JANVEY v. ALGUIRE

w and needed to be refinished. CT Page 1305 (Trial Tr. 208, 8/20/10.) He testified that he was surprised when he entered the house because it was in a new development and it was new construction. Id. He estimated that it would cost $1,500 to repair the sheetrock and retape the seams. (Trial Tr. 209, 8/20/10; Trial Ex. G.) D'Averso testified that the staircase would need to be refinished and sanded at an estimated cost of $850. (Trial Tr. 210, 8/20/10; Trial Ex. G.) He also testified that the cabinets in the kitchen would need to be raised at an estimated cost of $1,600. (Trial Tr. 211, 8/20/10; Trial Ex. G.) D'Averso further testified that the tile under the refrigerator and cabinets would need to be repaired at an estimated cost of $650 and that the kitchen ceiling would need to be repaired at an estimated cost of $550. (Trial Ex. G.) He testified that in two bathrooms the toilets would need to be relocated, tile and trim repaired and estimated that cost to be $2,600. (Trial Tr. 213, 8/20/10; Trial Ex. G.)

D'Averso also testified as to the exterior work that needed to be done to fix the yard. He recommended bringing in fill, adding drainage, clearing rock, and doing general basic landscaping at an estimated cost of $21,900. (Trial Tr. 214, 8/20/10; Trial Ex. G.) He broke this estimate out into three categories: (1) $2,500 to level and remove debris; (2) $14,000 to install drains on foundation corners and catch basins to storm sewer drains; and (3) $5,400 for forty yards of top soil and grass seed. (Trial Ex. G.) He testified as to the work that needed to be done to fix the back deck and testified that the sonotubes in the center of the deck that would support the weight of the deck were not touching the floor joists of the deck. (Trial Tr. 215-16, 8/20/10.) He proposed popping off some of the boards of the deck and sinking an additional sonotube next to it. (Trial Tr. 216-17, 8/20/10.) His estimate for this work was $2,275. (Trial Ex. G.) D'Averso also estimated that it would cost $2,050 to repair or replace the railing on the front porch to meet code and to push the cement stairs back to the building to meet code. (Trial Ex. G.) D'Averso's total estimates for the work required was $33,975.

On February 11, 2008, the plaintiff filed a Certificate of Mechanic's Lien with the town clerk of the city of Waterbury, which was recorded on February 13, 2008 on the Waterbury land records. The plaintiff claimed it was owed $70,000 for services allegedly rendered in the development of the premises located at 27 Red Maple Lane. (Trial Ex. 2.) The Certificate of Mechanic's Lien stated that the lien was for services rendered July 1, 2007 through November 16, 2007. Id.

At trial plaintiff testified that the $70,000 figure requested in the Certificate of Mechanic's Lien was derived by combining the $69,900 lot CT Page 1306 price and $230,000 new home construction contract price and subtracting the $221,777 it had received in payment from the defendants. In arriving at its calculations, the plaintiff did not take into account that under General Statutes § 49-33 a mechanic's lien is for services rendered and materials furnished in the construction, raising, removal or repairs of any building or in the improvement of a lot, not to recover the remaining balance on the purchase price of a lot. The plaintiff also pursued the balance remaining on the lot at trial even though such debt had already been discharged in the Negron's bankruptcy.

Thomas testified at trial that he was a "self-admitted poor record keeper" and that he was stressed during construction of the defendants' home. (Trial Tr. 14-15, 8/20/10.) The Negrons testified and Thomas conceded that they had requested an accounting of the expenses of the project in January 2008. Thomas testified at trial that in January 2008 he had requested $40,000 from the Negrons, but did not provide an accounting to them for the expenses incurred. (Trial Tr. 16-17, 8/20/10.)

Thomas testified at trial that "at the time . . . I thought everything was fine up until the end." (Trial Tr. 221, 8/25/10.) Thomas also testified that he inspected the interior and exterior of the house and claimed the "painter would not paint like that," the cracks were not there, his tile workers were not responsible for the metal pieces on the tile, the gaps in the molding were fine, he wasn't given the chance to stain or sand the interior staircase, and there were no drainage issues around the house. (Trial Tr. 234-37, 8/25/10.) Ed Thomas testified that in his opinion the house looked good and the Negrons should have paid in full.

To say this brand new house constructed by EM Custom Homes was a travesty is an understatement.

III DISCUSSION A. Mechanic's Lien Foreclosure Claim

The plaintiff EM Custom Homes moves for judgment on the mechanic's lien it filed on February 16, 2008, with respect to services rendered in the development of 27 Red Maple Lane. The plaintiff claims a lien in the amount of $70,000 for services rendered from July 1, 2007, through November 16, 2007. The lien was dated February 11, 2008, and filed on February 13, 2008. The Certificate of Mechanic's Lien was executed by Ed Thomas, who averred he was a member of EM Custom Homes, LLC. The court finds the lien was timely CT Page 1307 filed within ninety days of the completion of work at the house.

In its revised complaint dated August 16, 2010, the plaintiff alleged that it was a registered New Home Construction Contractor and that it furnished materials and rendered labor in the construction and improvement of 27 Red Maple Lane. The plaintiff also alleged that it provided these materials and services under an agreement with the Negrons and that it commenced work on or about July 1, 2007, and completed its work on November 16, 2007. The plaintiff further alleged that it filed a Certificate of Mechanic's Lien with the city of Waterbury and that the sum due to the plaintiff for said labor and materials under the lien remains unpaid. During the course of trial the plaintiff sought permission to amend its complaint further to set forth that it completed work on December 4, 2007.

The Negrons first claim that this court should enter judgment in their favor as the plaintiff was not entitled to file a mechanic's lien on the subject property because of Paragraph 12(d) of the New Construction Dwelling Contract between the parties whereby the plaintiff agreed to provide to the Negrons "a complete and absolute mechanic's lien waiver at the time of closing." The Negrons claim that this paragraph prohibits the plaintiff from filing and enforcing its mechanic's lien.

In Capp Industries, Inc. v. Schoenberg, 104 Conn.App. 101, 112, 932 A.2d 453, cert. denied, 284 Conn. 941, 937 A.2d 696 (2007), the court was also faced with the issue of determining the applicability of an absolute mechanic's lien waiver. In that case the parties had signed an initial waiver that seemingly waived the plaintiff's right to file a mechanic's lien. However, as work was being completed, the parties subsequently signed nine subsequent waivers with more restrictive and situational language. The Appellate Court concluded that it was "unclear from the ten waivers whether the parties intended for each to constitute separate and distinct waivers as to specific work, as the court found, or whether they were intended, either separately or conjunctively, to waive [the plaintiff's] rights with respect to all of the work performed on the property." Id., 114. The Appellate Court upheld the trial court's determination that the "waivers were intended to cover the portions of work for which they had received payment, rather than all of the work performed as of that time." Id.

In the present case, the court has before it a general mechanic's lien waiver and a subsequent specific lien waiver, called a Contractor's Affidavit, relating to work done at 27 Red Maple Lane. The court finds CT Page 1308 that it was the intention of the parties to have the subsequent Contractor's Affidavit waiver cover the specific stages of work for which the plaintiff had performed and completed and that the lien waiver contained in the New Construction Dwelling Contract was not intended to waive the plaintiff's rights with respect to all of the work performed on the property. Accordingly, the Negrons' request that judgment enter in its favor on plaintiff's mechanic's lien on Paragraph 12(d) of the New Construction Dwelling Contract is denied.

General Statute § 49-33(a) provides, in relevant part: "If any person has a claim for more than ten dollars for materials furnished or services rendered in the construction, raising, removal or repairs of any building or any of its appurtenance . . . and the claim is by virtue of an agreement with or by consent of the owner of the land . . . or of some person having authority from or rightfully acting for the owner in procuring the labor or materials, the building, with the land on which it stands . . . is subject to the payment of the claim."

"In this state, a mechanic's lien is a creature of statute and gives a right of action which did not exist at common law . . . The purpose of the mechanic's lien is to give one who furnishes materials or services the security of the building and land for the payment of his claim by making such claim a lien thereon . . . Moreover, [t]he guidelines for interpreting mechanic's lien legislation are . . . well established . . . its provisions should be liberally construed in order to implement its remedial purpose of furnishing security for one who provides services and materials . . . Our interpretation, however, may not depart from reasonable compliance with the specific terms of the statute under the guise of a liberal construction . . . The interpretation of the language of § 49-33 is an issue of law . . . [which is] subject to de novo review." (Citation omitted; internal quotation marks omitted.) Intercity Development, LLC v. Andrade, 286 Conn. 177, 183-84, 942 A.2d 1028 (2008).

"[General Statute § 49-33] is designed to furnish security for a contractor's labor and materials and, as this court has noted previously, is remedial in nature . . . the statute was not intended to provide a security interest for a builder's expectation of profit or other contract measure of damages." Id., 184-85. (Internal quotation marks omitted.) The Supreme Court in Intercity cited to Brin v. Mestite, 89 Conn. 107, 110, 93 A. 4 (1915), which stated that the predecessor to General Statute § 49-33 [General Statutes § 4135] secured the plaintiff's claim for materials furnished and services rendered in the construction of the building, but it did not "afford him security for CT Page 1309 his loss of profit or damage suffered by his being prevented from completing the work." (Internal quotation marks omitted.) Intercity Development, LLC v. Andrade, supra, 286 Conn. 185.

