LLC v. Scott Sharkley et al. (2010)

MEMORANDUM OF DECISION ON PLAINTIFF'S MOTION FOR CONTEMPT AND FOR ORDERS IN SUPPORT OF PREJUDGMENT REMEDIES (# 201)

Introduction

This is a commercial litigation case involving a dispute over the purchase by the plaintiff of three franchised children's hair salons from the defendants.   These salons are located in Fairfield and Westchester Counties;  more specifically, Cos Cob and Westport, Connecticut, and Larchmont, New York. The plaintiff, The Final Cut, LLC, is a Delaware limited liability company formed by a group of investors in order to purchase salon franchises from the defendants.   The defendants are Scott Sharkey, his wife Linda Sharkey, and Sharkey's Franchising Co., LLC (Sharkey's Franchising), a Connecticut limited liability company owned and controlled by the couple.   Other named defendants include the now-dissolved limited liability companies controlled by the Sharkeys for the three salons at issue which were sold to the plaintiff.

The plaintiff previously obtained a prejudgment remedy (PJR).  Now before the court is the plaintiff's motion for contempt, in which the plaintiff requests that this court enter a default judgment against the defendants, or in the alternative, to hold the defendants in contempt of court for disobeying the court's earlier order of a PJR in favor of the plaintiff.   The plaintiff also asks that the defendants be held in contempt of court for disobeying certain disclosure orders entered in connection with the PJR. The plaintiff further seeks an order that the defendants immediately produce cash sufficient to satisfy the PJR.

By order dated January 20, 2009 (# 119.10), the court, Tobin, J., granted the plaintiff's application for prejudgment remedies.   In doing so, the court entered the following orders:  (1) an attachment of $600,000 on the property of the defendants Scott Sharkey and Sharkey's Franchising;  (2) a garnishment of $600,000 on any amounts presently or becoming due to Scott Sharkey and Sharkey's Franchising;  and (3) an attachment of $75,000 on the property of the codefendant Linda Sharkey.   Following Judge Tobin's order, the plaintiff moved, pursuant to Practice Book § 13-13 and General Statutes § 52-278n(a),¹ for an order that the defendants disclose assets sufficient to satisfy the PJR. The defendants' objection to these motions was sustained “only in part” by the court, Downey, J., who found the demand to disclose assets within three days to be too stringent (# s 126 and 129).

In March 2009, the defendants moved for an order of substitution pursuant to General Statutes § 52-578n(d).²  The motion sought a ruling that the defendant Sharkeys' house at 37 Highland Road, Westport, be deemed sufficiently valuable to satisfy the PJR order.   This motion for substitution was granted by the court, Tierney, J., who also marked “off” the plaintiff's motions for disclosure of assets and the defendants' objections thereto.   See The Final Cut, LLC v. Sharkey, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 08 5007365 (November 25, 2009, Adams, J.).   The court, Adams, J., later held an evidentiary hearing on the plaintiff's motion to determine the sufficiency of the substituted asset, where it heard testimony from real estate appraisers and a real estate attorney.   Based on that evidence, the court determined that the defendant Scott Sharkey's equity in his Westport home did not provide sufficient security to satisfy the PJR order.   The court further ordered that the defendants disclose assets within twenty days following the date of its decision, which was entered on November 25, 2009.

The plaintiff claims that the defendants' disclosure dated December 8, 2009, in response to Judge Adams' order (and later supplemented by the defendants) is incomplete, inadequate, and in violation of the law.   Specifically, the plaintiff claims that the defendants violated § 52-278n(a), which requires the defendants to, “disclose property in which [they have] an interest or debts owing to him sufficient to satisfy a prejudgment remedy.   The existence, location and extent of the [defendants'] interest in such property or debts shall be subject to disclosure.”   Further, according to subsection (e) of that same statute, “Rules of court shall be enacted to carry out the foregoing provisions and may provide for reasonable sanctions to enforce orders issued pursuant to this section.”

