Opinion
NO. 2009-CV-201
10-28-2013
Verres Financial Corporation v. Robert M. Sowa
ORDER
Plaintiff, Verres Financial Corporation ("VFC"), commenced a civil action against the Defendants, Robert M. Sowa ("Mr. Sowa") and his wife Joanne ("Mrs. Sowa") along with a number of other defendants in 2009, alleging conversion, civil conspiracy, fraud, violations of RSA 358-A, fraudulent misrepresentation, and constructive trust. Mr. Sowa asserted a number of counterclaims, including breach of partnership agreement, breach of contract, conspiracy to breach partnership agreement and or contract, tortious interference with partnership agreement, a petition for accounting from various entities, spoliation, unjust enrichment, breach of fiduciary duty, enhanced compensatory damages, fraud, and piercing the corporate veil. Both parties have asserted a number of affirmative defenses. This case was tried to the Court.
Although VFC brought this action against a number of individuals with which it alleges Mr. Sowa conspired, it has filed no memorandum setting forth what damages it claims are due from them. One defendant, such as Robert Jenkins, has filed for bankruptcy. It is not clear that VFC intends to pursue those claims. The Court therefore makes no finding with respect to any of the other individuals against whom claims were made.
For the reasons stated in this Order, the Court finds for VFC and against Mr. Sowa in the net amount of $946,794.74. As explained in this Order, the Court finds that Mr. Sowa's liability to VFC exceeds VFC's liability to Mr. Sowa on Mr. Sowa's counterclaims in that amount. The Court finds against VFC and for Joanne Sowa on VFC's claims against her. The parties' claims and counterclaims are discussed and accepted or rejected as explained in the Order.
I
The sole shareholders of VFC are Adrienne and Peter Rolla, children of Mario Rolla a/k/a Mike Rolla, (collectively the "Rollas"). For many years Mario Rolla was a lawyer in the State of New York who focused on corporate and tax law. While practicing law, he established a number of manufacturing companies. He testified that his family controls VFC and a number of related companies. VFC is headquartered in New York but has locations all over the United States and China. According to Adrienne Rolla, the long standing secretary-treasurer of VFC, the Rolla-family companies have between 800 and 900 employees, with gross annual revenues of $150 million.
Mario Rolla met Mr. Sowa in the early 1980s. Mr. Sowa was an automobile salesman when they met. They began a business relationship in the 1980s by starting a business which purchased luxury automobiles and then leased them to consumers, a practice which was then unusual. To facilitate this business, essentially run by Mr. Sowa, Mr. Rolla established two divisions of VFC referred to as VFC-New Hampshire (or VFC-NH) and VFC-New York (or VFC-NY). Each division had separate accounting records. The money to run the VFC-NH business came from VFC-NY. VFC-NY would advance monies to VFC-NH as an open account; the New Hampshire books would show a debt to VFC-NY, and the VFC-NY division would accrue interest on a monthly basis. Monthly balance sheets and income statements were prepared and distributed to Mr. Sowa. Mr. Sowa was to be paid a monthly fee by VFC, and would receive 50% of the net profits of VFC-NH, that is, profits after the interest expense from funds advanced by VFC-NY were deducted.
As leasing automobiles became a common business practice, Mr. Sowa and Mario Rolla moved VFC-NH into other business ventures. During these years and into the 1990s, they continued to work together pursuant to an unwritten agreement that Mr. Sowa characterized as a partnership and Mario Rolla characterized as an independent consulting agreement. VFC continued to supply all of the money to fund New Hampshire operations. While Mr. Sowa was responsible for developing new businesses, he was unable to unilaterally pursue new business opportunities without Mario Rolla's approval. Mario Rolla described himself as the "gatekeeper" of the funds. (Trial Tr. Vol. 1, 20: 13-21:2, Dec. 7, 2011.) Mr. Sowa did not own an equity interest in any of the VFC corporations, (Tr. Vol. 1, 15:11-24; Trial Tr. Vol. 2, 224:4-20, Dec. 8, 2011), nor did he participate in absorbing any losses from VFC-NH. (Trial Tr. Vol. 6, 728:17-22, Dec. 19, 2011.)
By 2002, it had become clear that the structure of the operation was not a desirable one from the standpoint of Mr. Sowa. VFC-NH had begun acquiring real estate, and much of the real estate did not produce income. The current liabilities from VFC-NH to VFC-NY resulting from interest on funds advanced to purchase non-income producing properties exceeded $14 million.
Mario Rolla testified that the parties agreed to restructure their business operation so that Mr. Sowa would have the opportunity to achieve a bonus from the profits generated. The agreement was memorialized in VFC's Exhibit 32, dated April 1, 2002 (the "Agreement"). However, neither party ever signed it. The Agreement is brief, and contains no merger clause; much of the testimony at trial concerned the parties' understanding of the rights and obligations under the Agreement.
Mario Rolla testified, in substance, that the Agreement was created to modify the existing agreement between the parties, and to provide Mr. Sowa with a greater opportunity to earn income. According to Mario Rolla, at the time the Agreement was drafted, the cash flow from VFC properties "was not sufficient to pay the real estate taxes and to pay interest" and Mr. Sowa felt "he could never see any performance bonus money." (Tr. Vol. 1, 23:15-22.) Under the Agreement, many of the non-income producing properties would be transferred to the New York books, reducing the debt service on the New Hampshire books. The debt was reduced from approximately $14 million to $2 million. (Tr. Vol. 1, 27:20-22.) In order to provide Mr. Sowa an incentive to sell properties being transferred to the New York books, it was agreed that Mr. Sowa would receive a commission of 5% of the selling price of all real estate held by VFC-NY when the property was sold.
The Agreement states that "[t]he purpose of these adjustments are to simplify, make more accurate and provide a real, immediate and fair incentive to the manager." (Pl.'s Ex. 32.) The document contains a section entitled "Compensation & Bonus plan for Manager (RMS)." (Id.) The document provides that the manager is entitled to "a) 50% of pretax profit of VFNH payable after year end closing[,] b) 5% of selling price on all real estate sold that was transferred to VFNY books[, and] c) 72K draw against #4a and 4b." (Id.) Mr. Sowa denies that he ever agreed to the terms of the 2002 Agreement.
