James Irovando v. Richard Huntington et al. (2013)

MEMORANDUM OF DECISION

This is an action brought by the plaintiff James Irovando (“Irovando”) against his former business partner Richard Huntington (“Huntington) to recover for alleged breach of contract, conversion, unjust enrichment and breach of fiduciary duty.   This matter was tried to the court over five separate dates.   Testimony was received from nine witnesses;  11 documents and were admitted as full exhibits.   Post-trial briefs were filed by both parties.

I. FINDINGS OFFACT

This court, having carefully reviewed the documentary exhibits and evaluated the demeanor and credibility of the witnesses, having analyzed and weighed the evidence according to the applicable standards of law, and having considered the parties' arguments made to the court, finds the following facts to have been proven by a fair preponderance of the evidence.

Sometime in 2002 or 2003, the plaintiff Irovando began working for Banker's Life and Casualty in West Hartford selling insurance products.   There he met the defendant Huntington.   From working with Huntington, Irovando recognized that he was a good salesman and would make a good business partner.   During 2003 the two discussed the possibility of opening up their own company to sell insurance-related products.

In late 2003, Irovando and Huntington, along with two other individuals by the names of Peter Cirelli and Paul Janco, formed their own business which they named Southern New England Financial, Inc. (“SNEF”).  The four shareholders of SNEF verbally agreed to a compensation model that was based upon individual production, not percentages of shares owned in SNEF. The agreement called for the writing agent (the person making the sale to a client) to keep 60% of the commission from the sale and the other 40% would be paid back into or left with SNEF towards expenses.   The business owners elected subchapter S treatment for tax purposes.

Cirelli's employment at SNEF came to an end in early 2004.   Huntington brought to Irovando's attention that Cirelli was not turning over his commission checks to the company, and was instead keeping the entire commission for himself.   Janco later resigned from the company when it was found he was engaging in the same misconduct as Cirelli.

After Janco and Cirelli departed SNEF, Irovando and Huntington redistributed the remaining shares of stock such that they were each 50% shareholders of SNEF. They continued in business under the following oral agreement regarding the allocation of revenue from sales commissions.   Where one of them acted independently to earn a commission, there would be a 60/40 split such that the individual seller would receive 60% of the commission and SNEF would receive 40%.

Another aspect of the parties' agreement for allocation of commissions related to sales generated from seminar presentations.   Huntington and Irovando conducted insurance seminars together at local restaurants in an effort to obtain sales leads.   After the seminar, Irovando and Huntington would split up the leads and work to close the sale with the prospective client.   Nonetheless, their arrangement was that no matter who closed the sale from a seminar, the commission would be divided 30% to each business partner, and 40% to the company.   This caused problems because Huntington was much more successful at following leads and closing sales with seminar clients.   Irovando sold 4 seminar clients in three years, while Huntington was selling 40 or more seminar clients during the same period.

In addition to regular commissions, some insurance providers paid “override commissions” on certain sales.   An override commission is additional compensation paid over and above the normal percentage commission.   Typically it represents an amount paid to an agency principal for premium business written by sub-agents that the agency principal has recruited.   The testimony at trial did not clearly establish the existence of an agreement with respect to the allocation of override commissions.   Plaintiff Irovando contends that the parties had agreed that the override commissions were to be paid 100% exclusively to him.   Defendant Irovando insists that prior to 2006, the override commissions were to put back into SNEF to cover overhead and corporate expenses.   After 2006, the override commissions were allocated along with the ordinary commission to the agent responsible for the sale.

At some point in 2005, Huntington met with the corporate accountant for SNEF, David Angliss and raised a concern about compensation.   Huntington felt that the existing agreement for allocating revenue from insurance commissions was unfair to him and he wanted to determine if there was another way to allocate commissions that was more equitable.

