Roger L. SAUNDERS
v.
Clark BRINER et al.
Argued
December 20, 2018
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[Copyrighted Material Omitted]
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Appeal
from the Superior Court in the judicial district of
Fairfield, Zemetis, J.
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David
P. Friedman, Stamford, with whom were Proloy K. Das,
Hartford, and, on the brief, Marilyn B. Fagelson, New Haven,
Taruna Garg, Stamford, David S. Hoopes and Jay R. Lawlor,
Hartford, for the appellants-cross appellees (named defendant
et al.).
David
Feureisen, pro hac vice, with whom were Edward N. Lerner and,
on the brief, George Kent Guarino, Westport, for the
appellee-cross appellant (plaintiff).
Robinson,
C.J., and Palmer, McDonald, DAuria, Mullins, Kahn and Ecker,
Js.[*]
OPINION
KAHN,
J.
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[334
Conn. 138] This appeal requires us to consider five issues:
(1) whether, in the absence of authorization in a limited
liability companys operating agreement, its members or
managers lack standing to bring derivative claims on behalf
of it under either the Connecticut Limited Liability Company
Act (CLLCA), General Statutes [334 Conn. 139] (Rev. to 2017)
§ 34-100 et seq.,[1] or, in the alternative, the common
law; (2) whether a trial court may exempt single member
limited liability companies from the direct and separate
injury requirement necessary to bring a direct action; (3)
under what circumstances may a trial court admit opinion
testimony of a joint, court-appointed fiduciary hired to wind
up the companies at issue when the party who proffered the
testimony of the fiduciary failed to disclose him as an
expert witness under Practice Book § 13-4; (4) under what
circumstances, if any, may the trial court apportion its
award of attorneys fees under the Connecticut Unfair Trade
Practices Act (CUTPA), General Statutes § 42-110a et seq.,
between the plaintiffs CUTPA claims and non-CUTPA claims;
and (5) the parameters under which a trial court may order
reimbursement for fees incurred by a joint, court-appointed
fiduciary hired to wind up the companies at issue. The
defendants, Clark Briner and two entities solely owned by
Briner, a Connecticut limited liability company and a Texas
limited liability company with the same name, Revere Capital,
LLC (respectively, Revere Capital CT and Revere Capital
TX),[2] appeal,[3] following a bench trial,
from the trial courts judgment. The plaintiff, Roger L.
Saunders, cross appeals from the trial courts judgment. We
reverse the trial courts judgment rendered in favor of the
plaintiff [334 Conn. 140] as to his derivative claims because
we conclude that the plaintiff lacked standing to bring them
under the CLLCA or the common law. We, therefore, do not
reach the issues of whether the trial court improperly
admitted the testimony of a joint, court-appointed fiduciary
or whether the trial court incorrectly apportioned the
plaintiffs award of attorneys fees under CUTPA. We affirm
the trial courts judgment rendered in favor of the plaintiff
as to his direct claims and conclude that the trial court did
not abuse its discretion in
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refusing to order the defendants to reimburse the plaintiff
for the fees incurred by the joint, court-appointed fiduciary
and an accountant hired by him.
The
present case arises from the deterioration of a business
relationship between three individuals: Briner, the
plaintiff, and the plaintiffs son, Sloan Saunders
(Saunders). The trial court found the following facts that
are relevant to our resolution of this appeal. In 2009, while
working together at Deutsche Bank, Saunders and Briner
decided to enter into the high interest, high yield
commercial real estate lending business by setting up a
limited liability company, Revere Investments, LLC (Revere
Investments), to act as a servicer of the loans. Initially,
Saunders and Revere Capital TX each owned 50 percent of
Revere Investments and constituted its
comanagers.[4] Although Saunders and Briner chose to
enter an industry in which they had little experience,
Saunders introduced Briner to the plaintiff, Saunders
father, who had successfully navigated the "hard money
lending business" for forty years. Briner and Saunders
sought the plaintiffs help in two respects. First, they
wanted the plaintiff, who had many contacts in that industry,
to help them "establish the relationships necessary to
create and maintain" the business.
[334
Conn. 141] Second, Briner and Saunders also needed access to
the plaintiffs capital "to fund the high interest
loans" before they secured investors to participate in
them. The parties often did not secure all the investors
necessary to fund a loan prior to closing the transaction
with the borrower. Throughout their business relationship,
therefore, the plaintiff helped Revere Investments succeed by
lending it the capital necessary to close loans before the
parties raised the necessary capital to finance it (bridge
financing). After Revere Investments raised capital from
investors to participate in the loan, it repaid the plaintiff
the principal amount of his bridge loan with interest. The
trial court found that, without the plaintiffs bridge
financing, Revere Investments "would have had little or
no business."
