Nancy R. Levin v. Fidelco Guide Dog Foundation, Inc. (2012)

MEMORANDUM OF DECISION

The plaintiff's complaint, which is in four counts, alleges in the first count that the plaintiff and the defendant entered into a non-qualified deferred compensation agreement by which the plaintiff was to receive compensation, medical and other benefits which the defendant refused to honor.   The second count claims that the parties entered into a written employment agreement and that the defendant withheld compensation payable to the plaintiff under the terms of that agreement.   The third count claims that the defendant's conduct violated General Statute § 31–72, the wage payment statute, which allows for the recovery of double damages as well as attorneys fees.   The fourth, which alleged emotional distress, has been withdrawn.

FACTS

The defendant, Fidelco Guide Dog Foundation, Inc. (Fidelco), is a nonprofit corporation that dedicates itself to providing trained guide dogs to the blind.   Fidelco is qualified as a non-profit organization and has tax-exempt status under Internal Revenue Code § 501(c)(3).   It has, at present, annual revenues of approximately $4 million.

The plaintiff had a relationship with Fidelco for many years.   Ms. Levin's involvement with the defendant began as a volunteer raising puppies that would ultimately be returned to Fidelco for formal training as guide dogs.   In approximately 1983, she became a paid employee of the corporation.   From that date forward she held a number of positions, including vice president and director of development.   Ultimately, she became the executive vice president.   Her responsibilities throughout her employment were varied, but were concentrated principally in the area of fund raising.   At different times, the plaintiff also served as a member of Fidelco's board of directors and a member of the board's corporate governance committee.

On or about 1999 Fidelco hired George Salpietro (Salpietro) as its executive director.   In broad terms, Salpietro oversaw the business operations of Fidelco.   In 2006, Salpietro initiated an inquiry into obtaining written agreements addressing the issues of employment and compensation upon his retirement.   In pursuit of these agreements he initiated contact with attorney Michael Levin, of the law firm Levin, Ford, and Paulekas, LLP which represented Fidelco at that time in a number of areas.   Michael Levin was, and still is, the husband of the plaintiff, Nancy Levin.

After some initial research into the matter, Michael Levin decided that he should consult an attorney with expertise in the area of compensation agreements for employees of nonprofit organizations because of the many related complexities, including the Internal Revenue Service regulations.   He hired the law firm of Reid & Reige P.C. (Reid & Reige) for this purpose, on behalf of his client Fidelco.   No one, aside from Salpietro, Michael Levin and counsel from Reid & Reige, appear to have had any involvement with the negotiations of these contracts.   Salpietro was, in essence, negotiating with himself.

Salpietro did not testify nor, to the court's knowledge, was his testimony preserved prior to the trial of this case.   The testimony with regard to his actions was provided by the plaintiff and by Michael Levin, her spouse.   That testimony is that around the time that these negotiations were being concluded, Salpietro decided that the agreements which were originally for his own benefit should be extended to the plaintiff as well.   Salpietro directed that Nancy Levin's agreements be prepared and signed prior to his own.   Thus, during the time that the agreements were being negotiated and drafted, Salpietro, Michael Levin, and the attorneys from Reid & Reige became aware that Nancy Levin was the person who would be paid under the terms of the agreements, and that Salpietro would be receiving essentially identical agreements at a later date.   Salpietro's directive that Nancy Levin's agreements should be executed before his own was accomplished.

Michael Levin initially participated in the drafting of the terms of the agreements on behalf of his client, Fidelco.   The drafts of the agreements were provided by Reid & Reige to him as counsel for Fidelco.   The bills from Reid & Reige likewise were presented directly to him for his review and approval.   The bills were forwarded to Fidelco for payment once approved by him.   By his own testimony, the only person at Fidelco that Michael Levin consulted was Salpietro.   Michael Levin knew that both the plaintiff and Salpietro would benefit from the terms of the agreements since they were to receive identical contracts.   It is also clear that he, at different times throughout this process, negotiated for and on behalf of his wife.

The plaintiff signed her agreements on October 2, 2006.   The nonqualified deferred compensation agreement provided for an annual retirement benefit to be paid in ten installments commencing January 1, 2010.   The agreement also provides for an additional “gross up amount” equal to 39 percent of the present value of the total retirement benefit.   Under the terms of this agreement, the plaintiff's retirement benefit would be $85,562.50 in January 1, 2010 and January 1, 2011 for a total of $171,125.   The annual benefit would continue to accrue through the year 2019.   The “gross up amount” referred to above is the equivalent of the tax consequence to the plaintiff when the agreement goes into payment status.   The amount due under this provision would have been paid by Fidelco and amounted to $245,603.   The amounts claimed as damages for the medical insurance coverage provision is $24,760 for 2010 and $24,940 for 2011.   The agreement also provided health benefits for both the plaintiff and Michael Levin for a period of ten years.   There was an amendment to the agreement executed in September 2007 which contained some technical changes.

