Opinion
No. CV-08-4027098
March 25, 2010
MEMORANDUM OF DECISION
The issue raised by the defendants' James A. Thompson, Scott R. Raissis and RT Management, LLC, motion to dismiss is whether the plaintiff, Kenneth E. Newlands, has standing to bring direct claims against them involving company malfeasance and nonfeasance, as opposed to derivative claims on behalf of the defendant, NRT Associates, LLC, or its members. The plaintiff brings this action as a minority member of a limited liability company, NRT, a closely held entity, against its two other members, Thompson and Rassis, and their unrelated limited liability company, RT Management. Thompson and Rassis allegedly controlled NRT in such a way to have caused the plaintiff to suffer separate and distinct harms from those suffered by Thompson and Rassis as members of NRT or by the company itself, including wrongfully diverting business to RT Management, a business in which Thompson and Rassis were members. For the reasons more fully discussed herein, the court concludes that the plaintiff has standing to assert direct claims of injury against the defendants and denies the defendants' motion to dismiss.
In their memorandum in support of their motion, the defendants characterize the action as "nothing more than an internal dispute between the majority members of an LLC and a minority member."
The genesis of the present action is a joint venture to construct a house in Darien, Connecticut. In his amended complaint dated January 26, 2009, the plaintiff alleges the following. The plaintiff, Thompson and Raissis each have a one-third interest in the defendant, NRT Associates, LLC, which at all relevant times was engaged in the business residential real estate construction and construction management. The rights and responsibilities of the members of NRT are set forth in an operating agreement. Thompson is the managing member of the entity.
The plaintiff claims that Thompson and Raissis have committed various wrongs against him in the operation of NRT. Specifically, the plaintiff claims that they have (1) "improperly made payments from NRT to [Thompson Raissis Architects, Inc.], another business entity of which they are the sole shareholders thereby reducing the net revenue of NRT and increasing the net revenue" of their architectural firm and "advancing their own interests to the plaintiff's detriment;" (2) prevented the plaintiff from participating in NRT, and have failed to provide him with business and financial information; (3) failed to pay to the plaintiff certain sums due to him under the operating agreement despite repeated demands to do so; (4) "wrongfully attempted to induce and coerce [the] plaintiff to assign to them his membership interest in NRT by representing that, unless he did so, he would not receive all sums to which he is entitled" under the operating agreement; (5) failed to provide to the plaintiff financial and other records relating to NRT despite repeated demands that they do so; and (6) diverted NRT's business opportunities and clients to the defendant RT Management, LLC, a limited liability company organized by Thompson and Rassis and in which they are members, thereby depriving NRT of revenue.
As a result of the foregoing alleged acts and omissions, the plaintiff claims the following in the first through fourth counts, respectively, of his complaint: a dissolution and winding up of NRT; that Thompson and Rassis breached their fiduciary duties to the plaintiff; that Thompson, Rassis and RT are liable to the plaintiff for civil conversion; that Thompson, Rassis and RT Management are liable to the plaintiff for unjust enrichment; and that Thompson, Rassis and RT are liable to the plaintiff for under the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq. ("CUTPA"). The defendants' motion challenges the second through fifth counts of the complaint asserting that the plaintiff does not have standing to maintain those counts because his claims are derivative, not direct, in nature.
"The motion to dismiss . . . admits all facts which are well pleaded, invokes the existing record and must be decided upon that alone . . . Where, however . . . the motion is accompanied by supporting affidavits containing undisputed facts, the court may look to their content for determination of the jurisdictional issue . . ." (Internal quotation marks omitted.) Cogswell v. American Transit Ins. Co., 282 Conn. 505, 516, 923 A.2d 638 (2007). "[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). "The burden rests with the party who seeks the exercise of jurisdiction in his favor . . . clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute." (Internal quotation marks omitted.) Goodyear v. Discala, 269 Conn. 507, 511, 849 A.2d 791 (2004). "[I]n determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged." (Internal quotation marks omitted.) Connor v. Statewide Grievance Committee, 260 Conn. 435, 443, 797 A.2d 1081 (2002).
