Charles E. Fogarty v. Ralph Palumbo James Ottenbacher v. Ralph Palumbo , 163 A.3d 526 ( 2017 )

June 23, 2017
Supreme Court
No. 2015-271-Appeal.
No. 2015-291-Appeal.
Charles E. Fogarty : (KB 08-1073)
v. :
Ralph Palumbo et al. :
No. 2015-273-Appeal.
No. 2015-292-Appeal.
James Ottenbacher : (KB 08-1087)
v. :
Ralph Palumbo et al. :
NOTICE: This opinion is subject to formal revision before
publication in the Rhode Island Reporter. Readers are requested to
notify the Opinion Analyst, Supreme Court of Rhode Island, 250
Benefit Street, Providence, Rhode Island 02903, at Telephone 222-
3258 of any typographical or other formal errors in order that
corrections may be made before the opinion is published.
Supreme Court
No. 2015-271-Appeal.
No. 2015-291-Appeal.
Charles E. Fogarty : (KB 08-1073)
v. :
Ralph Palumbo et al. :
No. 2015-273-Appeal.
No. 2015-292-Appeal.
James Ottenbacher : (KB 08-1087)
v. :
Ralph Palumbo et al. :
Present: Suttell, C.J., Goldberg, and Flaherty, JJ.
OPINION
Chief Justice Suttell, for the Court. The matter before us arises from the August 15,
2005, sale of an approximately 360-acre tract of undeveloped land located on Dye Hill Road in
Hopkinton (the property). The plaintiffs, Charles E. Fogarty and James Ottenbacher, averred
that the sale of the property to an entity of which the defendants, Ralph Palumbo and Jonathan
Savage, were principals, without the plaintiffs’ consent, was fraudulent; they each consequently
filed an eight-count complaint in Superior Court. The plaintiffs also named Pilgrim Title
Insurance Company (Pilgrim), which was the title insurance and escrow agent in connection with
the sale of the property, as a defendant in this case. Following discovery, all three named
defendants, Palumbo, Savage, and Pilgrim (jointly, the defendants), filed motions for summary
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judgment, all of which were granted by a justice of the Superior Court. For the reasons stated
herein, we affirm the judgment of the Superior Court in part and we vacate the judgment in part.
I
Facts 1
The property was originally purchased by Fogarty in the 1970s. In 1994, Fogarty formed
a corporation known as Stone Ridge, Inc. (Stone Ridge), with three other shareholders: Grant
Schmidt, M.D.; William McComb; and co-plaintiff, Ottenbacher; each shareholder owning 25
percent of the corporation. At or about the time Stone Ridge was formed, Fogarty transferred
ownership of the property to Stone Ridge. At all times pertinent to this case, the sole asset of
Stone Ridge was the property and the shareholders’ objective was to develop it. 2 In or about
2003, Brushy Brook Development, LLC (Brushy Brook), was created as a holding company for
Stone Ridge. Title to the property was transferred from Stone Ridge to Brushy Brook 3 and
Schmidt became the managing partner for Brushy Brook. After disagreement arose among the
partners of Stone Ridge concerning the development plans for the property, in late 2004 and
early 2005, Brushy Brook sought to sell the property either to a separate buyer or to one or more
of its shareholders. As of November 2004, Ottenbacher became the president of Stone Ridge.
Ottenbacher claimed that he secured Palumbo, a certified public accountant, and Savage,
a corporate attorney, to assist him in either purchasing the property, or securing another buyer.
1
Our summary of the facts in this case is drawn from the complaints and from the evidence
produced during discovery. We note that the first of seven Superior Court files is missing and is
not part of the record on appeal. Nevertheless, we are satisfied that enough is before us to
properly consider the issues raised.
2
The project to develop the property consisted of building sixty-six single-family homes, sixty-
eight townhouses, and an eighteen-hole golf course.
3
The title transfer of the property to Brushy Brook caused Fogarty to file suit against the three
other shareholders. According to Fogarty, Schmidt violated Stone Ridge’s bylaws by
transferring the property without the needed 100 percent of the shareholders’ vote. Ultimately, a
consent order was filed and the case was dismissed.
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Palumbo and Savage “produced * * * a buy-out plan” whereby Ottenbacher and Fogarty,
through financing, would buy out Schmidt and McComb. A buyout agreement was drafted by
Adam Clavell, an associate at Savage’s law firm at that time, at the direction of Savage. At
deposition, Fogarty stated that he met with Ottenbacher, Palumbo, and Savage and discussed
receivership as an option, but that they ultimately did not want to go that route. Fogarty testified
that, at this time, Savage “was [their] attorney,” and “was doing all of the paperwork,” but that
he had not signed a retainer agreement with, or ever paid, Savage or Savage’s law firm. Fogarty
averred that it was his understanding that “from November 17, [2004,] to probably towards the
end of December” he was represented by Savage. 4 He further indicated that “Palumbo was
supposed to then be [their] accountant for the new project.”
Palumbo and Savage were the principals of an entity named Boulder Brook
Development, LLC (Boulder Brook), and plaintiffs claim this was unknown to them. On April
6, 2005, the four shareholders of Stone Ridge (plaintiffs, Schmidt, and McComb) executed an
Asset Purchase Agreement (APA) for the sale of the property to Boulder Brook. By the terms of
the APA, a closing date was set for thirty days thereafter. The APA closing date lapsed prior to a
closing occurring. 5
Sometime in July 2005, Ottenbacher made an offer to Brushy Brook to purchase the
property with a partner, Steven Kaufman. 6 According to Ottenbacher, Schmidt and McComb
agreed on the sale of the property and a closing was set for August 15, 2005, with Attorney Mark
4
Fogarty also maintained that in April 2005 Savage represented both himself and Ottenbacher.
5
Emails exchanged between the parties evidence that Boulder Brook was seemingly seeking to
do its due diligence in order to close on the property.
6
Steven Kaufman is not a party to this litigation.
