HEARTH KITCHEN PRODUCTS v. STEARN, No. X05-CV01-0184294 S (Feb. 1, 2006)

MICHAEL E. SHAY, JUDGE.

The first-named case was brought to this court by way of a Writ, Summons and Complaint dated June 4, 2001, returnable on July 10, 2001. The plaintiff, Hearth Kitchen Products, Inc. ("HKP"),¹ is a Delaware Corporation with its headquarters in Stamford, Connecticut. The company is a manufacturer and marketer of cooking devices and products. At the heart of the case is the issue of the control of the corporation, and, in particular, the use and, ownership of certain intellectual property (sometimes referred to as "intangible assets") creating a ceramic oven insert used for baking bread, as well as chicken and other foods. The device is the brainchild of Charles van Over ("van Over"), formerly a defendant in the first-named litigation, and now, along with Priscilla Martel ("Martel"), a defendant in the second-named case. The tortured history of his attempts, along with others, to market these products and methods, has led erstwhile partners to become litigants and to align themselves on opposing sides.

The genesis of the first-named action emanated from an idea for baking bread that was conceived in the kitchen of van Over, a chef and restauranteur of some note, and his life companion, Martel. The former approached David M. Bohonnon ("Bohonnon"), a lawyer, who, in turn, introduced him to Leathem Stearn ("Stearn") with the hope that the idea was marketable. On August 20, 1997, the defendants Stearn and Bohonnon, along with van Over, and Martel signed a Memorandum (Exhibit #1) outlining their understanding or agreement to form a Connecticut limited liability corporation known as C.v.O., LLC ("CVO") in order to develop and to market the oven insert. The articles of organization dated September 12, 1997, were filed one week later. Stearn, Bohonnon, and van Over each held an ownership interest, and while Martel did not have a specific ownership interest in CT Page 2485 the company at that time, she was tapped to serve as president and chief executive officer. The initial estimate of the capital that would be required was $500,000.00,³ and under the terms of the Memorandum, Stearn and Bohonnon had the responsibility to raise it "as necessary." After two years of effort, several patents and/or trademarks were obtained, but other than a couple of loans, the group failed to garner any capital or bring the device to market, and the members turned to William Van Wyck ("Van Wyck"), a friend of Stearn, and to Lewis White ("White") in hopes of attracting capital and getting the project past the formative stages. Stearn, White, and Van Wyck all had impressive and extensive backgrounds in successful business ventures, and perhaps it was inevitable that sooner or later there would be a clash among such high achievers.

On December 23, 1997, van Over conveyed a 2% share of his interest in CVO to J. Whitney Huber, contrary to the provisions of the Memorandum dated August 20, 1997, which stated that all future dilutions of interest would come from the 40% share held by Stearn and Bohonnon. There is no evidence that there was any objection to the transfer. (See Exbibit #3.)

Once again, van Over elected to divide his interest in the company by transferring portions to Van Wyck, White, and Martel on September 30, 1999 (Exhibit #523).

In large measure, the case involves an interpretation of the written Agreement (Exhibit 13) dated December 19, 1999, in particular as it related to the ownership of the intellectual property. However, the witness Bohonnon repeatedly testified that he relied upon the original Memorandum of August 20, 1997, as the basis for his belief that he retained an interest in the intellectual property. Despite his dogged insistence to the contrary, the overwhelming evidence leads this court to the conclusion that the Agreement dated December 19, 1999, executed by all of the parties, as well as on behalf of CVO, was intended to eliminate any confusion regarding this critical issue so that the project could finally be brought to market. A Memorandum dated February 19, 1998, and signed solely by van Over and Martel whereby they purportedly agreed, among other things, to transfer their interest in the intellectual property to CVO (Exhibit #509), is the only tangible evidence presented to the court to support Stearn and Bohonnon's claim. However, for all intents and purposes, that memorandum and the earlier one (August 20, 1997) were superceded by the later agreement. In fact, paragraph 15 of the latter clearly states that: " This Agreement sets forth the entire understanding and agreement of the parties relating to the subject matter hereof and merges all prior advertising, discussions, proposals, agreements, communications and representations between them, whether written or oral." (Emphasis added.) Specifically, the parties to the agreement were CvO, LLC, the "putative" owner of the intellectual property, as well as several individuals, including Bohonnon, Stearn, White, Van Wyck, Martel, J. Whitney Huber (not a party to either lawsuit) and van Over, who it was also represented, may have retained some ownership interest in the intellectual property. CT Page 2486 The express purpose of the agreement was to, " exploit the Intangible Assets and consolidate ownership of the Intangible Assets for the purposes of such exploitation." To that end, two legal entities were to be formed, namely, Breadways, Inc. ("Breadways"), a Delaware corporation, and C.v.O. IP, LLC ("CVOIP"), a Connecticut limited liability corporation, to which the Intangible Assets would be transferred. Just to be on the safe side, the agreement also called for a release by van Over of any rights he might have in the Intangible Assets. In addition, an exclusive licensing arrangement to Breadways was agreed upon, subject to change in the event certain funding and/or income levels were not reached within preset deadlines. Stearn was given the right to approve future investor offerings in excess of $500,000.00, which approval would " not be unreasonably withheld or delayed." Ownership of Breadways was reallocated. The Agreement also provided for the repayment to Stearn for certain out of pocket expenditures he had made on behalf of CVO, provided he submit his claims to Breadways, together with sufficient verification, within five days. White told the court that Stearn had not provided adequate documentation for some expenses, and that he rejected them since he felt that they would not survive an IRS audit. Despite that, the evidence shows that $41,727.97 was paid to Stearn or on his behalf, however, the balance of his claim remains in dispute as of the time of trial. Provision was made for the payment of attorneys fees to the prevailing party to any lawsuit to enforce the agreement, and, finally, a clause provided that there would be no changes to the by-laws protecting Breadways shareholders from dilution, nor would any shareholder be given any preemptive rights.

