R.S. Silver Enter. v. Pascarella

Full title: R.S. SILVER ENTERPRISES CO., INC. v. HENRY PASCARELLA ET AL

Court: Connecticut Superior Court Judicial District of Stamford-Norwalk at Stamford

Date published: Jul 14, 2010

2010 Ct. Sup. 14700 (Conn. Super. Ct. 2010)

Opinion

No. FST CV-06-5002499S

July 14, 2010

Memorandum of Decision

ALFRED J. JENNINGS, JR., Judge Trial Referee.

This action has been brought by a Connecticut corporation, R.S. Silver Enterprises, Inc., formerly known as R.S. Silver Co. Inc. ("Plaintiff," or "Silver Co.") against Henry Pascarella, a resident of Greenwich and a real estate developer and a practicing attorney in Greenwich for more than 50 years ("Pascarella"), and against Riversedge Partners, a Connecticut general partnership formerly known as SPD Associates ("SPD"). The litigation focuses on the involvement of the parties in various capacities over a period of more than 20 years in the development, ownership, and operation of a two-story, 46,000 square foot office building located at 200 Pemberwick Road in Greenwich, continuously leased to a single tenant, Direct Media, Inc. which became a subsidiary of Axiom Corporation in about 1997. The individual principal of the plaintiff is Robert S. Silver of Bedford, N.Y., a licensed Connecticut real estate broker since 1961 dealing primarily with commercial real estate.

The First Amended Complaint filed on January 26, 2009 contains the operative counts that went to trial.¹ Count One alleges breach of a certain "Participation Agreement" signed on April 28, 1997 as of March 3, 1997 by Silver Co., SPD, and Pascarella. Count Two incorporates the allegation of Count One and seeks an accounting of the business and affairs of SPD. Count Three alleges breach of fiduciary duty against Pascarella and SPD. And Count Four alleges breach of a certain "Letter Agreement" of March 3, 1997 between and among plaintiff, SPD, and Pascarella. The parties agreed at the outset of the trial that Count Two seeks a remedy that would only arise if plaintiff prevails on the Count One breach of contract claim, and no party has addressed the requested accounting in their trial briefs. The court dismissed Count Four pursuant to Practice Book § 15-8 at the conclusion of plaintiff's case. Consequently Counts One and Three only will be discussed and decided herein. The defendants have denied the material allegations of the complaint and have jointly filed special defenses addressed to those counts: laches (all counts): statute of limitations (Conn.Gen. Stat. § CT Page 14701 52-576) to Count One; statute of limitations (Conn.Gen. Stat. § 52-577) to Count Three; accord and satisfaction (all counts); and waiver and estoppel (all counts). The defendants also jointly filed with their answer and special defenses, a three-count counterclaim (slander of title, vexatious suit, and intentional tort), but that counterclaim was withdrawn verbally during trial on March 12, 2009, confirmed by written withdrawal (No. 259). By reply the plaintiff has denied the material allegations of the operative special defenses, and has pleaded certain matters in avoidance including a tolling of the statutes of limitation under the doctrine of a continuing duty, tolling by fraudulent concealment as to the tort count (Count Three) and insufficiency of the allegation of accord and satisfaction. Defendants have denied the allegations of plaintiff's matters in avoidance.

1 The case was tried to the court without a jury with trial days on February 4, 5, 6, 10, and 11, and March 3, 4, 5, 10, and 11, 2009. Thereafter, after transcripts were prepared, each of the three parties filed detailed trial briefs and reply briefs directed to the claims of each adversary. (Seven briefs, in all). Seventy-seven documents were admitted in evidence as full exhibits. After reviewing all the evidence and considering the briefs of the parties and the authorities cited, this is the court's memorandum of decision of the case.

I. CHALLENGE TO PLAINTIFF'S CORPORATE CAPACITY (See Findings of Fact No. 1, infra.)

Defendant Riversedge Partners in its post-trial memorandum raises a threshold issue by challenging the corporate capacity of plaintiff R.S. Silver Enterprises Co., Inc. f/k/a R. S. Silver Co., Inc. to maintain Count One, claiming breach of the Participation Agreement. This claim was raised by special defenses which were stricken by the court without opinion (Downey, J.) on September 29, 2008. Thereafter the defendant filed its answer denying plaintiff's allegation of capacity to sue which, under Practice Book § 10-46, ² entitles a defendant to controvert the capacity issue without filing a special defense. Defendant's argument (summarized here without citation of authority) is that the plaintiff corporation was administratively dissolved on October 25, 1991 for failure to file annual reports. Following its dissolution and prior to its reinstatement the corporation was a de facto corporation authorized only to wind up its affairs as expeditiously as possible and was not authorized other than that to carry on its business. The corporate act on March 3, 1997 of investing $1,250,000 with SPD and the April 28, 1997 execution of the Participation Agreement with the defendants had no pre-dissolution aspects and were not "winding up" activities and were therefore unauthorized and null and void. Under the Stock Corporation Act which was then in effect, the corporation had three years to seek reinstatement. After the passage of three years without reinstatement, the corporation ceased to exist in 1994 and its assets passed to its shareholders subject to payment of corporate debts. When the corporation made its SPD investment and entered into the Participation Agreement in 1997, it did not exist and its president Robert Silver became personally obligated for its liabilities, and the corporation therefore lacks status to claim or litigate for breach of the Participation Agreement. This claim was reflected in Judge Downey's dismissal without written opinion of the predecessor litigation between these parties commenced in 2003 ( R.S. Silver Co. v. Pascarella, Superior Court, Judicial district of Stamford/Norwalk, Docket No. CV03-0198172). The corporation was reinstated under the Stock Corporation Act on February 9, 2006, and changed its name to the present name of R.S. Silver Enterprises, Inc. This lawsuit was commenced under the accidental failure of suit statute on October 17, 2006. On November 3, 2006 the defendants herein moved to dismiss this case for lack of subject matter jurisdiction in that the plaintiff corporation lacked standing to maintain this action due to the fact that it did not exist in 1997 when operative acts occurred. Before that motion was decided, the Business Corporation Act took effect on January 1, 2007 repealing the Stock Corporation Act. Judge Adams denied the motion to dismiss by written memorandum of decision dated June 18, 2007 (No. 129.10). The basis of the ruling was that the reinstatement section of the Business Corporation Act (Conn.Gen. Stat. § 33-892) provides in subsection (c) that "when reinstatement is effective it relates back and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution never occurred". As originally enacted in 1994, § 33-892 arguably applied only to corporations reinstated under the Business Corporation Act because § 33-892(a) then provided that "a corporation administratively dissolved under Section 33-890 may apply to the Secretary of State for reinstatement . . ." [§ 33-890 is the administrative dissolution section of the Business Corporation Act], but the legislature amended § 33-892(a) by Public Act 97-246 by eliminating the words "under Section 33-890" so that provision as amended reads "A corporation administratively dissolved may apply to the secretary of State for reinstatement." Judge Adams held that the amendment made 33-892(c) applicable to all corporation that had been administratively dissolved under either statute, and the plaintiff corporation had standing and the motion to dismiss was denied.

2 Section 10-46 provides, in part: "Any defendant who intends to controvert the right of the plaintiff to sue . . . as a corporation . . . shall deny the same in the answer specifically".

As part of that motion to dismiss, the defendants made the standing argument, discussed above, and a second argument on the same facts claiming that the corporation lacked the corporate capacity to maintain this action. Judge Adams ruled that the corporate capacity claim was not properly raised by motion to dismiss and rejected the contention "at this time". The defendant has now raised the corporate capacity issue anew in its post-trial memorandum.

As far as I can tell, the corporate capacity argument is the standing argument in different clothing. The alleged lack of capacity centers on the claim that the plaintiff corporation went out of existence in 2004 and there was nothing to reinstate in 2006 — an argument which calls into question the reach of § 33-892(c) as amended. The analysis would be the same. This court agrees with Judge Adams' ruling and reasoning on standing and holds now that the same ruling shall apply to the claim of lack of corporate capacity. The plaintiff corporation, reinstated as of February 6, 2010 (before this action was commenced) "as if the administrative dissolution had never occurred" has both the standing and the corporate capacity to maintain the breach of contract claim (Count One).³

3 The issues surrounding the corporate dissolution and reinstatement of R.S. Silver Co., Inc. have been extensively litigated by defense counsel in this case representing these defendants and others. See, Gillion v. Bysiewicz, No. 4009020S, Superior Court, Judicial District of Stamford/Norwalk at Stamford (February 21, 2007, Downey, J.) 2007 Ct.Sup. 3206 (plaintiffs lack standing to seek a writ of mandamus directing the Secretary of State to revoke the reinstatement of R.S. Silver Co., Inc.), affirmed, 105 Conn.App.654 (2008); and Pascarella v. Commissioner of Revenue Services, et als., Docket No. CV08-4036286, Superior Court, Judicial district of Hartford (October 30, 2008, Elgo, J.), 2008 Ct.Sup. 17372, 46 Conn. L. Rptr. 606 (Plaintiffs lack standing to seek a declaratory judgment challenging the validity of the reinstatement of R.S. Silver Co., Inc.), affirmed 119 Conn.App. 771 (2010).

II. FINDINGS OF FACT

The court finds that the following facts are uncontested or, if contested, have been proved by a preponderance of the evidence:

1. R.S. Silver Co., Inc. was incorporated in 1982, dissolved in 1991, and reinstated on February 9, 2006 when it changed its name to R.S. Silver Enterprises, Inc. Henry Pascarella was the attorney who represented Mr. Silver in forming the company and filing the organizational papers with the Secretary of State. He or persons working at his law office under his control drafted the corporate bylaws. Henry Pascarella was designated on the corporate papers as the company's agent for service of process and remained in that status as of 1997. The Henry Pascarella law office address was listed on the organizational papers as the address of the corporation.

2. Robert S. Silver developed the office building at 200 Pemberwick Road in Greenwich in the mid-1980s. With the legal advice of the defendant Attorney Henry Pascarella he organized a partnership to own, manage and operate the building. He owned 64% of the partnership and located the tenant, Direct Media, Inc., which, in addition to being the tenant, owned 20% of the partnership. The remaining 16% was owned by defendant Henry Pascarella. The partnership SPD Associates took its name from the partners' names: Silver, Pascarella, and Direct Media, Inc.

3. Henry Pascarella represented Robert Silver in refinancing his home on at least one occasion, and prepared wills and trusts for Mr. Silver and his wife and is named as a trustee of a trust established by will. As of the date of trial Pascarella was the custodian of the original wills.

4. In 1991 Mr. Silver sold his 64% partnership interest in SPD to Direct Media, Inc. which thereby became the holder of 84% of the partnership interests with Pascarella holding 16%. Silver was represented by Atty. Pascarella in connection with that transaction.

5. In 1995 Henry Pascarella represented Mr. Silver in setting up another corporation, R.S. Silver Associates, Ltd. to act as exclusive agent for a company named 9 West and was serving as agent for service of process of that company as of 1997. Mr. Silver consulted with Atty. Pascarella concerning a commission dispute on a 9 West Project and received advice from him that R.S. Silver Associates, Ltd. accept a $2.5 million reduced commission, which advice was accepted.