In Intercity, the plaintiff relied upon the construction contract to calculate the lien amount and alleged an unpaid balance due under the contract after deducting payments made. In the present case, the plaintiff is relying upon the contract price to calculate the lien amount and. has deducted the payments made by the plaintiffs to reach the $70,000 it claims is secured by the mechanic's lien. In Intercity, the testimony at trial was that the $161,117 dollar amount claimed in the mechanic's lien was based on the contract amount and deductions for payments made thereto. In Intercity, the defendant did not challenge the plaintiffs method of calculating the material and services rendered in the lien amount in any way. Intercity Development, LLC v. Andrade, supra, 286 Conn. 187. In the present case, the Negrons challenged the plaintiff's methodology repeatedly. The Negrons argued that the mechanic's lien calculation should be based solely on the costs associated with Stage Five of the construction, and due to the contractor's affidavit signed by Ed Thomas affirming that the four previous stages of construction had been fully paid for, stages one through four should not be included in the calculation. The court agrees with the Negrons' argument as to calculation of amounts owed for labor and materials.

In the present case, the plaintiff originally claimed at trial that its mechanic's lien of $70,000 is the difference between the sum of the lot purchase price of $69,900 and house construction purchase price of $230,000, and the $221,777 paid by the Negrons to the plaintiff. While the actual difference in contract price and payments made is $78,123, the plaintiff only seeks the balance of $70,000 in its mechanic's lien. There are a number of problems with the plaintiff's calculations. First, the Negrons had paid $62,150 towards the lot and $7400 of the lot purchase price had been subordinated to the construction financing on the property. In 2010, the balance owed for the lot was discharged in bankruptcy as was plaintiff's contract claim against the defendants for the purchase of the lot. The balance owed on the lot was $7,750 and the court finds that the plaintiff was not entitled to include this $7,750 as part of its mechanic's lien calculation.

The court notes that the plaintiff has changed the amount due to it under its mechanic's lien multiple times with the amount increasing above $70,000.

The next issue with plaintiff's calculations is that while there may have been a construction contract with a $230,000 purchase price, there was also a construction budget for labor and materials for the CT Page 1310 same house which the plaintiff signed off on. The plaintiff is seeking to foreclose its mechanic's lien for materials and services provided. The construction budget was laid out for the five stages of construction that the plaintiff affirmed was going to occur. On August 22, 2007, the plaintiff affirmed, through its member Ed Thomas, in a Contractor's Affidavit to the bank providing construction financing that the first four stages of construction were completed. Ed Thomas, however, testified at trial that the first four stages of work were never truly complete, nor fully paid for. Thomas testified that he signed the Contractor's Affidavit and affirmed the work was done and paid for because he wanted to get paid and he knew that this is what the bank required in order for a check to be cut to the plaintiff.

The court found Thomas's testimony regarding the August 22, 2007, Contractor's Affidavit to be disconcerting. If Thomas was to be believed, he lied to the bank about the status of construction and payment of labor and materials for work allegedly completed so that he could receive a significant construction loan advance. In the alternative if Thomas was lying under oath at trial, he lied to the court about the Contractor's Affidavit to get the court to award him additional monetary damages on this same work. The court finds that there was credible evidence presented at trial that the first four stages of construction at 27 Red Maple Lane were completed and fully paid for by August 22, 2007. The court did not find Ed Thomas' testimony to be credible not only this subject, but every other subject at trial.

In its post-trial brief, the plaintiff concedes the following: "[t]he plaintiff may have shown itself to be incompetent in the management of the construction operation; incompetent in the management of its business affairs; or incompetent on the keeping of its business records . . ." (Plaintiff's 10/15/10 Post-trial Brief p. 7). The plaintiff also concedes that from the amount it is seeking for its mechanic's lien, payments, credits and adjustments for allowances and incomplete work should be subtracted. ( Id., 17). The court will do as the plaintiff suggests and deduct from any mechanic's lien amount due, payments made by the defendants, credits and adjustments due to defendants for allowances and incomplete work.

In its post-trial brief the plaintiff concedes that it did not complete certain aspects of work at 27 Red Maple Lane and recites the following as incomplete work: it did not "complete the final grading of the property together with the placement of loam and seed to disturbed areas; painting the front door or the front porch posts; the installation of a hand rail on the left side of the stairs, or the installation of a small block of wood to support the rear deck . . . CT Page 1311 install an intercom system; install a small strip of asphalt along the driveway; install brick veneer on the front porch or energize the air conditioning compressor." (Plaintiff's 9/10/10 Post-trial brief pp. 24-25.)

The plaintiff then provided estimates as to the cost of fixing or completing this work, which in large part flew in the face of its own expert's testimony at trial as to the cost of repair and completion. For example, at trial Ed Thomas testified that the cost to finish the fill and landscaping was the amount budgeted in the construction contract of $1,900. In its post-trial brief, the plaintiff further reduced this figure to $1,500. The plaintiff's own trial expert, Kloss, however, testified that the cost for this same work was $3,500. The court further notes that in the list of work to be completed or fixed in plaintiff's post-trial brief, it does not refer to staining or refinishing the staircase in the entry hall, fixing the toilet so that the shower door did not hit the toilet, fixing the molding issues around several of the doors in interior of the house, fixing the multiple tile problems in the house, or fixing the improperly hung cabinets in the kitchen. The plaintiff's own trial expert testified that all those areas needed to be fixed. The fact that plaintiff continues to ignore blatant defects in its workmanship is egregious.

Moreover, the plaintiff's summary of monies due to it for overages which it prepared for trial is inaccurate. For example, in the "cabinetry and countertop allowance" summary sheet prepared for trial, it sets forth that the cost incurred for total cabinetry and granite was $13,841.00. The plaintiff then subtracted an $8,000 allowance amount and claimed there was a $5,841 amount due to it for the "overage." (Trial Ex. 33.) What plaintiff didn't put in its "summary" was the fact that Negrons made direct payments for the cabinets and granite in the amount of $12,278.00. The plaintiff agreed to reimburse the defendants for this amount and in fact a check was cut by Owner Builder Loan Services to the Negrons for this reimbursement. (Trial Ex. 18 p. 168.) Thus, the plaintiff never expended $13,841 for countertops and granite as the Negrons had paid $12,278 for these materials and supplies. At best, the plaintiff was owed $1,127 in overages relating to cabinets and countertops.

The same is true with respect to the plaintiff's claimed overage for first floor kitchen and floor and wall tile. In the flooring and tiling summary plaintiff prepared for trial, plaintiff set forth figures of $3,332.70 for flooring and $4,366.15 for tile, totaling $7,698.85. (Trial Ex. 31.) The plaintiff, however, concedes in Trial Exhibit 29, that the Negrons directly paid $7,400 to Atlantic Flooring CT Page 1312 and they should be credited for that payment. The credit does not appear in the flooring and tile summary. (See Trial Ex. 31.) Thus, deducting the $7,400 payment made by the Negrons for materials, the plaintiff is potentially owed an overage of at best, $298.85, not $3,580.90.

With respect to plaintiff's claimed overage for plumbing fixtures, plaintiff prepared a summary sheet for trial. (Trial Ex. 34.) All of the invoices relied upon by the plaintiff in its summary are from April 2007 and as such are outside the date set forth in the mechanic's lien of July 1, 2007, through November 16, 2007. (Trial Ex. 34.) Based on this fact, the court will not consider any of these invoices or claims relating to these invoices. The Negrons and the plaintiff also offered into evidence additional invoices, totaling $914.27, relating to plumbing work done at 27 Red Maple Lane which were within the relevant mechanic's lien time period. (Trial Exs. O and 45.) The Negrons argue in their post-trial brief that these sums may have been included in the $19,425.00 Stage Five disbursement that the plaintiff EM Custom Homes received in October 2007 and that the plaintiff did not meet its burden in showing these items were not included. However, in Trial Ex. 18, p. 15, it delineates line by line how the $19,425 paid to the plaintiff was calculated and the category "finish plumbing" is not included. Thus, the court finds that the $914.27 incurred by the plaintiff during the relevant mechanic's lien period will be credited to the plaintiff.

Based on the foregoing, the court finds that the overage expenses the plaintiff is entitled to are $1,425.85, not the $17,673.12 claimed at trial and in its post-trial brief and the court further finds that the plaintiff is also entitled to a credit of $914.27 for plumbing materials and supplies.