The licensing provision was agreed to at the last minute at the insistence of Stearn. This was the first visible hint of trouble, although by then the parties had been literally divided into two camps — Stearn and Bohonnon on the one hand, and White and Van Wyck on the other, while van Over and Martel had a foot in both. Stearn himself recognized the division and testified that at that time he felt that van Over "was on our side of the table." In fact van Over struck the court as a "thin reed" easily blown this way and that depending upon the prevailing breeze. Each group had its own ideas as to the marketing of the product and the ownership and use of the intellectual property. In the meanwhile, prior to the execution of the December 1999 Agreement, and apparently unbeknownst to Stearn and Bohonnon at the time, van Over transferred a portion of his majority interest in CVO principally to White and Van Wyck, with a more modest share to CT Page 2487 Martel, all for nominal consideration. However, the evidence is somewhat conflicting as to when and if Stearn knew of the transfer prior to the December 19, 1999 Agreement, or whether, at the very least, that a sufficient red flag had been raised in his correspondence with Van Wyck shortly before.

As of December 8, 1999, in an e-mail memorandum to the principals, Van Wyck referred to an apparent agreement with Stearn following a meeting with him that the intellectual property would be transferred to Breadways (Exhibit #526) and Stearn's reply the following day makes no mention to the contrary (Exhibit #529).

Stearn testified that he did not want White in the company. The feeling was mutual. For his part, White testified that, without reservation, he and Van Wyck did not want Stearn in the company due to fundamental differences of opinion. To his way of thinking, for the past two years Stearn and Bohonnon had "sat on the deal" and that they "brought nothing to the table." For their parts, both van Over and Martel testified that they were "frustrated" with the lack of progress on the part of Stearn and Bohonnon during the previous two years, and they evidenced same in a letter (Exhibit #525) dated December 2, 1999 (admittedly with some input from White and Van Wyck). Stearn's initial victory would prove Pyhrric.

As further confirmation of their frustration, on November 16, 1999, van Over asked Bohonnon for all legal documents dealing with CVO. (Exhibit #524.)

In due course, Breadways and CVOIP were formed in January 2000, with van Over as the sole member of the latter. On or about April 5, 2000, a private placement memorandum (hereinafter "PPM") was sent to potential investors which sought to raise a total of $2,000,000.00. Van Wyck told the court that there was some "investor resistence." As a result, the PPM was later amended on June 23, 2000 (Exhibit #550), to reflect the transfer of the intellectual property to HKP, and in order to extend the offering period to September 30, 2000. The amendment, which was set forth on a "sticker," disclosed that the intellectual property was now wholly owned by HKP. The transfer of intellectual property to HKP took place on or about June 23, 2000 by way of an Intellectual Property Assignment (Exhibit #549), and was executed by van Over, as the sole member, on behalf of CVOIP. This action was a primary trigger for the actions of Stearn and Bohonnon that followed. However, the extended offering attracted fourteen additional investors, who, along with the original five investors, provided a total of $1,200,000.00 in new capital by the fall of 2000. Based upon this development, a business plan was formed and implemented. A question was raised as to whether or not Stearn's review of a draft of the PPM carried over to subsequent amendments. However, the evidence supports a finding that on February 8, 2001, Stearn reviewed a draft PPM and approved the seeking of funds in excess of $500,000.00 (Extibit #544). CT Page 2488

CVOIP, LLC was incorrectly referred to in the pleadings as a Wisconsin limited liability corporation. It is and has been formed pursuant to Connecticut law. The confusion stemmed from the fact that the draftsman of the documents was a Wisconsin law firm, and that the final draft was obviously not proofed.

Van Wyck testified that he and Stearn discussed "Charlie's Company' and that the idea was Stearn's. White corroborated Van Wyck's story that Stearn wanted a separate company for the intellectual property with van Over as the sole member. Van Over also testified as to "many discussions" with Stearn about how CVOIP would be held, including him as sole member. Stearn denied these claims, and he testified that he told Bohonnon to "set it up like CVO."

Ultimately, an additional $800,000.00 was raised from Robert Mountain, which raised the final total to $2,000,000.00.

It was at this stage that the plaintiff alleges that the named defendants began to undermine the efforts of HKP to raise capital and to bring its products to market, the effect of which was to, in turn, threaten the company's chances for success. The claim is that, at this time, the defendants, Stearn and Bohonnon, had lost control of the company, and that as a result, they began a campaign to cast doubt upon HKP's right to utilize the intellectual property — the fundamental basis of the company's existence and the key to attracting necessary capital. What the court finds problematic for the positions of Stearn and Bohonnon is the gap of more than nine months following the December 19, 1999 Agreement in which both seemingly took little or no active interest in the workings of the company. Bohonnon, whose admitted duty was to review the legal aspects of the company, took no action in January 2000 to question the propriety of the legal documents prepared by the Wisconsin attorneys forming CVOIP and the transfer of the intellectual property to it. Neither questioned the initial PPM, both claiming that the first they knew of it was when they saw the revised version in the Fall. (Stearn testified that Bohonnon brought it to his attention by sending a copy to Attorney Bjorkman.) The overwhelming evidence demonstrates that Stearn, both a director and stockholder, reviewed an early draft of the PPM and was sent regular notices of meetings. The court did not find Stearn credible on this point. Bohonnon himself testified that he had received "all notices." Sufficient testimony and evidence was introduced that all relevant documentation and notices were sent to Stearn and Bohonnon to create a rebuttable presumption of delivery and to shift the burden of proof to them. They have failed to meet that burden. Echavarria v. National Grange Mutual Ins. Co., 275 Conn. 408, 418-19 (2005).

It is clear that Bohonnon did not expect to prepare the legal documents initially transferring the intellectual property to CVOIP as is apparent from a contemporaneous letter he sent to Van Wyck dated January 5, 2000, returning the fully executed Agreement of December 19, 1999, and referencing the intellectual property. (Exhibit #18.)

However, if nothing else, assuming that Stearn and Bohonnon did not receive the initial PPM, given the importance to them of the intellectual property, as well as the critical need to raise funds, either or both should have asked questions much sooner, if only for their own benefit, let alone that of the company. Like ostriches, they buried their heads in the sand. Their testimony on this point does not ring true. The evidence is uncontroverted that Stearn, Bohonnon and van Over met in early December 2000 to "strategize" regarding their positions on certain issues that would come up at the director's and shareholders' meetings slated for January 2001. Stearn testified that the primary issue discussed was voting, however, he did admit that the issue of intellectual property had come up. Stearn CT Page 2489 also met with Van Wyck on or about December 12, 2000. (Exhibit #36.) At or about the same time, White, Van Wyck, and van Over entered into a Voting Agreement (Exhibit #31) in which it was agreed that any two of the three could pool their voting power, which in turn would allow them to vote the third party's stock. Once again, White testified that the purpose of the voting agreement was to, "keep Stearn and Bohonnon from taking over the company and taking advantage of Charles van Over." For his part, van Over testified that he had signed, but had not read the document. He said there was no pressure to sign, but that he later felt that it was part of a "conspiracy" to eliminate Stearn and Bohonnon from the company.

