Indoor Billboard Nw., Inc. v. M2 Sys. Corp.

202 Conn.App. 139

245 A.3d 426

INDOOR BILLBOARD NORTHWEST, INC., et al.

v.M2 SYSTEMS CORPORATION

AC 39890, (AC 40558)

Appellate Court of Connecticut.

Argued December 9, 2019

Officially released January 12, 2021

Bradley A. Bell, pro hac vice, with whom were Scott M. Harrington, Stamford, and, on the brief, Philip A. Beach, pro hac vice, for the appellant in Docket No. AC 39890 and the appellee in Docket No. AC 40558 (defendant).

Arden E. Shenker, pro hac vice, with whom was John Robacynski, Hartford, for the appellees in Docket No. AC 39890 and the appellants in Docket No. AC 40558 (plaintiffs).

Keller, Elgo and Bright, Js.^*

KELLER, J.

The action underlying these appeals was brought by twenty-three plaintiffs who are the victims of a fraudulent loan scheme that was created and carried out by the former manager of their custodial investment accounts.¹ The plaintiffs sought to recover from the defendant, M2 Systems Corporation, the funds wrongfully transferred from their accounts by the manager

of the accounts. They sought to recover either by virtue of their rights as partial assignees of a promissory note that had been executed by the defendant in favor of a third party or under a theory of unjust enrichment. Following a trial to the court that lasted five days, the court rejected the plaintiffs’ attempt to recover damages as assignees of the note at issue but agreed with the plaintiffs that they were entitled to recover damages under a theory of unjust enrichment. The court awarded the plaintiffs $2,494,800, which included the amount wrongfully transferred from each plaintiff's investment account, as well as prejudgment interest.²

In Docket No. AC 39890, the defendant appeals from the judgment of the trial court with respect to the unjust enrichment cause of action brought by the plaintiffs. The defendant claims that the court erred in the following ways: (1) by awarding damages to a person who was neither a plaintiff in the underlying action nor a nonparty who had assigned his interest to a plaintiff in the underlying action; (2) by determining that the defendant was not entitled to a setoff; (3) by rejecting its special defense of judicial estoppel; (4) by finding that the note executed by the defendant in favor of a third party had been amended; (5) by finding that the defendant had been unjustly enriched as a result of the plaintiffs’ funds; (6) by finding that cross-traded subnotes, which had been exchanged between some of the plaintiffs’ accounts, had unjustly enriched the defendant; (7) by finding that the defendant's loan obligation to a third party was satisfied in part with the use of the plaintiffs’ funds; and (8) by finding that the plaintiffs had satisfied in part the defendant's debt obligation to a third party despite the fact that the debt was not discharged pursuant to the terms of the note at issue.

Docket No. AC 40558 is the plaintiffs’ appeal from the court's decision denying their postverdict motion for attorney's fees. In their appeal, the plaintiffs claim that the court erred by denying their motion for attorney's fees and expenses after rendering judgment in their favor with respect to their unjust enrichment cause of action. We agree with the first claim raised by the defendant in Docket No. AC 39890 and, consequently, reverse the portion of the judgment that is the subject of that claim. With respect to the remainder of the claims raised by the defendant in Docket No. AC 39890 and the claim raised by the plaintiffs in Docket No. AC 40558, we affirm the judgment and the decision of the trial court.

In its memorandum of decision filed November 23, 2016, the court aptly summarized the relevant procedural history of the case, including the nature of the plaintiffs’ causes of action and the defendant's defenses, and set forth the facts and legal bases of its decision. The court began its decision as follows: "The plaintiffs contend [that] they are partial assignees of a promissory note issued by [the] defendant ... and seek to recover $3,848,000 from [the defendant] under the terms of the note. In the alternative, should the plaintiffs’ claims as assignees fail, the plaintiffs seek to recover from [the defendant] on an unjust enrichment theory. They claim [that] their funds were used to pay [the defendant's] loan obligation. The defendant ... contends [that] the plaintiffs have failed to prove their claims. [The defendant] posits [that] the plaintiffs are victims of their financial advisor's fraudulent conduct. [The defendant] raises various special defenses. For the reasons stated [in this memorandum of decision], this court [renders] judgment for the plaintiffs."

The court next set forth the following findings: "There are twenty-three plaintiffs in this lawsuit. Each held investments in custodial accounts that were maintained with the wealth and services division of [the] State

Street Bank and Trust Company

[bank].³ Each plaintiff entered into an account agreement with the bank that stated [that] Tauris Advisory Group, LLC (TAG), was the account owner's agent and authorized investment manager. Each plaintiff also entered into investment-management agreements with TAG. The TAG agreements stated that TAG was the plaintiffs’ agent and authorized investment manager.

