Opinion
No. CV 04 0084606 S
May 16, 2007
MEMORANDUM OF DECISION
The defendant, Janet G. LaPointe, moves the court to appoint a receiver to windup the affairs and dissolve the plaintiff, Gottier's Furniture, LLC. The court heard three days of testimony on this motion and makes the following determinations of fact and rulings of law.
Under the provisions of the Connecticut Limited Liability Company Act, General Statutes Chapter 613, Albert and Helen Gottier, in June 1999, formed Gottier's Furniture, LLC. The specific purpose of the company, as stated in the second paragraph of the operating agreement, "is to acquire, own, operate, manage, rent, lease, repair and otherwise deal with a retail furniture store located at 48 Windsor Avenue, Vernon, Connecticut . . ."
Albert and Helen Gottier were the members of the company and shared voting and distribution interests equally. On July 1, 1999, the organizers gave their membership interests to three of their children, viz. Robert A. Gottier, Rosemary Toth, and the defendant.
On August 27, 1999, the operating agreement was amended to reflect the new membership. The amendment specified that, while the three siblings shared ownership rights equally, the distribution allocation was 37.5 percent to Robert Gottier, 37.5 percent to the defendant and 25 percent to Toth.
Eventually, on June 30, 2001, the company agreed to buy out Toth's interest. The agreement called for the company to pay Toth $1,000 per month for fifty months. During this fifty-month period, Toth would cease to receive any distribution of profits and would incur no charges for losses generated by the company. Upon receipt of the final payment, Toth would transfer her interest to the company or its designee. If, however, the company failed to make any monthly payment, then Toth would be entitled to full reinstatement of her former membership rights and interests if she gave written notice of the default and her intent to reactivate those rights and interests.
The company defaulted after paying only $23,000 to Toth. The last payment was made sometime in 2003.
After their parents transferred the business to their three children, the defendant became the financial manager of the company. She handled receipts, made bank deposits, paid the bills, and kept the company's financial records. Robert Gottier became the sales, warehouse, and inventory manager.
In August 2003, Robert learned that the company was suffering from financial difficulties. The company was delinquent paying debts owned to vendors and had issued checks with insufficient funds to cover them. He began to scrutinize the company's books and discovered that bank deposits disagreed with deposit slips and that check stub data failed to correspond to the checks both with respect to amount and payee.
These discrepancies led Robert to hire an independent accountant to examine the records. Robert supplied the accountant, at the accountant's request, with the records covering the years 2002, 2003, and the beginning of 2004. The accountant's audit disclosed that around $100,000 of company funds placed in the care of the defendant was unaccounted for.
Robert showed this report to Toth. Upon review of this evidence, Toth exercised her reinstatement right and, on March 5, 2004, notified the defendant, in writing, of her decision.
On March 8, 2004, a meeting of the three members was held at Robert's request. He confronted the defendant with the charge that she had embezzled company funds. The defendant never denied the allegation.
Robert Gottier and Toth voted to remove the defendant from her position as financial manager and terminated her employment with the company. Robert assumed the role of financial manager.
After a careful review of the evidence, the court finds, by clear and convincing evidence, that the defendant misused her position as financial manager and misappropriated substantial sums of company money for her own use or that of her husband. The court further finds that this defalcation contributed to the financial distress from which the company suffered in 2003 and 2004, although other debilitating factors were also at play.
The family furniture business, in general, has been in decline because of competition from large chain stores and discount outlets. Also, furniture sales diminish in proportion to the decline of the sales of residential property sales which occurred during this period.
Because he lacked an accounting background, Robert converted a member of the company's sales staff, who had such training, into a bookkeeper for the business. Since the defendant's termination, Robert trimmed the company work force, procured employee health insurance with lower premiums, and reduced inventory. He obtained a $100,000 loan from his mother to help keep the business afloat. He paid some company bills using personal credit. He curtailed expensive media advertisement.
When Robert took the financial reins many vendors would only accept C.O.D. orders from the company because of the past delinquencies. This circumstance inhibited the company from securing enough stock to maintain adequate cash flow. The debts to vendors has since been paid off and some credit restored. Most of the property tax penalties from past years have been paid, however, around $70,000 is still owed for past and current property taxes.
Except for payment on the tax obligation and repayment of the loan from Helen Gottier, the store sales are now sufficient to meet other day-to-day expenses, such as utility and insurance bills. The company remains about five weeks behind in wages. For the past year, the company has earned enough to pay all operating costs.
Over the past three years, Robert gave the company's remaining employees, including his wife, a one dollar per hour raise. He gave himself a weekly raise of $100. The court finds this increase justified by the additional duties Robert has assumed.
It will be very difficult for this company to pay off all its debts. The money pilfered by the defendant would have gone far in helping the business to regain solvency. The company's financial health is weak but not moribund.
