Opinion
No. CV03-0477220-S
December 8, 2005
MEMORANDUM OF DECISION ON MOTIONS FOR SUMMARY JUDGMENT
In this suit, claims were made by the plaintiffs against Anthony Parillo, a business advisor and Met Mal and Mel Horowitz sellers of a cafe business to the KGM Corporation. Motions for summary judgment have been filed by the defendants and the court will examine the motions and the opposition to them in this decision.
This corporation, KGM, was formed by Kenneth D. Peterson, Michael Peterson, and Gregory Albone for the purpose of and in connection with the purchase of a cafe which turned out to be an unsuccessful business venture.
Three companion cases were brought against three separate defendants by Kenneth D. Peterson (D. Peterson) and his father, Kenneth J. Peterson (J. Peterson), for damages relating to the purchase and subsequent failure of the Courtside Cafe. Two of these cases are now before this court (1) one against Anthony Parillo and (2) the other suit against Met Mal Inc. and Mel Horowitz (the court will refer to this suit as the Horowitz case).
Several causes of action have been filed against Parillo. (A.) Count I, breach of the duty of good faith and fair dealing (B.) Counts II, XVI and XVII, breach of contract (C.) Count III, fraud, (D.) Count IV, negligence.
The suit against the Horowitz defendants lies in Count IX, fraud; count X, negligent misrepresentation; Count XI, promissory estoppel; and Count XII, CUTPA violation. Count VIII of the plaintiffs' complaint alleges disregard of corporate entities and seeks to pierce the corporate veil for joint and several liability against Mel Horowitz.
In each of the two summary motions filed by the defendants it is claimed there is no genuine issue of material fact. Both motions state that the plaintiffs lack standing and have no evidence of damages. Alternatively each motion claims that there is no substantive basis for the various allegations made in the several counts.
The standards to be applied in addressing a motion for summary judgment are well-known. Such a motion should not be granted if there is a genuine issue of material fact because parties have a constitutional right to a jury trial. On the other hand, if there is no such disputed issue of material fact, then these motions should be granted to avoid putting people through the expense and burden of having to confront legally meritless litigation.
The court will focus its discussion on the lack of standing claim made in both motions for summary judgment. The court will briefly discuss the factual allegations made in the two respective suits in the following section.
Suit Against Parillo
The court will rely in large part on Judge Silbert's decision in a companion case Kenneth Peterson et al. v. Woodbridge Cusano, CV04-0487404. As to the facts, Parillo signed a contract with Kenneth D. Peterson (D. Peterson) and Albone as officers of KGM to provide the corporation with assistance in preparing an SBA loan application. There is also a claim made that Parillo verbally agreed to assist in the operation of the business with regard to advice and counseling after the cafe was purchased.
The plaintiffs claim there was a violation of this verbal "agreement" after the business began to operate and a violation of the written agreement as regards fees and commissions. The claim is made that the plaintiffs were misled "throughout their dealings with Mr. Parillo and Mr. Horowitz as to the value of the assets" of the cafe and how much money they could make from its operation and as to the services Parillo would provide after the Courtside Cafe was purchased. Parillo's misrepresentations as to the cafe led D. Peterson to give up a good job. Parillo and Horowitz made misrepresentations regarding the venture which were made to induce the plaintiffs to buy the cafe.
The written agreement for the SBA loan application signed by Parillo and D. Peterson and Albone on behalf of the corporation is dated January 12, 2000. The complaint states the plaintiffs had met with Parillo in August 2000 concerning the purchase of the cafe. KGM was thus in existence for several months before the actual purchase which occurred on May 17, 2001. What is somewhat confusing are exhibits the plaintiffs attached in their opposition to the motion dated in January 2001 stating "Tony Parillo" wants a C corporation and that the accountant Cusano wants to know the status of the incorporation. What does appear to be uncontested, however, is that at the time of the cafe's purchase, KGM was the purchaser — in fact KGM Corporation purchased the assets of the restaurant through a written agreement dated February 1, 2001.
