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NovaFund Advisors, LLC v. Capitala Group, LLC

United States District Court, D. Connecticut

March 31, 2019

NOVAFUND ADVISORS, LLC, Plaintiff,
v.
CAPITALA GROUP, LLC, Defendant.

          RULING ON MOTION FOR PREJUDGMENT REMEDY AND MOTION FOR DISCLOSURE

          Michael P. Shea, U.S.D.J.

         In this contractual dispute between two financial services firms, the plaintiff, NovaFund Advisors, LLC (“NovaFund”), filed a motion seeking a prejudgment remedy against the defendant and counterclaim plaintiff, Capitala Group, LLC (“Capitala”), together with a motion for disclosure of assets. I held an evidentiary hearing on the motion for prejudgment remedy on March 28, 2019. This ruling sets forth my findings of fact and conclusions of law.

         As set forth more fully below, I find that there is not probable cause to believe that a judgment in the amount sought by NovaFund - over $8.5 million - will be rendered in its favor, but that there is probable cause that a judgment in the amount of $250, 000, taking into account defenses, counterclaims, and setoffs, will be rendered in its favor. Specifically, there is probable cause to believe that a $250, 000 judgment will be rendered in favor of Novafund on its claim for breach of the covenant of good faith and fair dealing, and there is not probable cause to believe that any specific amount will be rendered in favor of Capitala on its counterclaims. NovaFund has demonstrated probable cause that, as the placement agent for Capitala's investment fund, it would have earned additional fees of $250, 000 had Capitala not taken steps to frustrate and undermine the objectives of the agreement between the parties. These fees would have been generated by a large investment made into the fund by an investor courted by NovaFund, and from which Capitala later unilaterally obtained a substantial investment outside the fund without NovaFund's knowledge. There is also probable cause to find that Capitala acted in bad faith. Accordingly, I GRANT IN PART and DENY IN PART the motion for prejudgment remedy (ECF No. 15) and GRANT the motion for disclosure of assets (ECF No. 19).

         I. Legal Standard

         A. Prejudgment Remedy

         Fed. R. Civ. P. 64(a) provides in relevant part that “throughout an action, every remedy is available that, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment.” Fed.R.Civ.P. 64(a). I thus apply Connecticut's prejudgment remedy statute, Conn. Gen. Stat. §§ 52-278a, et seq. Under that statute, “[a] prejudgment remedy is available upon a finding by the court that there is probable cause that a judgment in the amount of the prejudgment remedy sought, or in an amount greater than the amount of the prejudgment remedy sought, taking into account any defenses, counterclaims or set-offs, will be rendered in the matter in favor of the plaintiff . . . .” TES Franchising, LLC v. Feldman, 286 Conn. 132, 137 (2008) (citation and internal quotation marks omitted); see also Conn. Gen. Stat. § 52-278d(a)(1).

         The probable cause standard is modest, and “not as demanding as proof by a fair preponderance of the evidence.” TES Franchising, LLC, 286 Conn. at 137. “The legal idea of probable cause is a bona fide belief in the existence of the facts essential under the law for the action and such as would warrant a man of ordinary caution, prudence and judgment, under the circumstances, in entertaining it.” Id. (citation omitted). It is “a flexible common sense standard” that “does not demand that a belief be correct or more likely true than false.” Id. (citation omitted). “[T]he trial court's function [under this standard] is to determine whether there is probable cause to believe that a judgment will be rendered in favor of the plaintiff in a trial on the merits.” Id. (citation omitted). The trial court has “broad discretion” to make this determination, and “a prejudgment remedy hearing is not contemplated to be a full scale trial on the merits.” Id. at 143.

         In addition, the statute “requires that a trial court make a probable cause determination as to both the validity of the plaintiff's claim and the amount of the remedy sought.” Id. at 145-46 (citation omitted). “[T]he party seeking the prejudgment remedy must present evidence that is sufficient to enable the court to determine the probable amount of the damages involved.” Id. at 146 (citation and internal quotation marks omitted). “Although the likely amount of damages need not be determined with mathematical precision . . . the plaintiff bears the burden of presenting evidence that affords a reasonable basis for measuring her loss.” Id. (internal quotations and alterations omitted). Nonetheless, the “court may grant a prejudgment remedy order that authorizes an attachment for an amount less than that sought in the application for prejudgment remedy as long as there is probable cause that a judgment in that lesser amount, taking into account any defenses, counterclaims or setoffs, will be rendered in the plaintiff's favor.” Connecticut Light & Power Co. v. Gilmore, 89 Conn.App. 164, 176 (2005).

         Finally, under Conn. Gen. Stat. § 52-278n, “the court may, on motion of a party, order an appearing defendant to disclose property in which he has an interest or debts owing to him sufficient to satisfy a prejudgment remedy.” Conn. Gen. Stat. § 52-278n(a). “Generally, under Connecticut law, a disclosure of assets is ordered if a prejudgment remedy is ordered.” Wachovia Bank, N.A. v. Cummings, No. 309CV957SRU, 2010 WL 466160, at *9 (D. Conn. Feb. 8, 2010); see also Conn. Gen. Stat. § 52-278n(c) (authorizing same).

         B. Implied Covenant of Faith and Fair Dealing

         Under Connecticut law, [1] the covenant of good faith and fair dealing is implied in every contract and “requir[es] that neither party do anything that will injure the right of the other to receive the benefits of the agreement.” De La Concha of Hartford, Inc. v. Aetna Life Ins. Co., 269 Conn. 424, 432 (2004) (citation omitted). “Essentially the implied covenant of good faith and fair dealing is a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended.” Geysen v. Securitas Sec. Servs. USA, Inc., 322 Conn. 385, 399 n.11 (2016) (citation and alterations omitted). “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.” Id. “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.” De La Concha of Hartford, Inc., 269 Conn. at 432 (alterations and citation omitted). “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.” Id. (citation omitted). “Bad faith may [also] include one party's performance or interpretation of the contract in a manner that evades its spirit and is unfaithful to its purpose, resulting in a denial of the justified expectations of the other party.” Landry v. Spitz, 102 Conn.App. 34, 48 (2007).

         II. Findings of Fact & Conclusions of Law [2]

         I assume familiarity with the pleadings, NovaFund's motion for a prejudgment remedy and motion for disclosure, as well as the testimony and exhibits admitted at the March 28 hearing. I emphasize that I make the following findings based on the probable cause standard, not by a preponderance of the evidence. The parties have not yet taken any significant discovery, and it remains to be seen whether either party will be able to prove its claims and defenses by a preponderance of the evidence.

         1. NovaFund, was, at the relevant time, a business located in Darien, Connecticut, focused on providing investment advisory and investment placement services. Capitala, which is located in Charlotte, North Carolina, “organize[s] and manage[s] various types of investment funds and provide[s] investment management ...


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