LLC v. LLC (2013)

MEMORANDUM OF DECISION

The plaintiff initiated the captioned matter in October of 2008 seeking a $69,000 prejudgment remedy against the defendants in connection with a claimed violation of a commercial and guarantee agreement.   The parties filed numerous pleadings and engaged in extensive discovery over several years.   The trial of the captioned matter began in September of 2011 and continued intermittently over nine trial dates over the ensuing months.   Many witnesses were called by each side.   The plaintiff offered thirty-eight exhibits and the defense offered sixty-three exhibits.   The plaintiff's counsel filed over sixty pages of trial and post-trial memoranda.   The defendants' counsel filed trial and post-trial briefs of similar length.

In sum, each side litigated the instant matter thoroughly and vigorously.   Counsel for each side prepared and presented their respected clients' positions with extraordinary efforts and excellence in the best traditions of the bar.

The September 13, 2011 Amended Complaint is the operative pleading for the plaintiff.   That pleading asserts four theories of recovery:  Count One:  Breach of Lease and Guaranties;  Count Two:  Quantum Meruit;  Count Three:  Promissory Estoppel;  and Count Four:  Unjust Enrichment.

The defense filed a September 22, 2011 Amended Answer to the September 13, 2011 Amended Complaint.   However, the defendants had previously filed an October 13, 2009 Special Defenses, Set Offs and Counterclaims which was merely supplemented by the September 22, 2011 Amended Answer.   Thereafter on September 20, 2011 the defendants amended the claims for relief of their Counterclaims and on December 7, 2011 the defendants amended the Fifth Count of their Counterclaims.   The plaintiff filed a September 13, 2013 Answer to the defendants' Amended Special Defenses, Set Offs and Counterclaims and later a January 23, 2012 Answer to the Amended Fifth Count of the defendants' Counterclaims dated December 7, 2011.

Additionally, the parties filed a Stipulation of Facts dated September 21, 2011.   These facts set forth a description of the basic controversy between the parties.   The parties' Stipulation provided as follows:

1. Plaintiff, SOUTHHAVEN ASSOCIATES LLC (“Plaintiff'), is a Connecticut limited liability company with an office and place of business located at 100 Main Street North, Southbury, CT 06488.

2. The Defendant, MCMERLIN, LLC (“Defendant McMerlin”), is a Connecticut Limited Liability Company with an office and place of business located at 8 Summer Street, Ansonia, CT 06401.

3. The Defendant, SHANE MCMURRAY (“Defendant McMurray”), is an individual who resides at 8 Summer Street Ansonia, CT 06401.

4. The Defendant, FRANCIS G. LINN (“Defendant Linn”) is an individual who resides at 150 Prompton Road, Honesdale, PA 18431–8003 and/or 63 Mount Linn View, Waymart, PA 18472.

5. The Plaintiff and Defendant McMerlin entered into a written Lease Agreement dated June 2007 (the “Lease”) which is Plaintiff's 1.

6. The lease was for 100 Main Street North, Store Number 13, in Southbury, CT.

7. On or about June 27, 2007, Defendant McMurray signed a document entitled “Lease Guaranty” which is Plaintiff's 3.

8. On or about June 27, 2007, the Defendant Linn signed a document entitled “Lease Guaranty” which is Plaintiff's 2.

9. The Lease was for a term of ten (10) years.

10. From on or about June 2007 through October 2008 when McMerlin vacated the Premises, the Plaintiff provided the aforementioned rental space to the Defendants.

11. McMerlin vacated the premises on October 28, 2008.

12. McMerlin was served with a Notice to Quit on October 22, 2008.

13. McMerlin surrendered the premises to Plaintiff on October 28, 2008, Plaintiff's 7.

14. Plaintiff served a Summary Process Complaint on October _, 2008.

15. Judgment of Possession was entered by the Housing Court on November 13, 2008.   Defendants' 51.

16. Pursuant to section 45 of the Lease the Defendants agreed to pay $70,000.00 for certain personal property and fixtures.

