Walters v. Generation Financial Mortgage LLC et al

Filing 54

MEMORANDUM OF DECISION granting in part and denying in part 36 Motion to Dismiss. Signed by Judge Warren W. Eginton on 6/27/2011. (Heard, J.)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
J. TODD WALTERS,
Plaintiff,

:
:
:
v.
:
:
GENERATION FINANCIAL MORTGAGE, LLC:
and AMSTON MORTGAGE COMPANY, INC., :
Defendants.
:

3:10-cv-647 (WWE)

MEMORANDUM OF DECISION ON DEFENDANTS’ MOTION TO DISMISS
In this action, plaintiff J. Todd Walters asserts claims of breach of contract,
breach of the covenant of good faith and fair dealing, fraud, violation of Connecticut
General Statutes § 31-51q, wrongful discharge in violation of public policy, violation of
the Connecticut Unfair Trade Practices Act (“CUTPA”), and breach of fiduciary duty
against Generation Financial Mortgage, LLC (“Generation”) and Amston Mortgage
Company, Inc. (“Amston”).
Defendants have filed a motion to dismiss the claims of breach of the covenant of
good faith and fair dealing, fraud, wrongful discharge in violation of public policy, and
CUTPA. Plaintiff does not oppose dismissal of the count for wrongful discharge in
violation of public policy. Upon review, the motion to dismiss will be granted in part and
denied in part.
BACKGROUND
For purposes of ruling on a motion to dismiss, the court accepts all allegations of
the complaint as true.
At the time relevant to this action, defendant Generation was a Delaware limited

1

liability company engaged in the business of selling residential reverse mortgage
products and services to persons 62 years of age and older within the State of
Connecticut. Defendant Amston was a Connecticut corporation also engaged in the
same business as Generation.
Prior to May 2007, plaintiff J. Todd Walters was the president and sole
shareholder of Amston. On May 14, 2007, Generation purchased all of the outstanding
capital stock of Amston from Walters.
As part of the consideration for the purchase of the Amston stock, Walters
accepted employment for a five year term as President of the division within Generation
comprising Amston. Plaintiff’s employment during this five year term was subject to a
written employment agreement, which provided that he would receive a salary of
$200,000 per year with benefits and performance bonuses and a 3.5% interest in
defendant Generation. The employment agreement also provided that Generation could
only terminate plaintiff for “cause” or incapacity, and it could force plaintiff to sell his
interest in Generation.
On November 6, 2009, defendants verbally informed plaintiff that his employment
was terminated. No grounds for the termination were disclosed. However, plaintiff was
provided with a document entitled “Confidential Separation and Release Agreement,”
which provided that plaintiff would be paid $175,000 if he released defendants from any
financial liability owed to plaintiff pursuant to his employment agreement. Plaintiff
refused to sign the separation agreement and continued to perform pursuant to his
employment agreement.
On November 29, 2009, defendants served notice on plaintiff that he had failed to
2

“substantially perform” his reasonably assigned material duties to the company “as
evidenced by a 36% drop in average monthly loan volume when compared to the
previous year.”
On May 10, 2010, defendants offered $350 for the fair market value of plaintiff’s
3.5% interest in Generation. The price offered in plaintiff’s interest was grossly
undervalued. On December 17, 2009, defendants ceased paying plaintiff any further
compensation or benefits, thereby terminating his employment.
DISCUSSION
The function of a motion to dismiss is “merely to assess the legal feasibility of the
complaint, not to assay the weight of the evidence which might be offered in support
thereof.” Ryder Energy Distrib. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779
(2d Cir. 1984). When deciding a motion to dismiss, the court must accept all wellpleaded allegations as true and draw all reasonable inferences in favor of the pleader.
Hishon v. King, 467 U.S. 69, 73 (1984). The complaint must contain the grounds upon
which the claim rests through factual allegations sufficient “to raise a right to relief above
the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). A plaintiff
is obliged to amplify a claim with some factual allegations to allow the court to draw the
reasonable inference that the defendant is liable for the alleged conduct. Ashcroft v.
Iqbal, 556 U.S. ___, 129 S. Ct. 1937 (2009).
Breach of the Covenant of Good Faith and Fair Dealing
In count one, plaintiff asserts that defendant breached the terms of the
agreements for purchase of Amston and for his employment. In counts two and three,
plaintiff alleges breach of the covenant of good faith and fair dealing relevant to plaintiff’s
3

employment agreement and the Amston purchase agreement.
The duty of good faith is implied in every contract or contractual relationship. De
La Concha of Hartford, Inc. v. Aetna Life Ins. Co., 269 Conn. 424, 432-33 (2004). Thus,
on a claim for breach of the covenant of good faith and fair dealing, the plaintiff must
demonstrate that the defendant engaged in bad faith that impeded the plaintiff’s right to
receive the contract benefits. Rafalko v. Univ. of New Haven, 129 Conn. App. 44, 51
(2011). “Bad faith in general implies 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.” De la Concha of Hartford, Inc., 269 Conn. at
433.
Here, defendants assert that plaintiff has not properly alleged claims of breach of
the covenant of good faith and fair dealing. Defendants argue that plaintiff could not
have any expectation of receiving benefits from the agreement to purchase Amston
because that contract had been fully executed. However, plaintiff alleges that he
expected as part of the consideration for the purchase of Amston that he would receive
the benefit of a 3.5% interest in defendants and that defendants breached the purchase
agreement when it wrongfully called his interest. The Court finds that these allegations
adequately plead that plaintiff had the expectation of receiving a benefit from the
purchase agreement.
Defendants argue further that plaintiff has alleged acts that constitute legitimate
business decisions that cannot be considered to have been taken in bad faith.
Plaintiff’s claims of breach of the covenant of good faith are premised on the assertion
4

