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Caton v. Fischel

Superior Court of Connecticut
May 5, 2016
X10UWYCV146026078 (Conn. Super. Ct. May. 5, 2016)

Opinion

X10UWYCV146026078

05-05-2016

Stephen Caton et al. v. Harold Fischel


UNPUBLISHED OPINION

MEMORANDUM OF DECISION RE MOTION TO DISMISS (#105)

Kari A. Dooley, J.

Preliminary Statement

This action arises out of a dispute between partners in a business venture. Plaintiff Stephen Caton (Caton), is a 50% owner and a member of plaintiff Carabiners Fairfield, LLC (Carabiners), an entity formed for the purpose of operating a rock climbing facility in Fairfield, Connecticut. Defendant Harold Fischel (Fischel) is the owner/manager of Rock Climb LLC, the other 50% owner of and member of Carabiners. Fischel is also the manager of Carabiners per the terms of the operating agreement. Caton brings various claims in his individual capacity. As a member of Carabiners, he has also brought suit on behalf of and in the name of Carabiners. These latter counts include claims that Fischel breached the operating agreement, breached his fiduciary duties to Carabiners, committed fraud, was unjustly enriched and committed violations of the Connecticut Unfair Trade Practices Act (CUTPA). Caton further seeks judicial dissolution of Carabiners pursuant to Conn. Gen. Stat. § 34-207. Fischel filed a motion to dismiss the claims by Carabiners on the ground that Caton does not have standing or authority to bring such claims under the terms of the Carabiners operating agreement, or by the terms of any statute, or under the common law. Caton objects to the motion. The court heard oral argument on February 3, 2016. For the reasons set forth below, the motion is DENIED.

Some or all of his interest in Rock Climb may have been transferred to related persons or entities but any such transfer does not impact this decision.

Initially, the motion to dismiss was directed to all counts in the complaint. Fischel subsequently clarified that he seeks only dismissal of the claims brought in the name of Carabiners. Those claims are contained in counts one, two, three, five, and seven. The court notes at the outset that the parties (and the court) have referred to these counts as the " derivative" counts. The complaint is not brought by Caton in his derivative capacity. Rather, he claims that as a member of the LLC, pursuant to § 34-187 of the LLC Act, he is authorized to bring suit on behalf of and in the name of Carabiners. This is the issue on which the parties diverge. The defendant, in the alternative, moves to dismiss the claims as being non-cognizable derivative claims. As the court finds in favor of the plaintiff on the first issue, and since the plaintiff does not purport to bring these claims in his derivative capacity (though he does brief the issue in response to the motion to dismiss), the court does not reach this alternative basis for dismissal.

Standard of Review

A Motion to Dismiss is the appropriate vehicle by which to assert that the court lacks jurisdiction, to include subject matter jurisdiction. P.B. § 10-31; Upson v. State, 190 Conn. 622, 624, 461 A.2d 991 (1983); Sadloski v. Manchester, 235 Conn. 637, 645-46 n.13, 668 A.2d 1314 (1995). " The plaintiff bears the burden of establishing subject matter jurisdiction, whenever and however, raised." Fink v. Golenbock, 238 Conn 183, 199 n.13, 680 A.2d 1243 (1996). However, " in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged." State v. Mann, 271 Conn. 300, 857 A.2d 329, 335 (2004).

A claimant's lack of standing implicates the court's subject matter jurisdiction. The court's analysis will necessarily focus not on the merits of the plaintiff's claim, but rather whether the plaintiff is the proper party to bring such a claim. Wellswood Columbia, LLC v. Hebron, 295 Conn. 802, 809-10, 992 A.2d 1120 (2010); 418 Meadow Street Assocs. LLC v. Clean Air Partners, LLC., 123 Conn.App. 416, 1 A.3d 1194 (2010). " Standing is the legal right to set judicial machinery in motion. One cannot rightfully invoke the jurisdiction of the court unless he has, in an individual or representative capacity, some real interest in the cause of action, or a legal or equitable right, title or interest in the subject matter of the controversy." Sadloski v. Manchester, 228 Conn. 79, 84, 634 A.2d 888 (1993).