The plaintiff also claims that if the court goes by the construction budget, then it is entitled to add $15,699 in non-inspectible items to the $41,850 Stage Five construction budget amount. (Plaintiff's 10/15/10 Post-trial brief, p. 16.) The plaintiff contends that this brings the total due to the plaintiff from the construction loan to $57,549.00. ( Id., pp. 16-17.) This analysis is also inaccurate. In the construction budget, the Non-Inspectible Items category had an original budget of $15,699.00. (Trial Ex. 18, p. 11.) That budget however, was later reduced to $12,121.00 of which $5,072 had been paid out for the construction of the house. (Trial Ex. 18, p. 273.) Thus, the total amount the plaintiff could possibly claim was $7,049 not $15,699 as claimed by plaintiff. In addition, in examining what comprised the $7,049 left in this non-inspectible items category $5,149 was for miscellaneous, $950 was for a survey, and $950 was for CT Page 1313 permits. The plaintiff did not offer any evidence at trial that it expended funds for a survey and is owed this money or that $950 in permit fees were paid and not reimbursed. Moreover, the plaintiff failed to set forth at trial what specific materials and services would be included in this miscellaneous category. Accordingly, the plaintiff's argument that $15,699 should be added to the original Stage Five construction budget amount is without merit.

The court notes that the construction budget for Stage Five of construction was $45,428 in August 2007, not $41,850 as originally budgeted.

As of August 2007, the Stage Five Construction budget was $45,428. (Trial Ex. 18, p. 272-73.) Plaintiff was paid $19,425 for Stage Five work, and it concedes that the defendants Negrons properly received a $12,278 reimbursement for cabinets and countertops. The $12,278 expenditure was a line item in the Stage Five construction budget. It also agrees that a $1,900 credit should be given to the Negrons with respect to appliances budgeted in Stage Five as the plaintiff never expended any funds for appliances. The plaintiff has also conceded that the $1,900 line item budgeted in Stage Five to finish landscaping was never incurred. This leaves a balance of $9,925 the plaintiff could possible claim was owed to it under the construction budget.

The plaintiff, however, has additionally conceded that the Negrons should be credited $1200 for an intercom system that was never installed. The plaintiff has also conceded that the defendants should be credited $200 for plaintiff's failure to charge the air conditioning condenser and $150 for painting the exterior columns and front doors. Thomas testified at trial that he estimated the cost of energizing the compressor at $200. The defendant Alberto Negron also testified at trial that the system need more than energizing as the air conditioner was inoperable and that it cost him $1,044.00 to get the system operating. The defendant Alberto Negron offered into evidence an invoice supporting his claim. (Trial Ex. M.) The court credits the testimony of defendant Alberto Negron as to the condition of the air conditioning unit and expenses incurred. The plaintiff also conceded that it did not finish the brick veneer to the house and owed a credit to defendants of $1,120.00 and that extra asphalt should have been put in the driveway at a cost of $160.00. At trial the Negrons did not offer any counter estimates to the estimates that the plaintiff offered for the painting and veneer. The total of the plaintiff's mechanic's lien after the foregoing deductions is $6,401. Adding in the $1,425 in overages and $914.27 in plumbing expenses, the plaintiff's mechanic's lien totals $8,740.27.

The court also credits the defendants' expert, Joseph D'Averso's, a witness with forty years of experience in the construction business, CT Page 1314 more than that of plaintiff's expert, Mr. Kloss,' testimony with respect to the work that needed to be done to fix and repair the defective workmanship at the premises. The court credits D'Averso's estimates and testimony as to the following work: $1,500 for foyer repair; $850 to sand and seal stairs and railings; $2,800 to raise cabinets, repair tile under cabinets and island and repair the kitchen ceiling; $2,600 to relocate the two toilets, redo trim, repair the tile in the bathrooms; $2,050 to replace or repair the railing and raise and push back cement stairs to meet code; $2,275 install a proper foundation for deck to meet code, remove deck demo, re-use deck materials or re-install. With respect to the work required for the lot the court credits the $5,400 estimated for forty yards top soil and spread forty yards or fill, and spread or plant grass seed and the $2,500 estimate to level and remove debris on the lot. The court finds that a sufficient evidentiary basis has also been laid for the drainage work requested at an estimated cost of $14,000, which the court finds to be reasonable.

Accordingly, based on the foregoing the court finds that the cost of additional work necessary to finish and repair the premises constructed by the plaintiff is $33,975.00. The court also finds that the $8,740.27 owed to the plaintiff for materials and services during the period of time July 1, 2007, through November 16, 2007, is set off by the $33,975 cost to the Negrons to finish and repair the dwelling at 27 Red Maple Lane. Based on the foregoing, the court finds that the amount the plaintiff is owed on its mechanic's lien is zero and plaintiff in fact owes the Negrons $25,234.73 to finish and repair the premises at 27 Red Maple Lane.

Judgment enters in the defendants' favor on the plaintiff's mechanic's lien count in the complaint.

B. New Home Warranty Act Claim

In their post-trial brief, the Negrons argue that the plaintiff breached the requirements of the New Home Warranty Act, General Statutes § 47-116 and that such violation is a violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110, et seq. (Defendants' Post-trial brief, p. 1). In its reply brief, the plaintiff argues that this is the first time that the Negrons raised a claim pursuant to the New Home Warranty Act and this claim is a material variance from the defendants' December 11, 2009, counterclaim. The plaintiff is correct. In its amended counterclaim dated December 11, 2009, the defendants Negrons asserted a single counterclaim against the plaintiff pursuant to CT Page 1315 New Home Contractors Act, General Statutes § 20-417, et seq., not the New Home Warranty Act. The court notes that the Negrons have not offered any theory upon which the court should consider this new claim and not their original counterclaim.

"The purpose of [a pleading] is to limit the issues to be decided at the trial of a case and is calculated to prevent surprise . . . It is fundamental in our law that the right of a [party] to recover is limited to the allegations in his [pleading] . . . A [party] may not allege one cause of action and recover upon another." (Citations omitted; internal quotation marks omitted.) Boccanfuso v. Conner, 89 Conn.App. 260, 286-87, 873 A.2d 208, cert. denied, 275 Conn. 905, 882 A.2d 668 (2005).

The court finds that the introduction of a new theory of liability on a different statutory scheme after the close of evidence and trial is highly prejudicial to the plaintiff. The court will not consider the Negrons' arguments in their post-trial brief relating to this claim.

C. New Home Construction Act Claim

The Negrons have asserted a single counterclaim against the plaintiff pursuant to the New Home Construction Act, General Statutes § 20-417c. The Negrons have alleged that the plaintiff violated subsections (4), (6) and (7) of the Act.

General Statutes § 20-417c provides in relevant part: "The commissioner may revoke, suspend, or refuse to issue or renew any certificate issued pursuant to Sections 20-417a to 20-417j, inclusive, or place a registrant on probation or issue a letter of reprimand after notice and hearing in accordance with the provisions of Chapter 54 concerning contested cases if it is shown that the holder of such certificate has: (1) failed to comply with any provision of Sections 20-417a to 20-417j, inclusive, or any regulation adopted pursuant to said sections . . . (4) engaged in any untruthful or misleading advertising . . . (6) engaged in any unfair or deceptive business practice under subsection (a) of Section 42-110b; (7) failed to timely complete any task, as specified in a written contract of sale . . ."

1. General Statutes Section 20-417c(4)

The plaintiff first contends that in order for the plaintiff to be liable under § 20-417c(4), a new home construction contractor may not engage in any untruthful or misleading advertising, the Negrons would CT Page 1316 have to prove that the plaintiff had promotional literature or advertisements which engaged in untruthful or misleading advertising. The plaintiff argues that the Negrons' claim must fail because the Negrons were introduced to the plaintiff through a broker and none of the broker's advertisements were introduced into evidence.

The Connecticut Supreme Court has defined the word "advertise" as follows: "to announce publicly esp[ecially] by a printed notice or a broadcast; [and] to call public attention to esp[ecially] by emphasizing desirable qualities so as to arouse a desire to buy or patronize." (Internal quotation marks omitted.) QSP, Inc. v. Aetna Casualty Surety Co., 256 Conn. 343, 365, 773 A.2d 906 (2001). Additionally, the court recognized that "Black's Law Dictionary defines advertising in a manner that would include such dissemination of information [as]: [a] oral, written, or graphic statement made by the seller in any manner in connection with the solicitation of business . . ." (Internal quotation marks omitted.) Id. "Courts have differed over precisely what type of conduct constitutes advertising activity. A number of courts have defined the term expansively to include even individual sales pitches to individual consumers; but other courts have defined it more narrowly." (Internal quotation marks omitted.) Id. In certain contexts, "courts . . . have defined [advertising] in terms that include the dissemination of information to promote a product . . . A common theme, however, is the requirement that information must be publicly or widely disseminated in order to be considered advertising." (Internal quotation marks omitted.) Id., 366.

Based on the testimony at trial and exhibits admitted, the court finds that the Negrons did not offer sufficient evidence at trial to prove by a fair preponderance of the evidence that the plaintiff violated § 20-417c(6). In particular, the court finds that the Negrons offered no evidence as to any promotional brochures or other advertising materials that were provided to them or observed by them that induced them to enter into a contract with the plaintiff. Accordingly, judgment enters in the plaintiff's favor with respect to the defendants' claim pursuant to § 20-417c(4).

