Opinion
HHDCV176083063
12-31-2018
William AUCLAIR v. Randolph AUCLAIR et al.
UNPUBLISHED OPINION
James T. Graham, Superior Court Judge.
FACTS
The plaintiff, William Auclair, commenced the present case in October of 2017 against the defendants, Randolph Auclair, John Auclair, Diana Beebe, and Ross Skelly. In his revised complaint, the plaintiff alleges the following facts:
The plaintiff founded the Electric Motion Company, Inc. (EMC), and was a member of EMC’s Board of Directors at all times relevant to this case. The plaintiff’s brothers, Randolph and John Auclair, were also members of EMC’s Board of Directors during the relevant time period, and John Auclair was the President of EMC from January of 2014 until EMC was sold to Hubbell, Inc., in February of 2016. Diana Beebe was EMC’s Chief Accountant. Ross Skelly is a certified public accountant (CPA) and a partner at an accounting firm; at all times relevant to the present case, Skelly and his firm worked for EMC, EMC’s related companies, and for defendants Randolph and John Auclair personally. Skelly’s firm also did personal financial work for the plaintiff from 1980 through 2013.
Prior to the events leading to the commencement of the present case, the defendants conspired to defraud the plaintiff, pushing him out of EMC and keeping the profits to themselves. Upon discovering this conspiracy, the plaintiff initiated legal action against the defendants; in retaliation, Randolph and John Auclair terminated the plaintiff’s position with EMC. Ultimately, the lawsuits were settled and the plaintiff was reinstated to EMC pursuant to three agreements (the Agreements), which guaranteed that the plaintiff would have access to any information he requested, and the plaintiff would be held harmless for any fraud. The Agreements were offered to permit the sale of EMC, owned by the three brothers, to Hubbell. The Agreements required that the profits of EMC’s sale be divided equally between the brothers. Notwithstanding the Agreements, however, the plaintiff discovered after the sale to Hubbell that the defendants "had intentionally concealed information and misrepresented facts that resulted in the [plaintiff] being defrauded and his profit from the sale of EMC substantially diminished." Specifically, Skelly conspired with the defendants "to carry out ... acts of fraudulent misrepresentation against the [plaintiff] that would enrich the [defendants] at the expense of the [plaintiff] and defraud the [plaintiff]." The fraudulent misrepresentations include that the plaintiff’s brothers awarded themselves greater compensation without approval from the Board of Directors, depriving the plaintiff of fair compensation; awarded themselves and other officers of EMC excessive bonuses without appropriate approval; concealed tax returns and financial statements that the plaintiff was entitled to see under the Agreements; withheld information that the plaintiff was entitled to pursuant to the Agreements; committed financial and tax fraud; concealed tax and financial fraud, and admitted to such concealment only after the sale of EMC to Hubbell; used EMC to pay their attorneys fees and other personal legal expenses; and improperly distributed the cash from a company related to EMC.
Skelly’s actions also constituted a breach of fiduciary duty. Skelly owed the plaintiff a fiduciary duty because Skelly acted as "the in-fact Chief Financial Officer for EMC and its related companies" and because Skelly’s "highly personal and expert knowledge of EMC, its related companies, and individual personal knowledge related to the "plaintiff, Randolph, and John [Auclair]" put Skelly in a position of power and trust.
On July 27, 2018, Skelly filed a motion to dismiss counts three and seven-alleging fraudulent misrepresentation and breach of fiduciary duty, respectively, against him-on the ground that the court lacks subject matter jurisdiction because the plaintiff does not have standing to bring these claims. The motion was accompanied by a memorandum of law in support and an affidavit from Skelly. On August 27, 2018, the plaintiff filed a memorandum in opposition. On September 5, 2018, Skelly filed a reply to the plaintiff’s objection. The court heard the parties at short calendar on September 10, 2018, and reserved judgment at that time.