17. McMerlin paid Plaintiff $35,000.00 for the personal property and fixtures.

In addition the court finds the following facts.

The Plaintiff and Defendant McMerlin, LLC, a Limited Liability Company solely owned by the Defendant Shane McMurray, entered into a written Lease Agreement dated June 2007 (the “Lease”) (Exhibit P.1) whereby the Plaintiff, as Landlord, was to provide rental property to the Defendant, McMerlin, LLC, as tenant, at the property known as 100 Main Street North, Store Number 13, in Southbury, CT for use as a liquor store.   Pursuant to the Lease, Plaintiff leased to Defendant MeMerlin approximately 2,601 square feet within a shopping center of over 300,000 square feet for a base minimum, monthly rental rate of $5,635.50 for the first two years of the Lease, plus a certain proportionate share of operating expenses and taxes (See Section 10 of Lease) and merchant dues (See Section 38 of Lease), all as set forth within the Lease.   For the first year under the Lease, the monthly amounts due for rent and all other charges as set forth above was $7,233.80 and Defendant paid such amount monthly from August 2007 until March 2008 when it ceased paying the monthly rent and other charges under the Lease.  (Testimony of Mr. Gatto, Ms. Gentil, and See Exhibit P.8).

On or about June 27, 2007, by written instrument, Defendant McMurray personally guaranteed the Lease pursuant to a signed Lease Guaranty (See Exhibit P.2).   Also on or about June 27, 2007, by written instrument, the Defendant Linn (a secured creditor and consultant for Mr. McMurray but not an owner of McMerlin) personally guaranteed the Lease pursuant to a signed Lease Guaranty.  (See Exhibit P.3) (collectively the “Guaranties”).   Pursuant to the Guaranties, the Defendants McMurray and Linn, jointly and severally, “absolutely and unconditionally guarantee[d] to Landlord its successors and assigns, the full and timely payment performance and observance of all the covenants, conditions and agreements provided to be performed and observed by Tenant in said Lease, including without limitation the prompt payment of all principal, interest, the Indebtedness (as defined in Section 45 of the Lease) [pertaining to payment for fixtures] and all other amounts provided in said lease to be paid by tenant.”

Additional Findings of Fact will be incorporated into the discussions below as necessary.

Plaintiff's prima facie Case

The plaintiff has established the elements of a prima facie case with respects to Count One:  Breach of Lease and Guaranties.   As noted in the Stipulation of Facts, the parties did enter into a written Lease.   The defendants Linn and McMurray did personally guarantee the performance of the lessee.

The plaintiff established that the lessee failed to make the payments due under the Lease.   The plaintiff suffered damages as a consequence of the lessees' breach of the Lease.   Demand was made upon the guarantors to fulfill the obligations of the lessee.   The guarantors failed, neglected and/or refused to fulfill their obligations under the guarantee.   The plaintiff has established an agreement, breach and damage with respect to all defendants.

The defendants' Special Defenses are:  First Special Defense:  Fraud in the Inducement;  Second Special Defense:  Fraud;  Third Special Defense:  Failure to Mitigate Damages;  Fourth Special Defense:  Payment and Set–Off.   The defendants also pled setoffs and counterclaims.   The first Set-off and Counterclaim is Payment and Set–Off.   The Second Set-off and Counterclaim is Fraud in the Inducement.   Third Set-off and Counterclaim is Fraud.   The Fourth Set-off and Counterclaim is Negligent Misrepresentation.   The Fifth Set-off and Counterclaim is Unfair Trade Practices and statutory theft.