"TAG, as well as its successor, TAG Virgin Islands, Inc., was managed by James Tagliaferri, who was a principal in the two financial service companies. TAG at one time maintained offices in Stamford .... The effect of the plaintiffs’ agreements with [the bank] and TAG was to give Tagliaferri carte blanche authority over the plaintiffs’ investment accounts at [the bank].

"Tagliaferri had other clients who are not parties to this lawsuit. One of those clients was Matthew J. Szulik. Szulik maintained a custodial account with [the bank]. His agreement with the bank, like the plaintiffs’ agreements, provided that Tagliaferri was his agent. Szulik's investment-management agreement with TAG, like the plaintiffs’ agreements, provided that TAG was his authorized investment agent.

"In July of 2006, Tagliaferri arranged for Szulik's investment account with [the bank] to be used as a source of a loan to [the] defendant .... Tagliaferri negotiated the loan over the telephone with the chief executive officer of [the defendant], Michael Muscato. Szulik did not participate in the telephonic negotiations.

"[The defendant] develops and sells software that integrates computer systems. At the time of the loan to [the defendant] ... Muscato, in addition to his position as chief executive officer of [the defendant], was president of another company, IQ-Ludorum, Plc (IQL).

[The defendant] obtained the loan so that it could assist IQL in obtaining computer equipment. IQL was pursuing a business venture that involved providing ‘offshore’ services to gamblers. [The defendant] designed IQL's computer system and provided maintenance and support services at IQL's data center in Antigua. IQL's stock was traded on a stock exchange in London, England.

"The loan to [the defendant] was evidenced by a promissory note for $2,050,000 signed on behalf of [the defendant] by ... Muscato. The note is dated July 25, 2006. In the document, [the defendant] promises to pay ... Szulik, payee, on April 24, 2007, the principal amount of $2,050,000. The note provides for the prepayment of interest at a rate of 12 percent per annum. The interest prepayment amounted to $184,500 and was deducted from the loan amount. Thus, $1,865,500 was advanced from Szulik's account. The note was secured by shares of IQL stock and an equipment lease with J.P. Morgan Electronic Financial Services, Inc. At [the defendant's] direction, the loan proceeds ($1,865,500) were forwarded to an escrow account and thereafter distributed in accordance with the terms of the note and a security agreement.

"The records for Szulik's custodial account with [the bank] indicate that in 2006, Szulik held a note designated as ‘Prom NTM2 Sys Corp 12% 4/27/07 valued at $2,050,000 USD.’ The bank's records further indicate that, on February 26, 2009, the note, using the bank's term, was ‘distributed’ from Szulik's account.

"In 2007, according to Muscato, Congress passed a law banning United States citizens from using the gambling services that IQL was offering. [The defendant] decided to stop its gambling venture, which decision put [the defendant's] business ‘on the skids.’ Muscato negotiated with Tagliaferri for an extension of the note. In August of 2007, the note was extended to February 23, 2010. [The defendant] paid an extension fee of $205,000

and, in addition, paid $45,000 for interest that had accrued between the original due date, April 24, 2007, and the date of the fee payment.

"According to Tagliaferri, the [defendant's] note was amended by a document dated April 24, 2007. The purported amendment changed the section ... [of the original note that pertained to] interest and repayment of principal. The purported amendment requires [the defendant] to ‘pay [i]nterest on the [p]rincipal accruing on and after April 24, 2007, on the first full day of each month commencing on July 1, 2007 until the [o]bligations are paid in full.’ The typed document has lines for the signatures for ... Muscato on behalf of [the defendant] and ... Tagliaferri on behalf of TAG as agent for Szulik. The copy in evidence is not signed. ... Muscato, as of the date of his deposition on August 14, 2015, had never seen the document amending the note and was not aware the note had been amended.

"Tagliaferri, in 2009 and 2010, directed [the bank] to wire funds from the plaintiffs’ ... accounts [at the bank] to an escrow account maintained by TAG's attorney. TAG advised the bank that the funds were being used as payment for ... corporate notes or subnotes [of the defendant]. These transactions were described by [the bank] in the plaintiffs’ statements as ‘cash disbursement ... for assignment of M-2 Note’ or ‘cash disbursement ... wire for M2 Note.’...