Jerrold M. Metcoff et al. v. NCT (2011)

MEMORANDUM OF DECISION ON CLAIM FOR EQUITABLE RELIEF AND INDEMNIFICATION

This case was tried to a jury on the second substitute complaint filed by the plaintiffs, Jerrold M. Metcoff and David B. Wilson, against the defendant Michael J. Parrella, Sr., and the corporate defendants NCT Group, Inc., Midcore Software, Inc., and Artera Group, Inc. The corporate defendants were defaulted for failure to appear and the trial proceeded against them as a hearing in damages.   The other defendants named in the complaint are Carole Salkind and Morton Salkind.   The trial did not proceed against the Salkinds because they filed a bankruptcy petition.   The jury rendered its verdict on April 21, 2010.

The complaint asserts twenty-six counts against the defendants.   A summary of these claims is provided in the court's Memorandum of Decision on Attorney Fees and Punitive Damages (filed February 17, 2011) and will not be repeated here.   The present memorandum provides a final disposition of counts fourteen, nineteen and twenty of the complaint.   Count fourteen alleges that under the terms of a merger agreement executed between the plaintiffs and NCT Group and NCT Midcore, these defendants are required to indemnify the plaintiffs for the costs of litigation arising from the defendants' breach of the agreement.   The plaintiffs waived their right for the jury to determine the amount of these fees and requested that this decision be made by the court.   See Notice of Plaintiffs' Waiver of Jury Trial, dated April 6, 2010 (# 546).   Count nineteen seeks an award against Artera based on unjust enrichment.   Count twenty seeks an order for a resulting trust against Artera.   These latter claims were reserved for adjudication by the court because they seek equitable relief.

DISCUSSION

I

The plaintiffs were the principals of a company named Midcore Software Incorporated.   This company developed and marketed certain computer software called Midpoint.   On August 29, 2000, the plaintiffs executed a merger agreement for Midcore to be acquired by NCT Group.   Parrella was the chief executive officer of NCT Group and he negotiated the contract on behalf of NCT Group.   The terms of the agreement provided that after the merger, Midcore would become NCT Midcore.   Under the terms of the contract, the plaintiffs were entitled to receive NCT Group stock and certain royalties generated from the sale of Midcore products.   The gravamen of the plaintiffs' complaint is that they did not receive the stock or royalties promised to them under the agreement and that Parrella made false representations to them as part of the merger transaction.

The trial against NCT Group and NCT Midcore was essentially a hearing in damages because they had been defaulted for failure to appear.   The law concerning the plaintiffs' burden of proof at such a hearing is well-established:

A judgment of default normally requires a two-step process.   The first step is the entry of a judicial ruling of default, which constitutes a technical admission by the defendant of the truth of the facts alleged in the complaint.   The second step of the process is the hearing in damages, in which the plaintiff must still prove how much of the judgment prayed for in his complaint he is entitled to receive.   It is normally only after these two steps are completed that a judgment on default may be rendered.   An action brought by a plaintiff which requests equitable instead of legal relief poses a situation in which a determination of monetary damages in a hearing in damages is not appropriate.   The plaintiff, however, is still required to establish his right to receive equitable relief after the entry of default.   This necessarily entails a hearing in which the plaintiff must prove the matters he has alleged in his complaint.   Thus, in contrast to a default entered in a legal action, the facts alleged in the plaintiff's complaint are not treated as confessed when a default is entered in an equitable action.   In equitable as well as legal actions, however, the entry of a default bars a defendant from asserting a defense.   Thus, the distinction between defaults entered in equitable and legal actions lies merely in what must be proven by the plaintiff in the subsequent hearing on the relief to be granted.   In legal actions, the plaintiff must establish that the amount of damages he claimed is appropriate, whereas in equitable actions the principles of equity require that the plaintiff prove the allegations contained in his complaint so that equitable relief may be granted.   Thus, in both equitable and legal actions, the plaintiff must establish his right to relief to the court's satisfaction, even though some issues may have been laid at rest by the default.

(Citations omitted;  internal quotation marks omitted.)  Ratner v. Willametz, 9 Conn.App. 565, 574-76, 520 A.2d 621 (1987).