Of the many witnesses that appeared before the court, aside from his consistent but misplaced reliance upon the Memorandum dated August 20, 1997, Bohonnon's testimony stood out in stark contrast as replete with inconsistencies, with at least two recantations, together with an unsubstantiated accusation of fraud. He was so confused at times that his credibility was seriously undermined. It is even more puzzling that he was, by his own admission, representing his own interests without a disclosure and a waiver of the potential conflict.

The court notes that this is a case of "the pot calling the kettle black." For their part, in January 2001, Stearn and Bohonnon were pushing for an amendment to the Amended and Restated Certificate of Incorporation of HKP that would require a "super majority" vote regarding the sale of the company or the sale or licensing of the intellectual property (Exhibit # 38), a move that could only ensure the fact that the company cauldron would continue to bubble, particularly with regard to the intellectual property. The measure was defeated by the shareholders. (Exhibit #45.)

The matter came to a head at the Board of Director's meeting held January 8, 2001, when it was reported by Attorney Ryan that Bohonnon had told him that he, Stearn, van Over, and Martel had a claim with regard to the ownership of the intellectual property. (Exhibits #40 and #41.) The evidence is not clear as to whether Bohonnon had been authorized by Stearn, who did not appear at the January 8 meeting, to raise that particular issue on his behalf. In fact, Stearn denied that he gave such authority, as did van Over and Martel. Bohonnon appeared in person and voiced his concerns at the shareholders' meeting on January 26. Stearn also appeared, and he did not distance himself from Bohonnon's assertions. (Exhibits #45 and #46., This ostensive third holding referenced by the city is not a separate holding but is from a portion of the last paragraph of the decision in which the court is summing up its holding referred to by the city in the second sentence of this paragraph.) Van Over, himself, testified that the transfer was in the best interest of HKP, and that he believed that he had the power to effect the transfer as the sole member of CVOIP. White and Van Wyck testified quite emphatically that the transfer of the intellectual property was "good for the company." In fact, White informed the court that he had told Stearn that, "You can't raise money on a license." Moreover, he indicated metaphorically that until retracted, the statement by Bohonnon, and supported by Stearn, "was a knife in the heart of the fund raising process," and that he was unable to, "go out and raise new funds with that on the table." This appears to be borne out by the evidence, since shortly prior to the transfer of the intellectual property, and just prior to the deadline for the license to lapse, the group had not met the initial fund raising goal, which was, however, ultimately met following the transfer. CT Page 2490

Formerly known as "Breadways, Inc." (See Exhibit #545.) The party is now known as Hearth Kitchen Company however, so as to avoid confusion due to the large amount of documentary evidence, the court has chosen to use the name of the company as set forth in the caption of the case by way of the initials CT Page 2508 "HPK."

There is some evidence that this estimate was later increased to $750,000.00. Memorandum dated August 20, 1998 (Exhibit #517).

It was also at this meeting that the Board voted to temporarily suspend operations in order to sort things out, but resumed about two months later. As a result, the launch date for the product line was delayed, which, in turn, resulted in further expenditure of precious funds. Of some significance, the claim by Stearn and Bohonnon has not been withdrawn as of the date of the trial. Stearn and Bohonnon were asked repeatedly for substantiation of their claim, which was not forthcoming. William Perrin, the Chairman, described Stearn and Bohonnon's behavior at this time as "non cooperative." He further stated that Stearn simply wasted everybody's time by failing to follow through with issues raised by him at meetings regarding the direction of the company.

By letter dated May 5, 2001, and a follow up two days later (Exhibits #58, #59, and #582), van Over and Martel resigned as employees from the company, although van Over initially remained as a Director. The resignations were accepted at the board meeting held on May 9 (Exhibit #608). At the same time, the board appointed the defendant Philip Russell ("Russell") as a member to fill another vacancy. There is evidence that van Over was experiencing some serious financial difficulties at this time, and that, on or about June 11, 2003, he and Martel sold all of their shares to Sugar Magnolia Enterprises, LLC ("Sugar Magnolia"), the sole member of which is the defendant Russell, for $225,000.00. At this time, by agreement, HKP returned to van Over his patent for the bread making method that he had designed for use with a food processor. (Exhibits #78 and # 79.) Virtually simultaneous therewith, Hearth Kitchens entered into a settlement and release agreement with van Over and Martel. (Exhibit #73.) Van Wyck also resigned as President and CEO, and on June 5, 2003, he, too, sold his shares to Sugar Magnolia for $130,000.00 (Exhibit #606), in turn creating further controversy. Stearn and Bohonnon claim that the transfer of all the stock by van Over, Martel, and Van Wyck was in violation of a Stockholders' Agreement approved on January 26, 2001 (Exhibits #44 and #45), which set forth certain "tag-along" rights and rights of first refusal. Sugar Magnolia sent a letter to all shareholders after the fact, but which contained the express representation that their rights under the agreement would be honored. (Exhibit #80.) Other than a letter from Stearn's attorney, which made no demand, but merely alluded to the rights, there was no credible evidence offered that at any time, up to and including the trial, either Stearn or Bohonnon intended to either sell their shares to the company or to exercise their rights of first refusal. CT Page 2491

It is the contention of the plaintiff that the defendants breached their fiduciary duties (First Count) and tortiously interfered with a business expectancy (Second Count). During the course of the case, the defendants van Over and Martel settled with the plaintiffs in the first case, and they are currently joined as defendants in the second-named case. The plaintiffs seek monetary damages, punitive damages, interest, and costs from Stearn and Bohonnon.