Legal Standard

Practice Book § 13-14 provides in pertinent part:  “(a) if any party has failed to answer interrogatories or to answer them fairly, or has intentionally answered them falsely or in a manner calculated to mislead, or has failed to respond to requests for production ․ or has failed to comply with a discovery order made pursuant to Section 13-13 ․ or has failed otherwise substantially to comply with any other discovery order made pursuant to Sections 13-6 through 13-11, the judicial authority may, on motion, make such order as the ends of justice require. (b) Such orders may include the following:  (1) the entry of a nonsuit or default against the party failing to comply;  (2) the award to the discovering party of the costs of the motion, including a reasonable attorneys fee ․”

“The court's authority to impose civil contempt penalties arises not from statutory provisions but from the common law ․ The penalties which may be imposed, therefore, arise from the inherent power of the court to coerce compliance with its orders.”  (Citations omitted.)  Papa v. New Haven Federation of Teachers, 186 Conn. 725, 737-38, 444 A.2d 196 (1982).  “The decisional law concerning contempt findings is well-established.   The interests of orderly government demand that respect and compliance be given to orders issued by courts possessed of jurisdiction of persons and subject matter.   One who defies the public authority and willfully refuses his obedience, does so at his peril.  United States v. United Mine Workers, 330 U.S. 258, 303, 67 S.Ct. 677, 91 L.Ed. 884 (1947).[A]n order issued by a court with jurisdiction over the subject matter and person must be obeyed by the parties until it is reversed by orderly and proper proceedings.  Id., 293.  Rocque v. Design Land Developers of Milford, Inc., 82 Conn.App. 361, 366, 844 A.2d 882 (2004) ․

“Contempts of court may be classified as either direct or indirect, the test being whether the contempt is offered within or outside the presence of the court ․ [A] finding of indirect civil contempt must be established by sufficient proof that is premised upon competent evidence presented to the trial court in accordance with the rules of procedure as in ordinary cases ․ The contempt remedy is particularly harsh ․ and may be founded solely upon some clear and express direction of the court ․ One cannot be placed in contempt for failure to read the court's mind.”  (Citation omitted;  internal quotation marks omitted.)   Cianbro v. National Eastern Corp., Superior Court, judicial district of New Britain, Docket No. CV 05 4007723 (January 10, 2007, Shapiro, J.).

“In a civil contempt proceeding, the movant has the burden of establishing, by a preponderance of the evidence, the existence of a court order and noncompliance with that order.”  Statewide Grievance Committee v. Zadora, 62 Conn.App. 828, 832, 772 A.2d 681 (2001).   A finding of contempt is a question of fact, and therefore, before finding a party in contempt for the willful violation of a court order, the trial court must consider the circumstances and facts surrounding the violation.  Marcil v. Marcil, 4 Conn.App. 403, 405, 494 A.2d 620 (1985).  “To constitute contempt, a party's conduct must be willful ․ Noncompliance alone will not support a judgment of contempt ․ [T]he credibility of witnesses, the findings of fact and the drawing of inferences are all within the province of the trier of fact ․ The fact that the order had not been complied with fully, however, does not dictate that a finding of contempt must enter.   It is within the sound discretion of the court to deny a claim for contempt when there is an adequate factual basis to explain the failure to honor the court's order ․ The fact that the order had not been complied with fully, however, does not dictate that a finding of contempt must enter.   It is within the sound discretion of the court to deny a claim for contempt when there is an adequate factual basis to explain the failure to honor the court's order.  [Thus,] [t]he inability of a party to obey an order of the court, without fault on his part, is a good defense to the charge of contempt ․ The contemnor must establish that he cannot comply, or was unable to do so.”  (Citations omitted;  internal quotation marks omitted.)  Keeney v. Buccino, 92 Conn.App. 496, 513-14, 885 A.2d 1239 (2005).

Discussion

As previously stated, the plaintiff argues that the defendants' disclosure pursuant to the court order of November 25, 2009 is insufficient and incomplete.   The plaintiff argues that aside from certain accounts receivable from the plaintiff ³ and from “Kids Stuff, LLC,” ⁴ the defendants' disclosure lists Scott Sharkey's sole asset (apart from his Westport home) as a bank account containing only $264.25, and that the sole asset of Sharkey's Franchising is described as a bank account containing $1,675.36.

