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.

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.

Does A Limited Liability Company Protect Its Members From Personal Tort Liability?

Not always.  An individual member of an LLC or an officer of a corporation may be individually liable for their own torts.  This rule is well settled and the Connecticut Supreme Court reaffirmed it in Strum v. Harb Development, which will be officially released on August 31, 2010.  

Business owners often chose to a form a business entity to operate under, such as a limited liability company (LLC), limited liability partnership, or professional corporation.  In basic terms, the entity operates as an individual for legal purposes. There are many reasons to form a business entity. One of the more common reasons is to limit your personal liability and protect your assets.  The idea is, if you make a mistake in business, the entity is responsible, not you personally.  

Many times, a properly formed and maintained business entity, like an LLC or corporation, can provide a shield or "veil" of protection for an individual member or officer.  However, the protection is not absolute, and there are many instances where you can be personally liable in business despite the formation and operation of a business entity.    Two of the most common methods of establishing personal liability are "piercing the corporate veil" and individual responsibility for torts, such as breach of fiduciary duty, negligence, fraud, and misrepresentation. 

In the Strum case, the Connecticut Supreme Court addressed the later situation involving personal liability for torts (I will do a post on veil piercing soon). The Strum case involved a homeowner alleging poor workmanship and breach of a construction contract for new home construction.  The plaintiff homeowners in the case brought a lawsuit against not only the entity, Harb Development, LLC, but also its principal member, John Harb.   The plaintiffs alleged, among other claims, that Mr. Harb was personally liable for negligence.  Mr. Harb moved the trial court to strike the allegations against him personally seeking protections of his LLC, Harb Development.   His attorney argued that absent facts sufficient to pierce the veil of protection of the LLC, Mr. Harb personally was immune from liability.

At the lower level, the trial court granted the motion to strike primarily on the grounds that there were no facts in the complaint to pierce the veil of the LLC.  Although the Supreme Court ultimately found that there were insufficient facts alleged in the complaint to establish the negligence claim against Mr. Harb personally, the Court rejected the argument that Mr. Harb could not be personally liable for negligence merely because he was a member of an LLC. 

The Supreme Court noted that Connecticut’s common law provides for personal liability of officers of a corporation for torts personally committed (such as negligence) that injure third parties provided  the injured party can show a legal duty, breach of that duty, causation, and damages.   As such, if an officer of a corporation commits a tort in business, the officer may be personally liable even if the corporation is also responsible.  The Strum case makes clear that this common law rule applies even in the absence of facts sufficient to pierce the corporate veil.  This same common law rule also applies to members of an LLC. 

The Strum case serves as a reminder to business owners that formation of a business entity will not protect you from personal liability in all circumstances.  Liability for individual torts and piercing the veil of a business entity are two common scenarios where business owners may face personal liability despite the shield that a business entity may provide.  Whether a business owner can face personal liability for negligence, fraud, or misrepresentation involving the business will often depend on the facts of the case.