6. At about the time Silver or his company received the $2.5 million commission on the 9 West deal, Pascarella introduced Silver in 1997 into a $1,250,000 investment opportunity in SPD related to the building at 200 Pemberwick Road. The deal included the purchase by SPD of Direct Media's 84% interest in SPD with a new mortgage from Met Life to be used to pay off the existing mortgage and pay in part for Direct Media's share.

7. On or about March 3, 1997 Pascarella provided to Silver a letter handwritten by Pascarella (the "Dear Bob letter") acknowledging receipt of a check of that date to SPD Associates from R.S. Silver Co. in the amount of $1,250,000 to be deposited in an account for SPD Associates.⁴

4 The "Dear Bob" letter is admitted in evidence as Exhibit 1 limited to the issues raised in Count Three alleging breach of fiduciary duty. It was excluded from evidence as improper parol evidence with respect to Count One. This ruling also formed the basis of the court's dismissal of Count Four (breach of contract — the "Dear Bob letter") since the Participation Agreement ultimately signed by the parties on April 28, 1997 (Ex. 3 4) contains at para. 8 a full integration clause which provides that "no prior or contemporaneous agreement or understanding [relating to the premises at 200 Pemberwick, the SPD partnership or Silver's participation therein] shall be of any force or effect."

8. The March 3, 1997 "Dear Bob" letter stated "We have agreed that after I close with Direct Media we will do the necessary paper work to evidence that R.S. Silver Co. owns a 50% equity interest in the property known as 200 Pemberwick Rd. subject to the right for me and/or an assignee of mine to withdraw from SPD A) the first $500,000 of its cash distributions; and B) the sum of $1,250,000 from [illegible] investment by partners, or otherwise. After payment of A) B) above, R.S. Silver and I will share the economic benefits of SPD equally. I will control SPD." The letter is signed by Henry Pascarella.

9. On or about April 28, 1997 at Pascarella's office Pascarella presented to Silver another document in Pascarella's hand which was a draft of a Participation Agreement between Silver Co., SPD and Pascarella. Pascarella advised Silver that under this document Silver Co. would not be an owner of the property but rather would be a fifty percent holder of the distributions or profits as if he were a partner.

10. Between March 3, 1997 when the "Dear Bob letter" was given and $1,250,000 check was delivered to Pascarella for SPD, and April 28, 1997 when the draft Participation Agreement was presented, Silver had asked Pascarella for a $200,000 loan so he could deal with problems at his house. That request resulted in a $200,000 loan from SPD Associates to Robert S. Silver as evidenced by a promissory note dated April 28, 1997 a copy of which came to be attached to the Participation Agreement as Exhibit B. The maker of the note is Robert S. Silver and it accrues interest at 8.85% per annum payable semi-annually. The note provides that "The principal sum shall be due and payable on the first to occur of: (a) the first anniversary of the date of this note or (b) the sale of the Maker's home at Meeting House Road, Greenwich, Connecticut. The note is guaranteed by R.S. Silver and Company by an endorsement: "The undersigned guarantees the full and prompt payment of this Note in accordance with its terms and gives S.P.D Associates the right to set off the same against any sums due to the undersigned."

11. On April 28, 1997 Pascarella and Silver spent several hours at Pascarella's office going over the handwritten draft of the Participation Agreement dated "as of March 3, 1997" (Ex.3). As they did so, they each initialed each page and each change made to the original handwriting. They also added language in several places by making a "bubble insertion" in the margin or other available blank space and initialed each such insertion. Following that review and process, the Participation Agreement was signed in the form of Exhibit 3 at page 9 by "R.S. Silver and Company by Robert S. Silver, its President" and by "Henry W. Pascarella individually and as managing partner of S.P.D."

12. On April 28, 1997 Robert Silver considered Henry Pascarella to be his attorney. He did not consult with any other attorney in connection with reviewing and signing the Participation Agreement, although he had been and was then represented by other attorneys in other matters. The court finds, however, that Atty. Pascarella was not acting as attorney for Mr. Silver or Silver Co. in connection with this investment of $1,250,000.

13. On April 28, 1997 Robert Silver was a competent real estate professional. He had read number of partnership agreements before signing this Participation Agreement. He admits that he accepted the agreement as it was written and signed it in good faith but claims that Pascarella failed to carry out the terms and obligations of the agreement.

14. On April 28, 1997 Silver was familiar with the office building because he had been the majority partner of SPD when the building was developed and leased to Direct Media. He was also familiar with the terms of the Direct Media lease including the amount of the rent obligation and the fact that the term of the fifteen-year lease was scheduled to end in 2003.

15. The Participation Agreement uses the shorthand phrase "Silver", defined as R.S. Silver Company.

16. The Participation Agreement recites that in return for the $1,250,000 paid to SPD, R.S. Silver Company was assigned an economic interest in the anticipated restructured SPD Associates partnership, called the "Silver Participation". The Silver Participation required that certain preference or priority payments be paid first to Pascarella. Thereafter, cash distributions from SPD were to be paid one-half to Pascarella and one-half to R.S. Silver and Company.

17. The first priority payment per Section 2a) of the Participation Agreement was reimbursement for costs to obtain and close the $5,000,000 Met Life Loan to be used to acquire DMI's [Direct Media Inc.'s] interest in the partnership together with interest at the rate of 8.85% per annum.

18. The second priority payment per Section 2b) is any and all sums, other than the $5,000,000 Met Life mortgage proceeds, paid by or on behalf of Pascarella or SPD to acquire DMI's interest in SPD (including, without limitation, any and all sums paid directly, or indirectly, from said $1,250,000) together with interest thereon at 8.85% per annum.

19. The third priority payment to Pascarella per section 2c) is "the first $500,000 of cash or equivalent hereafter distributed by SPD whether from rent, or refinancing, a sale or otherwise." Pascarella considers this to be a makeup for when Silver had sold his controlling 64% interest in SPD to Direct Media and had left Pascarella with a minority 16% interest.

20. The fourth priority payment per section 2d) is "said $1,250,000 Silver Investment and the interest earned thereon from March 3, 1997 shall be paid to Pascarella."

21. Section 1 of the Participation Agreement provides in part that: "Silver shall pay $1,250,000 to an SPD account controlled solely by Pascarella, and to be used, invested, and disbursed as Pascarella may direct, meaning and intending that this $1,250,000 payment, and the income thereon, shall be used only to benefit Pascarella in the same manner as if it were owed outright by Pascarella."

22. The $1,250,00 investment referred to in the Participation Agreement is the same $1,250,000 paid to SPD by Silver Co. on or about March 3, 1997 in connection with the "Dear Bob letter." No additional investment was made by Silver.

23. The Participation agreement (Section 3) prohibits any sale, transfer or encumbrance of the Silver Participation without Pascarella's written consent which he may give or withhold "with or without any reason." In the event of Silver's death Pascarella shall have the right to purchase the Silver Participation "for its then fair market value" or, if he does not do so, the Silver Participation can pass as part of Silver's estate.

24. Section 4 of the Participation agreement gives Pascarella or his designees exclusive control and management of SPD including the power to decide when and if any cash distributions shall be made. Section 10 describes that power of control as "the essence of the Agreement" and prohibits "any interference or participation by Silver or his permitted successors or assigns."

25. Section 5 of the Participation Agreement mentions possible hazardous substances on the premises and obligates Silver to indemnify Pascarella and hold him harmless from all claims, liabilities, damages, judgments, expenses or disbursements with respect to the Met Life Loan Documents or SPD's operation unless arising solely from his own gross negligence or wilful misconduct. The handwritten agreement as first drafted by Pascarella then provides "[i]n the event Silver fails to pay any sums due hereunder, Pascarella may, at Pascarella's option, elect to equitably reduce or charge the Silver Participation to compensate Pascarella and the other partners of SPD for such non-payment." Then, in their discussions at Pascarella's office reviewing that draft on April 28, 1997, at which time the $200,000 promissory note to SPD was signed by Robert Silver and guaranteed by R.S. Silver Company, Silver and Pascarella slashed in by bubble insert after the words, "fails to pay any sums due hereunder" the additional words "or due to SPD or the holder of that certain promissory note, a copy of which is attached hereto as Exhibit "B" in a timely manner." The promissory note is thereby cross defaulted to the other obligations of the Participation Agreement.

26. Under Section 8 of the Participation Agreement, the agreement "may not be changed, amended, modified or waived, except in writing signed by the parties hereto."

27. The purchase by SPD of Direct Media's 84% interest in SPD closed on June 12, 1997 with a new mortgage from Met Life which was used to pay off the existing mortgage and pay Direct Media in part for its share. This resulted in Henry Pascarella becoming the sole partner of SPD which was a technical dissolution of the partnership.

28. SPD then changed its name to Riversedge Partners and restructured itself. The partners became two limited liability companies, 200 Pemberwick Road LLC. and Henry W. Pascarella LLC. Pascarella himself became a 1% member of each limited liability company. His wife and other members of his family own the remaining membership interests of the limited liability companies.

29. The $200,000 promissory Note matured on April 28, 2008. Neither Robert Silver nor R.S. Silver Co. has made at any time any repayment of principal or interest on the note.

30. On August 26, 1999, when the promissory note was in default Pascarella and Silver met at Pascarella's office to discuss the defaulted note.

31. Pascarella made unsigned handwritten notes of the meeting and gave Robert Silver a copy thereof (Exhibit V) which Silver acknowledged receiving.

32. The Pascarella notes (Exhibit V) state: "August 26, 1999. Bob is to do the following: (1) Trustee Acct. pd in full by 10/30/99 (2) Inter [interest] on $200,000 [say $40,000] by Dec. 31. (Compute amount) ($44,250) (3) $25,000 of prin. [principal] + interest on outstanding bal. [balance] quarterly starting on April 1, 2000-then July 1, Oct. 1, and so on until all prin. + interest is paid in full. (4) Time for each payment shall be of the essence (5) If any [double underlined] payment is not made on time — Bob is out of Riversedge project completely with no remaining interest or carry at all."

CT Page 14710

33. Robert Silver did not agree with the terms of the Pascarella notes of the August 26, 1999 conference as summarized in Exhibit V. He was not asked to sign and did not sign Exhibit V. He did, however, comply with the first request by repaying some loans Pascarella had made to him from Pascarella's trustee account. He did not make any of the payments on the $200,000 note as set forth in Exhibit V because he had no ability to make those payments. At that point he had gone through a bankruptcy and lost his residence in foreclosure.

34. Pascarella maintains that the Silver Participation was terminated on December 31, 2009 for nonpayment of principal and interest due under the terms of the $200,000 Note and that the Note was thereby cancelled or paid off. No verbal or written notice was given by Pascarella or by SPD to Silver Co. or Robert Silver at any time advising that the Silver Participation was terminated or the note cancelled. No annual operating reports of SPD have been provided at any time to Silver as required by Section 6 of the Participation Agreement. Silver, through the letter of his attorney Stephen Wright, requested the right to inspect the books and records of SPD on July 11, 2003 but was not allowed to do so . . .