In the employment agreement, Fidelco was to provide the plaintiff employment and wages from October 2, 2006 through January 1, 2010.   Fidelco paid the plaintiff's wages until October 2009.   The plaintiff had significantly reduced the number of hours she was working at that time, but her salary had not been reduced.   At or around that time, a new executive director, Elliot Russman, was installed by Fidelco, and the plaintiff's wages were reduced at his direction.   The plaintiff's claim is that the damages payable to her resulting from the reduction of wages from October 4, 2009 until December 1, 2009 is $17,231 and that her wages during the month of December 2009 should have been $12,762.   The total she claims she is due under the employment contract allegations is $29,993.   The plaintiff's employment at Fidelco ended on December 31, 2009.

Neither agreement came to the attention of Fidelco's board until 2009.   Fidelco has made no payments under the nonqualified deferred compensation agreement, and only such payments as are referred to above were made as wages.

By way of affirmative defenses, the defendant claims that the enforcement of the agreement would constitute the payment of an “excess benefit” under the meaning of § 4958 of the Internal Revenue Code of 1986 and as such, it could endanger the defendant's tax-exempt status under § 501(c)(3) of the Code. Thus, the defendant argues, plaintiff's claims are barred under the doctrine of illegality of contract.   Based on the same underlying facts, the defendant asserts, by way of special defense, that the plaintiff's claims are barred by the doctrine of impossibility of contract as well as the doctrine of impracticability of contract.   Additionally, the defendant argues that the agreement was entered into without the actual or apparent authority of its board of directors, though the plaintiff knew that the board's approval was necessary.   The defendant also claims that the plaintiff's claims are barred by the doctrine of unclean hands and that, if it breached the agreements, its breach was justified.   In addition, in its counterclaim, the defendant asserts that the plaintiff had a fiduciary duty to Fidelco, and that she breached that duty, which caused it to incur monetary damages.

DISCUSSION

An analysis of the contracts requires a review of the relationship between the parties and, in particular, an inquiry as to whether the plaintiff owed a fiduciary duty to the defendant.   If there was none, the case is a straightforward claim for breach of contract.   If there was such a duty, both the burden and the standard of proof may be different.

To begin with, the existence of a contractual relationship between two parties does not necessarily mean that a fiduciary duty has resulted.  “The fact that a relationship is formed by way of contract has no bearing on whether the relationship is fiduciary in nature.   The question is what kind of relationship did the contract or agreement between the parties create, cf Breen v. Larson College, 137 Conn. 152, 153, 157 [75 A.2d 39] (1950) (contract to serve as college dean breached by violation of fiduciary relationship it created);  Konover Development Corp. v. Zeller, 228 Conn. 206 [635 A.2d 798] (1994) (partnership agreement created fiduciary relationship) ․

“[T]he issue is whether the relationship between parties formed by agreement or contract, in fact, creates a fiduciary relationship which under our law ‘is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other ․ The superior position of the fiduciary or dominant party affords him (sic) great opportunity for abuse of the confidence reposed in him,’ Cadle v. D'Addario, 268 Conn. 441, 455 [844 A.2d 836] (2004) ․ also see Falls Church Group v. Tyler, Cooper and Alcorn, LLP, 281 Conn. 84, 108 [912 A.2d 1019] (2007);  Konover Development Corp. v. Zeller, [supra ] 228 Conn. 219.”  (Emphasis in original.)   Thomas v. Biller Associates Tri–State, LLC., Superior Court, judicial district of New Haven, Docket No. CV 05 4010695 (August 31, 2011, Corradino, J.).

“Our Supreme Court has recognized that fiduciary duties do not come in a ‘one size fits all’ package.   The nature of the duties of a conservator of an incompetent or a trustee for a minor may be entirely different from that of an agent of a sophisticated client in the business world.”   XL Specialty Ins. Co. v. Carvill America, Inc., Superior Court, judicial district of Middlesex, Docket No. X04 CV 04 4000148 (May 31, 2007, Beach, J.) (43 Conn. L. Rptr. 536, 549).   In examining this issue further, the court considers that “we recognize that the fiduciary relationship is not singular.   The relationship between sophisticated partners in a business venture may differ from the relationship involving lay people who are wholly dependent upon the expertise of a fiduciary.   Fiduciaries appear in a variety of forms, including agents, partners, lawyers, directors, trustees, executors, receivers, bailees and guardians.  ‘[E]quity has carefully refrained from defining a fiduciary relationship in precise detail and in such a manner as to exclude new situations.’  Harper v. Adametz, 142 Conn. 218, 225, 113 A.2d 136 (1955).   Simply classifying a party as a fiduciary inadequately characterizes the nature of the relationship.”  Konover Development Corp. v. Zeller, supra, 228 Conn. 222–23.