Toward the end of 2005, a series of meetings took place between Irovando, Huntington and Angliss regarding changing the method of compensation.   Sometimes Angliss would meet with both Irovando and Huntington together, other times Angliss would meet separately with either Irovando or Huntington.   During these meetings, Angliss suggested to the parties a concept of allocating expenses specifically to each individual and crediting each individual with the sales commission revenue he was responsible for generating.   Irovando actively participated in those meetings, asked questions, and received explanations as to how the new compensation system would work.

Under the system Angliss was suggesting, 100% of all revenue flowing from any sales made by a writing agent (either Irovando or Huntington) would be allocated to that writing agent.   Expenses would be similarly allocated at the rate of 100% or 50% to the individual depending on whether the expense was individually incurred (such as health care, auto, personal marketing efforts) or incurred jointly (such as rent and liability insurance).   This is a common system used for determining compensation in small financial firms, law firms, and accounting firms, including sub-chapter S corporations such as SNEF.

As a result of the meetings, Huntington and Irovando decided to change the method for calculating compensation and agreed to the system which Angliss had proposed going forward from January 1, 2006.   Angliss undertook to develop a chart of accounts so that income and expenses could be tracked and allocated to a particular agent.   Angliss assisted the parties in setting up the accounts in the company's bookkeeping software system, known as “Peachtree,” and showed SNEF personnel (initially Huntington, then from November 2006 onward a SNEF employee, Ninette Tirita) how to code the receipts and expenses appropriately and input the information into the software.

The Peachtree software permitted reports to be run showing revenue and expenses for each agent on a monthly basis, as well as trial balances and year end reports.   Beginning in 2006, and continuing over the next three and one-half years, Irovando received approximately 42 of these monthly reports.   Irovando also had access to bank account balances and statements, payroll accounts and records, on-line accounts for insurance providers such as Allianz, 3–ring binders with hard copies of commission statements, and cash receipts journals.

In 2006 and into 2007, Irovando's lack of insurance sales resulted in his revenue not covering his own expenses.   In meetings which took place in 2007, Angliss went over all of the revenue and expense reports and discussed with Irovando his “predicament.”   Based on the year to date results, Angliss projected a $30,000 capital shortfall for Irovando by the end of the year 2007.   Significantly, during all of these discussions, Angliss testified that Irovando did not complain about the allocation of revenue from commissions or protest that the system for allocating revenue from commissions was unfair to him.

Angliss counseled Irovando that he would have to generate more revenue from insurance sales or put money into the company from other sources to cover his capital shortfall.   To help with the former, Angliss suggested a sales coach.   To deal with the shortfall, Irovando paid $30,000 into the company from his personal accounts.   That $30,000 was originally booked as a short-term loan to the company, but after review by the accountants, was later re-classified to as “paid-in-capital.”   Irovando insisted at trial that the payment was intended as a loan and should have remained classified on the company's books as a loan to be repaid to him, but the court does not credit his testimony in that regard.

In the spring of 2009, a disagreement between Huntington and Irovando over a sub agent became heated.   A verbal argument ensued and Irovando stormed out of the office.   Over the course of the next few months the relationship deteriorated, with each side accusing the other of deceitful and devious conduct.   Sometime in June of 2009, Irovando and Huntington agreed to end their business relationship.   At first they jointly engaged the attorney for SNEF, Daniel Kennedy, to assist with the dissolution.   Irovando subsequently obtained his own lawyer.

Several meetings took place over the summer of 2009 made for the purpose of dissolving SNEF with a mutual release of claims by each business partner.   The parties, through their lawyers, also exchanged several communications and draft agreements.   While there was, within all this activity, agreement as to several important terms (e.g., Irovando to take over the lease for the office space) a comprehensive, “global” settlement agreement encompassing all the terms and expressly releasing the parties' respective claims was never finalized.

By the fall of 2009 Huntington had left SNEF and established his new business, Huntington Financial.   Irovando later set up his own business, GPS Financial, utilizing the former SNEF office for his business.

