East Point Systems, Inc. et al v. Maxim et al
ORDER granting without prejudice Plaintiffs' 29 Motion to Dismiss Maxim Entities' Counterclaims. See the attached memorandum of decision. The Defendants have until February 21, 2014 to file an amended Cross-complaint as detailed in the order. Signed by Judge Vanessa L. Bryant on 2/7/2014. (Burkart, B.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
EAST POINT SYSTEMS, INC., et al.,
STEVEN MAXIM, et al.,
CIVIL ACTION NO.
February 7, 2014
MEMORANDUM OF DECISION GRANTING IN PART
PLAINTIFFS’ MOTION TO DISMISS [Dkt. #29]
The Plaintiffs, East Point Systems, Inc. (“EPS”), Thomas Margarido, Jason
Margarido, and Paul Taff, bring this action against Defendants, Steven Maxim,
S2K, Inc. (“S2K”), Maxim Enterprises, Inc. (“MEI”), Maxim Field Service Supply,
Inc. (“MFSS”), Edwin Pajemola, and Cleveland Field Systems, LLC (“CFS”) for
breach of contract, statutory and common law breach of fiduciary duty, specific
performance, tortious interference with business expectancy, violations of the
Connecticut Uniform Trade Secrets Act, Conn. Gen. Stat. §§ 35-50, et seq.
(“CUTSA”), violations of the Connecticut Unfair Trade Practices Act, Conn. Gen.
Stat. § 53a-251 (“CUTPA”), copyright infringement pursuant to 17 U.S.C. § 501,
and for the imposition of a constructive trust. The Defendants, Maxim, S2K, MEI,
and MFSS (collectively, the “Maxim Defendants” or “Maxim Entities”)
counterclaimed for breach of contract, fraud, quantum meruit, accounting,
specific performance, violations of CUTPA, rescission or reformation, punitive
damages, injunction, and declaratory judgment. The Plaintiffs have moved to
dismiss all of these counterclaims pursuant to Fed. R. Civ. P. 12(b)(6) for failure
to state a claim upon which relief can be granted. For the reasons that follow, the
motion is GRANTED without prejudice.
The following allegations are taken from the Counterclaim. [Dkt. #22,
Answer of Maxim Entities, Counterclaim and Cross-claim]. MEI is and has been
in the property preservation business as an Ohio corporation since April 29, 1999.
[Id. at ¶ 275]. S2K is in the business of importing and selling various hardware,
including locks, to companies in the property preservation industry. [Id.]. Maxim
is the sole shareholder of MEI and owns 91% of the shares in S2K. [Id.]. MEI and
numerous other property preservation companies work with clients who have
homes in foreclosure that must be maintained. [Id. at ¶ 276]. The maintenance
and repairs are generally accomplished through the use of subcontractors. [Id.].
The property preservation business has been driven and has developed its
ability to meet the needs of its clients by the use of specialized property
preservation software. [Id. at ¶ 278]. The specialized property preservation
software allows the client to post information concerning the job that is to be
done in the Maxim Entities’ system and allows the subcontractor to pull that
information and bid on the work. [Id.]. The client, typically a bank, accepts or
rejects the bid and provides the time frames in which the work is to be
accomplished. [Id.]. Utilizing this software, the contractor performs the work,
generates invoices, and provides pictures before the work commences and after
the project is completed. [Id. at ¶ 280]. The invoice is then reviewed by the client,
entered for payment, and tracked, all in the same software. [Id.]. If the work was
performed and invoiced timely and satisfactorily, the client pays MEI, and MEI
pays the subcontractors, withholding a portion of the payment for its services.
[Id. at ¶ 281].
Maxim attended a California trade show and met the Plaintiff, Thomas
Margarido, president of EPS’s predecessor, and ultimately ended up buying a
property preservation program from the predecessor entity (hereinafter “Old
EPS”). [Id. at ¶ 282]. However, Maxim discovered that the program did not
perform as promised and contacted Thomas Margarido regarding this issue. [Id.].
Thomas Margarido advised that he would need $250,000 to further develop the
software that Maxim wanted and that without the investment, his company, Old
EPS, would fail. [Id. at ¶ 283].
Accordingly, Maxim caused S2K to purchase approximately six percent of
EPS’s initial stock offering for $250,000. [Id. at ¶ 284]. The rest of the stock was
purchased by Old EPS’s shareholders (hereinafter the “Connecticut
Shareholders”). [Id.]. The Connecticut Shareholders formed EPS, after which
both S2K and Maxim, individually, signed the purported non-compete agreements
with EPS. [Id. at ¶ 285].
EPS was allegedly not able to produce a computer-based software system
that could satisfactorily perform tasks necessary to the property preservation
industry. [Id. at ¶ 286]. The EPS software frequently failed and, ultimately, cost
the Maxim Entities their contracts with various clients. [Id. at ¶ 287]. The Maxim
Entities also lost various subcontractors because the information provided by
EPS’s computer software system was not up-to-date or was otherwise not
workable. [Id.]. Due to the failure of the EPS computer software system, the
Maxim Entities overpaid subcontractors in one pay period alone, approximately,
$100,000, most of which was not recovered. [Id. at ¶ 288].
