77 Conn. App. 289 | Conn. App. Ct. | 2003
Opinion
The defendant, John Conlon, appeals from the judgment of the trial court, rendered after a trial to the court, in favor of the plaintiff, Springfield Oil Services, Inc. (Springfield Oil). On appeal, Conlon claims that the court improperly found that Springfield Oil proved by clear and convincing evidence that the assignment of promissory notes to it by its affiliate was fair.
The relevant facts and procedural history are as follows. Harvest Oil Company (Harvest) was the general partner of a limited partnership known as Salisbury Associates (Salisbury). Salisbury was formed for the purpose of exploratory oil and natural gas drilling. Units in the Salisbury partnership were offered to investors
The exploration and drilling contract between Salisbury and Springfield Oil, which was referred to in the memorandum as the “turnkey contract,” provided that Springfield Oil would drill five wells between 1981 and 1983, and that Salisbury would pay Springfield Oil $700,000 in each of the first two years for acquisition and drilling of the first three wells, and an additional $700,000 for drilling the fourth and fifth wells. The $700,000 installments were payable partly in cash and partly in interest bearing notes, with the accrued balance of each note due on December 31,1991, December 31, 1992, and December 31, 1993.
Conlon, who was a securities trader, became a limited partner in Salisbury by purchasing one unit in the Salisbury partnership. He paid for that unit partly in cash
From 1981 through 1989, inclusive, Salisbury provided Conlon with Internal Revenue Service schedule K-l forms. Each of the K-l forms set forth the amount of Salisbury’s loss that was allocated to Conlon, which he could use to offset any other income he may have earned, thereby reducing his tax liability.
On October 20, 1989, Harvest, Salisbury’s general partner, sent Conlon, and presumably the other limited partners, a letter in which it proposed to dissolve the Salisbury partnership. The letter explained that the partnership had been successful with its tax strategy, but that the partnership had not generated sufficient cash flow to pay off Conlon’s promissory note obligation. The letter further stated that because of the drop in oil and gas prices, the partnership no longer was economically viable and that the assets of the partnership had little worth. The letter indicated that Salisbury would, therefore, dissolve the partnership and assign each partner his or her proportionate share of the assets and note obligations. It also indicated that Conlon could restructure his financial obligation by accepting either of two alternatives by November 20,1989. Conlon could either (1) execute a new $22,500 promissory note, payable to Springfield Oil, which would be due in fifteen
Thereafter, on December 31, 1989, Harvest dissolved the Salisbury partnership. Upon dissolution, Harvest assigned to Springfield Oil all of its assets, including Conlon’s promissory notes, as well as the promissory notes of the other limited partners, and its drilling rights to the oil and gas wells.
On April 11,1990, Harvest sent Conlon a letter advising him that pursuant to the October 20, 1989 letter, the Salisbury partnership had been dissolved and that because he had not responded to the October letter, his promissory notes would be payable on their original due dates. The letter did not, however, provide any details regarding the dissolution, namely, that the partnership assets were assigned to Springfield Oil. The letter also did not provide an accounting as to the value of Salisbury’s assets at the time of dissolution. On June 11, 1992, Springfield Oil sent Conlon a letter indicating that the first of his three promissory notes had come due. On November 9, 1995, Springfield Oil sent a letter to Conlon in which it demanded payment of the three promissory notes, totaling $150,000, plus interest. Conlon did not respond to either of those letters.
Thereafter, Springfield Oil brought this action against Conlon to enforce the three promissory notes that Conlon had executed in favor of Salisbury and which Salis
Conlon filed an answer in which he admitted that he had executed the notes in connection with his purchase of a unit in the Salisbury partnership and that he had not paid the debt represented by those notes. He denied the remaining allegations of Springfield Oil’s complaint. Conlon also filed four special defenses.
Prior to trial, Springfield Oil stipulated that it was not a holder in due course with regard to the notes and, therefore, was subject to any of the defenses that Conlon was entitled to assert against Harvest.
Only two witnesses testified at trial, Conlon and Jerry Karlik, the vice president of both Harvest and Springfield Oil. Conlon testified that he did not remember anything about his investment in the Salisbury partnership. When he was shown the closing documents and promissory notes, Conlon admitted that it was his signature that appeared on those documents.