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Spangler engaged as the closing agent. 7 In anticipation of the closing, $3,654,367.38 was
transferred into Spangler’s clients’ trust account. On August 16, 2005, Spangler traveled to the
Hopkinton Town Hall to review the Hopkinton Land Evidence Records and discovered a deed
signed by Schmidt dated August 15, 2005, transferring the property to Boulder Brook (herein,
the sale to Boulder Brook). As noted, Pilgrim was the title insurance agent and escrow agent in
connection with the sale to Boulder Brook. According to plaintiffs, the deed was executed
without their knowledge and, because the terms of the APA had since expired without a closing,
their approval was required to convey the property. 8
II
Travel
Approximately three years later, on August 14 and 18, 2008, Fogarty and Ottenbacher,
respectively, filed two pro se complaints against Palumbo. Thereafter, in 2010, both of their
7
Palumbo and Savage maintain that the proposal was rejected. In an August 1, 2005 email sent
from Gerald Vande Werken, Brushy Brook’s attorney, in response to two offers from
Ottenbacher (one of $5 million and one of $3.6 million in cash according to the email),Vande
Werken acknowledged that Boulder Brook was in default of the APA but that he had just
recently learned that Boulder Brook had an entity to finance the transaction, Realty Financial
Partners (RFP), and that “[a]ssuming for the moment that Savage and RFP * * * close[d] under
the terms that they had previously agreed to in [the APA], their offer [was] potentially worth
$500,000 more than [Ottenbacher’s] offer of $5M, assuming that both parties ([Ottenbacher
group] and Savage’s) [were] equally capable of bringing this project to a successful conclusion.”
After Vande Werken articulated his doubts about whether Ottenbacher could complete a project
of this magnitude, and communicated that he could not react to Ottenbacher’s offer of a $3.6
million all-cash offer because he “was not certain of the details or what that proposal mean[t] to
all 4 of the Stone Ridge shareholders,” Vande Werken concluded that he “would recommend to
[Schmidt] that [Schmidt] pursue a closing with * * * Savage and RFP ASAP” as his “gut [told
him] that they [were] the ones most likely to perform the complete project.”
8
On that same day, plaintiffs filed an involuntary petition against Brushy Brook in the United
States Bankruptcy Court for the Judicial District of Rhode Island (Case No. 1:05-bk-13009).
Attorney Charles Pisaturo was appointed as a Chapter 7 Bankruptcy Trustee. On or about June
20, 2006, Pisaturo petitioned Stone Ridge, Brushy Brook’s sole shareholder, into Bankruptcy and
was also appointed the Chapter 7 Bankruptcy Trustee. After investigating the entities and the
sale to Boulder Brook, Pisaturo filed suit against Schmidt and Vande Werken claiming breach of
fiduciary duties. This case settled and no other claims were made.
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complaints were amended to include Savage and Pilgrim as defendants, they obtained legal
representation, and their matters were consolidated. Fogarty’s second-amended complaint filed
in March 2010 and Ottenbacher’s first-amended complaint filed in April 2010 are nearly
identical and allege, against both Palumbo and Savage, negligence (counts 1 and 2 9), breach of
contract (counts 3), tortious interference with a contractual relationship (counts 4), interference
with a prospective contractual relationship (counts 5), fraud (counts 6), and civil conspiracy
(counts 8). The plaintiffs also each raise one negligence count against Pilgrim (counts 7).
Discovery ensued for approximately five years. In addition to the production of
documents and interrogatories exchanged between the parties, Fogarty, Ottenbacher, Schmidt,
McComb, Palumbo, Clavell, Spangler, Gerald Vande Werken, who was Brushy Brook’s
attorney, and James A. Houle, who was retained to appraise the property, were all deposed.
Certain depositions and documents produced during discovery will be discussed in further detail
as they become pertinent to this Court’s analysis.
On March 6, 2014, Pilgrim filed a motion for summary judgment on the negligence
counts against it, to which plaintiffs objected. A hearing was held on April 7, 2014, and, on June
9, 2014, the hearing justice issued a written decision granting Pilgrim’s motion. The hearing
justice reasoned that there was “no genuine issue of material fact that” any “potential liability”
on Pilgrim’s part “was discoverable as of August 16, 2005.” Unable to satisfy the requirements
of the discovery-rule exception to the three-year statute of limitations set forth in G.L. 1956 § 9-
1-14.3 10 for legal malpractice claims, plaintiffs’ 2010 claims against Pilgrim were deemed
9
Counts 2 were dismissed pursuant to an April 27, 2011 stipulation of the parties.
10
General Laws 1956 § 9-1-14.3 provides, in relevant part, that “an action for legal malpractice
shall be commenced within three (3) years of the occurrence of the incident which gave rise to
the action.”
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untimely. Final judgment entered on August 12, 2014, and, on August 22, 2014, plaintiffs filed a
notice of appeal.
As the appellate process proceeded on Pilgrim’s summary disposition, defendants
Palumbo and Savage filed a total of four motions for summary judgment; two of which were
joint motions and two of which were Savage’s individual filings. 11 A hearing was held on all
four motions on November 10, 2014. In a written decision filed on December 1, 2014, the
hearing justice granted all four motions for summary judgment. On April 17, 2015, the Superior
Court granted final judgment pursuant to Rule 54(b) of the Superior Court Rules of Civil
Procedure and plaintiffs filed a timely notice of appeal. 12
III
Standard of Review
“This Court will review the grant of a motion for summary judgment de novo, employing
the same standards and rules used by the hearing justice.” Newstone Development, LLC v. East
Pacific, LLC, 140 A.3d 100, 103 (R.I. 2016) (quoting Daniels v. Fluette, 64 A.3d 302, 304 (R.I.
2013)). “We will affirm a [trial] court’s decision only if, after reviewing the admissible evidence
in the light most favorable to the nonmoving party, we conclude that no genuine issue of material
11
Palumbo and Savage moved for summary judgment on all counts against them on the basis
that plaintiffs had “failed to demonstrate any form of damages resulting from the alleged actions
[of] * * * [d]efendant[s],” with a reasonable degree of certainty and, accordingly, had failed to
“establish a prima facie case for any cause of action.” In a separate motion, they moved for
summary judgment as to counts 4, on the grounds that no contract existed between Brushy Brook
and plaintiffs, a legal prerequisite and factual element to their claims of tortious interference with
a contractual relationship, and on counts 5 on the basis that no business relationship or
expectancy existed between Brushy Brook and plaintiffs since Brushy Brook had duly rejected
plaintiffs’ offer to purchase. Savage individually moved for summary judgment on counts 3, 6,
and 8 of the complaints on the basis that “there [was] no evidence whatsoever that an attorney-
client relationship ever existed between Savage and * * * [p]laintiffs” and, in a separate motion,
on the basis that plaintiffs filed their complaints outside of the applicable statute of limitations.