Stearn testified that the second-named lawsuit was initiated in response to the first-named lawsuit filed against him and Bohonnon, and it was commenced by Writ Summons, and Complaint returnable November 6, 2001. The plaintiffs, Stearn and Bohonnon, have set forth their current claims in a twelve-count pleading referred to as the Third Amended Complaint dated April 21, 2005 (#200). In addition to the defendants HKP, van Over, and Martel, there are seven individual and two LLC defendants cited in one or more of the various counts. The twelve counts include breach of contract (I and XI), fraud (II and III), breach of the covenant of good faith and fair dealing (IV), lack of mutual obligation (V), breach of fiduciary duty (VII and X), tortious interference (VI), unjust enrichment (VIII and XII), and a request for a declaratory judgment (IX).

The cases were brought to the Complex Litigation Docket and consolidated for trial. The court heard testimony and evidence over the course of eight days.

AS TO THE FIRST-NAMED CASE BREACH OF FIDUCIARY DUTY

In the First Count of the complaint, HKP seeks damages from Stearn, as a director of the company for a breach of his fiduciary duty, in that it is alleged that he made groundless claims that the company did not have clear title to the intellectual property. If made in good faith, this claim in and of itself would not likely rise to the level of an actionable breach. However, the fact that he persisted in the claim and refused repeated requests for substantiation of the claim, which, based upon the evidence, was ultimately baseless, adds an element to the allegation which is potentially significant. Among other legal forms, a corporate director is considered fiduciary. In a suit between former partners, the Connecticut Supreme Court has held that as a fiduciary, a partner has the duty, "of rendering true accounts and full information about anything which affects the partnership." Konover Development Corp. v. Zeller, CT Page 2492 228 Conn. 206, 218-19 (1994). Moreover, once such a relationship is established, "the burden of proving fair dealing properly shifts to the fiduciary." Id., at 219.

On January 8, 2001, a meeting of the Board of Directors of HKP when the question was first publically raised regarding the title to the intellectual property, Stearn was a director. The evidence supports a finding that he was a director of HKP until he was voted off the board at the shareholder's meeting on January 26, 2001. The company then voted to suspend operations in order to sort things out, later restarting about two months later. Arguably, damages to HKP could lie during this two-month period, but the court is not going to speculate as to any amount based upon the evidence submitted. Moreover, by that time, Stearn was no longer serving in a fiduciary capacity. Accordingly, the plaintiff has failed to meet its burden.

TORTIOUS INTERFERENCE WITH BUSINESS EXPECTANCIES

In the Second Count of its complaint, the plaintiff seeks damages based upon its assertion that the actions of the defendants Stearn and Bohonnon not only made it difficult to raise funds from potential investors, but also that they, in fact, caused the company to suffer an economic loss, namely the fact that it paid a premium in the form of additional shares of stock, to one investor, Robert Mountain.

It is well established that the elements of a claim for tortious interference with business expectancies are: (1) a business relationship between the plaintiff and another party; (2) the defendant's intentional interference with the business relationship while knowing of the relationship; and (3) as a result of the interference, the plaintiff suffers actual loss. Hi-Ho Tower, Inc. v. Com-Tronics, Inc., 255 Conn. 20, 27 (2000). All three elements must be present in order to sustain such an action. The evidence clearly supports the fact that the plaintiff had a potential business relationship or expectancy with prospective investors, and that the defendants were aware of the efforts of the plaintiff to attract additional capital. However, evidentiary support for the remaining elements of the cause of action is somewhat problematic. The act of interference, in and of itself, is not sufficient to sustain such a claim. The burden is on the plaintiff to prove that the defendant acted with malice, "not in the sense of ill will, but intentional interference without justification." (Internal quotation marks CT Page 2493 omitted.) Daly v. Aetna Life Casualty Co., 249 Conn. 766, 806 (1999). "A wilful or malicious injury is one caused by design. Wilfullness and malice alike import intent . . . [Its] characteristic element is the design to injure either actually entertained or to be implied from the conduct and circumstances . . . Wanton misconduct is reckless misconduct . . . It is such conduct as indicates a reckless disregard of the rights or safety of others or of the consequences of action." (Citations omitted; internal quotation marks omitted.) Stohllts v. Gilkinson, 87 Conn.App. 634, 648 (2005); Markey v. Santangelo, 195 Conn. 76, 78, (1985).

Were ill will alone the deciding point, it quickly became clear to the court that there was a sufficient amount of it on both sides. The introduction of Van Wyck and White to the process touched off an internal fight for control of the company. Like oil and water, the two sides simply would not mix. Stearn and Bohonnon had a different vision of how to lead the company, which was, in many respects, at total odds with Van Wyck and White. As stated earlier, White testified emphatically that he and others wanted Stearn and Bohonnon out of the company. Once again, the focal point of the dispute was the ownership and use of the intellectual property. The evidence is clear, that as of December 19, 1999, Stearn and Bohonnon believed that the issue had been decided their way, and that this was memorialized in the Agreement of that date. Much to their surprise, and no doubt chagrin, they were outmaneuvered by Van Wyck and White, and they saw their control of the company simply melt away. While the court finds that their reliance on the Agreement was misplaced, nevertheless, the court further finds that their actions do not rise to the level of malice.

However, even if the court were to attribute malice to the actions of the defendants, the plaintiff has failed to meet its burden of proof as to damages. This is fatal. It has been long held that proof of an actual loss is an "essential element" of this tort. Taylor v. Sugar Hollow Park, Inc., 1 Conn.App. 38, 39 (1983). Aside from the fact that the company issued additional stock without cost to Robert Mountain, no other credible evidence was offered to sustain its claims. It was clear to the court that ownership and use of the intellectual property was an important issue, however, this was, after all, a start-up company, and the court can imagine myriad reasons why somebody would or would not invest in it, but that is not evidence. The court simply did not hear sufficient testimony for it to draw the same conclusions CT Page 2494 reached by the plaintiff.

AS TO THE SECOND-NAMED CASE BREACH OF CONTRACT

Count I alleges a breach of contract. Specifically, it is alleged that the defendants, HKP, Van Wyck, White, van Over, Martel, and CVOIP, breached the terms of the December 19, 1999 Agreement in one or more ways. They allege that under the terms of that document, the transfer of the intellectual property was flawed, and, hence, title reverted to the individual members of CVO, including themselves. Furthermore, they allege that the agreement called for the creation of an entity, ultimately known as CVOIP, which would hold title to the intellectual property, and that they, along with van Over, would be the members thereof. Lastly, it is alleged that because the agreement contemplated that the intellectual property would be licensed to the new corporation, ultimately HKP, that the subsequent transfer from CVOIP to HKP was without legal effect.