Karlik testified as follows. Harvest provided various documents to potential investors of the Salisbury partnership, including the private placement memorandum, some closing documents and the partnership agreement.
Karlik further testified that Springfield Oil either drilled the wells itself or hired third parties to conduct
Additionally, Karlik testified that the partnership was dissolved on December 31, 1989, and that at that time, Salisbury owed Springfield Oil approximately $2.1 million but had only $1.5 million in assets. According to Salisbury’s final balance sheet for the period December 31, 1988, through December 31, 1989, which was introduced at trial, the $2.1 million debt consisted of Salisbury’s notes payable to Springfield Oil, plus accrued interest payable. Karlik conceded, however, that he did not have copies of the notes evidencing Salisbury’s debt to Springfield Oil. According to Karlik and Salisbury’s balance sheet, the $1.5 million in assets consisted mainly of notes receivable from the limited partners, including Conlon’s notes totaling $150,000.
Finally, Karlik testified that on the date of dissolution, December 31,1989, he assigned the notes of the limited
On the basis of the testimony and documentary evidence adduced at trial, the court concluded that Springfield Oil, because it was the assignee of the fiduciary Harvest, had the burden of proving by clear and convincing evidence that Harvest had acted in accordance with its fiduciary duties when it assigned Conlon’s notes to Springfield Oil. The court further found that Springfield Oil had demonstrated by clear and convincing evidence that Harvest had acted in accordance with its duties as a fiduciary in assigning Conlon’s promissory notes to its affiliate, Springfield Oil. The court reasoned, in reliance on Konover Development Corp. v. Zeller, 228 Conn. 206, 635 A.2d 798 (1994), that because Conlon was a sophisticated securities trader and because Salisbury was obligated to pay Springfield Oil $2.1 million for its drilling services, an obligation that had been previously disclosed to Conlon, Harvest’s assignment of Conlon’s notes to Springfield Oil in satisfaction of that obligation did not constitute a breach of fiduciary
Conlon claims that the court improperly found that the fairness of Harvest’s 1989 assignment of the notes to Springfield Oil was proven by clear and convincing evidence. We agree.
Conlon’s claim requires us to review a finding of fact. “The standard of review with respect to a court’s findings of fact is the clearly erroneous standard. The trial court’s findings are binding upon this court unless they are clearly erroneous in light of the evidence and the pleadings in the record as a whole. . . . We cannot retry the facts or pass on the credibility of the witnesses. ... A finding of fact is clearly erroneous when there is no evidence in the record to support it ... or when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed . . . .” (Internal quotation marks omitted.) Blitz v. Subklew, 74 Conn. App. 183, 186, 810 A.2d 841 (2002).
In determining whether the court’s finding was clearly erroneous, we must examine that finding in the context of the heightened standard of proof imposed on a fiduciary. See Spector v. Konover, 57 Conn. App. 121, 127, 747 A.2d 39, cert. denied, 254 Conn. 913, 759
“Once a [fiduciary] relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary.” (Internal quotation marks omitted.) Konover Development Corp. v. Zeller, supra, 228 Conn. 219. “Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of proof 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.” (Internal quotation marks omitted.) Id., 229-30. That burden of persuasion is sustained if the evidence “induces in the mind of the trier a reasonable belief that the facts asserted are highly probably true, that the probability that they are true or exist is substantially greater than the probability that they are false or do not exist.” (Internal quotation marks omitted.) Parker v. Slosberg, 73 Conn. App. 254, 264, 808 A.2d 351 (2002).
Accordingly, in the present case, Springfield Oil, because it is the assignee of Harvest, which was a fiduciary of the partnership, had the burden to prove, by clear and convincing evidence, that Harvest dealt fairly with Conlon when it assigned his notes to Springfield Oil. We must determine whether the court properly found that Springfield Oil met that burden by clear and convincing evidence.
