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.

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.

Do Members of LLCs Owe A Fiduciary Duty To Each Other in CT?

A limited liability company is essentially a combination or mix of a corporation and a partnership.  The LLC as an entity provides the flexibility of a partnership with the ability to govern and create ownership interests similar to a corporation.  The legislature codified the framework for LLCs in Connecticut in Title 34, Chapter 613 of the General Statutes.  The statutory frameworks permits the owners or members of LLCs to include specific governance provisions in a document called an “operating agreement.” Many times members use an attorney to draft the operating agreement. The operating agreement may cover a variety of topics including:

  • duties and rights of members and managers
  • finance
  • distributions
  • ownership and transfer of property
  • admission and withdrawal of members
  • lawsuits by and against the company
  • merger, consolidation and conversion
  • dissolution

If the members of an LLC fail to address any of these issues, the provisions for the Connecticut general statutes apply as a default.  With some exceptions, the statutory framework basically provides for simple majority control. The failure to address these issues typically results in significant control in the majority member.  So, if a minority member wants some aspect of control on these topics, the member would be well advised to take care of it by using an attorney to negotiate or draft provisions in the operating agreement with protections as part of the admission process.

Notwithstanding the above, members holding a minority ownership interest in an LLC continue to have rights that may provide some protection depending on the circumstances and the operating agreement.  In particular, a minority owner might be permitted to assert claims in a lawsuit for  breach of fiduciary duty or breach of statutory duty to address various inequities and unfair management of an LLC.  A minority interest holder might seek to apply these rights in various situations such as:

  • freezing out of the minority owner from affairs of the business
  • unfairly devaluing the member’s ownership interest
  • operating the company in bad faith
  • depriving the member of books and records of the LLC
  • use of deception and fraud in a buy-out of a member
  • unfair expulsion of a member
  • inequitable assignment of membership interest or sale of business
  • improper dissolution or valuing of membership interests
  • self dealing with excessive guaranteed payments or distributions

The outcome of these claims might depend on whether the court acknowledges a fiduciary duty exists between members of an LLC or between a member-manager of an LLC and the other owners.  The existence of a fiduciary duty is significant because it requires the utmost good faith and loyalty.  It also might help the attorney because it shifts the burden of proof in a civil case requiring the member owing such a duty to prove good faith and fair dealing.  As a result, the question in many disputes involving minority ownership of LLCs is whether a fiduciary duty exists.

In Connecticut, by case law, a court may deem a fiduciary duty to exist when there is “justifiable trust confided on one side and a resulting superiority and influence on the other.”  The relationship is broadly defined to permit courts to consider new situations.  It is generally a relationship “characterized by a unique degree of trust and confidence.”  The superior position of one party typically will permit a great opportunity for abuse of confidence.

At the outset, a fiduciary duty is likely to be found to exist if the operating agreement includes such duties for members or managers.  As such, an individual that is offered a minority stake in an LLC might want to insist that the operating agreement impose a fiduciary duty on the manager or controlling members.  In addition to an operating agreement, a claim for breach of duty may be found in General Statutes Section 34-141.  The statute states in relevant part:

 A member or manager shall discharge his duties under section 34-140 and the operating agreement, in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and in the manner he reasonably believes to be in the best interests of the limited liability company, and shall not be liable for any action taken as a member or manager, or any failure to take such action, if he performs such duties in compliance with the provisions of this section.

Further, there are a series of trial court cases in Connecticut where lawyers have argued this point and judges have recognized a fiduciary duty between managers and/or controlling members of an LLC and the other members.  The reasoning is based, in part, on the law dealing with partnerships and the fiduciary duty owed to each partner.  There is some dispute as to the existence and extent of this duty, but the Connecticut Supreme Court has chosen to keep an open definition of a fiduciary relationship.  Nevertheless, until such duties are further codified or deemed to exist as a matter of law, a controlling member or manager might opt to have such duties disclaimed in an operating agreement.

A fiduciary duty may or may not be desirable depending on your ownership interest or your role in the LLC.  The take away here is that an operating agreement is the best method to clearly define the duties of members and managers.  The operating agreement can include specific provisions on the extent and nature of the duties of a manager or member of an LLC.  In the absence of a specific provision in the operating agreement stating otherwise, members or managers may be deemed a fiduciary with respect to other members.  Although not required, a lawyer familiar with LLCs can assist in ensuring valuable rights are in an agreement or bringing a lawsuit when rights are violated.