The gravamen of the claims for fraud in the inducement and fraud, both as a special defense and as a setoff/counterclaim, arise out of the claim that plaintiff's agents, Chris Gatto and John Ottaviano, provided defendants, specifically Linn, with false information concerning a prior tenant's gross sales volume.   Though Linn testified to several undocumented conversations during lease negotiations between Ottaviano and/or Gatto and Linn, wherein Ottaviano/Gatto allegedly made oral representations of a prior tenant's reported and/or projected gross sales volume, Exhibit A is Linn's primary evidence on the claim of plaintiff's “factual representation of a known falsehood.”   Furthermore, Linn asserts that such information was calculated or designed to induce the defendants' reliance, and that the defendants did reasonably rely upon such information to their detriment.  “Under the common law ․ it is well settled that the essential elements of fraud are:  (1) a false representation was made as a statement of fact;  (2) it was untrue and known to be untrue by the party making it;  (3) it was made to induce the other party to act upon it;  and (4) the other party did so act upon that false representation to his injury ․ All of these ingredients must be found to exist ․ Additionally, [t]he party asserting such a cause of action must prove the existence of the first three of [the] elements by a standard higher than the usual fair preponderance of the evidence, which ․ we have described as clear and satisfactory or clear, precise and unequivocal.”  (Citation omitted;  internal quotation marks omitted.)  Ferris v. Faford, 93 Conn.App. 679, 692 (2006).

The Court rejects the defendants' claims of fraud and fraud in the inducement.

While the defendant Linn offered testimony and documentary evidence that plaintiff's agents, Gatto and Ottaviano, made factual assertions concerning sales volumes of prior tenants, and that such information was false, that the plaintiff knew the information was untrue, that such information was calculated to induce Linn's reliance, that such information was reasonably relied upon by Linn to his detriment, these claims were not proven to the Court by clear, precise and unequivocal evidence or even by a fair preponderance of evidence.

Linn's recollection of Gatto/Ottaviano's oral representations during lease negotiations is unreliable, self-serving and directly contrary to the language contained in the Lease Agreement concerning representations and warranties.   The court rejects this evidence as trustworthy.

The provenance of defendants' Exhibit A is suspect.   That document was purportedly provided by Ottaviano to Linn in 2005 during a conference.   Exhibit A is a single sheet of paper containing unverified and undocumented claims of gross sales volume supposedly reported by a former tenant to the landlord/plaintiff.   The information on Exhibit A is inconsistent with other years' sales figures maintained by the plaintiff concerning the same retail space leased to the defendants, based on prior tenants' reports of sales figures in that same lease space.   Further, the Court is not persuaded that defendants' Exhibit A was provided by Ottaviano to Linn as Linn claims.   Ottaviano and Linn were childhood friends.   They have remained friends in spite of this dispute.   The court is unpersuaded that Ottaviano, who was unsure that he had ever seen Exhibit A prior to the instant litigation or had given Exhibit A to Linn, knew that the information on Exhibit A was inaccurate much less false, and/or that Ottaviano would provide that misinformation to Linn to induce Linn to sign the Lease and Guarantee.   Gatto, who Linn claimed was present at the conference where Ottaviano gave the document now marked as Exhibit A to Linn, had no recollection of Ottaviano providing the ‘orange colored paper’ (now Exhibit A) to Linn.

If Ottaviano did give Exhibit A to Linn, Linn has not established by clear and unequivocal evidence that Ottaviano and/or Gatto knew that the information on Exhibit A was untrue.   The plaintiff's tenants provided gross sales figures to the plaintiff in connection with the tenant's lease obligations toward a calculation of additional rent for proportionate share of operating expenses and taxes.   The tenants simply reported the gross sales figures to the landlord/plaintiff—no supporting documentation was required.   The plaintiff did not verify the tenant's representations of gross sales volume figures listed on Exhibit A. The court cannot find that the plaintiff knew the information on Exhibit A was false, even if the plaintiff provided Exhibit A to the defendants.

