You Must Prove Damages With Reasonable Certainty In Business Lawsuits

Determining if you have provable damages is often the first step in analyzing whether to pursue a business lawsuit as a shareholder, partner, or member of a limited liability company.  Likewise, if you have been sued as a result of a partnership or shareholder dispute, reviewing the exposure or possible damages you face is an important part of determining an appropriate litigation strategy.  The question that must be answered is, how will the plaintiff prove to a judge or jury that the damages allegedly sustained are real, quantifiable, and reasonably certain.

In Connecticut, the party that brings the lawsuit has to prove damages with reasonable certainty.  A plaintiff must put forth evidence to afford a judge or jury a sufficient basis for estimating the alleged damages with reasonable certainty.  In other words, there must be evidence for the court or jury to calculate damages.  You cannot simply state “I have lost money” or “I have damages.”  There must be proof beyond speculation or your own subjective belief.

On the other hand, Connecticut law does not require exactitude or precision.  There are no hard and fast rules as to the level of proof required, but it must rise to the level of reasonable certainty or a reasonable estimate.  The level of proof may differ depending on the case facts, and that type of damages at issue.

For example, lost business opportunities may be harder to prove for business attorneys than other types of damages.  A recent appellate court case highlighted some of the evidentiary issues with lost profits.  In System Pros, Inc v Kasica, two equal shareholders of a company went through a lawsuit involving dissolution of their corporation and a trial on other tortious conduct.  At the trial level, the plaintiff shareholder convinced a trial court that he had damages for lost earning opportunities due to wrongful conduct of the other shareholder defendant.  To support his case, he admitted in evidence a series of documents and calculations as to wages he would have earned as a consultant if he was not locked out of the business.  The trial judge was persuaded and awarded damages.

However, the appellate court reversed on the issue and found that the plaintiff did not prove that he would have been hired as a consultant for any specific opportunities.  The appellate court decided:

Although the plaintiff presented ample evidence regarding the nature of the opportunities for employment that were not communicated to him, his testimony as to whether he would in fact have secured such employment resorted to conjecture and subjective opinion, which cannot constitute the basis for an award of damages

The appellate court decided that plaintiff left the trial court to speculate as to the lost opportunities based on plaintiff’s own opinion and assumptions.   The appellate court determined there were too many unknowns as to whether plaintiff would have profited from the opportunities he claimed he was denied by the defendant. The court highlighted that plaintiff needed to establish not only that there were opportunities, but that he was qualified for the positions and would have obtained the positions.

The Systems Pros case serves to highlight the various levels of proof that may be required to recover damages in a shareholder lawsuit.  To summarize, to establish damages for a shareholder in a business lawsuit, an attorney will need to offer evidence at trial showing a reasonable estimate of damages beyond speculation and personal opinion.

Lost Profit Damages in Connecticut for New Business Ventures

When business lawyers evaluate the merits of bringing a lawsuit, one of the first questions to ask a client should be “what are the damages?”  Many times, in business litigation cases, business owners want to seek recovery of lost profits with a very optimistic view of what is recoverable in a case.  In such cases, the next question to the client should be  “how do we prove the damages.”

When I consult with a new client that wants to bring a claim in court for lost profits, I will often ask the client to articulate how he or she would go about proving the lost profits.  There are no clear, bright line tests in Connecticut for what is or is not recoverable for lost profits.  Instead, attorneys are guided by the general law on lost profit damages and case precedents.

In Connecticut, the plaintiff bringing the case bears the burden of proving lost profit damages by a preponderance of the evidence.  When lost profit damages are available, the general standard is that a plaintiff must prove the damages with reasonable certainty.  Difficulty in establishing damages is not necessarily a bar to recovery and mathematical exactitude is not required.  Nevertheless, the facts and evidence must permit the trier of fact to form an objective basis to award damages, not merely speculation or subjective belief.  Basically, this means that the plaintiff has to provide evidence to support the claim for damages, not merely a subjective belief or speculative theory.

In the case of a new business venture, lost profit damages are available if a plaintiff can prove the damages with reasonable certainty.  Of course, proof of lost profits damages for a new business likely will require some creativity and perhaps an expert to provide the necessary proof.  The reason is that there is a lack of history of profits in the business so it may be difficult to project what would have happened in the future.  As a result, courts typically will look for more evidence from the new business plaintiff than an established business.