35. SPD as a general partnership was obliged to file partnership tax returns (Form 1065) annually with the Internal Revenue Service. Form 1065 includes as schedule L a balance sheet showing all assets, liabilities and partners' capital as of the beginning of the tax year and the end of the tax year. Prior to 1999 the Silver Participation was reflected on that balance sheet on line 19 (mortgages, notes, bonds payable in 1 year or more) at $1,250,000 (the amount of Silver Co's investment), combined with other payables. The $200,000 Silver Co. Promissory note was reflected as an asset of the partnership on line 13 (other assets) broken down in a supporting statement at $200,000. (Ex. 6A-1998 return). The 1999 return (Ex.6B) reflects the Silver Participation in exactly the same manner as the 1998 return. The returns for 2000 through 2007 (Exhibits 6C through 6J) continue to carry the $200,000 Note as an asset shown on the supporting statement for Line 8, and continue to reflect the Silver Participation as a $1,250,000 liability, the only difference being that, starting with the 2000 return, the liability was segregated directly as a $1,250,00 liability of the partnership and so reported on Schedule L of form 1065. In 2000, it was reported on line 19 as the only mortgage, note or bond payable in 1 year or more. For the years 2001 through 2007 it was reported as a $1,250,000 liability on Line 18 (all nonrecourse loans) as the sole item in that category. For the years 2001 for 2007 there is a supporting statement for line 18 specifically designating this $1,250,000 entry both at the beginning and the end of the year as a "qualified nonrecourse loan".

36. If the Silver Participation which was being carried on the balance sheet of SPD as a liability of the partnership had been terminated or cancelled, that reduction in liabilities would have resulted in an increase of partner's capital. No such adjustment to the partners' capital accounts was made at any time on or after December 31, 2009.

37. The total Pascarella priority payments under Section 2 of the Participation Agreement add up to $2,062,170. All of those priority amounts have been paid to Pascarella or his designees as of mid-2003. On December 31, 1999 the priority payments had not been fully paid. Approximately $1.4 million in priority payments were still unpaid at that time. The balance of principal and interest due on the $200,000 promissory note was $248,343 as of December 31, 2009.

38. At no time since the Participation Agreement was signed in 1997 has SPD paid any distributions of cash flow to R.S. Silver Co. During that same period SPD has paid more than five million dollars in distributions of cash flow to Pascarella and/or his designees.

39. Between August 26, 1999 (the date of the meeting at Pascarella's office) and July 11, 2003 (the date of a letter (Ex. 7) from Atty. Stephen Wright to Henry W. Pascarella demanding on behalf of Mr. Silver the right to inspect the books and records of SPD) there was no contact or communication of any kind between Pascarella and Silver or their representatives concerning SPD or the 200 Pemberwick Road property. During that interval, however, there was some contact between Mr. Silver and Atty. Pascarella in connection with Pascarella's representation of other members of the Silver family.

Other findings of fact will be set forth in the following discussions.

III. DISCUSSION AND CONCLUSIONS OF LAW A. Count One: Breach of the Participation Agreement (1) Claimed Modification of the Participation Agreement

The defendants take the position that the Participation Agreement was modified by the August 26, 1999 discussions between Silver and Pascarella as memorialized by Pascarella's notes (Exhibit V.) The court disagrees for several reasons. First and foremost, although there was conflicting testimony on the point, the court has made a finding of fact (No. 33) that Mr. Silver did not agree with Atty. Pascarella's demands as set forth in Exhibit V. Although Pascarella testified that Silver did agree with the terms of Exhibit V, he admitted that he based that testimony on Silver's silence. Mr. Silver testified unequivocally that he did not agree with Exhibit V and that he took the note to be "Pascarella giving me his version of what he wanted me to do." He also testified that "I knew what position Mr. Pascarella was trying to take, or thinking of taking" and that he never took the note seriously because Pascarella knew of his financial problems. The court credits Mr. Silver's testimony on this point over Mr. Pascarella's and has found that there was no agreement on the terms of Exhibit 5 insofar as they apply to the Silver Participation. (Obviously, Mr. Silver did agree to the first term regarding repayment of the unrelated loans which were made to him from Atty. Pascarella's trustee account because he did repay those loans.)

Another reason why the court concludes that the August 26 discussions and Exhibit V cannot have effectively modified the Participation Agreement is that such a modification would violate the Connecticut Statute of Frauds, Conn.Gen. Stat. § 52-550 which requires a signed written memorandum in order to enforce an agreement "against any person upon any special promise to answer for the debt, default or miscarriage of another." The August 26 meeting especially the provision which would supposedly extinguish the Silver Participation was directly related to Silver Company's obligation to answer (by is guarantee of April 29, 1997) for the $200,000 debt of Robert S. Silver. As such it is covered by the statute of frauds. Huckabee v. Stevens, 32 Conn.Sup. 511 (1972). It is also covered by the statute of frauds because it would modify the terms of "any agreement for a loan in an amount which exceeds fifty thousand dollars." Exhibit V fails to meet the statutory requirement of a written agreement or memorandum signed by the party to be charged. The court has found (Nos. 31, 33) that the notes were totally unsigned. Defendant Pascarella in his Reply Memorandum at page 17 mentions that Silver's payment of the "Trustee Loan" was an act of partial performance, seemingly invoking the so-called partial performance exception to the statute of frauds. Partial performance is not pleaded. There is just a single sentence on this point without analysis, and the partial performance supposedly claimed is that of Silver. To the extent that there is a "partial performance exception" to the statute of frauds, that partial performance is one component of an estoppel and must be based on acts of part performance done by "the party seeking to enforce the contract in pursuance of the contract and with the design of carrying the same into execution." Glazer v. Dress Barn, Inc., 274 Conn. 33, 60 (2005). Silver is not the party here seeking to enforce the alleged agreement, so his part performance could not form the basis of the exception.

For all these reasons, then, the discussions of August 26, 1999 as memorialized by Exhibit V fail to constitute an effective or enforceable modification of the Participation Agreement.

(2) Claimed Termination of the Silver Participation under the Participation Agreement.

The defendants claim that the Silver Participation under the Participation Agreement was terminated or extinguished by Henry Pascarella as the managing partner of SPD on December 31, 1999. The court finds by a preponderance of the evidence that there was no termination on that date or in that time frame. Absolutely nothing of note happened at that time. December 31, 1999 only figures in the evidence because it was the "deadline" given by Pascarella to Silver for a partial payment on the Note during the conversation of August 26, 1999 that, for the reasons already discussed, did not modify or amend the Participation Agreement. Item 5 of Exhibit V which is Pascarella's unsigned memorandum of the August 26 conversation says "If any payment is not made on time — Bob is out of Riverside project completely with no remaining interest or carry at all." The most that this statement can be considered to be is a warning that Pascarella intended on August 26, 1999 to exercise SPD's default remedies under the Note Guarantee and/or the Participation Agreement if no payment was made on the Note by December 31, 1999. No such payment was made, but the Note had been in default since October 28, 1997 and matured without payment on April 28, 1998 without consequence. There was nothing "automatic" about December 31. If the Silver Participation — which cost Silver Co. $1,250,000 less than three years prior — was to be extinguished pursuant to the Participation Agreement, it was necessary under Section 5 thereof for SPD to "elect" its "option" to equitably reduce or charge the Silver Participation. There is no evidence whatsoever that Pascarella as manager of SPD took any steps to make such an "election" or exercise" its "option" to invoke one or more of those remedies, or "extinguish" the investment in satisfaction of a $200,000 promissory note. At the very least the situation called for some form of book entry and written or at least verbal notice to Robert Silver as maker of the Note, and R.S. Silver as guarantor of the Note and holder of the Participation that the Participation was totally extinguished, and all liability under the Note and Guarantee was cancelled.⁵ Absolutely no such entry was made and no form of notice was given. Mr. Pascarella testified that he treated Exhibit V as an accord and satisfaction and "wrote off" the Note and the Silver Participation, but he failed to point out a single act done or communication made to Silver Co. or Robert Silver to effectuate those supposed write-offs. The record is void of any evidence of any action taken by Henry Pascarella or any other representative of SPD to terminate or extinguish the Silver Participation or cancel the $200,000 Note and Guaranty, and the court accepts Mr. Silver's testimony that no notice was given.

5 Cancellation of the note could result in taxable income to Robert Silver and possibly the plaintiff which is yet another reason for some form of written notice (such as an IRS Form 1099) to them.

Furthermore there is evidence from SPD's own records that the Silver Participation and the $200,000 promissory Note and Guarantee remained in full force and effect as of the date of trial, more than ten years after December 31, 2009. (See Findings of Fact Nos. 35, 36). At the time of trial nine consecutive partnership tax returns (Form 1065) were filed after December 31, 2009. Every one of them showed on the Schedule L balance sheet that the partnership owned the $200,000 note which it carried as an asset and the partnership had a $1,250,000 liability being the Silver Participation. The tax returns were professionally prepared and signed by the accountants for SPD. They are also signed by SPD under penalty of perjury. They amount to an admission of SPD that the Note and the participation have not been extinguished and the rights and obligations of those instruments are still in effect.

In an attempt to avoid the impact of the tax return admissions defendant Pascarella called Atty. David Petshaft who holds an LLM degree in taxation from NYU. He testified that he was the tax preparer for Riversedge Partners who prepared the 1998 through 2007 returns for SPD. He testified that Henry Pascarella told him in 2000 that the interest of Mr. Silver had been terminated and he "segregated" an amount on subsequent tax returns because of that information. As the court has found (No. 35), the $1,250,000 liability representing the Silver Participation had in prior returns been combined with other numbers with only a total of all such items reported. Starting with the 2000 return the $1,250,000 was moved to a separate line and individually reported as the only item in those categories ("mortgage, note, or bond payable in one year or more" — 2000; "all nonrecourse loans" — 2001-2007). In each case there was only one item in each category so the "segregation" could have been just a function of the categorization. Atty. Petshaft testified that the reason for the segregation was that he needed to adjust that number to the partner's capital accounts, and "just never got the chance to sit down with Henry and finalize the accounting for it." It strains credulity for the court to accept the claim that an experienced highly qualified tax attorney representing an experienced real estate developer attorney would forget for eight years to make a million dollar entry, and thereby file false tax returns for those eight years, especially when that very issue regarding the entry had been the primary point of litigation before this court since November 10, 2003.⁶ Five of the returns (2003 through 2007) were filed during the litigation period. The court therefore infers that Atty. Petshaft failed to make the correcting tax return entries to reflect the termination of the Silver Participation and the cancellation of the $200,000 note because he had seen no records or book entries reflecting those events and had some reservation about whether or not those events had effectively occurred.

6 This action was commenced under the accidental failure of suit statute, Conn.Gen. Stat. § 52-591, with a return date of October 17, 2006. It was preceded by an earlier similar action commenced on November 10, 2003 which was dismissed by the court.