Generally, on a motion to dismiss, the allegations of the complaint are construed in a manner most favorable to the pleader. Conboy v. State, 292 Conn. 642, 651, 974 A.2d 669 (2009). However, where additional uncontested facts are provided to the court by way of affidavit or other competent evidence, the court may consider those facts and evidence when deciding the issues presented in a motion to dismiss and need not conclusively presume the accuracy of the allegations in the plaintiff's complaint. Id., 652. Here, the parties have submitted documentary and testimonial evidence by way of affidavit. The additional facts offered are not generally in dispute and to the extent they may be, the parties agree that resolution of any factual disputes is not necessary to deciding the motion to dismiss.

Facts/Allegations

For purposes of the motion to dismiss, the following facts are germane. Caton is a member and 50% owner of Carabiners. Fischel is the manager of Carabiners and was the owner/manager of Rock Climb, LLC, the other 50% owner of Carabiners at the time the operating agreement was signed. The LLC was formed for the purpose of constructing and operating a rock climbing facility in Fairfield. Caton and Fischel each contributed funds and effort to the build out of the facility. The facility is located on property owned by 85 Pond Mill, LLC, an entity in which Fischel also has a proprietary interest (the landlord).

Their respective contributions are disputed.

The Landlord, 85 Pond Mill, LLC, is identified in the operating agreement as an " affiliate" of Rock Climb, LLC. An " affiliate" is defined as an entity in which a member of Carabiners has an 80% or greater interest, or an entity that has an interest of 80% or more in a member.

Caton alleges that Fischel entered into a lease on behalf of Carabiners with the landlord that required payment of a higher rent than was agreed upon or appropriate. Caton alleges that Fischel overstated his own capital contributions to Carabiners. Caton alleges that Fischel, acting on behalf of the landlord, orchestrated an effort to evict Carabiners from the property (which would have put Carabiners out of business) by commencing a summary process action. Caton alleges that Fischel concealed the eviction action from Caton so that a default judgment would enter, and when that didn't succeed, he hired an attorney on behalf of Carabiners to acquiesce in the eviction. While there are other allegations of wrongdoing by Fischel, these are the primary allegations, which, as indicated, are presumed true for purposes of the standing analysis.

When Caton learned of the Notice to Quit and summary process action, he hired a different lawyer to fight the eviction. After argument and a hearing, the housing court determined that the attorney hired by Caton would represent Carabiners in the summary process action.

The Carabiners operating agreement, signed by Caton and Fischel, provides that Fischel will be Carabiner's manager. With respect to the duties of the manager it further provides at Section IV, paragraph 4.1.1.2:

Fischell signed the Operating agreement on behalf of Rock Climb and individually with respect to the provisions relating to the Manager's duties and responsibilities.

The determination of any and all matters pertaining to the business of the Company shall be solely made by the Manager of the Company. The Manager shall, in his sole discretion, make all decisions and shall have the authority to carry out, implement and exercise any and all of the objects, purposes and powers of the Company . . .

Paragraph 4.1.1.3 provides:

General Powers . The Manager shall have full, exclusive, and complete discretion, power, and authority, subject in all cases to the other provisions of this Agreement and the requirements of applicable law, to manage, control, administer, and operate the business and affairs of the Company for the purposes herein stated, and to make all decision affecting such business and affairs, including without limitations for Company purposes, the power to: . . .
4.1.1.3.13 In addition to the foregoing powers, the Manager shall have all additional powers contained in and specifically enumerated in § 45a-234 and § 45a-235 [(1) through (27)] of the Connecticut General Statutes as if the Manager was deemed to be a trustee, which may be exercised by the Manager in his/her sole and absolute discretion.

Discussion

The defendant first argues that the provisions of the operating agreement preclude plaintiff from bringing claims on behalf of Carabiners as such authority is granted solely and exclusively to the Manager. Thus, he argues, although the Limited Liability Company Act (the LLC Act) provides a member with a statutory right to commence an action in the name of and on behalf of an LLC, here, any such right is contracted away by the express terms of the operating agreement.