The plaintiff was an officer of the corporation.   She had been so for more than a decade, and had been a member of the board of directors for approximately fourteen years.   As previously stated, she held the title of vice president and director of development.   She also held the title of executive vice president.   She had served on Fidelco's corporate governance board.   By her own testimony, she considered herself an integral part of the Fidelco organization, its leadership, and an important element in the company's success.

The plaintiff argues that there is no fiduciary relationship between the parties.   In part, her argument is based upon the fact that at the time the contracts were signed she was no longer a member of the board of directors.   The plaintiff states that “[a]fter there has been a severance of official relationship, either because of resignation or removal, generally, a director or officer occupies no relation of trust or confidence to the corporation.”   (Citing 18b Am.Jur.2d 447, Corporations § 1461 (2004)).   However, the plaintiff's argument assumes a “severance” that is different from the one that took place here.   In this case, the plaintiff's ties to the corporation were not severed.   Upon leaving the board, she continued her relationship with the corporation as an officer.   Her official relationship with Fidelco continued, uninterrupted, and existed at the time of the execution of the contracts.   The same section cited by the plaintiff also contains the following provision:  “It is not possible to limit the fiduciary duty of a director of a corporation to the time while he or she is acting as a director ․ Such a rule would deprive the rule of almost all its efficacy and would facilitate innumerable invasions of its force.”  Id.

Under the circumstances that exist in this case, the court finds that the plaintiff and defendant were in a fiduciary relationship, and further, the plaintiff owed a fiduciary duty to the defendant.

The plaintiff also claims that the burden shifting which applies to cases in which a fiduciary duty exists does not apply to this case because there is no fraud, self-dealing or conflict of interest.  “Once a [fiduciary] relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary ․ Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence.”  (Citations omitted;  internal quotation marks omitted.)  Dunham v. Dunham, 204 Conn. 303, 322–23, 528 A.2d 1123 (1987), overruled on other grounds, Santopietro v. New Haven, 239 Conn. 207, 213, 682 A.2d 106 (1996).  “Proof of a fiduciary relationship, therefore, generally imposes a twofold burden on the fiduciary.   First, the burden of proof shifts to the fiduciary;  and second, the standard of proof is clear and convincing evidence.”  Murphy v. Wakelee, 247 Conn. 396, 400, 721 A.2d 1181 (1998).

The plaintiff claims that she did not negotiate with herself to establish the terms of her employment agreement or the deferred compensation agreement, and thus there is no self-dealing.   She urges that she negotiated those terms through dealings with the president and executive director of the corporation who had authority to enter into those contracts, and that as such, there is no self-dealing.   This argument, while seemingly valid on its face, addresses what is a situation factually unique to this case.   Specifically, the executive director (Salpietro) negotiated both of these agreements.   He did so for himself.   He, clearly, was under a fiduciary duty to Fidelco.   In negotiating the terms of what were to be his own agreements, the evidence supports the conclusion that he did not negotiate with anyone but himself.   To the extent that Michael Levin represented Fidelco in these negotiations, there is no evidence that he did anything other than follow the instructions and terms dictated by Salpietro.   There is no claim or evidence to support the proposition that Salpietro's contract was submitted to the board or that the agreements were the product of negotiations between Salpietro and the board.   There is no evidence that Michael Levin consulted with anyone at Fidelco with respect to the terms of these agreements, other than with Salpietro himself.

Nancy Levin became a party to these agreements by Salpietro's fiat.   At a point in time where the terms of his agreement had been established, he directed that the same terms and agreements should be offered to Nancy Levin.   Obviously, she did not refuse.   Nor did she speak to anyone other than Salpietro and her husband about the agreements.   While some modifications were made, they were not the result of arm's length negotiations, and inured solely to the benefit of Nancy Levin and Michael Levin.   If the definition of self-dealing is “[p]articipation in a transaction that benefits oneself instead of another who is owed a fiduciary duty;” (internal quotation marks omitted) Charter Oak Lending Group, LLC v. August, 127 Conn.App. 428, 442 n.9, 14 A.3d 449, cert. denied, 302 Conn. 901, 23 A.3d 1241 (2011);  then Salpietro engaged in self-dealing.   Having found that Nancy Levin had a fiduciary duty independent of Salpietro's, she did as well.

In light of those findings, the court examines the evidence presented by the plaintiff in support of her claims.   The court starts from the framework endorsed by the Connecticut Supreme Court in a case where both parties were financially sophisticated.