Specifically, the plaintiff claims that the defendants are withholding information about the following assets:

1.  Between the time the PJR application was filed in April 2008, and when it was granted in January 2009, the defendant Sharkey's Franchising deposited over $481,700 into an account at Chase Bank in Westport, Connecticut.   The defendants then withdrew $478,600, including $217,000 of which was placed in a money market account.

2. Sharkey's Franchising currently has at least twenty-four other franchised salons sold to other franchisees.   It has not disclosed the monthly royalty income from those franchises.   Monthly bank statements reveal that this company deposits somewhere between $36,000 and $83,000 each month.

3. The bank statements produced by the defendant show that Scott Sharkey used his Chase Bank account to receive monies payable to Sharkey's Franchising through 2008 when the account was depleted.   On January 29, 2009, the day after Judge Tobin's PJR orders, Scott Sharkey opened a bank account for Sharkey's Franchising at the Westchester Bank in New York. Bank statements produced by the defendants show that Scott Sharkey has subsequently deposited several hundred thousand dollars into that account.5

4. Bank statements from the Westchester Bank show that the Sharkeys use this account to pay personal debts, and that they regularly transfer tens of thousands of dollars into an account called “REG CK.” The defendants have not produced the records from that bank account, the money market account or the personal savings account.

The plaintiff contends that Scott Sharkey, who was served both individually and as president of Sharkey's Franchising is attempting to hide and/or shelter his assets, as well as the assets of Sharkey's Franchising, by moving the company's checking account out of state to a New York bank, and by transferring at least $217,000 into a money market account.   Further, the August 2009 bank statement shows that Scott Sharkey moved $178,000 of the company's assets into a “personal savings account,” thereby depleting the account balance.

The matter is now before the undersigned, which held a hearing on the plaintiff's motion for contempt, at which time the court provided an opportunity for counsel for both the plaintiff and defendants to be heard.   The defendants contend that they are not in violation of any court order, inasmuch as no judicial authority has ever set forth the specific form and terms of the defendants' disclosure, and that the movement of funds occurred before an insufficiency was found by the court.   By way of background, after reciting the reasons why the equity in the Sharkey's residence was insufficient to secure the PJR, Judge Adams' decision of November 25, 2009 concluded, “[The court] orders that the defendants Scott Sharkey and Sharkey Franchising disclose assets to the plaintiff within twenty days of the date of this decision.”   The Final Cut, LLC v. Sharkey, supra, Superior Court, Docket No. CV 08 5007365.   In response to the plaintiff's allegations, the defendants cite to this language and contend that they have fully satisfied the court's order.   The defendants contend that this language merely calls for the disclosure of assets, and maintained at oral argument that Judge Adams' order does not mean the defendants must disclose assets sufficient to satisfy the PJR. The defendants further maintain that, “[t]he monthly royalty incomes from certain franchisees are not required to be disclosed.”  (Defendants' Brief, 5/3/10, p. 3.)

The court is not persuaded by this line of reasoning.   The defendants' interpretation makes sense only if it is divorced from all context whatsoever.   Assets may be either income producing or not income producing, or a potential source of income, but the court is concerned only with disclosure of sufficient assets to satisfy the PJR as required by statute, not an exercise in sophistry.   For purposes of both this PJR and the order of disclosure which concludes this memorandum of decision, the court hereby makes the following articulation.   It finds that “assets” of the defendants Scott Sharkey, Linda Sharkey and Sharkey's Franchising includes all income earned by operation of Sharkey's Franchising, including all current assets, cash, investments, accounts receivable, and funds held in the account of or for the benefit of either Scott Sharkey, Linda Sharkey and/or Sharkey's Franchising, together with proceeds thereof, including any assets acquired by expenditure of such funds.⁶  The physical location (New York, Connecticut or elsewhere) of the accounts containing such assets is immaterial.