In 2007, Maxim approached Thomas Margarido and shared with him ideas
concerning a software system that Maxim could develop in-house that would
resolve EPS’s shortfalls. [Id. at ¶ 289]. Thomas Margarido confirmed that the
Maxim Entities should proceed on their own and provided the name of a potential
software expert to be hired, Mr. Alex Bardzilauskus. [Id. at ¶ 290]. After spending
two to three years of time and approximately $500,000, the Maxim Entities have
developed a software system that meets the needs of the property preservation
industry and is successfully being used internally at MEI. [Id. at ¶ 291].
The software developed by Maxim Entities is web-based, while the EPS’s
computer-based software system is not. [Id. at ¶ 292]. EPS’s computer-based
software system is not user friendly, and the Maxim Entities’ system is cheaper,
faster, and more accurate with a much lower failure rate. [Id. at ¶¶ 293, 294].
Thus, it is alleged that the central operating features of Maxim Entities’ system
are not derived from information obtained from EPS. [Id.].
“‘To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its
face.’” Sarmiento v. United States, 678 F.3d 147 (2d Cir. 2012) (quoting Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009)). While Rule 8 does not require detailed factual
allegations, “[a] pleading that offers ‘labels and conclusions’ or ‘formulaic
recitation of the elements of a cause of action will not do.’ Nor does a complaint
suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’”
Iqbal, 556 U.S. at 678 (citations omitted). “Where a complaint pleads facts that
are ‘merely consistent with’ a defendant’s liability, it ‘stops short of the line
between possibility and plausibility of ‘entitlement to relief.’” Id. (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 557 (2007)). “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.” Id. (citations
and internal quotation marks omitted).
In considering a motion to dismiss for failure to state a claim, the Court
should follow a “two-pronged approach” to evaluate the sufficiency of the
complaint. Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010). “A court ‘can
choose to begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.’” Id. (quoting Iqbal, 556
U.S. at 679). “At the second step, a court should determine whether the ‘wellpleaded factual allegations,’ assumed to be true, ‘plausibly give rise to an
entitlement to relief.’” Id. (quoting Iqbal, 556 U.S. at 679). “The plausibility
standard is not akin to a probability requirement, but it asks for more than a sheer
possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (internal
In general, the Court’s review on a motion to dismiss pursuant to Rule
12(b)(6) “is limited to the facts as asserted within the four corners of the
complaint, the documents attached to the complaint as exhibits, and any
documents incorporated by reference.” McCarthy v. Dun & Bradstreet Corp., 482
F.3d 184, 191 (2d Cir. 2007). The Court may also consider “matters of which
judicial notice may be taken” and “documents either in plaintiffs’ possession or
of which plaintiffs had knowledge and relied on in bringing suit.” Brass v. Am.
Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993); Patrowicz v. Transamerica
HomeFirst, Inc., 359 F. Supp. 2d 140, 144 (D. Conn. 2005).
Finally, when a party pleads fraud, the alleged fraud must be pled with the
particularity required by Rule 9(b). Fed. R. Civ. Proc. 9(b). Rule 9(b) provides that
“[i]n alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.” In this Circuit, therefore, a
complaint based on fraudulent acts 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.” Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993).
“Rule 9(b) [also] provides that ‘[m]alice, intent, knowledge and other conditions
of a person’s mind may be alleged generally.’ However, to safeguard a
defendant’s reputation from unsubstantiated charges of wrongdoing or a strike
suit, the Second Circuit has instructed that plaintiffs must allege facts that give
rise to a strong inference of fraudulent intent.’” Parola v. Citibank (South Dakota)
N.A., 894 F. Supp. 2d 188, 200 (D. Conn. 2012 ) (quoting Fed. R. Civ. P. 9(b) and
Gabrielle v. Law Office of Martha Croog, No. 3:10-cv-1798(WWE), 2012 WL 460264,
at *4 (D. Conn. Feb. 9, 2012) (citing Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.
2004))). “The ‘strong inference of fraud’ may be established by either alleging
facts to show that a defendant had both the motive and opportunity to commit
fraud, or facts that constitute strong circumstantial evidence of conscious
misbehavior or recklessness.” Parola, 894 F. Supp. 2d at 200 (D. Conn. 2012)
(quoting Gabrielle, 2012 WL 460264, at *4 (citing James F. Canning Agency v.
Nationwide Ins. Co. of America, No. 3:09-cv-1413(MRK), 2010 WL 2698292, at *2
(D. Conn. Mar. 10, 2010))).
A. Breach of Contract
The Plaintiffs argue that the Defendants do not sufficiently allege a breach of
any contract at issue in this case because none of the allegations in the
Counterclaim refer to any specific contractual provisions that were allegedly
breached. [Dkt. #30, Memorandum in Support of Motion to Dismiss Maxim
Entities’ Counterclaims, p. 6-8]. The Defendants respond by claiming that they
have sufficiently alleged that the Plaintiffs have acted in bad faith, which
constitutes a breach of contract under Connecticut law because all contracts
have an implied duty of good faith. [Dkt. #51, Maxim Entities’ Memorandum in
Opposition to Plaintiffs’ Motion to Dismiss Counterclaims, p. 7-9].