II. Indemnification Claim

Count fourteen of the complaint alleges that under paragraph 10(c) of the merger agreement (Plaintiffs' Exhibit 18), the defendants NCT Group and NCT Midcore agreed to indemnify the plaintiffs and hold them harmless for all losses that they may suffer as a result of the defendants' breach of the merger agreement.   Paragraph 10(b) of the merger agreement defines “losses” as “loss, liability, deficiency, damage, expense or cost, including, in each case, reasonable legal expenses and costs.”   Under count fourteen, Metcoff was awarded $673,837, plus $379,778 in interest, and Wilson was awarded $639,752, plus $365,693 in interest.   In supplemental proceedings before the court, the plaintiffs offered evidence indicating that the attorney fees incurred by them for this entire litigation total approximately $1.3 million.   On the basis of this evidence, the plaintiffs now claim that in addition to the amounts awarded by the jury, they are also entitled to an award under count fourteen for attorney fees in the amount of $809,579 and for litigation expenses in the amount of $42,722 (plus statutory costs).

In its Memorandum of Decision on Attorney Fees and Punitive Damages, the court addresses the principles and criteria governing an award of attorney fees under the Connecticut Unfair Trade Practices Act, General Statutes § 42-110g (CUTPA).   Much of that discussion, particularly the criteria articulated in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir.1974), is applicable here and will not be repeated.   In that ruling, the court awarded $540,000 in attorney fees under the provisions of CUTPA.

The analyses of the plaintiffs' indemnification claim for litigation expenses and their CUTPA claim for litigation expenses differ in significant respects.   The contractual language of the merger agreement makes the indemnification claim broader.   Under CUTPA, the recoverable litigation expenses are limited to those related to the prevailing CUTPA claim.   The plaintiffs' complaint asserted many claims for breach of contract that were unrelated to the CUTPA claim.   On the other hand, under the indemnification provision of the merger agreement, the plaintiffs are entitled to be held harmless and indemnified for all litigation expenses resulting from the defendants' breach of the agreement.

Consequently, under the indemnification provision, the court, for example, need not evaluate whether the litigation expenses were related to the prevailing CUTPA claim, but only whether the litigation expenses were incurred as a result of the defendants breach of the agreement.   The existence of the defendants' breach of the agreement is evidenced by their default for failure to appear.   Additionally, only statutory “taxable” costs are recoverable under CUTPA, whereas the “reasonable legal expenses and costs” recoverable under the indemnification provision do not appear to be so limited.   See generally Taylor v. King, 121 Conn.App. 105, 994 A.2d 330 (2010).

Thus, the court's task in applying the Johnson criteria to the plaintiffs' indemnification claim for litigation expenses is to determine the reasonable amount of these expenses that are the result of the defendants' breach of the merger agreement.   This task is somewhat more challenging in this situation because the claim is not presented in a true adversarial context because of the defendants' failure to appear.   Nevertheless, in evaluating the factors relevant to this determination, the court decides that on the plaintiffs' indemnification claim for litigation expenses under count fourteen, the plaintiffs should be awarded $892,000 against the defendants NCT Group and NCT Midcore, $446,000 in favor of Metcoff and $446,000 in favor of Wilson.

III. Equitable Claims

A

As previously stated, count nineteen asserts a claim for unjust enrichment against Artera.   Specifically, this count alleges that pursuant to the terms of the merger agreement, NCT Midcore acquired certain intellectual property rights from Midcore.   According to the complaint, NCT Midcore transferred these intellectual property rights and the authority to develop and sell these rights to Artera, but Artera failed to pay “NCT Midcore and/or Wilson and Metcoff the amount of money equal to the royalties Metcoff and Wilson are owed on account of such transfer and/or utilization.”   Second Substitute Complaint, Count Nineteen, ¶ 65.   As a consequence, the plaintiffs claim that “Artera has been unjustly enriched.”  Id. ¶ 67.

“Unjust enrichment is, consistent with the principles of equity, a broad and flexible remedy.   Plaintiffs seeking recovery for unjust enrichment must prove (1) that the defendants were benefitted, (2) that the defendants unjustly did not pay the plaintiffs for the benefits, and (3) that the failure of payment was to the plaintiffs' detriment.”  (Citations omitted;  internal quotation marks omitted.)  Hartford Whalers Hockey Club v. Uniroyal Goodrich Tire Co., 231 Conn. 276, 283, 649 A.2d 518 (1994).