Defendant Riversedge partners f/k/a SPD also attempts to explain the lack of any actual steps to terminate the Silver Participation on or about December 31, 1999 by claiming for the very first time in its post-trial memorandum that SPD took ownership of the Silver Participation on December 31, 1999 pursuant to a "strict foreclosure" of collateral under Article 9 of the Connecticut Uniform Commercial Code ("UCC"), Con.Gen. Stat. §§ 42a-9-101-412a-9-709.⁷ Briefly, the UCC argument is that the Participation Agreement meets the definition of a security agreement under 9-102(73) which created a security interest in favor of SPD which attached to the Silver Participation which is a payment intangible under 9-102(61) which qualifies as a general intangible under 9-102(42). The $200,000 Note was in default as of the April 28, 1998 maturity date. Pascarella's delivery to Silver of his handwritten notes of the August 26, 1999 meeting (Ex. V) including the statement that "[i]f any payment is not made on time, Bob is out of Riversedge project completely with no remaining interest or carry at all" was a "proposal" under 9-620(c)(2)(A) to accept the Silver Participation in full satisfaction of the $200,000 Note which was "accepted" by Silver Co. under 9-620(c)(2)(C) by failing to object with twenty days from receipt of the proposal which completed the "strict foreclosure" and automatically transferred ownership of the Silver Participation to SPD as of December 31, 1999 without any need for further action or documentation. Despite its ingenuity, this argument is fraught with procedural and substantive infirmities. On a procedural level, it should have been pleaded as a special defense. "Facts which are consistent with [the allegations of the complaint] but show, notwithstanding that the plaintiff has no cause of action must be specially alleged." Practice Book § 10-50. The lynchpin of the UCC argument is that Exhibit V is a "proposal" under the UCC to accept the Silver Participation in full payment of the Note. The only place in all the operative pleadings that the contents of the note which became Exhibit V is mentioned in the defendants' joint Sixth Special Defense of accord and satisfaction where ¶ 2 alleges that:

7 The court will cite the individual sections of Title 42a, Article 9 in abbreviated fashion, e.g. 9-102, 9-620, etc.

Plaintiff was advised by Defendants that if it did not cure the default by making certain payments by December 31, 1999, Plaintiff's rights under the Participation Agreement would be terminated in consideration of the fact of Plaintiff's default.

That is insufficient notice to the plaintiff that SPD is claiming a strict UCC foreclosure of the Silver Participation. It does not even allege that the "advice" was in writing. There was no opportunity to anticipate the UCC claim or rebut it factually at trial. It is wholly out of order and must be rejected on that basis alone. On a substantive level the UCC claim is likewise deficient. Assuming without deciding that the Participation Agreement created a valid security interest in a general intangible, Exhibit V would totally fail as "proposal" under 9-9620(c)(2)(A). The August 26, 1999 note is not "unconditional." It says IF any payment is not made, etc. It identifies the debtor (R.S. Silver Co., Inc.) simply as "Bob". It identifies the collateral simply as "the Riversedge project" and it fails to meet the requirement of 9-206(c)(2)(B) that the proposal must propose "to accept the collateral in full satisfaction of the obligation it secures". Exhibit V makes no mention whatsoever of cancelling or satisfying the $200,000 Note. And finally Exhibit V fails as a matter of law to be an adequate UCC Article 9 proposal to accept collateral because it is not a "proposal" in UCC terms at all. A "proposal" means a record authenticated by a third party which includes the terms on which the third party is willing to accept collateral in full or partial satisfaction of the obligation it secures . . ." 9-102(66). "Authenticate" means "(A) to sign; or (B) to execute or otherwise adopt a symbol . . ." 9-102(7). Exhibit V is unsigned; nor did Pascarella affix thereto any authenticating symbol. It is unauthenticated for UCC purposes and cannot be a "proposal". The UCC argument is unavailing.

Defendant Pascarella cites the case of Thomas E. Golden Realty Company v. Society for Savings, 31 Conn.App. 575 (1993), to support his claim that Pascarella's actions at the August 26, 1999 meeting provided more than adequate notice of the imminent reduction of the Silver Participation. Golden is an appeal from the dismissal of a summary process case where the trial court had held that the landlord had failed to give adequate notice of default. Defendant argues from the Golden case ". . . where plaintiff gave notice of defendant's default under the contract but did not act on it for several months while parties were in negotiations regarding cure of default, court held it was disingenuous for defendant to argue that it did not have notice of default especially since plaintiff's delay acted to extend the time for defendant to cure") (Pascarella Brief, p. 19). The facts were that the landlord had notified the tenant of the reasons for default on November 27, 1990. For several months thereafter the parties were involved in negotiations regarding the cure of the defaults. The landlord then extended the time for cure at the tenant's request, but tenant failed to cure. The landlord served the notice to quit on September 17, 1991. In reversing the dismissal the Appellate Court did hold that "[i]t is disingenuous for the defendant to argue now that it did not have notice of the reasons for the notice to quit." Id. 581. Here, Silver is not claiming inadequate notice of SPD's intent to exercise its remedy. Mr. Silver admitted that he understood the August 26 meeting and Exhibit V as an indication of SPD's intention to exercise a remedy. The important point of Golden for present purposes is that, after giving notice of default and establishing and extending a cure period, the landlord actually took the formal step after the cure period to terminate the tenancy by filing the notice to quit. It did not just declare at some point months later that on September 17, 1991 it had decided to "write off" the tenancy and no longer considered itself bound by the terms of the lease. That is the missing ingredient here. SPD gave notice of what it intended to, but so far as the evidence has shown, failed to effectuate that intention to terminate the Silver Participation.

The Silver Participation and the $200,000 promissory note have not been terminated or cancelled and all the rights and obligations thereof are in full force and effect. The court further finds that the defendant SPD has breached the Participation Agreement since Henry Pascarella as managing partner of SPD testified, as did Mr. Silver, that SPD has never at any time paid to R.S. Silver Co. any part of its post-4/28/97 cashflow distributions net of the full amount of the Pascarella preference payments.

CT Page 14718

(3) Alternative Holding: Whether or not a Termination of the Silver Participation as Claimed by Defendants would have been Permitted under the Participation Agreement. Even if it should be determined that SPD did somehow effectuate the termination of the Silver Participation in December 1999, the court holds, alternatively, that under the circumstances then and there existing the total termination or extinguishment of the Silver Participation was not an authorized remedy under the Participation Agreement, and would have resulted in SPD being in breach of the agreement for failure to make distributions to plaintiff after the Pascarella preferences were satisfied.

It is undisputed that the Silver Participation was not a partnership interest or an equity interest. Silver Co. had no capital account in SPD (as the tax returns reflect). The Silver Participation is defined and described in the Participation Agreement (Ex. 3, 4) Section 2 as an economic interest entitling to Silver Co. to receive one-half of "all further cash distributions from SPD" after "Pascarella has received each of (a)(b)(c) and (d), above" [the Pascarella preference payments, Findings of Fact Nos. 16-20]. It is also undisputed that the Silver Participation was a contingent speculative investment. That is so because, in order for Silver Co. to receive its cashflow distributions: (1) SPD must have positive cashflow after paying all debt service and other expenses; (2) the Pascarella preference payments would have to be paid in full; and (3) Henry Pascarella as managing partner of SPD would have to decide under Section 4 of the Participation Agreement to make a SPD cash distribution.

The purported exercise of remedy by SPD was a total termination, a cancellation, an extinguishment, of the Silver Participation in return for a cancellation of the note. The Silver Participation would never revive. Silver Co. would never be entitled to any share of the SPD cash distributions no matter how successful the building might have been leased or managed or even refinanced or sold. Mr. Pascarella himself admitted that the purported remedy exercise by SPD would ". . . be a forfeit of over a million dollars". (Tr. 2/6/09 p. 72).

The contract language applicable to this issue at hand is found in Section 5:

In the event Silver fails to pay any sums due hereunder, or due to SPD or the holder of that certain Promissory Note, a copy of which is attached hereto as Exhibit "B," in a timely manner, Pascarella may, at Pascarella's option, elect to equitably reduce or charge the Silver Participation to compensate Pascarella and the other partners of SPD for nonpayment.

The plaintiff claims that "equitably reduce or charge the Silver Participation" does not authorize a total termination of the Silver Participation in the absence or such words as "terminate," "extinguish," "dissolve," "cancel," or the like. They also argue that a "reduction" to zero would not have been "equitable" and a total termination would be inconsistent with the goal of the remedy — "to compensate Pascarella and the other partners of SPD for non-payment" since potentially the total termination could as actually happened deprive the plaintiff of far more than the unpaid balance due on the note.

Defendants argue, on the other hand, that the power to "reduce" and the power to "charge" are separate remedies each of which could be "elected" by SPD depending on whether or not the Silver Participation was "in the money" at the time the remedy was being exercised, and that only the second remedy — to "charge" — is modified by the "to compensate" purpose. Their position is that to "charge" the participation is the same as to "set off" cash due the plaintiffs, and can only be utilized when there is something to "set off" against — namely a cash distribution then and there due to be paid, and since the Pascarella preference payments had been fully paid in December of 1999, no distributions could be made to Silver Co. and SPD's only effective remedy⁸ was to "reduce" the Silver Participation from 50% to some lesser portion down to and including zero. They argue that a reduction to zero was equitable because of the speculative contingent nature of Silver's participation in 1999 before Direct Media had committed to staying in the building and renewing its lease.

8 In making this "only effective remedy" argument defendant Riversedge Partners refers to the law of garnishment where a writ served at a particular time is only effective against sums actually due at the time of service, and not against sums accruing to the defendant thereafter. See F W Welding Service, Inc.v. ADL Contracting, 217 Conn. 507 (1991), where the holding is based on a construction of the word "due" in the garnishment statute, Conn.Gen. Stat. § 52-329. But there is no reason why that construction would apply to a remedy created by mutual agreement which does not use the word "due," but rather grants a right to "charge" a "participation" which by definition is a right to share in future cash flows of a partnership. The more appropriate comparison to compulsory process would be a wage execution under Conn. Gen Stat. § 52-361a where the levy attaches to "all earnings which are due or become due to the judgment debtor to the extent specified in the wage execution" or to a "charging order" against a partnership interest under Conn. Gen. Stat. § 34-349 which authorizes the court to appoint a ". . . receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership." The court does not agree with the "only effective remedy" argument.

Since the parties have incorporated the April 28, 1997 promissory note from Roberts S. Silver to SPD, and guaranteed by R.S. Silver and Company into the Participation Agreement and have attached a copy thereof as an exhibit to the agreement, the language of that incorporated document must be read together with the language of the contract for purposes of contract interpretation. Regency Savings Bank v. Westmark Partners, 59 Conn.App. 160, 165 (2000). The relevant language appears in the note guarantee: "The undersigned [R.S. Silver and Company] guarantees the full and prompt payment of this Note in accordance with its terms and gives S.P.D. Associates the right to set off the same against any sums due to the undersigned." R.S. Silver and Company is the obligor on the note guarantee and the holder of the Silver Participation.

The court finds that Henry Pascarella had drafted the basic language of the handwritten Participation Agreement and the Note/Guarantee before the April 28, 1997 meeting with Silver, and Silver had not seen those drafts prior to arriving at Pascarella's office on that day. The so-called bubble insertions resulted from discussion and collaboration between the two men as they went through the Pascarella draft. The only bubble insertion directly involved with the provisions quoted above is the insertion of the reference to the promissory note into the default of obligation provisions of Section 5. The operative language defining the remedy (". . . elect to equitably reduce or charge the Silver Partcipation," etc.) as well as the language of the Note Guarantee were drafted exclusively by Pascarella on behalf of SPD which invokes the contra-preferentem rule of contract construction: If a contract term is susceptible to more than one interpretation, then any ambiguity must be construed against the drafter. Southwick at Milford Condo. Assoc. v. Road, 294 Conn. 311, 323 (2009); Flaherty v. Flaherty, 120 Conn App. 266, 273 (2010).