2. General Statutes Section 20-417c(6)

The plaintiff next argues that judgment should be rendered in its favor on the Negrons' claim pursuant to § 20-417c(6). The plaintiff argues that in order for it to be found liable under this statutory section, the Negrons must plead and prove that the plaintiff engaged in unfair or deceptive business practices under the Connecticut Unfair CT Page 1317 Trade Practices Act, General Statutes § 42-110b(a) (CUTPA). The plaintiff contends that the Negrons have not alleged any specific conduct which would bring the allegations under this subparagraph other than negligent construction.

CUTPA provides: "No person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110b(a). The Connecticut Supreme Court has "adopted the criteria set out in the cigarette rule by the Federal Trade Commission . . . (1) [W]hether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwise . . . (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers [(competitors or other businessmen.]" Williams Ford, Inc. v. Hartford Courant Co., 232 Conn. 559, 591, 657 A.2d 212 (1995). "[A]ll three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three." (Internal quotation marks omitted.) Associated Investment Co. Ltd. Partnership v. Williams Associates IV, 230 Conn. 148, 156, 645 A.2d 505 (1994). "Thus, a violation of CUTPA may be established by showing either an actual deceptive practice . . . or practice amounting to a violation of public policy . . . Furthermore a party need not prove an intent to deceive to prevail under CUTPA." (Citations omitted; internal quotation marks omitted.) Cheshire Mortgage Services, Inc. v. Montes, 223 Conn. 80, 106, 612 A.2d 1130 (1992).

In Associated Investment Co. Ltd. Partnership, the. Connecticut Supreme Court held that our General Assembly in adopting the sweeping language of § 5(a)(1) of the Federal Trade Commission Act "upon which the CUTPA legislation was based, chose not to define the scope of unfair or deceptive acts proscribed by CUTPA so that courts might develop a body of law responsive to the marketplace practices that actually generate such complaints." (Internal quotation marks omitted.) Associated Investment Co., Ltd. Partnership v. Williams Associates IV, supra, 230 Conn. 157. (Internal quotation marks omitted.) "Predictably, [therefore] CUTPA has come to embrace a much broader range of business conduct than does the common law tort action." Id., 157-58. "In addition to establishing a standard of conduct more flexible than traditional common law claims, the expansive language of CUTPA prohibits unfair or deceptive trade practices without requiring proof of intent to deceive, to defraud or to mislead." (Internal quotation marks omitted.) Id., 158. CT Page 1318

"[N]ot every contractual breach rises to the level of a CUTPA violation." Hudson United Bank v. Cinnamon Ridge Corp., 81 Conn.App. 557, 571, 845 A.2d 417 (2004). In Naples v. Keystone Building Development Corp., 295 Conn. 214, 229, 990 A.2d 326 (2010), the Supreme Court affirmed the trial court's determination that the defendants' unworkmanlike construction of the plaintiff's home did not constitute a CUTPA violation. In making that finding the court stated that the trial court could reasonably have relied on testimony that the general contractor and its subcontractors had attempted multiple times, albeit unsuccessfully, to remedy the damage and problems about which the plaintiff had complained. The court found that "[i]n the absence of aggravating unscrupulous conduct, mere incompetence does not by itself mandate a trial court to find a CUTPA violation." Id.

Conversely in Tessman v. Tiger Lee Construction Co., 228 Conn. 42, 54, 634 A.2d 870 (1993), the Supreme Court upheld a finding of a CUTPA violation where the contractor's actions constituted reckless disregard of the homeowner's rights justifying a punitive damages award. There the contractor "1) represented that it would perform all work with its own employees, but instead relied heavily on subcontractors; (2) refused to try to fix leaks, claiming they were "merely condensation"; 3) told homeowners to set traps to resolve problems of rodents entering through hole in wall; and 4) buried paint cans and other noxious materials . . . in a wetland near [the home's] well." Id., 54-55. See also Centimark Corp. v. Village Manor Associates Ltd Partnership, 113 Conn.App. 509, 523-24, 967 A.2d 550, cert. denied, 292 Conn. 907, 973 A.2d 103 (2009) (upholding finding of CUTPA violation in case arising from faulty roofing work when general contractor represented that work would be done by a "Master Elite" roofing subcontractor, and then failed to inform owner that task would be subcontracted to another, less qualified subcontractor).

In Scrivani v. Vallombroso, 99 Conn.App. 645, 649, 916 A.2d 827, cert. denied, 282 Conn. 904, 920 A.2d 309 (2007), the Appellate Court found that the trial court had properly found CUTPA violations, both per se and under the New Home Improvement Act, General Statutes § 20-417 et seq., based on the contractor's false representations of qualifications with respect to installation of siding, and also his pressuring of the plaintiffs for payment in full before he had completed work so as to preclude them from raising the Home Improvement Act in defense of any suit for payment that he might bring. CT Page 1319

In the present case, the court heard multiple days of testimony that the plaintiff, through Thomas, had misrepresented the plaintiff's qualifications and abilities to properly construct a new home. At trial Thomas testified the plaintiff had built very few new homes prior to 27 Red Maple Lane. It is clear from the voluminous evidence received at trial that the plaintiff neither had the expertise nor qualifications to build a home. The plaintiff never offered to nor completed repairs for the multitude of problems in this travesty of a house after its construction. Instead, the plaintiff left the Negrons to finish construction and repair the work done. The court also finds that Thomas' refusal to provide an accounting to the Negrons for expenditures and potential overages was egregious. At trial, Thomas exhibited no remorse for the disaster of a home the plaintiff left for the defendants, nor any concern as to the safety issues that were left at the house. In fact, from testimony at trial it was clear that Thomas thought the plaintiff did a good job constructing this house. This was not incompetence in the running of a business as plaintiff claims. This was the conscious and reckless disregard by the plaintiff for both the condition of this dwelling and for the Negrons' safety.

The plaintiff also argues that the Negrons have not proven an ascertainable loss from the plaintiff's actions. At trial, the Negrons offered expert testimony as to the loss suffered and costs to repair and finish the house and the Negrons also offered into evidence a video of the catastrophic nature of the house. The court credits the testimony of the defendants' expert witness and found him to be credible with respect to the work that needed to be done and cost of such work at the dwelling. The court finds that the Negrons have in fact proven the ascertainable loss they have suffered as a result of the plaintiff's actions.

The court finds that plaintiff has violated § 20-417c(6), which is a per se violation of CUTPA. The court enters judgment in the Negrons' favor on this claim in the amount of $25,234.73, plus attorneys fees and costs.

3. General Statutes Section 20-417c(7)

The Negrons next claim that the plaintiff violated § 20-417c(7) in that the plaintiff failed to timely complete the construction of the house as specified in the written contract of sale. Pursuant to Paragraph Three of the New Dwelling Construction Contract, "the work to be performed under this contract shall be CT Page 1320 commenced as soon as practicable after the date of the execution of this Agreement, and shall be completed three (3) months from date of commencement, excepting delays caused directly or indirectly by the Owner, or at such later date shall be determined in accordance with the provisions of this Agreement."

The Negrons signed the contract on September 26, 2006 and the plaintiff signed it on October 4, 2006. By the time of the March 2007 closing, work had been commenced and the plaintiff was paid a significant sum of money for this work. There is no dispute, however, that the house was not completed within the three months required under the contract. In fact, six months after the execution of the contract at the closing, the house was no where near completed. The house did not receive a certificate of occupancy until December 31, 2007, fifteen months after execution of the contract.

Paragraph 12(f) of the New Dwelling Construction Contract specifically provided that "[t]he Seller at his expense shall deliver to the Buyer at closing an unconditional certificate of occupancy issued by the building inspector of the city of Waterbury in which the property is located pertaining to the subject premises." This never occurred. In fact, after the dwelling failed the city of Waterbury building inspection on two occasions in November 2007, and the certificate of occupancy was obtained largely through the Negrons' efforts.

The plaintiff nonetheless contends that the Negrons contributed to the delays in construction of the house. Based on the evidence and testimony presented at trial the court disagrees. The court also finds that the delay in finishing the house was due in large part to the plaintiff's inability to construct a house and the diversion of the plaintiff's attention to completing the road in the development in which 27 Maple Road was situated.

Based on the foregoing, the court finds that the plaintiff violated § 20-417c(7) and enters judgment in the Negrons' favor on this claim and awards the defendants $10,000 in damages on this count.

IV CONCLUSION

After having considered the evidence and testimony presented, the court enters judgment as follows: 1) in the Negrons' favor on plaintiff's mechanic's lien claim, 2) in plaintiff's favor on the Negrons' General Statutes § 417c(4) counterclaim; 3) in the Negrons' favor on their General Statutes § 417c(6) counterclaim and the court awards the Negrons damages in the amount of $25,234.73, plus attorneys CT Page 1321 fees and costs; 4) in the Negrons' favor on their General Statutes § 417c(7) counterclaim and awards the Negrons $10,000 in damages.

