Psaki v. Karlton, No. X05-CV04-4002447S (Conn. Super. 8/24/2006)
| Decision Date | 24 August 2006 |
| Docket Number | No. X05-CV04-4002447S,X05-CV04-4002447S |
| Court | Connecticut Superior Court |
| Parties | James R. Psaki v. John S. Karlton et al. Opinion No.: 94826 |
The named-defendant, John S. Karlton ("Karlton"), is a highly successful real estate entrepreneur who conducts his business on a national scale through a series of related and/or interlocking legal entities. He makes his home in Bal Harbor, Florida, although he does have another residence as well as business interests in Connecticut. Karlton relies upon a small, select team of trusted employees to manage all of his related businesses, including financial matters related to them. Based upon the testimony offered in this case, however, it is clear to the court that he takes an interest in all aspects of his businesses, and that, notwithstanding his use of corporate "pickets," all roads lead to Bal Harbor. Karlton did not appear for trial, however, his testimony was offered through a deposition taken on August 23, 2005. (Exhibit B, "Karlton TR.")
The named-plaintiff, James R. Psaki ("Psaki"), holds a degree in business and finance from the University of Texas and an M.B.A. from St. John's University. Psaki has an extensive background in the management and development of commercial properties, and on the strength of that, in November 1998 he was hired by J.S. Karlton Company, Inc. ("Karlton Company"), headquartered in Greenwich, Connecticut, as Executive Vice President and Chief Operating Officer. He also holds a 10% share in Karlton Company.1 His responsibilities encompassed all of the Karlton Company and affiliated enterprises, including that of Continental Asset Management, Inc. ("Continental"), a corporation also having its principal office in Greenwich, Connecticut.2He was paid a salary of $100,000.00 per annum, and, in lieu of additional salary, Karlton gave him as further compensation, a $100,000.00 stake as a limited partner in an entity known as Capital Growth of Jacksonville, Ltd. ("Capital Growth"),3 a Florida limited partnership also headquartered in Greenwich, Connecticut. His interest therein, which includes both a Class A (10.13%) and a Class B interest (2.67%), amounts to an 8.58% share overall.4 This arrangement was memorialized in a Limited Partnership Interest Subscription Agreement dated April 19, 1999 (Exhibit #502). The plaintiff received regular updates and distributions consistent with his interest in Capital Growth until the Spring of 2004, when the principal asset of the limited partnership was sold.
Capital Growth was formed on April 19, 1999, for the purpose of acquiring the Bell South tower in Jacksonville, Florida. The real estate is a large, thirty-story office building/parking complex in the heart of the city. The purchase price of approximately $ 67,000,000.00 was financed by means of a first and second mortgage. Under the terms of the Agreement, the general partner of Capital Growth was Capital Growth of Jacksonville, LLC. ("CG"), which was entitled to a 1% share of Capital Growth. The Class A limited partners are entitled to share in a 79% interest, and the Class B limited partners are entitled to share in a 20% interest. Psaki played a key role in the consummation of the transaction, including the negotiation of the Letter of Intent to purchase, financing, and leasing. He left his employment with Karlton Company in March 2000, but he retained his interest in Capital Growth. He told the court that, from that point on, he was not involved in the day to day operations of the partnership. The mortgages were later refinanced, and he told the court that he was asked to sign legal papers in July 2002, in connection with it.
The problems giving rise to the instant lawsuit occurred five years after the purchase when the Bell South tower, which had been listed for sale in the Fall of 2003 at the direction of Karlton, was ultimately sold in May 2004. The selling price for the building, approximately $90,900,000.00, should have resulted in smiles all around, however, relations quickly turned sour. To begin with, the secondary lender demanded, what all agreed was exorbitant ("tantamount to a shakedown"), an assumption fee of $4,000,000.00, later reduced to $975,000.00 after negotiations (Exhibit #531), in order to transfer the financing to the new buyer. Psaki was asked to contribute approximately $400,000.00, or roughly half, which was proportionally well in excess of his total 8.58% partnership share. The evidence demonstrated that the figure constituting Psaki's contribution came directly from Karlton, and, in fact, the latter indicated that he would let the entire sale fall apart unless Psaki went along (Exhibit #566). Psaki testified that he was told that "too much was at stake," and, "don't play brinkmanship with John [Karlton]." Reluctantly, after some discussion, Psaki agreed. The sale closed on May 21, 2004, and things went downhill from that point.
