Garnet Analytics, Inc. v. Diversified Solutions, Inc. et al

Filing 310

RULING 288 on Defendants' Defenses to the Prejudgment Remedy of Contract Unenforceability and Illegality. 10 pages. A ruling addressing the arguments for increasing and decreasing the amount of the PJR will issue separately. Signed by Judge Holly B. Fitzsimmons on 11/7/13. (Esposito, A.)

UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
GARNET ANALYTICS, INC.

v.
DIVERSIFIED SOLUTIONS, INC.,
MICHAEL LUNDY, and BRIAN SOL

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CIV. NO. 3:12CV716 (WWE)

RULING ON DEFENDANTS’ DEFENSES TO THE PREJUDGMENT REMEDY OF
CONTRACT UNENFORCEABILITY AND ILLEGALITY [DOC. #288].
Plaintiff, Garnet Analytics, Inc., (“Garnet”), brings this
action to recover payment and damages for breach of contract and
six other causes of action. [Doc. #1; Doc. #27 at 1]. Defendants
are Diversified Solutions, Inc., (“DSI”); Michael Lundy,
President of DSI, and Brian Sol, Vice President of DSI
(collectively “defendants”).
Evidentiary hearings on plaintiff’s Application for
Prejudgment Remedy were held on January 30; March 11, 12 and 13;
and September 9, 11, 12 and 27, 2013.

Pending Claims
By complaint dated May 14, 2012, plaintiff alleges breach
of contract (against DSI), breach of the implied covenant of
good faith and fair dealing (against DSI), promissory estoppel
(against DSI), quantum meruit (against DSI), negligent
misrepresentation (against DSI), fraud (against all defendants),
and violation of the Connecticut Unfair Trade Practices Act

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(“CUTPA”), Conn. Gen. Stat. §42-110a to 110q (against DSI).
[Doc. #1].
Defendants filed their First Answer and Counterclaims on
June 25, 2012, asserting counterclaims against Garnet for Breach
of Contract, Negligence, Fraud, Breach of Covenant of Good Faith
and Fair Dealing. [Doc. #22].

On December 12, 2012, defendants

filed a “Second Amended Answer and Counterclaims,” reducing the
counterclaims against Garnet to Breach of Contract, Negligence,
and Breach of the Covenant of Good Faith and Fair Dealing.
Defendants also added counterclaims against Garnet, Michael
Plude and Denise Plude for Fraud and violation of the
Connecticut Unfair Trade Practices Act. [Doc. #69].

On June 12,

2013, Judge Eginton granted with prejudice plaintiff’s Motion to
Dismiss Count Four: Fraud. [Doc. #155].
On June 13, 2013, successor counsel for defendants filed

a

Motion to Amend/Correct its Second Amended Answer and
Counterclaims. [Doc. #156]. The Motion to Amend was withdrawn by
defendants’ third set of attorneys on August 26, 2013. [Doc.
#256].
On October 8, 2013, defendants filed a Motion to
Amend/Correct the Second Answer of December 12, 2012. [Doc.
#291]. Plaintiff’s responsive pleading is due December 2, 2013.
[Doc. #299; #300 Ruling granting on consent motion for extension
of time to file plaintiff’s response]. This motion is not ripe
for review and the Proposed “Amendment to Second Amended Answer”
is not the operative answer or counterclaims.

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Defendants’ First

Motion to Dismiss

On August 27, 2013, the Court denied defendants’ Motion to
Dismiss which was based on the argument that Garnet lacked
standing to bring this action because Kaskie Plude & Company,
LLC, not Garnet, rendered all the services to DSI that are the
subject of this action. [Doc. #257].

Defendants’ Second Motion to Dismiss
On September 27, 2013, on the eighth day of the prejudgment
remedy hearing, defendant argued that the alleged agreement
between Garnet and DSI was unenforceable on public policy and
illegality grounds.

Leave to brief the new defense was granted

at the conclusion of the hearing. Defendants filed a Brief on
Contract Unenforceability and Illegality on October 4, 2013.
[Doc. #288]. Plaintiff filed a response on October 11, 2013.
[Doc. #297]. Defendant filed a reply on October 16, 2013. The
parties filed surreply briefs on October 28 and 29, 2013, [Doc.
##306, 307].