In the present case, the court relied on Konover Development Corp. v. Zeller, supra, 228 Conn. 228, in finding that Harvest’s assignment of Conlon’s notes to Springfield Oil was fair. In Zeller, our Supreme Court held that “in certain circumstances a fiduciary may demonstrate that a particular transaction is fair by showing (1) that the fiduciary made a free and frank
“The Zeller standard effectively preserves the heightened standards required of fiduciaries while allowing parties in a fiduciary relationship the flexibility to contract freely among themselves. The standard articulated in Zeller is most appropriately applied in situations where a principal challenges the fairness of a particular transaction in which both the principal and the fiduciary made a fully informed decision to act in a manner that is seemingly contrary to the normal fiduciary relationship. Implicit in the Zeller standard is the requirement that the principal consent to the transaction carried out by the fiduciary. To invoke the Zeller standard in an attempt to justify the fairness of a particular transaction, the fiduciary must first be able to show that there was some agreement among the parties allowing the fiduciary to act in a manner that may otherwise be a breach of fiduciary duty.” (Emphasis added.) Id., 129.
In the present case, there was an agreement between Harvest and Conlon that Salisbury would contract with Harvest’s affiliate, Springfield Oil, to perform drilling services and that Salisbury would compensate Springfield Oil for those services. Springfield Oil failed, however, to offer any evidence of an agreement allowing Harvest to assign the entirety of the partnership’s assets to its affiliate, Springfield Oil, in satisfaction of Salisbury’s debt to Springfield Oil, upon dissolution of the partnership without a valuation of the partnership assets, a netting of the value of the assets of the partnership against its liabilities and an accounting to the limited partners.
Even under the Zeller standard, Springfield Oil failed to establish that Harvest acted fairly in assigning Con-Ion’s notes to Springfield Oil because it failed to demonstrate that Harvest made a full and frank disclosure of all of the relevant information regarding the assignment and because it failed to demonstrate that the consideration was adequate.
The court found, in reliance on Zeller, that Springfield Oil had proved by clear and convincing evidence that Harvest’s fiduciary duty was discharged because Conlon was sophisticated and because Harvest had made full disclosure of “the relationship and terms that have resulted in the assignment” of Conlon’s notes to Springfield Oil. That finding is problematic for two reasons. First, it seems to imply that the assignment was appro
Second, the court’s finding seems to imply that because Conlon was sophisticated and because he knew that Springfield Oil, Harvest’s affiliate, would be doing the drilling and would be compensated by the partnership for those services and chose to invest in the partnership anyway, Harvest owed Conlon some lesser duty with respect to transactions involving the turnkey contract. Such a finding, however, contravenes Zeller, which reasoned that a general partner’s fiduciary duty is an ongoing duty, and extends to all decisions that have “adverse, concrete financial consequences that [flow] foreseeably and directly from that decision . . . .” Id., 222. By agreeing to the terms of the turnkey contract between Harvest and Springfield Oil, Conlon did not agree to give Harvest carte blanche in its dealings with Springfield Oil. The terms of a limited partnership agreement cannot negate the fiduciary duty of the general partner even where the relationship and terms of a contract between the fiduciary and its affiliate are disclosed and even where the partnership involves sophisticated parties. See id., 226. Furthermore, Zeller
We conclude that Springfield Oil did not demonstrate by clear and convincing evidence that Harvest’s assignment of Conlon’s notes to Springfield Oil was fair because Harvest did not make a free and frank disclosure to Conlon of all relevant information regarding the assignment at the time of dissolution. Harvest assigned the notes and drilling rights, yet it failed to appraise or to otherwise set a value for the drilling rights that were, in addition to the notes of the limited partners, an asset of the partnership that could have been used to offset Salisbury’s debt to Springfield Oil. Harvest also failed to provide Conlon with an accounting after dissolution.
Springfield Oil also did not demonstrate that the compensation that Harvest gave to Springfield Oil in satisfaction of Salisbury’s debt was adequate. The court found that Harvest discharged its fiduciary duty by using the notes as a partnership asset solely to fulfill a partnership obligation that was clearly identified in the private placement memorandum. The problem with that finding is that because there was no valuation of the drilling rights, or an accounting, either before or after dissolution, the court had no way of determining the extent of that obligation. Although the court emphasized the fact that both the relationship between Harvest and Springfield Oil and the terms of the turnkey contract had been fully disclosed to Conlon before he
Karlik testified that the assets of the partnership were exceeded by its liabilities and that the only real asset that the partnership had at the time of dissolution was the notes of the limited partners. He stated that although the rights to the wells also were an asset, those rights were of “little value.” To accept Karlik’s seemingly unsupported testimony that the drilling rights had little value would, however, inappropriately shift the burden of proving adequate consideration from the fiduciary to Conlon. Furthermore, the fact that the drilling rights had “little value” implies that they had, at least, some value and, accordingly, the drilling rights should have been appraised and Harvest should have accounted for their value at the time of dissolution.
