Opinion
No. X08 CV 05 4003801 S
July 19, 2006
MEMORANDUM OF DECISION RE MOTION TO DISMISS
Background
The plaintiff Shubhinder Puri, M.D. is a licensed anesthesiologist who was president of the defendant Norwalk Anesthesiologists P.C. (NAPC) from 1989 until February 1, 2004 and chairman of the Department of Anesthesia of the Norwalk Hospital from 1987 until February 1, 2004. He alleges he is one of eight equal shareholder-members of NAPC and one of eight equal shareholders of the defendant Norwalk Anesthesia OBA, Inc. (NAOBA). The seven other members of NAPC and shareholders of NAOBA are licensed anesthesiologists Dr. Michael Smith, Dr. Richard Hughes, Dr. Paul Beiles, Dr. Dino Zacharakos, Dr. Mark Venditti, Dr. Rammurthy Chirunomula and Dr. Pratrap Kurra and each has been named defendant. The defendant Dr. Eric Kitain became chairman of the Norwalk Hospital Anesthesia Department in September 2004. At approximately the same time NAPC lost its exclusive contract with Norwalk Hospital to provide anesthesia services and defendant Anesthesiology Associates of Southern Connecticut (AASC) became the exclusive provider of anesthesia services at the hospital. Dr. Kitain and his professional corporation, also a defendant, are the sole officers and managing member of AASC.
The complaint alleges that defendant Connecticut Anesthesia of Fairfield, LLC (CAF) provides anesthesia services to Fairfield Surgical Center, an outpatient facility. NAOBA provides these services to CAF and revenue earned by CAF is distributed to members of NAPC, presumably through NAOBA. The value of this business is estimated by Dr. Puri to be around $400,000.
The complaint also alleges that AASC, in the fall of 2004, had no other licensed anesthesiologists on its staff other than Dr. Kitain. In order to meet AASC's contractual obligation to Norwalk Hospital, Dr. Kitain approached Dr. Smith, the president of NAPC about NAPC providing anesthesiology services to AASC by subcontract, and reached an agreement with Drs. Smith, Hughes and Beiles in which they would be offered membership in AASC following the expiration of the subcontract between AASC and NAPC. It is alleged that the subcontract was unfair to the remaining members of NAPC in that compensation for NAPC anesthesiologists was low and NAPC's existing and future accounts receivable were used to finance AASC. Dr. Kitain and Dr. Smith eventually obtained the approval of the subcontract by seven NAPC members, but it is alleged that Dr. Puri was not consulted, nor included in the agreement. On January 3, 2006 Dr. Puri resigned from NAPC.
Dr. Puri's complaint is in fifteen counts. He asserts damages including loss of his share of' accounts receivable, loss of stock value, severance and sick pay due from both NAPC and NAOBA. In this case Dr. Puri seeks damages and other relief for himself alone. His complaint does not seek to vindicate the rights of NAPC, NAOBA or any other corporation and he makes no mention of, or effort to comply with, General Statutes § 52-572j, the statute governing and authorizing derivative actions. The defendants have filed motions to dismiss a number of the counts on the basis that Dr. Puri's claims are not direct claims but derivative in nature and therefore he lacks standing to pursue them directly, and the court is without subject matter jurisdiction to hear or determine them.
The defendants are divided into two groups. NAPC, NAOBA, the seven anesthesiologists of these entities, other than Dr. Puri, and CAF comprise one group and move to dismiss eight counts. Dr. Kitain, his PC and AASC move to dismiss seven counts.
Discussion of Local Principles A. Standing and Subject Matter Jurisdiction
"If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause." Carrubba v. Moskowitz, 274 Conn. 533, 550 (2005) [quoting Broadnax v. New Haven, 270 Conn. 133, 153 (2004).] The objectives of the concept of standing are met when the plaintiff "makes a colorable claim of direct injury [that] he has suffered or likely to suffer Id. 551 (quoting Broadnax). The question before the court is whether Dr. Puri has alleged direct injury to himself in the causes of action attacked by the defendants, or whether he has alleged direct injury only to the corporations involved and only indirect or derivative injury to himself as corporate shareholder. In the former case Dr. Puri would have the requisite standing to pursue the claims; in the latter he would be without standing, and the court would lack subject matter jurisdiction over the claim.
A motion to dismiss is the proper means to raise the issue of subject matter jurisdiction. Practice Book § 10-31(a). In determining a motion to dismiss, as a general rule, the court must take the facts to be those as alleged in the complaint, including those facts necessarily implied from the allegation, and construed in a manner most favorable to the plaintiff. Lawrence Brunoli, Inc. v. Branford, 247 Conn. 407, 410-11 (1990). Where a motion to dismiss is accompanied by supporting affidavits, the court may look to those and not conclusively presume the validity of the complaint's allegations, and a hearing on factual issues may be held. Barde v. Board of Trustees, 207 Conn. 59, 62; Practice Book § 10-31(a).
In this case, the motions to dismiss made by the two defendant groups were not accompanied by affidavits, and the papers in opposition to the motions as well as the defendants' replies all relied on memoranda of law without affidavits. The case was transferred to the Complex Litigation Docket after the motions to dismiss were filed, and before and after oral argument of the motions the parties submitted certain affidavits. The court has reviewed these affidavits and while certain of the affidavits raise issues concerning some of the allegations of fact made in Dr. Puri's verified complaint the court does not believe these factual arguments are germane to the issues raised by the pending motions which can properly be decided without a fact hearing.