DISCUSSION
"[B]ecause the issue of standing implicates subject matter jurisdiction, it may be a proper basis for granting a motion to dismiss." Electrical Contractors, Inc. v. Dept. of Education, 303 Conn. 402, 413, 35 A.3d 188 (2012). "[T]he plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. New London, 265 Conn. 423, 430 n.12, 829 A.2d 801 (2003). "It is well established that, in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged." (Internal quotation marks omitted.) New England Pipe Corp. v. Northeast Corridor Foundation, 271 Conn. 329, 335, 857 A.2d 348 (2004).
"[A]s a general rule, a plaintiff lacks standing unless the harm alleged is direct rather than derivative or indirect." Connecticut State Medical Society v. Oxford Health Plans (CT), Inc., 272 Conn. 469, 481, 863 A.2d 645 (2005). "[I]f the injuries claimed by the plaintiff are remote, indirect or derivative with respect to the defendant’s conduct, the plaintiff is not the proper party to assert them and lacks standing to do so. Where, for example, the harms asserted to have been suffered directly by a plaintiff are in reality derivative of injuries to a third party, the injuries are not direct but are indirect, and the plaintiff has no standing to assert them." Ganim v. Smith & Wesson Corp., 258 Conn. 313, 347-48, 780 A.2d 98 (2001). Nevertheless, "[f]or purposes of standing, the plaintiffs need only allege a colorable claim of injury as standing exists to attempt to vindicate arguably protected interests." (Internal quotation marks omitted.) Wilcox v. Webster Ins., Inc., 294 Conn. 206, 216-17, 982 A.2d 1053 (2009).
"Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved ... The fundamental test for determining aggrievement encompasses a well-settled twofold determination: first, the party claiming aggrievement must successfully demonstrate a specific, personal and legal interest in [the subject matter of the challenged action], as distinguished from a general interest, such as is the concern of all members of the community as a whole. Second, the party claiming aggrievement must successfully establish that this specific personal and legal interest has been specially and injuriously affected by the [challenged action] ... Aggrievement is established if there is a possibility, as distinguished from a certainty, that some legally protected interest ... has been adversely affected." (Internal quotation marks omitted.) May v. Coffey, 291 Conn. 106, 112, 967 A.2d 495 (2009).
In the motion to dismiss, Skelly argues that the plaintiff lacks standing to bring counts three and seven of the revised complaint because the plaintiff’s claims are derivative of harm to EMC and because Skelly did not owe a fiduciary duty to the plaintiff. Specifically, Skelly argues that any damages suffered as a result of the alleged misconduct was suffered by EMC and its related companies and not by the plaintiff directly. Essentially, Skelly contends that the plaintiff’s claims are derivative because if harm occurred, all of EMC’s shareholders would have been harmed and all would recover in proportion with their ownership interest in EMC. Skelly also argues that the allegations do not establish that he owed the plaintiff a fiduciary duty; although the plaintiff alleges that he retained Skelly’s firm for his personal financial work, Skelly contends that the gravamen of the allegations are not based on this personal work. In support of his arguments, Skelly offers an affidavit in which he avers that he performed work as a CPA for EMC and for the plaintiff’s brothers, but that he did not perform "any financial, accounting or tax preparation services for [the plaintiff]." Skelly also avers that he was not a signatory to any of the Agreements and that he was never a member of the Board of Directors of EMC or EMC’s Chief Financial Officer.
In opposition to the motion to dismiss, the plaintiff argues that he has standing to pursue a direct claim against Skelly for four reasons. First, Skelly conspired with the plaintiff’s brothers to harm the plaintiff, and if the plaintiff was directly and personally harmed by his brothers, then Skelly is liable as a conspirator. Second, because the majority of the acts alleged took place after EMC was sold, the harm could not be to the corporation directly because no corporation existed. Third, with regard to the alleged misconduct that occurred prior to the sale of EMC to Hubbell, the plaintiff suffered harm that was separate from the other owners of EMC. Fourth, because the present case concerns contractual violations, corporate law concerning standing is inapplicable and the plaintiff’s allegations establish standing by demonstrating classical aggrievement. The plaintiff contends, therefore, that he has standing to pursue his direct claims against Skelly.