The operating agreement gives the defendant, as the manager, broad and exclusive decision making authority with respect to the affairs of the LLC. Included, as noted above, is the grant of statutory authority under § 45a-234, the so-called " fiduciary powers act, " which sets forth the scope of a trustee in probate's obligations and authority. Subsection (18) provides that a Trustee has the authority to " compromise, adjust, arbitrate, sue on or defend, abandon or otherwise deal with and settle claims in favor of or against the estate or trust as the fiduciary shall deem advisable, and the fiduciary's decisions shall be conclusive between the fiduciary and the beneficiaries of the estate or trust in the absence of fraud, bad faith or gross negligence of the fiduciary." Thus, the defendant argues, since the operating agreement vests him with the sole and exclusive authority to exercise rights under Section 45a-234(18), the plaintiff is precluded from bringing suit on behalf of, or in the name of, the LLC.

The plaintiff disagrees and argues that the LLC Act, specifically § 34-187, allows the plaintiff, as a member of the LLC, to bring suit on behalf of the LLC notwithstanding the language in the operating agreement. Section 34-187 provides: " (a) Except as otherwise provided in an operating agreement, suit on behalf of the limited liability company may be brought in the name of the limited liability company by: (1) Any member or members of a limited liability company, whether or not the articles of organization vest management of the limited liability company in one or more managers, who are authorized to sue by the vote of majority in interest of the members . . ." Plaintiff argues that the statute is unambiguous and that it permits him to bring suit on behalf of the LLC even though the LLC has vested management with a manager. Plaintiff argues that the statutory language " [e]xcept as otherwise provided in an operating agreement" does not bar this action because although the operating agreement may be inconsistent with Section 34-187, it does not specify that Section 34-187 is inapplicable or that the LLC is opting out of Section 34-187.

Fischel agrees that Rock Climb, LLC's vote would be disregarded under § 34-187(b) as interpreted in 418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, 304 Conn. 820, 43 A.3d 607 (2012), and that the plaintiff's vote to bring this action would be sufficient under the statute.

Generally, the rights and obligations of members in a Connecticut LLC are set forth in the LLC Act. However, the LLC Act " provides a set of default rules governing [LLCs], which organizers and members can elect to modify at their discretion through the company's operating agreement." 418 Meadow Street Associates, LLC v. Clean Air Partners, LLC, 304 Conn. 820, 834, 43 A.3d 607 (2012). " [T]he statutory scheme controls and provides for the default method of operation unless the organizers or members of the limited liability company contract, through the operating agreement, for another method of operation. Indeed this is one of the foundational principles of the law governing limited liability companies." Id. at 837. Thus, the Act was not intended to limit the freedom to contract however the members of an LLC chose by way of the operating agreement. See Conn. Gen. Stat. § 34-242 (It is the policy of sections 34-100 to 34-242, inclusive, to give maximum effect to the principle of freedom of contract and to enforcement of limited liability company agreements"). Members may elect whether and to the extent they want to be bound by the LLC Act with respect to the matters covered thereby. Meadow Street Associates, LLC v. Clean Air Partners, LLC, supra, 837. Plaintiff's argument is defeated by the 418 Meadow Street Associates decision:

The defendant's argument [that because the operating agreement is silent as to whether it adopts or incorporates by reference § 34-187, the statute does not apply] misconstrues both the meaning of the phrase, " [e]xcept as otherwise provided in an operating agreement, " in § 34-187, as well as the general operation of the law governing limited liability companies. Contrary to the defendant's claim, § 34-187 applies to all limited liability companies unless the operating agreement provides for a different rule that conflicts with the statute or provides that the statute does not apply at all . That is the plain meaning of the statutory language, " [e]xcept as otherwise provided . . ."
(Emphasis added). Id. at 836 Thus, the operating agreement is not required to " opt out" of the statute. It need only provide for a different, conflicting, rule, which this one does. This is not the end of the inquiry however.

Under the express terms of the operating agreement, the manager is vested with the authority contained at § 45a-234, " as if the Manager was deemed to be a trustee, which may be exercised by the Manager in his/her sole and absolute discretion." (Emphasis added.) Generally, only a fiduciary to an estate or trustee to a trust, is authorized to bring an action on behalf of the estate or the trust. Geremia v. Geremia, 159 Conn.App. 751, 784, 125 A.3d 549 (2015).

