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

INDOOR BILLBOARD NORTHWEST, INC., ET AL. v. M2 SYSTEMS CORPORATION

AC 39890

AC 40558

COURT OF APPEALS OF THE STATE OF CONNECTICUT

Argued December 9, 2019

January 12, 2021

Keller, Elgo and Bright, Js.^*

Syllabus

The plaintiff investors sought to recover damages from the defendant software developer for the wrongful transfer by J, their investment manager, of funds from their custodial accounts at a bank that were used to pay the defendant's loan obligation to S, who also held a custodial investment account at the bank. The plaintiffs and S had entered into investment-management agreements with T Co., which was managed by J. In 2006, J used funds from S's account as a source of the $2,050,000 loan that J had negotiated with M, the defendant's chief executive officer. The defendant obtained the loan to assist another company, I Co., of which M was president, in obtaining computer equipment. M, on behalf of the defendant, issued a promissory note to J that named S as the payee. The promissory note was secured by shares of stock in I Co. In 2007, the defendant ceased the services offered by I Co., which resulted in a decline in the defendant's business. M then negotiated with J an extension of the promissory note to 2010. The amendment to the promissory note was not signed. M testified at his deposition that he had never seen the document that amended the promissory note and was unaware that it had been amended. J thereafter directed the bank to wire funds from the plaintiffs' accounts to an escrow account that was maintained by T Co.'s attorney as payment for the defendant's assignment of subnotes that J created and the bank recorded in the plaintiffs' accounts in amounts equal to the funds taken from those accounts. The plaintiffs paid $1,848,000 for the subnotes. The defendant did not thereafter pay the plaintiffs. J was later convicted of various federal charges, including investor advisement fraud, in connection with certain accounts at the bank but not as to the defendant's subnotes. The plaintiffs thereafter brought this action in which they sought to recover, as assignees of the promissory note or under a theory of unjust enrichment, the amount that was removed from their accounts. The trial court rendered judgment for the plaintiffs on their unjust enrichment claim. The court credited deposition testimony by J that his use of the plaintiffs' funds had satisfied the defendant's obligation to S. The court rejected the plaintiffs' assignment theory of liability, reasoning that the documents at issue had been created for and signed solely by J, and that the assignment claim was based on J's veracity and the reliability of records he kept while he was committing financial fraud. The court also rendered judgment for L, who was not a plaintiff but who had a custody account agreement with a different bank and held a subnote in his favor that J had executed on behalf of T Co. The court thereafter denied the plaintiffs' motion for attorney's fees and expenses, and the defendant and the plaintiffs filed separate appeals with this court. Held:

1. The trial court improperly rendered judgment for L, as the plaintiffs' complaint did not allege that L had assigned to a plaintiff his interest in the subnote that J executed in his favor: the court denied the plaintiffs' pretrial motion to amend their complaint to reflect L's assignment and precluded evidence at trial of any claims related to L on the ground that he was not a party, which the defendant did not dispute, and, although there was some evidence concerning L before the court, such evidence did not confer jurisdiction on the court to render an enforceable judgment for L; accordingly, the portion of the court's judgment rendered in L's favor was vacated.

2. The defendant could not prevail on its claim that the trial court improperly rejected its special defense that it was entitled to a setoff for funds the plaintiffs received from collateral sources; although the defendant's claim for a setoff was intertwined with a motion for sanctions it had filed concerning its attempt to determine from the plaintiffs' tax returns if they had written off losses or received funds in connection with the subnotes at issue, the defendant did not challenge the court's decision not to award it sanctions or its ruling that it could apply postjudgment for review of the tax returns of plaintiffs who received a monetary award; moreover, the defendant's assertion, which was not raised at trial, that the court could not properly consider the setoff issue without first permitting the defendant to review the tax returns, was unavailing, as the court was not persuaded that the defendant was entitled to unfettered access to the tax returns, the defendant failed to present evidence in support of its defense of setoff, none of the plaintiffs who testified at trial stated that they had recovered from a collateral source, and the defendant did not demonstrate that application to examine the plaintiffs' tax returns postjudgment was inadequate or that it pursued that potential relief.