The parties in the present action have not filed affidavits in support of, or in opposition to, the defendants' motion to dismiss. Therefore, the court will decide the motion on the basis of the well pleaded facts and the record. Cogswell v. American Transit Ins. Co., supra, 282 Conn. 516.
The court will first review the law applicable to the defendants' claim that the court lacks subject matter jurisdiction for the reason that the plaintiff does not have standing to maintain his claims. "The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss." St. George v. Gordon, 264 Conn. 538, 544, 825 A.2d 90 (2003). "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 . . . Standing . . . is not a technical rule intended to keep aggrieved parties out of court; nor is it a test of substantive rights. Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions which may affect the rights of others are forged in hot controversy, with each view fairly and vigorously represented." (Internal quotation marks omitted.) New Hartford v. Connecticut Resources Recovery Authority, 291 Conn. 511, 518-19, 970 A.2d 583 (2009).
The Supreme Court has stated that "[t]wo broad yet distinct categories of aggrievement exist, classical and statutory . . . [T]he fundamental test for determining [classical] 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 decision, as distinguished from a general interest, such as is the concern of all the members of the community as a whole. Second, the party claiming aggrievement must successfully establish that the specific personal and legal interest has been specially and injuriously affected by the decision." (Internal quotation marks omitted.) Id.
The defendants move to dismiss the second through fifth counts of the amended complaint, respectively claiming breach of fiduciary duty, conversion, unjust enrichment, and a CUTPA violation, asserting that the plaintiff lacks standing to maintain those actions in his individual capacity because his injuries are not separate and distinct from NRT or other members of NRT. More particularly, the defendants contend that given the nature of the plaintiff's claims, and under well settled law of corporations, the plaintiff must bring a derivative action on behalf of NRT. Alternatively, the defendants claim that pursuant to the general legal principles of standing, the plaintiff's alleged injuries are "indirect, remote or derivative" requiring dismissal of his claims.
The plaintiff has filed a withdrawal (135.00) of the third and fourth counts of the amended complaint. Consequently, the court will consider the defendants' motion only as to the second and fifth counts.
"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." Yanow v. Teal Industries, Inc., 178 Conn. 262, 281, 422 A.2d 311 (1979). "Since at least the middle of the [nineteenth] century, it has been accepted in this country that the law should permit shareholders to sue derivatively on their corporation's behalf under appropriate conditions . . . [I]t 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 . . .
"[I]n order for a shareholder to bring a direct or personal action against the corporation or other shareholders, that shareholder must show an injury that is separate and distinct from that suffered by any other shareholder or by the corporation . . . It is commonly understood that [a] shareholder — even the sole shareholder — does not have standing to assert claims alleging wrongs to the corporation." (Citations omitted; internal quotation marks omitted.) Smith v. Synder, 267 Conn. 456, 461, 839 A.2d 589 (2004).
The plaintiff's claims arise from alleged acts and omissions by the defendants relating to NRT, a closely held corporation. As properly noted by Judge Jennings, "[t]he application of these principles to claims brought by a shareholder of a closely held corporation against other shareholders of the corporation is particularly difficult." LeBlanc v. Tomoiu, Superior Court, complex litigation docket at Stamford, Docket No. X08-CV-06-5001421 (June 5, 2007, Jennings, J.) [ 43 Conn. L. Rptr. 599].
The defendants acknowledge this issue in their reply memorandum in which they note that "[i]t is true that in recent years, courts have struggled to determine whether the derivative or direct claim is more appropriate in closely-held companies." Similarly, Judge Adams commented that "[r]eading Connecticut Supreme Court cases on the distinctions between direct and derivative actions can be an unsettling experience as the decisions are few in number, somewhat sporadic in issuance, and deal with different factual scenarios." Puri v. Norwalk Anesthesiologists, P.C., Superior Court, complex litigation docket at Stamford, Docket No. X08-CV-05-4003801 (July 19, 2006, Adams, J).