The time of purchase is the critical element for any cause of action alleging negligence, fraud, misrepresentation, breach of contract, etc. 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. The court will now discuss in more detail why it agrees with Judge Silbert on the lack of standing in these plaintiffs to sue Parillo.
"Standing implicates the court's subject matter jurisdiction . . . When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue," Smith v. Snyder, 267 Conn. 456, 460 (2004).
(a)
The rule in most if not all jurisdictions is succinctly stated in 19 Am. Jur.2d "Corporations" § 1937, pp. 124-25.
Generally, a person cannot pursue an individual cause of action against third parties for wrongs or injuries to a corporation in which he or she holds stock, even if the stockholder suffers a harm that flows from the injury to the corporation, such as a reduction in the value of his or her stock. Such an action must be pursued by the corporation or by the shareholder in the form of a derivative action. A wrong that affects the corporation itself, or the stockholders generally, gives rise to a cause of action on the part of the corporation and not primarily on the part of an individual stockholder; however, a direct action is allowed if the stockholder has suffered an injury that is either separate and distinct from the injury suffered by the corporation or arises out of a violation of a special duty running from the alleged wrongdoer directly to the stockholder.
Connecticut certainly agrees with this rule, see Yanow v. Teal Industries Inc., 178 Conn. 262, 281-82; Delio v. Earth Garden, 28 Conn.App. 73, 78-79 (1992); Christ-Janer v. A.F. Conte Co., Inc., 8 Conn.App. 83, 88-90 (1986), see especially Fink v. Golenbock, 238 Conn. 183, 201, 202 (1996).
Under this case law Kenneth D. Peterson as a shareholder does not have the standing required to bring suit individually because the harm alleged to have occurred here was done to the corporation; any harm to Peterson flowed out of that corporate harm. Thus the corporation is the proper entity to bring suit. This injury test set forth in Am. Jur. and the case law can be confusing, however, the author of an article in 9 J. Corporation Law 147, 156 (1984) "Shareholder Individual and Derivative Actions" said: "The injury criterion can be most misleading in cases involving closely held corporations. If followed literally this criterion would convert almost all actions by shareholders into individual actions, since the impact of almost any injury to such corporations will fall heavily upon its shareholders."
The Golenbock case did hold that direct shareholder actions may be brought in situations "such as when an act affects both the relationship of the particular shareholder to the corporation and the structure of the corporation itself, causing or threatening injury to the corporation," 238 Conn. at page 202, cf. Yanow at 178 Conn. pp. 282-84. In Yanow the shareholder had standing to bring a direct action where the suit's "allegations claim a pervasive breach of fiduciary duty owed by the corporate majority to the sole minority stockholder." In other words in Yanow the "unlawful acts related solely to the stock owned by the plaintiff," thus individual not corporate claims were being asserted.
Perhaps a better approach is to say that it is important that the corporate entity be regarded as distinct from individual shareholders especially in light of the fact that there must be a rational method for processing claims in the judicial system and the corporation must have the ability to control and direct its own affairs including its litigation. If the corporation can bring a claim advancing discrete theories of liability but shareholder can also bring such claims, who controls the litigation? Does it make any difference if a majority of the stockholders bring the "shareholder" suit? Can one shareholder bring suit? Can different legal strategies be advanced in such litigation by the corporation as well as shareholders? How is recovery apportioned between the corporation and the shareholders who have brought suit? Is any shareholder a necessary party? What about the situation of a closely held corporation where there are hard feelings between the shareholders, as is apparently the case here — who determines litigation strategy? Would a corporate majority or the bylaws decide these issues? If individuals want to take advantage of the protections from liability the corporate regime offers, they should not be able to ignore the corporate structure by advancing willy-nilly corporate claims as their own.
In any event the court grants Parillo's motion against Kenneth D. Peterson on the basis that he has no standing to pursue the claims made. The court will not deal with the validity of the substantive claims made.