A hearing on the Negrons' attorneys fees and costs is scheduled for January 24, 2011. An Affidavit of Attorneys Fees showing the dates legal services were rendered, hourly rate charged and work performed should be filed and served by January 7, 2011.

parties to an arbitrable dispute out of court and into arbitration as quickly and easily as possible[,]" there is nothing to control the district court's expeditious determination of arbitrability. Moses H. Cone Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983) (emphasis added).

The cases cited by the Employee Defendants also do not bar the exercise of the district court's equitable powers here. The RGI Court found that "[t]he crux of the problem [in the circuit split] is whether the commands of the [FAA] require that a federal court immediately divest itself of any power to act to maintain the status quo once it decides that the case before it is arbitrable." RGI, 858 F.2d at 228-29 (emphasis added). Here, however, the district court has not yet decided whether the case is arbitrable and thus the circuit-split cases are not applicable. The Receiver's request for a preliminary injunction was entered before the motion to compel arbitration. We agree with the district court that if we were to reverse and hold that the district court must stop everything and consider the motion to compel arbitration, such a holding

would create a harsh procedural rule: in order to avoid irreparable injury, motions to "compel arbitration where a request for injunctive relief is involved must be resolved before any temporary restraining order expires. Such a rule would be both burdensome for district courts and impracticable, given the time it takes motions to compel arbitration to become ripe for ruling, even if no discovery is required.

(Supp. R. # 3 at 4273 n. 5.)

Though the circuit-split cases do not apply here, the reasoning of those circuits holding that a court may issue an injunction pending arbitration applies here. As explained by the First Circuit, "the congressional desire to enforce arbitration agreements would frequently be frustrated if the courts were precluded from issuing preliminary injunctive relief to preserve the status quo pending arbitration and, ipso facto, the meaningfulness of the arbitration process." Teradyne v. Mostek Corp., 797 F.2d 43, 51 (1st Cir. 1986). Here, the district court merely sought to preserve the status quo before deciding the motion to compel arbitration, and by doing so they sought to preserve the meaningfulness of any arbitration that might take place.

Given that the facts at issue here do not require us to enter the circuit split, we reserve for another day the issues of whether a district court divests itself of the discretion to maintain the status quo once it decides the case before it is arbitrable, and if not, what the limits of that discretion may be.

Even if applicable to the facts here, the Seventh Circuit case cited by the Employee Defendants would not bar the preliminary injunction issued by the district court. In Salvano, the Seventh Circuit held that the district court may issue injunctive relief only until the arbitration panel is able to address whether the equitable relief should remain in effect. 999 F.2d at 215-16. In the instant case, the district court expressly stated that if it decides to compel arbitration, the defendants may ask the district court to reconsider the preliminary injunction in light of Fifth Circuit precedent and the terms of the contracts.

The matter of arbitrability has not yet been decided, and the district court did not overreach when it decided the preliminary injunction motion.

C. Decision to Grant Preliminary Injunction

The four elements a plaintiff must establish to secure a preliminary injunction are:

(1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable injury if the injunction is not issued, (3) that the threatened injury if the injunction is denied outweighs any harm that will result if the injunction is granted, and (4) that the grant of an injunction will not disserve the public interest.

Byrum, 566 F.3d at 445 (quotation marks omitted). The Receiver bore the burden of establishing each element. Bluefield Water Ass'n, Inc. v. City of Starkville, Miss., 577 F.3d 250, 253 (5th Cir. 2009). The district court analyzed each of the elements in its grant of the preliminary injunction to the Receiver. The Employee Defendants challenge all aspects of the district court's analysis. We disagree with the Employee Defendants that the district court abused its discretion in issuing the preliminary injunction. We address each element in turn, reviewing the district court's ultimate decision to grant the preliminary injunction and its findings of fact for abuse of discretion and its legal determinations de novo. Byrum, 566 F.3d at 445.

1. Likelihood of Success on the Merits

The district court did not err in finding the Receiver carried his burden of proving likelihood of success on the merits. To satisfy the first element of likelihood of success on the merits, the Receiver's evidence in the preliminary injunction proceeding "is not required to prove [his] entitlement to summary judgment." Byrum, 566 F.3d at 446; see also CHARLES ALAN WRIGHT, ARTHUR R. MILLER, MARY KAY KANE, 11A FEDERAL PRACTICE PROCEDURE § 2948.3 (2d ed. 1995) ("All courts agree that plaintiff must present a prima facie case but need not show that he is certain to win." (footnote omitted)). To assess the likelihood of success on the merits, we look to "standards provided by the substantive law." Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir. 1990) (citation omitted). Here, the Receiver contends that there is liability under TUFTA. Under TUFTA, the trial court may find substantial likelihood of success on the merits when it is "presented with evidence of intent to defraud the creditor." See Tanguy v. Laux, 259 S.W.3d 851, 858 (Tex.App.-Houston [1st Dist.] 2008) (citing Tel. Equip. Network, Inc. v. TA/Westchase Place, Ltd., 80 S.W.3d 601, 609 (Tex.App.-Houston [1st Dist.] 2002)).

The Receiver and the Employee Defendants offer competing versions of what evidence is necessary to satisfy TUFTA's requirements. The Bennett Defendants contend that the Receiver failed to establish that Stanford operated as a Ponzi scheme. The FA Defendants argue that because they received their compensation from SGC and not SIB, they did not receive compensation from the Ponzi scheme. The Employee Defendants contend that the district court erred by allowing the Receiver to group all the former employees of Stanford together rather than requiring the Receiver to prove that each individual Defendant received fraudulent transfers of money from the Stanford scheme. Finally, the Employee Defendants also contend that the Receiver failed to follow the heightened pleading requirements of Federal Rule of Civil Procedure 9(b). The Receiver responds that (1) there is sufficient evidence to prove Stanford operated as a Ponzi scheme from the very beginning; (2) the Receiver has presented sufficient evidence to prove that each individual Defendant received transfers of money from the Stanford Ponzi scheme; and (3) this Court need not decide whether the Receiver's pleading satisfies the rules, and even if it did, Rule 9(b) does not apply to fraudulent transfer cases.

The Bennett Defendants do not tie this argument to any element of the preliminary injunction standard, instead lodging a general objection to the district court's determination that Stanford operated as a Ponzi scheme. Because the Ponzi scheme determination has the greatest impact on the likelihood of success element, we address the Bennett Defendants' argument in this section.

The district court agreed with the Receiver. It found that there was a Ponzi scheme and held that "`transfers made from a Ponzi scheme are presumptively made with intent to defraud, because a Ponzi scheme is, as a matter of law, insolvent from inception.'" (Supp. R. # 3 at 4277 (quoting Quilling v. Schonsky, 247 Fed.Appx. 583, 586 (5th Cir. 2007) (unpublished) (citing Warfield v. Byron, 436 F.3d 551, 559 (5th Cir. 2006))).) Therefore, the district court found that the Receiver satisfied his obligation to show an actual intent to defraud under TUFTA. The district court further found that the Receiver presented sufficient evidence that the assets implicated by the injunction request "represented transfers of Stanford CD proceeds."

We address first whether the Receiver presented sufficient evidence that Stanford operated as a Ponzi scheme, then discuss whether the Receiver adequately established that the Employee Defendants received proceeds of a fraudulent transfer, and finally address whether this satisfies the requirements of this element.

a. Whether Stanford Operated as a Ponzi Scheme

The Bennett Defendants spend the bulk of their brief disputing whether Stanford operated as a Ponzi scheme ab initio. The FA Defendants separate SGC from SIB, and claim that the Receiver failed to establish that SGC, the entity that provided compensation to the FA Defendants, was a Ponzi scheme. In large part, the Receiver relies upon the guilty plea of James Davis (the "Davis Plea"), the former Chief Financial Officer of SIB, to demonstrate that the Stanford enterprise operated as a Ponzi scheme. The district court relied upon the Davis Plea in its order, along with the declarations of the Receiver's forensic accountant, Karyl Van Tassel, to find that a Ponzi scheme existed. We find that the district court did not err in finding that the Stanford enterprise operated as a Ponzi scheme.

A Ponzi scheme is a "fraudulent investment scheme in which money contributed by later investors generates artificially high dividends or returns for the original investors, whose example attracts even larger investments." BLACK'S LAW DICTIONARY 1198 (8th ed. 2004); see also United States v. Setser, 568 F.3d 482, 486 (5th Cir. 2009) ("in a classic Ponzi scheme, as new investments [come] in . . ., some of the new money [is] used to pay earlier investors"). The Second Circuit also provides a good description of a Ponzi scheme:

A [P]onzi scheme is a scheme whereby a corporation operates and continues to operate at a loss. The corporation gives the appearance of being profitable by obtaining new investors and using those investments to pay for the high premiums promised to earlier investors. The effect of such a scheme is to put the corporation farther and farther into debt by incurring more and more liability and to give the corporation the false appearance of profitability in order to obtain new investors.

Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1088 n. 3 (2d Cir. 1995). This Circuit has found that a Ponzi scheme "is, as a matter of law, insolvent from its inception." Warfield, 436 F.3d at 558 (citing Cunningham v. Brown, 265 U.S. 1, 7-8, 44 S.Ct. 424, 68 L.Ed. 873 (1924)).

The Davis Plea and the Van Tassel Declarations provide sufficient evidence to support a conclusion that there is a substantial likelihood of success on the merits that the Stanford enterprise operated as Ponzi scheme. In his plea, Davis, who is singularly positioned to provide insight into the workings of Stanford, admitted that the "continued routine false reporting . . . upon which CD investors routinely relied in making their investment decisions, in effect, created an ever-widening hole between reported assets and actual liabilities, causing the creation of a massive Ponzi scheme whereby CD redemptions ultimately could only be accomplished with new infusions of investor funds." This statement reflects a classic Ponzi scheme and directly contradicts the Bennett Defendants' assertion that the district court relied upon a novel definition of a Ponzi scheme in its order. The Van Tassel Declarations also provide clear, numerical support for the creative reverse engineering undertaken by Stanford executives to accomplish the Ponzi scheme:

We found within SIB's accounting records worksheets used to derive fictitious SIB revenues back to 2004. The Ponzi scheme conspirators would simply determine what level of revenues SIB needed to report in order to both look good to investors and regulators and to purport to cover CD obligations and other expenses. They would then back into that total amount by assigning equally fictitious revenue amounts to each category (equity, fixed income, precious metals, alternative) of a fictitious investment allocation.

Van Tassel then goes on to specifically itemize how specific returns were based on fictitious asset totals.

The Bennett Defendants' argument that the Receiver failed to establish, and that the district court incorrectly assumed, that the Stanford entities constituted a Ponzi scheme ab initio is unavailing. The Davis Plea, when read as a whole, provides sufficient evidence for the district court to assume that the Stanford enterprise constituted a Ponzi scheme ab initio. In outlining the factual basis for the guilty plea, the Davis Plea describes how in 1988, Stanford directed Davis to "make false entries into the general ledger for the purpose of reporting false revenues and false investment portfolio balances to the banking regulators" shortly after opening Guardian International Bank, as SIB was then known, in Montserrat. The Plea further states that Stanford closed Guardian's operations in Montserrat in 1989 and moved the banking operations to Antigua under the name of SIB to avoid heightened scrutiny from bank regulators in Montserrat.

Finally, the FA Defendants' position that SGC should be separated from SIB is of no moment. As made clear by the Van Tassel Declarations, SGC received the bulk of its revenue from commissions for the sale of the SIB CDs and fees for other services it provided to SIB related to the CD investment portfolio. The Receiver seeks to recoup those proceeds because they were the assets of the alleged Ponzi scheme. The district court did not err when it found, for the purposes of this preliminary injunction proceeding, that Stanford operated as a Ponzi scheme.

b. Whether the Receiver Offered Sufficient Proof of the Source of the Frozen Accounts.

The Employee Defendants also argue that the district court erred in grouping all the transactions rather than examining evidence of claims against individuals. Contrary to the Employee Defendants' assertion, the district court found that the Receiver came forward with "competent evidence that each individual [Employee Defendant] received transfers of money representing CD sale proceeds from the Stanford Ponzi scheme." We agree. The Receiver's evidence is a spreadsheet in the Van Tassel Declarations that lists each former employee, the form of compensation (loan, commission, or quarterly bonus), and the amount that Stanford paid each employee. The Van Tassel Declarations sufficiently establish that Stanford paid the Employee Defendants from the alleged Ponzi scheme for the purposes of the preliminary injunction proceeding.

c. Likelihood of Success on the Merits

The district court did not abuse its discretion in finding the Receiver carried his burden of proving a substantial likelihood of success on the merits for his TUFTA claim. TUFTA requires that the debtor transferor make the transfer "with actual intent to . . . defraud any creditor of the debtor." TEX. BUS. COM. CODE § 24.008(a)(1). In his complaint, circuit, proving that [a transferor] operated as a Ponzi scheme establishes the fraudulent intent behind the transfers it made." SEC v. Res. Dev. Int'l LLC, 487 F.3d 295, 301 (5th Cir. 2007) (citing Warfield, 436 F.3d at 558). In other words, "`the transferees' knowing participation is irrelevant under the statute' for purposes of establishing the premise (as opposed to liability for) a fraudulent transfer." Id. (analyzing TUFTA) (quoting Warfield, 436 F.3d at 559 (analyzing Washington state law)). The Receiver carried his burden of proving that he is likely to succeed in his prima facie case by providing sufficient evidence that a Ponzi scheme existed — thereby obviating the need to prove fraudulent intent of the transferees — and sufficient proof that each individual received transfers of money from the Ponzi scheme. The Defendants did not refute this by showing that they are likely to succeed in proving a TUFTA statutory affirmative defense. Consequently, the district court did not err in finding a substantial likelihood of success.

The parties dispute whether Rule 9(b) applies to this case and whether this affects the district court's finding of substantial likelihood of success. The Employee Defendants argue that the Receiver was obligated to abide by Rule 9(b)'s heightened pleading standards for his fraud claims, and that he failed to meet this standard when he "lump[ed] together" the claims against all former Stanford employees. The Receiver asserts that Rule 9(b) does not apply to fraudulent transfer cases. We need not and do not address the issue of whether heightened pleading is required. As the district court notes in its Preliminary Injunction Order, it has not yet ruled on the defendants' pending motions to dismiss. The only question that the district court had to decide on this element in the preliminary injunction proceeding was whether the Receiver had shown a substantial likelihood of ultimately succeeding on the merits, see Doe v. Marshall, 622 F.2d 118, 119 n. 2 (5th Cir. 1980), potential procedural hurdles notwithstanding. The Receiver carried this burden.

2. Threat of Irreparable Harm

The Employee Defendants argue that the Receiver did not carry his burden of proving the second element of the preliminary injunction standard: threat of irreparable harm. The Employee Defendants argue that because the Receiver merely seeks a return of the fraudulently transferred CD proceeds, there is no threat of irreparable harm. The Employee Defendants contend that difficulty securing economic damages is insufficient to demonstrate irreparable harm. The Employee Defendants further argue that the Receiver was required to establish a likelihood that each individual defendant would remove or dissipate the frozen assets but for a preliminary injunction. The Receiver replies that TUFTA itself creates a presumption of dissipation. The Receiver then argues that its inability to collect a money judgment should the Employee Defendants dissipate the frozen accounts is sufficient to show a threat of irreparable harm. Finally, the Receiver agrees with the district court that he is not required to make an individualized showing of likely dissipation.

The district court found that "dissipation of the assets that are the subject of this suit . . . would impair the Court's ability to grant an effective remedy[,]" particularly because much of the relief the Receiver seeks under TUFTA is "equitable in nature and involves the assets that are . . . frozen." The district court further held that the Receiver need not show that each individual defendant would dissipate the frozen assets absent an injunction. The court reasoned that the Receiver was entitled to a presumption that the Employee Defendants would dissipate the frozen assets absent a preliminary injunction because the assets were fraudulently transferred as part of a Ponzi scheme. We find that the Receiver carried his burden of proving this element.

To satisfy the second element of the preliminary injunction standard, the Receiver must demonstrate that if the district court denied the grant of a preliminary injunction, irreparable harm would result. Holland Am. Ins. Co. v. Succession of Roy, 177 F.2d 992, 997 (5th Cir. 1985). In general, a harm is irreparable where there is no adequate remedy at law, such as monetary damages. Deerfield Med. Ctr. v. City of Deerfield Beach, 661 F.2d 328, 338 (5th Cir. Unit B 1981); Parks v. Dunlop, 517 F.2d 785, 787 (5th Cir. 1975). However, the mere fact that economic damages may be available does not always mean that a remedy at law is "adequate." For example, some courts have found that a remedy at law is inadequate if legal redress may be obtained only by pursuing a multiplicity of actions. See, e.g., Lee v. Bickell, 292 U.S. 415, 421, 54 S.Ct. 727, 78 L.Ed. 1337 (1934) ("we are not in doubt, the multiplicity of actions necessary for redress at law [is] sufficient . . . to uphold the remedy by injunction"). We have previously stated that where a district court has determined that a meaningful decision on the merits would be impossible without an injunction, the district court may maintain the status quo and issue a preliminary injunction to protect a remedy, including a damages remedy, when the freezing of the assets is limited to the property in dispute or its direct, traceable proceeds. See Productos Carnic, S.A. v. Cent. Amer. Beef Seafood Trading Co., 621 F.2d 683, 686-87 (5th Cir. 1980) ("[E]ven were [plaintiff's] remedy limited to damages, an injunction may issue to protect that remedy." (dicta)). Finally, a showing of "[speculative injury is not sufficient; there must be more than an unfounded fear on the part of the applicant." Id. (citing Carter v. Heard, 593 F.2d 10, 12 (5th Cir. 1979)).

