Spector v. Konover

• Decision Date: 28 March 2000
• Docket Number: (AC 17904)
• Citation: 57 Conn. App. 121,747 A.2d 39
• Court: Connecticut Court of Appeals
• Parties: LARRY D. SPECTOR, TRUSTEE v. SIMON KONOVER ET AL.

57 Conn. App. 121

747 A.2d 39

LARRY D. SPECTOR, TRUSTEE v. SIMON KONOVER ET AL.

(AC 17904)

Appellate Court of Connecticut.

Argued November 30, 1999.

Officially released March 28, 2000.

O'Connell, C. J., and Foti and Spear, Js.¹ William F. Gallagher, with whom were Richard J. Pascal and, on the brief, Amy M. Stone, for the appellant (plaintiff).

Wesley W. Horton, with whom were Robert A. Randich and, on the brief, Bageshree Ranade Blasius, certified legal intern, for the appellees (defendants).

Opinion

FOTI, J.

The plaintiff, Larry D. Spector, trustee, appeals from the judgment of the trial court rendered for the defendants. The plaintiff claims that the court improperly concluded that the defendants² met their burden of proving that they did not breach their fiduciary duty to the plaintiff.³ The plaintiff further argues that the court improperly concluded that the plaintiff is not entitled to damages caused by the defendants' breach of their fiduciary duty. Because we find that the defendants did violate their fiduciary duty to the plaintiff, we reverse the judgment of the trial court.⁴

The following facts are relevant to the resolution of this appeal. The plaintiff is the successor in interest to Martin Spector, one of four individuals⁵ who reached an oral agreement in 1961 to build a shopping center in Seymour. In 1961, Martin Spector and Abner Rosenberg executed a lease of land in Seymour, and then approached Marvin Patron and the named defendant Simon Konover to build a shopping plaza on the land. While no written partnership agreement was drafted, the four orally formed Tri Town Realty Co. (Tri Town), a general partnership in which each partner received a 25 percent interest. In return for their respective shares in the partnership, Martin Spector and Rosenberg contributed the land lease, while Patron and Konover were charged with building, operating and managing the shopping plaza. Konover and Patron initially managed the shopping plaza themselves, charging the partnership for any outof-pocket expenses they incurred. Over time, as Konover and Patron amassed twenty or thirty shopping centers, they formed K and P Management Company. K and P Management Company hired managers and leasing agents to manage all of Konover's and Patron's properties, and charged management fees and leasing commissions to all of their properties, including Tri Town. Eventually, K and P Management Company was replaced by the defendant Konover Management Corporation, which managed the Tri Town plaza for the last ten years of the partnership.

Konover's duties in managing Tri Town included the preparation and distribution of monthly reports to each of the partners. In the early 1980s, the plaintiff⁶ resolved to take a greater interest in monitoring the partnership because he felt that Konover's reports did not adequately explain the finances of the partnership. The plaintiff also was concerned about the minimum distributions that were being made to each partner. The defendants apparently determined the amount of money that was to be distributed to the partners as profit, and the plaintiff felt that the amount being distributed was too low. In fact, the plaintiff claimed that because the partnership was showing significant income but was distributing relatively little to the partners, the trust was developing a tax burden that it could not pay.

In June, 1985, the plaintiff made his first written request, through counsel, for an increase in the distributions. In September, 1985, Konover increased the distributions from $500 per month to $1200 per month. In February, 1989, the plaintiff again wrote to Konover. This time, the plaintiff requested an increase in the distribution of profits and an explanation of various expenses appearing on the monthly report. The plaintiff further requested an explanation as to why the trust was not receiving any interest earned on partnership funds. The plaintiff did not receive a response from Konover and, in May, 1989, the plaintiff hired counsel in his home state of Arizona,⁷ who wrote a letter to Konover, demanding that the partnership be terminated. The plaintiff received no response to this demand.

In April, 1990, the defendants stopped making profit distributions to the plaintiff. The defendants' purported reason for withholding disbursements was that Ames department store, one of Tri Town plaza's largest tenants, had declared bankruptcy. The defendants claimed that they needed to create a buffer reserve of cash to meet any expenses created by Ames' bankruptcy and the potential closing of Ames' Tri Town store.