“The courts of Illinois have developed a framework, which we endorse, that accommodates this need for balance.   In Brown v. Commercial National Bank of Peoria, 42 Ill.2d 365, 247 N.E.2d 894, cert. denied, 396 U.S. 961, 90 S.Ct. 436, 24 L.Ed.2d 425 (1969), reh. denied, 396 U.S. 1047, 90 S.Ct. 680, 24 L.Ed.2d 693 (1970), the Supreme Court of Illinois held that, in the context of a claim that a bank had breached its fiduciary duty in dealings with a financially sophisticated beneficiary, the fiduciary's responsibility to establish that the transaction was fair was to be considered in light of all the circumstances.  “ ‘Important factors in determining whether a particular transaction is fair include a showing by the fiduciary:  (1) that he made a free and frank disclosure of all the relevant information he had;  (2) that the consideration was adequate;  and (3) that the principal had competent and independent advice before completing that transaction’ “ ․ Id., 369.   We make explicit an additional factor that the Illinois court implicitly included in its analysis:  (4) the relative sophistication and bargaining power among the parties.”  Konover Development Corp. v. Zeller, supra, 228 Conn. 227–28.

The plaintiff has failed to show that she made a free and frank disclosure of the relevant information at her disposal.   In fact, the opposite is true.   The evidence shows that the plaintiff was resistant to the disclosure of information to the board of directors, and further that her regard for Roberta Kaman, president of the corporation and chair of the board, was low.   The plaintiff was resistant to what she perceived to be involvement by the board in the running of the corporation.   The plaintiff resented what she considered meddling by the board in her own and Salpietro's functions.   The evidence is further the plaintiff felt strongly that Kaman's business acumen and ability were poor, and vastly inferior to her own;  that Kaman was largely unaware of the operations of Fidelco;  and that Kaman did not have a working knowledge of the financial affairs of the corporation, other than what Salpietro told her.   In addition Michael Levin had an awareness of the necessity or the obligation of sharing the terms of the agreements with the board, but, for reasons not adequately explained, failed to do so.   These factors also serve to refute the notion that when Ms. Kaman signed the agreements she did so with the authority of the board or with the apparent authority to do so.   The court accordingly finds that the plaintiff failed to prove that she made a free and frank disclosure of all the relevant information at her disposal to the defendant.

Additionally the plaintiff was under an obligation to prove that the consideration was adequate.   In terms of this case, that would equate to a showing that the compensation was reasonable.   To begin with, there was no consideration for the issuance of the employment agreement.   The plaintiff was planning to retire and did so at the approximate time that the employment agreement ended.   The terms of her employment remained essentially the same, except that she reduced her hours without a corresponding reduction in pay.   In terms of the employment agreement, the plaintiff has failed to show that there was adequate consideration to support the agreement.

With respect to the deferred compensation agreement, the plaintiff has failed to demonstrate that the agreement was reasonable.   The evidence presented at trial overwhelmingly shows the contrary.   The defense's expert, in support of his opinion that the deferred compensation agreement represented an “excess benefit transaction,” testified that in a survey of nonprofit organizations that provide similar services and are of roughly equal size and scope as Fidelco, none of the organizations provided compensation of this type to officers who had similar duties.   The plaintiff's claims that her duties exceeded those of the other executives used in the comparisons is not compelling, and was properly addressed by the analysis of the defendant's expert.   The plaintiff failed to supply any basis upon which to conclude that the compensation and benefits that she would have received as a result of the agreements were reasonable.   She further failed in her burden to show that there was adequate consideration for the agreements.   Salpietro's decision to reward himself, and by extension the plaintiff, was the motivation for the agreements.   This cannot serve as consideration.

The plaintiff submitted no evidence upon which the court could conclude that “the principal had competent and independent advice before completing that transaction.”  Id. The only evidence presented with respect to this issue was that an attorney working in Michael Levin's office had, in 2004, presented a finding to the board in response to Fidelco's decision to provide a 401(k) plan to employees.   The attorney, Matthew Youman, advised the board that Fidelco was “well ahead of the curve” with respect to its offer of retirement plans.   At the time of the execution of the contracts that are the subject of this action in 2006, neither this attorney nor any other was consulted.   The evidence shows that the terms of the contract were dictated by Salpietro for his own use, and there is nothing to show that the defendant had either competent or independent advice in any regard.

Based on the foregoing, the court finds that the plaintiff has not adequately proven the allegations of count one or count two of her complaint.   Since the third count is based upon the defendant's alleged failure to pay wages due under the employment contract, that count must fail as well.

Judgment on the complaint is entered in favor of the defendant.

With respect to the allegations of the counterclaim, there is no evidence upon which the court can find damages as alleged.

Accordingly, judgment is found in favor of the plaintiffs on the counterclaim.

Robaina, J.

Robaina, Antonio C., J.