II
While this case spanned 15 trial days, and the parties presented voluminous documentation in support of their respective positions, the parties' claims against each other can be stated succinctly. VFC claims that Mr. Sowa misappropriated its assets. Mr. Sowa claims that he had an equity right in VFC-NH, and that apart from that, the accounting between VFC-NY and VFC-NH was improper, and served to increase the amount of debt owed by VFC-NH and reduced its profit. VFC denies that a partnership existed, and denies that the accounting was improper.
III
To resolve the competing claims, the Court must first determine if a partnership existed. The Uniform Partnership Act, RSA chapter 304-A (2005), sets forth the law governing partnerships in New Hampshire. Swiezynski v. Civiello, 126 N.H. 142, 146 (1985). Whether a partnership exists is a mixed question of law and fact. Cadle Co. v. Bourgeois, 149 N.H. 410, 415 (2003). A partnership is defined as an "association of 2 or more persons to carry on as co-owners a business for profit and includes, for all purposes of the law of this state, a registered limited liability partnership." RSA 304-A6, I. The association must be voluntary and must be based on an agreement between the parties. Hilco Prop. Servs., Inc. v. U.S., 929 F. Supp. 526, 536 (D.N.H. 1996). However, the agreement need not be reduced to writing, as the intent to form a partnership may be implied from the parties' actions. Higgins v. Higgins, 125 N.H. 806, 809 (1984); see also Stone & Michaud Ins. v. Bank Five for Savings, 785 F. Supp. 1065, 1069 (D.N.H. 1992) (applying New Hampshire law).
Mr. Sowa alleges that he formed a partnership with Mario Rolla sometime in 1982, for which no writing exists but, rather, was "signed with a handshake." (Tr. Vol. 6, 693:7-13.) Because the parties did not originally document their intentions in a written agreement, the Court first looks to "the conduct of the parties and the circumstances surrounding their relationship and transactions [to determine] the factual question of whether a partnership existed. . . ." Hilco Prop. Servs., 929 F. Supp. at 536 (citations omitted.) Although there is "no specific test to determine the existence of a partnership, courts consult a variety of factors including whether the parties intended to proceed as partners, have shared profits or losses, had the right to participate in the control of the enterprise, or commonly held real property." Id. at 537 (internal quotation marks and citations omitted). The Court considers each of these factors in turn.
A. Intent to Proceed as Partners
The parties dispute whether Mario Rolla and Mr. Sowa ever intended to form a partnership. Mario Rolla testified that Mr. Sowa was hired as an independent consultant. (Tr. Vol. 1, 14:5-13.) Mr. Sowa claims that Mario Rolla told him he would be a managing partner and referred to him as a partner on several occasions. (Tr. Vol. 6, 695:3-10; Trial Tr. Vol. 10, 1241:3-7, Jan. 12, 2013.) However, Mr. Sowa admitted that he listed himself as a "consultant" and not a partner on his personal income tax returns from 2003 through 2008, (Tr. Vol. 6, 714:3-717:19.), and as a consultant on a residential real estate loan application. (Pl.'s Ex. 27; Trial. Tr. Vol. 8, 933:16-934:20, Dec. 21, 2011.) He never received an IRS form K-1, used to report partnership income from VFC, but instead received an IRS form 1099, which is a report of miscellaneous income. For 2003 through 2007, his tax returns, introduced as exhibits at trial, show that he never filed a Schedule C, for income from a trade or business. (Tr. Vol. 6, 712:18-727:16.)
In an advertisement published on December 6, 1986, Mr. Sowa is described as a manager while Peter and Adrienne Rolla are described as partners. (Pl.'s Ex. 31; Tr. Vol. 8, 944:12-946:11.) While there was some testimony that Mr. Sowa was occasionally referred to as a partner by Mario Rolla, that fact is not dispositive of the parties' rights. As the United States District Court recently noted, "even if a business relationship is called a partnership by its participants (or, as is more often the case, even if the participants refer to themselves as 'partners,') the arrangement will not be treated as a partnership for state law purposes unless it meets the state's statutory partnership definitional requirements." See Contour Design, Inc. v. Chance Mold Steel Co., 794 F. Supp. 2d 315, 328-29 (D.N.H. 2011) (internal quotation and citations omitted).
B. Right to Participate in Control of the Enterprise
Mario Rolla testified that there was never any discussion of Mr. Sowa having an equity position in the company. (Tr. Vol. 1, 15:11-16:5.) Mr. Sowa testified that he "felt like [he] was an equity partner" in Verres based primarily on contributing "sweat equity"—Mr. Sowa "was going to do the work; [Mario Rolla] was going to provide the money." (Tr. Vol. 6, 702:11-704:3.) Yet, Mr. Sowa testified that he never had an equity or shareholder position in any of the VFC companies. (Tr. Vol. 10, 1240:1-1243:15.) Mr. Sowa stated that "[he] was put in charge of the five or the six corporations in the state of New Hampshire and given full authority to operate these business (sic), as [he] saw fit." (Trial Tr. Vol. 7, 840:12-19, Dec. 20, 2011.) He testified that he had the authority to draw checks to himself because Mario Rolla "gave [him] the checkbooks and gave [him] the authority when [Mario Rolla] let [him] sign [his] own payroll checks and draw checks." (Tr. Vol. 7, 843:7-844:5.) However, if Mr. Sowa wanted to pursue new business opportunities, he would have to consult with, and get the necessary funds from, Mario Rolla before moving forward. (Tr. Vol. 1, 20:10-21:2.)
This lack of control is a significant factor suggesting that no partnership existed. See Higgins v. Higgins, 125 N.H. 806 (1984) (finding no partnership where person claiming the existence of a partnership did not effectively control the management of the various enterprises nor did he make any major financial decisions).
C. Commonly Held Real Property
There is no evidence in the record that the parties commonly held real property. All property in question was purchased by funds from VFC. As a result, this factor weighs against finding the existence of a partnership.