According to testimony and exhibits admitted at trial, the plaintiff in 1994 hired a certified public accountant to review the financial records of the partnership. The accountant's review revealed that the defendants did not maintain any account dedicated solely to the Tri Town partnership. Rather, the Tri Town partnership funds were commingled with funds from several other Konover entities, and all the funds were commingled in one account called the K and R Associates Trust Fund (K and R). The accountant further discovered that not only were the funds commingled in one account, but the Tri Town funds were actually being diverted to and used by other properties owned by Konover. Even though Tri Town funds supposedly were kept in the K and R checking account, the balance of the entire K and R account actually was far less than the amount purported to be in the Tri Town partnership account.⁸ Additionally, interest earned on Tri Town funds was not credited to Tri Town's account and was not distributed to the individual Tri Town partners.

At trial, Konover admitted to diverting funds between his various entities. He and several of his employees testified that by sharing the funds in the K and R account, the defendants could use one property's funds to cover expenses incurred by another property. For instance, if one property needed repairs but did not have enough cash to pay for the repairs, the defendants would use cash from another property to pay for those repairs. It was, therefore, advantageous for the defendants to commingle the funds of different Konover entities so that one property's funds could be used to cover an overdraft of another entity.

The Tri Town partnership was terminated in 1994, with the plaintiff receiving his 25 percent share of the partnership's cash balance. The plaintiff then purchased the remaining 75 percent interest in the Tri Town plaza. On October 31, 1995, the plaintiff filed the action that is the subject of this appeal, seeking damages stemming from the defendants' breaches of their fiduciary duties in managing the Tri Town partnership. The court found that the defendants did in fact owe the plaintiff a fiduciary duty, but that they proved by clear and convincing evidence that they dealt with the plaintiff fairly and that they breached no fiduciary duty. We disagree.

I

The plaintiff argues that the court improperly determined that the defendants did not breach their fiduciary duties to the plaintiff. This claim is subject to a clearly erroneous standard of review. "A finding of fact is clearly erroneous when there is no evidence in the record to support it ... or when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.... State v. Hodge, 248 Conn. 207, 218-24, 726 A.2d 531 (1999)." (Internal quotation marks omitted.) State v. King, 249 Conn. 645, 660, 735 A.2d 267 (1999).

In determining whether the court's decision was clearly erroneous, we must examine the court's decision in the context of the heightened standard of proof imposed on a fiduciary. It is undisputed that the plaintiff and Konover were partners. Our Supreme Court has recognized that partners are generally "bound in a fiduciary relationship and act as trustees toward each other and toward the partnership." (Internal quotation marks omitted.) Oakhill Associates v. D'Amato, 228 Conn. 723, 727, 638 A.2d 31 (1994). "Proof of a fiduciary relationship imposes a twofold burden on the fiduciary. First, the burden of proof shifts to the fiduciary; and second, the standard of proof is clear and convincing evidence. Once a fiduciary relationship is found to exist, the burden of proving fair dealing properly shifts to the fiduciary.... Furthermore, the standard of proof for establishing fair dealing is not the ordinary standard of proof of fair preponderance of the evidence, but requires proof either by clear and convincing evidence, clear and satisfactory evidence or clear, convincing and unequivocal evidence." (Internal quotation marks omitted.) Konover Development Corp. v. Zeller, 228 Conn. 206, 229-30, 635 A.2d 798 (1994). We therefore must determine whether the court was clearly erroneous in determining that the defendants proved fair dealing by clear and convincing evidence.

A

The defendants' practice of diverting Tri Town funds to other entities and retaining interest earned on Tri Town partnership funds constitutes a breach of fiduciary duty. Our Supreme Court has stated that "[i]t is a thoroughly well-settled equitable rule that any one acting in a fiduciary relation shall not be permitted to make use of that relation to benefit his own personal interest. This rule is strict in its requirements and in its operation. It extends to all transactions where the individual's personal interests may be brought into conflict with his acts in the fiduciary capacity, and it works independently of the question whether there was fraud or whether there was good intention.... The rule applies alike to agents, partners, guardians, executors and administrators." (Emphasis added; internal quotation marks omitted.) Murphy v. Wakelee, 247 Conn. 396, 401-402, 721 A.2d 1181 (1998), quoting State v. Culhane, 78 Conn. 622, 628, 63 A. 636 (1906).

The defendants' misuse of partnership...