LLC v. Gordon, Haskett & Co. (2013)

MEMORANDUM OF DECISION

I. BACKGROUND

The plaintiff brought this action in small claims court seeking a refund of a $6,000 deposit paid by the plaintiff to the defendant pursuant to a written agreement signed in November 2005, alleging that the defendant would not deliver services according to “the written agreement and verbal representations.”   The plaintiff also alleged in the small claims complaint that the defendant made certain material misrepresentations.   The defendant's counsel filed a motion to transfer the case to the regular docket, which motion was granted.   Thereafter the defendant filed an answer special defenses and counterclaim.   The plaintiff in turn denied the special defenses and denied the material allegations of the counterclaim.

II. FINDING OF FACTS

1. The plaintiff is in the business of providing investment advice and investment management services to private clients.

2. The plaintiff is owned, and managed by Robert Kahl (Kahl) who is an experienced investment manager.   Kahl organized the plaintiff firm in 1999.   The plaintiff currently manages approximately $28,000,000 of assets for approximately 45 clients.   In 2005 the plaintiff managed approximately $20,000,000 of assets for its clients.   The plaintiff's office is in Kahl's home, Kahl generally works out of his home.

3. It is essential to the plaintiff's business that it utilize an adequate computer technology software system.   Such a system is essential for the plaintiff to keep track of its client's accounts, to engage in transactions on behalf of its clients and to comply with certain governmental regulatory issues.

4. TD Ameritrade and its predecessor (TD) is the custodian for the plaintiff's client's funds and the plaintiff has a limited power of attorney from its clients to engage in transactions on their behalf.   In this regard it is essential to the plaintiff's business that it be able to interface with the TD platforms through its software system.   It is also essential that it be able to access historical transactional data on behalf of its clients.

5. Prior to 2005 the plaintiff had utilized a software system known generally as Captools.

6. The defendant is a registered broker-dealer and a New York stock exchange member security's brokerage firm.   The defendant also provides its clients with investment software known generally as Indata Software.

7. The defendant is not identified in the marketing materials for Indata software.   The defendant has set up a separate limited liability company known as Indata Services, LLC (Indata) to provide marketing services as well as certain support services regarding the sales and installation of the defendant's software, though the defendant remains the owner and licensor of the software.

8. The subject software is licensed by the defendant and is designed to assist investment managers such as the plaintiff.   The software is generally referred to as the Indata system.

9. The plaintiff first saw the defendant's software at a conference and became interested in replacing Captools with the Indata system.   The plaintiff having seen the defendant's Indata system believed that it would provide him with additional functionality as compared to Captools.

10. In pursuing the Indata software the plaintiff first spoke with David Csiki, managing director of Indata, who in turn referred the plaintiff to Bryce Pearson a salesperson for Indata.   Pearson demonstrated the Indata system for the plaintiff from a remote location.   The plaintiff began a course of communication with Mr. Pearson which included an exchange of information about the functionality of the Indata system as well as hardware requirements necessary to run it.

11. On or about November 21, 2005, Kahl on behalf of the plaintiff signed a document entitled I.M.S. License Agreement (the Agreement).   The plaintiff returned the partially executed Agreement along with the $6,000 deposit called for in the Agreement.   In the Agreement the licensor is identified as INDATA, Gordon, Haskett & Co. The Agreement further identifies Indata, Gordon, Haskett & Co. (GHN Co.) as “a registered broker-dealer and a New York stock exchange member security brokerage firm.”   The first page of the agreement continues that GHN Co. provides clients with “investment software known and referred to as the Indata I.N.S. software.”   The defendant signed the license agreement on or about November 30, 2005.

12. The license agreement was drafted by the defendant.

13. The exchange of information between the plaintiff and the defendant prior to the execution to the license agreement took a period of at least several months.

14. The parties proceeded to move toward implementation of the Agreement.

15. The process of transitioning a licensee such as the plaintiff from its prior software system to the new Indata system can be complex and time consuming.   Accordingly, the license agreement specifically provides for a period of time of up to twelve weeks to implement and convert the licensee's data to the licensor's system once the licensor receives the necessary files from the licensee.   The plaintiff never forwarded its files to the defendant or Indata to begin this process.

16. Initially the parties proceeded to move toward implementation of the Agreement between November 2005 and early January 2006 in a productive and cooperative fashion.

17. On January 5, 2006 Kahl sent an email to Christy Hindley (one of the Indata's conversion and installation technicians) whom the plaintiff had been dealing with, which email contained nineteen questions, some with multiple parts.   Hindley responded to this email by setting up a phone call conference for the next day.   The phone conference took place as scheduled on January 6, 2006 (which was a Friday).