Neither party disputes that Connecticut law applies to the contracts at issue in
this case. Therefore, this Court will assume without deciding that that is correct
and will apply Connecticut law. The Defendants argue that six different points in
their Counterclaim sufficiently plead a claim for breach of contract: (1) “Plaintiffs
misrepresented the value of the property they were contributing” to EPS; (2)
“Plaintiffs misrepresented that the value of EPS was sufficient to justify S2K’s
$250,000 investment as being equal to 6% of the stock”; (3) “Plaintiffs
misrepresented their ability to create a new computer system”; (4) “Plaintiffs
entered into subscription agreements with S2K whereby the Connecticut
Shareholders may have their interests in [EPS] purchased through a procedure
designed to obtain a far higher price than the interests of S2K”; (5) “Plaintiffs
always represented to S2K that the latter would be paid its $250,000 investment in
full before other shareholders, and before employees took any raises or bonuses,
which representations later proved to be false”; and (6) “Plaintiffs have used the
same adhesive buy-sell procedure to force other minority shareholder investors
in [EPS] to sell for grossly unfair compensation, far less than the price of their
investment.” [Dkt. #51, p. 7-8]. The Defendants argue that each of these points is
sufficient to show that the Plaintiffs breached the implied duty of good faith and
fair dealing. [Id.].
The Defendants are correct that under Connecticut law a “duty of good faith
and fair dealing is implied into every contractual relationship, and it requires that
neither party do anything to injure the other’s right to receive the benefits of the
contract.” Landry v. Spitz, 925 A.2d 334, 344 (Conn. App. 2007) (citing
Renaissance Mgmt. Co. v. Conn. Hous. Fin. Auth., 915 A.2d 290, 297 (Conn.
2007)). However, “[t]he covenant of good faith and fair dealing presupposes that
the terms and purpose of the contract are agreed upon by the parties and that
what is in dispute is a party’s discretionary application or interpretation of a
contract term.” Id. “To establish that the covenant has been breached, a plaintiff
must show that the acts by which a defendant allegedly impeded the plaintiff’s
right to receive reasonably expected contract benefits were taken in bad faith.”
Id. Importantly, “the claim [that the covenant has been breached] must be tied to
an alleged breach of a specific contract term, often one that allows for discretion
on the part of the party alleged to have violated the duty.” Id. (citations and
internal quotation marks omitted); see also Steiner v. Lewmar, Inc., 3:09-cv1976(DJS), 2013 WL 5755578, at *5 (D. Conn. Oct. 22, 2013) (“The Court notes that
a claimed breach of the implied covenant of good faith and fair dealing must be
tied to an alleged breach of a specific contract term . . . .” (citations and internal
quotation marks omitted)); Larobina v. Wells Fargo Bank, N.A., 3:10-cv1279(MRK), 2012 WL 1032953, at *4 (D. Conn. Mar. 27, 2012) (the same).
In the Counter-complaint, the Defendants do not cite to any specific
provisions of any contract which they allege constituted the basis for the breach
of the implied duty of good faith and fair dealing. Instead, they seem to allege a
nebulous series of misrepresentations that constitute the basis for such relief.
These misrepresentations, however, are not tied to any specific term of the
contract, but seem to lead to the ultimate conclusion that the Defendants were
fraudulently induced into executing the contracts. This claim is not really one for
breach of contract, but really one of fraudulent misrepresentation, which will be
discussed later. Since the Defendants do not allege a breach of a specific
contractual provision or tie any of the alleged misrepresentations to provisions
that exist in the contracts, they have not fulfilled the requirements under
Connecticut law to maintain a claim for breach of the implied duty of good faith.
Accordingly, this count is DISMISSED.
The second claim in the Counter-complaint seems to be for fraudulent
misrepresentation related to the inducement of the Defendants to execute the
shareholder agreement and other related contracts. [Dkt. #22, ¶¶ 298-304]. The
Plaintiffs argue that the Defendants have not pled with sufficient particularity the
misrepresentations or omissions that constitute the basis for the fraud-based
claims. [Dkt. #30, p. 8-9].
“A claim for fraudulent misrepresentation requires that: ‘(1) a false
representation was made as a statement of fact; (2) it was untrue and known to be
untrue by the party making it; (3) it was made to induce the other party to act
upon it; and (4) the other party did so act upon the false representation to his
injury.’” Javier v. Deringer-Ney, Inc., 578 F. Supp. 2d 368, 374 (D. Conn. 2008)
(quoting Weisman v. Kaspar, 233 Conn. 531, 539, 661 A.2d 530 (Conn. 1995)).
Furthermore, to satisfy the heightened pleading standards of Fed. R. Civ. P. 9(b),
as the allegation is based on fraud, “a complaint must ‘specify the time, place,
speaker, and content of the alleged misrepresentations,’ ‘explain how the
misrepresentations were fraudulent and plead those events which give rise to a
strong inference that the defendant had an intent to defraud, knowledge of the
falsity, or a reckless disregard for the truth.’” Cohen v. S.A.C. Trading Corp., 711
F.3d 353, 359 (2d Cir. 2013) (quoting Caputo v. Pfizer, Inc., 267 F.3d 101, 191 (2d
Aside from the allegations made as related to the breach of contract claim
discussed above, the only other claims relevant to the fraudulent
misrepresentation count are that: (1) “the Plaintiffs intentionally and willfully
misrepresented the value of the assets of [EPS], [and] the viability of the subject
computer software system and the ability of Plaintiffs to write a system to Maxim
Entities’ satisfaction”; (2) “Plaintiffs intentionally led the Maxim Entities to believe
the [EPS] business to be formed was worth a sufficient amount that would make
the value of Maxim Entities’ investment equal to the [$250,000] paid”; (3)
“plaintiffs knew, or had reason to know, that [EPS] was worth nowhere close to
an amount sufficient to make the value of Maxim Entities’ investment”; and (4)
“plaintiffs used the [$250,000] for their own purposes, instead of utilizing the
money to advance the business of [EPS].” [Dkt. #22, ¶¶ 299-304]. These
allegations are insufficient as a matter of law to maintain a claim for fraud
because they fail to comply with the particularity requirements of Rule 9(b).