that Generation intended to destroy the business of its Amston division and it justified its
termination of plaintiff’s employment on the resulting poor business performance.
Plaintiff has alleged that such bad faith included reducing advertising and marketing,
appropriating leads generated by Amston’s website, failing to obtain licensure in states
in which Amston did substantial business, reducing the product line, opening a call
center that competed with Amston’s salespeople, and closing Amston branch offices.
The Court cannot determine the motivation for these acts, and it must construe the
inferences of fact in the light most favorable to plaintiff. Accordingly, these allegations
could constitute a course of bad faith conduct, and the Court will leave plaintiff to his
proof. The motion to dismiss will be denied.
Fraud
Defendants argue that plaintiff’s fraud count must be dismissed because it is not
pleaded with particularity.
In order to satisfy the pleading standard for allegations of fraud pursuant to
Federal Rule of Civil Procedure 9(b), a complaint must: (1) specify the statements that
the plaintiff contends were fraudulent; (2) identify the speaker; (3) state where and when
the statements were made; and (4) explain why the statements were fraudulent. Antian
v. Coutts Bank (Switzerland) Ltd., 193 F.3d 85, 88 (2d Cir. 1999). Plaintiffs may make
general allegations of malice, intent, knowledge or other state of mind, but the facts
must give rise to a strong inference of fraudulent intent. Shields v. Citytrust Bancorp,
Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). The purpose of the specificity requirement is:
(1) to ensure that a complaint provides defendant with fair notice of the plaintiff’s claim;
(2) to safeguard defendant’s reputation from improvident charges; and (3) to protect
5

defendant from a strike suit. O’Brien v. Nat’l Prop. Analysts Partners, 936 F.2d 674, 676
(2d Cir. 1991).
Defendants assert that plaintiff’s claim states only general allegations that
“Generation defrauded” plaintiff, that plaintiff relied on Generation’s statements, and that
plaintiff suffered damages. Plaintiff represents that defendant made false statements
concerning his contract for employment, his benefit of an interest percentage in
defendants and his value as an employee to defendants. Plaintiff asserts that these
statements were made by representatives of Generation, were made with intent to
induce plaintiff to sell his company, and were known to be false. However, plaintiff has
failed to provide specific facts as to the alleged fraud, such as the identities of the
individuals who made the statements or when and where such statements were made.
This information, which should be within the knowledge of the plaintiff, should be
included within the allegations of fraud. The motion to dismiss the fraud claims will be
granted, but plaintiff will be afforded leave to replead the claim.
CUTPA
Defendants argue that plaintiff’s CUTPA claim cannot be sustained because it is
based on the employment relationship. Plaintiff agrees that an employment relationship
is not within the scope of CUTPA protection, and he has agreed to remove allegations
concerning his employment. See Quimby v. Kimberly Clark Corp., 28 Conn. App. 660,
670 (1992).
CUTPA provides, in relevant part, that “[n]o person shall engage in unfair
methods of competition and unfair or deceptive acts or practices in the conduct of any
trade or commerce.” Conn. Gen. Stat. § 42-110b(a). The Connecticut Supreme Court
6

has adopted the following factors known as the “cigarette rule” to determine whether a
trade practice is unfair or deceptive: “(1) whether the practice, without necessarily
having been previously considered unlawful, offends public policy as it has been
established by statute, the common law, or otherwise –– whether, in other words, it is
within at least the penumbra of some common law, statutory, or other established
concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous;
and (3) whether it causes substantial injury to consumers, competitors, or other
businessmen.” A-G Foods, Inc. v. Pepperidge Farm, Inc., 216 Conn. 200, 215 (1990).
In order to prove that the practice is unfair, it is sufficient to meet only one of the criteria
or to demonstrate that the practice meets all three criteria to a lesser degree. Hartford
Electric Supply Co. v. Allen-Bradley Co., 250 Conn. 334, 368 (1999). A CUTPA violation
cannot be alleged “for activities that are incidental to an entity's primary trade or
commerce.” Sovereign Bank v. Licata, 116 Conn. App. 483, 493–94 (2009).
Plaintiff counters that the CUTPA claim is based on the alleged deceptive acts
asserted to have induced plaintiff to sell Amston rather than the subsequent conduct
during his employment relationship with defendants. In support of his claim, plaintiff
asserts that a single transaction such as the sale of a business may constitute a CUTPA
violation provided that it occurs within a business context. See Telesis Merges &
Acquisitions, Inc. v. Health Resources, Inc., 2001 WL 273176 (Conn. Super. 2001).
Although some Connecticut courts have held that CUTPA does not apply to an isolated
transaction for a sale of business, see Advest, Inc. v. Carvel Corp., 1999 WL 786357
(Conn. Super. 1999) (citing cases dismissing CUTPA claim based on sale of business),
the Court finds sufficient authority supporting a CUTPA claim stemming from a sale of a
7

business as alleged in the complaint. See Halo Tech Holdings, Inc. v. Cooper, 2008 WL
877156 (D. Conn. 2008) (finding that CUTPA applies to sale of business and citing
cases). Accordingly, the Court will not dismiss the CUTPA claim to the extent that it is
based on the sale of the business. Plaintiff is instructed to replead the count to remove
the allegations that concern his employment.

CONCLUSION
For the foregoing reasons, the motion to dismiss is GRANTED in part and
DENIED in part. Plaintiff is instructed to replead the claims of fraud and CUTPA.
Plaintiff should file an amended complaint consistent with this ruling within ten
days of this ruling’s filing date.
Dated this _27th__ day of June, 2011 at Bridgeport, Connecticut.

__________/s/________________
Warren W. Eginton
Senior United States District Judge

8