18. The phone call did not satisfy Kahl and on Monday, January 9, 2006 Kahl sent a letter to Csiki setting forth numerous claims concerning misrepresentations of the defendant's and or Indata's personnel leading up to the execution of the agreement and the inability of the Indata system to accommodate the plaintiff's needs, the additional cost for the acquisition of hardware which had not been disclosed to him, as well as other concerns.   The January 9th letter concluded by requesting an “immediate return of my $6,000 deposit and prompt termination of our business relationship.”   The most significant, though not the only, concerns of the plaintiff were its belief that the Indata system would not allow it to interface with TD and that the defendant either would not or could not convert its historical transaction data to the Indata system.

19. On February 1, 2006 Csiki writes back to Kahl addressing the points raised in the January 9th letter, essentially suggesting that Kahl's statements concerning material misrepresentations and material breaches are the result of misunderstanding.   Csiki specifically addresses the ability of the Indata system to interface with TD and Indata's ability and willingness to convert the plaintiff's historical data to the Indata system.   In the letter Csiki, while denying any obligation to do so, offers as a “measure of good faith” to provide the plaintiff with a credit against the license agreement fees in an amount that would compensate the plaintiff for his perceived additional hardware costs.

20. The Csiki letter ends by suggesting two options for the plaintiff:  either fulfill the plaintiff's obligations and accept the good faith credit, or terminate the agreement subject to Indata's right to retain “the $6,000 non-refundable deposit” made by the plaintiff in accordance with the terms of the Agreement.

21. On February 8th the plaintiff writes back to Csiki that neither of the two options are acceptable and again insists upon the return of the $6,000 deposit.   On February 16th Csiki writes again that Indata stands ready willing and able to perform and implement the Indata system in accordance with the Agreement and requests that the plaintiff forward his historical data files from the Captools system so that the defendant can proceed with the conversion and installation process.

22. Csiki testified at trial consistent with his letters that the defendant was fully capable of performing the conversion function consistent with the license agreement and representations that were previously been made to the plaintiff.   Csiki testified with some specificity about the defendant's ability to convert the plaintiff's historical data transactional data as well as its ability to interface with TD, which were the most significant functional concerns of the plaintiff.   Csiki testified that the defendant had accomplished this many times before with many other clients and was fully capable of performing its agreement.   The court finds Csiki's testimony credible and persuasive and finds that at all times the defendant was ready willing and able to perform consistent with the Agreement executed by the parties and consistent with the representations that the Indata had previously made concerning the defendant's software system.

23. While it would appear that the plaintiff became disenchanted with the defendant's ability to perform and other issues as a result of the plaintiff's understanding of what was said in the January 6th phone conference (and possibly some events leading up to the January 6th phone conference) the defendant had no reason to know of these concerns until the January 9, 2006 letter.   Csiki's response and correspondence provide reasonable assurance to the plaintiff that the defendant was ready willing and able to perform.

24. The plaintiff did not provide any credible evidence that the defendant had made material misrepresentations.   The plaintiff has not provided any credible evidence that the defendant was unable or unwilling to perform its obligations pursuant to the license agreement.

III. DISCUSSION

A. The Plaintiff's Claims

Because the plaintiff began this action as a small claims case pursuant to a small claims complaint that Mr. Kahl drafted himself, the complaint is somewhat summary in nature but it is fair to say that the complaint alleges that after the plaintiff paid a $6,000 deposit the defendant informed the plaintiff ․ that they would not deliver services according to the written agreement and verbal representations made during the selling process.   The material representations involve issues of 1) the entity that would provide the service;  2) conversion of historical data;  3) inclusion of January 2006 data and the database;  4) program functionality to download data from TD and 5) additional cost of implementation that were not disclosed.   The complaint essentially alleges a theory of anticipatory breach of contract and material misrepresentations.

The plaintiff simply has not sustained its burden of proof in this regard.   Csiki's thorough and credible testimony convinces the court that the defendant, at all times, was prepared to deliver services in accordance with the Agreement.   Moreover the court finds that the defendant did not make any material misrepresentations.   With regard to the specific misrepresentations alleged the court finds that the defendant was capable and willing to convert the plaintiff's historical data;  that the defendant was ready willing and able include the January 2006 data in its database;  that the defendant's system can provide the functionality to interface with TD;  and that the defendant did not misrepresent the costs of implementation.   Moreover the court finds that the defendant in good faith offered to provide the plaintiff with financial compensation that would have more than offset the perceived additional cost of implementation for which the plaintiff expressed concerns.