“The purpose of the prejudgment remedy of attachment is security for the satisfaction of the plaintiff's judgment, should he obtain one ․ It is primarily designed to forestall any dissipation of assets by the defendant and to bring [those assets] into the custody of the law to be held as security for the satisfaction of such judgment as the plaintiff may recover.”  (Emphasis added.)  Marlin Broadcasting, LLC v. Law Office of Kent Avery, LLC, 101 Conn.App. 638, 646-47, 922 A.2d 1131 (2007).   The court is not concerned here with whether or not the plaintiff will ultimately prevail on any of its claims at trial.  “[P]rejudgment remedy proceedings are not involved with the adjudication of the merits of the action brought by the plaintiff or with the progress or result of that adjudication.   They are only concerned with whether and to what extent the plaintiff is entitled to have property of the defendant held in the custody of the law pending adjudication of the merits of that action.”  Id., 646.   Therefore, the court will not enter a default judgment against the defendants at this time.

Pursuant to § 52-278n(a) quoted in footnote one, infra, the law is clear that the defendants must disclose property or debts owing to them sufficient to satisfy the PJR. Furthermore, pursuant to § 52-278n(e), and Practice Book §§ 13-13 and 13-14, the court may impose reasonable sanctions to enforce orders entered in connection with a PJR, which may include costs and reasonable attorneys fees.  “Decisions on the entry of such sanctions rest within the sound discretion of the trial court ․ On viewing a claim that this discretion has been abused, great weight is due to the action of the trial court and every reasonable presumption should be given in favor of its correctness ․ [T]he ultimate issue is whether the court could reasonably conclude as it did ․ The factors to be considered by the court include:  (1) whether the noncompliance was caused by inability, rather than willfulness, bad faith or other fault;  (2) whether and to what extent noncompliance caused prejudice to the other party, including the importance of the information sought to the party's case;  and (3) which sanction would, under the circumstances of the case, be an appropriate judicial response to the noncomplying party's conduct.”  (Citation omitted;  internal quotation marks omitted.)  Tuccio v. Garamella, 114 Conn.App. 205, 208, 969 A.2d 190 (2009).

“[C]areful attention must be paid to the prompt and orderly handling of discovery.   Trial courts should not countenance unnecessary delays in discovery and should unhesitatingly impose sanctions proportionate to the circumstances.”  Osborne v. Osborne, 2 Conn.App. 635, 637, 482 A.2d 77 (1984), superseded by statute on other grounds, as stated in Johnson v. Atlantic Health Services, P.C., 83 Conn.App. 268, 849 A.2d 853 (2004).   A finding of contempt is not a necessary predicate to an award of attorneys fees, and the court need not reach the defendants' argument at this time that contempt is not a permitted remedy under these circumstances.   However, the court finds that an award of attorneys fees is fully warranted here, as it will make the plaintiff whole for pursuing a legitimate legal claim.

“In order for a trial court's order of sanctions for violation of a discovery order to withstand scrutiny, three requirements must be met.   First, the order to be complied with must be reasonably clear.   In this connection, however, we also state that even an order that does not meet this standard may form the basis of a sanction if the record establishes that, notwithstanding the lack of such clarity, the party sanctioned in fact understood the trial court's intended meaning ․ Second, the record must establish that the order was in fact violated ․ Third, the sanction imposed must be proportional to the violation.”  Millbrook Owners Assn., Inc. v. Hamilton Standard, 257 Conn. 1, 17-18, 776 A.2d 1115 (2001).   The court finds that the intended meaning of Judge Adams' order was clear, and that the defendants' disclosure did not comply with that order.   The court is also satisfied that the award of attorneys fees to the plaintiff is a proportional sanction.

Conclusion

Within ten (10) days of the date of issuance of notice of this order, the defendants are ordered to disclose “assets,” as previously defined herein, in an amount sufficient to satisfy the PJR.

The defendants are further ordered to pay to the plaintiff its reasonable attorneys fees and costs incurred in connection with this motion.   Counsel for the plaintiff shall file an affidavit for attorneys fees and costs within ten days of the issuance of this decision, after which time this matter will be set down for a hearing to determine the amount of attorneys fees to be so awarded.

IT IS SO ORDERED.

Blawie, J.