In Goudis v. Am. Currency Trading Corp., the court held that the defendant’s
fraud-based allegations did not comply with the rule because the allegations did
not specify the date on which the misrepresentations were made, did not specify
what was actually said on each date, and did not specify which of the defendants
actually made the misrepresentations. Goudis v. Am. Currency Trading Corp.,
233 F. Supp. 2d 330, 333-34 (D. Conn. 2002). Similarly here, the Defendants have
given the content of several material misrepresentations, but failed to identify
who actually made the statements, when the statements were made, and to whom
they were made. Without these details, the counterclaims do not comply with
Rule 9(b)’s mandate. See also Catalano v. Bedford Assocs., Inc., 9 F. Supp. 2d
133, 136 (D. Conn. 1998) (granting a motion to dismiss for lack of particularity
when the plaintiff’s allegations “did not allege who made the alleged
misrepresentations on behalf of the Defendant . . . [and] fail[ed] to allege the
circumstances under which the statements were made or when and where they
The Defendants argue that their allegations are sufficient under this Court’s
holding in Javier v. Deringer-Ney, Inc., 578 F. Supp. 2d at 373-74. In that case,
this Court denied a motion to dismiss when a plaintiff’s allegations for fraudulent
misrepresentation included an allegation that the plaintiff’s boss, Mr. Langford,
told him “You’re doing an excellent job don’t worry” in response to a negative
written performance evaluation. Id. at 371. The difference between that
complaint and the present one is that the former identified the speaker of the
misrepresentation, gave a general time frame when the employment assurance
was given, and specifically alleged the exact content of what was actually said.
Here, the Defendants have made conclusory assertions of generalized
misrepresentations, but have not provided the dates when any statements were
made or the identity of the maker of any specific misrepresentations. Without
this information, the pleadings must fail.
In this Circuit, the pleading parties receive leave to re-plead their claims for
fraud in order to comply with Rule 9(b)’s requirements. See Goudis, 233 F. Supp.
at 334. Accordingly, the Defendants must file an amended complaint supporting
a claim of fraudulent misrepresentation with the requisite particularity under Rule
9(b) within fourteen (14) days of the date of this order.
C. Quantum Meruit
The Third count in the Counter-complaint is for quantum meruit. The
Defendants claim that “[i]f the court should conclude that Maxim Entities may not
fully exploit commercially the computer software system they developed [sic]
Maxim Entities are entitled to recover from plaintiffs for the fair value of the asset,
in the amount of” $750,000, “on the basis of quantum meruit for goods had and
received, either in contract implied in-fact or at-law.” [Dkt. #22, ¶ 310]. Based on
the Defendants response to the Plaintiffs’ motion to dismiss, the Defendants
seem to be claiming that the Plaintiffs will be unjustly enriched due to their
alleged material and fraudulent misrepresentations inducing the Defendants to
execute the shareholder agreement if the Court rules in favor of the Plaintiffs.
[Dkt. #51, p. 11-12]. The Plaintiffs argue, in response, that the claim for unjust
enrichment is really preempted by copyright law because what the Defendants
request is that their expenses for creating the new software be offset should this
Court find for the Plaintiffs on the copyright infringement claim. [Dkt. #30, p. 1112].
While it is nearly impossible to tell from the pleadings the exact nature of the
Defendants’ claim, it appears that the Defendants are actually alleging two bases
for unjust enrichment. First, the Defendants allege that the Plaintiffs were
unjustly enriched by fraudulently misrepresenting the value of the investment in
the shares of EPS stock, causing them to receive an artificially elevated financial
investment, and second, that the Plaintiffs will be unjustly enriched if they are to
receive damages related to the copyright infringement claim because the
Defendants invested money in developing the Maximum Entities’ software. [Dkt.
#22, ¶¶ 305-310].
As to the first basis, even though a claim for unjust enrichment or quantum
meruit need not be based on fraud, here the Defendants’ allegations are based on
fraudulent misrepresentations. Accordingly, the pleading requirements of Rule
9(b) apply. See Ramapo Land Co., Inc. v. Consol. Rail Corp., 918 F. Supp. 123,
128 (S.D.N.Y. 1996) (“This counterclaim is subject to the pleading requirements of
Rule 9(b) because Conrail’s only alleged basis for the claim that the enrichment
was unjust lies in the averment that Ramapo fraudulently induced Conrail to
execute the Torne Brook Road Agreement by misrepresenting certain facts upon
which Ramapo Land knew Conrail would rely.”); Virginia Sur. Co., Inc. v. Macedo,
No. 08-cv-5586(JAG), 2009 WL 3230909, at *11 (D.N.J. Sept. 30, 2009) (“Plaintiff,
however, has failed to plead the underlying fraud, which serves as the basis for
its unjust enrichment claim, with particularity, as required by Rule 9(b).”).