(b)
Kenneth J. Peterson (J. Peterson) is the father of Kenneth D. Peterson and the father has also brought suit against Parillo. The question of standing as to J. Peterson must be approached somewhat differently since he is not a shareholder. In examining the standing issue for the purposes of this motion, certain facts do not appear to be in dispute. The father did not purchase the cafe, KGM did, and he had no interest in it as a shareholder or officer or apparently as an investor. D. Peterson testified at his deposition that it was Parillo's idea to use his father's house as collateral for a loan to finance the cafe's purchase. The son then approached the father, J. Peterson, with this proposition. Parillo did meet with J. Peterson concerning the SBA loan application but the loan was applied for on behalf of the KGM Corporation. J. Peterson allowed his house to be used as collateral for the loan to purchase the business and when the business failed the father was required to put a mortgage on his house which is still being paid off.
The defendant argues that J. Peterson also does not have standing to bring suit against him. As noted in Holmes v. Securities Investor Protection Corp., 503 U.S. 258, 268 (1992) it has always been the case that "a plaintiff who complained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts was generally said to stand at too remote a distance to recover." Perhaps more to the point, the Holmes court went on to say that directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely," id., pp. 269-70, cf. Ganum v. Smith Wesson Corp., 258 Conn. 313, pp. 344 et seq. (2001). Thus the general law as set forth in "Corporations" 19 Am.Jur.2d, § 1942, pp. 129-30 is that, for example
It has been held that a loss incurred as a result of a shareholders guarantee of the corporation's debt is not a special injury and therefore, cannot be the basis for a dire it action by a shareholder, or simply that an individual shareholder is barred from bringing a lender liability action in his or her personal capacity, even if the shareholder has personally guaranteed a corporate debt and has alleged personal damages.
Even though J. Peterson is not a shareholder, if his position is analogized to a guarantor it is difficult to see why the just quoted rule should not be the same in barring his claim on standing grounds. In Miller v. U.S. Bank of Washington N.A., 865 P.2d 536, 542 (Wash. 1994), it is said that "the general rule is that the doctrine of standing prohibits a litigant from asserting another's legal right . . . No right exists under a guaranty contract to assert the rights of the principal debtor other than a right to raise defensively the claims of the principal debtor. Thus a guarantor may not recover affirmatively in the claims of the principal debtor."
Here the actions or failure to act of Parillo which form the basis of the claim against him by J. Peterson arise from contractual or tortious activity, allegedly, which was directed at the corporation alone. But for the injury inflicted on the corporation the plaintiff would have suffered no injury. The corporation is the appropriate party to vindicate its rights and recoup its losses — if it does so shareholders and guarantors will in turn be compensated to the extent and in the proportion that they are entitled. If every shareholder, guarantor, or person who has suffered a loss because of a financial injury inflicted on a corporation by a wrongdoer can bring suit, courts would be inundated and the corporation as a distinct entity conducting its own business and legal affairs in the courts would be rendered meaningless. Where would the limit be to the private liability claims? Could a supplier of a corporation that suffers a loss because of a third party's tortious actions toward the corporation advance claims arising out of injury to the corporation against the third party? How about the raw material provider to the supplier? Or to look at it from another perspective, why should a shareholder, guarantor, whether a shareholder or not, or a person or an entity in the position of J. Peterson here, be given preference to advance, what are in effect corporate legal claims, over any other type of corporate creditor — the answer cannot be, let any and all creditors then be given the right to advance corporate legal claims.
The motion for summary judgment against J. Peterson, the father, is granted on the basis that he lacks standing to bring the action. The court will not address the substantive claim.
Suit Against Met-Mel Inc. and Melvyn Horowitz
These two defendants sold the cafe to the KGM Corporation. There seems to be no dispute that all agreements and conduct alleged by the plaintiffs against these defendants was conduct engaged in by them vis-a-vis the corporation. For all of the reasons stated for the dismissal of the action against Parillo and for the reasons set forth by Judge Silbert in the separate suit brought by Kenneth D. Peterson and J. Peterson against the accountants for allegedly bad business advice to the corporation leading it to buy the cafe, the court dismisses this claim against these defendants for lack of standing.