12
On March 23, 2015, Palumbo and Savage filed a motion for sanctions pursuant to Rule 11 of
the Superior Court Rules of Civil Procedure. The defendants’ motion was denied; this denial
was not appealed and is not before this Court.
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fact exists and that the moving party is entitled to judgment as a matter of law.” Id. (quoting
Daniels, 64 A.3d at 304). “Furthermore, ‘the nonmoving party bears the burden of proving by
competent evidence the existence of a disputed issue of material fact and cannot rest upon mere
allegations or denials in the pleadings, mere conclusions or mere legal opinions.’” Id. (quoting
Daniels, 64 A.3d at 304).
“[S]ummary judgment should enter against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case * * *.” Newstone
Development, LLC, 140 A.3d at 103 (quoting Lavoie v. North East Knitting, Inc., 918 A.2d 225,
228 (R.I. 2007)). “Furthermore, this Court can affirm the Superior Court’s judgment on grounds
other than those relied upon by the trial justice.” Berman v. Sitrin, 991 A.2d 1038, 1043 (R.I.
2010).
IV
Analysis
A
Defendant Pilgrim Title Insurance Company
1. Negligence (Counts 7)
The plaintiffs’ claims against Pilgrim are negligence-based legal malpractice claims; they
allege that Pilgrim “owed a duty to all those with a legal interest in the property, to perform
professional services in a competent manner and in conformance with standards applicable to
closing agents.” According to plaintiffs, Pilgrim breached that duty and such breach caused
them to suffer damages.
On August 16, 2005, Spangler went to the Hopkinton Town Hall after being informed by
plaintiffs that “something had happened” regarding the property. Upon inspecting the
recordings, Spangler located the warranty deed transferring the property to Boulder Brook.
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Although he could not recall the specifics, Spangler testified at deposition that “there may have
been municipal lien certificates[.]” The first nine pages of the pertinent recordings located at the
Hopkinton Town Hall were municipal lien certificates, each of which contained the following
text on the bottom of the page: “Certificate requested by Pilgrim Title Ins. Co., 50 Park Row
West, S 102, Providence, RI 02903.” During discovery, plaintiffs learned for the first time that
counsel for Pilgrim had requested unanimous consent of the shareholders authorizing the
transaction and had been informed that it appeared that there would not be unanimity, but that he
nevertheless “continued forward with the closing.” A document signed by Schmidt authorizing
the sale to Boulder Brook entitled “Minutes of Actions Taken in Writing and Without A Meeting
by the Manager of Brushy Brook Development, LLC” was provided to Pilgrim. This document
referenced an operative Asset Purchase Agreement; however, such agreement was never
produced.
“General Laws 1956 § 9-1-14.3 sets forth a three-year statute of limitations for legal
malpractice claims.” Behroozi v. Kirshenbaum, 128 A.3d 869, 872 (R.I. 2016). Section 9-1-14.3
provides, in relevant part, that:
“Notwithstanding the provisions of §§ 9-1-13 and 9-1-14, an
action for legal malpractice shall be commenced within three (3)
years of the occurrence of the incident which gave rise to the
action; provided, however, that:
“* * *
“(2) In respect to those injuries due to acts of legal malpractice
which could not in the exercise of reasonable diligence be
discoverable at the time of the occurrence of the incident which
gave rise to the action, suit shall be commenced within three (3)
years of the time that the act or acts of legal malpractice should, in
the exercise of reasonable diligence, have been discovered.”
Because it is undisputed that the closing—the incident giving rise to this claim—
occurred in August 2005, and that plaintiffs amended their complaints to include Pilgrim as a
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defendant in March 2010, the determination of whether plaintiffs’ claims against Pilgrim should
be time-barred rests on the applicability of the discovery-rule exception, as set forth in § 9-1-
14.3(2), to the facts in this case.
The discovery-rule exception, codified in § 9-1-14.3(2), “serves ‘to protect individuals
suffering from latent or undiscoverable injuries who then seek legal redress after the statute of
limitations has expired for a particular claim.’” Behroozi, 128 A.3d at 873 (quoting Sharkey v.
Prescott, 19 A.3d 62, 66 (R.I. 2011)). “The standard applied to this exception is objective: [I]t
‘requires only that the plaintiff be aware of facts that would place a reasonable person on notice
that a potential claim exists.’” Id. (quoting Sharkey, 19 A.3d at 66). “The discovery rule does
not require perfect crystallization of the nature and extent of the injury suffered or a clear-cut
anchoring to the allegedly negligent conduct of a defendant.” Bustamante v. Oshiro, 64 A.3d
1200, 1207 (R.I. 2013). Rather, a legal-malpractice plaintiff is afforded three years to commence
suit from “the time that the act or acts of the malpractice should, in the exercise of reasonable
diligence, have been discovered.” Section 9-1-14.3(2).
“The reasonable diligence standard is based upon the perception of
a reasonable person placed in circumstances similar to the
plaintiffs, and also upon an objective assessment of whether such a
person should have discovered that the defendant’s wrongful
conduct had caused him or her to be injured. If a reasonable
person in similar circumstances should have discovered that the
wrongful conduct of the defendant caused her injuries as of some
date before the plaintiff alleged that she made this discovery, then
the earlier date will be used to start the running of the limitations
period.” Mills v. Toselli, 819 A.2d 202, 205 (R.I. 2003) (quoting
Martin v. Howard, 784 A.2d 291, 300 (R.I. 2001)).
On appeal, plaintiffs argue that summary judgment as to Pilgrim should be vacated
because there remain genuine issues of material fact regarding whether plaintiffs could have
reasonably discovered Pilgrim’s negligent conduct giving rise to their injury. The plaintiffs
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maintain that the hearing justice “considered disputed facts in a light most favorable to Pilgrim.”