The Receiver argues that TUFTA effectively creates a statutory presumption of irreparable harm. We disagree. TUFTA specifically provides that the claimant may obtain "an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred." TEX. BUS COM. CODE § 24.008(a)(3)(A). However, the statute explicitly states that this remedy is "subject to applicable principles of equity and in accordance with applicable rules of civil procedure." TEX. BUS. COM. CODE § 24.008(a)(3)(A). Clearly, TUFTA contemplates the application of equitable standards, encompassing the usual elements necessary to obtain a preliminary injunction.

We agree with the district court that the Receiver carried his burden of proving this element. First, we agree with the district court that the "Receiver successfully show[ed] that the threatened harm — dissipation of the assets that are the subject of this suit — would impair the [district court's] ability to grant an effective remedy." The relief that the Receiver ultimately seeks is equitable in nature; the Receiver seeks "avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim." TEX. BUS. COM. CODE § 24.008(a)(1). In his complaint, the Receiver asks the court for an order (1) establishing that the CD proceeds received by the Employee Defendants are property of the Receivership Estate held pursuant to a constructive trust for the benefit of the creditors, and (2) allowing him to withdraw proceeds from the segregated escrow account and add them to the Receivership Estate. He does not seek damages for breach of contract or tort. If the defendants were to dissipate or transfer these assets out of the jurisdiction, the district court would not be able to grant the effective remedy, either in equity or in law, that the Receiver seeks. The assets that the Receiver requests stay frozen are assets that are directly traceable to the Stanford Ponzi scheme and are the subject of this dispute. The Receiver merely asks that those assets continue to be held immovable while his case proceeds to judgment. We do not find that the district court erred in determining that a preliminary injunction was appropriate to protect against monetary asset dissipation.

The party seeking a preliminary injunction must also show that the threatened harm is more than mere speculation. Succession of Roy, 177 F.2d at 997. Here, the Receiver provided evidence of a massive Ponzi scheme and proof that each individual received proceeds from the fraudulent scheme. This is sufficient to prove the likelihood of each individual removing or dissipating the frozen assets but for the preliminary injunction. Accordingly, we find that the district court did not err in finding that irreparable harm would result in the absence of a preliminary injunction.

3. The Balance of Harms and Service of the Public Interest

On these elements, the district court weighed the interests of the Employee Defendants against the interests represented by the Receiver (the creditors) and looked to the broader ramifications of any potential recovery by the Receiver. The district court noted the extremely limited array of assets remaining to provide compensation to Stanford Ponzi scheme victims. The ret d supports the fact that Stanford, when it entered receivership, was grossly undercapitalized. Additionally, the Receiver and the Employee Defendants reached consent agreements to thaw all but certain discrete categories of compensation. These last elements of the district court's preliminary injunction analysis implicate the discretion of that court to craft a remedy and weigh the evidence. We do not believe that the district court abused its discretion when it found that these elements weighed in favor of the Receiver.

D. Scope of District Court's Grant of Preliminary Injunction

The Employee Defendants also challenge the breadth of the injunction. On appeal, the Employee Defendants renew a number of arguments that they brought before the district court. First, the Employee Defendants contend that any frozen IRA account is exempt from the Receiver's claim. Second, the FA Defendants argue that the account freeze improperly extends to pre-tax amounts because they already paid taxes on those earnings. Third, the FA Defendants argue that they are entitled to an offset of amounts they lost on their personal investments in Stanford CDs. We address each of the Employee Defendants' arguments in turn.

1. Frozen IRA Accounts

According to Texas law, IRA accounts are exempt from seizure. TEX. PROP. CODE § 42.0021(a). However, the party claiming the exemption must establish that she has a legal right to the funds in the IRA to be entitled to the exemption. Jones v. Am. Airlines, Inc., 131 S.W.3d 261, 270 (Tex.App. — Fort Worth, 2004, no pet.). It is undisputed that some of the frozen accounts are IRA accounts. The Employee Defendants had the burden of proving that they have a right to the funds in the accounts, particularly in light of the Receiver's extensive evidence that the Employee Defendants received these funds as a fraudulent transfer from the Stanford Ponzi scheme. The mere fact that an account is an IRA account does not automatically entitle the Employee Defendants to the exemption; it does not relieve the Employee Defendants of carrying the burden of proving they have a legal right to the account. Consequently, the district court did not err when it kept the IRA accounts frozen under the preliminary injunction.

2. Tax Matters

The FA Defendants argue that the Receiver improperly calculated the amounts represented by the account freeze because the Receiver did not account for taxes paid by the Employee Defendants on the compensation. The district court rejected this argument, relying heavily on Donell v. Kowell, in which the Ninth Circuit declined to offset for taxes paid. 533 F.3d 762, 779 (9th Cir. 2008). The Ninth Circuit first reasoned that if it allowed offsets for amounts paid in good faith as taxes, logic would suggest that the court also permits offsets for bank transfer fees, other fund management fees, and a myriad of other expenses. The court went on to state, "There is simply no principle by which to limit such offsets. . . . If each net winner could shield his gains in their entirety in this manner, the purpose of UFTA would be defeated, and the multitude of victims who lost their entire investment would receive no recovery." Id. at 779. Second, the court found that allowing offsets in even a few areas like taxes paid would "introduce complex problems of proof and tracing into each case," thereby "severely reducing] the receiver's ability to gather what few assets can be located in the wake of a failed Ponzi scheme." Id.

Although, as the FA Defendants note, the Donell case involved taxes paid by an investor after receiving fraudulent funds, id. at 778, we find the Donell reasoning persuasive, particularly because there is no basis for this offset in TUFTA. We do not find the district court erred in declining to offset the prepaid tax amounts with respect to the preliminary injunction.

3. Losses on Personal Investments

The FA Defendants also argue that the Receiver's figures do not account for the Defendants' losses on their own investments in Stanford CDs. The defendants have not offered any case law or statutory language on point, nor did we find any authority,' entitling the Employee Defendants to offsets for their personal losses on Stanford investments. We agree with the district court that the Defendants must seek these amounts through the Receiver's claims process like other creditors.

E. Type of Equitable Relief Granted

The Employee Defendants also renew their contention that the Receiver obtained, in essence, a writ of attachment, arguing that the "substance" of the Receiver's suit was a request to hold assets "in order to satisfy a money judgment." While the Receiver also requested an attachment, the district court did not consider this request and expressly granted an injunction. In doing so, the district court differentiated between a TUFTA injunction and a writ of attachment.

As the district court noted, TUFTA provides for both injunctions and attachments. See TEX. Bus. COM. CODE § 24.008(a)(2) (attachment); id. § 24.008(a)(3)(A) (injunction). The district court relied upon Telephone Equipment Network, Inc. v. TA/Westchase Place, Ltd., for the proposition that a claim for fraudulent transfer under Texas law contemplates the issuance of a preliminary injunction. 80 S.W.3d at 610. The district court's reliance was well placed. TUFTA provides that the claimant "may obtain an injunction against further disposition of `the asset transferred or of other property.'" Id. (quoting TEX. BUS. COM. CODE ANN. § 24.008(a)(3)). Furthermore, the district court's order granting the preliminary injunction lacks the hallmarks of an attachment: namely, a "seizure" or "lien."

Although the Telephone Equipment court uses the acronym "UFTA," it is apparent that the court cited to and analyzed provisions of TUFTA. Id. at 607 ("UFTA lists 11, non exhaustive `badges of fraud' to assist in determining whether the debtor made the transfer with the requisite fraudulent intent.") (citing TEX BUS. COM. CODE ANN. § 24.005(a)(1)).

The Receiver claims that Stanford fraudulently transferred proceeds from the alleged Ponzi scheme to the Employee Defendants and sought an injunction to prevent the dissipation of those proceeds, now held in the frozen accounts. TUFTA expressly provides for an injunction and the district court exercised its discretion to grant that injunction.

F. Motion to Compel Arbitration

The parties also dispute whether the Receiver's claims against the Employee Defendants are subject to arbitration. The district court did not decide the motion to compel arbitration, but both parties ask this Court to decide this question. As the parties note, the issue has been fully briefed as the Receiver had an opportunity to file a response to the motion to compel arbitration.

We must first decide whether this issue is before us as a part of the appeal of the preliminary injunction. We have previously held that our "jurisdiction under 28 U.S.C. § 1292(a)(1) is not limited to the specific order appealed from." In re Lease Oil Antitrust Litig., 200 F.3d 317, 319-20 (5th Cir. 2000) (citation omitted). To avoid "wast[ing] judicial resources without any offsetting benefit in the form of a fully developed record," we have held that "[J]urisdiction extends to certain related issues that have been sufficiently developed so as not to require further development at the trial court level." Id. at 320. We decide this issue to conserve judicial resources and expedite the disposition of this complex case. Refraining to do so would mean money wasted in litigation costs that could be used to compensate victims and more time spent before the Employee Defendants' assets are freed.

