Opinion
No. X08 CV 02 0200492
September 15, 2004
MEMORANDUM OF DECISION RE MOTION TO STRIKE (154.00)
I. The Complaint
In this action the plaintiff, Craig Adler, alleges that he was duped into selling his equity interest in the defendant First Creek Capital Partners, LLC (First Creek) an investment advisor to two hedge funds. According to the allegations of his second amended complaint, the defendant David Snoddy recruited Adler to execute trades on behalf of two Japanese hedge funds which Snoddy was establishing. Adler and Snoddy set up First Creek with Adler becoming the managing member and Snoddy the only other member. Adler contributed capital of $51,000.00 and Snoddy contributed $49,000.00. First Creek, as investment manager and general partner of the two hedge funds, was to receive annual revenue of 1.5% of assets in the hedge funds and 20% of the net profits of the funds' limited partners. Pursuant to the First Creek operating agreement, Adler was entitled to a share of its net profit.
The defendant, Speedwell Advisors, Ltd. (Speedwell) was established as the research advisor for First Creek. Snoddy was the president and majority shareholder of Speedwell. Speedwell's agreement with First Creek called for the latter to reimburse to Speedwell a "Basic Fee" equal to 105% of Speedwell's operating expenses and to pay an "additional Fee" composed of at least 84% of the net profits of First Creek to Speedwell. Adler alleges that Speedwell is the "defacto (sic) general partner/investment manager of the funds," that First Creek was essentially set up to avoid Japanese taxes and that First Creek is "nothing more than the alter ego of Speedwell." Adler alleges that the two hedge funds now have approximately $300,000,000.00 in assets.
Adler alleges that in April 2002 he advised Snoddy that his recent divorce had left him strapped for cash and he wanted to borrow money until he would receive a distribution of his profits from First Creek in July. After purporting to consult with his lawyers and accountants Snoddy told Adler that the only way Adler could borrow against his First Creek Capital account would be sell his interest to a third person who would then sell it back to Adler in July.
It is alleged that arrangements were worked out by Snoddy for Adler to sell his First Creek interest to the defendant Shigenobu Watanabe, the husband of Speedwell's office manager. Snoddy is alleged to have orally represented that Watanabe would sell the First Creek membership back to Adler in July 2002.
It is further alleged that when Adler returned from a honeymoon with his second wife on May 7, 2000 he was advised by Snoddy that he was terminated from First Creek, that Snoddy and Watanabe refused to sell the First Creek membership back to Adler and that Snoddy and First Creek have refused to pay Adler the share of profits from First Creek.
Adler has alleged numerous claims. He seeks recission based on fraud and lack of consideration. He alleges civil conspiracy, breach of fiduciary duties, breach of contract, unjust enrichment, a violation of the Connecticut Unfair Trade Practices Act, General Statues § 42-110a et seq. (CUTPA) and seeks an accounting.
The defendants have moved to strike certain portions of the second amended complaint, specifically seven paragraphs, ¶¶ 106-12, of Count Four (breach of fiduciary duty) and Count Eight in its entirety (the CUTPA account). The allegations sought to be stricken are essentially the same. In them, Adler alleges that Speedwell sent invoices to First Creek for the Basic Fee and the additional Fee; that these invoices did not contain the required detail, did not reflect Speedwell's expenses but were inflated and were designed to strip First Creek of assets and to enrich Snoddy and Speedwell. It is further alleged that Snoddy instructed Adler to direct the fee payments to Snoddy's personal bank account. Finally, it is alleged that "[t]he improperly inflated invoices reduced First Creek's profits, thereby reducing the plaintiff's compensation under the [o]perating [a]greement." Eighth Count, ¶ 135, see also Fourth Count, ¶ 108.
II. Standard of Review
The court's analysis of a motion to strike is guided by well accepted standards:
The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted. (Internal quotation marks omitted.) Faulkner v. United Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997); see Practice Book § 10-39. A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court . . . We take the facts to be those alleged in the Complaint . . . and we construe the complaint in the manner most favorable to sustaining its legal sufficiency. Thus, [i]f facts provable in the complaint would support a cause of action, the motion to strike must be denied. (Citations omitted; internal quotation marks omitted.) Vacco v. Microsoft Corp., 260 Conn. 59, 64-65, 793 A.2d 1048 (2002). A motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged. Novametrix Medical Systems, Inc. v. BOC Group, Inc., 224 Conn. 210, 215, 618 A.2d 25 (1992).
Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498 (2003).
III. Discussion
In prior proceedings in this action, before it was assigned to the Complex Litigation Docket, the defendants had successfully moved to strike a count in an earlier version of the complaint based on CUTPA. In a decision dated October 7, 2003, Judge Doherty determined that the plaintiff's CUTPA count allegations involved only the inner workings of the First Creek entity and that CUTPA did not apply to employer-employee relations, the internal business affairs of partnerships or intracompany disputes between shareholders. Distinguishing the Connecticut Supreme Court decision in Fink v. Golenbock, 238 Conn. 183 (1996), Judge Doherty held that Adler had not alleged that Snoddy had taken action to usurp the business or clientele of one corporation to the benefit of another. See Memorandum of Decision, Adler v. Snoddy, Superior Court, judicial district of Fairfield at Bridgeport, CV 02 0399008.