"The elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages." Rosato v. Mascardo, 82 Conn.App. 396, 411 (2004). "A contract is to be construed as a whole and all relevant provisions will be considered together." Lar-Rob Bus Corporation v. Fairfield, 170 Conn. 397, 407 (1976); see Blatt v. Star Paper Co., 160 Comm. 193, 200 (1970); 17 Am.Jur.2d, Contracts 258. "In giving meaning to the terms of a contract . . . a contract must be construed to effectuate the intent of the contracting parties." Sturman v. Socha, 191 Conn. 1, 10 (1983); Leonard Concrete Pipe Co. v. C.W. Blakeslee Sons, Inc., 178 Conn. 594, 598 (1979); Ginsberg v. Mascia, 149 Conn. 502, 506 (1962). In ascertaining intent, "we consider not only the language used in the contract but also the circumstances surrounding the making of the contract, the motives of the parties and the purposes which they sought to accomplish." Connecticut Co. v. Division 425, 147 Conn. 608, 616 (1960); Marcus v. Marcus, 175 Conn. 138, 141 (1978). "The intention of the parties to a contract is to be determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction. The question is not what intention existed in the minds of the parties but what intention is expressed in the language used." Ives v. Willlimantic, 121 Conn. 408, 411 (1936); Leonard Concrete Pipe Co. v. C.W. Blakeslee Sons, Inc., supra; Powel v. Burke, 178 Conn. 384, 387 (1979). This is so where the parties have their CT Page 2495 agreement in writing. Sturman v. Socha, supra, Robert Lawrence Associates, Inc. v. DelVecchio, 178 Conn. 1, 14 (1979). "In interpreting contract items . . . the intent of the parties is to be ascertained by a fair and reasonable construction of the written words and that the language used must be accorded its common, natural, and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract." Sturman v. Socha, supra, 10; Marcus v. Marcus, supra, 141-42; Sturtevant v. Sturtevant, 146 Conn. 644, 647-48 (1959). Where the language of the contract is clear and unambiguous, the contract is to be given effect according to its terms. A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity and words do not become ambiguous simply because lawyers or laymen contend for different meanings. Downs v. National Casualty Co., 146 Conn. 490, 494 (1959); Collins v. Sears, Roebuck Co., 164 Conn. 369, 374 (1973); see Reese v. First Connecticut Small Business Investment Co., 182 Conn. 326, 327 (1980); Barnard v. Barnard, 214 Conn. 99, 109-10 (1990). "[W]hen the plain meaning and intent of the language is clear, a clause . . . cannot be enlarged by construction." Gager v. Gager Peterson, LLP, 76 Conn.App. 552, 556-57 (2003); Hudson United Bank v. Cinnamon Ridge, 81 Conn.App. 557, 580-81 (2004).

Applying the foregoing reasoning to the facts, the court has concluded that the allegations of Stearn and Bohonnon as to those issues are completely without merit. The agreement is clear and unambiguous, to wit: that a new corporation (CVOIP) would be formed to hold title to the intellectual property and that the second new company (HKP) would be formed and granted an exclusive license to use same under certain conditions. This is precisely what the parties bargained for, but more important, this is precisely what occurred. The Agreement contains no specific language with regard to who would be members of CVOIP, and certainly, nothing was said as to whether or not the new corporation was prohibited from ultimately transferring its interest in the intellectual property. In his testimony, van Over told the court that several options had been discussed as to how CVOIP would be structured. One possibility discussed by the parties was that van Over himself would be the sole member. That is what occurred. In fact Stearn himself told the court that one of his goals was to protect van Over, the creator of the intellectual property. In addition, it is interesting to note that Stearn and Bohonnon complain that van Over alone, as a member of CVO, did not have the authority to transfer the CT Page 2496 intellectual property to CVOIP, a limited liability company in which he was the sole member. However, they are not heard to complain about the fact that, at the same time, van Over signed documents regarding the assumption of CVO's liabilities and the transfer to HKP of the other assets of the company. (Exhibits ##15, 16, and 17)

The clear weight of the evidence leads the court to the conclusion that prior to December 19, 1999, all parties agreed that there needed to be clarity with regard to the corporate structure, in particular, as to the ownership and use of the intellectual property. Hence, the parties took steps to negotiate and draft, at arms length, the new agreement. Paragraph 15 of the December 19, 1999 Agreement clearly and unequivocally states in relevant part that: " This Agreement sets forth the entire understanding and agreement of the parties relating to the subject matter hereof and merges all prior advertising, discussions, proposals, agreements, communications and representations between them, whether written or oral." Part and parcel of the Agreement was the transfer of the intellectual property to CVOIP, and it is significant to note that in that contract the parties recognized the interest of both CVO and van Over in that property.

Moreover, Bohonnon, whose duty it was to review the corporate documents, was the last to sign the Agreement. The court can infer that he did review that Agreement as well as those related legal documents. The evidence supports a finding that Bohonnon communicated by letter with Van Wyck on January 5, 2000, at which time he forwarded a fully-executed copy of the December 19, 1999 Agreement, and by implication, acquiesced in the drafting of the legal documents creating CVOIP and the transfer of the intellectual property by someone other than himself. (Exhibit #18.) Although it was his responsibility to review the legal documents, he neither questioned the draftsman, nor, apparently, followed up until late in the year. What undoubtedly sticks in Stearn and Bohonnon's respective craws is the fact that they did not draft a tight enough contract from their standpoint, so as to preclude the eventual transfer of the intellectual property, but it is not the function of the court to breathe life into their hindsight.

