Argument Recap:  Channing Real Estate, LLC v. Gates, SC19575

The Connecticut Supreme Court recently heard argument in Channing Real Estate, LLC v. Gates, an appeal that rose out of a failed real estate development joint venture.  This case presents two issues of interest to Connecticut’s business community.  The first issue is whether the whole case needs to be retried after an appellate ruling that the parol evidence rule blocks evidence of prior and contemporaneous statements from varying the meaning of promissory notes.  The second issue is whether the payor on those notes can counterclaim under the Connecticut Unfair Trade Practices Act (“CUTPA”) when he was a member of a limited liability company that was working on a joint venture with the limited liability company that was the payee.  This post will focus on the application of CUTPA to joint ventures, which is an issue of first impression for the Supreme Court.

Since it was enacted in 1973, CUTPA has been the basis for countless lawsuits in part because it is one of the few vehicles that litigants can use to recover their attorneys’ fees and punitive damages. Conn. Gen. Stat. § 42-110g.  Indeed, the defendant in this lawsuit, Mr. Gates, was awarded his attorneys’ fees by the trial court even though he did not prove he was entitled to damages on his CUTPA claim.  The courts have interpreted CUTPA broadly, citing its remedial purpose, but they also have ruled that certain conduct cannot violate CUTPA because it is not “trade” or “commerce” as required under the statute.  One of those categories of conduct that is outside of the bounds of CUTPA is intra-corporate or intra-partnership disputes.  In its appeal, Channing Real Estate, LLC argues that this is a dispute between former joint venturers, and that therefore Mr. Gates cannot pursue his CUTPA counterclaim.  Although the appellate courts have ruled a few times on what is or is not an internal business dispute outside of the reach of CUTPA, this case presents a fresh opportunity to clarify whether CUTPA applies to disputes in business arrangements that are not corporations or partnerships.

Mr. Gates and his wife were each 50 percent owners of Front Street Commons, LLC, which owned two parcels of commercial real estate in Putnam. Channing wanted to develop those parcels and some adjacent parcels.  The parties entered into an option agreement in principle for Channing to purchase 50 percent ownership in Front Street’s properties, and they contemplated creating a new limited liability company, Front Street Associates, LLC, to own and develop the properties, but they did not finalize and sign an operating agreement, nor did they sign the option agreement.  Throughout this time period and beyond, Channing loaned money to Mr. Gates, and the parties entered into six promissory notes totaling $281,272.74.  In December 2009, Channing demanded repayment, and when Mr. Gates did not repay the loans, Channing filed suit.

Mr. Gates asserted defenses and a counterclaim. One of the counterclaim counts was a CUTPA claim that essentially alleged that Channing misrepresented the purposes of the promissory notes by stating that they were payments towards the purchase of the interests in Front Street Associates, LLC and that seeking payment on the notes was “immoral, unethical, oppressive and unscrupulous.”  The trial court, which had held that the parol evidence rule did not apply, held that Mr. Gates had proved his CUTPA claim but that he had not proved any damages and awarded only attorneys’ fees.  The Appellate Court did not address the issue of whether CUTPA applied to this situation, but it did rule that the trial court should have applied the parol evidence rule and it remanded the entire case for a retrial.

On appeal to the Supreme Court, Channing again has raised the issue that CUTPA does not even apply because the two limited liability companies were forming a joint venture and the conduct at issue was internal to that joint venture and not in the course of trade or commerce. CUTPA provides:  “[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”   Conn. Gen. Stat. § 42-110b(a).  The Supreme Court on at least three occasions has ruled that disputes within corporations do not affect trade or commerce so as to trigger CUTPA. However, in each of those cases, the Court actually applied CUTPA because the defendants had usurped customers or assets or interfered with business expectancies in competition with the plaintiffs. Ostrowski v. Avery, 243 Conn. 355, 379 (1997); Fink v. Golenbock, 238 Conn. 183, 212 (1996); Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480, 493 (1995).  The Appellate Court extended this to partnerships, holding that although CUTPA does not apply to purely intra-partnership disputes, it could apply to claims that partnership assets were diverted to compete with the partnership. Spector v. Konover, 57 Conn. App. 121, 133-34 (2000).

In support of its appeal, Channing cited to Superior Court decisions that extended this reasoning to hold that CUTPA could not apply to disputes within joint ventures. Jalbert v. Stanziale, 2002 Conn. Super. LEXIS 122 (2002); Taurus Advisory Grp. v. Sector Mgmt., Inc., 1997 Conn. Super. LEXIS 1181 (1997).   Channing wants the Supreme Court to hold that disputes within joint ventures do not involve trade or commerce so as to be subject to CUTPA.  There is, however, a question as to whether the limited liability companies here had even formed a joint venture, and another question as to whether Mr. Gates individually can assert a CUTPA claim.  The Supreme Court could dismiss the CUTPA claim for lack of standing or affirm the Appellate Court’s holding that it is for a trial court to resolve on remand.  Alternatively, the Court could use these facts to hold for the first time that CUTPA has no role in disputes within joint ventures or even in disputes between two parties trying to create a joint venture.