The rules of contract construction are well established.

A contract must be construed to effectuate the intent of the parties, which is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction . . . [T]he intent of the parties is to be ascertained by a fair and reasonable construction of the written words and . . . the language used must be accorded its common, natural and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract . . . Where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms. A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity . . .

A contract is ambiguous if the intent of the parties is not clear and certain from the language of the contract itself . . . Accordingly any ambiguity in a contract must emanate from the language used in the contract rather than from one party's subjective perception of the terms; . . . and [w]here there is definitive contract language, the determination of what the parties intended by their contractual commitments is a question of law . . . Furthermore, a presumption that the language used is definitive arises when . . . the contract at issue is between sophisticated parties and is commercial in nature. (Citations and internal quotation marks omitted.) Allstate Life Insurance Company v. BFA Limited Partnership et al., 287 Conn. 307, 313-14 (2008).

During the trial the court found the contract provisions regarding the defendants' remedies in the event of Silver's default of its obligations under the Participation Agreement to be ambiguous, and permitted parol evidence to be presented in the form of each party's interpretation of the contact language. That testimony was subjective and conclusory, and not necessarily reconciled with all the contract provisions. That testimony has been considered, but given little weight in this analysis.

In searching for the "common, natural, and ordinary meaning and usage" of words it is appropriate for a court to look at the common understanding of the term as expressed in a dictionary. Key Air v. Commissioner of Revenue Services, 294 Conn. 225, 235 (2009). The following dictionary definitions of terms used in the final sentence of Section 5 of the Participation Agreement have been considered by the court.⁹

9 The definitions are taken and accepted from the parties' briefs and do not refer in each instance to the same edition of the source.

"Reduce" means "to cause to lessen in size, number, or amount." THE RANDOM HOUSE COLLEGE DICTIONARY (p. 1107, Revised Ed, 1075).

"Charge" means "to impose a lien to create a claim against property . . . to impose a trust" BLACK'S LAW DICTIONARY (p. 211, Fifth Ed., 1979).

A "setoff" is "[a] debtor's right to reduce the amount of a debt by any sum the creditor owes the debtor." BLACK'S LAW DICTIONARY, (Seventh Ed., 1999).

To "compensate" means" [t]o make equivalent return to, to recompense, or to pay." BLACK'S LAW DICTIONARY (Sixth Ed., 1992).

"Equitable" means "[j]ust; conformable to the principles of justice and right." BLACK'S LAW DICTIONARY (Sixth Ed., 1991).

Construing the Participation Agreement in accordance with the foregoing rules of contract interpretation and taking the words used in their common, natural, and ordinary meaning and usage, and resolving any ambiguity against the drafter Henry Pascarella, the court finds and concludes that a fair and reasonable construction of the Participation Agreement favors the plaintiff's position. Defendants are correct that the contract gives Henry Pascarella a right to "elect" an "option" between two remedies: to "reduce" or to "charge." Although those two remedies are not capable of being exercised in identical fashion, they are essentially the same remedy directed at the same right to receive cash distributions and they are both modified and limited by the common purpose of achieving compensation for non-payment of the Note or other Silver obligation to the partnership. In this case the word "or" is used conjunctively.¹⁰ Defendant Pascarella misconstrues, however, of the application of the "charge" remedy:

10 "Or" is usually disjunctive, but can be conjunctive when used to indicate a synonymous or equivalent expression as where one term is used to define another. Black's Law Dictionary (4th ed.) defines "or" as "a disjunctive particle used to express an alternative or to give a choice of one among two or more things. It is also used to clarify what has already been said, and in such cases means in other words, `to wit' or `that is to say' . . . Or is frequently misused; and courts will construe it to mean "and" where it was so used." (Citations omitted.) See, also Vitti v. Allstate Ins. Co., 245 Conn. 169, 173 n. 5 (1998).

. . . as noted by the Court's ruling [denying defendants' motion to dismiss after plaintiff had rested its case] one remedy under § 5 was to charge, or "set off" the distribution due under the Silver Participation for any sums owed under the Partnership by Silver Company. Thus, if hypothetically Silver Company was owed a $300,000 distribution under the Silver Participation, as of December 31, 1999 when the Silver Company owed the Partnership approximately $250,000 on the defaulted Promissory Note, Pascarella would have the right to charge or set off the $250,000 from the $300,000 due Silver Company to satisfy the Silver Company obligation . . .

Defendant Pascarella Brief, p. 15.

Despite defendant's characterization as a "charge," his hypothetical is clearly an application of the "reduce" remedy. Silver's $300,000 Participation in the cash flow distribution would have been reduced to $50,000 because of the $250,000 offset to pay the note indebtedness. The "charge" remedy would be appropriate if the hypothetical Silver distribution was $200,000. The $200,000 would be offset and the additional $50,000 unpaid note indebtedness would be "charged" or liened against the Silver Participation, being the right to 50% of future cash flow distributions.¹¹ This construction of the two available remedies is consistent with the definitions of "reduce," and "charge" and either remedy is consistent with a "setoff." This construction is also consistent with the purpose of exercise of either remedy which is ". . . to compensate Pascarella and the other partners of SPD for such non-payment."

11 The defendant Pascarella's construction of the provision suffers from his misconception that in order to "charge" against a Silver distribution, that distribution must be immediately due and payable. (See footnote 5 and accompanying text.) But the definition of "charge" contemplates a broader remedy including the imposition of a lien or trust on future distributions.

Defendant's interpretation of the agreement is that the "charge" remedy goes to the amount of any cash flow distribution (per the Pascarella hypothetical) but the "reduce" remedy goes to a permanent modification of the fraction or percentage of cash flow distributions that Silver would then or ever be entitled to; and such a reduction to zero percent, as admitted by Pascarella, would be a permanent forfeiture of the Silver Participation. But "charge" and "reduce" are verbs in a sentence which has a single direct object — the Silver Participation.¹² The sole object of two remedial actions cannot have one meaning for the first remedy and another meaning for the second remedy. There is only one right that can be affected by the exercise of either remedy and that is the "Silver Participation" — the amounts due to Silver equivalent to 50% of the partnership's cash flow distributions until his indebtedness to the partnership is resolved. There is nothing in the default remedy provision about forfeiture or confiscation or termination or cancellation of the interest above and beyond debt repayment. Any such construction would potentially be inconsistent with the limited purpose of either remedy ". . . to compensate Pascarella and the other partners of SPD for such nonpayment." (Emphasis added). If the agreement were meant to provide for a forfeiture of the Silver Participation because his cash flow amount due at any particular time is less than his obligations to the partnership, Henry Pascarella certainly knew how to say it, as he tried to do in Exhibit V: "Bob is out of Riversedge project completely with no remaining interest or carry at all." There is no equivalent language in the Participation Agreement and Pascarella/Riversedge cannot now re-make the deal to include the remedy of forfeiture. It is axiomatic that "Equity abhors a forfeiture. Menzies v. Fisheir, 165 Conn. 338, 357, 334 A.2d 452 (1973), quoting Pierce v. Staub, 78 Conn. 459, 466, 62 A. 760 (1906); Sheets v. Selden, 74 U.S. (7 Wall) 416, 19 L.Ed. 166 (1868)." (Interior quotation marks omitted) Fellows v. Martin, 217 Conn. 57, 65 (1991).

12 ". . . to equitably reduce or charge the Silver Participation to compensate Pascarella and the other partners of SPD for such non-payment." Participation Agreement, Section 5.

Defendant Pascarella argues that the inability to terminate the Silver Participation would deprive him of his right to "elect" an "option" between remedies. The court disagrees. He is still free to impose either remedy as the circumstances warrant, or to "elect" not to impose or fully impose either remedy. It must be kept in mind that this remedy language was drafted prior to the "bubble insertion" of April 28, 1997 when the obligation of the $200,000 Note was slashed in. Originally these remedies were drafted by Pascarella in contemplation only of Silver's indemnification obligations under Section 5 of the Participation Agreement including "personal liability for items such as hazardous substances" at the site. In the event of a very large environmental remediation liability, Pascarella would have the option of electing not to impose the nonpayment remedy strictly against each Silver distribution, but to spread it out equitably over a period of time. The right to "elect" could also refer to the Pascarella powers in the anti-alienation clause of Section 3:

The parties intend to render the Silver Participation immune from attachment and alienation. To that end, Pascarella shall have the power either to accumulate or withhold any and all payments otherwise to be paid on account of the Silver Participation.

(4) Failure to Establish a Fair Market Value of the Silver Participation

Defendant Pascarella also argues that Plaintiff's failure to establish a fair market value of the Silver Participation bars him from establishing a breach of the Participation Agreement. He argues, in effect, that in December 1999 Silver was not entitled to any distributions with no assurance of any future distributions and his obligations were increasing with accruals of interest, so that the Silver Participation was worth zero and the termination thereof could not therefore have caused him any loss or damage and therefore there could be no breach of contract. Admittedly, the plaintiff offered no evidence of fair market value of his participation rights in the partnership cash flows at any time after March of 1997 when he made his $1.25 million investment. But the default remedies of Section 5 are not tied in any way to an analysis of fluctuations in the fair market value of the Silver Participation. If fair market value was intended to play a role in the imposition of default remedies, defendant Pascarella knew well how to express that intent. For example, in Section 3 concerning the disposition of the Silver Participation in the event of Robert Silver's death, the agreement provides, "In the event of Silver's death Pascarella shall have the right to purchase the Silver Participation for it's the fair market value . . ." There is no similar language in the default remedies provision of Section 5 and fair market value of the Silver Participation is irrelevant to the analysis of those remedies.

(5) Whether or Not Plaintiff's Alleged Material Breach of the Participation Agreement Negates Any Breach of Contract Claim by the Plaintiff

Citing section 234 of the Restatement of Contracts¹³ and two Connecticut appellate cases¹⁴ defendant Pascarella claims that plaintiff committed a material breach of the Participation Agreement by defaulting on repayment of the $200,000 Note and that breach, per the cited authorities, excused defendants from the obligation to share future cash flow distributions with the plaintiff. It is not necessary to decide if plaintiff, who had promptly complied with its initial obligation to invest $1.25 million with the defendant Riversedge, then committed a "material breach" or just an "incidental breach" of the agreement by failing to make timely payments of interest and principal on the $200,000 Note, because this agreement is not structured an "exchange" of 50% of the cash flow distributions in return for repayment of the $200,000 Note.¹⁵ The Participation Agreement provides the defendant with two specific remedies for nonpayment of the Note or other Silver obligations (other than the initial investment). When there is a designated remedy specified for a particular kind of breach, the non-breaching party may exercise that remedy but is not excused from his own performance because of that breach. Section 239(2) of the Restatement (Second) of Contracts provides that a party who would otherwise be excused from performing under a contract, when the opposing party is in material breach of the same, is not excused "if the other party assumes the risk that he would have to perform is spite of such a failure." This is clearly such a case. If on December 31, 1999, to use defendant's own hypothetical, there had been enough available cash flow to declare a $600,000 cash distribution, $300,000 of which would be the plaintiff's share, there seems to be no dispute but that Pascarella/Riversedge would have been obligated to make the distribution after "reducing" it to $50,000 by taking $250,000 to pay off the note. But the situation can be no different when the cash flow situation does not permit a distribution or the plaintiff's share of the distribution is less than the unpaid Silver obligation. The specified remedy for nonpayment of the Note or other obligation in that situation is for the defendants to "charge" or lien or impose a trust on future distributions to recoup the nonpayment. In either case the defendant has agreed to the specified remedy and has "assumed the risk" of nonpayment if the remedy proves to be ineffective or insufficient, and is not excused from its obligation of providing the plaintiff with future shares of cash flow distributions, subject to the agreed remedies.