D. Sharing of Profits and Losses
RSA 304-A:7, IV, (b) provides that "the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment . . . (b) [a]s wages of an employee or rent to a landlord."
Mario Rolla testified that the "package was that Mr. Sowa was to be an independent consultant. We didn't want any employees, and he was to be paid a monthly fee, and participate in a bonus - -a performance bonus equal to one-half the net profits of the division, i.e., the New Hampshire division which he was responsible for." (Tr. Vol. 1, 14:8-13.) Mr. Sowa testified that it was agreed he would be compensated by a monthly draw and fifty percent (50%) of the net profits from VFC-NH. (Tr. Vol. 6, 691:13-16.) He admitted that he never shared in any losses. (Tr. Vol. 6, 728:17-22.)
Although Mr. Sowa received 50% of the net profits, in light of the fact that he did not share in any losses, the Court does not find this compensation scheme suggestive of a partnership. See 59A Am. Jur. 2d Partnership § 155 (August 2013) (stating the general rule under the UPA is that an agreement to share losses and profits is essential to existence of partnership); see also Higgins, 125 N.H. at 808-09 ("Even if the master had found the profits were being shared, he could still reasonably have found no partnership existed. The evidence could have supported a finding that the plaintiff lacked the power of ultimate control necessary to make him a co-owner of the business.") (internal citations and quotations omitted).
Mr. Sowa received copies of financial statements from VFC-NY which established an interest charge on a monthly basis. Mr. Sowa argues that this interest charge was merely imposed to "hide profit." His testimony was that the parties understood that the interest charge would be "backed out" when he left employment with VFC and that he would receive the value of his contributions to the business when he left. (Tr. Vol. 8, 981:3-982:24). This claim is vigorously disputed by Mario Rolla and VFC. Mr. Sowa's argument makes no sense. VFC was one corporation with two divisions; charging interest from one division to another would not have had any tax consequence to the corporation. (Tr. Vol. 10, 1250:9-1251:24.)
Finally, Mr. Sowa disputes accepting the Agreement, but acted upon it by writing himself checks for a 5% commission when properties that had been transferred to the New York books were sold and by accepting payment of $72,000 a year as consulting fees. The New Hampshire Supreme Court has stated on many occasions that to determine the intent of the parties in carrying out the transaction, there is no clearer evidence than how they behaved with respect to the transaction. See, e.g., Birch Broad., Inc. v. Capitol Broad. Corp., 161 N.H. 192, 197 (2010). The Court believes that the Agreement was entered into freely by the parties, but in any event it was ratified by the course of performance. Mr. Sowa was not a partner, and did not have an equity right to the properties, but did have the right to a bonus from profits earned by VFC-NH.
For the reasons stated above, the Court finds Mr. Sowa has failed to meet his burden to show a mutual "intent to do those things which constitute a partnership." In re Medallion, 103 Bankr. 8, 13 (Bankr. D. Mass. 1989). At no point during the lengthy relationship between the parties did VFC seek to recover money paid to Mr. Sowa, even though VFC's own documents show that by 2002 Mr. Sowa's supposed liability to VFC exceeded $14 million, and in many of the years following, Mr. Sowa's supposed liability increased.
Accordingly, the Court finds that Mr. Sowa was not a partner, but did have an employment agreement with a profit sharing component. His compensation was not a draw against partnership profits but was a fee as Mario Rolla himself testified; Mr. Sowa "was to be paid a monthly fee and participate in a bonus." (Tr. Vol. 1, 14:8-13.)
III
Many of the claims brought by VFC against Mr. Sowa arose more than three years before initiation of the suit in April 2009. However, in November 2011, this Court held an evidentiary hearing on Mr. Sowa's statute of limitations claim and held that apart from two 2006 checks, the doctrine of fraudulent concealment tolled the running of the statute of limitations. See Verres Fin. Corp. v. Robert M. Sowa, Merrimack County Superior Ct., No. 217-2009-cv-00201 (Nov. 30, 2011) (Order, McNamara, J.).
VFC alleges that Mr. Sowa committed conversion and fraud when he intentionally exercised dominion over VFC's corporate checkbook and funds for his personal use. VFC submits that Mr. Sowa's behavior of failing to disclose his conduct was fraudulent because Mr. Sowa made misrepresentations of the truth by submitting false invoicing causing VFC to pay for billings which were claimed to be for the benefit of VFC.
"The essence of conversion is the exercise of dominion or control over goods which is inconsistent with the rights of the one entitled to their possession." Pacific & Atlantic Shippers, Inc. v. Schier, 109 N.H. 551, 553 (1969). "To prevail in an action for misrepresentation, fraud or deceit, [a] plaintiff[] must prove there was a misrepresentation of fact." Studwell v. Travelers Ins. Co., 121 N.H. 1090, 1091 (1981). "A plaintiff has the burden of proving fraud by clear and convincing evidence." Hair Excitement v. L'Oreal U.S.A., Inc., 158 N.H. 363, 369 (2009).
The Court finds that VFC has proved by clear and convincing evidence that Mr. Sowa fraudulently misappropriated the following funds:
A. "Funds Procured by Sowa"
The list entitled "Funds Procured by Sowa" represents a compilation of funds that Mr. Sowa began misappropriating from VFC from July 1995 through February 2008. (Tr. Vol. 6, 749:8-10.) The list totals $662,055.71. (Pl.'s Ex. 21.) Mr. Sowa testified that he began misappropriating these funds in order to operate the VFC race car company ("Verres Racing"); however, he did not inform the Rollas of his activity because the Rollas had told him to shut the race car company down. (Tr. Vol. 6, 749:18-750:9.) It was not until 2008 that Mr. Sowa brought the list to the attention of Mario Rolla. (Tr. Vol. 6, 758:15-17.)