Stearn raises the issue of his right to prior approval of investor offerings seeking funding in excess of $500,000.00. At issue is the initial offering dated April 5, 2000, and later CT Page 2497 amended on June 23, 2000. Sufficient evidence was presented to the court for it to find that prior approval of that offering was, in fact, granted by Stearn by letter dated February 8, 2000 (Exhibit #544). Of more significance, the court finds that original offering and the amendment to it were part of the same offering. Therefore, the court finds no breach of contract in this regard. As a corollary to this argument, Stearn claims that HKP failed to meet its target amount within the specified time, and that therefore, HKP must relinquish all rights to the intellectual property. In two respects his argument must fail. First, the clear weight of the evidence demonstrates that HKP did, in fact, meet the goal. Thus the issue is moot. Secondly, even if HKP had failed, the language of the contract clearly and unequivocally calls for the relinquishment of "all rights under the license," as well as the re-assignment of the tangible property (e.g., "all other property" or "previously assigned assets"). All of the right, title and interest to the intellectual property having been specifically and separately transferred, initially to CVOIP, and later to HKP, it is beyond the reach of the Agreement. "A valid assignment transfers to the assignee exclusive ownership of all the assignor's rights to the subject assigned and extinguishes all of those rights in the assignor." Mall v. LaBow, 33 Conn.App. 359, 362 (1993), cert denied, 229 Conn. 912 (1994). "Unless a contrary intention is manifest or inferable, an assignment ordinarily carries with it all of the rights, remedies and benefits which are incidental to the thing assigned except those which are personal to the assignor and for his benefit only." National Loan Investors v. Heritage Square Associates, 54 Conn.App. 67, 75 (1999).

Finally, another issue raised by Stearn is the claim that he was not fully reimbursed for his out of pocket expenses made on behalf of CVO prior to December 19, 1999, which was a breach of the agreement. In addition, because of that, he asserts a further breach of contract, in that he is entitled to a promissory note (never issued), a security interest in the intellectual property (never granted), a seat on the board of directors until the monies are paid, and interest. As of the date of trial, a genuine dispute existed as to whether one or both of the parties had fully performed the mutual obligations regarding the repayment of Stearn. HKP offers as a special defense to the plaintiffs' claims the fact that it was not a party to the December 19, 1999 Agreement, and therefore it cannot be bound by its terms. Aside from the fact that it has accepted the benefit of that agreement, it has long been held that a corporation can be bound to pay, CT Page 2498 among other things, the legitimate incorporation expenses incurred by a shareholder or incorporator. There is sufficient evidence that HKP accepted the benefits of and assumed the obligations of the Agreement. United German Silver Co. v. Bronson, 92 Conn. 266 (1917).

According to the evidence, Stearn claims to have expended on behalf of CVO the sum of $68,107.78, excluding his claims for interest. The evidence further discloses that HKP has reimbursed Stearn or paid on his behalf the sum of $41,727.97, leaving a claimed balance owing, excluding interest, in the amount of $26,379.81. In considering the evidence, including the testimony of the parties, the court finds that it is equitable and appropriate to allow Stearn the sum of $22,379.81, as the proper measure of his damages, specifically disallowing his claim for reimbursement for the preparation of a business plan for CVO. While interest was clearly contemplated in the Agreement (Exhibit #13, paragraph 7), no specific rate was agreed to, and absent such evidence, the court will not impute a rate of interest. Stearn failed to comply with the terms of the December 19, 1999 Agreement to provide satisfactory substantiation of the expenses within five days. Both parties continued to negotiate this issue, and at the time of trial, HKP believed that it had complied with its obligations. However, since the court has found that the HKP has breached its obligation under the contract, Stearn, as the prevailing party, is entitled to receive reasonable attorneys fees in connection with his pursuit of this claim. Moreover, since the parties agreed to this in writing, such an award may be made by the court without further hearing. Goold v. Goold, 11 Conn.App. 268, 288-89 (1987). Under all the circumstances, the court finds that the reasonable attorneys fees to be awarded is $2,500.00.

Exhibit #62. However, Schedule B attached to Exhibit #13 shows a claim for $67,920.78. Since the difference is not substantial, the court has used the higher figure for its calculations.

In Count XI Stearn alleges that the Directors of HKP, HKP itself, Van Wyck, van Over, and Martel are in breach of the Amended and Restated Stockholders Agreement (Exhibit #66) in that they entered into a settlement agreement (Exhibit #73) with van Over and Martel, which in turn, permitted the purchase of their shares by Sugar Magnolia, and, in addition, the Directors also allowed Van Wyck to sell his shares to Sugar Magnolia. The court heard sufficient testimony to conclude that the settlement with van Over and Martel was in the best interest of HKP.

As to the sale of shares, a review of the stockholders agreement discloses that, although a signatory on the document, CT Page 2499 the only substantial affirmative duty was to issue the stock certificates with a restrictive legend (paragraph 11). It is basically an agreement among and between the respective shareholders themselves. Paragraph 1 states in relevant part that: ". . . any attempted transfer or disposition which is not permitted by or which is not in compliance with the provisions of this Agreement shall be void and ineffective for all purposes." At first blush, this could, arguably, end the discussion. However, paragraph 23 entitled "Equitable Remedies" states in relevant part: ". . . The parties agree that an injunction restraining any disputed disposition of Shares hereunder may be issued pending judicial resolution of the dispute, without bond or other security, and that the rights of the parties hereto shall be enforceable by decree of specific performance." In interpreting the intent of the parties to a contract, it is the function of the court to view its wording in a light most likely to give effect to the whole. Accordingly, in considering the Amended and Restated Stockholders Agreement as a whole, it is clear that the clear, overall purpose is to make sure that both the corporation and individual shareholders have a right of first refusal to purchase the shares in a proposed transfer under the same terms, and that individual shareholders have, in essence, the right to participate in the sale to the proposed transferee (i.e. "tag-along" rights).

To strictly interpret paragraph 1 to be self-executing in the event of any breach, no matter how technical, could well result in ineffective transfers, the knowledge of which might only come to light well after the fact, which would in turn negatively ripple through the governance and operation of the company. Therefore, in order to give effect to the intent of the parties to the contract, the court interprets paragraph 1 to mean that such non-compliant transfers are merely voidable, and that where the parties have all agreed to the transfer or have waived their rights to object to it, the transfer should be treated as valid.

A "waiver is an intentional relinquishment or abandonment of a known right or privilege." Gagne v. Vaccaro, 80 Conn.App. 436, 445 (2003). The evidence supports a finding that Stearn was aware of his rights under the stockholders agreement, and that he became aware of the transfers to Sugar Magnolia shortly after they took place. Yet, he chose not to seek the relief accorded to him under that contract. Moreover, he has failed to demonstrate to the court that, in fact, he suffered any actual damage. The purchaser of the shares made an offer by letter (Exhibit #80) to CT Page 2500 honor the Shareholders Agreement, and Stearn did not avail himself of the opportunity. Thus, he was in a position to mitigate any damage. By virtue of the foregoing, he has failed to meet his burden of proof.