13 Section 234 provides: "In promises for an agreed exchange, and material failure of performance by one party, not justified by the conduct of the other, discharges the latter's duty to give the agreed exchange even though his promise is not in terms conditional."

14 The cases are Rokalor, Inc. v. Connecticut Eating Enterprises, Inc., 18 Conn.App. 384, 392 (1989) (when tenant materially breaches a lease by failing to pay rent, landlord is excused from performing remaining duties under the lease); and Bernstein v. Nemeyer, 213 Conn 665, 772-73 (1990) (". . . it follows from an uncured material failure of performance that the other party to the contract is discharged from any duty to render performance yet to be exchanged").

15 To the contrary, Section 2 of the Participation Agreement specifically provides: "In exchange for the receipt of said $1,250,000 investment by Silver, Pascarella hereby assigns an economic interest in the anticipated restructured SPD Associates partnership to Silver . . ."

(6) Whether the First Count Breach of Contract Claim is Barred by the Breach of Contract Statute of Limitations.

Defendants claim that the First Count is barred by the six-year breach of contract statute of limitations, Conn.Gen. Stat. § 52-576(a) which provides: "No action for an account, or on any simple or implied contract, or on any contract in writing shall be brought within six years after the right of action accrues, except as provided in subsection (b) of this section [applicable to actions brought by persons who were legally incapable of suing within the six-year period]." As explained in footnote 6, this action was brought with a return date of October 17, 2006 pursuant to the accidental failure of suit statute following the dismissal of an earlier action commenced on November 10, 2003. Defendant's arguments that the breach of contract claim accrued on April 28, 1997 when the Participation Agreement was signed are unavailing.¹⁶ "In an action for breach of contract . . . the cause of action accrues at the time the breach of contract occurs, that is, when the injury has been afflicted." Kennedy v. Johns-Manville Sales Corporation, 135 Conn. 176, 180 (1948); Beckstein v. Potter and Carrier, Inc., 191 Conn. 150, 156 (1983). In this case the alleged breach of contract in Count One is the failure by defendants to pay to the plaintiff its 50% of cash flow distributions of the Riversedge partners after all the Pascarella priority payments had been made. The evidence was that the payment of all Pascarella priority payments were completed in mid-2003. (Finding of Fact No. 37). Suit commenced on November 10, 2003 or even October 17, 2006 was well within the six-year statutory period. Even if the breach is deemed to have occurred on December 31, 1999 when Pascarella claims he terminated the Silver Participation, November 10, 2003 would still be within the six-year period. There is no merit to the statute of limitations defense to Count One.

16 Mr. Silver's testimony that "I suppose you could say that he [Pascarella] took advantage of me from day 1." (2/4/09 Tr. 100) is inadequate to support any claim that the contract was breached on April 28, 1997 as defendants assert.

(7) Claim of Waiver Estoppel

Defendants have filed a waiver and estoppel special defense to all counts, alleging that "Plaintiff took no steps to make payment under the promissory note and made no claim of a continuing right under the Participation Agreement for many years" (¶ 2); and "Defendants reasonably understood and relied on the fact that Plaintiff, based on its actions, had no continued claim on its rights under the Participation Agreement and, in reliance on such fact, managed its affairs accordingly." (¶ 3) The evidence proved that Mr. Silver was aware as of the August 26, 1999 meeting and the Pascarella notes of that meeting (Ex. V) that Pascarella intended to exercise a default remedy for nonpayment of the $200,000 Note, but that he had no communication with Pascarella or anyone else representing Riverside until his attorney wrote to Henry Pascarella on July 11, 2003 demanding to inspect the books and records of Riversedge Partners. Defendants claim that Silver's total silence for almost four years is an implied waiver of his right to claim breach of the Participation Agreement, and defendant's reliance on that silence should estop plaintiff from claiming breach of the agreement.

Waiver is the intentional relinquishment or abandonment of a known right or privilege and is based on a species of the principle of estoppel and where applicable it will be enforced as the estoppel would be enforced. Estoppel has its roots in equity and stems from the voluntary conduct of a party whereby he is absolutely precluded, both at law and in equity from asserting rights which might perhaps have otherwise existed. Waiver does not have to be express but may consist of acts or conduct from which waiver may be implied. In other words, waiver may be inferred from the circumstances if it is reasonable to do so. AFSCME, Council 4, Local 704 v. Dept. of Public Health, 272 Conn. 617, 623 (2005).

The court concludes that defendants failed to satisfy their burden of proving an implied waiver by silence. Although Mr. Silver knew in August 1999 that Pascarella intended to exercise a default remedy if no payment was made on the Note by December 31, Pascarella never sent or gave any form of written or oral notice on or after December 31, 1999 that any default remedy had in fact been exercised, and the court has already found that the Participation Agreement and the Promissory Note have not been cancelled and remain in full force and effect. Furthermore there was no evidence that Mr. Silver knew before July 11, 2003 that he was entitled to receive cash flow distributions under Section 2 of the agreement, that is, he had no knowledge whether or not the Pascarella preference payments had all been made. Pascarella was obligated under Section 6 of the agreement to provide annual operating reports of SPD to Silver, but none were ever received by Silver. The July 11, 2003 letter was sent shortly after the expiration of the fifteen-year lease of the building to Direct Media. Silver had knowledge of that expiration date. Since there was no evidence that Silver knew of the satisfaction of the conditions precedent to his receipt of distributions, there was no intent to relinquish or abandon a known right.

Estoppel consists of two elements: (a) the party to be estopped must do or say something, or refrain from saying or doing something, which is calculated to induce another to believe in the existence of certain facts and to act upon that belief; and (b) the other party, influenced thereby, must actually change his position or do something to his detriment, which he would otherwise not have done. In other words, estoppel rests upon the misleading conduct of one party to the prejudice of the other and must include: (i) conduct which amounts to a false representation or concealment of material facts, or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; and (ii) the intention, or, at least, the expectation that such conduct shall be acted upon by, or influence, the other party or persons; and (iii) knowledge, actual or constructive, of the real facts. See Cowles v. Bacon, 21 Conn. 451 (1852); and Johnnycake Mountain Associates v. Ochs, 104 Conn.App. 194, 208-09 (2007) citing 28 AmJur.2d 640, Estoppel and waiver § 35.

Defendants' entire argument in support of the estoppel special defense is set forth in one sentence of the Post Trial Memorandum of Law of Defendant Henry Pascarella, ¹⁷ at page 37: "Here, Plaintiffs completely passive conduct from December 31, 1999 through July 11, 2003 and Pascarella's reliance on the understanding that Plaintiff was out of the deal, must result in Plaintiff being estoppel from pursuing its claims." The court has already ruled that Mr. Silver's silence from August 26, 1999 until July 11, 2003 was not a knowing waiver of any rights under the Participation Agreement. The court also finds that Silver's "passive conduct" during that period, being no different than his "silence" during that period did not amount to a false representation or concealment of a material fact calculated to convey a false impression with the intention that Pascarella or SPD rely on the same to their detriment. Defendants had no right to rely on any belief that Silver was "out of the deal." That language comes from Exhibit V and the court has already ruled that exhibit V did not amount to a valid modification of the Participation Agreement. There was no proof of any act taken by defendants to their detriment or prejudice between December 31, 2009 and July 11, 2003 in reliance upon plaintiff's silence. The restructuring of SPD took place in or about June of 1997, long before the period of silence began. The only other possible act in reliance was Pascarella's taking of 100% of the cash flow distributions for himself and his assignees, instead of the 50% to which he was entitled under the agreement. That was not to his detriment or prejudice and the propriety of that action is the ultimate issue in this case. Defendant SPD also failed to sue Robert Silver for nonpayment of the Note or plaintiff for breach of its guaranty of the Note, but that is also nondetrimental and nonprejudicial, because the Participation Agreement (which the court has held to be in full force and effect) gives the defendant the power to reduce or charge the Silver Participation to recoup nonpayment of the Note. The court therefore finds no estoppel.

17 The arguments made in the Pascarella memorandum were adopted by the defendant Riversedge Partners in its post trial memorandum, p. 35.

Furthermore, in considering the defenses of waiver and estoppel there is a provision in the Participation Agreement as drafted by Pascarella (the "nonwaiver clause") that must be considered: "This Participation Agreement may not be changed, amended, or waived, except in writing signed by the parties hereto." (Participation Agreement, Section 8). Such nonwaiver clauses have been upheld and enforced under Connecticut law to bar both waiver and estoppel defenses, especially in non-foreclosure cases and cases such as this where the party claiming waiver and estoppel drafted the nonwaiver clause. See, S.H.V.C., Inc. v. Roy, 188 Conn. 503 (1982); Christiansen v. Cutaia, 211 Conn 613 (1989); and Liberty Bank v. New London Limited Partnership, Docket No. 4005236, Superior Court, Judicial District of New London at New London, (May 1, 2007, Devine, J.), 43 Conn. L. Rptr. 326. The nonwaiver clause of the Participation Agreement is enforceable against defendants and bars both the waiver and estoppel special defenses in the absence of any evidence of a written waiver signed by the plaintiff.

(8) Claim of Laches CT Page 14729

Defendants have filed a special defense of laches directed to all counts. The affirmative defense of laches requires a showing of inexcusable delay in making a claim which has prejudiced the defendant. Lesser v. Lesser, 134 Conn. 418, 424 (1948); Federal Deposit Insurance Co., v. Voll, 38 Conn.App. 198, 210, cert. den., 235 Conn. 903 (1995), citing Kurzatowski v. Kurzatowski, 142 Conn. 680, 684-85 (1955). The facts here do not warrant a finding of laches. Plaintiff commenced suit well within the applicable statutes of limitation. The only prejudicial effect of the claimed delay mentioned in defendant Pascarella's memorandum (at page 36) is that ". . . ownership of the Partnership [SPD] was changed by the transfer of the underlying ownership of the two Limited Liability Companies for estate planning purposes to irrevocable family trusts benefitting the Pascarella family." The only evidence of a restructuring of SPD was that it took place promptly after Pascarella bought out the partnership interest of Direct Media in June of 1997, just weeks after the Participation Agreement was signed. That certainly was not the product of any delay by plaintiff in starting this litigation. If the limited liability companies which became partners in SPD as part of the June 1997 restructuring were later converted to or their interests assigned to irrevocable family trusts, that cannot be attributed to the plaintiff who was not a partner in SPD, and there has been no showing of how that would be prejudicial. The defendants have failed to prove inexcusable delay or that they were prejudiced by any delay in starting this litigation.