II. ANALYSIS

A. Withdrawn or abandoned counts

The complaint was originally filed in fourteen counts.   Withdrawals have been filed as to the Fourth, Eighth, Eleventh and Fourteenth Counts.   In his post-trial brief, the plaintiff also indicates that he is “not proceeding” with the Twelfth Count.  (Irovando Post–Trial Brief at p. 1.) The First, Second, Third, Ninth, and Tenth Counts of the complaint are derivative causes of action alleging injury and financial loss to SNEF. In his post-trial brief, the plaintiff represents that he is “not pursuing” those counts because they afford relief, which, as a practical matter, is no different from the relief in the claims brought on behalf of Irovando personally.  (Irovando Post–Trial Brief at p. 2.)

Therefore, the remaining causes of action before the court are set forth in the Fifth Count (breach of contract);  the Sixth Count (civil conversion);  the Seventh Count (unjust enrichment);  and the Thirteenth Count (breach of fiduciary duty).

B. Discussion:  Breach of Contract

The Fifth Count asserts a cause of action for breach of contract.   Essentially, Irovando alleges that an oral agreement existed between himself and Huntington governing the determination of compensation from 2004 through 2009.   According to Irovando, the oral agreement regarding the allocation of commissions was as follows:  where one agent acted independently to earn a commission, there would be a 60/40 split such that the individual seller would receive 60% of the commission and SNEF would receive 40%.   If a seminar presentation resulted in a sale, each business partner would receive 30% of the commission and the other 40% would remain in the company.

The defendant Huntington does not disagree that the aforementioned oral agreement was reached and controlled the calculation of compensation during the years 2004 and 2005.   However, Huntington contends the oral agreement reached for allocation of income in 2004 was replaced by a new agreement for allocating compensation effective January 1, 2006, and that all of the allocation of commission revenues from 2006 forward was consistent with that agreement.   Hence there was no breach of the 2004 oral agreement, because a different agreement covered the calculation of compensation in the years from 2006 to 2009.

Irovando concedes that he was aware that, beginning in 2006, the company was “tracking expenses differently” than they had in 2004 and 2005.   Irovando contends that Huntington breached the 2004 oral agreement by—in effect—manipulating the company's bookkeeping system to “overpay himself” in the amount of $237,245.00 during the period from 2004–2009.  (Irovando Post–Trial Brief at p. 34.)   Although he acknowledges the new system for allocating expenses, Irovando expressly denies that in late 2005 “the parties sat down and reached an agreement that they would allocate income differently that they had in the past.”  (Irovando Post–Trial Brief at p. 26.)

However, considering all the evidence and testimony, the court finds that the parties did exactly that.   The court finds the testimony of the defendant Huntington and the company's accountant, David Angliss, more credible than that of the plaintiff as to events leading up to and following the implementation of the new compensation system in 2006.   Substantial documentary evidence, including accounting evidence from the Peachtree bookkeeping system, is completely consistent with Huntington & Angliss' version of events, but not at all with Irovando's version of events.   Moreover, from January 2006 up until the time the parties' business relationship began to unravel, Irovando conducted his business under new system for determining compensation, and accepted every compensation payment generated by that system, voluntarily and without protest.   Not once during that time, despite the enormous volume of information given to him showing that sales commissions were not being allocated as they had in 2004 and 2005, did he raise a concern.

Irovando attributes this remarkable disconnect to the fact that Huntington & Angliss “worked together” on the scheme to deny him his rightful compensation and then hide that fact from him.   As to his unquestioning acceptance of the output of the compensation system from 2006 through 2009, Irovando explains that he relied upon and trusted Huntington to be truthful and honest, and had no reason to believe that he was not.   The court does not credit those rationalizations, and concludes instead that it is more likely than not that the parties did in fact agree to and implement a new system of determining compensation beginning in 2006.

