This appeal before the Connecticut Supreme Court arose out of a 2006 foreclosure auction held by the defendant bank of real and personal property at a former special events facility. The plaintiff, who was the successful bidder at the auction, later learned that much of the personal property he thought he had purchased was not owned by the defaulting debtor, but leased, and therefore not subject to the sale. The plaintiff sued the debtor, the defendant bank, and the auctioneer, alleging, inter alia, violations of Connecticut’s Unfair Trade Practices Act (“CUTPA”), under which both attorneys’ fees and punitive damages may be awarded.
The case was tried to a jury, which returned a verdict in favor of the plaintiff and awarded compensatory damages, which, after remittitur, amounted to $417,000. The trial judge subsequently added attorneys’ fees and punitive damages under CUTPA, bringing the judgment against the defendants, before interest, to $1.9 million, substantially in excess not only of the value of the leased personal property but also of the amount that the plaintiff had paid at auction.
In the appeal, NELF filed an amicus brief in support of the bank, arguing that the economic loss doctrine, which is recognized in Connecticut, should apply to this case. The economic loss doctrine is a well-settled common law contract rule that limits an injured party to its contract damages when its damages, as in this case, are entirely economic. In Flagg Energy Development Corp. v. General Motors Corp., 244 Conn. 126 (1998) (“Flagg Energy”), a sale of goods case, the Connecticut Supreme Court applied the doctrine to limit damages to the monetary damages available under the UCC. NELF argued in its brief that in this case, which involves a sale of secured property under Article 9, the plaintiffs should likewise be limited to their economic damages under the UCC, i.e., the value of the personal property that the plaintiff mistakenly thought he was buying at auction. That value would be a fraction of the massive award obtained at trial.
NELF also supported the bank’s position that the trial court applied the wrong standard for assessing whether the Bank’s conduct violated CUTPA. Connecticut law requires that its courts, in construing CUTPA, be guided by the interpretations of unfair trade practices given by the Federal Trade Commission. Here, the trial court applied the so-called “cigarette rule,” a 1964 FTC standard that was later rejected by the FTC and replaced by a more nuanced interpretation embodied in its Policy Statement on Unfairness, adopted in 1980. The Connecticut Supreme Court, obviously cognizant of its responsibility to look to the FTC policy, has recognized on more than one occasion that “a serious question exists as to whether the cigarette rule remains the guiding rule utilized under federal law.” Glazer v. Dress Barn, Inc., 274 Conn. 33, 83 n. 34 (2008). Indeed, the Court has already adopted the FTC’s injury standard, not as a replacement for the cigarette rule, but rather as clarification of the third, “substantial injury,” prong of the rule. See Hartford Elec. Supply Co. v. Allen-Bradley Co., 250 Conn. 334, 368 (1999). NELF supported the Bank’s argument that the 1980 FTC standard should have been applied in this case.
In a disappointing decision issued on November 12, 2013, the Supreme Court of Connecticut, while agreeing with NELF and the Bank that the economic loss doctrine applies to sales under UCC Article 9—and, therefore, that the plaintiff’s tort claims were barred—reversed its own holding in Flagg Energy and held that the economic loss doctrine does not bar a CUTPA claim. The Court reasoned that while all tort claims based on contract are barred by the economic loss doctrine, this does not apply to claims under CUTPA, which are not based on any contract. Furthermore, the Court held (over a dissent) that the Bank had not properly preserved its objection to the application of the “cigarette rule” under CUTPA. In short, although NELF and the Bank were victorious on the application of the economic loss doctrine, the massive judgment against the Bank was upheld.