Given that the district court has not yet decided this matter, we necessarily review the motion to compel arbitration de novo. Therefore, we "perform a two step inquiry to determine whether to compel a party to arbitrate." Dealer Computer Servs., Inc. v. Old Colony Motors, Inc., 588 F.3d 884, 886 (5th Cir. 2009) (citation omitted). In the first step, we "determin[e] whether the parties agreed to arbitrate the dispute." Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002). This step is further subdivided into an inquiry into whether "(1) . . . there is a valid agreement to arbitrate the claims and (2) . . . the dispute in question fall[s] within the scope of that arbitration agreement." Sherer v. Green Tree Servicing, 548 F.3d 379, 381 (5th Cir. 2008). If we find affirmatively as to the first step, then we must determine whether "any federal statute or policy renders the claims nonarbitrable." Id. (quotations and citations omitted). We find that this issue can be decided in the first step: The Receiver, acting on behalf of the creditors, is not party to the arbitration obligations between SGC and the Employee Defendants.

1. The Receiver's Powers

The parties expend considerable energy debating what we believe may be distilled to a simple question: in what capacity is the Receiver suing the Employee Defendants? This question goes to the first subpart of the first step of the arbitrability assessment.

From the Employee Defendants' perspective, the Receiver stands in SGC's shoes when it seeks to disgorge compensation that SGC paid to the Employee Defendants. The Employee Defendants contend that the Receiver is bound by any pertinent agreements or rules that govern the relationship between SGC and the Employee Defendants. Thus, because SGC and the Employee Defendants are members of FINRA, and the Promissory Notes contained arbitration clauses, the Receiver must arbitrate any disputes with them.

The Receiver conceptualizes his rights and obligations differently. The Receiver contends that he is suing as a creditor or as a representative on behalf of other creditors. Although the Receiver acknowledges that he is marshaling the assets of the Stanford estate, the Receiver claims that here, he is suing for the fraudulent transfer of assets, and he contends that there is substantial precedent standing for the proposition that receivers may assert the rights of creditors to avoid fraudulent transfers. Because Stanford's creditors are not party to the arbitration obligations between SGC and the Employee Defendants, the Receiver concludes that he need not arbitrate his claims here. We believe that the Receiver's characterization of this case and the pertinent case law is more accurate.

The district court appointed the Receiver, "granting] him the power to conserve, hold, manage, and preserve the value of the receivership estate," Adams, 588 F.3d at 833, and vesting him "with full power of an equity receiver under the common law as well as such powers as are enumerated herein in this order." (Supp. R. # 3 at 4270.) It is a general rule that "the receiver cannot recover, except where recovery could have been had by the corporation." Drennen v. S. States Fire Ins. Co., 252 F. 776, 789 (5th Cir. 1918). In this sense, a receiver "stands in the shoes of the person for whom he has been appointed and can assert only those claims which that person could have asserted." Armstrong v. McAlpin, 699 F.2d 79, 89 (2d Cir. 1983). Were this general rule the only rule, we believe the Employee Defendants would prevail and the Receiver would be bound by the arbitration agreements. As is often the case, however, the general rule comes with a few caveats.

A receiver is also "an instrument of court; he is acting also for the stockholders of the corporation, and the creditors of the corporation." Drennen, 252 F. at 788. In this manner, receivers are legal hybrids, imbued with rights and obligations analogous to the various actors required to effectively manage an estate in the absence of the "true" owner. See, e.g., Setser, 568 F.3d at 487-88 (discussing the ability of a receiver to enter and search estate property without a warrant and relinquish property to law enforcement officials). It is well settled that, at different points during the pendency of the receiver-ship, a receiver may represent different interests. The Receiver argues here that he should be able to represent the creditors' fraudulent transfer claims, and thereby avoid the matter of arbitrability. We must address whether the Receiver's claims are, indeed, fraudulent transfer claims and whether this posture avoids the arbitration clauses between SGC and the Employee Defendants.

See, e.g., McGinness v. United States, 90 F.3d 143, 146 (6th Cir. 1996) (finding, under Ohio law, that "[w]hile it is true that the receiver can acquire no greater legal rights or powers with respect to the property than [the taxpayer] possesses . . ., the receiver's powers are not limited to the legal rights of the debtor-taxpayer, [because] [u]pon his appointment, the receiver succeeded to the rights of not only the debtor, but also the creditor").

2. Fraudulent Transfer

The Receiver asserts his claims against the Employee Defendants under a theory of fraudulent transfer, claiming that Stanford gave proceeds of the Ponzi scheme to the Employee Defendants. In Texas, fraudulent transfer claims are governed by TUFTA. TEX. BUS. COM. CODE ANN. § 24.008. TUFTA's remedies are expressly directed toward creditors: "In an action for relief against a transfer or obligation under this chapter, a creditor, subject to the limitations in Section 24.009 of this code, may obtain" relief. Id. § 24.008(a) (emphasis added). The Receiver claims the right to represent "creditors" under that section and to assert his disgorgement claims against the Employee Defendants. To support his position, the Receiver contends that receivers have long held the power to assert creditor claims. We agree.

In analyzing Texas law, we have previously rejected a challenge to a receiver's standing to sue on behalf of creditors. Meyers v. Moody, 693 F.2d 1196, 1206 (5th Cir. 1982). The Meyers Court quoted from Cotten v. Republic National Bank of Dallas, which held that:

Certainly a receiver for an insolvent insurance corporation . . . has a right to maintain a suit which is necessary to preserve the corporation's assets and to recover assets of which the corporation has been wrongfully deprived through fraud. In such a suit the receiver may be said to sue as the representative of the corporation and its creditors, stock-holders and policyholders. . . .

395 S.W.2d 930, 941 (Tex. Civ.App. — Dall. 1965, writ ref'd n.r.e.). This position enjoys wide support.

See Wheeler v. Am. Nat'l Bank of Beaumont, 338 S.W.2d 486, 495 (Tex.App.-Beaumont 1960, writ granted) ("[T]here are instances where a corporation itself would not be permitted to sue for recovery of a true corporate asset because of its own fraudulent conduct in connection with the loss of the same. However, the receiver would not be so estopped. In such instances he may disaffirm or repudiate the fraudulent acts of the corporate officers and seek recovery of such assets for the benefit of the corporation and creditors. This is the rule in Texas."), aff'd in part and rev'd on other grounds by 162 Tex. 502, 347 S.W.2d 918 (1961); Guardian Consumer Fin. Corp. v. Langdeau, 329 S.W.2d 926, 934 (Tex.Civ.App.-Austin 1959, no writ) ("[W]hen the receiver acts to protect innocent creditors of insolvent corporations . . . the receiver acts in a dual capacity, as a trustee for both the stockholders and the creditors, and as trustee for the creditors he can maintain and defend actions done in fraud of creditors even though the corporation would not be permitted to do so."); see also SEC v. Cook, No. CA 3:00-CV-272-R, 2001 WL 256172, at *2 (N.D.Tex. Mar. 8, 2001) (holding that receiver had standing to pursue fraudulent transfer claim); 64 TEX. JUR.3D Receivers § 179 (2010) (noting power); 66 AM. JUR. 2d Receivers § 450 (1973) (same).

The Employee Defendants provide no contrary support concerning the power of the Receiver to bring a claim under TUFTA, instead contending that the Receiver merely "stands in the shoes" of SGC. We believe that in this case, the Receiver is acting on behalf of creditors, who are not party to the arbitration agreements and therefore he is not bound by the arbitration agreement. We therefore remand to the district court for action in accordance with this decision.

The Employee Defendants rely heavily on Javitch v. First Union Securities, Inc., 315 F.3d 619 (6th Cir. 2003), to support their claim that receivers are also bound by arbitration agreements. Javitch is easily distinguishable. The Javitch receiver brought suit against a number of brokers and financial institutions that provided services to the insolvent corporation. Id. at 622. Akin to the instant case, the receiver claimed to bring the claims for defrauded investor creditors. Id. at 625. However, the receiver alleged that the defendants provided negligent services and breached fiduciary duties owed to the insolvent corporation. Id. at 622. Because the Javitch receiver sued on behalf of the insolvent corporation, and that corporation had enforceable arbitration agreements with the defendants, the Sixth Circuit held that the receiver was bound to arbitrate. Id. at 627. Here, as explained above, the Receiver's fraudulent transfer claims are brought on behalf of defrauded creditors under TUFTA, which looks to the actions of Stanford and not to the services provided by the Employee Defendants. TEX. BUS. COM. CODE ANN. § 24.005.

CONCLUSION

The Receiver is in an unenviable position: although the Stanford estate has many thousands of claimants, there are startlingly few assets to disperse to the Stanford victims. In this appeal concerning the Receiver's attempt to marshal estate assets, we hold: (1) The district court acted within its power when it considered and decided the motion for preliminary injunction before deciding the outstanding motion to compel arbitration. (2) The district court did not abuse its discretion in issuing the preliminary injunction. (3) The preliminary injunction was not an attachment, nor was it overly broad. And (4) The Receiver's claims are not subject to arbitration because he is suing on behalf of estate creditors.

AFFIRMED and REMANDED.