According to plaintiffs, it was not until they received closing documents in response to an
October 2009 subpoena that they learned “the acts and omissions with Pilgrim which [gave] rise
to this litigation,” e.g., that Pilgrim “continued forward with the closing” despite being informed
that there may not be unanimous consent of the shareholders. The plaintiffs further highlight that
Spangler testified that he did not recall seeing the municipal lien certificates depicting the name
of Pilgrim, and that, in any event, “Municipal Lien Certificates bearing the name Pilgrim * * *
would not place a reasonable person exercising reasonable diligence on notice of Pilgrim’s
actions.” 13
It is our opinion that the negligence claims against Pilgrim are time-barred because, in
August 2005, plaintiffs were aware of facts that placed them on notice that potential claims
existed against Pilgrim. See Behroozi, 128 A.3d at 873. Notably, it is undisputed that Pilgrim’s
name was on the municipal lien certificates recorded in the Land Evidence Records. Pilgrim’s
participation in the closing of the sale to Boulder Brook was readily discoverable by plaintiffs as
of August 16, 2005. As noted, nine pages of the pertinent recordings located at the Hopkinton
Town Hall specifically stated that the certificates had been requested by Pilgrim.
Moreover, as plaintiffs themselves acknowledged in their filings to this Court, “[o]n
August 14, 2005, Ottenbacher sent an email to * * * Schmidt, * * * Savage, and others, advising
that there was no consent among the shareholders to sell the property and that the [APA] had
13
The plaintiffs also argue that the hearing justice failed to address G.L. 1956 § 9-1-20, which
provides accrual of causes of actions when any person “liable to an action by another, shall
fraudulently, by actual misrepresentation, conceal from him or her the existence of the cause of
action,” and its application to this case. However, because plaintiffs did not present this
argument to the hearing justice, we will not consider it on appeal. See State v. Saluter, 715 A.2d
1250, 1258 (R.I. 1998) (“It is axiomatic that ‘this [C]ourt will not consider an issue raised for the
first time on appeal that was not properly presented before the trial court.’”) (quoting State v.
Gatone, 698 A.2d 230, 242 (R.I. 1997)).
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long since lapsed. * * * He advised that they would be committing fraud if they proceeded to
closing.” The plaintiffs believed, therefore, as soon as they learned from Spangler that a deed
conveying the property had been recorded, that they were wronged because they had not
consented to or authorized the sale. At that moment, or at any time prior to the expiration of the
three-year statute of limitations, plaintiffs were required to inspect and inquire to determine what
claims they had against the parties involved in the alleged fraudulent transaction. Instead, and
despite being armed with the belief that the sale to Boulder Brook was fraudulent, plaintiffs did
not seek to discover who the escrow agent was in this transaction. Both plaintiffs testified that
they relied on the bankruptcy attorneys they had hired at that time. The plaintiffs cannot,
however, avoid the three-year statute of limitations or seek application of the discovery-rule
exception by faulting their attorneys for failing to see the potential claims they had against
Pilgrim. This is particularly true given that Fogarty, as a real-estate agent, and Ottenbacher, a
real-estate developer, were experienced in real-estate transactions.
Undoubtedly, plaintiffs wholly fail to satisfy the reasonable diligence standard of § 9-1-
14.3(2). Because plaintiffs’ claims against Pilgrim were filed outside of the three-year statutory
period, and because they fail to present any evidence that raises an issue of material fact
regarding their diligence in discovering these claims, we affirm the judgment of the Superior
Court as it relates to counts 7.
B
Defendants Ralph Palumbo and Jonathan Savage
1. Damages (All Counts)
Palumbo and Savage filed a joint motion for summary judgment on all counts on the
basis that plaintiffs had “failed to demonstrate any form of damages resulting from [their] alleged
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actions” and, accordingly, had failed to “establish a prima facie case for any cause of action.”
The hearing justice agreed, and granted defendants’ motion for summary judgment on all counts
because plaintiffs had failed to put forth “evidence regarding lost profits to a reasonable degree
of certainty.”
In his answers to interrogatories posed by Palumbo, Ottenbacher noted that “[b]ecause of
* * * [d]efendants’ actions, [he] lost [his] intended share of the land owned by Brushy Brook
* * * and the profits derived from the land, which would include profits on condominiums, sale
of house lots, and revenues generated by a golf course and exercise facility and restaurant.”
Additionally, he noted that he “would have received repayment of the principal of the debts
owed to [him] by Brushy Brook and Stone Ridge but for the actions [and omissions] of
[d]efendant Palumbo.” At deposition, Ottenbacher stated: “[he] had an opportunity taken away
from [him]. [He] was damaged [in] that the money [he] invested in Stone Ridge was never
returned to [him], and [he] had the opportunity of taking over the project and probably turning it
into a 20 or $30 million operation.”
The plaintiffs also retained a real-estate appraiser, James A. Houle, to opine regarding the
value of the property and the damages plaintiffs allege to have incurred due to defendants’
conduct. In a March 26, 2007 appraisal, Houle appraised value of the property at “$10,000,000”
as of 2005. To reach this figure, Houle had to assume that the property’s construction approvals,
which had been previously granted but had since expired, would be renewed. At deposition,
Houle testified that he had “calculated out the full value, retail value, of all the properties and
then deducted the expenses that [one] would normally incur to arrive at a residual number which
was the value of the property.” Houle stated that he was prepared to testify at trial as to the value
of the property at the time of the August 2005 conveyance, the costs to develop the property, as
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well as the expected profits a developer might have made if the property was developed under a
certain series of circumstances.
When asked if he could state “within a reasonable degree of certainty, based upon [his]
experience as a developer[,] * * * what the lost profits [were] to * * * Fogarty as he[] [had]
claimed in his complaint,” Houle replied that he had not “seen the complaint. [He did not] know
what [the] purchase price would have been. [He did not] know what [Fogarty’s] financing terms
were. Assuming all things [were] equal to what [he] had projected * * *, [he] could calculate
easily what [he] would have projected a developer to not gain or not get if he didn’t do the
project.” Houle testified that that amount would be “20 percent of * * * the retail sales of the
project divided by whatever percentage of ownership.” Because the “property * * * at one time
carried extensive approvals for 134 units,” he testified that “it certainly would be reasonable to
expect if you were doing an appraisal that [the property] could support 90 or 100” units. Houle
also noted that, about one year before he was deposed, and after having stored it for ten years, he
destroyed the working file that he prepared for this case.
Additionally, in their attempt to establish that they had incurred damages, plaintiffs also
presented a valuation of the condominium site, including construction costs, and a notice that
twenty-two single-family lots had been reserved as of October 2004.