I. Count Three: Fraudulent Misrepresentation
"A distinction must be made between the right of a shareholder to bring suit in an individual capacity as the sole party injured, and his right to sue derivatively on behalf of the corporation alleged to be injured ... Generally, individual stockholders cannot sue the officers at law for damages on the theory that they are entitled to damages because mismanagement has rendered their stock of less value, since the injury is generally not to the shareholder individually, but to the corporation-to the shareholders collectively ... In this regard, it is axiomatic that a claim of injury, the basis of which is a wrong to the corporation, must be brought in a derivative suit, with the plaintiff proceeding ‘secondarily, ’ deriving his rights from the corporation which is alleged to have been wronged ... It is, however, well settled that if the injury is one to the plaintiff as a stockholder, and to him individually, and not to the corporation, as where an alleged fraud perpetrated by the corporation has affected the plaintiff directly, the cause of action is personal and individual ... In such a case, the plaintiff-shareholder sustains a loss separate and distinct from that of the corporation, or from that of other shareholders, and thus has the right to seek redress in a personal capacity for a wrong done to him individually." (Citations omitted; footnote omitted.) Yanow v. Teal Industries, Inc., 178 Conn. 262, 281-82, 422 A.2d 311 (1979).
"For example, where a sole minority stockholder ... is the victim of a fraud perpetrated by the sole controlling stockholder ... the injury, and the action for redress, cannot be said to belong merely to the corporation. If the controlling majority stockholder seeks to injure the minority stockholder through the means of looting the corporation or so wrecking it that the minority stockholder would get nothing out of his assets, the claim resulting therefrom is sufficient to constitute an individual action ... Likewise, where an injury sustained to a shareholder’s stock is peculiar to him alone, and does not fall alike upon other stockholders, the shareholder has an individual cause of action." (Citations omitted.) Yanow v. Teal Industries, Inc., supra, 178 Conn. 282 n.9. Essentially, though, "[i]t is commonly understood that [a] shareholder-even the sole shareholder-does not have standing to assert claims alleging wrongs to the corporation." (Citation omitted; internal quotation marks omitted.) Smith v. Snyder, 267 Conn. 456, 461, 839 A.2d 589 (2004).
The Supreme Court discussed whether minority-shareholder plaintiffs in a closely held corporation had standing to bring direct claims against the defendants, majority shareholders, in May v. Coffey, supra. With regard to the complaint, the court noted that "[t]he plaintiffs allege that the defendants, acting in concert as a shareholder majority, set the offering price of the shares too low, resulting in the dilution of the plaintiffs’ percentage ownership of the company. They claim that, as a result of the unreasonably low offering price, the defendants breached their fiduciary duty to the plaintiffs and have been unjustly enriched by their actions at the expense of the plaintiffs." Id., 111. "The plaintiffs ... claim that the unreasonably priced stock offering injured them directly and resulted in no harm to the majority shareholders or to the company as a whole. They claim, therefore, that they have individual standing to bring directly their breach of fiduciary duty and unjust enrichment claims against the defendants." Id., 113. In assessing whether the plaintiffs had standing, the court determined that "the central inquiry ... is whether the stock offering to existing shareholders at a price that was unreasonably low resulted in a separate and distinct harm to the plaintiffs, or whether the unreasonably low price harmed the corporation and, accordingly, all shareholders collectively." Id., 115. Ultimately, the court concluded that "[b]ecause the unreasonably low offering price injured the corporation and because a proper remedy to the corporation would make all shareholders whole ... the injury suffered by the plaintiffs, the dilution of their existing shares by the unreasonably low pricing of the new shares, was derivative of the harm suffered by the company." Id., 119-20.