The
plaintiff, who "desired to teach his son" the
business, agreed to source loans, secure investors and
financers, and provide bridge financing. Although the
plaintiff agreed to provide assistance "to his economic
detriment and for the equal and joint benefit" of
Saunders and Briner, he "was not willing to forgo the
... profits on his investment or [on] the investment
of [others] that he would have earned if he simply invested
in hard money loans outside of [Revere Investments]."
(Emphasis in original.) The plaintiff, Saunders, and Briner,
therefore, created a business arrangement in which the
plaintiff and his contacts sourced most of the loans and most
of the financing, especially at the beginning of their
relationship. Revere Investments would charge the borrower a
high interest rate. The parties then found investors to
purchase a "participation interest" in the loans on
a deal specific basis (outside investors). Outside investors
would provide capital in exchange for a return of the
principal invested plus a negotiated interest rate.
Revere
Investments profited from outside investors by offering them
a lower interest rate than it received from the borrower on
the underlying loan, which provided [334 Conn. 142] Revere
Investments with a profit equal to the difference between the
two interest rates (interest rate spread
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profit). Revere Investments also withheld from outside
investors various fees that it charged the borrower, such as
extension fees, late fees, and servicing fees. Revere
Investments charged the borrower
"points"[5] "in connection with most of its
loans," and, "[i]n all cases where points were
charged, [they] were financed by Revere Investments as part
of a loan, so that Revere Investments did not advance to the
borrower the full principal amount of the loan, but advanced
the principal amount less the points" (net funding).
Revere Investments did not pass the points to outside
investors, however, who received a return of principal and
interest only on the amount they actually invested.
Saunders,
Briner, the plaintiff, or their respective family members
(inside investors) who participated in a loan, by contrast,
did profit from points charged to borrowers. The advantageous
treatment for inside investors derived from the fact that,
unlike the outside investors, they received a return of
principal plus interest on the face amount of their
investment in the loan, despite the fact that they had not
funded the full face amount.[6] This technique of
"grossing up" allowed inside investors to receive a
higher return on their investment than an outside investor
who participated equally in a loan.
As part
of the parties agreement[7] to gross up inside investments, the
parties additionally agreed that— in [334 Conn. 143]
exchange for his help— the plaintiff "would also
keep both the interest rate spread profit ... and the
fees earned on certain identified and agreed upon
nonfamily [investments ]." (Emphasis
added.) This allowed the plaintiff to earn profits that
Revere Investments otherwise would have earned on the outside
investors he sourced. The oral agreement, however, did not
give Briner the same rights with respect to the outside
investors he sourced.
By
mid-2011, Briner had grown dissatisfied with the arrangement
allowing the plaintiff but not Briner to profit from outside
investors sourced by each of them respectively, because, by
that time, Revere Investments business model and the
parties respective responsibilities had changed. Saunders,
Briner and the plaintiff had created— at the request of
Briner— a second entity, Revere High Yield
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Debt Fund, L.P. (Fund), which provided a vehicle for pooling
outside investor capital, and a controlling general partner
of the Fund, Revere High Yield, GP, LLC (Fund GP), which
"was owned equally [and comanaged] by [the plaintiff]
and Briner ...." Under this revised arrangement, Revere
Investments loans were funded by various combinations of
investments, including (1) financing from the Fund, which
would pool money from outside investors and buy a single
participation interest in a loan, (2) capital from inside
investors, and (3) capital from outside investors [334 Conn.
144] that chose to participate in a particular loan alongside
the Fund (side car investments)[8] .
The
parties formation of the Fund and Fund GP expanded Revere
Investments "loan portfolio size ... [thereby]
increasing the back office workload." During that
time, however, Saunders had accepted and begun a full-time
job at another investment firm, which required him to work
sixty to seventy hours per week. This placed a strain on
Briners relationship with Saunders, because Briner—
concerned that Saunders left him to handle much of the work
himself, including sourcing the loans and finding the Fund
investors— felt that he worked
"disproportionately greater " than
Saunders yet profited less because he could not derive
profits from the outside investors he sourced in the same way
as the plaintiff did.