There is a dispute in the record about when Mario Rolla learned of this list. (Pl.'s Ex. 21.) He testified that he had never seen the "Funds Procured by Sowa" document totaling $662,055.71 until after the commencement of litigation. Rather, Mario Rolla testified that he was presented with a "Funds Procured by Sowa" document totaling $292,676.71. (Pl.'s Ex. 20.) Although the Rollas claimed they did not learn of the "Funds Procured by Sowa" list until 2008, Mr. Sowa produced compelling evidence that the Rollas might have known of the document earlier. However, Mr. Sowa has not established that this earlier knowledge affects the Court's ruling on the statute of limitations. Nevertheless, Mr. Sowa testified that he had kept the list from the Rollas (Tr. Vol. 6, 751:22-752:3) until March 2008 (Tr. Vol. 6, 758:15-17; 762:1-11) and admits he is liable for the $662,055.71. (Sowa Post-Trial Memo. 35.)
B. Mast Road Property
The evidence at trial clearly showed that invoices were paid to vendors who performed no work on property owned by VFC known as Mast Road in Goffstown, New Hampshire. (Tr. Vol. 7, 863:1-883:25); see (Pl.'s Ex. 47, tab 12.) Mr. Sowa invoked the Fifth Amendment when questioned about invoices involving this property. Under N.H. R. Ev. 512(d), a court may, in a civil case, draw an inference against an individual who invokes the Fifth Amendment. The Court is entitled to take an inference against Mr. Sowa based on the invocation of his Fifth Amendment right. Therefore, the Court finds VFC is entitled to the converted funds of $1,416.87 made out to "Miche Corp," the converted funds of $2,588.08 made out to "Structural Consultants," and the converted funds of $13,450 made out to "Laventure Concrete" resulting in a total amount of $17,424.95.
C. Mr. Sowa's Personal Bank Account
VFC introduced evidence at trial of a number of suspicious deposits and withdrawals from Mr. Sowa's checking account at Citizens Bank. The parties provided a stipulation of Mr. Sowa's assertion of his Fifth Amendment right regarding several items listed in the summary of VFC's Exhibit 51. See (Stipulation As to Pl.'s Ex. No. 51 Summary); (Tr. Vol. 6, 767:10- Tr. Vol. 7, 789:8.) These items amounted to a total of $218,288.01. Again, the Court is entitled to take an inference against Mr. Sowa based on the invocation of his Fifth Amendment right. See N.H. R. Ev. 512(d). Based upon the evidence presented, and in part upon the invocation of the Fifth Amendment right, the Court finds that Mr. Sowa is liable for conversion in the amount of $218,288.01.
D. Exhibit 51: Sowa's Bank Accounts
Mr. Sowa testified and provided reasonable explanations regarding certain deposits into his checking account, produced as Exhibit 51. He did not assert his Fifth Amendment privilege with respect to those transactions. The Court finds that VFC has not established its claim with respect to those items except for the December 2005 checks for $8,500 and $5,000 cash totaling $13,500. The Court declines to take a negative inference from the fact that Mr. Sowa testified that he withdrew cash to pay contractors who did not pay taxes, since from the evidence presented, the Court believes that this probably occurred, and that it is difficult to believe that VFC-NY was unaware of this practice. Therefore, Mr. Sowa is liable for $13,500.
E. Exhibit 47, tab 2, 500 Riverdale Avenue
VFC clams it has proved fraud and/or fraud by silence entitling it to $128,280.23 for VFC expenditures on property owned by Joseph Carreau. The Court agrees. Mr. Carreau testified that he was hired "to work for [Mr. Sowa] at Verres Financial" beginning around 1990. (Trial Tr. Vol. 12, 1446:7-18, Jan. 12, 2012.) He provided chauffeuring services, and performed "[e]rrands and whatever needed to be done for the company." (Tr. Vol. 12, 1446:13-18.) He further testified that he believed that Mr. Sowa was providing these improvements to the property located at 500 Riverside Road "as payment for what [he] had done for [Mr. Sowa]." (Tr. Vol. 12, 1470:10-17.) While the VFC funds expended on Mr. Carreau's modular home were described as such on the disbursement ledgers from December 31, 2003 through July 7, 2005 and presented to Adrienne Rolla, see (Pl.'s Ex. 42, tab 2.), VFC did not know that the property was owned by Mr.Carreau. Even assuming that Mr. Carreau had performed services for Mr. Sowa, those services had never been authorized by VFC. The use descriptions accurately portrayed how the VFC funds were being utilized, but did not disclose that the property did not belong to VFC. Therefore, VFC has demonstrated, by clear and convincing evidence, that Mr. Sowa is liable to VFC for $128,280.23.
However, VFC has recovered $75,000 from Mr. Carreau in settlement of the claims made against him as a result of this transaction. Sowa is therefore entitled to a $75,000 credit on this claim.
F. Exhibit 47, tab 10, Concrete Cutters
Evidence presented at trial showed that three invoices—amounting to $14,500— from a company referred to as "Concrete Cutters Enterprise" were in fact from a vendor referred to as "Country Club Enterprises," a company dealing in the sale of golf carts which never performed any work for VFC. Therefore, VFC has proven its claim and is entitled to $14,500.
G. Exhibit 47, tab 11, Mount Uncanoonuc
VFC presented an invoice from MTS Associates in the amount of $4,500 paid by VFC for repairs to cell tower property. It also proved that MTS Associates was in fact a company dealing with the selling and repairing of golf carts and forklifts, and had no capability to perform repairs on Mount Uncanoonuc. As a result, VFC has proved its claim and is entitled to $4,500.
H. Exhibit 47, tab 4, Carreau checks
VFC produced significant evidence that four separate checks endorsed by Joseph Carreau were fraudulent. Mr. Carreau invoked his Fifth Amendment right while testifying about these four separate VFC checks. He invoked his Fifth Amendment right when asked whether Check 7170, in the amount of $2,000 and drawn to cash, was used for "Money for laborers to remove snow from . . . Community Plaza Roof." (Tr. Vol. 12, 1451:6-1452:6.) There was no credible evidence that these funds were used for VFC's purposes. Similarly, Mr. Carreau invoked his Fifth Amendment right regarding three other VFC checks he endorsed, totaling $6,000, when asked for what purpose the checks were used. The Court finds based on all the evidence that VFC has proved its claim by clear and convincing evidence and is entitled to the value of the four VFC checks amounting to $8,000.