The plaintiff claims that the defendant hid the identity of the licensor and that the plaintiff would not have entered an agreement with the defendant because Kahl perceived a conflict of interest between a registered broker-dealer and a licensor of investment management software.   While it is true that during the time prior to the execution of the license agreement in late November of 2005, the plaintiff was unaware that the defendant was the licensor, the plaintiff cannot credibly suggest that this was not disclosed to him at the time of the signing of the agreement.

Moreover notwithstanding the plaintiff's express concern is that he would never buy software operating system from a broker-dealer as he believes it is a conflict of interest, the plaintiff offered no evidence that such an arrangement was in violation of any ethical standards, rules or regulations or other bodies of law governing investment managers.

Moreover the contract clearly sets forth that the licensor is a “registered broker-dealer and a New York stock exchange member securities brokerage firm.”   If the plaintiff had any concerns the time to raise them was prior to the signing of the agreement not after.   Moreover the plaintiff did not raise that concern during the time period subsequent to the execution of the license agreement when he had multiple conversations with the conversion and installation personnel.   While the plaintiff may have made inquiries as to the relationship between the defendant and Indata and its personnel the plaintiff never objected to the defendant as licensor though the defendant is identified in the agreement.   Moreover, he had reason to believe based upon oral discussions that there was an affiliation between the defendant and Indata but chose not to pursue the precise nature of the relationship prior to the execution of the agreement.

The plaintiff has simply failed to sustain its burden of proof with regard to its claims concerning breach of contract and its claims concerning material misrepresentation.

B. The Defendant's Counterclaim

The defendant assert a counterclaim alleging that the defendant and the plaintiff entered into the Agreement, that at all times the defendant was ready willing and able to perform its obligations under the terms of the Agreement, that the plaintiff failed and refused to allow and permit the defendant to complete the performance of its obligations under the agreement and that the plaintiff was in material breach of the expressed and implied obligations of the agreement.   The defendant further asserts that pursuant to the Agreement the defendant is entitled liquidated damages in the amount of $84,000 and that the defendant is also entitled to reasonable attorneys fees.   The court finds that the plaintiff and the defendant did enter into the Agreement, that there was meeting of the minds and that the plaintiff without cause prevented the defendant from fulfilling its obligations under the agreement and was thereby in breach of its obligations pursuant to the Agreement.

The more difficult question is the issue of liquidated damages.  “[T]he law is well established in this jurisdiction, as well as elsewhere, that a term in a contract calling for the imposition of a penalty for the breach of the contract is contrary to public policy and invalid, but a contractual provision fixing the amount of damages to be paid in the event of a breach is enforceable if it satisfies certain conditions ․ A contractual provision for a penalty is one the prime purpose of which is to prevent a breach of contract by the holding over the head of the contracting party the threat of punishment for a breach ․ A provision for liquidated damages on the other hand is one the real purpose of which is to fix fair compensation to the injured party for a breach of contract.”  American Car Rental, Inc. v. Consumer Protection, 273 Conn. 292, 306 (2005) quoting Berger v. Shanahan, 142 Conn. 726, 731–32 (1995).

In reviewing the entire agreement the court must conclude that the liquidated damages clause contained in the Agreement is not applicable by its own terms.

Paragraph two of the agreement states the agreement is effective “as of the contract date and shall continue in effect thereafter for the period specified in Scheduled B hereto (the Effective Term).”   Schedule B separates the performance of the agreement into two distinct terms.   The first term is referred to as the “Initial Term” and “the Initial Term will end upon installation date whereby licensee will enter into the Effective Term of the Agreement.   Effective Term will last for three years whereupon this Agreement will be deemed expired.”   Schedule B continues that the licensee shall have a yearly recurring fee of $30,000.  “Recurring fee begins upon installation.”   Schedule B further continues “Upon initial signing of the Agreement, as a measure of good faith towards successful implementation of the software, Licensee will pay GH & Co. a non-refundable deposit of $6,000 or 20% of the recurring fee.   Prior to installation, licensee will pay the data conversion/installation and training fees per diem in Schedule C. Upon installation date licensee will pay GH & Co. the first year balance of payment as outlined in the Agreement.”   Paragraph three of the agreement as well as the testimony at trial indicate that installation of the Indata software as well as the conversion of the plaintiff's previously utilized system to the Indata system which includes a conversion of the plaintiff's historical data to the new system can be a complex and time consuming process.   The process can take up to twelve weeks once the plaintiff has delivered its files to the defendant.   Much of the defendant's expense and work is performed and incurred during this initial term which consists of evaluation of the plaintiff's file under paragraph three;  the defendant will have six weeks to evaluate and begin the conversion process of the required data period “once the data is deemed to be correct and in workable order, i.e. ready for implementation, licensor will have six weeks to fully install and implement the software at the licensee's site.”