(9) Claim of Accord and Satisfaction

Defendants have affirmatively pleaded accord and satisfaction as a defense to all counts, based on the alleged acquiescence of Robert Silver and the plaintiff to Pascarella's notes of the August 26, 1999 meeting (Exhibit V). An accord is a contract between creditor and debtor for the settlement of a claim by some performance other than that which is due. Satisfaction takes place when the accord is executed. W.H. McCune, Inc., v. Revzon, 151 Conn. 107, 109 (1963). The existence of a contract (the "accord') is essential to a defense of accord and satisfaction. The court has already held that the August 26, 1999 Pascarella notes (Exhibit V) were not agreed to by Silver, and do not evidence an agreement or contract between the parties. The defense of accord and satisfaction therefore fails.

(10) Claim of Disposition by Alternative Dispute Resolution

Defendant Riversedge Partners (whose memorandum is incorporated by defendant Pascarella) argues that all disputes between the parties have been resolved by Henry Pascarella acting as the person to whom the parties had designated the power to resolve disputes. The alternative dispute resolution agreement is claimed to exist by reading in combination certain language from Pascarella's August 26, 1999 notes (Exhibit V) and his actions evidenced by those notes and the language of Section 5 of the Participation Agreement regarding remedies for Silver Obligations. The argument is:

In the present case, the allegedly breached contract between R. S. Silver Company and S.P.D. Associates et al. designated Henry Pascarella to resolve any dispute arising from the failure by R.S. Silver and Company to pay the $200,000 note due S.P.D. in a timely manner. On August 26, 1999 (the date of his decision evidenced by Exhibit V), the situation was that an interest payment on the note had been overdue to S.P.D. ever since October 28, 1997 (six months after April 28, 1997, the date of the note). No part of the interest had been paid, nor had any subsequent semi-annual interest payments been paid. The evidence, largely undisputed, was that Pascarella resolved the dispute by doing three things. Pascarella gave an extension ex post facto to R. S. Silver and Company to pay interest to S.P.D. The extension was until the end of 1999. Time was of the essence. The partners in S.P.D. were bound by this concession because the Participation Agreement designated Pascarella to address failure to pay the note. The second item Pascarella decided, again binding on the S.P.D. partners, was that R.S. Silver and Company was given an extension to make principal payments. Instead of all principal having been due and payable on April 28, 1998, quarterly principal payments of $25,000 each were to be made, beginning on April 1, 2000 — close to a four-year extension to pay a one-year note. The third decision by Pascarella was that failure to abide by the concession resulted in Silver's being `out of the deal' No payments having been made, the Silver Participation was equitably reduced from 50% to zero. The remedy for Silver's failure to perform and the decision maker were both clearly provided in the Participation Agreement. As in the M L Building Company case [ M L Building Company v. Housing Authority, 35 Conn.App. 379 (1994)], despite the invitation to do otherwise, the Court is not authorized to substitute its judgment for that of the person designated in a contract freely made between the parties.

Riversedge Partners Post-Trial Memorandum, 16-17.

The language from the Participation Agreement supposedly delegating to Pascarella the power to make binding resolutions of all disputes between the parties relating to the agreement is the familiar breach remedy being the last sentence of Section 5 which specifies that, in the event of a Silver default of payment under the Note or any other obligation of the agreement, ". . . Pascarella may, at Pascarella's option, elect to equitably reduce or charge the Silver Participation to compensate Pascarella and the other partners of SPD for such non-payment."

Procedurally, this claim is out of order. It clearly should have been pleaded as a special defense under Practice Book § 10-50 which specifically lists "arbitration and award" as something that must be specially alleged. The failure to file such a special defense is fatal to this claim. It was not even mentioned at trial. Plaintiff's only opportunity to contest this claim was through its post-trial reply memorandum.

Aside from the procedural deficiency, the argument relies heavily on the August 26, 1999 Pascarella notes (Exhibit V) as a component of an alternative dispute resolution agreement. But the court has held that the Silver did not agree with the terms set forth in Exhibit V. (Finding of fact No. 33) and that it was not a contract. It therefore cannot be a component of another contract.

And finally, the court cannot accept that this last minute¹⁸ cobbled-together combination of words and actions somehow transforms itself into an alternative dispute resolution agreement giving one of the parties to the transaction the power to make binding unilateral resolutions of disputes without any opportunity for the adversary even to be heard. The federal courts of the Second Circuit have held that an order compelling arbitration should not be granted unless the contract giving rise to the dispute contains "a clear, explicit statement" showing that the parties consciously decided to relinquish their rights to judicial relief in favor of arbitration. Geico Corp. v. Pennsylvania Power Light Co., 669 F.Sup. 590, 591 (S.D.N.Y., 1987) (quoting Fuller v. Guthrie, 565 F.2d 259, 261 (2d Cir. 1977). This court adopts that standard and finds that there is no clear concise statement showing a conscious decision of Silver Co. to relinquish its rights to judicial relief in favor of letting Henry Pascarella have unilateral binding power to resolve disputes without a hearing. The defense of previous resolution by alternative dispute resolution is rejected.

18 If Pascarella in fact issued a "ruling" as the binding mediator of this dispute on December 31, 1999, in the ensuing eleven years he has totally failed to issue any notice whatsoever that he has made a ruling. Since this litigation was commenced four years ago, no motion to dismiss or motion to stay because of alternative dispute resolution was made, and as mentioned, no special defense regarding alternative dispute resolution was filed. The inescapable conclusion is that argument is an afterthought very much lacking in substance.

(11) Damages

See discussion below of Count Two in Part III B of this memorandum.

B. Count Two: Action for an accounting

The second count alleges that Pascarella and SPD have failed and refused to account to the plaintiff in regard to the business and affairs of SPD despite demand by the plaintiff, and asks for an accounting of the business and affairs of SPD. The parties stipulated at trial that Count Two seeks a remedy that would only arise if plaintiff prevails on the Count One breach of contract claim, and accordingly all consideration of Count Two was deferred.

The court has now ruled in plaintiff's favor on all liability issues under Count One. Even though the plaintiff did present an expert witness who testified extensively on damages, it is unclear to the court at this point if the plaintiff is still seeking an accounting under Count Two to develop additional evidence on the issue of damages. For that reason the court is not making any ruling on damages at this point, but will seek input from all parties as to the need for and purpose of further proceedings on Count Two.

C. Count Three: Breach of Fiduciary Duty

As first pleaded, Count Three sought damages for the tort of violation of a fiduciary duty allegedly owed to plaintiff by both defendants under theories of partnership law with specific citation to Section 34-338 of the Connecticut Uniform Partnership Act entitled "General standards of conduct of a partner." (Complaint, 9/15/06, Count Two, ¶¶ 11-14). That complaint was superseded as of January 26, 2009 with the filing of the present First Amended complaint in which the claim for breach of fiduciary duty appears as Count Three which has dropped all the allegations regarding fiduciary allegations owed by a partner and makes no claim against defendant Riversedge Partners. Instead, the current claim for breach of fiduciary duty is directed exclusively against defendant Atty. Henry Pascarella alleging an attorney-client relationship between him and Robert Silver/Silver Co. giving rise to fiduciary duties which he breached, causing damage to the plaintiff. (Amended Complaint. Count Two, ¶¶ 13, 15, 16.) There are seven claims of of breach of fiduciary duty alleged in ¶ 15, all related to the Participation Agreement and/or the property at 200 Pemberwick Road owned by SPD. There is also a vague allegation in ¶ 14 that "Moreover, Attorney Pascarella and SPD owed the Plaintiff a fiduciary duty with respect to their dealings with the Plaintiff as it relates to the Participation Agreement." The court will address separately the claim of attorney-client fiduciary duties and the "other" fiduciary duties under ¶ 14.

(1) Attorney-Client Fiduciary Duties

The evidence clearly shows that at various times before 1977 Atty. Pascarella had performed legal services on behalf of Mr. Silver and several of his entities, including the plaintiff corporation. But the parties stipulated at trial that there is no claim that Henry Pascarella was acting as an attorney for the plaintiff after April 28, 1997 (Tr. 3/13/09 p. 35), and the court has already found (Finding of Fact No. 12) that Pascarella was not acting as attorney for Mr. Silver or Silver Co. in connection with this investment of $1,250,000. Between that finding and stipulation, there was no attorney-client relationship between Henry Pascarella and the plaintiff at any time on or after March 3, 1997 when the Letter Agreement was delivered and the $1,250,000 check was delivered.

Since the court found no attorney-client relationship relating to the plaintiff's investment with SPD, and that is the entire subject matter of the Participation Agreement, and all the allegations of violations of fiduciary duty relate to the Participation Agreement and/or the property, there can be no breach of any attorney-client fiduciary duty as alleged in the Amended Complaint. All of the claims of breach of duty are directly related to a transaction in which there was no attorney-client relationship between the parties and those alleged breaches therefore could not have been caused by any fiduciary duty arising out of the attorney-client relationship.

Plaintiff also claims that Attorney Pascarella violated the fiduciary duty owed to former clients by failing to comply with Rule 1.8 of the Rules of Professional Conduct as it was in effect in March and April 1997 when the dealings between Silver and Pascarella resulted in the $1,250,000 investment and the Participation Agreement. Rule 1.8 at that time provided in relevant part:

(a) A lawyer shall not enter into a business transaction with a client or former client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client or former client unless:

CT Page 14734

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client or former client and are fully disclosed and transmitted in writing to the client or former client in a manner which can be reasonably understood by the client or former client;

(2) The client or former client is advised in writing that the client or former client should consider seeking the advice of independent counsel in the transaction and is given a reasonable opportunity to do so;

(3) The client or former client consents in writing thereto;

(4) With regard to a business transaction the lawyer advises the client or former client in writing either (i) that the lawyer will provide legal services to the client or former client concerning the transaction, or (ii) that the lawyer will not provide legal services to the client or former client and that the lawyer is involved as a business person only and not as a lawyer representing the client or former client and that the lawyer is not one to whom the client or former client can turn for legal advice concerning the transaction.

Court Exhibit 1¹⁹

19 Rule 1.8 was amended June 26, 2006 effective January 1, 2007. The amendment added the following definition: ". . . the phrase "former client" shall mean a client for whom the two-year period starting from the conclusion of representation has not expired. The full text of the Rule, as amended, was admitted into evidence as Court Exhibit 2.

The court finds that Henry Pascarella was a member of the bar of Connecticut in 1997 and that Robert Silver and the plaintiff R.S. Enterprises, Inc. f/k/a/ R.S. Silver Co., Inc. had been clients of Atty. Pascarella prior to 1997. The court further finds that Atty. Pascarella entered into a business transaction with those former clients in March-April 1997 by soliciting the $1,250,000 investment into SPD and by drafting, negotiating and entering into the Participation Agreement. The court also finds that Atty. Pascarella, by his own admission at trial, did not comply with Rule 1.8 of the Rules of Professional Conduct in that he failed to provide the written notices required by subsections (2) and (4) and failed to obtain the written consent of his former clients as required by subsection (3).