I. Dr. Igari
Mr. Sowa paid a person identified as one of his physicians, a Dr. Igari, $3,500 with VFC funds. He introduced no evidence suggesting that there would be any legitimate reason why VFC would pay Dr. Igari. At trial, when asked whether Dr. Igari was a vendor of VFC or if Mr. Sowa benefited from the payment of the $3,500 to Dr. Igari from the VFC checking account, Mr. Sowa invoked his Fifth Amendment right. The Court draws a negative inference from Mr. Sowa's testimony and finds that VFC has proved its claim and is entitled to $3,500. See N.H. R. Ev. 512(d).
J. Checks to Marcia McDonald
VFC contends that Mr. Sowa is liable for $68,312.64 as detailed in Exhibit 58. Specifically, it asserts that a series of 17 VFC checks totaling $53,392.64 was paid to or cashed by Marcia McDonald and then ultimately all of the monies from these checks were given to Mr. Sowa. Further, in 2004, Mr. Sowa paid Marcia McDonald a total of $14,920 from his personal checking account. At that time, Mr. Sowa's salary was approximately $72,000. VFC asserts that these extra funds were VFC funds which Mr. Sowa paid or gave to Marcia McDonald from his personal checking account. VFC's claim is that all or part of the checks comprising the $68,312.64 are fraudulent. However, VFC has not met its burden of proving fraud with particularity.
A plaintiff cannot allege fraud in general terms, but must specifically allege the essential details of the fraud and the facts of the defendants' fraudulent conduct. Snierson v. Scruton, 145 N.H. 73, 77 (2000). During trial, Mr. Sowa's counsel objected to entering Exhibit 58 into evidence arguing it was irrelevant because the amended writ (Doc. #83) did not plead fraud with particularity regarding the McDonald checks. See (Trial. Tr. Vol. 3, 548:16-552:9, Dec. 9,2011.) After a review of the December 22, 2009 Amended Writ, the Court agrees that VFC has failed to sufficiently plead facts which would connect the Exhibit 58 documents or testimony to a claim for fraud. But more importantly, the evidence is insufficient to prove by clear and convincing evidence that these checks were fraudulent and that funds were misappropriated. Therefore, Mr. Sowa is not liable for the $68,312.64.
IV
VFC makes two separate additional claims; that Mrs. Sowa was complicit, and that Mr. Sowa fraudulently transferred assets to her, and that it can therefore reach those assets pursuant to RSA 545-A.
First, VFC asserts that Mr. Sowa "acquired, purchased, and improved his farmhouse homestead [the "Farmhouse"] with funds he misappropriated from VFC while general manager of VFC-NH and conveyed a one-half undivided interest in said property to his wife, Joanne M. Sowa . . . as joint tenants with rights of survivorship for no consideration . . . ." (VFC Post-Trial Memo. 21.) According to VFC's post trial memorandum, all of Mrs. Sowa's income came from Mr. Sowa.
However, there was evidence at trial that not only was Mrs. Sowa employed, but a VFC employee, Douglas Pochini (without knowledge of VFC's New Hampshire counsel), deceitfully attempted to contact her during trial at her place of business.
VFC contends it has proven by clear and convincing evidence that "a confidential relationship existed between the Sowas as husband and wife, and that [Mr. Sowa] transferred assets of VFC to [Mrs. Sowa] for no consideration . . . .[a]nd a constructive trust is appropriate as [Mrs. Sowa] was unjustly enriched as she obtained title to the property through fraudulent acts of" Mr. Sowa. (Id.) VFC argues that the Sowas were unjustly enriched in the following amounts: $186,000; $19,696; and $23,607.00. (Id. at 20-23.) Furthermore, based on the above allegations, and the claim that Mr. Sowa used VFC funds to purchase the Farmhouse, VFC asserts Mr. Sowa fraudulently transferred VFC assets with the intent to hinder, delay and defraud VFC.
VFC produced compelling evidence that RE Jenkins submitted bills to VFC for work done at Mast Road, a VFC property, which was actually done at Mr. Sowa's property at 266 Deerfield Rd., the Farmhouse. It also produced compelling evidence and invoices from MJF Excavation for work done at Mast Road, which was actually done at 266 Deerfield Rd. (Trial Tr. Vol. 11, 1315:6-1316:12, Jan. 10, 2012.) Mr. Sowa took the Fifth Amendment when asked about the following funds: seven VFC checks listed on Exhibit 26 (the "Farmhouse Addition Costs List") amounting in $30,521.88; two checks made out to RE Jenkins Construction amounting in $19,696 for purported site work on VFC owned property named Mast Road; and five checks made out to MJF Excavation amounting in $23,607 for purported site work on Mast Road for a total of $73,824.88. Mr. Sowa admits he is liable for this amount. See (Sowa Post-Trial Memo 35.)
In its post-trial memo, VFC asserts that Mr. Sowa invoked his Fifth Amendment privilege with regard to the entire Farmhouse Addition Costs List amount— $186,260.34— and not just the seven VFC checks from the Farmhouse Addition Cost List totaling $30,521.88, which were specifically discussed during trial. See (VFC Post-Trial Memo 21-22.) The Court finds that VFC's counsel's question, "Okay, with regard to this list, -- do you claim that this list provides a listing of all transactions concerning Verres with regard to your farmhouse addition?" referred only to the list of seven checks specifically identified during Mr. Sowa's testimony. (Tr. Vol. 7, 852:2-862:25.) Therefore, the Court declines to draw a negative inference against Mr. Sowa regarding the remaining items on the Farmhouse Addition Cost List. Nonetheless, based on all of the evidence the Court finds by clear and convincing evidence that fraud was committed, and finds Mr. Sowa is liable to VFC for the entire $186,260.34
However, VFC has failed to prove by clear and convincing evidence that Mrs. Sowa was complicit in this fraud. Mrs. Sowa did not testify at trial, and VFC presented no evidence that Mrs. Sowa participated in, or was aware of her husband's wrongdoing.