Nevertheless, an exception exists to the general rule precluding civil actions by heirs and beneficiaries on behalf of an estate. " [W]here the executor or administrator has been guilty of fraud or collusion with the party to be sued, or where the interests of the personal representative are antagonistic to those of the heirs or distributees, the heirs or distributees may maintain actions relating to the personalty of the estate in their own names. Similarly, when the legal representative has failed or refused to act, the heir may maintain an action to recover assets for the benefit of the estate." (Footnotes omitted.) 31 Am.Jur.2d, supra, at § 1131, p. 764;
The General Statutes likewise contemplate such an exception to the general rule that the right to bring actions on behalf of an estate belongs to the legal representative. Section 45a-234(18) vests an administrator or executor the exclusive power " to compromise, adjust, arbitrate, sue on or defend, abandon, or otherwise deal with and settle claims in favor or against the estate . . . as the fiduciary shall deem advisable . . ." Yet that statute further provides that " the fiduciary's decision shall be conclusive between the fiduciary and the beneficiaries of the estate . . . in the absence of fraud, bad faith or gross negligence of the fiduciary . . ." (Emphasis added) . . . Our trial courts have applied such an exception in determining whether a beneficiary possessed standing to maintain an action alleging injury to an estate, albeit without specific reference to that statute. See Dickman v. Generis, 48 Conn.Supp. 380, 383-85, 845 A.2d 488 (2004); Hart v. Hart, Superior Court, judicial district of Windham at Putnam, Docket No. CV-14-6007918, 2014 WL 4921955 (August 28, 2014) ; Wright v. Wright, Superior Court, judicial district of New Haven, Docket No. CV-05-4000024, (May 27, 2005). The question, then, is whether that limited exception is applicable in the present case.
Id. at 785-86. By incorporation of § 45a-234(18), the operating agreement incorporates as well, this exception to the manager's sole and exclusive authority to bring suit on behalf of or in the name of the LLC. Here, the plaintiffs' complaint is replete with allegations of fraud, bad faith, self-dealing and breaches of the defendant's fiduciary duties to the LLC. Therefore, under these circumstances, the operating agreement does not preclude the plaintiff from proceeding either under the operating agreement pursuant to the exception identified above, or, as a result, § 34-187. Construing the pleadings in a manner which favors the court's jurisdiction, the allegations of misconduct are sufficient to establish the plaintiff's standing to sue in the name of and on behalf of the LLC.

Under the circumstances, the " except as otherwise provided in the operating agreement" is not a bar to reliance upon the statute, because, as indicated, the operating agreement does not preclude the action pursuant to the exception noted above.

The court notes that " where a jurisdictional determination is dependent on the resolution of a critical factual dispute, it cannot be decided on a motion to dismiss in the absence of an evidentiary hearing to establish jurisdictional facts. Gordon v. H.N.S. Management Co., 272 Conn. 81, 92, 861 A.2d 1160 (2004)." Id. at 652. If the allegations are deemed an insufficient basis upon which to find subject matter jurisdiction, the court further notes that " if the question of jurisdiction is intertwined with the merits of the case, a court cannot resolve the jurisdictional question without a hearing to evaluate those merits." Id. at 653. " [T]he court may in its discretion choose to postpone resolution of the jurisdictional question until the parties complete further discovery or, if necessary, a full trial on the merits has occurred." Id., n.16. Here, whether the defendant committed fraud, acted with bad faith or otherwise breached his fiduciary duties to the LLC, thus implicating the exception contained in § 45a-234(18), is a question that will not be answered until a full hearing on the merits.

The motion to dismiss is DENIED.


Summaries of

Caton v. Fischel

Superior Court of Connecticut
May 5, 2016
X10UWYCV146026078 (Conn. Super. Ct. May. 5, 2016)
Case details for

Caton v. Fischel

Case Details

Full title:Stephen Caton et al. v. Harold Fischel

Court:Superior Court of Connecticut

Date published: May 5, 2016

Citations

X10UWYCV146026078 (Conn. Super. Ct. May. 5, 2016)

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