In granting summary judgment, the hearing justice noted that plaintiffs alleged to have
suffered damages in two ways: (1) as shareholders who “would have received some return of
their initial contribution” had their deal been accepted; and (2) lost profits as a result of not
purchasing and developing the property. The hearing justice concluded that plaintiffs lacked
standing to recover under the first claim of damages because this was “a claim that Stone Ridge
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or its [s]hareholders ought to make,” not plaintiffs in their individual capacities. 14 Relating to
plaintiffs’ claims of lost profits, the hearing justice ultimately decided that plaintiffs’ proffered
expert witness, Houle, had failed to “support a finding that damages ha[d] been established with
a reasonable degree of certainty.” Houle had opined that the property fully developed would be
valued at over $10,000,000, but the hearing justice believed that any expert testimony regarding
lost profits was speculative of whether all building permits would be in place, plaintiffs would be
able to obtain necessary financing for the development, and the actual construction costs.
On appeal, plaintiffs argue that the hearing justice erred in determining that there was no
factual issue regarding damages. The plaintiffs argue that the hearing justice “failed to view the
deposition testimony in the light most favorable to [them].” The plaintiffs claim that the hearing
justice instead “consistently considered disputed facts in the light most favorable to the moving
party,” and failed to view the record in its entirety. The plaintiffs also highlight that all but one
of the cases cited by the hearing justice in support of his contention that damages must be based
on more than speculation were decided after a trial on the merits, and not at the summary-
judgment stage.
The basic precondition for the recovery of lost profits is that such a loss be established
“with reasonable certainty.” Troutbrook Farm, Inc. v. DeWitt, 611 A.2d 820, 824 (R.I. 1992).
Although mathematical precision is not required, the jury should be provided with some rational
14
In their filings to this Court, plaintiffs do not challenge the hearing justice’s determination
regarding standing; instead, they solely press the issue of damages as it relates to lost profits.
Palumbo and Savage contend in their written submission that plaintiff’s failure to dispute
standing is dispositive of plaintiffs’ appeal in its entirety. We disagree. The hearing justice’s
decision on standing quite clearly only relates to plaintiffs’ first theory of damages—that they, as
shareholders of Stone Ridge, would have received a return on their initial capital contributions—
because the hearing justice ruled that these claims were derivative. The hearing justice’s
decision continues and addresses the plaintiffs’ second theory of damages—lost profits. Having
fully briefed their second theory of damages, no such waiver has occurred.
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model of how the lost profits occurred and on what basis they have been computed. Abbey
Medical/Abbey Rents, Inc. v. Mignacca, 471 A.2d 189, 195 (R.I. 1984). In all counts raised in
the complaint, plaintiffs are burdened with establishing that they incurred reasonably certain
damages as a consequence of defendants’ wrongdoing. See Petrarca v. Fidelity and Casualty
Insurance Co., 884 A.2d 406, 410 (R.I. 2005) (breach of contract); Belliveau Building Corp. v.
O’Coin, 763 A.2d 622, 627 (R.I. 2000) (tortious interference with a contractual relationship);
Avilla v. Newport Grand Jai Alai LLC, 935 A.2d 91, 98 (R.I. 2007) (interference with a
prospective contractual relationship); Cliftex Clothing Co. v. DiSanto, 88 R.I. 338, 344, 148
A.2d 273, 275 (1959) (fraud).
While we by no means depart from our well-established principle that damages must be
sufficiently certain, it is our opinion that, in this case, Houle’s testimony on damages, coupled
with the exhibits submitted, was sufficient to survive summary judgment. The existence of
damages, including their certainty, is a question for the factfinder to decide. The plaintiffs in this
case did not “simply rest on the allegations and denials in [their] pleadings,” but instead
presented an expert witness who opined that they suffered damages. Brito v. Capone, 819 A.2d
663, 666 (R.I. 2003). Here, a careful review of Houle’s testimony indicates that, although he
could not quantify plaintiffs’ damages with certainty because he did not have the necessary
details of the purported sale, he did supply proof of the existence of damages and a formula by
which to compute those damages. In viewing the evidence in the light most favorable to
plaintiffs and drawing reasonable inferences therefrom—i.e., that the building permits would
have been renewed and the project would have been financed—we are of the opinion that
plaintiffs presented sufficient evidence to survive summary disposition.
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The Tennessee Court of Appeals’ holding in Patel v. Bayliff, 121 S.W.3d 347 (Tenn. Ct.
App. 2003), is instructive and persuasive. In Patel, the Court held the following:
‘“Uncertain * * * damages are prohibited only when the existence
of damage is uncertain, not when the amount is uncertain. When
there is substantial evidence in the record and reasonable
inferences may be drawn from that evidence mathematical
certainty is not required.’ * * * ‘[T]he law does not require
exactness of computation in suits that involve questions of
damages growing out of contract or tort.’ * * * Accordingly,
although [the plaintiff] did not quantify [her damages] * * *, she
[did] supply proof of the existence of damages, which is sufficient
to survive a motion for summary judgment.” Id. at 356 (quoting
Walker v. Sidney Gilreath & Associates, 40 S.W.3d 66, 72 (Tenn.
Ct. App. 2000)).
We are satisfied that the evidence of damages in the form of lost profits presented by
plaintiffs was sufficient to survive summary judgment, as plaintiffs supplied proof of the
existence of such damages. Therefore, because we do not affirm summary judgment on all
counts based on uncertainty of damages as it relates to lost profits, we will address the other
grounds upon which defendants moved for summary judgment to determine if they are
nevertheless entitled to summary disposition.
2. Tortious Interference with a Contractual Relations (Counts 4)
In counts 4, plaintiffs allege that Palumbo and Savage tortiously interfered with their
contract with Brushy Brook to purchase the property. The plaintiffs allege that “Palumbo and
Savage knew or should have known that [plaintiffs] entered into a contractual relationship in
connection with the purchase of [the property],” that Palumbo and Savage intentionally and
negligently interfered with such contract, and that this interference caused them to suffer
damages. Palumbo and Savage moved for summary judgment on counts 4 on the basis that no
contract existed between plaintiffs and Brushy Brook—a legal prerequisite to plaintiffs’ claims.