Eventually, Briner demanded that the plaintiff and Saunders
allow him to "skim the same ... profits" from
Revere Investments and the Fund on his outside investors that
the plaintiff received on the investors he sourced. Both the
plaintiff and Saunders refused. Despite their refusal, and
without their knowledge, Briner created Revere Capital CT,
which constituted an inside investor as Briner owned 100
percent and which enabled Briner to conceal the true source
of the funds he sourced by placing investments of outsider
capital into that company as opposed to the Fund or Revere
Investments. Consequently, when Revere Capital CT
participated in Revere Investments loans, either through the
Fund or as a side car investment, Briner was able to treat
those outside investments as insider capital, allowing him to
retain "100 percent of the profits associated
therewith," including a benefit from the elevated
treatment of points. This conduct effectively [334 Conn. 145]
"erased the distinction between the treatment of
[Briners] inside and outside investors, negatively
affecting the profits of [Revere Investments] and/or the Fund
and correspondingly increasing [Briners] personal
profits."
In
addition to diverting outside capital away from Revere
Investments and the Fund in order to profit off of those
investments as if they were his own insider capital, Briner
also misallocated investor profits by withholding interest on
points from the other inside investors, so that they received
a return only on the net amount they invested. At the same
time, Briner grossed up investments made by his inside
investors. Briner also improperly[9] charged Revere
Investments for expenses
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incurred by Revere Capital TX,[10] including employment,
rent, travel and advertising expenses. In [334 Conn. 146]
mid-2012, after Saunders discovered Briners misallocation of
points in some of Revere Investments loan spreadsheets, he
and the plaintiff hired outside accountants and legal
counsel, who exposed[11] "the extent of [Briners]
incompetent and inconsistent management of [Revere
Investments], the Fund, and Fund GP ...."
In
November, 2012, the plaintiff commenced this action and, in
May, 2014, filed the operative twenty-seven count second
amended complaint[12] against the defendants, consisting
of fourteen direct counts brought by the plaintiff,
individually, and thirteen derivative counts brought on
behalf of Revere Investments, Fund GP, or both.[13] In
addition to moving for judicial
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dissolution of Revere Investments and Fund GP in [334 Conn.
147] direct count one, the plaintiff asserted both direct and
derivative counts alleging common-law fraud,[14] breach of
contract,[15] breach of the implied covenant of
good faith and fair dealing,[16] breach of fiduciary
duty,[17] and violations of CUTPA and the
Connecticut Uniform Securities Act.[18]
After
the plaintiff initiated the action, the parties agreed to
hire a joint, court-appointed fiduciary, Citrin Cooperman and
Company, LLP (Citrin), to wind up the Fund and Fund GP. After
a team led by Citrins partner Alan A. Schachter examined
sixteen of Revere Investments loans, "totaling nearly
$18 million" of Revere Investments approximately $40
million loan portfolio, Schachter wrote a report containing
Citrins findings. In that report, Schachter noted that the
team "found a lack of internal controls" and
"a number of ... reporting and recording problems,"
which he noted were "not surprising ... given the lack
of oversight and the [334 Conn. 148] complexity of the
investments." Schachter concluded that Revere
Investments, the Fund, and Fund GP, "as managed by
Briner, had underpaid both the investors and the principals,
particularly [the plaintiff]." During the bench trial,
the plaintiff called Schachter to testify at trial regarding
the findings he outlined in his report. Over Briners
objection, the trial court allowed Schachter to testify and
admitted his report into evidence.
Following a ten day bench trial, in which the parties
distilled "897 trial exhibits exceed[ing] several
hundred thousand pages in length," the trial court
rendered judgment in favor of the plaintiff on four of his
thirteen derivative counts and four of his fourteen direct
counts. Under derivative counts two and six, which alleged,
on behalf of Revere Investments, breach of contract against
Revere Capital TX and violations of CUTPA against the
defendants, respectively, the trial court ordered the
defendants to pay Revere Investments one payment of $284,600.
Under derivative counts seven and eight, which alleged
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breach of fiduciary duty on behalf of Revere Investments and
Fund GP, respectively, the trial court ordered Revere Capital
TX to pay Revere Investments and/or the Fund GP one payment
of $92,797, under counts seven and eight, and an additional
$71,000 under count seven. Under direct counts four and six,
alleging breach of the implied covenant of good faith and
fair dealing against Revere Capital TX and Briner,
respectively, and counts nine and ten, alleging breach of
fiduciary duty on the part of Briner and Revere Capital TX,
the trial court awarded the plaintiff one payment of $85,078
in connection with the failure to repay one of the
plaintiffs loans to Revere Investments. As to direct counts
four and six, however, the court rejected the plaintiffs
claim that the court should direct Briner to reimburse him
for "fees [related to] tax and accounting experts,"
including Schachter.