Accordingly, the Defendants are permitted to re-plead this basis for their unjust
enrichment claim because it fails for the reasons discussed above.
As to the second basis, the question of whether the Plaintiffs stand to become
unjustly enriched depends solely on whether this Court finds for the Plaintiffs on
the copyright infringement claim. However, the applicable copyright statute
already contains a provision related to the calculation of damages that accounts
for the Defendants’ financial investment. The statute states that “[i]n establishing
the infringer’s profits, the copyright owner is required to present proof only of the
infringer’s gross revenue, and the infringer is required to prove his or her
deductible expenses and the elements of profit attributable to factors other than
the copyrighted work.” 17 U.S.C. § 504(b) (emphasis added). The “copyright
owner is entitled to recover the actual damages suffered by him or her as a result
of the infringement, and any profits of the infringer that are attributable to the
infringement and are not taken into account in computing the actual damages.”
Id. This statute clearly takes into consideration the claim that the Defendants
appear to be making in the count for quantum meruit because it allows for the
infringer to deduct investment expenses. Since this copyright statute deals
directly with the issue presented in the Counter-complaint, the statute preempts
the Defendants’ state common law claim. See Briarpatch Ltd. v. Phoenix
Pictures, Inc., 373 F.3d 296, 304-05 (2d Cir. 2004), cert. denied, 544 U.S. 949, 125 S.
Ct. 1704, 161 L. Ed. 2d 525 (2005) (“The Copyright Act Exclusively governs a claim
when: (1) the particular work to which the claim is being applied falls within the
type of works protected by the Copyright Act under 17 U.S.C. §§ 102 and 103, and
(2) the claim seeks to vindicate legal or equitable rights that are equivalent to one
of the bundle of exclusive rights already protected by copyright law under 17
U.S.C. § 106.”); see also Moser Pilon Nelson Architects, LLC v. HNTB Corp., No.
05-cv-422(MRK), 2006 WL 2331013, at *10 (D. Conn. Aug. 8, 2006) (finding a claim
for unjust enrichment was preempted by the Copyright Act).
Therefore, the Defendants quantum meruit or unjust enrichment claim is
DISMISSED in so far as it requests relief already provided for in the copyright act,
and DISMISSED without prejudice for any claims based on fraud as to the
investment in EPS.
The Defendants fourth claim is for an accounting “of the financial affairs of
plaintiffs from the date of Maxim Entities’ investment through the date of trial.”
[Dkt. #22, ¶ 312].
An accounting is an equitable remedy defined as “an adjustment of the
accounts of the parties and a rendering of a judgment for the balance ascertained
to be due. An action for an accounting usually invokes the equity powers of the
court, and the remedy that is more frequently resorted to [ ] is by way of a suit in
equity.” Mankert v. Elmatco Prods., Inc., 854 A.2d 766, 768 (Conn App. 2004); see
also Censor v. ASC Techs. of Conn., LLC, 900 F. Supp. 2d 181, 216-17 (D. Conn.
2012) (quoting the same). “To support an action of accounting, one of several
conditions must exist. There must be a fiduciary relationship, or the existence of
a mutual and/or complicated accounts, or a need of discovery, or some other
special ground of equitable jurisdiction such as fraud.” Mankert, 854 A.2d at 769.
Here, there was a fiduciary relationship between the Plaintiffs and some of the
Defendants because some of the Defendants are board members and minority
shareholders in EPS. See Pacelle Bros. Transp., Inc. v. Pacelli, 189 Conn. 401,
407 (Conn. 1983); see also Datto, Inc. v. Braband, 856 F. Supp. 2d 354, 375-77 (D.
Conn. 2012). However, “[t]he general rule is that a prior demand by the plaintiff
for an accounting and a refusal by the defendant to accounting is a prerequisite
to the commencement of an action for an accounting.” Baghdady v. Baghdady,
3:05-cv-1494(AHN), 2008 WL 4630487, at *9 (D. Conn. Oct. 17, 2008) (quoting Zuch
v. Conn. Bank & Trust Co., Inc., 500 A.2d 565, 567 (Conn. App. 1985)).
Furthermore, the availability of the equitable remedy is tied to the inadequacy of a
legal remedy. Datto, 856 F. Supp. 2d at 375.
There are two issues with the Defendants’ claim for an accounting. First, the
complaint does not allege that the Defendants made a request for an accounting
that was rejected by the Plaintiffs. Without the fulfillment of this prerequisite, the
claim for an accounting cannot stand. See Baghdady, 2008 WL 4630487, at *9.
Second, the Defendants, as minority shareholders, have a right at law to view the
corporate records. See Datto 856 F. Supp. 2d at 375-77 (“Braband is a minority
shareholder in Datto, entitled to rely on the Connecticut statute allowing for the
inspection of corporate records by shareholders.”); see also Frank v. LoVetere,
363 F. Supp. 2d 237 (D. Conn. 2005) (applying Conn. Gen. Stat. § 33-946 to a close
corporation). Conn. Gen. Stat. § 33-946(a) provides that “[a] shareholder of a
corporation is entitled to inspect and copy, during regular business hours at the
corporation’s principal office, any of the records of the corporation described in
subsection (e) of section 33-945 if he gives the corporation a signed written
notice of his demand at least five business days before the date on which he
wishes to inspect and copy.” The Defendants have not alleged that they wish to
view corporate documents that are not already provided for under Connecticut
law or that such records were fraudulently kept. Accordingly, based on the
pleadings, the Defendants have not demonstrated either the ripeness of this
claim or that the legal remedy is insufficient to provide for the accounting
requested. The claim for an accounting is DISMISSED.