On or about June 1, 2004, following the closing of the Bell South tower, Psaki received the initial notice of his proposed distribution (Exhibit #532) in the amount of $858,965.57 based upon his interest as both a Class A and Class B limited partner of Capital Growth. This sum was less than he expected under the terms of his Partnership Agreement, and he asked for and received a copy of the closing statement (Exhibit #533) from Alan Cosby ("Cosby") on June 3, 2004, including a listing of escrowed funds. When he raised several issues about the calculations, further adjustments were made, resulting in an even smaller share for him—$525,475.80 to be precise. Continued back and forth between Psaki and Stephen Lipkins ("Lipkins") and/or Cosby resulted in further revised internal calculations within the Karlton organization, but no payments to Psaki.5 At issue, among other things, were the proposed deduction of a "disposition fee" and an allocation of unbilled past expenses attributable to Continental on behalf of the partners, as well as certain other adjustments. To date, no payment has been made, however, the defendant asserts that sufficient monies are being held in a separate account so as to satisfy any judgment in Psaki's favor.6 Karlton and all other interested parties, except Psaki, have received their respective shares outright or by way of settlement.
The plaintiff instituted the present action to determine the amount of and to recover his unpaid share. Compounding the problem is the fact that it was not until November 2005, during the pendency of the lawsuit that Psaki received a 2004 Form K-1 detailing the transaction, which was mailed to the wrong address, and which reported in excess of $2,000,000.00 in gains attributable to his share of the Bell South tower sale. He contends that this untimely disclosure has resulted in additional personal federal and state tax liabilities, including principal, interest, and penalties, estimated by Psaki to be in excess of $500,000.00. The court found Psaki to be a credible witness.
At trial, the court heard from Stephen Lipkins, Executive Vice President and Chief Financial Officer of Continental Asset Management, Inc. He has been employed there for twelve years, and he described Karlton as a "big picture guy." However, after listening to Lipkins' testimony, it became apparent to the court, that Karlton took a more active interest in corporate affairs, in particular with regard to monetary decisions. For the most part, the court found Lipkins to be a credible witness, albeit one who was somewhat defensive, and who came across as very protective of Karlton and his various enterprises.
The court also heard from Alan Cosby, who had been employed by Continental from 1996 through 2001, most recently as Senior Vice President. After he left his employ, Cosby remained a consultant to Continental and J.S. Karlton until January or February 2006. While working for Continental, he was involved in real estate acquisitions including the Bell South purchase, and he testified that Psaki was "ultimately in charge," of that transaction. Cosby was also involved with the sale of the Bell South tower to El Ad, as well as the negotiations regarding the assumption fee. He was the one who first broached the request to Psaki to contribute $400,000.00 toward the assumption fee, which he testified was at the express direction of Karlton. He also admitted that the overall assumption fee demanded by the secondary lender was exorbitant. As to the change in the calculation of Psaki's proposed distribution, by way of explanation, he testified that, "in the beginning he did not pay attention to the partnership agreement as much as he should." He also told the court that Karlton, "knows where every penny is."
The court heard from John S. Karlton by way of his deposition taken on August 23, 2005, the transcript of which was admitted as a full exhibit (Exhibit B, "Karlton TR."). In response to a question from plaintiff's attorney, Karlton admitted that he had a fiduciary duty to his fellow limited partner, James Psaki. (Karlton TR. 39-40 and 132.) When asked why he had not paid him anything, he responded, "I don't know what to pay him." Pressed if there was any amount that Psaki was "definitely entitled to," the witness responded, (TR. 63) Later, when he was asked whether or not he and Cosby and Lipkins felt that it would be necessary to consult Psaki prior to the initial fax in June 2004 containing the proposed distribution, his response was candid: (Karlton TR. 88-90) The evidence clearly demonstrates that on two separate occasions, the defendants proposed the payment to Psaki of $858,965.57 and $525,475.80 respectively, which the court finds to be admissions...
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