PREJUDGMENT REMEDY
Evidentiary hearings on plaintiff’s Application for PJR
were held on January 30; March 11, 12 and 13; and September 9,
11, 12 and 27, 2013. The evidence in support of the PJR
application and defenses and setoffs closed on September 27, and
the Court heard closing argument.
The Court indicated that, after the close of the evidence
on September 27, it would not consider facts or evidence not in
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the record. Nevertheless, defendants cite PJR Def. Ex. 1003 for
I.D., a copy of AICPA Rule 302; Def. Ex. 1041 for I.D. Depo. Tr.
Michael Plude; and Def. Ex. 1042 for I.D. Depo. Tr. Denise
Plude, which are not part of the PJR record. [Doc. #288].
Appending a copy of Rule 302 as Exhibit C; the Treasury
Department Circular No. 230 as Exhibit D; or excerpts of Michael
Plude’s and Denise Plude’s deposition testimony as Ex. A, B, E,
F, G, H, I, J and K to defendants’ brief does not make this
evidence of record for purposes of the PJR application and
defendants’ assertion of counterclaims, setoffs and defenses.
Accordingly, references to evidence that was not in the
record at the close of the PJR hearing will not be considered.
Nor will factual assertions without citation be considered.
Any unsourced evidence and/or testimony will not be considered.
A party, particularly if represented by counsel, should not
leave it to the Court “to scour the record on its own in search
for evidence that may support that party’s contention.”
Rodriguez v. Schneider, No. 95 Civ. 4083 (RPP), 1999 WL 459813,
*1 n.3 (S.D.N.Y. June 29, 1999)l; Cusamano v. Mr. Sobek, 604 F.
Supp. 2d 416, 426 (N.D.N.Y. 2009) (A district court has no duty
to perform an independent review of the record to find proof of
a fact.).

The Court must be satisfied by citation that the

evidence in the record supports the assertion. Without citation
to the record, an assertion is properly treated as argument and
given only the weight the record evidence supports.

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Defendants’ Improper Assertion of Unpleaded Defenses
Plaintiff first argues that defendants’ affirmative
defenses “should be rejected . . . because they never pleaded
either public policy enforceability or the statute of frauds.”
[Doc. 297 at 2]. The Court agrees. Affirmative defenses that
were not operative at the close of the PJR evidence on September
27 will not be considered.
Rule 8(c)(1) provides that “a party must affirmatively
state any avoidance or affirmative defense,” specifically
including the defenses of illegality and statute of frauds that
defendants now attempt to raise. There is no dispute that the
affirmative defenses of illegality and statute of frauds were
not pleaded in defendant’s operative “Second Amended Answer and
Counterclaim.”

[Doc. #69].

Defendants filed a Motion to Amend/Correct Second Amended
Answer of 12/12/12 on October 8, 2013.

If the motion is granted

and defendants are permitted to file their Proposed Amendment to
Second Amended Answer, then the parties can complete discovery
and present these claims, defenses and counterclaims on a Motion
for Summary Judgment on a full evidentiary record.

But the

Court cannot find probable cause to sustain these affirmative
defenses on the existing PJR record.

Contract Claim
Defendants seek dismissal of plaintiff’s contract claim,
arguing that the contract is unenforceable on public policy and
illegality grounds. [Doc. #288 at 1]. Specifically, they argue
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that the “contract was in violation of a CPA’s duties under
Treasury Regulations of the United States, [IRS Circular 230]
and the ethical rules of the AICPA [Rule 302]”

Id. While the

subject of IRS Circular 230 was raised in these PJR proceedings,
the Court pointed out that this defense had not been pleaded.
[Doc. #171, Tr. 3/12/13 at 138:15-139:5]. During the hearing,
defendants argued their theory that Garnet was formed because
Michael Plude “didn’t want to have a contract where he was
billing out at a contingency fee that was unlawful under the
Circular 230 requirements of the IRS.” 3/12/13 Tr. 137:4-6.

The

Court noted that no evidence presented supported that theory;
that Denise Plude was asked this question and responded “no,”
and defendants did not ask Michael Plude.

3/12/13 Tr. 138: 8-9;

137:23-25; 142:12-15.
COURT: Is this the point of all of this, Ms.
Fillmore? Are you going to claim that the
contract is void because of public policy . . .is
a violation of public policy?
MS. FILLMORE: Your Honor, we wanted
it here to establish that the scope
hadn’t actually changed; it was the
far as what our defenses are, we’re
pre-trial hearing now.
3/12/13 Tr. 139: 9-15.

to get into
of work
same. But as
just at a

. . .
COURT: So it would be very helpful to me to
know. . . and I’m hoping to hear at some point,
what the defenses to this are, the counterclaim
and the set offs. Because if there is no evidence
of those, then all I need to do is make a
probable cause determination based on the
plaintiff’s evidence.
3/12/13 Tr. 139:21-140:1
MS. FILLMORE: Well I think it is a defense we
intend on raising. However, we’ve just become
aware of this fact within the last week or so.
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It’s just a newly discovered issue we’ve come
across . . . but we intend on pursuing that
defense, yes.
3/12/13 Tr. 140:10-14.
Plaintiff correctly states that no evidence was presented
to support defendants’ public policy/illegality defense during
the PJR hearings and “there is no basis for an inference that
the motivation was other than as Mr. and Mrs. Plude testified:
the work expanded to include preparation of supporting
documentation for TETR returns.” [Doc. #297 at 2, n.2]. The
record evidence supports the Pludes’ testimony; the Court
declines to go beyond the existing PJR record.