E. Specific Performance
The fifth count in the Counter-complaint is one for specific performance. The
Defendants request that “[i]n the event this court should determine there is no
adequate remedy at law available to Maxim Entities, the said defendants demand
the subject buy-sell provisions of the documents attached as Exhibits to the
complaint be specifically enforced, and that Maxim Entities receive [$750,000] in
return for the sale of such shares.” [Dkt. #22, ¶ 318].
“Under the law of Contracts . . . when a contract is breached by the obligee,
the obligor may maintain a suit for specific performance of the accord, in addition
to any claim for damages for partial breach.” Ackerman v. Sobol Family P’ship,
LLP, 4 A.3d 288, 312 (Conn. 2010) (internal quotation marks and citations
omitted). Here, the Defendants have not alleged a breach of any contract by the
obligee, indeed, they have not referenced any specific contract clause at all. In
this claim, it seems that the Defendants seek specific enforcement of the buy-sell
provision should the Court find for the Plaintiffs. There is no allegation that the
Plaintiffs have refused to comply with the buy-sell provision or even a claim that
the Defendants have attempted to enforce that provision. At most, their claim is
only for unjust enrichment if the Plaintiffs prevail. Clearly, this claim is not ripe
for judicial review. Moreover, the Defendants’ request that the Plaintiffs be forced
to repurchase the EPS shares for $750,000 does not appear to be based on the
terms of any contract. This Court has not seen, and the Defendants have not
cited, any provision in any of the contracts which specifies $750,000 as being the
proper repurchase price. Without sufficient allegations proving that the claim is
ripe or supporting that the Defendants’ request is based in contract, the
Defendants claim for specific performance must be DISMISSED.
The Defendants’ sixth claim is for violations of CUTPA, which also seem to be
grounded in two different bases. First, the Defendants allege that the Plaintiffs
violated the statute by fraudulently misrepresenting the value of EPS stock,
telling the Defendants that the “Maxim Entities that they would be paid in full for
the . . . investment . . . before any other shareholders and before employees took
any raises or bonuses,” and misrepresenting the company’s ability to create new
computer software. [Dkt. #22, ¶¶ 319-321]. Second, they allege that the Plaintiffs
“misused buy-sell agreements such as those alleged by plaintiffs herein as part
of a scheme to force minority shareholders to sell at a price far below that which
such minority shareholders paid for their interests in [EPS],” but do not impose
similar unfair repurchase terms on the Connecticut-based shareholders. [Id. at
The first basis is comprised of the same fraudulent misrepresentation
allegations that have been discussed previously in this order. Since the
fraudulent misrepresentation facts have not been pled with sufficient
particularity, the CUTPA claim is DISMISSED on that basis without prejudice. See
Aviamax Aviation Ltd. v. Bombardier Aerospace Corp., 3:08-cv-1958(CFD), 2010
WL 1882316, at *9 (D. Conn. May 10, 2010) (“When a plaintiff in federal court
bases a CUTPA claim on fraud allegations, the plaintiff must satisfy the
particularity requirement of Federal Rule of Civil Procedure 9(b).”); Tatum v.
Oberg, 650 F. Supp. 2d 185, 195 (D. Conn. 2009) (“CUTPA claims brought in
federal court only must satisfy Rule 9(b) if such claims are based on fraud
allegations.”); Phoenix Home Life Ins. Co. v. Greenwich Acupuncture Ctr., Inc.,
2:92-cv-782(JAC), 1993 WL 298967, at *3 (D. Conn. July 20, 1993) (“In order to
sustain a CUTPA claim based on intentional fraud, the plaintiff must plead fraud
The second basis is comprised of general allegations that the terms of the
cross-purchase agreement differ between S2K and the Plaintiffs, to the detriment
of the Defendants. However, the complaint does not allege how or why the terms
are unfair, instead the Defendants rely on the conclusory statement that the terms
are unfair because they will lead to a diminished repurchase price for S2K’s
shares. This outcome is not a fact, but a conclusion. The Defendants have not
alleged any facts showing how or why the terms of the cross-purchase
agreement, which appears to have been the result of an arms-length negotiation,
would be deceptive or unfair as defined in CUTPA. Without alleging how the
cross-purchase agreement violates CUTPA, the Defendants have not sufficiently
pled their CUTPA claim. Accordingly, the claim is DISMISSED on this ground as
G. Rescission or Reformation
The Defendants’ seventh count is for rescission or reformation of the contract.
First, the Defendants allege they “were unaware of the unfair and inequitable
provisions contained within the documents attached to the complaint, and the
attempted enforcement of the terms as expressed by plaintiffs herein constitutes
a surprise,” rendering the contracts acts of adhesion. [Dkt. #22, ¶¶ 328, 329].
Second, the Defendants allege that “the deception of plaintiffs in inducing Maxim
Entities to purchase what now appear to be virtually worthless shares in [EPS],
combined with Maxim Entities’ lack of knowledge of facts that rendered the
purchase inequitable, entitled Maxim Entities to rescission or reformation.” [Id. at
“A cause of action for reformation of contract rests upon the equitable
theory that the instrument sought to be reformed does not conform to the real
contract agreed upon and does not express the intention of the parties and that it
was executed as the result of mutual mistake, or mistake of one party coupled
with actual or constructive fraud, or inequitable conduct on the part of the other.”
