E. Point Sys., Inc. v. Steven Maxim, S2K, Inc.

EAST POINT SYSTEMS, INC., THOMAS MARGARIDO,JASON MARGARIDO, AND PAUL TAFF, Plaintiffs, v. STEVEN MAXIM, S2K, INC., MAXIM ENTERPRISES, INC.,MAXIM FIELD SERVICE SUPPLY, INC., EDWIN PAJEMOLA, AND CLEVELAND FIELD SYSTEMS,LLC, Defendants.

CIVIL ACTION NO.: 3:13-cv-00215 (VAB)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT

MARCH 22, 2016

MEMORANDUM AND ORDER

Plaintiffs, East Point Systems, Inc., Thomas Margarido, Jason Margarido and Paul Taff, brought this action against Defendants, Steven Maxim, S2K, Inc., Maxim Enterprises, Inc., Maxim Field Service Supply, Inc. (collectively, the "Maxim Defendants"), Edwin Pajemola, and Cleveland Field Systems, LLC (collectively, the "Pajemola Defendants"). The Court held a four-day bench trial, and now sets forth its findings of fact and conclusions of law under Federal Rule of Civil Procedure 52(a)(1).

As explained below, the Court finds for the Maxim Defendants on Counts One through Eight, and Ten through Fourteen. The Court finds for Plaintiffs on Count Nine and orders S2K, Inc. to sell its shares of East Point Systems, Inc. for $57,000. The Court also finds for Plaintiffs on Count Fifteen and establishes a constructive trust over any Field Navigator software in the Maxim Defendants' possession containing Field-Comm.net database tables.

The Court finds for Plaintiffs on Counts Eleven through Thirteen against the Pajemola Defendants and awards $750,000 in damages and an additional $100,000 in punitive damages, as well as reasonable costs and attorney's fees. The Court also finds for Plaintiffs on Count Fifteen and imposes a constructive trust on any Field Navigator software in the Pajemola Defendants' possession containing Field-Comm.net database tables. Finally, the Court permanently enjoins the Pajemola Defendants from using or otherwise disposing of such software.

This memorandum addresses motions pending against the Pajemola Defendants for contempt, default judgment, and dismissal of counterclaims. For the reasons explained below, Plaintiffs' Motion for Contempt (ECF No. 149) is GRANTED IN PART AND DENIED IN PART. Plaintiffs' Motion to Dismiss Counterclaims for Failure to Prosecute (ECF No. 150) is GRANTED. Plaintiffs' Motion for Default Judgment (ECF No. 152) is GRANTED IN PART AND DENIED IN PART. Maxim Defendants' Motion for Default Judgment (ECF No. 151) is FOUND AS MOOT.

I. FINDINGS OF FACT

The parties to this action operate in the mortgage field service industry, which provides preservation services for mortgaged properties in default or foreclosure. Lenders and national mortgage servicing companies typically engage regional service companies, which, in turn, typically engage subcontractors to perform preservation services on properties in default or foreclosure, such as drive-by inspections, mowing lawns, changing locks, and winterizing.

In 1996, Thomas Margarido and Paul Taff began doing business together to develop software for the mortgage field service industry. They formed East Point Systems, LLC for that purpose. Thomas Margarido's son, Jason, helped developed the software and eventually became an owner of East Point Systems, LLC. The initial version of the software was called Field-Comm, and was developed using a tool called FileMaker Pro. It took several years to develop, test, and market.

Field-Comm facilitated the processing of work orders for mortgage field services. Users could upload work orders to Field-Comm, and Field-Comm could automatically assign work orders to contractors based on certain data (e.g., the service requested or the location of the property), track the status of work orders, allow field workers to upload photographs of completed work, track the history of services performed on properties, automatically create invoices, process payments, and generate reports.

Initially, East Point Systems, LLC licensed Field-Comm to customers for a $1,500 fee. Customers received compact discs containing the software, and installed the software on their computers. Later, instead of the $1,500 fee, East Point Systems, LLC charged its customers a monthly fee, and charged "per click" fees for particular transactions conducted within Field-Comm. Regional service companies would pay "per click" fees for particular transactions that they conducted, and subcontractors of the regional service companies would also pay "per click" fees for particular transactions that they conducted. Field-Comm was not web-based. Only computers on which Field-Comm had been installed could access and use Field-Comm.

