Can You Seek Damages if You Lose Business Based on an Opponent’s Conduct During Litigation?

Ordinarily, if someone acts in bad faith, or with malice, and interferes with a contract causing lost profits, a party can potentially bring a claim in court for tortious interference with contractual relations. However, the claim is likely unavailable if the basis for the claim arises from a pending litigation case. For example, assume you have a valuable business contract, and the contract gets cancelled because of something an opponent claimed during a litigation proceeding?  A recent appellate court case case confirms that immunity applies to bar claims of interference with contractual relations when the actionable conduct arises out of a litigation case.  Litigation can be very disruptive to ongoing business relationships.  There could be situations where a party in a litigation case loses business because of something someone does or says during a proceeding in litigation, such as a court hearing.  Unfortunately, some litigants might do this intentionally as a way to gain advantage in a case.   In contrast, some other litigants might seek to raise a claim of interference or infliction of emotional distress even if the conduct in question was fair game in the course of the case.  The courts in Connecticut essentially come down on the side of barring subsequent claims of this type that are based on conduct during a litigation proceeding.  The reason is policy based, in part, because the courts do not want witnesses and litigants to fear reprisals for raising legitimate facts and arguments in court. Essentially, although there is a risk of litigants unfairly seeking to harm an opponent through deliberate efforts, the risk is outweighed by the importance of candor and truth seeking in court proceedings. There are other ways to address improper, baseless or unethical conduct by opponents during a litigation proceeding.  However, if an opponent resorts to filing a separate lawsuit for interfering with a business relationship or for infliction of emotion distress, the case likely will be opposed by a motion to dismiss based on immunity.

 

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.

 

 

 

“I Don’t Want To Be Your Partner Anymore” …. Can That Statement End A Partnership?

After 5 years of litigation, two appeals, and one trial, the answer is…….Yes, that statement can constitute a valid offer to end a Connecticut partnership between two feuding sisters who had agreed in writing to split lottery winnings.  The story of the feuding sisters has been covered by Alaine Griffin at the Hartford Courant and the local news stations (NBC CT;   CBS NEWS).

According to yesterday’s ruling by Connecticut Superior Court Judge Cynthia Swienton, when one sister said "I don’t want to be your partner anymore" and the other said "okay," the partnership was over and the contract rescinded. 

The case involved a dispute between two sisters, Terry and Rose,  over a written contract that dated back to 1995.  Terry split some poker winnings ($165,000) with her sister Rose and decided they needed a contract to make sure there would be a split for any future winnings.  You might call the contract a  paper napkin partnership agreement, but it was notarized and drafted by an accountant.  It was simple and straightforward.  The relevant part of the contract read:

We are partners in any winning we shall receive, to be shared equally.

Fast forward to 2004 and a fight over $250.  The Court found that Terry said during the fight "I don’t want to be your partner anymore."  Rose replied "okay."  Rose then went and became partners with her brother, Joe.  Of course, Joe then went out and bought a $500,000 winning Powerball ticket.  Terry found out, Rose refused to pay Terry, and finally a lawsuit was filed for breach of contract.   

After going through the history of the relationship and finding credibility in favor of Rose, the Court found that Terry and Rose mutually agreed to rescind or cancel the contract on the basis of that exchange of words and the conduct of the sisters after the exchange.  Case closed, at least for now.  It is unclear if there will be any appeal.   

In reading the decision, I found it interesting that there was no mention of Connecticut’s partnership statute.  It is not clear if either party raised the statute in the case.  The case was decided on pure contractual grounds based on an agreement to rescind the contract.  Nevertheless, it also appears to me that the Court was swayed by more than just the exchange of words, but the actual conduct of the parties after the exchange.  In other words, you could say that they stopped acting like partners, they agreed not to be partners, and therefore, no partnership continued to exist.  

Interesting case, but also sad to see.  In the end, Terry’s frustration over $250 might have cost her not only a share of the $500,000 winning ticket, but the good relationship she had with her sister. 