Trenwick Am. Reins. Corp. v. W.R. Berkley Corp., 54 A.3d 209, 216 (Conn. App.
2012) (quoting Greenwich Contracting Co. v. Bonwit Constr. Co., 239 A.2d 519,
521 (Conn. 1968)).
As to the claim for reformation, the Defendants have not pled how the
contracts at issue are different from what was anticipated. It appears that the
Defendants are alleging that the contracts contained provisions that they had not
intended or had provisions that they had not read. Unfortunately, without
pleading the basis for the claim for reformation, meaning the mistakes at issue, it
is impossible for this Court to find that the Defendants have sufficiently pled a
basis for reformation. Importantly, there are no allegations that the contracts
were forged, and it appears that all of the terms were reviewed by both parties as
the contracts were executed by both Plaintiffs and Defendants. If the basis for
the reformation claim is the same fraudulent misrepresentations that have been
discussed previously in this order, the claim fails because the allegations do not
contain the particularity required by Rule 9(b).
Rescission is different from reformation, even though the Defendants seem to
conflate the two. Rescission is appropriate where a party made “material
misrepresentations of fact upon which [the Defendants] had a right to rely and
which induced [them] to enter into the contract.” State v. Hartford Acc. & Indem.
Co., 70 A.2d 109, 113 (1949). “As a matter of common law, a party to a contract . .
. may rescind that contract and avoid liability thereunder if that party’s consent to
the contract was procured either by the other party’s fraudulent
misrepresentations, or by the other party’s nonfraudulent [sic] material
misrepresentations.” Munroe v. Great Am. Ins. Co., 661 A.2d 581, n.5 (Conn.
1995). Therefore, the basis for the claim for rescission in this case must be that
the Plaintiffs made fraudulent misrepresentations inducing the Defendants to
execute the shareholder agreement and other contracts at issue. However, as
before, these fraud-based claims were insufficiently pled pursuant to Rule 9(b).
In IM Partners v. Debit Direct Ltd., the court dismissed a claim for rescission
which was based on the same fraudulent misrepresentations previously found to
be insufficiently pled under Rule 9(b). IM Partners v. Debit Direct Ltd., 394 F.
Supp. 2d 503, 518-19 (D. Conn. 2005). Similarly here, the fraudulent
misrepresentation allegations were insufficiently pled. Therefore, this claim is
also DISMISSED without prejudice.
H. Punitive Damages
The Defendants’ eighth count is for punitive damages. [Dkt. #22, ¶¶ 331-335].
The Plaintiffs have moved to dismiss this count as punitive damages are not an
independent cause of action in Connecticut. [Dkt. #30, p. 17-18].
A claim for punitive damages “is not a separate count inasmuch as it is a
remedy.” Supreme Indus., Inc. v. Town of Bloomfield, No. X03-cv-0340022269,
2007 WL 901805, at *26 (Conn. Super. Ct. Mar. 8, 2007). “In Connecticut, punitive
damages may be based either on statute or, in the absence of a statutory
provision, common law. ‘Punitive damages are a remedy awarded only when the
evidence shows reckless, intentional or wanton violation of the rights of others.’”
Id. (quoting Suffield Dev. Assocs. Ltd. P’ship v. Nat’l Loan Investors, L.P., 905
A.2d 1215, 1235 (Conn. App. 2006), cert. denied, 280 Conn. 942, 943 (2006)); see
also Rose v. City of Waterbury, 3:12-cv-219(VLB), 2013 WL 1187049, at *10 (D.
Conn. Mar. 21, 2013) (quoting the same). The Court, therefore, dismisses the
Defendant’s independent count for punitive damages, but notes that the
Defendants have included punitive damages as one of the remedies sought.
In the ninth count of the Counter-complaint, it appears that the Defendants
seek an injunction against the Plaintiffs to prevent disclosure of the confidential
information used to develop the Defendants’ software. [Dkt. #22, ¶¶ 336-340].
The Counter-complaint alleges that “Maxim Field Supply has spent substantial
amounts of time and money to develop the programming and engineering of the
Field Navigator computer system, in an effort to build a loyal client base, all of
which required years of effort in development and $500,000 in development costs,
all with the knowledge, approval, and authorization of plaintiffs.” [Id. at ¶ 337].
Subsequently, “Maxim Field Supply attempted to test market its system, but
halted such efforts when it became aware of plaintiffs’ claims of disputed
ownership. . . . Defendants Mr. Pajemola and Cleveland Field Systems, LLC, also
claim ownership over the disputed computer system developed at the expense of
Maxim Field Supply. [Id. at ¶¶ 338-339]. Finally, the Defendants allege that
[u]nless defendants Mr. Pajemola, Cleveland Field
Systems, LLC, and plaintiffs, and each of them, are
enjoined and restrained from using or disclosing,
directly or indirectly, Maxim Field Supply Confidential
Information [sic] in order to divert customers and profits
from Maxim Field Supply to plaintiffs or defendants Mr.
Pajemola, Cleveland Field Systems, LLC, during the
pendency of this action, and for a period thereafter
consistent with the agreements between them, law and
equity, Maxim Field Supply will suffer immediate and
irreparable injury, including (without limitation) loss of
the money it invested in created [sic] the computerbased system, its competitive position in the industry
and loss of its customers and potential customers.