In opposing the defendants' dismissal motion, the plaintiff contends that Connecticut law does not support the application of the principles of corporate law governing derivative and direct claims as set forth in Yanow and its progeny to claims against NRT, a limited liability company. The defendants counter that "the limited liability company is still a relatively young form of corporation facing new legal issues, and for this reason, courts must at times apply traditional corporate law concepts." The court agrees with the defendants and concludes that the foregoing principles of corporate law apply to limited liability companies. In this regard, the court finds well reasoned and persuasive the decision by Judge Prescott in Ward v. Gamble, Superior Court, judicial district of Hartford, Docket No. CV-08-5017829 (July 23, 2009, Prescott, J.) [ 48 Conn. L. Rptr. 286], in which he noted that "there is no appellate authority in Connecticut directly addressing the applicability of derivative actions to LLCs . . ." and that the statute governing derivative actions, § 52-572j, and the Connecticut Limited Liability Company Act, do not address the applicability of derivative actions to limited liability companies. Judge Prescott reviewed the policy reasons for applying corporate laws concerning derivative actions to limited liability companies, cited to New York case law as supporting the public policy reasons and also to a few Connecticut Superior Court cases, in concluding that the rule set forth in Yanow and its progeny apply to limited liability companies. Id. The court concludes in the present action that the law pertaining to derivative actions applies to limited liability companies.
The court must next determine whether the allegations of the plaintiff's complaint set forth harm to the plaintiff that is separate and distinct from any harm suffered by NRT or by its members collectively. More particularly, the court must decide whether the plaintiff is required to bring his claims in a derivative, as opposed to a direct, action.
The well pleaded allegations in the plaintiff's complaint, deemed admitted for the purpose of deciding this motion, demonstrate that the plaintiff sustained injuries separate and distinct from NRT or its two other members, Thompson and Rassis, or by NRT. Two of the plaintiff's allegations relate to the operating agreement pertaining to NRT; specifically, that Thompson and Rassis have failed to pay certain amounts due to the plaintiff under the agreement, and that they told the plaintiff that he would not receive the sums due to him under the operating agreement if he failed to assign to them his membership interest in NRT. These claims clearly allege a personal and distinct harm to the plaintiff sufficient to support a direct, as opposed to a derivative, claim. The plaintiff's allegations that Thompson and Rassis have precluded him for being involved in NRT, and failed to provide him with business and financial information relating to the company, are also in the nature of direct claims. The plaintiff alleges that Thompson and Rassis "advance[ed] their own interests to the plaintiff's detriment" by wrongfully making payments from NRT to Thompson Rassis Architects, Inc., an entity in which Thompson and Rassis are the sole shareholders. The court finds this allegation is properly brought as a direct claim.
The court need not determine whether the plaintiff's allegation that Thompson and Rassis "diverted NRT's business opportunities and clients to . . . RT . . . a limited liability company organized by Thompson and Rassis and in which they are members, thereby depriving NRT of revenue" should be brought as a derivative or direct claim in view of the court's conclusions on the other allegations. Also, given that the court finds that the plaintiff has alleged a separate and distinct harm, the court need not address the defendants' additional argument that the plaintiff lacks standing under general principles of common-law standing. In any event, the court's finding that the plaintiff suffered a separate and distinct harm for purposes of deciding whether his claims should be brought in a derivative or direct action also supports a finding that the plaintiff is classically aggrieved.