The hearing justice agreed and found that “a contract for the sale of the [p]roperty to the
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[p]laintiffs ha[d] not been established by the evidence,” and thus count 4 of their complaints
failed.
In order to establish a claim for tortious interference with a contractual relationship,
plaintiffs must establish the following four elements: “(1) [T]he existence of a contract; (2) the
alleged wrongdoer’s knowledge of the contract; (3) his [or her] intentional interference; and (4)
damages resulting therefrom.” Belliveau Building Corp., 763 A.2d at 627 (quoting Smith
Development Corp. v. Bilow Enterprises, Inc., 112 R.I. 203, 211, 308 A.2d 477, 482 (1973)). To
form a valid contract, there must be “competent parties, subject matter, a legal consideration,
mutuality of agreement, and mutuality of obligation.” Rhode Island Five v. Medical Associates
of Bristol County, Inc., 668 A.2d 1250, 1253 (R.I. 1996) (quoting Black’s Law Dictionary 322
(6th ed. 1990)). Moreover, in Rhode Island, the statute of frauds requires that, to enforce an
agreement for the sale of real property, the agreement must be signed by the party against whom
enforcement is sought. See G.L. 1956 § 9-1-4.
The plaintiffs rely on an email from Schmidt to establish the existence of a contract for
the purchase of the property. The email is dated August 11, 2005, and reads as follows:
“[Ottenbacher],
“I don’t have a functional fax at home presently and [McComb]
just read me your letter. In principle, I would agree to sell at $4.1
million and reluctantly agree that SK Capital and [Fogarty] get the
specified amounts off the top, in the case of [Fogarty] for [the] sale
of his shares to Stone Ridge. I agree that hold[-]harmless clauses
will be included with the sale. I don’t object to escrow of the
funds in a Stone Ridge account. The only thorny issue is the
payoff of the creditors of [Brushy Brook], and that will have to
[be] taken care of in order to sign this agreement. The other issues
I addressed with you a week ago may resolve themselves.
“[Schmidt]”
On appeal, plaintiffs argue that the hearing justice erroneously concluded that no contract
existed between plaintiffs and Brushy Brook for the sale of the property and that the hearing
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justice “ignore[d] the multiple statements of acceptance overtly asserted by the accepting party,
Schmidt * * *.” Specifically, plaintiffs point to the following language in Schmidt’s email: “In
principle, I would agree to sell at $4.1 million”; “[I] reluctantly agree that SK Capital and
[Fogarty] get the specified amounts off the top * * *”; “I agree that hold[-]harmless clauses will
be included with the sale”; and “I don’t object to escrow of the funds in a Stone Ridge account.”
The plaintiffs insist that viewing these statements in the light most favorable to them establishes
“offer and acceptance to buy the property, or, in the alternative, a counteroffer on behalf of
Schmidt” and, accordingly, warrants a reversal of summary judgment.
It is this Court’s opinion that this email, as a matter of law, does not establish the
existence of a contract. Although Schmidt agreed on the purchase price “in principle,” there are
terms like “the payoff of the creditors of [Brushy Brook]” that needed “to [be] taken care of in
order to sign th[e] agreement.” It is evident that the parties had not yet reached an agreement on
material terms. Moreover, it is clear that Schmidt did not intend to enter a contract at that precise
moment, as required to constitute a valid acceptance. See Smith v. Boyd, 553 A.2d 131, 133 (R.I.
1989); see also Weaver v. American Power Conversion Corp., 863 A.2d 193, 198 (R.I. 2004)
(“for parties to form a valid contract, each must have the intent to be bound by the terms of the
agreement”).
Because plaintiffs failed to present competent evidence of the existence of a contract—a
legal prerequisite and factual element to their tortious interference with a contractual relationship
claims, we hereby affirm the Superior Court order granting summary judgment as to counts 4.
3. Intentional Interference with Prospective Contractual Relations (Counts 5)
The plaintiffs also allege, in counts 5, that they “expected to enter into a beneficial
contractual relationship with other individuals and/or entities in connection with the development
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of [the property]” and that defendants Palumbo and Savage “knew or should have known” of
these prospective contractual relations and that their “intentional and negligent conduct * * *
interfered with” their contracts relating to the property. In granting summary judgment, the
hearing justice found that it was “clear that these two parties competed in their attempts to
acquire the [p]roperty,” and that while defendants were victorious, this “[c]ompetition alone
[was] not enough to demonstrate tortious interference,” so the motion for summary judgment on
this basis was also granted.
On appeal, plaintiffs contend that the Vande Werken email, see note 7, supra, when
viewed in the light most favorable to them, does not constitute a rejection of their offer to
purchase the property. The plaintiffs argue that instead of a “rejection,” this email requests
clarification of plaintiff’s offer in order to compare it to the offer of Savage. The plaintiffs also
argue that the evidence they proffered at the summary-judgment stage showed that they were in
ongoing negotiations to purchase the property, and that they had an expectation of purchasing the
property and entering into a business relationship with Brushy Brook. Palumbo and Savage
counter that plaintiffs did not possess a business expectancy associated with developing the
property as their “proposal to purchase the [p]roperty was outright rejected and marked as
inferior by Brushy Brook,” and “[t]herefore, no business relationship or expectancy existed.”
“[T]he elements of intentional interference with prospective contractual relations ‘are
identical to those required to state a claim based on interference with contractual relations,
except for the requirement in the latter that an actual contract exist.’” Avilla, 935 A.2d at 98(quoting Mesolella v. City of Providence, 508 A.2d 661, 670 (R.I. 1986)). A party must
establish: “(1) the existence of a business relationship or expectancy, (2) knowledge by the
interferer of the relationship or expectancy, (3) an intentional act of interference, (4) proof that
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the interference caused the harm sustained, and (5) damages to the plaintiff.” Id. (quoting L.A.
Ray Realty v. Town Council of Cumberland, 698 A.2d 202, 207 (R.I. 1997)).
We are of the opinion that plaintiffs did not raise an issue of material fact as it relates to
their prospects of purchasing the property and entering into a business relationship. Again, as
plaintiffs presented no evidence to support the existence of a contract between them and Brushy
Brook for the sale of the property, they again present no evidence that there was an ongoing
business relationship or expectancy when the parties were negotiating the terms of a sale. We
agree with the hearing justice that the evidence established that there were competing buyers for
the property; the fact that Palumbo and Savage were ultimately victorious, standing alone, does
not present issues of material fact. The plaintiffs fail to present any evidence that they were in a
business relationship with Brushy Brook or expected to be (or with any other third party).