The Court is also unpersuaded that Linn/McMerlin reasonably relied upon a single sheet of paper in executing/guaranteeing the subject Lease Agreement and Guaranty.   The information claimed to be false on Exhibit A has to do with gross volume of sales figures provided to the plaintiff by a prior retail liquor store tenant which had occupied the same space that the defendant was going to occupy in the plaintiff's shopping mall.   However, there are a number of problems with this claimed reliance.   First, the figures are informally provided by tenants to the landlord without documentation by tenant to landlord and landlord made no effort to verify the accuracy of the tenant's reports.   Secondly, the claimed false information has to do with a period of time that is several years prior to the inception of the instant Lease and is contradicted by other year's sales figures that were provided by plaintiff to defendants.   Furthermore, the retail space that the defendant was leasing in the plaintiff's mall had been unoccupied for several years immediately prior to the defendant leasing this space therefore this ‘vacant store’ status is dissimilar to the period of time when the gross sales volume figures were allegedly tabulated.   Further, evidence was offered that a competing liquor store had opened in close proximity to the mall between the time when the sales figure on Exhibit A were supposedly submitted and the defendants leased the subject space—and the existence of this competitor was known to the defendants Additionally, Linn claimed to be a sophisticated analyzer of liquor store businesses.   He testified that he acted as a consultant in advising other people seeking to purchase liquor stores.   Linn acknowledged that he told potential purchasers to rely on the “best evidence,” the official sales and use tax returns, rather than any informal accountings that might be provided, when evaluating a business opportunity.   The court cannot conclude, under all the circumstances here presented, that such a sophisticated businessman as Linn, and hence the remaining defendants, would reasonably rely on the information contained on the single sheet of paper that is Exhibit A.

The issue of why the defendant's business failed, and hence the lease was breached for non-payment of rent, is also clouded.   Moeller, a prospective purchaser of the lessee's business and potential replacement tenant in defendant's leased space, testified that the defendants' business was severely undercapitalized and had insufficient stock in the store to support sufficient sales to be a profitable business.   Evidence from Linn and Gatto, plaintiff's principal, established that the lessee had insufficient financial resources to sustain the business.   Not only does it appear that the business was initially undercapitalized, but that Linn, the investor/money source in this business venture, was unable or unwilling to continue to finance the business venture due to other, unrelated, financial pressures he faced.   Had the liquor store been consistently stocked with sufficient quantities of desired products, manned by competent sales forces, supported with sufficient advertising efforts, given sufficient time to build a customer base, and not faced a terrible market due to the greatest financial recession since the Great Depression, the business may have succeeded—but none of that has to do with the plaintiff's conduct.

Under the circumstances, the Court is unpersuaded, that the defendants have proved by clear and convincing evidence that the plaintiff provided Exhibit A to the defendants or that that plaintiff made oral misrepresentations of fact to the defendants, that the plaintiff knew that the information on Exhibit A was false, or that the defendants would reasonably rely upon a single sheet of unsubstantiated listings of gross sales figures when entering into a Lease and/or Guaranty Agreement.   The defendants have not established by a fair preponderance of evidence that they suffered any damages as a result of reliance.

Neither is the Court persuaded that the defendants have established that if there was a negligent misrepresentation, that the plaintiffs knew or should have known of, calculated to induce the defendants' reliance, that the defendants reasonably relied upon said representation, and/or that their damages were caused by that reliance.   As the court has previously addressed the issues concerning whether a factual misrepresentation was made by the plaintiff to the defendant, whether such a misrepresentation was made to induce defendants' reliance, whether defendants reasonably relied upon such representation and the lack of persuasive evidence of causally related damages, the court will not repeat that analysis.   The burden of proof in negligent misrepresentation is a fair preponderance, “more likely true than not true,” but the defendant has not established by credible evidence all of the elements for a valid Special Defense of negligent misrepresentation.