In contrast, in Wiederman v. Halpert, 178 Conn.App. 783, 176 A.3d 1242 (2017), cert. granted, 328 Conn. 906, 177 A.3d 1161 (2018), the Appellate Court determined that a plaintiff who was a 50 percent member in several LLCs had standing to bring a direct action against other shareholders who allegedly mismanaged company funds. Disagreeing with the defendants’ argument that the plaintiff lacked standing, the court determined that "[T]he plaintiff alleged that Isaac Halpert, who allegedly conducted the day-to-day management of the LLCs, did so in a manner that damaged her directly. The plaintiff claimed that she never received any portion of the profits or distributions from the properties and that the defendants, instead of fulfilling their contractual and fiduciary obligations to so distribute those funds to her, misappropriated, wasted and mismanaged them. She alleged that her investment was ‘misappropriated, used to maintain properties unrelated to this investment endeavor, and/or wasted.’ The plaintiff further claimed that the defendants failed to provide to her an accounting of their use of funds to which she allegedly was entitled and forged her signature on certain financial documents. The injuries claimed by the plaintiff were not remote, indirect or derivative, but were peculiar to her." Id., 797. The court therefore concluded that the plaintiff had standing to bring a direct claim. Id., 797-98.
In the present case, the plaintiff’s allegations establish that he has standing to pursue a direct claim against Skelly. Contrary to Skelly’s characterization of the plaintiff’s revised complaint, the plaintiff has not alleged that he suffered damages due to injuries to EMC and its related companies. Rather, the plaintiff has alleged that the defendants, including Skelly, "intentionally concealed information and misrepresented facts that resulted in the [plaintiff] being defrauded and his profit from the sale of EMC substantially diminished." The plaintiff has thus alleged that the cause of action is personal and individual, as the fraud alleged affected the plaintiff directly. Although some of the allegations-such as Skelly’s conspiring with the plaintiff’s brothers to violate EMC’s by-laws-could be interpreted as acts that would cause harm to the corporation, the thrust of the present case concerns allegations that Skelly and the other defendants worked in concert to deprive the plaintiff, and only the plaintiff, of his due upon the sale of EMC to Hubbell. Moreover, even the allegations concerning the aid Skelly provided to the plaintiff’s brothers in their scheme to overcompensate themselves is linked to a direct harm to the plaintiff rather than to the resulting depletion of the corporation’s assets. The plaintiff alleges that the defendants "[perpetuated] a fraud designed to overcompensate themselves prior to [the] sale [of EMC to Hubbell] and reduce the [plaintiff’s] profit at sale." In sum, the plaintiff alleges that Skelly and the other defendants undertook a concerted effort to steer funds away from the plaintiff, while also depriving him of the information he needed to uncover the fraud. The plaintiff’s harm is therefore not derivative of injury to EMC or its related companies.
Indeed, the present case is more similar to Wiederman than May. Although May and the present case have certain surface-level commonalities, the allegations in the present case compel a different result as to the question of standing. In both May and the present case, for instance, the plaintiffs are minority shareholders in closely held corporations. Unlike May, however, the allegations in the present case point to injuries aimed at the plaintiff as an individual rather than a harm that lands squarely on the corporation. Furthermore, whereas the court in May determined that the alleged wrongful act injured the corporation and that a remedy would make all shareholders whole, the allegations in the present case indicate that the harm impacted the plaintiff directly and that a remedy to the fraud would make him, rather than EMC and its shareholders, whole. The present case is therefore more closely analogous to Wiederman, in which the Appellate Court recently determined that a plaintiff had standing to assert a direct claim where she alleged that the defendant shareholders mishandled company money, withheld financial information, and failed to distribute profits to her, supporting the conclusion that the plaintiff in the present case has standing to pursue a direct claim.