Accordingly, we affirm summary judgment on counts 5.
4. Breach of Contract (Counts 3)
Savage moved for summary judgment on counts 3, 6, and 8 of plaintiffs’ complaints on
the basis that “there [was] no evidence whatsoever that an attorney-client relationship ever
existed” between plaintiffs and him, and, in a separate motion, on the basis that plaintiffs filed
their complaints outside of the applicable three-year statute of limitations for legal-malpractice
claims. The hearing justice agreed and granted the motions on both grounds. On appeal,
plaintiffs contend that the hearing justice “improperly conflated and combined” their legal-
malpractice breach-of-contract claims against Savage with their claims for fraud and civil
conspiracy, as the two latter claims did not relate to Savage’s conduct as their alleged attorney.
We need not delve into an analysis of the applicable statute of limitations, however, because we
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affirm summary judgment on counts 3 on the grounds that plaintiffs have failed to put forth
competent evidence of the existence of an attorney-client relationship with Savage.
In their breach-of-contract claims, plaintiffs allege that they “contracted with Savage, to
be [their] legal advisor and to assist [them] in the purchase of, or in securing a purchaser for, the
* * * property.” They claim that Savage breached their contract and that such breach resulted in
damages to plaintiffs. In a breach-of-contract claim, the plaintiff must prove both the existence
and breach of a contract, and that the defendant’s breach thereof caused the plaintiff’s damages.
See Petrarca v. Fidelity and Casualty Insurance Co., 884 A.2d 406, 410 (R.I. 2005). The
plaintiffs’ breach-of-contract claims are premised on their alleged fiduciary attorney-client
relationship with Savage.
“To prevail on a legal malpractice claim, a plaintiff must prove by a fair preponderance
of the evidence: the defendant’s duty of care, a breach of that duty, and damages actually and
proximately sustained by the plaintiff as a result of such breach.” Richmond Square Capital
Corp. v. Mittleman, 773 A.2d 882, 886 (R.I. 2001). Here, the existence of a duty depends on
whether an attorney-client relationship existed between plaintiffs and Savage. An “attorney-
client relationship * * * is the product of an agreement of the parties and may be implied from
their conduct.” State v. Austin, 462 A.2d 359, 362 (R.I. 1983).
We agree with the hearing justice that “[p]laintiffs’ mere allegation that Savage was their
attorney without other corroborating evidence does not prevent the granting of a summary
judgment motion.” The plaintiffs rely on the fact that Clavell drafted the buyout agreement,
whereby plaintiffs would buy out Schmidt and McComb’s interest in Stone Ridge, as evidence
that an attorney-client relationship existed between plaintiffs and Savage. However, it was
Fogarty’s understanding that plaintiffs would then sell the property to Savage. Additionally, in
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his deposition, Ottenbacher testified that he first met Savage in November 2004 to obtain
financing so that Ottenbacher and Fogarty could buy out their two partners, and that Savage went
from “being a lender to * * * being a buyer” in December 2004 or the beginning of 2005. He
also testified that he met with Savage, Fogarty, and Palumbo in March or April 2005 to discuss
Savage’s purchase of the property.
Moreover, integral parties to the transaction testified at deposition that at all times Savage
was a purchaser of the property. Ottenbacher, in his deposition during the bankruptcy
proceedings, indicated that he began to work with Savage as a purchaser of the property as early
as November 2004. Vande Werken also testified that plaintiffs never represented to him that
Savage was their attorney. Pisaturo also understood Savage to be the buyer, and that Savage had
been negotiating with a member from Brushy Brook on the purchase price and terms.
After reviewing the record, we agree with the hearing justice that plaintiffs have failed to
present evidence that Savage was acting as their attorney. Accordingly, we affirm summary
judgment as to counts 3 against Savage.
5. Fraud (Counts 6)
In their fraud claims, plaintiffs allege that Palumbo and Savage “made false
representations about material facts, and/or failed to disclose facts and/or information” to them.
They allege that “Palumbo and Savage had a relation[ship] of trust and confidence with [them],
and therefore, had a duty to disclose their/its involvement with Boulder Brook * * * and/or
Boulder Brook[’s] * * * intention to purchase the [property].” They further allege that, “as
fiduciaries to [Brushy] Brook and Stone Ridge,” Palumbo and Savage “had a duty to disclose to
its members and shareholders” Schmidt’s plan to defraud them. They also assert that, “Palumbo
and Savage, as fiduciaries to [them], had a duty to disclose Schmidt’s plan * * *.” They claim
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that Palumbo and Savage “made false representations about material facts, and/or failed to
disclose facts or information to” them. They list the following conduct which they claim
constitute Palumbo and Savage’s “participat[ion] in the fraud[:]”
“a.) Undertaking, and being compensated, to secure third party
buyers for the subject property while conspiring to obtain the
property for themselves;
“b.) Collusion with Schmidt to defraud Fogarty, Ottenbacher
and Kaufman;
“c.) Preparation of a sham Asset Purchase Agreement designed
to defraud the closing agent, Pilgrim Title, in order to effectuate
the transfer of title to property which was the subject of a pre-
existing Purchase and Sales Agreement;
“d.) Obtaining said property by false pretenses, to wit, a
fraudulent deed all in violation of R.I. Gen. Laws Sec. 11-41-4;
and
“e.) Preparation or dissemination of fraudulent documents,
including the Asset Purchase Agreement, documents reflecting
Consent of Shareholders or Members, Purchase and Sale
Agreement, or other false financial documents necessary for
and intended to obtain credit, in violation of R.I. Gen. Laws
Sec. 11-18-6.”
“To establish a prima facie fraud claim, ‘the plaintiff must prove that the defendant made
a false representation intending thereby to induce [the] plaintiff to rely thereon and that the
plaintiff justifiably relied thereon to his or her damage.’” McNulty v. Chip, 116 A.3d 173, 182-
83 (R.I. 2015) (quoting Parker v. Byrne, 996 A.2d 627, 634 (R.I. 2010)).