The Court is unpersuaded that the evidence established that there was an intentional or a negligent misrepresentation of a material fact, made to induce defendants' reliance, that was reasonably relied upon by the defendants and that caused the defendants damage as a consequence.   Therefore the Court rejects the Special Defenses and Counterclaims based on a theory of fraud in the inducement, fraud and negligent misrepresentation, oral or written, arising out of the claimed misrepresentation by Ottaviano and/or Gatto to Linn during the negotiations for the Lease.

Lastly, the Court would note that there is a merger and integration clause in the comprehensive Lease which is Exhibit 1. That twenty-seven-page Lease includes Paragraph 3(c) which provides in pertinent part “the Tenant acknowledges that Landlord has made no representations or warranties whatsoever, expressed or implied, and that Tenant has relied upon no representations or warranties, expressed or implied, from Landlord regarding the condition of the leased premises, its building systems, equipment, suitable for Tenant's use or any other matter.”   Paragraph 25 of the Lease provides that “this Lease sets forth fairly the intentions of the parties to the extent of foreseeable circumstances.”   The defendants were represented by competent counsel during the negotiations for the Lease.   Nowhere in the Lease document is there a mention of either any oral representations by the landlord or what is later marked as Exhibit A for the defense, the document now claimed to prove misrepresentation, intentional and/or negligent, that form the basis for the misrepresentation claims—though Linn claims that Ottaviano gave that document to Linn many months prior to the execution of the Lease and Guaranty Agreements.   Logically, if Linn relied upon that single sheet of paper, Exhibit A, then the Lease, paragraphs 3(C) and 25 would be differently drafted.

The Court is unpersuaded that the defendants have established fraud by clear and convincing evidence and is unpersuaded that the defendants have established by a fair preponderance of the evidence that the plaintiff misrepresented material facts to the defendants, calculated to induce reliance, upon which the defendants reasonably relied and/or that the defendants' damages arose from any such misrepresentation and reasonable reliance.

The defendants' Third Special Defense is a failure to mitigate damages.

The Court rejects these claims.

There are two periods of claimed failure to mitigate:  pre-termination of Lease and post-termination of Lease.

The pre-termination of Lease failure is based upon the claim that the plaintiff failed to accept the Lease proposal of Moeller.   Moeller's testimony was clear that he had many problems with the existing Lease between the plaintiff and defendants.   Moeller would not accept an assignment of that Lease.   Nonetheless, the plaintiff Landlord sought to negotiate with Moeller to create a new lease.   Ultimately Moeller testified that under no circumstances would he personally guarantee the performance of the Lease, but proposed instead that the sole tenant would be an LLC with little or no assets.   Under the circumstances, the Landlord had every right to reject such an unreasonable proposal.   The Landlord is under no obligation to negotiate to his disadvantage simply to mitigate damages for the defendants.

The defendants offered a number of witnesses in an effort to establish their claim of post-Lease termination failure to mitigate damages.

The Court rejects these claims.

The Landlord affirmatively took more than reasonable efforts to lease the subject premises promptly and continuously following the termination of the Lease until the property was relet effective October 1, 2011.   During the years between the termination of the Lease and the reletting, the Landlord continuously advertised, through competent real estate agents, the subject premises, together with other vacancies in the mall, as well as cataloguing, meeting, vetting, and negotiating with potential tenants of the Lease space.   All the conduct of the Landlord can be described as consistent with reasonable business behavior.   The Landlord appears to have made no distinction between the lease efforts of the subject premises and lease efforts made of any other vacancy in the mall.   The plaintiff was operating the mall for profit and wished to have the premises fully leased and took commercially reasonable efforts to do so.