Connecticut Supreme Court Confirms Expulsion Is Available Remedy In Partnership Dispute

In an issue of first impression, the Connecticut Supreme Court confirmed that partnerships can expel a partner rather than dissolve when there is a breakdown of the business of the partnership.  The case is Brennan v. Brennan Associates, et al.  The official opinion will be released on August 18, 2009, but the advanced opinion already was released online. 

The case involves a complicated set of facts and circumstances surrounding the deterioration of a once successful partnership that operated a shopping center in Trumbull.  The breakdown of the partnership began after the death of a partner.

The decedent partner essentially ran the partnership and kept all the books until his death.  The decedent’s will directed that his interest go to his two cousins.  Following the will reading, the partnership broke down over disputes on check writing authority, access to records, the transfer of interest, and an old tax conviction of a surviving partner who was the plaintiff in the case. 

The plaintiff  offered to buy out the decedent’s interest, which as rejected by the estate.  The plaintiff subsequently filed a lawsuit seeking, among other things, to accomplish a buy out of the decedent’s partnership interest and to gain access to the books and records.  The surviving partners wanted to continue the partnership’s business rather than dissolving it.  As such, in addition to other claims by the defendant administrators, they filed a counterclaim application seeking to expel the plaintiff from the partnership under section 34-355 of Connecticut’s Uniform Partnership Act.

The statutory scheme at issue permits a trial court to grant an application for expulsion if a partner engages in conduct that "makes it not reasonably practicable to carry on the business in the partnership with the partner." In this case, after a bench trial, the court issued a ruling granting the application filed by the surviving partners to expel or dissociate the plaintiff partner.  The plaintiff appealed claiming that acrimony and distrust between partners may be proper for a dissolution, but it was not a proper basis for dissociation.

On appeal, the Connecticut Supreme Court  disagreed with the plaintiff and ruled that dissociation was an available remedy given the facts present as an alternative to dissolution.  The supreme court noted that under Connecticut’s Partnership Act,

a partnership now has a choice, either to dissolve the partnership or to seek the dissociation of a partner who has made it not reasonably practicable to carry on the partnership with him.  The new remedy of dissociation permits a financially viable partnership to remain intact without dissolving the partnership and reconstituting it.

In this case, the conduct at issue for the dissociated partner was a past felony tax conviction, a pattern of adversarial conduct toward other partners, and a false accusation of fraud against the others partners.  With these facts present, the supreme court found that a trial court had enough to grant an application for expulsion and dissociation of the partner.  The court stated:  

irreparable deterioration of a relationship between partners is a valid basis to order dissolution, and, therefore, is a valid basis for the alternative remedy of dissociation.

It is worth noting that the court indicated that an old felony conviction standing alone likely would not meet the required standard.   In any event, the case essentially provides that there is no basis for a higher burden for dissociation as opposed to dissolution.

My takeaway from the decision is that it promotes the policy of cooperation amongst partners by confirming expulsion as an option for getting rid of a "problem" partner.  As noted in the decision, prior to the statutory scheme permitting dissociation, partnerships faced with similar problems had to dissolve.  This process could perhaps create too much leverage for a "problem" partner forcing dissolution.  Instead, this decision confirms the statutory availability of dissociation under no higher of a standard than dissolution.  This may be a more preferable remedy for many Connecticut partnership disputes.

The decision also serves as a reminder of how a partnership or  closely held company can breakdown following the death or disability of a partner or key member of the business.  These circumstances highlight the need for specificity in partnership and operating agreements including buy out provisions for death and disability, transfer or assignment of interests, and continuation of operations.   

It is also important to note that the supreme court left open the dissociated partner’s rights to bring a proceeding to compel valuation and purchase of his interest after dissociation.  The court also indicated that the partnership agreement could have included a provision allowing the remaining partners to initiate a valuation proceeding, but it did not in this case.