FOOTNOTES

FN1. Practice Book § 13-13(a) and General Statutes § 52-278n(a) provides that, a court may “order an appearing defendant to disclose property in which he has an interest or debts owing to him sufficient to satisfy a prejudgment remedy.   The existence, location and extent of the defendant's interest in such property or debts shall be subject to disclosure.”.  FN1. Practice Book § 13-13(a) and General Statutes § 52-278n(a) provides that, a court may “order an appearing defendant to disclose property in which he has an interest or debts owing to him sufficient to satisfy a prejudgment remedy.   The existence, location and extent of the defendant's interest in such property or debts shall be subject to disclosure.”

FN2. Practice Book § 13-13(d) and General Statutes § 52-278n(d) provide that a party, “in lieu of disclosing assets pursuant to subsection (a) of this section, may move the court for substitution either of a bond with surety substantially in compliance with Section 52-307 and 52-308 or of other sufficient security.”.  FN2. Practice Book § 13-13(d) and General Statutes § 52-278n(d) provide that a party, “in lieu of disclosing assets pursuant to subsection (a) of this section, may move the court for substitution either of a bond with surety substantially in compliance with Section 52-307 and 52-308 or of other sufficient security.”

FN3. Pursuant to Judge Tobin's order, the plaintiff is permitted to withhold the payment to the defendants of its $3,000 monthly franchising fees pending the resolution of this matter..  FN3. Pursuant to Judge Tobin's order, the plaintiff is permitted to withhold the payment to the defendants of its $3,000 monthly franchising fees pending the resolution of this matter.

FN4. Kids Stuff, LLC is owned by a member of The Final Cut, LLC, and the plaintiff advises it also owns other Sharkey's franchises in the state of New Jersey..  FN4. Kids Stuff, LLC is owned by a member of The Final Cut, LLC, and the plaintiff advises it also owns other Sharkey's franchises in the state of New Jersey.

FN5. At his deposition on April 1, 2010, the defendant Scott Sharkey testified that the reason he opened a bank account in New York was to have the money of Sharkey's Franchising outside of the jurisdiction of Connecticut so it could not be frozen..  FN5. At his deposition on April 1, 2010, the defendant Scott Sharkey testified that the reason he opened a bank account in New York was to have the money of Sharkey's Franchising outside of the jurisdiction of Connecticut so it could not be frozen.

FN6. Support for this interpretation of what constitutes the “assets” of an enterprise may be found in the records of Connecticut-based Foxwoods, purportedly one of the most financially successful casinos in the western Hemisphere, if not the world.   The Mashantucket Pequot Tribe, through a series of enabling resolutions identified by number, established an entity known as The Mashantucket Pequot Gaming Enterprise (Enterprise) to run Foxwoods.  “Resolution 022591-02 defines the ‘Assets of the Enterprise’ to include, inter alia, all income earned by operation of the Bingo Hall and the Casino ‘including all current assets, cash, investments, accounts receivable, and funds held in the account of the Enterprise, together with proceeds thereof including any assets acquired by expenditure of such funds' prior to the transfer of those funds to the general funds or other accounts of the Tribe.”   Mashantucket Pequot Gaming Enterprise v. CCI, Inc., Superior Court, judicial district of New London at Norwich, Docket No. 103729 (July 11, 1994, Leuba, J.)..  FN6. Support for this interpretation of what constitutes the “assets” of an enterprise may be found in the records of Connecticut-based Foxwoods, purportedly one of the most financially successful casinos in the western Hemisphere, if not the world.   The Mashantucket Pequot Tribe, through a series of enabling resolutions identified by number, established an entity known as The Mashantucket Pequot Gaming Enterprise (Enterprise) to run Foxwoods.  “Resolution 022591-02 defines the ‘Assets of the Enterprise’ to include, inter alia, all income earned by operation of the Bingo Hall and the Casino ‘including all current assets, cash, investments, accounts receivable, and funds held in the account of the Enterprise, together with proceeds thereof including any assets acquired by expenditure of such funds' prior to the transfer of those funds to the general funds or other accounts of the Tribe.”   Mashantucket Pequot Gaming Enterprise v. CCI, Inc., Superior Court, judicial district of New London at Norwich, Docket No. 103729 (July 11, 1994, Leuba, J.).

Blawie, John F., J.