[334
Conn. 149] After the court rendered judgment, it held a
hearing to determine the appropriate amount of attorneys
fees to award the plaintiff under derivative count six, which
alleged that the defendants had violated CUTPA through
Briners diversion of outside capital into Revere Capital CT.
After the posttrial hearing, the trial court filed a
memorandum of decision and supplemental order awarding the
plaintiff $639,054.91 in attorneys fees pursuant to General
Statutes § 42-110g. This appeal followed.
The
issues presented for resolution on appeal are numerous. The
defendants first challenge the plaintiffs standing to bring
any of the direct or derivative counts for which the trial
court rendered judgment in his favor. The defendants appeal
from the trial courts judgment in favor of the plaintiff as
to his claims under derivative counts two, six, seven, and
eight— alleging breach of contract, violations of
CUTPA, and breach of fiduciary duty— claiming that the
trial court lacked subject matter jurisdiction to review the
plaintiffs derivative counts, because the CLLCA, the
statutory scheme in place at the time the plaintiff commenced
his action, did not provide a derivative remedy.
Additionally, the defendants claim that, in the absence of
such statutory authority by the legislature under the CLLCA,
the common law does not afford a member or manager of a
limited liability company derivative standing, because the
CLLCA, the statute that created that company structure,
solely governs this issue. The plaintiff responds that trial
courts have interpreted the CLLCA as permitting derivative
claims. In the alternative, the plaintiff claims that this
court should conclude that the common law grants him
derivative standing.
The
defendants also appeal from the trial courts judgment in
favor of the plaintiff as to his claims under direct counts
four, six, nine, and ten, alleging breach of fiduciary duty
and breach of the implied covenant of good faith and fair
dealing. The defendants claim [334 Conn. 150] that the
plaintiff lacked standing to challenge Briners failure to
repay one of the plaintiffs loans to Revere Investments,
because the plaintiffs single-member limited liability
company, Saunders Capital, LLC (Saunders Capital), provided
the investment at issue and, therefore, constituted the
proper party to bring the action. The plaintiff responds
that, because he funded the investment with his personal
capital, he satisfies the requirements for direct standing
regardless of the source of his investments.
Additionally,
the defendants appeal from the trial courts judgment in
favor of the plaintiff as to derivative counts seven and
eight, claiming, specifically, that the trial court abused
its discretion in admitting Schachters testimony because the
plaintiff failed to disclose him as an expert pursuant to
Practice Book § 13-4. The plaintiff responds that the trial
court did not abuse
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its discretion in admitting Schachters testimony in the
absence of expert disclosure because he did not call
Schachter to testify as an expert but, rather, as a fact
witness testifying in his capacity as the court-appointed
fiduciary. To the extent that the trial court allowed
Schachter to provide expert opinion, the plaintiff claims,
Briner suffered no prejudice from its admission, and the
trial court needed Schachters assistance in understanding
the complex calculations required to determine what Revere
Investments owed to its investors and principals.
Finally, the defendants appeal from the trial courts award
of attorneys fees under derivative count six, on which the
trial court rendered judgment for the plaintiff under CUTPA.
The defendants claim that the trial court improperly awarded
attorneys fees associated with both the plaintiffs CUTPA
and non-CUTPA claims, rather than those fees attributable
only to the CUTPA claims. The plaintiff responds that the
trial court properly apportioned attorneys fees under CUTPA
because, when parties litigate both CUTPA and non-CUPTA [334
Conn. 151] claims in the same action and those claims involve
the same inextricably entwined facts, the trial court does
not need to apportion the payment of attorneys fees only to
work performed on the CUTPA related claims.
The
plaintiff cross appeals from the trial courts judgment on
his direct counts four and six insofar as he claims that the
trial court abused its discretion in refusing either to order
Briner to reimburse Revere Investments for the fees incurred
by Schachter and another accountant hired by him or to hold a
hearing for the purpose of apportioning those fees. The
defendants respond that the trial court properly rejected the
plaintiffs request for reimbursement because it determined
that all of the owners of Revere Investments, including the
plaintiff, bore some responsibility for failing to ensure
that Revere Investments operated in accordance with proper
bookkeeping and accounting procedures.
We
affirm the trial courts judgment rendered in favor of the
plaintiff on his direct counts, including its determination
not to apportion the fees incurred by Schachter and another
accountant hired by him. Because we conclude, however, that
the plaintiff lacked standing to bring his derivative claims,
we reverse the trial courts judgment in favor of the
plaintiff on his derivative counts and vacate the courts
award of attorneys fees under CUTPA. Additionally, because
we conclude that the plaintiff ...