FRAUD

The allegations of Count II, in essence, center around the disposition of the intellectual property. In brief, Stearn and Bohonnon allege that they were fraudulently induced to sign the December 19, 1999 Agreement, and that once signed, the defendants White and Van Wyck obtained van Over's signature, as sole member of CVOIP, on a document transferring title to the intellectual property to HKP. This they, in turn, claim deprived them of their rights to use the intellectual property should the venture fail. This is a common refrain throughout their case. For reasons set forth more fully above, their claims are without merit. The same can be said regarding the allegations in Count III relating to the execution of the voting agreement.

The clear weight of the evidence demonstrates that the December 19, 1999 Agreement was a valid contract, the purpose of which, among other things, was to clarify the existing ownership of the intellectual property. During the course of the negotiations, two distinct approaches were discussed. All parties agreed that the intellectual property should be held by a separate new corporation. However, Stearn and Bohonnon felt that HKP should only operate with a license, thus hedging their bets if the new venture should fail. White and Van Wyck both held that such a format would make fund raising difficult if not impossible, and they supported a clear and unequivocal transfer to HKP. The evidence further supports a finding that up to a few days prior to the execution of the agreement, White and Van Wyck's position, with the apparent agreement of Stearn, had prevailed. A last minute maneuver by Stearn, at which White threatened resignation, brought things back to Stearn's position.

Nothing in the December Agreement prohibited the ultimate transfer of the intellectual property. Both sides recognized that van Over was a key player, and each worked hard behind the scenes to secure his place, in Stearn's words, on their "side of the table." Stearn and Bohonnon made an arm's length bargain, and now that they do not like the result, want to undo it. That is not fraud. During the course of the trial the issue was raised, and the court did set out the essential elements of an action in CT Page 2501 fraud, to wit: "(1) that a false representation made as a statement of fact; (2) that it was untrue and known to be untrue by the party making it; (3) that it was made to induce the other party to act on it; (4) and the latter did so act on it to his injury." Kilduff v. Adams, Inc., 219 Conn. 314, 329 (1991) "[A]lthough the elements of fraud must be proved by clear and convincing evidence damages may be proved by a preponderance of the evidence." Dockter v. Slowik, 91 Conn.App. 448, 453-54 (2005). Stearn and Bohonnon have not met their burden.

As to the Voting Agreement dated November 21, 2000 (Exhibit # 31), Stearn and Bohonnon allege that the defendants induced van Over to execute that document with the intent to deprive them of "their ownership rights and opportunities to exploit the Intangible Assets [Intellectual Property] separately and apart from the development through Hearth Kitchen." As a general rule, a voting agreement is not, in and of itself, illegal. However, such agreements cannot be perpetual, nor can they work a fraud upon minority shareholders, confer a benefit on a party at the expense of the corporation, or contravene public policy. Weil v. Beresth, 154 Conn. 12, 17-18 (1966). While Stearn and Bohonnon have pleaded fraud, they have not met their burden by clear and convincing evidence. The transfer of the intellectual property, in fact, conferred a benefit upon the corporation and not upon any of the directors. This claim must also fail due to the fact that the intellectual property had already been transferred on June 23, 2000, well prior to the execution of the Voting Agreement, and no further rights in it remained except in HKP. Thus, the execution of the Voting Agreement in and of itself did not result in the damages alleged in this Count.

BREACH OF COVENANT OF GOOD FAITH AD FAIR DEALING

In Count IV, Stearn and Bohonnon allege a breach of the covenant of good faith and fair dealing, reciting a litany of lapses from the transfer of the intellectual property to the voting agreement to the failure of HKP to reimburse him for expenditures related to the start-up of CVO. "Every contract carries an implied covenant of good faith and fair dealing requiring that neither party do anything that will injure the right of the other to receive the benefits of the agreement." (Internal quotation marks omitted.) Gaudio v. Griffin Health Services Corp., 249 Conn. 523, 564 (1999) (Callahan, C.J., dissenting). "Bad faith means more than mere negligence; it involves a dishonest purpose . . . Bad faith in general implies CT Page 2502 both actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one's rights or duties, but by some interested or sinister motive." (Citation omitted; internal quotation marks omitted.) Hudson United Bank v. Cinnamon Ridge, 81 Conn.App. 557, 576-77 (2004); Cadle Co. v. Ginsberg, 70 Conn.App. 748, 768, cert. denied, 262 Conn. 905 (2002).

"The concept of good faith and fair dealing is [e]ssentially . . . a rule of construction designed to fulfill the reasonable expectations of the contracting parties as they presumably intended. The principle, therefore, cannot be applied to achieve a result contrary to the clearly expressed terms of a contract, unless, possibly, those terms are contrary to public policy." Verrastro v. Middlesex Insurance Co., 207 Conn. 179, 190 (1988). (Internal quotation marks omitted.)

As the court has already noted, the December 19, 1999 Agreement was valid and enforceable, as well as clear and unambiguous in its essential terms. It is not up to the court to rewrite the contract simply because one party finds that the events did not turn out as they had contemplated. For the most part, the principals herein were sophisticated businessmen and entrepreneurs, with experience with start-up companies. The stakes were high, and those on each "side of the table" played the game hard, but the court is not prepared to find that based upon the evidence, the defendant's actions rose to the level of bad faith and sinister motive. Accordingly, the claim must fail.

LACK OF MUTUAL OBLIGATION

In Count V Stearn and Bohonnon allege that because HKP was not a party to the December 19, 1999 Agreement. They further allege that because the defendants claim that HKP and White and Van Wyck have no duties thereunder, for those reasons, the contract must therefore be void due to a lack of mutual obligation. Leaving aside the question of whether or not Stearn and Bohonnon have correctly stated the position of the defendants, their claim suffers from a more fundamental flaw. In brief, they are conflating the concept of the "meeting of the minds" (i.e., "mutual obligation") with the power of a party to execute the contract. As recently articulated by the Appellate Court:

"Meeting of the minds" is defined as "mutual CT Page 2503 agreement and assent of two parties to a contract to substance and terms. It is an agreement reached by the parties to a contract and expressed therein, or as the equivalent of mutual assent or mutual obligation." Black's Law Dictionary (6th Ed. 1990). This definition refers to fundamental misunderstandings between the parties as to what are the essential elements or subjects of the contract. It refers to the terms of the contract, not to the power of one party to execute the contract as the agent of another. Sicaris v. City of Hartford, 44 Conn.App. 771, 784 (1997).