According to the complaint and the evidence, NCT Group and NCT Midcore were contractually obligated to pay certain royalties to the plaintiffs, but this was a contractual obligation that existed between the parties to the merger agreement.   Artera was not a party to that agreement and neither the complaint nor the evidence indicate how Artera itself was obligated to pay royalties to the plaintiffs.   Additionally, the complaint and the evidence do not indicate the amounts of any royalties received by Artera which may be characterized as an unjust enrichment or which may provide a sufficient evidentiary basis for an equitable award.   Consequently, the court declines to grant any relief on plaintiffs' claim for unjust enrichment as requested in count nineteen of the complaint.

B

In count twenty, the plaintiffs seek a resulting trust based again on the allegation that NCT Midcore transferred property to Artera in contravention of the purposes and provisions of the merger agreement.   On the basis of this claim, the complaint alleges the following:

70.  Accordingly, Artera should not be permitted to retain ostensible ownership of certain property rights in the aforementioned intellectual property and ostensible ownership of monies obtained as a result of its ostensible ownership of said certain property rights in the aforementioned intellectual property.

71. Accordingly, Artera is equitably charged with holding said property rights in the aforementioned intellectual property and the monies attributed to and obtained as a result of its ostensible ownership of said property rights in the aforementioned intellectual property, in trust, in favor of the plaintiffs.

Second Substitute Complaint, Count Twenty, ¶ 70, ¶ 71.

The general principles governing the imposition of a resulting trust have been stated as follows:  “When the purchase money for property is paid by one and the legal title is taken in the name of another, a resulting trust ordinarily arises at once, by operation of law, in favor of the one paying the money ․ If it can be proved that the intention of the parties was otherwise, there is no resulting trust.”  Walter v. Home National Bank & Trust Co., 148 Conn. 635, 638, 173 A.2d 503 (1961).   Thus, a resulting trust typically arises where one party provides funds for the purchase of certain property by another under circumstances indicating that the parties intended that the purchaser will hold the property for the benefit of the financier.   In the present case, the plaintiffs are seeking a resulting trust in a manner that is somewhat broader than this typical situation in that the plaintiffs are calling for the court to exercise its equitable authority to impose a resulting trust as a remedy for fraudulent or otherwise tortious behavior.

The problem with this claim is that the plaintiffs have not proven that Artera committed any of the tortious acts on which this relief is being requested.   In count twenty, the complaint incorporates two other counts of the complaint naming Artera and asserting its participation in wrongful conduct.   These allegations are asserted in counts fifteen and nineteen.   In count fifteen, the plaintiffs allege that Artera, acting through Parrella, its president, tortiously interfered with their merger agreement with NCT Group.   The jury found against the plaintiffs on this claim as it was asserted against Parrella individually.   Consistent with this verdict, the court concludes that the plaintiffs' evidence is insufficient to prove by a preponderance of the evidence that Artera, the principal on whose behalf Parrella was acting, committed tortious interference.   Count nineteen is the second claim incorporated into count twenty that names Artera and alleges wrongdoing against it.   As just discussed, count nineteen alleges a claim for unjust enrichment and the court declines toward any relief for this claim.

Consequently, although a default has entered against Artera for its failure to appear, the court concludes that the plaintiffs have failed to prove by a preponderance of the evidence that they are entitled to equitable relief as requested in counts nineteen and twenty of the complaint.

CONCLUSION

Therefore, for the foregoing reasons, on count fourteen of the complaint claiming an entitlement to contractual indemnification, the court awards damages of $446,000 in favor Jerrold M. Metcoff and damages of $446,000 in favor of the plaintiff David B. Wilson against the defendants NCT Group and NCT Midcore.   The court denies the plaintiffs' claim for unjust enrichment as requested in count nineteen and their claim for a resulting trust as requested in count twenty of the complaint.   On counts nineteen and twenty the court awards the plaintiffs nominal damages of $1. Cf. Ratner v. Willametz, supra, 9 Conn.App. 579 (“[A]n entry of default against a defendant in a legal action ․ entitles the plaintiff to at least nominal damages”).

So ordered this 17th day of February 2011.

STEVENS, J.

Stevens, Barry K., J.