The court finds and concludes, however, that the ethical violations of Atty. Pascarella as noted above do not give rise to civil liability to the plaintiff in this case. The preamble to the rules of Professional Conduct is very clear:

Violation of a Rule should not itself give rise to a cause of action against a lawyer, nor should it create any presumption that a legal duty has been breached. In addition, violation of a Rule does not necessarily warrant any other nondisciplinary remedy, such as disqualification of a lawyer in pending litigation. The Rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies. They are not designed to be a basis for civil liability. Furthermore, the purpose of the Rules can be subverted when they are invoked by opposing parties as procedural weapons. The fact that a rule is a just basis for a lawyer's self-assessment, or for sanctioning a lawyer under the administration of a disciplinary authority, does not imply that an antagonist in a collateral proceeding or transaction has standing to seek enforcement of the Rule. Nevertheless, since the Rules do establish standards of conduct by lawyers, a lawyer's violation of the Rule may be evidence of breach of the applicable standard of conduct.

In Noble v. Marshall, 23 Conn.App. 227, 231, (1990), the Appellate Court quoting the above preamble to the Rules, held: "We conclude that the Rules of Professional Conduct do not of themselves give rise to a cause of action, even to an attorney's client. The rules that have been adopted by the judges of the Superior Court have the force of law . . . but they were not intended to create a private cause of action under CUTPA." (Citation omitted).

The court therefore declines to impose civil liability on Atty. Pascarella based on the finding that he violated Rule 1.8 in the spring of 1997. Plaintiff had other remedies. It could have filed a grievance with the Statewide Grievance Committee, or could have sued Atty. Pascarella for legal malpractice and attempted to establish a violation of the standard of care by violation of the Rule. None of those remedies were pursued.

The court's finding of a violation of the Rules of Professional Conduct creates another possible ethical duty upon the court itself, under Canon 3(b)(3) of the Code of Judicial Conduct: "A judge should take or initiate appropriate disciplinary measures against a judge or lawyer for unprofessional conduct of which the judge may become aware." The commentary to Canon 3(b) addresses the discretion to be exercised in such situations: "Disciplinary measures may include reporting a lawyer's misconduct to an appropriate disciplinary body. The judge who receives this information still has discretion to report it to the appropriate authority, depending on the seriousness of the conduct and the circumstances involved." The court will exercise that discretion and make no report or take no action against Atty. Pascarella. The evidence of his prior representation of Mr. Silver and the plaintiff related to services concluded more than two years prior to March-April 1997, ²⁰ and they would therefore not meet the definition of "former clients" under the current Rule. Furthermore, if the court were to refer this matter to the Statewide Grievance Committee now in 2010, the reference would be untimely under Practice Book § 2-32(a)(2)(E) which calls for dismissal of the complaint if "the complaint alleges that the last act or omission constituting the alleged misconduct occurred more than six years prior to the date on which the complaint was filed." (This would be more than thirteen years.) The court will also observe that same time limitation as to any direct disciplinary action by the court.

20 The consultations in 1995 regarding the 9 West commission were between Atty Pascarella and a Silver corporation known as R.S. Silver Associates, Ltd., which was not involved in the 1997 SPD investment or the Participation Agreement. (See Finding of Fact No. 5.)

(2) Joint Venture Fiduciary Fiduciary Duties

The plaintiff now claims for the first time in its post-trial memorandum the Participation Agreement created a joint venture between the parties and that the other fiduciary duties alleged in ¶ 14 are fiduciary duties owed by one joint venturer to another. There is Connecticut authority that "[a]s a matter of law, parties to a joint venture undertake fiduciary duties to each other concerning matters within the scope of the joint venture." Electronic Associates, Inc. v. Automatic Equipment Development Corp., 185 Conn. 31, 35 (1981). But before the plaintiff can take advantage of that concept, it must have pleaded that the relationship between the parties with respect to the 200 Pemberwick Road property and the Participation Agreement was a joint venture. He made no such allegation in the Amended Complaint and therefore deprived the defendants of notice and opportunity to litigate at trial whether or not the relationship of the parties actually was a joint venture. The very general allegation of ¶ 14 was insufficient notice that a joint venture was claimed. The pleading insufficiency is particularly prejudicial given the history of having pleaded breach of partnership fiduciary obligations in detail in the original complaint. In amending the complaint in 2009 plaintiff did not simply substitute "joint venture" for the word "partnership." Rather, it abandoned the partnership allegations entirely, leaving only the vague ¶ 14 reference to some other fiduciary duties. A joint venture shares many of the aspects of a partnership. Indeed "[t]he distinction between a partnership and a joint venture is often slight, the former commonly entered into to carry on a general business, while the latter is generally limited to a single transaction." Travis v. St. John, 176 Conn. 69, 72 (1978). "The relations and obligations in a joint venture are generally governed by the principles of common law partnership." Id., 73. In fact, our Supreme Court has said that a joint venture was historically looked upon as "a sort of informal partnership." Dolan v. Dolan, 107 Conn. 342, 349 (1928). Having pleaded partnership in detail and then replaced those allegations with an amended complaint, to avoid being misleading it was incumbent on the plaintiff to plead with the same specificity that it was claiming a partnership-like relationship — a joint venture. The claim of breach of fiduciary duties owed to a joint venturer is therefore not properly in the case and plaintiff cannot prevail on that theory.

Even if the existence of a joint venture relationship had been properly pleaded, the evidence fails to support that proposition because one required element of a joint venture — shared or joint control over the venture — has not been proved.

A joint venture requires five elements, namely two or more persons must enter into a specific agreement to carry on an enterprise for profit; their agreement must evidence their intent to be joint venturers; each must make a contribution of property, financing, skill, knowledge, or effort; each must have some degree of joint control over the venture; and there must be a provision for the sharing of both profits and losses. (Emphasis added.) 46 Am.Jur.2d, Joint Ventures, § 8.

The mere sharing of an economic interest is not sufficient to form a joint venture, since there must be some evidence that the parties participate and have control over the enterprise. Id., § 13.

The control element played a role in the holding of Doe v. Yale University, 252 Conn. 641 (2000), that a joint venture could be an employer under the workers' compensation act, where the court noted that "each had a voice" in the venture. Id. 682. Plaintiff Silver Co. had no control whatsoever in the management of SPD or the operation of the 200 Pemberwick property. Section 4 of the Participation Agreement vests "exclusive control and management of SPD" with Pascarella or his designee(s). Section 10 goes even further, providing that "[i]t is the Essence of this Participation Agreement that Pascarella and/or his designees shall control SPD and the Premises without any interference or participation by Silver or his permitted successors or assigns . . ."

Silver Co., having no right to participate in the management or control of SPD, could not have been a joint venturer with Pascarella, and consequently Pascarella could not have had joint venture fiduciary duties to Silver Co.

(3) Other Fiduciary Duties

Citing the exclusive control provisions of the Participation Agreement, plaintiff argues that the defendants, acting through Pascarella, held a position of confidence and trust with respect to Silver which gave rise to fiduciary duties which were violated by the purported extinguishment of the Silver Participation, by wrongfully failing to make distributions to plaintiff, and by charging the partnership excessive and unnecessary management fees and attorneys fees. The court finds that the plaintiff has failed to prove the existence of those fiduciary duties.

Our Supreme Court has carefully refrained from defining a fiduciary relationship in precise detail and in such a manner as to exclude new situations. "It has left the bars down for situations in which there is justifiable trust confided in one side and a resulting superiority and influence on the other." Harper v. Adametz, 142 Conn. 218, 225 (1955). Such a fiduciary relationship is characterized by a unique degree of trust and confidence between parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other. Barber v. Skip Barber Racing School, LLC, 106 Conn.App. 59; Dunham v. Dunham, 204 Conn. 303, 322 (1987), overruled in part on other grounds by Santopietro v. City of New Haven, 239 Conn. 207, 213 n. 8 (1996). A fiduciary relationship exists where the fiduciary is either in "dominant position, thereby creating a relationship of dependency" or is "under a special duty to act for the benefit of another." Alaimo v. Royer, 188 Conn. 36, 41 (1982). It has long been recognized, however, that not all business relationships implicate the duty of a fiduciary. Hemingway v. Coleman, 49 Conn. 390, 391 (1881). The Supreme Court has thus said that "[i]n the cases where this court has, as a matter of law, refused to recognize a fiduciary relationship, the parties were either dealing at arm's length, thereby lacking a relationship of dominance and dependence, or the parties were not engaged in a relationship of special trust and confidence." Tricon International, Ltd v. United Construction, Inc. et al., Docket No. X03CV98-0518862S, Superior Court, Judicial District of New Britain (April 1, 2005, Sheldon, J.), 2005WL 1097103 (Conn.Super.), citing Alaimo, supra. Thus, it was held in Hi Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 43 (2000), that for a plaintiff to succeed on a breach of fiduciary duty claim, it is necessary to show that the defendant "exercised dominance or influence over the plaintiff as a result of his superior knowledge and skill and that the defendant undertook to act primarily for the benefit of the plaintiff. Failure to demonstrate such element is fatal to a breach of fiduciary duty claim." (Emphasis added.)

The court finds that when Mr. Silver and Mr. Pascarella met between March 3 and April 28, 1997 to work out the details of the Silver Participation in the Pemberwick property, they dealt with each other "at arm's length." There was nothing in their relationship at that time which created a dependency or any expectation that one would act primarily for the other. They were each experienced professionals, thoroughly familiar with commercial real estate transactions in the Greenwich market — Pascarella as an experienced real estate lawyer and Silver as an experienced commercial real estate broker, and each of them as experienced developers of commercial real estate in the area. Furthermore, they were each very familiar with the particular property at 200 Pemberwick Road. Pascarella had been a partner in the project since it was developed in the mid 1980's, approximately twelve years, and was the managing partner in 1997 when the Silver Participation was put in place. Silver was the broker who put together the purchase of the property from the Mead School, the construction of the building, the procurement of Direct Media as the tenant/partner, and from the mid 1980's until about 1990 was the majority (64%) partner of SPD. True, the Participation Agreement vested total control in Pascarella, but that did not result from anything inherent in their relationship but from the terms of a contract freely and voluntarily entered into, which Mr. Silver accepted and "absolutely" was comfortable claiming under. (2/4/09 Tr. 101). There has been no showing whatsoever that the control Pascarella had over the project and the Silver's dependency on Pascarella resulted from any superior knowledge and skill possessed by Pascarella, and consequently there were no fiduciary duties created between them.

IV ORDER

For the foregoing reasons, the court:

1. Enters judgment for the plaintiff against both defendants on Count One, as to liability only.

2. Enters judgment for the defendants on Count Three.

3. Since, by agreement, proceedings on Count Two, seeking an accounting were deferred, pending the court's ruling on Count One, and judgment on liability only has now entered against the defendants on Count One for breach of contract, the plaintiff shall, not later than July 23, 2010 file a supplemental memorandum indicating whether or not further proceedings are requested on Count Two, and, if so, the scope of such proceedings contemplated by plaintiff. Plaintiff is also requested, in view of the judgments which have entered, to list in its memorandum each item in the "Prayer for Relief" and the "Demand for Relief" attached to the amended complaint of January 26, 2009, indicating which items of relief the plaintiff is presently seeking. The defendants may respond by August 3, 2010. After reviewing those memoranda the court will determine what further proceedings, if any, will be held prior to a determination of damages on Count One and the disposition of Count Two.