VFC nonetheless asserts that Mr. Sowa fraudulently transferred VFC assets to Mrs. Sowa with the intent to hinder, delay and defraud VFC pursuant to RSA 545-A:4 when he transferred a one-half undivided interest in the Farmhouse property by way of warranty deed to Mrs. Sowa for no consideration, and that it can therefore reach those assets. Specifically, VFC asserts that Mr. Sowa used VFC funds to purchase and secure the Farmhouse—$61,828 put towards the balance of the Farmhouse purchase price (the "Alpha Title" check) and a VFC check for $30,198 applied to "Sowa Loan payoff" (the "Bow Mills" check)—and that he deeded the property to his wife. Further, VFC contends that Mr. Sowa transferred VFC funds into a joint bank account ending in 6023 he shared with his wife, and that Mrs. Sowa had constructive notice of the transfer and use of the VFC funds for renovations on the Farmhouse. VFC seeks to hold Mrs. Sowa jointly and severally liable for the following amounts: the Alpha Title and Bow Mills checks totaling $92,206 which VFC plans to use as offset/recoupment in accordance with this Court's earlier order. See Verres Fin.Corp., Merrimack County Superior Ct., No. 217-2009-cv-00201, at 6 (Nov. 30, 2011) (Order, McNamara, J.) and $186,260.34 comprising the entire Farmhouse Addition Cost List as VFC funds spent on alleged improvements made to the transferred property.
In its posthearing memorandum, VFC asserts that Mr. Sowa made the transfers with the actual intent to defraud. (VFC Post-Trial Memo. 28.) A plaintiff who asserts actual fraud has the burden of proving the claim by clear and convincing evidence, Chagnon Lumber Co. v. De Mulder, 121 N.H. 173, 176 (1981), unlike a plaintiff who alleges constructive fraud, who need only prove the claim by a preponderance of the evidence. Dahar v. Jackson, 459 F.3d 117, 123 (1st Cir. 2006). The debtor's intent at the time he makes the transfer is at issue; the plaintiff must prove subjective intent to "hinder, delay or defraud." Dahar v. Jackson, 318 B.R. 5, 13, (2004)
RSA 545-A:4, II, provides a non-exclusive list of several factors—referred to as the "badges of fraud"— for the Court to consider in order to determine actual intent. Id. The Court considers the following relevant factors.
A. Transfer or Obligation to Insider
Mr. Sowa transferred real estate to his wife, Mrs. Sowa. She qualifies as an insider. See RSA 545-A:1, VII(a)(1); RSA 545-A:1, XI ("insider" includes "relative" and "relative" is defined as spouse).
B. Debtor Retained Possession of Property Transferred After Transfer
Mr. Sowa transferred the real estate to his wife by way of warranty deed as joint tenants. New Hampshire does not protect marital property by allowing married couples to hold property as tenants by the entirety, but protects marital property by the homestead exception. RSA 480:1; Boissonault v. Savage, 137 N.H. 229, 231 (1993). While the New Hampshire Supreme Court has never specifically ruled on the issue, it has suggested that creditors can reach property held by spouses as joint tenants with rights of survivorship. Compare In re Coffey's Case, 157 N.H. 156, 177-79 (2008), with RSA 545-A:1, II, (c). Therefore, Mr. Sowa did maintain possession of the Farmhouse property following the conveyance to his wife. Similarly, Mr. Sowa's other funds were held in a joint bank account with his wife and he thereby maintained possession over these funds as well.
C. Transfer or Obligation Was Disclosed or Concealed
No evidence was presented to indicate that the transfer of the property was concealed. Mr. Sowa conveyed the Farmhouse property by way of warranty deed to himself and his wife as joint tenants in common with a right of survivorship. See (Pl.'s Ex. 28.) This deed was recorded on October 20, 2004 in the Merrimack County Registry of Deeds. (Id.)
D. Prior Threat of Being Sued
The transfer of the Farmhouse real estate occurred in October, 2004, several years before the commencement of this action. Similarly, the last of the seven VFC checks from the Farmhouse Addition Cost List was paid in November 2005. Therefore, the Court finds that Mr. Sowa was not threatened with suit before using these funds for improvements on the Farmhouse.
E. Transfer of Substantially All Debtor's Assets
Mr. Sowa testified that following a September 6th heart attack that placed him in the hospital for two weeks, he was advised by his attorney to have his wife's name put on the deeds to all of their properties and his checking account at that time. As previously stated, he did not insulate his share of the property from creditors by doing so. Coffey's Case, 157 N.H. at 177-79. Therefore, the transfer cannot be said to be of substantially all of Mr. Sowa's assets; rather, he maintained joint ownership of the property.
F. The Debtor Absconded
There is no evidence in the record that Mr. Sowa absconded.
G. Debtor Removed or Concealed Assets
There is no evidence that Mr. Sowa removed or concealed the assets. Rather, the transfer was recorded in the registry of deeds.
H. Value of Consideration Received By Debtor Was Reasonably Equivalent to the Value of the Asset Transferred
Mr. Sowa did not receive any consideration in exchange for the transfer of the property, or the improvements made thereon by VFC funds. Rather, Mr. Sowa's testimony indicates that the transfers were made for estate planning purposes.
I. Debtor Was Insolvent or Became Insolvent Shortly After the Transfer Was Made
The transfer of the property occurred in October 2004 and the last VFC check from the Farmhouse Addition Cost List was paid in November 2005. There is no evidence in the record that shortly after this time period Mr. Sowa became insolvent.
J. Transfer Occurred Shortly Before or After a Substantial Debt Was Incurred
Mr. Sowa recorded the Farmhouse property deed on May 6, 2004 in the Merrimack County Register of Deeds. In order to purchase the property he used a combination of VFC funds and a mortgage. Approximately five months later, Mr. Sowa transferred the property to his wife, as a joint tenant, on October 20, 2004. The Court finds that the five month period that elapsed between the time of purchase and the time of transfer weighs against an inference of actual intent to defraud.