‘The existence of a contract is a question of fact to be determined by the trier on the basis of all the evidence.”  Fortier v. Newington Group, Inc., 30 Conn.App. 505, 509, cert. denied, 225 Conn. 992 (1993).   The court does not accept the plaintiff's evidence as credible.   The plaintiff has failed to establish by a preponderance of the evidence that the allocation of revenues from commissions between the plaintiff and defendant for the period from 2006 to 2009 was governed by the oral agreement reached by the parties in 2004.   Therefore, as to the plaintiff's claim for breach of contract in the Fifth Count of the Complaint, the court finds the issues for the defendant.

C. Discussion:  Conversion

The Sixth Count asserts a cause of action for civil conversion.  “Conversion is an unauthorized assumption and exercise of the right of ownership over property belonging to another, to the exclusion of the owner's rights.”   Mystic Color Lab, Inc. v. Auctions Worldwide, LLC, 284 Conn. 408, 418, 934 A.2d 227 (2007).  “The intent required for a conversion is merely an intent to exercise dominion or control over an item even if one reasonably believes that the item is one's own.”  Plikus v. Plikus, 26 Conn.App 174, 180, 599 A.2d 392 (1991).   The plaintiff's burden to prove conversion is by a fair preponderance of the evidence.

“To establish a prima facie case of conversion, [a] plaintiff ha[s] to demonstrate that (1) the material at issue belonged to the plaintiff, (2) that [the defendant] deprived the plaintiff of that material for an indefinite period of time, (3) that [the defendant's] conduct was unauthorized and (4) that [the defendant's] conduct harmed the plaintiff.”  (Internal quotation marks omitted.)  Coster v. Duquette, 119 Conn.App. 827, 832, 990 A.2d 362 (2010).  “There may be a conversion by a wrongful taking, by an illegal assumption of ownership, by an illegal user or misuse, or by any other form of possession wrongfully obtained.   Furthermore, a wrongful detention, even though possession was rightfully obtained, may constitute conversion.”  Bruneau v. W & W Transportation Co., 138 Conn. 179, 182–83, 82 A.2d 923 (1951).  “Under our case law, [m]oney can clearly be subject to conversion.”  (Internal quotation marks omitted.)  Deming v. Nationwide Mutual Ins. Co., 279 Conn. 745, 771, 905 A.2d 623 (2006).

Sifting through the vast amount of accounting and bookkeeping evidence at this trial, and closely reviewing the testimony of the plaintiff and the plaintiff's expert, Mark Makuch, the court cannot adequate proof of a threshold requirement of the conversion claim:  that money which “belonged” to the plaintiff was wrongfully taken or obtained by the defendant.   Makuch could not render an opinion that money was missing from the SNEF bank accounts that had not been properly accounted for.   The plaintiff asserts that he did not receive the full share (under the 2004 verbal contract) of the commissions he earned.   But that claim will not support a cause of action for conversion since the court has found that the allocation of compensation from 2006 to 2009 was properly done pursuant to an agreement between the parties reached in late 2005.   Therefore, the plaintiff never had legal ownership of the funds sufficient to support a conversion claim.   Plaintiff also failed to demonstrate that the override commissions were at all times legally and conclusively his property.   The evidence was at best contradictory as to whether, once received, they were intended to be paid exclusively to Irovando, paid into the company to cover expenses, or allocated to the agent producing the sale as with any other commission.   The plaintiff failed to otherwise demonstrate a single instance where any funds over which he had unquestioned legal ownership were “taken” from him by Huntington by wrongful means.

The plaintiff has failed to prove his claim or conversion, and therefore the court finds the issues for the defendant as to the Sixth Count of the Complaint.

D. Discussion:  Unjust Enrichment

The Seventh Count asserts a cause of action for unjust enrichment.  “A right of recovery under the doctrine of unjust enrichment is essentially equitable;  its basis being that in a given situation it is contrary to equity and good conscience for one to retain a benefit which has come to him at the expense of another.”  (Internal quotation marks omitted.)  Vertex v. Waterbury, 278 Conn 557, 573, 898 A.2d 178 (2006).  “Plaintiffs seeking recovery for unjust enrichment must prove (1) that the defendants were benefited, (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.”  (Internal quotation marks omitted.)  Breen v. Judge, 124 Conn.App. 147, 158–59, 4 A.3d 326 (2010).