I
The plaintiffs interpose the equitable defense of unclean hands and contend that the defendant, who misappropriated substantial funds and contributed to the economic woes of the company, ought to be barred from moving for the appointment of someone to windup the company's affairs. Neither the parties' nor the court's research discloses a Connecticut case directly on point.
It is clear that the appointment of a receiver to manage a company during dissolution is an equitable remedy. Chance v. Norwalk Fast Oil, Inc., 55 Conn.App. 272, 278 (1999). It is interesting to note that, unlike for stock and nonstock corporations, there is no comparable statutory authority for the appointment of someone to windup the affairs of a limited liability company. Connecticut General Statutes § 33-898 empowers the superior court to "appoint one or more receivers to windup and liquidate" stock corporations. Similarly. General Statutes § 33-1189 uses nearly identical language with respect to nonstock corporations.
By contrast, General Statutes § 34-208(a) invests the court with the discretion to windup a limited liability company "if one or more of the members or managers of the limited liability company have engaged in wrongful conduct, or upon other cause shown," but the statute contains no provision for the appointment of a receiver to accomplish the dissolution. Thus, if any such power of appointment as to a limited liability company exists, it must arise from the court's common-law, equitable jurisdiction.
One who seeks the benefits of equity must come before the court with "clean hands." Sachs v. Sachs, 22 Conn.App. 410, 416 (1990). The doctrine holds that, whatever the nature of the proponent's claim and relief sought, if that claim grows out of or depends upon, or is inseparably connected with the proponent's misconduct, a court of equity will generally deny the equitable relief sought. Pomeroy, Equity Jurisprudence (5th Ed.) § 401.
The movant in this case certainly bears unclean hands based on the court's findings that she contributed to the company's dire economic condition by embezzling money during the time she was financial manager. So, the relevant question devolves into whether the doctrine applies to the equitable appointment of a receiver to windup a limited liability company. The plaintiffs point to two extraterritorial cases to support their contention that it does.
In Premier Farm Credit v. W-Cattle, 05C.A.444 (Colo.App. 2006), the Colorado Court of Appeals recognized the applicability of the doctrine relative to a motion to discharge a previously appointed receiver. That court ruled that the trial court properly rejected the motion to discharge based on unclean hands. Id. Also, in In Re Silver Leaf, LLC, Court of Chancery of Delaware, New Castle County, d.n. 20611 (June 20, 2005), a court of equity held that the doctrine barred the appointment of a particular receiver.
The court holds that, based on the findings detailed above, the movant is disqualified, under the doctrine of clean hands, from seeking to have the court appoint someone to windup the affairs of Gottier's Furniture, LLC. Having significantly impaired the financial well-being of the company by breaching her position of trust, the movant cannot now obtain the equitable remedy of appointment of a receiver because the company is experiencing economic difficulties.
II
Alternatively, ignoring the doctrine of clean hands, the court declines to appoint a receiver to windup the affairs of the company. Appointment of a receiver for such purpose has been characterized as an extraordinary remedy available only as an emergency measure to be utilized with great caution and in the face of compelling circumstances, 65 Am.Jur.2d, Receiver § 3 (2001). The appointment of a receiver should occur "only when clearly necessary." Rosen v. Siegel, 106 F.3d 28, 33 (2nd Cir. 1997). "A receivership is a drastic remedy, and if some course less stringent will meet the situation that course should be taken." Bland v. Lee C. Bland Corp., 16 Conn.Sup. 268, 271 (1949).
Dissension among members is insufficient to warrant appointment of a receiver to facilitate the dissolution of a business. Bator v. United Sausage Co., 138 Conn. 18, 22 (1951). The discord must be of a nature to destroy the business purpose and "render it impossible" to conduct the company's affairs. Id.
Even though a company is losing money, a receivership and dissolution are not mandatory. Ray v. Robert Price Coal Co., 80 Conn. 558, 560-61 (1908). In that case our Supreme Court upheld the trial court's refusal to appoint a receiver to windup a corporation based on a claim of poor management and economic loss. In the absence of waste, fraud, or self-dealing, the trial court is justified in allowing a corporation to remain in existence. Id.; Sheehy v. Barry, 87 Conn. 656, 662-63 (1914). The claims of the movant in the present case are very similar to those made in Ray v. Robert Price Coal Co., supra.
While it is true that Robert Gottier has increased his and his wife's pay, these increases were reasonable and temperate. He performs additional duties necessitated by the removal of the movant as financial manager. Also, the company has managed to pay many past debts, restore the company's credit, and eke out an existence under his management. The decision to incur a large debt to Helen Gottier in order to stabilize its affairs will not be second-guessed by the court. No creditor is presently seeking to shut down this business, nor have foreclosure proceedings been filed. Under these circumstances, the court exercises its discretion and denies the motion to appoint a receiver to windup the company.