Based on consideration of these factors, the Court finds VFC has not met its burden to prove a fraudulent transfer. Rather, the transfer of the assets was for a legitimate purpose: estate planning. Mr. Sowa testified that he was advised by his attorney to have his wife's name put on all of the deeds on all of his properties and checking accounts at that point in time. This legitimate purpose outweighs any of the indicia that may suggest Mr. Sowa had an actual intent to defraud VFC.
In sum, VFC has failed to prove its claim against Mrs. Sowa, and has failed to prove a fraudulent transfer pursuant to RSA 545-A.
V
VFC further alleges that Mr. Sowa violated RSA 358-A, the Consumer Protection Act ("CPA") based on his misappropriation of its assets. RSA 358-A provides, in relevant part that "[i]t shall be unlawful for any person to use any unfair method of competition or any unfair or deceptive act or practice in the conduct of any trade or commerce within this state." RSA 358-A:2 (2009). While noting that the New Hampshire Supreme Court has never decided the precise issue, the United States District Court has held that the CPA is not applicable in cases involving disputes between employees and employers. Jon-Don Products, Inc. v. Malone, No. 02-429-M, 2003 WL 1856420, at *3 (D.N.H. Apr. 10, 2003). The United States District Court looked to the Massachusetts courts for guidance, since New Hampshire's statute is based on Massachusetts's CPA. Id. at *3 (citing Milford Lumber Co. v. RCB Realty, Inc., 147 N.H. 15, 17 (2001)).
The Massachusetts Supreme Judicial Court has specifically held that M.G.L. 93-A (the Massachusetts Consumer Protection Act) does not apply to employer-employee transactions. It reasons that the statute provides a remedy for those who suffer injury as the result of another person's use or employment of unfair methods of competition or an unfair or deceptive act while engaged in any trade or commerce. Mass. Gen. Laws Ann. Ch. 93-A:11 (West 2013) (emphasis added); Manning v. Zuckerman, 388 Mass. 8, 12 (1983); see also Bolen v. Paragon Plastics Inc., 754 F. Supp. 221, 227 (D. Mass. 1990).
Like M.G.L. 93-A, RSA 358-A2 provides a remedy for those who suffer any loss as a result of the use or employment by another person of an unfair method of competition in the conduct of their business. There is nothing in the statute which would suggest it could be applied to a dishonest employee by an employer, and VFC has not provided any authority for this proposition. Therefore, the Court believes that RSA 358-A, like the Massachusetts statute, simply was not intended to apply to employee-employer relations. VFC's CPA claim cannot succeed.
VFC has not briefed its other claims and the Court finds that these claims are either unsupported by the evidence or lack merit.
VI
Mr. Sowa makes a number of counterclaims. His overarching claim is that he was a partner in the venture, and therefore, he is entitled to a share in the assets of VFC-NH. Since the Court finds he was not a partner, the Court rejects those claims. However, that does not end the matter. Mr. Sowa was entitled to a share of the VFC-NH profits, in accordance with the 2002 Agreement, and VFC had an obligation to properly account for the expenses and revenue of VFC-NH.
Mr. Sowa claims that he was entitled to revenue from the Massachusetts cell towers which was not properly credited on the VFC-NH books. The Court agrees that the cash receipt journals maintained by Marsha McDonald for VFC-NH and the consolidated trial balances confirm that Mario Rolla withheld the distribution of revenue from the Gardner smokestack and the Templeton tower. VFC's argument that Mr. Sowa was not involved in the management of the cell towers after 2006 is unavailing; the point of the 2002 Agreement was, in part, to allow Mr. Sowa to focus on the cell tower business. VFC-NH should have been credited with $319,676 in cell tower revenue.
The Court rejects Mr. Sowa's claim that VFC-NH is entitled to $709,956 for the sale of the Bow Mills stock. While Mr. Sowa's figures regarding VFC's cost basis in the sales price are correct, the 2002 Agreement between the parties contemplated that interest would be charged at 6%, and $202,425 in interest for carrying the stock from 1993 to 2002 would be part of the basis upon which VFC's profit would be calculated. (Pl.'s Ex. 32.) VFC's analysis of $543,564 is therefore correct.
Mr. Sowa's expert pointed out significant questions regarding the manner in which VFC underreported the gain on its 2007 federal income tax returns. However, this issue does not affect Mr. Sowa's right to VFC revenue. It does affect VFC's right to equitable relief.
The evidence also disclosed that a Rolla owned family entity, GEM Southeast, Inc., took a charitable deduction on its 2008 federal income tax return for inventory owned by Verres Racing which was, according to the testimony of Adrienne Rolla, worthless, for the full retail value of that asset, determined by her to be $235,959. Mr. Sowa's expert vigorously disputed the propriety of that deduction. While the Court need not decide the issue of the propriety of the deduction, the Court can only assume that since the property was valued at $235,959 for federal income tax purposes, $235,959 was the fair market value of the property. There is no dispute that GEM Southeast Inc. obtained title to the property.
VFC is bound by the valuation its principals placed on the property. Since the asset was conveyed to a party other than VFC, its value at conveyance must be considered revenue to VFC-NH. It may be true that by donating the property, and obtaining a tax deduction for it, GEM Southeast, Inc. realized less than $235,959, but the decision to donate the property was made by the principals of VFC.
Mr. Sowa's expert, Leslie Gosule, CPA constructed a theory that a charge of $10,445,820 should be made to the retained earnings of VFC-NY based upon what he considered inadequate adjusting journal entries. The Court disagrees.
At the time the 2002 Agreement was created, Mr. Sowa and Mario Rolla had agreed to restructure the arrangement because the New Hampshire division of VFC would never be profitable because of the large amount of debt it had, and the lack of income producing properties. As of March 31, 2002 the amount owed by VFC-NH to VFC-NY was $14,100,461. Based upon the agreement to transfer properties to New York, the amount owed by VFC-NH was recalculated and reduced to a little more than $2 million. Based upon this 2002 Agreement, apparently VFC decided to restate its balance sheet, which had no impact on the earnings of VFC. In simplest terms, the Rollas apparently decided that the interest VFC-NY had been charging VFC-NH prior to the Agreement needed to appear somewhere on VFC's balance sheets, even though it would never be collected. It was therefore carried on VFC's books as retained earnings. Based upon review of the VFC tax returns, Mr. Gosule admits that no dividends have ever been paid based on these retained earnings.