Skelly’s reliance on Peterson v. Parillo, Superior Court, judicial district of New Haven, Docket No. CV-03-0477220-S (December 8, 2005, Corradino, J.), is misplaced. In Peterson, the plaintiffs brought suit against a business advisor and café sellers following the purchase of the café. Id. After the sale, the plaintiffs discovered that the assets and value of the café were not as represented. The court determined that the shareholder-plaintiff did not have standing to bring a direct action, noting that the corporation, rather than the individual plaintiff, was the purchaser of the café. "The time of the purchase is the critical element ... because that is when harm would have accrued on any cause of action and at that time KGM Corporation was the purchaser. This is the factual basis really for the conclusion that Kenneth D. Peterson in particular has no standing." Id. The court went on to note that the question of injury can be complicated in cases that involve closely held corporations, as any injury to a closely held corporation might be construed to fall on the shareholders. Id. The key to the court’s determination, however, was the fact that the allegations focused on harm arising from a purchase and that the corporation was the purchaser; that the corporation was closely held was merely a factor that made the determination of whether the shareholder-plaintiff had been directly harmed less clear. Skelly argues that Peterson is a factually similar case and provides persuasive authority that the plaintiff in the present case has alleged a derivative injury. On the contrary, although both Peterson and the present case are brought by shareholders of a closely held corporation, the factual circumstances underlying the two actions are distinguishable because the present case does not allege that the defendants’ fraud caused the corporation to suffer financial harm. Peterson, well-reasoned as it may be, does not stand for the proposition that the plaintiff in the present case alleges a derivative injury.
II. Count Seven: Breach of Fiduciary Duty
Although the plaintiff has demonstrated that he has standing to bring a direct claim for fraudulent misrepresentation against Skelly based upon the alleged harm, whether the plaintiff has standing to bring a claim for breach of fiduciary duty is a separate inquiry. With regard to count seven, the question is not only whether Skelly’s alleged misconduct harmed the plaintiff personally, but also, whether a fiduciary relationship existed between Skelly and the plaintiff. "It is axiomatic that a party cannot breach a fiduciary duty to another party unless a fiduciary relationship exists between them." Biller Associates v. Peterken, 269 Conn. 716, 723, 849 A.2d 847 (2004). "It [is] the plaintiffs’ burden to establish the existence of a fiduciary duty." (Internal quotation marks omitted.) Local 84, Theatrical Stage Employees, Moving Picture Technicians, Artists and Allied Crafts of the United States, its Territories and Canada, AFL-CIO, CLC v. Francis, 138 Conn.App. 77, 86, 51 A.3d 401 (2012). A plaintiff who fails to establish the existence of fiduciary relationship lacks standing to assert claim for breach of fiduciary duty. Id., 87.
"In the seminal cases in which [the Supreme Court] court has recognized the existence of a fiduciary relationship, the fiduciary was either in a dominant position, thereby creating a relationship of dependency, or was under a specific duty to act for the benefit of another ... In the cases in which this court has, as a matter of law, refused to recognize a fiduciary relationship, the parties were either dealing at arm’s length, thereby lacking a relationship of dominance and dependence, or the parties were not engaged in a relationship of special trust and confidence." (Internal quotation marks omitted.) Biller Associates v. Peterken, supra, 269 Conn. 723-34. "[A] fiduciary duty determination is a question of law ..." Iacurci v. Sax, 313 Conn. 786, 796, 99 A.3d 1145 (2014). "[A] flexible approach determines the existence of a fiduciary duty, which allows the law to adapt to evolving situations wherein recognizing a fiduciary duty might be appropriate ... [A] fiduciary or confidential relationship is characterized by a unique degree of trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other ... The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him ... [N]ot all business relationships implicate the duty of a fiduciary." (Citations omitted; internal quotation marks omitted.) Id., 800.