“With no other test than what, under a given set of circumstances, is just or unjust, equitable or inequitable, conscionable or unconscionable, it becomes necessary in any case where the benefit of the doctrine is claimed, to examine the circumstances and the conduct of the parties and apply this standard.”   Breen v. Judge, 124 Conn.App. 147, 158–59, 4 A.3d 326 (2010).  “[E]quitable remedies are not bound by formula but are molded to the needs of justice.”   Stewart v. King, 121 Conn.App. 64, 71, 994 A.2d 308 (2010).

The court has considered the circumstances and the conduct of the parties and does not find that the defendant has been unjustly enriched and therefore, as to the Seventh Count, finds the issues for the defendant.

E. Discussion:  Breach of Fiduciary Duty

The Thirteenth Count of the complaint asserts a cause of action for breach of fiduciary duty.   It alleges that, as a director of SNEF, Huntington managed the affairs of the corporation for his own benefit and to the detriment of Irovando, failed to act in connection with the conversion and misappropriation of corporate funds, and failed to and refused to properly discharge and fulfill his obligations and duties to Irovando and caused Irovando damages.

At trial, the plaintiff's evidence regarding the breach of fiduciary duty seemed to center on the fact that the defendant kept plaintiff “in the dark about ․ tax returns, bank records, the SNEF client database, side deals involving David Petruzzi, and the ․ new method of allocating compensation.”   (Irovando Post-trial Brief at p. 32.)

The credible testimony and evidence does not support the plaintiff's claim that he was “kept in the dark.”   The accounting experts were in agreement that the Peachtree bookkeeping software “database” represented an accurate and complete record of all the company's receipts and expenses.   From that database, the Peachtree software generated several types of detailed reports of income and expenses for each agent on a monthly and yearly basis.   All of these Peachtree reports were delivered to or available to Irovando.   The company's accountant testified that the Peachtree reports were discussed in meetings with Irovando.   In addition to the Peachtree reports, Irovando had access to the payroll records, he had access to 3–ring binders with hard copies of commission statements, he had the ability to get bank statement and account balances, and he had on-line access to the commission and sales records for various insurance providers.

From early 2006 through at least the end of 2008, Irovando never once complained about being denied access to company records or being “kept in the dark.”   In 2009, as it became apparent that the business relationship between Irovando and Huntington was foundering, Irovando claims he went to Huntington to “demand” access to the records on several occasions, but Huntington supposedly put him off with questions.   Despite his strong suspicions and his grave concerns about the financial information being kept from him, Huntington never pressed his “demands” or asserted his rights as President of the company to see all company records.

Irovando also testified about sending a letter to SNEF in June of 2009 requesting access to the records and getting no response.   However, that letter was never put into evidence and, in other testimony, Irovando testified to reviewing corporate tax returns supplied by David Angliss during the same time period.   On the whole, the plaintiff's evidence regarding being “kept in the dark” and being intentionally denied access to financial information regarding the company was loose, equivocal and contradictory.

The plaintiff's proof as to “side deals” was also ambiguous and inconclusive.   David Petruzzi received a check written from Huntington's personal bank account in August of 2009, in the amount of $6,870.91, representing a 70/30 split of a commission for an annuity that Petruzzi had referred to Richard Huntington.   Although the Plaintiff's expert testified to discrepancies in cash receipts that might conceivably relate to alleged “side deal” or “off the books” transactions like the Petruzzi commission, in fact “off the books” transactions were never tied by any testimony or documents into any accounting discrepancy or any financial loss to Irovando.   In a similar vein, the Plaintiff's expert Mark Makuch identified occasions when the defendant Huntington had deposited commission checks into his personal checking account, but he was “unable to draw any conclusions as to whether Huntington had paid back more to SNEF than had received associated with those commission statements.”