Whether or not this is a proper accounting practice is not the issue. Since the entire purpose of the 2002 Agreement was simply to reduce the interest burden of VFC-NH, to provide that over 10 million dollars in interest would never be paid by VFC-NH, no part of the $10,446,820 can be considered an asset of VFC-NH.
Mr. Gosule's opinion also claims that interest charged between VFC-NY and VFC-NH was "erratic." The undisputed facts are that Mr. Sowa received copies of monthly statements, and those statements showed the interest charged. It is not unreasonable to suppose that in a commercial transaction, where an interest rate is set nowhere in the Agreement between the parties, that the rate might fluctuate due to economic conditions based upon tacit agreement of the parties. Mr. Sowa never objected to any fluctuation in interest rate, or lack of documentation in the time frame from 2002 to 2008, before he was terminated. The parties' course of performance is important evidence of the meaning of the transaction. Birch Broad., Inc., 161 N.H at 197. The Court cannot find on the record presented that Mr. Sowa's rights were violated by VFC's recordkeeping.
Mr. Sowa argues that he is entitled to the full 5% commission for the sale of the Harvey Road property in September 2007 for the sum of $1,340,000. The 5% commission due would be $312,000. Mr. Sowa received only $50,000. However, the transaction closed after he was terminated. Since the Court has found that he was simply an employee, he has no rights in any revenue obtained by his former employer after he was terminated.
Finally, Mr. Sowa argues that even if the Court finds that he has no partnership interest in the assets of VFC, he is entitled to damages on a theory of unjust enrichment. He argues that he is entitled to one half of the net valuation of all 14 properties which remained in the New Hampshire division of VFC. The Court disagrees.
Unjust enrichment is an equitable remedy "that is available when an individual receives a benefit which would be unconscionable for him to retain." Axenics, Inc. v. Turner Constr. Co., 164 N.H. 659, 669 (2013) (emphasis in original); Pella Windows and Doors Inc. v. Faraci, 133 N.H. 585, 587 (1990). It is "not a boundless doctrine, but is, instead, narrower, more predictable, and more objectively determined than the implications of the words unjust enrichment." Id. (internal quotation and citation omitted). "One general limitation is that unjust enrichment shall not supplant the terms of an agreement." Clapp v. Goffstown Sch. Dist., 159 N.H. 206, 210 (2009). The general rule is that an unjust enrichment claim cannot arise where a valid contract applies. Id. at 211. Here the rights and obligations of the parties were defined by the 2002 Agreement. Unjust enrichment is not available to Mr. Sowa. Axenics, Inc., 164 N.H. 671.
Moreover, a person who seeks an equitable remedy must have acted equitably. The equitable doctrine of clean hands "expresses the principle that where a party comes in to equity for relief he or she must show that his or her conduct has been fair, equitable, and honest as to the particular controversy in issue." 27A Am. Jur. 2d Equity § 98 (August 2013); see generally Polonsky v. McIlwaine, 114 N.H. 467, 470-71 (1974). Here, Mr. Sowa wrongfully and meretriciously converted property of VFC. Under these circumstances, a court could not provide the equitable remedy of unjust enrichment.
VII
This Court ruled in its Order of November 2011 that to the extent VFC has a claim against Mr. Sowa which is otherwise barred by the statute of limitations, it may assert those claims on the theory of offset recoupment. Verres Fin. Corp. v. Robert M. Sowa, Merrimack County Superior Ct., No. 217-2009-00207 (Nov. 30, 2011) (Order, McNamara, J.). However, it is not necessary to undertake this analysis in the instant case because as of March 31, 2008 when the relationship between the parties ended, the amount of money that VFC-NH was due from VFC-NY was less than the amount of money misappropriated by Mr. Sowa.
While the Court does not accept Adrienne Rolla's analysis of the rights and liabilities of the parties, her spreadsheet, Exhibit 69, is a useful starting point for the analysis. According to Exhibit 69, Adrienne Rolla's calculation of the liabilities between the New Hampshire and New York divisions, as of March 31, 2008, the New Hampshire intercompany liability exceeded the New York intercompany receivable by $106,489.
However, the Court has found that rental income from the Massachusetts cell towers and the inventory donation of $235,959 to GEM Southeast, Inc. should have been credited to VFC-NH. Finally, since the Court has determined that Mr. Sowa was a consultant, who was paid a fee—and not a salesman who received only commissions and was responsible to repay draws which did not equal his commissions, and not a partner who shares in losses—he had no liability for draws which exceeded compensation, and was therefore not responsible to pay the $640,000 he had received in consulting fees back to VFC. Mr. Sowa would be entitled to 50% of the $555,635 in revenue due VFC-NH, or $277,817.50.
VFC makes no argument that New York law applies to this transaction, or that it is entitled to restitution under the unfaithful servant doctrine, and the Court expresses no opinion on either issue. Astra USA v. Bildman, 455 Mass. 116, 129-30 (2009).
However, the Court has found that Mr. Sowa wrongfully misappropriated $1,299,612.24 from VFC. Thus, VFC has no liability to Mr. Sowa, but Mr. Sowa is liable to VFC in the amount of $1,021,794.74. Mr. Sowa is entitled to a credit for the $75,000 recovered by VFC from Mr. Carreau as a result of the Riverdale Avenue transaction. Thus, VFC is entitled to $946,794.74 from Mr. Sowa. While the Court finds that VFC has not proved a right to the remedy of unjust enrichment against Mrs. Sowa, even if it had established such a right, it would not be entitled to the remedy based upon its inequitable conduct. 27A Am. Jur. 2d Equity § 98 (August 2013); see generally Polansky, 114 N.H. at 731-32.
As previously noted, Mr. Sowa is entitled to credit of $75,000 for the funds VFC recovered from Joseph Carreau.
SO ORDERED
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Richard B. McNamara,
Presiding Justice
RBM/