Konover Development Corp. v. Zeller, 14732

• Decision Date: 04 January 1994
• Docket Number: No. 14732,14732
• Citation: 228 Conn. 206,635 A.2d 798
• Court: Connecticut Supreme Court
• Parties: KONOVER DEVELOPMENT CORPORATION v. A. James ZELLER.

Page 798

635 A.2d 798

228 Conn. 206

KONOVER DEVELOPMENT CORPORATION v. A. James ZELLER.

No. 14732.

Supreme Court of Connecticut.

Argued Sept. 22, 1993.

Decided Jan. 4, 1994.

David F. Sherwood, Glastonbury, with whom, on the brief, was F. Timothy McNamara, Hartford, for the appellant (defendant).

Neil F. Murphy, Jr., with whom were John L. Laudati and, on the brief, Lawrence J. Kiel and Phillip N. Walker, Farmington, for the appellee (plaintiff).

PETERS, C.J., BORDEN, NORCOTT, KATZ and PALMER, JJ.

BORDEN, Justice.

The dispositive issue in this appeal is the standard of proof required, under the circumstances of this case, in a breach of contract action by a general partner against a limited partner. The defendant appeals ¹ from the judgment, after a jury trial, in favor of the plaintiff on the complaint and on the defendant's counterclaim. The defendant claims that the trial court improperly: (1) instructed the jury on the extent of the plaintiff's fiduciary duty; (2) instructed the jury on the burden of proof by which a fiduciary must prove fair dealing; (3) admitted evidence of certain partnership expenses; (4) enforced provisions of a partnership agreement that are void as a matter of public policy; and (5) awarded prejudgment interest under both General Statutes § 52-192a and General Statutes § 37-3a. We agree with the defendant's first and second claims and therefore reverse the judgment and remand the case for a new trial.

The plaintiff, Konover Development Corporation, the general partner in a limited partnership with the defendant limited partner, A. James Zeller, brought this action claiming that the defendant had failed to pay debts according to the partnership agreement. The defendant filed a counterclaim alleging, inter alia, that the plaintiff had breached its fiduciary duty to the defendant. ² The jury returned a verdict for the plaintiff on both the complaint and the counterclaim, and the trial court rendered judgment accordingly. This appeal followed.

The jury could reasonably have found the following facts. In April, 1986, the plaintiff and the defendant, together with Alan Temkin, executed a written agreement to form a limited partnership called Torringford Commercial Associates Limited Partnership (partnership). The purpose of the partnership was to merge parcels of land owned by Temkin and the defendant with four additional parcels, and construct a shopping mall in Torrington. The limited partnership agreement named the plaintiff as the general partner with a 50 percent interest, and Temkin and the defendant as limited partners with 29 percent and 21 percent interests, respectively. The agreement provided that expenses would be shared, with the general partner contributing 50 percent and the limited partners contributing 50 percent collectively. The agreement further required the limited partners to authorize, in advance and in writing, any partnership expenditures exceeding $75,000.

At the time of the partnership formation, Temkin owned a twenty-eight acre parcel of land and the defendant owned a four acre adjoining parcel. The defendant and Temkin conveyed options on their parcels to the partnership. The option on the parcel owned by Temkin provided for a purchase price of $464,000 and expired on December 31, 1988. The partnership also acquired options on the four additional parcels needed to complete its plans, and later, it acquired an option on an additional parcel. The partnership intended to exercise its options upon the project receiving approvals by local zoning and wetlands authorities.

The project began with the advantage of a 1970 approval by the Torrington planning and zoning commission of Temkin's land for the development of a shopping center. The plaintiff's legal counsel, however, noticed a defect in the approval that required the partnership to resubmit the previous application. After the application received renewed approval, the partnership submitted to the Torrington inland wetlands and planning and zoning commissions a new application, involving all of the parcels, for approval of an enclosed shopping mall of approximately 300,000 square feet.

While the application was pending, Temkin decided to withdraw from the partnership. In February, 1988, for $1.3 million, Temkin sold the defendant his interest in the partnership and the twenty-eight acre parcel that the partnership held under option. That transaction left the defendant and the plaintiff with equal shares in the partnership.