The facts of this case are similar to those in LeBlanc v. Tomoiu, supra, Superior Court, Docket No. X08-CV-06-5001421. That case involved "an action brought by a shareholder of H2 Energy Solutions, Inc., ("H2 Energy"), a closely held Nevada corporation with a place of business in the town of Stratford, [Connecticut], against certain former officers, directors and shareholders of the company, and against certain financial consultants and investors who allegedly came into control of the company and transferred all its assets and technology to the defendant General Ultrasonics Corporation (`GUC'), a corporation owned and controlled by certain of the defendants." Id. The defendants moved to dismiss certain the counts of the complaint on the ground of subject matter jurisdiction contending that the plaintiff lacked standing to assert direct claims against them and the claims had to be asserted derivatively by H2 Energy. Id. The court denied the motion. Id. The court found that "[the counts] state claims which are individual to the plaintiff . . . and may be individually maintained by him. Central to this holding are the allegations incorporated into and essential to each of those counts that the defendants have taken over ownership and control of H2 Energy and have deprived plaintiff of his management positions as a director and chairman of the board to marginalize and dilute his shares, have failed to disclose to plaintiff material facts regarding the acquisition of H2 Energy by GUC and Greenshift, have violated fiduciary responsibilities owed to him as a minority shareholder, and have looted the assets of H2 Energy to their own benefit and to the detriment of the value of his shares." Id.
This case is also factually similar to Yanow, which involved an "action in the nature of both a shareholder's derivative suit and an individual action brought by the plaintiff, Bernard Yanow, against Teal Industries, Inc. (Teal), a Connecticut corporation, and Martin B. Gentry, Jr., who, at relevant times, was an officer and director of Teal, seeking an accounting, damages and nullification of a merger between Teal and Mallard Manufacturing Company (Mallard), of which Yanow was a 10 percent shareholder. The complaint . . . alleged in four counts that Teal and Gentry had committed a series of corporate wrongs resulting in damage to Yanow individually and to Mallard." Yanow v. Teal Industries, Inc., supra, 178 Conn. 263-64. An issue on appeal was whether the trial court properly granted the plaintiff's summary judgment motion on certain counts of the complaint for the reason that the counts set forth derivative claims "and could only be brought by one who, unlike the plaintiff, was a shareholder of Mallard acting on behalf of Mallard at the time of suit." Id., 281.
The Supreme Court disagreed with the trial court that the claims in the subject counts were derivative in nature. Id., 283.
Count one, as noted earlier, states nineteen individual transactions which the plaintiff alleged to be unfair and undisclosed to him, which put into issue the looting of Mallard by Gentry. Such claims — of looting the corporation and of failure of the directors to disclose important facts concerning corporate transactions — state personal, as opposed to derivative, causes of action . . . In count four, the plaintiff alleged that Gentry, in his capacity as officer and director of Mallard and Teal, took advantage of special facts concerning Mallard's financial condition, which he failed to disclose to the plaintiff, and that Gentry caused the merger to deprive the plaintiff of his shares and to avoid paying the plaintiff their full fair market value. The plaintiff, in effect, via counts one and four, alleged that both defendants dismantled Mallard step-by-step, transaction-by-transaction, depriving Mallard and the plaintiff of income and assets. These allegations claim a pervasive breach of the fiduciary duty owed by the corporate majority to the sole minority stockholder. The rule of corporation law and of equity invoked is well-settled: the majority has the right to control, but when it does so, it occupies a fiduciary relationship toward the minority, as much as the corporation itself or its officers and directors . . . As pleaded, these causes of action are based upon alleged unlawful acts relating solely to the stock owned by the plaintiff, in violation of the fiduciary duty owed the plaintiff by the defendants, and they thus state individual, and not derivative, claims.
(Citations omitted.) Id., 283-84.
Similarly, in the present case, the allegations of the plaintiff's complaint incorporated into the second and fifth counts assert that Thompson and Rassis, as majority members, have assumed control of NRT to their benefit and the plaintiff's detriment by, among other things, depriving him of certain sums due to him, failing to provide him with certain company information, and preventing him for participating in the company. These allegations concern improper acts and omissions solely against the plaintiff's membership interest in NRT. They set forth individual, not derivative, claims.
In view of the foregoing, the defendants' motion to dismiss (122.00) is denied.
CT Page 7825