Saunders v. Briner

         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, D’Auria, 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 company’s 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 attorney’s fees under the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq., between the plaintiff’s 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 court’s judgment. The plaintiff, Roger L. Saunders, cross appeals from the trial court’s judgment. We reverse the trial court’s 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 plaintiff’s award of attorney’s fees under CUTPA. We affirm the trial court’s 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 plaintiff’s 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 plaintiff’s 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 plaintiff’s 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 plaintiff’s 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 Briner’s 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 [Briner’s] ‘inside and outside investors,’ negatively affecting the profits of [Revere Investments] and/or the Fund and correspondingly increasing [Briner’s] 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 Briner’s 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 [Briner’s] 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 Citrin’s 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 Citrin’s 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 Briner’s 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 plaintiff’s loans to Revere Investments. As to direct counts four and six, however, the court rejected the plaintiff’s 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 attorney’s fees to award the plaintiff under derivative count six, which alleged that the defendants had violated CUTPA through Briner’s 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 attorney’s fees pursuant to General Statutes § 42-110g. This appeal followed.

          The issues presented for resolution on appeal are numerous. The defendants first challenge the plaintiff’s 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 court’s 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 plaintiff’s 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 court’s 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 Briner’s failure to repay one of the plaintiff’s loans to Revere Investments, because the plaintiff’s 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 court’s judgment in favor of the plaintiff as to derivative counts seven and eight, claiming, specifically, that the trial court abused its discretion in admitting Schachter’s 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 Schachter’s 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 Schachter’s 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 court’s award of attorney’s 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 attorney’s fees associated with both the plaintiff’s CUTPA and non-CUTPA claims, rather than those fees attributable only to the CUTPA claims. The plaintiff responds that the trial court properly apportioned attorney’s 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 attorney’s fees only to work performed on the CUTPA related claims.

          The plaintiff cross appeals from the trial court’s 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 plaintiff’s 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 court’s 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 court’s judgment in favor of the plaintiff on his derivative counts and vacate the court’s award of attorney’s fees under CUTPA. Additionally, because we conclude that the plaintiff ...