[Id. at ¶ 340].
Once again, the Court notes that the relief sought, injunctive relief, does
“not constitute [a] separate” cause of action.” Williams v. Walsh, 558 F.2d 667,
671 (2d Cir. 1977). Therefore, to the extent that the Defendants are alleging an
injunction as a cause of action as opposed to requested relief, the count must be
dismissed. Moreover, the Defendants have not stated clearly for what they are
asking. It appears that the Defendants want a preliminary injunction against the
disclosure of “Maxim Field Supply’s confidential information, obtained by Mr.
Pajemola while he worked for Maxim Field Supply.” [Dkt. #51, p. 14]. If that is the
case, the Defendants’ request for an injunction in the Cross-complaint is directed
at the wrong parties. Indeed, there are no allegations that the Plaintiffs ever
obtained the private or confidential information for which the Defendants request
equitable relief. On the contrary, the Plaintiffs in this case are alleging that the
Defendants violated confidentiality agreements and copyright laws by using the
Plaintiffs’ proprietary software in developing the Defendants’ software. The
argument the Defendants appear to be making is that if the Court rules in favor of
the Plaintiffs, then the Defendants would request that the Plaintiffs be enjoined
from dispersing confidential information to the public or diverting customers
away from the Defendants. The Court is at a loss as to how this merits a claim for
injunctive relief in the Cross-complaint. Even so, if the Defendants are requesting
a preliminary injunction, a motion for that relief must be sought pursuant to Rule
Assuming the that the Defendants’ request for injunctive relief was made
pursuant to Rule 65, the Defendants have not alleged sufficient facts to establish
entitlement to that extraordinary relief. First, the Defendants do not allege what
confidential information was obtained by the Plaintiffs that could cause
irreparable injury if disseminated. And second, the Defendants do not allege or
argue that there is no sufficient legal remedy, such as damages, that would
redress any potential injury. See Forest City Daly Housing, Inc. v. Town of North
Hempstead, 175 F.3d 144, 153 (2d Cir. 1999) (noting that to prove irreparable
harm, a movant must show an “injury that is neither remote nor speculative, but
actual and imminent and that cannot be remedied by an award of monetary
damages.”); see also Waterbury Teachers Ass’n v. Freedom of Info. Comm’n, 645
A.2d 978, 980 (Conn. 1994) (explaining that the four-part test for the issuance of a
temporary injunction under Connecticut law involves the following
considerations: “(1) the plaintiff ha[s] no adequate legal remedy; (2) the plaintiff
would suffer irreparable injury absent [the injunction]; (3) the plaintiff [is] likely to
prevail . . . ; and (4) the balance of the equities favor[s the issuance of the
injunction].”). Without sufficient facts showing that injunctive relief is warranted
against the Plaintiffs, this claim for injunctive relief, or count in the Complaint as
it currently stands, must be DISMISSED.
J. Declaratory Relief
Finally, the Defendants’ tenth count is one for declaratory relief. [Dkt. #22, ¶¶
341-342]. The “Maxim Entities state that the status of the agreements by and
among the parties, and the rights and obligations imposed by law and equity are
such that the matters require resolution by means of declaratory judgment, in
order that ownership of the computer-based software system that is the subject
hereof may be established by this court.” [Id. at ¶ 342]. In arguing this point, the
Defendants allege that the Plaintiffs have claimed ownership of the computerbased software system developed by the Defendants.
The Court is again confused as to what the Defendants are requesting. The
Defendants have nowhere cited, and this Court cannot find, any claim of
ownership by the Plaintiffs over the software developed by the Defendants.
Instead, the Plaintiffs claim that the Defendants are liable in copyright, tort and
contract for developing the software, and further request disgorgement of profits
and injunctive relief to prevent future copyright infringement from occurring. It
may be the case that the Cross-plaintiffs are making a claim of ownership, which
would require a declaration of rights under the declaratory judgment act, but the
Court fails to find any imminent case or controversy with respect to the Plaintiffs
over the software’s ownership. Accordingly, the Declaratory Relief request is
DISMISSED since the Plaintiffs have not alleged a claim of ownership over the
Maxim Entities’ software.
Furthermore, to the extent that the ownership of the software is related to the
copyright infringement claim, there is no “‘clear disassociation’ between the
claim seeking declaratory relief and the remaining claims that . . . require
interpretation of contract.” Snakepit Auto., Inc. v. Superperformance, Int’l, LLC,
489 F. Supp. 2d 196, 202 (E.D.N.Y. 2007). In short, no independent declaration of
rights is needed because the rights between the Plaintiffs and Defendants will be
completely adjudicated when the Plaintiff’s claims are decided. The independent
request for declaratory relief with respect to the Plaintiffs, therefore, is nothing
but duplicative of the claims already before this Court.
For the foregoing reasons, Plaintiffs’ [Dkt. #29] Motion to Dismiss is
GRANTED without prejudice to the Defendants’ right to re-plead with particularity,
as required by the federal rule of civil procedure applicable to their claim, facts
which constitute each of the elements of each cognizable claim they seek to
assert, within fourteen (14) days of the date of this order.
IT IS SO ORDERED.
Hon. Vanessa L. Bryant
United States District Judge
Dated at Hartford, Connecticut: February 7, 2014
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