East Point Systems, LLC licensed Field-Comm to Steven Maxim's father for use in his business, Maxim Enterprises, Inc. ("MEI"). When Steven Maxim took over MEI, he discovered Field-Comm and contacted Thomas Margarido. Thomas Margarido trained Steven Maxim on Field-Comm in or about 1999. MEI then used Field-Comm in its business.

MEI was a regional service company. It coordinated subcontractors to perform mortgage field services in some northern states. MEI received work orders from lenders and national servicing companies, distributed those work orders to subcontractors, and reported back to the lenders and national servicing companies when the work was done. Some of MEI's subcontractors actually performed the work, while others were contractors who, in turn, engagedsubcontractors to perform the work. To make money, MEI retained 15 to 20 percent of the money that lenders and national servicing companies paid to have work done.

In or about 2004, Thomas Margarido told Steven Maxim that East Point Systems, LLC might go out of business without a cash infusion, and that, if it went out of business, it would not be able to support Field-Comm any longer. Steven Maxim inquired about investing in East Point Systems, LLC. Following negotiations, East Point Systems, LLC was reorganized into East Point Systems, Inc. ("East Point"). S2K, Inc. ("S2K"), a hardware retail company owned by Steven Maxim, purchased shares of East Point for $250,000, and Steven Maxim took a position on the board of directors of East Point (the "Board").

Several agreements were entered into at this time. First, Paul Taff, Thomas Margarido, Jason Margarido, and S2K entered into a Shareholder Agreement. Second, Paul Taff, Thomas Margarido, Jason Margarido, and S2K entered into a Cross Purchase Agreement. Third, East Point and S2K entered into a Confidentiality and Non-Competition Agreement. Fourth, East Point and Steven Maxim entered into a Confidentiality and Non-Competition Agreement.

While on the Board, Steven Maxim participated in meetings regarding the general direction of East Point, large expenditures, and principal compensation. He periodically engaged a financial professional to review East Point's books and records. He also proposed numerous enhancements to Field-Comm. For example, he proposed that Field-Comm have a reverse payment feature, so that if a lender or servicing company underpaid for a service, Field-Comm could reverse any payment already made to a subcontractor for that service. East Point did not implement this feature immediately, however. Steven Maxim came up with many ideas for improving Field-Comm, but East Point was unable to implement enhancements as quickly as Steven Maxim wanted them for use in his business, MEI.

In 2004, Steven Maxim proposed transitioning Field-Comm to a web-based format. The other principals of East Point rejected this proposal. They believed that transitioning to a web-based format was too risky because, at that time, the tools for web-based software development either did not exist or were unreliable. East Point instead developed the next version of its software using Microsoft's .NET framework. The principals of East Point believed that the .NET framework was more stable, well-developed, and posed less risk than the then-existing tools for web-based software development. East Point called the next version of its software Field-Comm.net, and began offering it to customers in 2005. East Point registered a copyright for Field-Comm.net. The effective date of that copyright registration was November 20, 2012. Pls.' Ex. 7.

Field-Comm.net was an improvement over Field-Comm. East Point could send downloadable software updates to customers, which was not possible with Field-Comm. Also, users could access Field-Comm.net through web browsers, whereas Field-Comm could be accessed only from computers on which it was installed.

Despite its improvements, however, Steven Maxim encountered problems with Field-Comm.net. He found it cumbersome - it sometimes timed out - and payment processing errors resulted in MEI overpaying contractors approximately $100,000 during one period. Also, Steven Maxim wanted the ability to perform advanced data analytics. He wanted to track and measure how much time, money, and staff was spent on various jobs so that MEI could identify and remedy inefficiencies. Field-Comm.net could not perform data analytics to Steven Maxim's satisfaction.

Steven Maxim told the principals of East Point that he was experiencing issues with Field-Comm.net, and that he wanted to improve the software's data analytics capabilities. EastPoint agreed to "branch" the code. That is, East Point created a copy of Field-Comm.net's code to which MEI could make modifications to meet its business objectives. MEI's branch was isolated from the code driving the software that East Point's other customers used. As a result, modifications that MEI made to its branch did not affect any other customer's software.

Around the same time, East Point referred a business analyst to Steven Maxim to help address his issues with Field-Comm.net. That business analyst referred Steven Maxim to a software developer named Edwin Pajemola. MEI engaged Edwin Pajemola to develop modifications to its branch.

To facilitate the modification of MEI's branch, East Point agreed to give MEI and Edwin Pajemola access to Field-Comm.net's source code and database. In December 2008, two...