The drilling rights to the wells were, however, never appraised or valued. That fact is important because any value realized upon the sale or other disposition of the drilling rights should have been used to offset Salisbury’s debt to Springfield Oil before it could fairly demand any payment from Conlon. Other than Karlik’s testimony, Springfield Oil offered no proof as to what the drilling rights to the wells were worth at the time that the partnership was dissolved. The balance sheet of Salisbury, which Springfield Oil adduced at trial, showed only the amount of receivable sales that the wells had generated for a specific period of time. The balance sheet did not contain an entry that showed the value of the drilling rights to the wells as an asset in and of themselves.
Moreover, one of the options offered to Conlon in the October 20, 1989 letter that Harvest sent to Conlon was that Conlon could execute a new promissory note, payable to Springfield Oil, in the amount of $22,500 along with a fifteen year assignment of production
Additionally, the sales generated from the oil and gas production from the wells was intended to be used, in part, to pay off, or at least pay down, the notes of the limited partners. Although Karlik testified that the value of the wells was diminished because production was down to a trickle, there was no supporting evidence as to the amount of oil and gas that the wells had produced for the last three years of the partnership’s existence because Springfield Oil did not have production reports for 1986 through 1989, inclusive. Furthermore, the reports for the years 1981 through 1985 that were introduced at trial did not necessarily paint a true picture of production and sales because the reports themselves indicated that Salisbury was having difficulty getting the drillers
On the basis of our examination of all of the evidence, we are left with the definite and firm conviction that a mistake has been made with regard to the court’s finding that Springfield Oil proved by clear and convincing evidence that Harvest’s assignment of Conlon’s notes to Springfield Oil, in partial satisfaction of Salisbury’s debt to Springfield Oil, was fair. Therefore, the defendant was entitled to prevail on his special defense that Harvest breached its fiduciary duties to the limited partners in assigning the notes.
The judgment is reversed and the case is remanded with direction to render judgment in favor of the defendant.
In this opinion the other judges concurred.
Although Conlon also claims on appeal that the court improperly failed to find that because the exploration and drilling contract at issue was executed by an unauthorized party, it could not be enforced, Conlon made no attempt to raise that issue by pleading or by evidence at trial. It was called to the court’s attention for the first time by way of Conlon’s posttrial brief and, consequently, the court did not address that issue in its memorandum of decision. Accordingly, we decline to review the claim. See Practice Book §§ 5-2 and 60-5; see also Boxed Beef Distributors, Inc. v. Rexton, Inc., 7 Conn. App. 555, 558, 509 A.2d 1060 (1986) (trial court correctly did not consider claim first brought to its attention by way of posttrial brief).
Bentley Blum is the sole shareholder of both Harvest and Springfield Oil. The two companies have the same officers and business address.
For each $700,000 installment, Salisbury was to pay Springfield Oil $235,000 in cash and give Springfield Oil an interest bearing promissory note for $465,000. The $235,000 cash portion of each installment was to bo paid from the cash contributed by the limited partners. The court found that, according to Salisbury’s financial records, $64,667.10 was paid on the turnkey contract in 1991 and that no payments were made in 1992 or 1993.
Each of the K-1 forms introduced at trial showed a loss.
Conlon originally filed five special defenses. Before trial, he withdrew his fifth special defense, which alleged that Springfield Oil's claim was barred by the applicable statute of limitations.
See General Statutes § 42a-3-301 et seq.
The private placement memorandum, closing documents and partnership agreement were all admitted as full exhibits at trial.
The 1985 report did not include production figures for the entire year. It reflected production for the period January 1 to June 30, 1985.
The balance sheet contained an entry entitled, “A/R oil and gas.”
Springfield Oil was one of those drillers.