It is our opinion that the fraud claims are derivative claims and that plaintiffs lack
standing to raise them. The relevant inquiry, in determining whether a claim is derivative, is
two-fold: “(1) who suffered the alleged harm ([Brushy Brook] or the suing [shareholders],
individually); and (2) who would receive the benefit of any recovery or other remedy ([Brushy
Brook] or the [shareholders], individually)?” Heritage Healthcare Services, Inc. v. Beacon
Mutual Insurance Co., 109 A.3d 373, 378 (R.I. 2015) (quoting Tooley v. Donaldson, Lufkin &
Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004). “If [Brushy Brook] suffered the harm and
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would be entitled to receive the requested relief, the claim is derivative.” Id. “Conversely, the
claim is direct if the plaintiffs can demonstrate that they have suffered harm ‘independent of any
alleged injury to [Brushy Brook]’ that would entitle them to an individualized recovery. Id.(quoting Tooley, 845 A.2d at 1039).
Clearly, plaintiffs’ claims that Palumbo and Savage, “as fiduciaries of B[r]ushy Brook
and Stone Ridge, had a duty to disclose to its members and shareholders” Schmidt’s plan to
defraud them, fail as derivative claims on its face. (Emphasis added.) Any duty owed, as
plaintiffs themselves articulate, are owed to Brushy Brook and Stone Ridge. Moreover, in listing
the alleged specific fraudulent behavior on the part of Palumbo and Savage, plaintiffs list the fact
that Palumbo and Savage were hired to find a third-party purchaser for the property and that they
ultimately purchased the property for themselves. Even if that allegation is true, when Palumbo
and Savage were hired to obtain a buyer, the seller and legal owner of the property was Brushy
Brook, not plaintiffs, individually. Accordingly, any wrong relating to their failure to secure a
buyer and instead purchasing the property for themselves was against Brushy Brook, not
plaintiffs individually. Similarly, the allegations that Palumbo and Savage defrauded the closing
agent, Pilgrim, obtained the property by false pretenses, and prepared a fraudulent asset purchase
agreement are all claims that caused injury to Brushy Brook, as the entity with legal ownership
and interest in the property.
Because we hold that these claims are derivative, and because both Stone Ridge and
Brushy Brook were petitioned to Bankruptcy Court, plaintiffs lack standing to bring these
claims. See In Re The 1031 Tax Group, LLC, 397 B.R. 670, 680-81 (Bankr. S.D.N.Y. 2008).
The appointed trustee, Pisaturo, became the only party with standing to bring any lawsuits for
damages arising from wrongs alleged to have been occasioned by the seller, Brushy Brook, and
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its sole member, Stone Ridge. See id. Notably, plaintiffs do not challenge on appeal the hearing
justice’s determination that they lack standing to pursue derivative claims.
Accordingly, because plaintiffs lack standing to bring any claim alleging wrongs done to
Brushy Brook or Stone Ridge, summary judgment as to counts 6 is also affirmed.
6. Civil Conspiracy (Counts 8)
Finally, in their civil-conspiracy claims, the plaintiffs allege that the actions of Palumbo
and Savage in acquiring the property “constitute[d] an unlawful enterprise.” 15 However, because
the intentional tort of civil conspiracy is not an independent basis of liability, and, instead, “[i]t is
a means for establishing joint liability for other tortious conduct[,] * * * it ‘requires a valid
underlying intentional tort theory.’” Read & Lundy, Inc. v. Washington Trust Co. of Westerly,
840 A.2d 1099, 1102 (R.I. 2004) (quoting Guilbeault v. R.J. Reynolds Tobacco Co., 84
F.Supp.2d 263, 268 (D.R.I. 2000)). Because no intentional tort theory survives summary
disposition, we need not analyze the plaintiffs’ civil-conspiracy claims.
V
Conclusion
For the reasons stated herein, we affirm the judgment of the Superior Court in part and
we vacate the judgement in part. We vacate the grant of Palumbo and Savage’s joint motion for
summary judgment on all counts on the grounds that the plaintiffs failed to demonstrate
damages, but only to the extent that the plaintiffs may show damages for lost profits sustained in
their individual capacities and not as shareholders or members of Stone Ridge or Brushy Brook.
We affirm said judgment to the extent that the plaintiffs’ claims for damages are derivative in
15
The only substantive difference between plaintiffs’ complaints is found in counts 8. When
listing Palumbo and Savage’s conduct that plaintiffs allege “constitute an unlawful enterprise,”
Fogarty, but not Savage, includes the following: “Preparation and issuance of a 1099C tax form
to Fogarty in an attempt to extort Fogarty.”
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nature. We affirm the judgment, therefore, in favor of Palumbo and Savage on counts 6 (fraud)
and counts 8 (civil conspiracy). We affirm the grant of the defendants’ motion for summary
judgment concerning counts 4 (tortious interference with contractual relations) and counts 5
(tortious interference with prospective contractual relationship) in all respects. We affirm the
grant of Savage’s motions for summary judgment concerning counts 3 (breach of contract), on
the grounds that the plaintiffs failed to put forth competent evidence that an attorney-client
relationship existed. Finally, we affirm the judgment in favor of Pilgrim in all respects.
Accordingly, we remand the record to the Superior Court for further proceedings with
respect to the plaintiffs’ claims against Palumbo on counts 1 and 3.
Justices Robinson and Indeglia did not participate.
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STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
SUPREME COURT – CLERK’S OFFICE
OPINION COVER SHEET
Charles E. Fogarty v. Ralph Palumbo et al.
Title of Case
James Ottenbacher v. Ralph Palumbo et al.
No. 2015-271-Appeal.
No. 2015-291-Appeal.
(KB 08-1073)
Case Number
No. 2015-273-Appeal.
No. 2015-292-Appeal.
(KB 08-1087)
Date Opinion Filed June 23, 2017
Justices Suttell, C.J., Goldberg, and Flaherty, JJ.
Written By Chief Justice Paul A. Suttell
Source of Appeal Kent County Superior Court
Judicial Officer From Lower Court Associate Justice Brian P. Stern
For Plaintiffs:
Michael T. Finan, Esq.
Carol L. Ricker, Esq.
Philip Laffey, Esq.
Attorney(s) on Appeal
For Defendants:
Vincent A. Indeglia, Esq.
Patricia A. Buckley, Esq.
Ryan J. Lutrario, Esq.
SU-CMS-02A (revised June 2016)