3. The trial court did not abuse its discretion in rejecting the defendant's special defense of unclean hands, which was based on the defendant's assertions that the plaintiffs were tainted by J's fraud and had taken a different position in prior lawsuits they brought against the bank by challenging the validity of the assignments and subnotes: the claim that the plaintiffs took an inconsistent position with respect to the assignments and subnotes logically and legally pertained to their assignee cause of action, which the court rejected, and the defendant did not suggest, and the court did not find, that the defendant was a party in the prior lawsuits, in which the plaintiffs did not state claims against the defendant.

4. The trial court's factual finding that the promissory note had been amended was not clearly erroneous, there having been no basis to presume that the court improperly relied on an exhibit from M's deposition that had been precluded from evidence when the amendment to the note had been admitted into evidence as an exhibit from J's deposition; J's testimony that M both negotiated the amendment with him and at some point executed it provided an evidentiary basis for the court's finding, and, even if the finding was improper, the defendant could not demonstrate that it was harmful, as it was not integral to the court's analysis under a theory of unjust enrichment; moreover, to the extent that the defendant's payment obligations were relevant to a determination that it was aware of the note's existence and the defendant's obligations thereunder, there was evidence before the court that M was aware of the note and had written in an e-mail to J that the defendant would not default.

5. The defendant failed to demonstrate that the evidence did not support the trial court's finding that the plaintiffs were entitled to recover under a theory of unjust enrichment: contrary to the defendant's assertion that it was not benefited by the disbursement of the plaintiffs' funds because the plaintiffs lacked knowledge of how the funds were used and produced no evidence that S received payments from the plaintiffs, J testified that S had been repaid in full, and M testified that the defendant benefited when it used the loan proceeds to purchase hardware for I Co.; moreover, despite the defendant's claim that the plaintiffs failed to prove that it unjustly did not pay them for the benefit it received, which was based on its assertion that the plaintiffs did not justly obtain an interest in the promissory note and that the subnotes were mere IOU's from T Co. that obligated the defendant to pay T Co. rather than the plaintiffs, the court did not award the plaintiffs a remedy as legal assignees and subrogees but under the unjust enrichment doctrine; furthermore, the defendant's claim that the plaintiffs did not prove that the failure of payment to them was to their detriment was undermined by J's testimony that the proceeds of the promissory note plus interest were repaid to S in part by virtue of the funds that were deducted from the plaintiffs' accounts, over which T Co. exercised control.

6. This court declined to reach the merits of the defendant's inadequately briefed claim that the trial court erred in finding that the defendant was unjustly enriched as a result of J's cross-trading of subnotes in and among the plaintiffs' accounts; the defendant did not demonstrate that the cross-trading undermined the court's finding that funds removed from the plaintiffs' accounts were used to repay the defendant's debt to S, as the defendant's one sentence conclusory statement of its claim in its brief was unsupported by analysis or citation to authority.

7. The trial court's finding that the defendant's loan obligation to S was satisfied in part with the use of the plaintiffs' funds was not clearly erroneous: despite the defendant's claims of technical defects in themanner in which J's telephonic deposition occurred, J's deposition testimony, which supported the court's finding, was admitted into evidence without limitation, and the defendant did not demonstrate that the court misconstrued or drew improper inferences from it, as the court's finding was not inconsistent with its decision not to credit J's version of the events at issue and to reject the defendant's claim that the plaintiffs were assignees of the subnotes; moreover, the court was free to reject the portions of J's testimony that would have supported the defendant's assignee claim while relying on J's testimony that supported the plaintiffs' claim for equitable relief, as the plaintiffs, to be entitled to equitable relief, did not need to prove the legal validity of the instruments at issue but, rather, that their funds had been used to partially satisfy the defendant's debt to S.

8. The defendant could not prevail on its claim that the trial court erred in finding that the...