In the absence of direct proof, the plaintiff urges that the court infer dishonesty, improper motive, and harm to the plaintiff from the limited evidence connected with these transactions.   However, court believes that an inference of fraud or dishonesty from such inconclusive evidence would amount to nothing more than conjecture and speculation and is not warranted under all the circumstances.

“The essential elements [of] a cause of action for breach of fiduciary duty under Connecticut case law are:  (1) That a fiduciary relationship existed which gave rise to (a) a duty of loyalty on the part of the defendant to the plaintiff, (b) an obligation on the part of the defendant to act in the best interests of the plaintiff, and (c) an obligation on the part of the defendant to act in good faith in any matter relating to the plaintiff;  (2)[T]hat the defendant advances his own interests to the detriment of the plaintiff;  (3) That the plaintiff sustained damages;  (4) That the damages were proximately caused by the fiduciary breach of his or her fiduciary duty.”   Stone v. Pattis, Superior Court, judicial district of Stamford–Norwalk, Docket No. CV 09 5011515 (May 9, 2013, Brazzel–Massaro, J.).

For reasons previously explained, the court does not find that the plaintiff has proven by a fair preponderance of the evidence that Huntington managed the affairs of the corporation for his own benefit and (by denying him an agreed share of revenues from commissions) to the detriment of Irovando.   In addition, the court does not accept as credible the plaintiff's evidence that the defendant, in breach of his fiduciary duty, intentionally withheld or concealed financial information from Irovando.   Finally, the court does not find that the plaintiff has proven his claim that Huntington engaged in dishonest commission “side deals,” which caused financial loss to the plaintiff.   As a result, the plaintiff has failed to establish several necessary elements of his claim for breach of fiduciary duty, namely that the defendant advanced his own interests to the detriment of the plaintiff and that the plaintiff sustained damages proximately caused by the breach of fiduciary duty.

Therefore, as to the cause of action for breach of fiduciary duty set forth in the Thirteenth Count of the complaint, the court finds the issues for the defendant.

F. Defendant's Special Defenses and Counterclaim

The court having found for the defendant as to all the remaining causes of action asserted in the plaintiff's complaint, it is unnecessary to reach the defendant's special defenses.

The defendant's counterclaim asserts a breach of a settlement agreement.   The court finds for the plaintiff as to the counterclaim for the reason that the defendant has failed to establish by a preponderance of the evidence a valid and binding settlement agreement based upon a manifestation of mutual assent.   See, Ubysz v. DiPietro, 185 Conn. 47, 51, 440 A 2d 830 (1981).   In order to have an enforceable agreement, the parties must have an “identical understanding” of the matters to which they have mutually agreed in their offer and acceptance.  Bridgeport Pipe Engineering Co. v. DeMatteo Construction Co., 159 Conn. 242, 249, 268 A.2d 391 (1970);  Shulman v. Hartford Public Library, 119 Conn. 428, 433, 177 A. 269 ( 1935).   If the minds of the parties have not truly met, no enforceable contract exists.  Fortier v. Newington Group, Inc., 30 Conn.App 505, 510, 620 A.2d 1321, cert. denied, 225 Conn. 922, 625 A.2d 823 (1993).  “If the parties have not agreed to all the essential terms, but have merely engaged in preliminary negotiations, there is no contract.”   17A Am.Jur.2d, Contracts § 37 (2004).

In the present case, the evidence did not demonstrate complete agreement by both parties to the all the essential terms of the alleged “settlement agreement” and for that reason, the court finds in favor of the plaintiff as to all issues in the counterclaim.

III. CONCLUSION

For the foregoing reasons, the court finds in favor of the defendant.   Judgment will enter for the defendant on all counts.   Each party is to bear its own costs.

BY THE COURT,

Sheridan, J.

Sheridan, David M., J.