Since the formation of the partnership, property values in Torrington had risen rapidly. As a result, a disagreement arose between the plaintiff and the defendant regarding the purchase price to be paid by the partnership for the twenty-eight acre parcel that the defendant had purchased from Temkin. The defendant wanted more than $1 million for the parcel, while the plaintiff insisted on the $464,000 option price. As an alternative, however, the plaintiff proposed that the partnership take advantage of the increased property values by exercising its options on parcels it could acquire below market value, reselling them at a profit, and then dissolving the partnership and abandoning the development plans. The defendant rejected the plaintiff's proposal.

This disagreement led to a series of negotiations between the plaintiff and the defendant that eventually culminated in the letter agreement of November 14, 1988, that gave rise to this lawsuit. ³ The letter, written by the plaintiff and countersigned by the defendant, stated that the partnership agreed to increase the purchase price of the twenty-eight acre parcel from $464,000 to $1,000,000, but that the partnership would only exercise its option to acquire the parcels in order to go forward with the proposed mall. Furthermore, the defendant would receive a development fee of 1 percent of the total project costs, and the plaintiff would finance the project's entire carrying costs, including reimbursement to the defendant for his expenses in acquiring and carrying the optioned properties when it became necessary to execute options in the defendant's own name.

In exchange, the defendant agreed that if the plaintiff, in its sole discretion, determined that the project were no longer feasible, the defendant would reimburse the plaintiff for all of the plaintiff's "out-of-pocket" expenditures. The plaintiff would then withdraw from the partnership, leaving the defendant with a 100 percent interest in the partnership and full ownership of all real estate, permits and property rights. The letter agreement, therefore, in effect, permitted the plaintiff to terminate the partnership if it determined that the project were no longer feasible, and provided that the defendant would own all of the partnership assets and would be obligated to reimburse the plaintiff for all of its partnership expenditures.

Furthermore, the letter authorized the plaintiff to expend more than $75,000 in support of the project, purportedly in accordance with the original partnership agreement's requirement that limited partners authorize such expenditures. On August 11, 1989, by amendment to the partnership agreement, the partners formalized the essential terms of the letter agreement.

In the interim, the partnership encountered outside problems. A neighborhood group opposed the development plans and precipitated costly additional legal procedures. In addition, the partners had difficulty locating tenants interested in occupying the proposed development. Finally, in July, 1988, the inland wetlands commission issued a ruling that denied in part the partnership's application to develop the properties and significantly reduced the mall's proposed parking space. The partnership amended its plans and resubmitted them to the inland wetlands commission, but the commission's ruling on the amended plan still substantially restricted the proposed parking area.

As a result, the partners reduced the size of the proposed development. They changed the plan from a 300,000 square foot enclosed mall to a 200,000 square foot strip shopping center. They believed that the partial approval by the inland wetlands commission would accommodate the strip shopping center and that they would not be required to return to the commission for further approval. The inland wetlands commission and the planning and zoning commission, however, ordered new applications.

At that point, the plaintiff decided that the project was no longer feasible. The plaintiff determined that the cost of developing new applications, combined with carrying costs, litigation costs, delay and uncertainty, outweighed the potential benefit of completing the development. On February 7, 1990, the plaintiff advised the defendant of its decision, and on February 22, 1990, the plaintiff formally requested reimbursement for its out-of-pocket expenses according to the amended partnership agreement. The plaintiff fixed these expenses at nearly $1.1 million. The defendant did not acknowledge any debt to the plaintiff. At that time, the defendant owned all the properties that had been the subject of the partnership agreement, and the following year he entered into a contract to sell them for approximately $4.3 million.

Thereafter, the plaintiff brought this action for breach of contract, seeking recovery of the alleged debt under the partnership agreement. The defendant denied the debt and filed a counterclaim for breach of fiduciary duty. On March 5, 1992, the plaintiff filed an offer of judgment pursuant to General Statutes § 52-192a in the amount of $1 million. The defendant rejected the offer. On June 24, 1992, the jury returned a verdict for the plaintiff on both the complaint and the counterclaim, awarding damages of $1,052,663.67, plus 10 percent interest on the debt from February 22, 1990, pursuant to General Statutes § 37-3a. The trial court rendered judgment accordingly and awarded the plaintiff an...