In Iacurci, the court identified the issue before it as "whether, under the specific circumstances of this case, a certified public accountant performing tax return preparation services had a fiduciary relationship with his client." Iacurci v. Sax, supra, 313 Conn. 788. The court noted that it "[had] not previously considered whether a tax return preparer, including an accountant, ordinarily owes a fiduciary duty to its client ... Our cases considering whether ad hoc fiduciary duties existed in business relationships have turned on the presence of a special vulnerability." Id., 801. "[P]articular attention is given to whether there is a great opportunity for abuse of the confidence reposed in the hired party ... This follows logically from the need to avoid assigning the serious, significant duties that are expected of a fiduciary to every business arrangement." (Citation omitted; internal quotation marks omitted.) Id.
The court in Iacuri then noted that "[t]o the extent that courts in other jurisdictions have addressed the present question, they have concluded that a fiduciary relationship does not exist when a client relationship is limited to the preparation of tax returns." Iacurci v. Sax, supra, 313 Conn. 802. "In contrast, courts have concluded that the relationship between a tax return preparer and a client is fiduciary in nature when a heightened risk of abuse of trust or confidence exists, such as when the tax return preparer or accountant acts as an investment advisor or manages the client’s funds." Id., 804. Ultimately, the court determined that the plaintiff’s averments concerning the trust and confidence he placed in the defendants when the defendants prepared his tax returns and the plaintiff’s assertion of the defendants’ superior knowledge and skill in tax matters did not establish a fiduciary relationship. Id., 804-06. The court also noted that the duration of the parties’ relationship-seventeen years-did not change the character of the relationship. Id., 805. Accordingly, the court concluded that the defendants did not owe the plaintiff a fiduciary duty. Id., 804-06.
In the present case, the plaintiff alleges the following facts to establish that Skelly owed him a fiduciary duty. First, not only was Skelly employed by EMC as a CPA, but also Skelly and his firm were the CPAs for EMC, EMC’s related companies, and for the plaintiff’s brothers at all times relevant to the plaintiff’s action. Second, Skelly’s firm performed personal financial work for the plaintiff from 1980 until 2013. Third, "Skelly in his actions at EMC acted as the in-fact Chief Financial Officer for EMC and its related companies ..." Fourth, and finally, "Skelly had highly personal and expert knowledge of EMC, its related companies, and individual personal knowledge related to the [plaintiff], Randolph [Auclair], and John [Auclair] that put him in a unique position of trust and power and also had a duty to maintain ethical practices as governed by his own profession." The plaintiff argues that these allegations establish that a fiduciary relationship existed between Skelly and the plaintiff.
As the plaintiff has not carried his burden of establishing the existence of a fiduciary relationship, the court lacks subject matter jurisdiction over count seven, which alleges a breach of fiduciary duty against Skelly. The revised complaint is devoid of allegations that a relationship of dependency existed between Skelly and the plaintiff, or allegations that Skelly was under a specific duty to act for the plaintiff’s benefit. Furthermore, even if the court were to assume that the plaintiff, rather than EMC, should be considered Skelly’s client, based on the allegations concerning the scope of Skelly’s work for EMC it is not apparent that a fiduciary relationship developed. There are no allegations establishing a unique degree of trust that would elevate Skelly’s work above a standard business relationship. Although the relationship between Skelly and the plaintiff would indeed be different if Skelly had been an officer at EMC, the plaintiff’s conclusory allegation on this point-which has been explicitly refuted by Skelly’s affidavit-lacks the factual support necessary to demonstrate the existence of a fiduciary relationship. The plaintiff’s allegation that Skelly’s knowledge put him in a position of power are similarly unsupported, and Skelly’s separate work with Randolph and John Auclair’s personal finances and the length of Skelly’s business relationship with the Auclair family and their businesses is not determinative. Consequently, in the absence of a fiduciary relationship, the plaintiff lacks standing to bring a claim for breach of a fiduciary duty, and the court is thereby deprived of subject matter jurisdiction over count seven.
For the reasons set forth above, the motion is denied as to count three and granted as to count seven.