Judge Doherty's decision also denied defendants' motion to dismiss. The docket number of this case was changed when it was transferred to the Complex Litigation Docket.
The defendants' present motion presents several arguments. They contend that the new CUTPA count is a restatement of the count previously stricken and they ask for sanctions against Adler, pursuant to General Statutes § 52-130. The defendants also argue that Paragraphs 106-12 which have been added to the Fourth Count are an improper amendment since Adler did not seek leave to amend. Finally, they assert that Adler has no standing to raise the additions to the Fourth Count and the new Eighth Count because they are derivative in nature and can only be brought on behalf of First Creek, not by Adler directly.
The court will turn to the substantive arguments first. Contrary to the defendants' assertions, the substantive allegations now in the CUTPA count before the court do state a cause of action under that statute. Unlike the pleading before Judge Doherty, the second amended complaint has sufficient allegations that Snoddy and Speedwell unfairly or unscrupulously acted against the interest of First Creek and Adler and caused injury. The new allegations involve matters which are not confined to the inner workings of First Creek but involve depleting its assets to the benefit of Snoddy or Speedwell.
Perhaps a more difficult question is the argument by the defendants that Adler lacks standing to pursue his claims based on the alleged inflated invoices leading to excessive fees paid to Speedwell or Snoddy. The defendants assert this claim may only be brought derivatively on behalf, and for the benefit of, First Creek, a claim which Adler has not pleaded. The gravamen of the defendants' contention is that the injury alleged is an injury to First Creek and the right to a remedy also belongs to First Creek, not Adler.
As a matter of general business organization law
[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 stockholder 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 his individually.
Yanow v. Teal Industries, Inc., 178 Conn. 262, 281-82 (1979) (citations omitted).
On this question of corporate law all parties have argued Connecticut law. See, e.g. Def. Memo. in support of Motion to Strike, 9; Pl. Surreply, 1-2, both arguing on the basis of Yanow v. Teal Industries, Inc., supra. The second amended complaint alleges that First Creek was organized under Delaware law. At oral argument, defendants' counsel suggested that Yanow might not apply and cited one case, Litman v. Prudential-Bache Properties, 611 A.2d 12 (1992) (Del. Chancery Ct) (stating that for a direct action the injury alleged must be separate and distinct from injury to other shareholders). Based on the papers submitted, and the absence of' any briefing that Delaware law is materially different on this point, the court will analyze the question under Connecticut precedent.
The issue before the court is whether Adler's allegations state a claim based on a loss that is separate and distinct from a loss to the corporation or other members or shareholders. In Fink v. Golenbock, supra, the Connecticut Supreme Court said,
The distinction between derivative and direct claims turns primarily on whether the breach of duty is to the corporation or to the shareholders and whether it is the corporation or the shareholders that should appropriately receive relief.
Id. 238 Conn. 201 (quoting In re Ionosphere Clubs, Inc., 17 F.3d 600, 605 (2d Cir. 1994)).
The merits of the parties' arguments are closely balanced, but taking the allegations of the second amended complaint at face value, which the court must on a motion to strike, the balance is in Adler's favor. The court determines that the allegations of the Eighth Count set forth a basis for a direct claim by Adler against Snoddy and Speedwell. According to those allegations Adler's compensation was directly adversely affected by the alleged inflated invoices whereas the fortunes of the only other member of First Creek, Snoddy, were not. To be sure, Snoddy's share of First Creek's profits might have been diminished, but his overall situation benefitted either because the inflated bills were paid directly to him or were paid to Speedwell which he allegedly controlled. In light of the allegation that Speedwell was the de facto investment manager of the hedge funds, not First Creek, the inference is clear that Snoddy might lose a little at First Creek but gain more through Speedwell. Indeed this case has similarities to Yanow where the Connecticut Supreme Court deemed that allegations stating that the defendants "dismantled Mallard" (the corporation of which Yanow was a shareholder) "step-by-step, transaction-by-transaction depriving Mallard and the plaintiff of income and assets" were sufficient to state a direct cause of action. Yanow v. Teal Industries, Inc., supra, 178 Conn. 283 (emphasis added).
For the above reasons, the court denies the motion to strike the Eighth Count. As a corollary to this determination the motion for sanctions is also denied.
As to the additional paragraphs added to the Fourth Count, the defendants are correct that Adler improperly added these allegations when filing the second amended complaint in response to Judge Doherty's October 7, 2003 decision. Since the Fourth Count was not affected by the decision it could not be amended without leave of the court. Practice Book §§ 10-59, 10-60. Adler responds by requesting the court to deem the Fourth Count amended nunc pro tunc.
Without wishing to seem to approve the conduct of the plaintiff, the court is aware of the liberal approach of the Connecticut courts to allowing amendments to pleadings. See e.g. Practice Book § 10-60. The new paragraphs in the Fourth Count are essentially the same as those added to the Eighth Count. While this case is not new, the pleadings are not yet closed and discovery has not been completed since there have been numerous and ongoing disputes that remain unresolved. The defendants will not be unfairly prejudiced by the amended Fourth Count, and the court allows it.
So Ordered.
Taggart D. Adams
SUPERIOR COURT JUDGE