With this understanding of the contemplated terms and breakdown of the parties' responsibilities the court turns specifically to the liquidated damages clause contained in paragraph two of the agreement.   The liquidated damages clause reads “notwithstanding the forgoing in the event the licensee elects to discontinue the software for any reason other than material breach by the licensor or the licensor's obligation hereunder or reasons beyond the licensor's control, licensee shall remain responsible for the commitments of licensee specified in Schedule B for the balance of the effective three year term hereof and shall be immediately due and payable to licensor in cash it being agreed that the licensor's damages in case licensee so elects to discontinue the software might be impossible to ascertain ․” (Emphasis added.)   The literal reading of the liquidated damages clause allows the defendant to apply it in the event the licensee elects to discontinue the software.  “Discontinue” means “to put an end to;  stop;  terminate” or” to cease to take, use subscribe to, etc.” as in “to discontinue a newspaper.”   The Random House Dictionary of the English Language, Second Edition, Unabridged, Copyright 1987.   Within the law it is most frequently used to mean “to terminate or abandon.”  Id. In order for the licensee to discontinue the software it must first have had to start to use it.   In the present context that means it first would have had to have been installed by the defendant, which corresponds with the end of the “Initial Term” and the beginning of the “Effective Term.” This never took place.   This also is consistent with the language in the liquidated damages clause that the licensee shall remain responsible for the recurring fees for the “balance” of the Effective Term.

Moreover the concept of the liquidated damages clause not being effective until such time as the installation of the software is implemented is consistent with the framework of the license agreement itself.   The license agreement contemplates a period of time subsequent to execution of the agreement during which the licensee transmits its files to the licensor, which is followed by a period of up to six weeks for evaluation of those files, which in turn is followed by a period of up to another six weeks in which the licensor begins and completes the conversation and installation process.   All of this is referred to in the Agreement as the “Initial Term.” It is apparent from the evidence at trial that this “Initial Term” is a period of time in which a substantial amount of effort work, not to mention commitment of software resources and programming expertise is expended by the defendant.   Consistent with the language in the liquidation clause, it would make sense that once the defendant had committed these resources that it was entitled to the benefits of its bargain should the plaintiff subsequently decide to discontinue use of the software.   In other words under the liquidated damages clause, once the licensor has committed and expended the resources necessary to evaluate the licensee's existing system, convert the data obtained to the new system, and then install the new system, the plaintiff cannot then discontinue the use of the software without honoring its obligations pursuant to the agreement.   However on the other hand, prior to the time that the defendant licensor has expended all of those efforts (or in the case at bar) has not received the files, has not evaluated the files, has not converted the files and has not installed its software, it would be both unreasonable and inconsistent with the literal language of the liquidated damages clause to require the plaintiff to pay 100% of the amount that the plaintiff would have been obligated to pay had it caused the defendant to expend those efforts and resources.   When two possible interpretations are possible, the court will prefer the more equitable and rational interpretation.  American Fabrics Co. v. United Textile Workers of America, 12 Conn.App. 642 at 648;  Game–A–Tron Corporation v. Gordon, 23 Conn.App. 692, at 694–95.   The court does not consider the plaintiff's interpretation to be the more equitable or rational one.   Rather it is more consistent with the language of the Agreement, as well as the practicality of the process that the parties envisioned, to leave the defendant with its remedy of retaining the “non-refundable $6,000 deposit.”

To put it another way there are effectively two liquidated damages clauses in the Agreement.   The first is a loss of the $6,000 non-refundable deposit if there is a breach by the plaintiff prior to the implementation of the software or in the language of the Agreement during the “Initial Term.” If the licensee breaches the agreement once the software has been installed and the “Effective Term” has begun, the licensor is entitled to the remaining recurring fees for the “balance” of the effective term.   This dichotomy is captured in the language “in the event the licensee elects to discontinue the software.”   Perhaps not coincidentally, this is the precise suggestion made by Csiki to the plaintiff in his letter of February 1, 2006.

The defendant has not introduced any evidence of its actual damages and cannot prevail on its claim that the liquidated damages clause is applicable on the facts before the court.   The court will render judgment in favor of the defendant on the counterclaim and award nominal damages of $1. This the defendant will receive in addition to the defendant's ability to retain the $6,000 deposit.

The court is also aware that the agreement contains a reciprocal attorneys fees clause.   At the beginning of trial the parties stipulated that evidence on the amount of reasonable attorneys fees would be reserved until after the court's decision on the case in chief.

Judgment will enter in favor of the defendant on the plaintiff's complaint and judgment will enter in favor of the defendant on its counterclaim.   The court awards $1 in damages to the defendant on its counterclaim.

BY THE COURT

GENUARIO, J.

Genuario, Robert L., J.