started discussing the purchase of a bar that they planned to jointly own and operate. Around August of 2005, the defendant located a potential property that they both decided to purchase. Due to the defendant's recent bankruptcy filing, the parties were in a poor position to secure a business loan on behalf of the LLC. The plaintiff obtained a home equity loan in the amount of $150, 000 in order to purchase the property. The parties planned for the defendant to leave his $70, 000 salaried position at Associated Spring to run the bar, since the plaintiff had secured financing. She would join the defendant in running the business once she retired from Associated Spring. The parties formed the LLC as 50 percent members in December of 2005, for the purpose of operating the business. They purchased Central Cafe in May of 2006.

         "The defendant operated the business solely until February of 2010. The plaintiff was still employed at Associated Spring and did not retire until July 1, 2009. During the time that the defendant managed the business, the plaintiff would occasionally come to the bar to help clean after closing. She was busy working and caring for sick family members. She had limited time to participate actively in the day-to-day management of the business and left it all to the defendant. The plaintiff's health also interfered with her full involvement with the bar even once she began regularly working at the bar in 2010.

         "During the three years when the defendant solely operated the business, since the business was just starting out, he took care of everything that the business needed, including cleaning, tending to customers, closing the bar each night, balancing the register, handling the business records of the bar, and various other activities. The defendant had no experience with running a business.

         "When the plaintiff began working regularly at the bar in February of 2010, she started helping with cleaning and learning how to run the banquets that the bar would host. She also started balancing the cash register at the end of each night. As she began running more of the bar, she noticed certain practices of the bar that she found questionable. She noticed that employees were paid a certain amount of wages in cash and that the cash register balances she determined at the end of each night did not match up with amounts that the defendant reported. The plaintiff also noticed that certain customers were not paying for their orders but running tabs. The defendant explained that Central Cafe was part of a barter exchange with other businesses so that the bar would allow patrons in the barter exchange to trade services they provided for food and drinks at the bar. The plaintiff never saw the barter exchange agreement or any records related to the agreement. The defendant admittedly used some of the services through the barter exchange for his own personal use and benefit.

         "By that time, the defendant had hired an accountant, [Guy] Giantonio, to handle the business tax filings for the bar. When the plaintiff learned of certain record keeping practices of the bar, she decided to set up a meeting with her personal accountant, Diane Libby . . . Giantonio, and the defendant in August of 2010. In reviewing the financials of the bar, Libby said that the expenses were at least five to ten percent higher than industry benchmarks and that the income was underreported. In particular, she expressed concern over the adjustments that were done without any documentation, which was exceptional based on standard accounting practices.

         "Within months of that meeting, the relationship between the parties deteriorated. At some point in 2011, the plaintiff asked if there were any profits and the defendant still indicated that there were not sufficient profits to generate equal salaries for the both of them. The plaintiff was increasingly concerned, but did not ask for specific documentation from the defendant. In 2012, she started to log the amount she counted in the register each night and compared that number to the amount noted by the defendant the following morning. The defendant was aware of the plaintiff tracking these amounts and raised the matter with her several months later. The defendant admitted that he kept cash in a drawer in the bar's office to pay for daily expenses and some employee wages. The defendant offered to buy out the plaintiff's interest in the bar so he could continue to run it, but the plaintiff believed he was simply trying to push her out so he could continue to run the business without concern for the issues she raised regarding his questionable business practices.

         "The plaintiff filed this action when the defendant prevented her from entering the bar in June of 2013. The defendant subsequently transferred all of his interest in the limited liability corporation to the plaintiff in August of 2013. The plaintiff is now the sole member of the LLC and the sole owner of Central Cafe." Additional facts will be provided as necessary.


         The plaintiff first claims that the court erred by concluding that the defendant did not breach his fiduciary duty to her through his handling of the LLC revenues. Specifically, the plaintiff argues that, although the court correctly allocated the burden of proof to the defendant with respect to her allegation that he misused the barter agreement, the court misallocated the burden of proof with respect to the plaintiff's allegation that the defendant misappropriated LLC revenues. We agree with the plaintiff.

         In rendering judgment on the breach of fiduciary duty count, the court first observed that "[o]nce a fiduciary duty is found to exist, the burden of proving fair dealing shifts to the fiduciary and must be established by clear and convincing evidence." The court then concluded as follows: "The plaintiff trusted the defendant with the operation of their business and relied upon him to run it legally. The parties were equal members of the limited liability corporation, but the defendant had sole control over the operation of the business for the first three years. The plaintiff did fairly have an expectation that the defendant would operate the business legally and the defendant breached this trust by operating the business in the manner that he did and continuing to do so once the plaintiff actively participated in the operation and raised her concerns over certain business practices to the defendant. By using an asset of the business, specifically the barter agreement to pay for home heating and dental bills, the defendant clearly misused a business asset for his personal benefit at the expense of the other [member] and breached the trust that he had as the managing member of the bar. The court finds that the plaintiff has met her burden of establishing a breach of fiduciary duty[1] by the defendant by his use of the barter exchange agreement and awards damages based on the misuse of this asset.[2] The plaintiff presented other evidence of damages but the court does not find that the plaintiff met her burden of proof with respect to those claims. The defendant has failed to establish fair dealing by clear and convincing evidence. Therefore, the court finds for the plaintiff and against the defendant on count one, alleging a breach of fiduciary duty."

         The plaintiff asserts that the court, in determining that "[t]he plaintiff presented other evidence of damages but [that] . . . the plaintiff [did not meet] her burden of proof with respect to those claims, " improperly imposed on her the burden of proving that the defendant breached his fiduciary duty to the plaintiff with respect to his handling of the LLC revenues. The plaintiff argues that once she established that the defendant owed a fiduciary duty to her, the court should have allocated the burden of proving fair dealing to the defendant. See, e.g., Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998).

         We observe the following legal principles governing breach of fiduciary duty actions. "Once a [fiduciary] relationship is found to exist, the burden of proving 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. . . . 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.) Id. "Such burden ...

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