The defendants' various witnesses contradicted the defendants' claims in large measure.   The representative from the Liquor Control Commission indicated that the defendants had no right to hold the sales permit in suspension, as they did, following the termination of their Lease as they had no alternative location from which to operate, and that the liquor sales permit should have been returned to the Liquor Control Commission at that time.   Instead the defendants retained that permit, made efforts to sell their failing, and later closed, liquor store business and offered the usage of the state liquor sales permit to potential replacement tenants.   The defendants directed a number of potential purchasers of their business to the Landlord to determine whether those potential purchasers of McMerlin LLC could qualify as suitable tenants in plaintiff's mall.   None of the potential business purchasers and/or prospective lessees was willing or able to reach agreement with the Landlord on the same terms as the defendants had reached agreement with the Landlord.   The landlord, plaintiff, is not bound to mitigate its damages by negotiating a new lease with less favorable terms than existed with the defendants, Brennan Assoc. v. OBGYN Specialty Group, P.C., 127 Conn.App. 746, 755 (2011).

In sum, the Court finds that voluminous testimony of Messers.   Ottaviano, Gatto and Wuchinski, as well as Ms. Luck and Mr. Linn, Mr. Najaime, Mr. Duris and Mr. Pedros, established that the Landlord did consistently make reasonable efforts to mitigate the defendants' damages by making reasonable efforts to re-let the subject property before and after the defendant McMerlin defaulted on its contractual obligations.

The Court finds merit in the defendants' Fourth Special Defense of payment.   The defendants did post a security deposit in the amount of $15,042.45 with the plaintiff pursuant to the terms of the Lease Agreement between the parties.   Further, the defendant McMerlin did pay $35,000 towards equipment purchase from the plaintiff.   These payments are admitted by the plaintiff and will be deducted from any claims of damages proved by the defendants.

The Fifth Count of the Amended Counterclaim seeks damages for a CUTPA violation and statutory theft.   The basis for these claims is the same as the basis for the fraud and the fraud in the inducement claims rejected above.   The Court does not find that the plaintiff knowingly made a material misrepresentation of fact to the defendants, which representations were made or calculated to induce defendants' reliance, on which the defendants reasonably relied upon and which caused the defendants damages.   The defendants have failed to establish any of these elements by clear and convincing evidence as noted above.   The defendants have failed to establish even by a fair preponderance of the evidence any of those elements as noted above.   Consequently, the Court rejects the claims for unfair trade practices and/or statutory theft as the factual predicate for either of those claims would arise out of the same conduct and the same findings that would support a claim of fraud or fraudulent misrepresentation and the Court has, as noted above, found that the defendants have failed to prove the elements of those defenses.

The plaintiff has established its damages in this case to be a total of $433,430.90 which is comprised of Rent, CAM (common area maintenance) charges, Merchant Dues and Interest through the end of September 2011 (plaintiff relet the property effective 10/1/11), less the Security Deposit, plus the unpaid balance due the plaintiff from the defendants concerning the purchase of the fixtures (less the payment defendants made on said fixtures), together with late fees.   The unpaid Rent, CAM and Merchant Dues total $405,807.30 through October 1. The Security Deposit was $15,042.45.   The net due plaintiff concerning the payment for the fixtures is $42,666.05 (after deduction of the $35,000 payment by defendants to plaintiff in connection with the purchase of those fixtures), and less the credit for $1,650.00 for Landlord sale of those fixtures years after defendants abandoned the same, for a total of $433,430.90 due plaintiff from defendants and from defendant Guarantors, jointly and severally.

In addition thereto, pursuant to the terms and conditions of the Lease Agreement, the plaintiff is entitled to attorneys fees and reasonable expenses.   The same will be submitted pursuant to Practice Book § 11–21.

As the court has found that the plaintiff has proved the existence of a contract, breach and damages as alleged in Count One, the court rejects the balance of the Complaint as all subsequent counts allege theories of quasi contract.   The premise of such counts is that no valid contract exists between the parties.   As the court has found the existence of such a contract, judgment enters for the defendants on those counts.

WHEREFORE, judgment will enter in favor of the plaintiff, on Count One, in the amount of $433,430.90 plus reasonable attorneys fees and expenses against the defendants, jointly and severally.

BY THE COURT

ZEMETIS, T.

Zemetis, Terence A., J.