Accordingly, the claim must fail.

TORTIOUS INTERFERENCE WITH A BUSINESS EXPECTANCY

For the reasons articulated in the first-named lawsuit, the plaintiffs' claim of tortious interference with a business expectancy in Count VI must fail. Stearn and Bohonnon have failed to prove damages, which is an essential element. Taylor, supra 39.

BREACH OF FIDUCIARY DUTY

In Count VII Stearn and Bohonnon ostensibly claim a breach of fiduciary duty against HKP, Van Wyck, White, van Over, Martel, and CVOIP, however, a fair reading of that count clearly demonstrates that the gravamen of the claim is limited to the actions of Van Wyck as a member of the Board of Directors, and thus clearly a fiduciary, in connection with HKP's entry into a contract with Elcom Services Group, Inc., an entity in which he had a prior business association. Whether or not Van Wyck had such a relationship and failed to disclose it, is not in and of itself actionable as a breach of fiduciary duty. Article VIII of the Amended Certificate of Incorporation (Exhibit #550, Exhibit C) grants immunity to board members, with specific exceptions thereto. The court was not presented with credible evidence of actual harm or that Van Wyck derived "an improper personal benefit," and absent such a showing, this count must fail.

Likewise in Count X, Stearn alleges that he was harmed as a result of a breach of fiduciary duty by Russell, Perrin, White, Van Wyck, Mountain, and Denny. He claims that, acting in their own self-interest they approved a settlement agreement with van CT Page 2504 Over and Martel, and they approved the sale of their stock, and that of Van Wyck, to Sugar Magnolia, a company in which Russell was the sole member, in contravention of the Shareholders Agreement. As is stated elsewhere in this decision, this court finds that there was ample evidence, in particular the testimony of Perrin, that the settlement reached with van Over and Martel, was in the best interest of HKP (and by extension, to its shareholders, including Stearn) in that it brought an end to a part of the expensive and time-consuming litigation, and, perhaps more important, it resolved the ownership of the intellectual property, which was an essential element in the viability of HKP.

UNJUST ENRICHMENT

In Count VIII, Stearn and Bohonnon claim that HKP, Van Wyck, White, van Over, Martel, and CVOIP have been unjustly enriched due to their breach of the 1999 Agreement, including their "purporting to obtain title to the Intangible Assets." A similar claim is made in Count XII by Stearn alone against van Over, Martel, and Van Wyck, claiming that they benefitted to his detriment, "insofar as they were able to sell more of their shares than they would have been had all the shareholders of Hearth Kitchen, including Plaintiff Stearn, had been afforded tag-along rights to sell their shares to Sugar Magnolia . . ."

Unjust enrichment is a legal doctrine to be applied when no remedy is available pursuant to a contract . . . Recovery is proper if the defendant was benefited, the defendant did not pay for the benefit and the failure of payment operated to the detriment of the plaintiff." (Citation omitted.) United Coastal Industries, Inc. v. Clearheart Construction, 71 Conn.App. 506, 512 (2002). In Count VIII of the instant case, no credible evidence was introduced by Stearn and Bohonnon as to how the named defendants benefited from the transfer of the intellectual property to CVOIP. On the contrary, there was considerable testimony that the transfer, in fact, benefitted HKP, and, in turn, its shareholders, of which Stearn and Bohonnon were two.

Likewise, Stearn's claim against van Over, Martel, and Van Wyck in Count XII that by the sale of their shares to Sugar Magnolia they were unjustly enriched and the remaining shareholders, including Stearn, were deprived of the full benefit of their tag-along rights, must also fail. The burden is upon the plaintiff to demonstrate that the defendants benefitted by their actions, either directly or indirectly. Russell v. Russell, CT Page 2505 91 Conn.App. 619, 638 (2005). The facts clearly demonstrate that, while prior notice of the transactions was not given in accordance with the Shareholders Agreement (Exhibit #66), nevertheless, the defendant Russell sent notice to other shareholders, virtually contemporaneous with the transaction (Exhibit #80), in which he offered to honor the exercise of their rights thereunder, should any so elect, as well as to indemnify HKP from any liability in connection therewith. No credible evidence was introduced as to whether or not any other shareholders, including Stearn, wanted to sell their shares to Sugar Magnolia at the time of the sale by van Over, Martel, and Van Wyck, short of the letter from counsel referred to above (Exhibit # 94).

DECLARATORY JUDGMENT

In Count IX Stearn and Bohonnon seek declaratory relief in the alternative. Connecticut Practice Book Section 17-55(3) provides the court with the discretion to grant declaratory relief:

In the event that there is another form of proceeding that can provide the party seeking the declaratory judgment immediate redress, [and] the court is of the opinion that such party should be allowed to proceed with the claim for declaratory judgment despite the existence of such alternate procedure.

However, while a trial court is afforded wide discretion to render a declaratory judgment, a court "should not entertain an action for a declaratory judgment when an ordinary action affords a remedy as effective, convenient and complete . . . but unless that clearly appears, the matter rests within the discretion of the court." Leoni v. Water Pollution Control Authority, 21 Conn.App. 77, 83 (1990).

The court finds that the issues raised by Stearn and Bohonnon in this count are capable of being fully addressed and resolved in the case in chief, and that under all the circumstances, and it denies their claim for declaratory relief.

ORDER As to the first-named case: CT Page 2506

Judgment shall enter for all defendants on both counts, together with costs per statute.

As to the second-named case:

On the Third Amended Complaint, Judgment shall enter in favor of the plaintiff, LEATHEM STEARN against HKP alone, on the First Count, in part, as to his claims for reimbursement alone, and in favor of HKP and the remaining defendants on the balance of the count. The court hereby enters judgment in his favor in the amount of $22,379.81, together with $2,500.00 as and for attorneys fees, and costs per statute. Payment in full is ordered within thirty (30) days from the date of this decree. Judgment shall enter in favor of all defendants on the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, and Twelfth Counts, with no costs taxed.