Contingency Fee Agreement
Plaintiff correctly points out that on March 12, defense
counsel seemed to say that the defense was not illegality as
such; rather, defendants stated that Garnet’s purported
contingent fee treatment of billing left them “in a position
where they can’t even try to analyze what hours were done,
because . . . [Garnet] didn’t keep track of any of their hours.”
3/12/13 Tr. at 141:25-142:6.

The following day, defense counsel

disclaimed any intent to characterize the contract as a
contingency fee agreement. “[I]t is certainly not the
defendant’s position that there was a contingent agreement . . .
. [w]hat the assertion is is that it was treated that way . . .
. .” [Doc. #166, 3/13/13 Tr. 22:7-12 (emphasis added].

Defense

counsel confirmed that the “contingent fee” argument was an

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objection to Garnet’s time accounting because the records were
not created contemporaneously.
[T]he only logical assumption that the two
highest billing members of a company wouldn’t
keep track of their very valuable $500 per hour
time is at least circumstantial evidence that
they were treating it as something other than it
was and not abiding by the terms as they were
between the parties.
And so it’s not that we somehow argue that it
really was a contingent fee agreement, that –it’s
only that it was treated that way. And I think
that records created after the fact are not more
probative than prejudicial with respect to how
the records were kept at the time.
3/13/13 Tr. 22:12-22 (emphasis added). Defendants have committed
themselves to this position. This is a judicial admission that
binds defendants, notwithstanding the change of counsel. Banks
v. Yokemick, 214 F. Supp. 2d 401, 405 (S.D.N.Y. 2002).
“Judicial admissions obviate the need for debate, discussion or
discovery regarding particular factual issues because the
parties make concessions or stipulations regarding those issues
that remove them from debate.”

Id. 214 F. Supp. 2d at 405.

Indeed, in the parties’ Rule 26(f) Report, DSI stipulated that,
“GAI performed work for DSI in connection with TETR applications
on behalf of DSI clients pursuant to an agreement that GAI would
be paid on an hourly basis, with total fees capped at 20% of the
payment to DSI from each such client.” [Doc. #38 at 9].
Defendants’ Second Amended Answer and Counterclaims states
that, “[t]he agreement between the parties consists of a number
of understandings evidenced by email communications and
telephone calls. However, it was always clear that GAI agreed
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and represented to DSI that its services were provided to DSI on
an hourly fee basis.” [Doc. #69 at ¶65].

Stipulations by a

party or its counsel are binding upon the party making them.
Banks, 214 F. Supp. 2d at 405 (citation omitted).

Statute of Frauds Defense
As set forth above, defendants did not plead or argue this
affirmative defense by the conclusion of the PJR hearing and the
pending Motion to Amend the Second Amended Answer is not ripe
for decision. Defendants’ conclusory statements of fact to
support their statute of frauds defense, without support in the
record, will not be considered at this time.

CONCLUSION
In raising these defenses at the conclusion of the PJR
hearing, defendants ask the Court to consider and rely on
evidence outside the PJR record, which the Court declines to do.
If the amendment to the answer is permitted, defendants may
perhaps present a factual record which would support summary
judgment or entitle defendants to raise them at trial.

The

Court is not opining on the potential success of a possible
summary judgment motion on a different record. Defendants were
urged from the beginning of these prolonged proceedings to raise
any defenses for the Court’s consideration, and three sets of
lawyers contributed to the existing record. Sufficient time and
resources have been spent litigating this Application for
Prejudgment Remedy. On this record, these asserted defenses to
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the contract claim, belatedly raised and unsupported by the
evidence, do not provide a basis for vacating or modifying the
Court’s prior ruling.5
This is not a recommended ruling.6 This is a ruling on an
Application for Prejudgment Remedy which is reviewable pursuant
to the “clearly erroneous” statutory standard of review. 28
U.S.C. §636(b)(1)(A); Fed. R. Civ. P. 72(a); and D. Conn. L.
Civ. R. 72.2. As such, it is an order of the Court unless
reversed or modified by the district judge upon motion timely
made.
Dated at Bridgeport this 7th day of November 2013.

______/s/_______________________
HOLLY B. FITZSIMMONS
UNITED STATES MAGISTRATE JUDGE

The Court will issue another ruling addressing the arguments
for increasing and decreasing the amount of the PJR.
6
See Aetna Life Ins. Co. v. Toothsavers Dental Serv., No. 96 CV
570 (GLG), 1997 WL 102453 (D. Conn. Feb. 4, 1997) (finding
referral to Magistrate Judge "for the purpose of a hearing on
prejudgment remedy" was a request for a determination of the
prejudgment remedy pursuant to 28 U.S.C. §636(b)(1)(A) and was
not a recommended ruling effective only upon a District Court
Judge’s review and adoption, pursuant to 28 U.S.C.
§636(b)(1)(B)).
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