Member Rights For Connecticut Limited Liability Company

Generally, there are two sources to determine the rights and duties of members of a Connecticutmembers(1)[1] limited liability company (“LLC”).  The first source is an operating agreement.  The ability to form a limited liability company (“LLC”) as a legal entity in Connecticut derives from legislative enactment.  Title 34 of Connecticut General Statutes covers LLC’s.  Title 34 gives great deference to the members of an LLC in forming an agreement on governance of the LLC.  Statutory deference creates flexibility and is one of the biggest advantages when choosing a LLC as an entity for a business.

The members’ agreements on governance of the LLC are typically documented in a written agreement known as an operating agreement.  These agreements are typically drafting by a business attorney.  The operating agreement for a LLC will typically document the rights and duties of members and managers for LLC’s.  An operating agreement is similar to a partnership agreement.    An operating agreement can be simple or complex depending on the needs of the members.

Operating agreements can alter or change the statutory rights of members or managers.  Members by agreement can define the voting rights of members, the number of votes required to decide matters, and the manner in which managers can be appointed or removed.  Members can also agree upon limitations on ownership interests such as transfer of ownership or withdrawal of members.  Members further can agree upon duties of managers and members.

Unexpected problems sometimes arise when an operating agreement is silent on rights and duties. When an operating agreement is silent, the second source to determine rights and duties of members is Title 34.  You might consider Title 34 to govern by default unless otherwise agreed upon by the members.

Connecticut General Statutes 34-140 to 34-144 covers the rights and duties of members and managers.  If the operating agreement of a Connecticut LLC is silent on the issue, the following is an example of governance rules:

  • If the LLC is governed by managers, the vote of more than one-half the number of managers will decide most matters with the LLC
  • If the LLC is governed by members, the majority vote of the members in interest will decide most matters with the LLC
  • Majority of members in interest can vote and designate a manager
  • Any and all managers may be removed with or without cause by vote of a majority of the members in interest
  • Absent proper consent, every member and manager must account to the LLC and hold as trustee for it any profit or benefit derived by that person from transactions connected with the LLC or through use of confidential or proprietary information of the LLC
  • The vote of two-thirds of the members in interest is sufficient to amend the operating agreement

·         The vote of two-thirds of the members in interest is sufficient to amend the operating agreement

The take away here is to use the operating agreement to document how you want to run the LLC.  Consult an attorney to help draft the operating agreement.   If you fail to do it, the Connecticut legislature will decide how to run the business for you.  This may have unintended consequences.

Business Litigation Roundup

As we head to the new year, here is a round up from some fellow bloggers on contracts, cobra, wage disputes, patents, and oral agreements for limited liability companies. 

The California Business Lawyer Blog offers a very detailed post about contractual relationships  between manufacturers and suppliers.  The focus is on well drafted agreements eliminating the fears and concerns of both sides.

A lot of talk about the AT&T suits in different states for $1 billion dollars for unpaid overtime.  The suits picked up a lot of steam with a recent employee favorable ruling from the federal court in Connecticut allowing the claim to proceed as a class action. Rush on Business covers some tips for businesses to avoid these suits.

Just in time for Christmas, President Obama has extended the COBRA subsidy.  Dan Schwartz’s Connecticut Employment Law Blog covers this topic in detail for employers.

Twin Cities Business Litigation Blog has an interesting post on concerns you might have as a shareholder of corporation that fails to follow corporate formalities.  Gavin Craig gives examples of how a shareholder could be exposed to liability.

Anyone who frequently litigates matters involving limited liability companies will tell you that there is not much case law out there in Connecticut.  It is still a developing area of the common law.  Delaware law is often a good option for law in this area because these issues are more frequently litigated by volume in Delaware.  A good resource is the Delaware Corporate and Commercial Litigation Blog.   Two recent posts concerning oral partnerships and LLC agreements are just an example.

PatentlyO hits on some themes for 2010, including an expected increase in patent prosecution and litigation.    They also have a cool picture of heat miser, a childhood classic.

Jeff Mehalic, author of the West Virginia Business Litigation Blog, writes a detailed follow up post to his coverage of the Connecticut dispute between Charter Oak Lending and CTX Mortgage.  Jeff also comments about a post I wrote on the same case.  The case remains significant as it is an example of what can go wrong when a business grows too fast and no written agreements are in place with employees.