A recent appellate court case in Connecticut pointed out that the evidence in the case of a new business will often have to focus on the likelihood of whether the new business would have succeeded including an evaluation of factors such as business climate, business planning, experience of the business owners, and the success of similar businesses.  An expert may be necessary to help with proof of lost profit damages.  Simply providing a subjective belief without documentation or statistical analysis may fall short of the required proof.

Here are some instances where a new business satisfied the required proof for lost profit damages: (1) statistical analysis of future profits deemed reliable by the court; (2) expert testimony including an analysis based on similar new businesses; and (3) expert testimony based on relevant industry models for profits.  It is important to note that expert testimony alone will not necessarily suffice to prove damages.  A damages expert likely will face a reliability challenge from an opponent.  Once challenged in court, an expert’s methodology on determining lost profits must be deemed reliable before the testimony is permitted.  An expert’s subjective opinion alone, or opinion based on speculation, will not satisfy the standards for admissibility.

The take away here is that lost profit damages are available to a new business venture.  However, the level of proof required to recover such damages likely will be more difficult than for an established business.  Subject belief and speculation by the business owner as to the probable success of the business will likely fall short of the required proof.   A plaintiff considering a claim for lost profit damages for a new business venture may want to bring in an expert to evaluate the case and remove the damages from the realm of speculation.

 

 

 

HOW TO DISSOLVE A LIMITED LIABILITY COMPANY IN CONNECTICUT

Limited Liability Companies in Connecticut, and every other state, are created by statutory law. General Statutes Title 34 governs the creation and governance of LLC’s in Connecticut. Specifically, General Statutes sections 34-206 sets forth the means of dissolving an LLC. The LLC may be dissolved by:

  1. At the time or upon the occurrence of events specified in writing in the articles of organization or the operating agreement;
  2. If not provided in writing under #1, then by affirmative vote, approval, or consent of at least a majority in interest of the members; or
  3. By the entry of a judicial decree of dissolution.

The operating agreement for an LLC is the document the members execute to govern the affairs of the LLC. Many times they are drafted by an attorney. Operating agreements are not required. However, they are a good idea for a variety of reasons, including the issue of dissolution. It is also a good idea to have an attorney draft the operating agreement rather than resorting to Legalzoom. I have seen many instances of operating agreements from Legalzoom that simply do not cover the likely problems members of an LLC face when there is more than one member.

If members of an LLC do not have an operating agreement that defines how the company may dissolve and wind up its affairs, then by law the decision is controlled by General Statutes. This essentially means a majority vote can dissolve the LLC.

I recently came across an operating agreement for an LLC that covered many aspects of the affairs of the LLC, but it left out dissolution. As such, the members of the LLC faced a situation where a super majority (two thirds in this case) was required to permit a transfer of interest, but a simple majority would suffice for dissolution. The minority members had bargained for some ability to have input on transfer of interests, but neglected to address dissolution. The failure to address it in the operating agreement in this particular circumstance provided leverage for the holder of the simple majority interest.

If a member desires to dissolve an LLC but does not have majority control, or the required interest necessary under an operating agreement, then the last resort is what is called “judicial dissolution.” Under General Statutes section 34-207, a trial court in Connecticut can grant an application to dissolve an LLC “whenever it is not reasonably practical to carry on the business in conformity with the articles of organization or operating agreement.” Again, there is a specific reference by the legislature to the operating agreement. A member moving for dissolution likely needs to show the trial court that the other members are not carrying on the business in accordance with the governing document for the LLC.

One circumstance where a trial court likely will grant dissolution is where the members are in a deadlock. Deadlock tends to happen when the voting interests of the LLC are equal (i.e. 50/50 ownership) and there is no ability to break the deadlock. You see deadlocks mostly when there are two or more partners and the interests are divided equally such that the opposing sides have equal interests. If a dispute occurs, and the members did not address a means of breaking a deadlock in the operating agreement, then a member can seek to file a lawsuit in superior court requesting that the court dissolve the LLC.

Once an LLC is dissolved the company must wind up its affairs. The person winding up the affairs of the LLC may prosecute or defendant lawsuits on behalf of the LLC, settle and close business, dispose of and transfer property, discharge the liabilities of the LLC, and distribute any remaining assets. In the event of a lawsuit for or against an LLC, an attorney will be necessary to represent the LLC. The LLC essentially continues to exist during its winding up phase and can bring a lawsuit or face a lawsuit. Winding up may also require the LLC to make adequate payments to creditors followed by debts owed to the members and/or return of capital to the members. Winding up may also be addressed in the operating agreement.