B. Shareholders Derivative Actions
Connecticut law has long recognized a shareholder's derivative suit "as an equitable action by the corporation as the real party in interest with a stockholder as a nominal plaintiff representing the corporation." Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 370 (1977) [citing Allen v. Curtis, 26 Conn. 456 (1857)]. A derivative suit "is designed to facilitate holding wrongdoing directors and majority shareholders to account and to enforce corporate claims against third persons." Id. The Connecticut Supreme Court has stated
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.
Yanow v. Teal, 178 Conn. 262, 281 (1979). In that case the court went on to say, however,
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 him individually.
Id. 281-82. The Connecticut Supreme Court upheld the right of a sole minority shareholder, Yanow, to sue individually a majority shareholder for breaching the fiduciary duty owed by the majority shareholder to minority shareholders and thus reducing the value of the minority shareholder's holdings.
In Fink v. Golenbock, 238 Conn. 183 (1996), the Connecticut Supreme Court held that one 50-percent owner of a professional corporation could sue the other 50-percent owner derivatively on behalf of the corporation for the defendant's breach of the statutory duty of care owed the corporation. In so doing the court rejected the argument that any injury in such a closely held corporation would have to be individual to the plaintiff, and that individual and derivative actions were invariably mutually exclusive. Id., 202 and n. 17. The court did not decide whether the plaintiff could have made personal claims as well; id., 203; but recognized there might be some instances where the facts could give rise to either a derivative or a direct action "such as when the act affects both the relationship of the particular shareholder to the corporation and the structure of the corporation itself." Id., 202.
In Smith v. Snyder, 267 Conn. 456 (2004), the Connecticut Supreme Court quoted Fink v. Golenbock to the effect that in order to bring a direct action against the corporation or other shareholders, a plaintiff must show an injury separate and distinct from that suffered by any other shareholder or by the corporation and quoted from an opinion by the United States Court of Appeals for the Second Circuit that even a sole shareholder does not have standing to assert claims which allege wrongs to the corporation. Id. 461-62.
Reading 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 fact scenarios. While each of the cases discussed above dutifully recognized what Yanow called "axiomatic," that a claim based on a wrong to a corporation must be brought as a derivative suit, and only a shareholder who suffers a loss separate and distinct from that of the corporation or other shareholders can sue directly, it can be somewhat difficult to reconcile the fact that injuries to corporations generally affect the value of shareholders' investments equally, yet it was a loss in the value of his stock which the Connecticut Supreme Court recognized as giving Yanow a right of an individual direct action. The possible inconsistencies that can be read into the few Connecticut appellate decisions on the subject have engendered the widely disparate readings accorded those cases by the vigorous and competent counsel representing the opposing parties in this case. The interpretation more accommodative of direct actions which can be drawn from Yanow and Fink as distinguished from Smith may be reconciled by limiting the interpretation to fact scenarios involving very small numbers of shareholders. The plaintiff in Yanow was described as the "sole minority stockholder"; 178 Conn. 283 and n. 9; and in Fink v. Golenbock, supra, there were only two stockholders.
Complaint
With the above case law in mind, this court now turns to consideration of the specific claims being made by Dr. Puri in his verified complaint which are sought to be dismissed by the defendants. At the outset the court notes the difficulty it has had in analyzing parts of the complaint which consists of fifteen separate counts. This difficulty, in part, arises from the plaintiff's decision to re-allege all prior allegations in the complaint as part of each succeeding count. Thus, allegations which are specific to the Second Count (a claim under General Statutes §§ 31-72) are included in the Third through Fifteenth Counts making it very unclear at times whether the Section 31-92 claims are meant to be included in each count. The inclusion of a broad array of claims in some counts makes it less likely that whole counts can be dismissed on standing grounds.
In the First Count Dr. Puri sets forth a broad claim of civil conspiracy against all defendants. It is alleged that the defendants conspired (1) to deprive Dr. Puri of benefits owed to him through his employment agreement with NAPC, and the operating agreement of NAOBA; (2) to divert accounts receivable and other assets of NAPC to AASC without adequate consideration, and (3) to divert accounts receivable and other assets of CAF and NAOBA without consideration. Complaint, ¶ 14. Later in the count it is alleged that each of the defendants are liable for the wrongful acts of each co-conspirator, and that the wrongful acts were done "in furtherance of misappropriating NACP, NAOBA and CAF's assets and depriving Dr. Puri of his contractual benefits." Complaint ¶ 39.
Also contained in the First Count is the allegation that Dr. Puri was owed money for work he performed under the subcontract between NAPC and AASC between October 1 and December 31, 2004. Complaint, ¶ 37. Except for the allegations of Paragraph 37 the court determines that the First Count raises claims that are primarily corporate claims of NAPC and NAOBA and that Dr. Puri cannot sue on the claims except derivatively on behalf of the corporation. As set forth throughout the First Count, and referred to directly in Paragraph 39, the claim is largely for diverting corporate assets, a quintessential corporate claim. The concomitant claim of depriving Dr. Puri of contractual benefits; e.g. redemption of his stock and benefits under his employment agreement, arise indirectly from the same alleged stripping of assets from the companies.
The court finds that the wage claim, mentioned in Paragraph 37, which is a direct claim by Dr. Puri is not an essential part of the conspiracy claim raised in the First Count. Indeed, it is the sole claim raised in the Second Count and is not the subject of either motion to dismiss. Therefore, the First Count is dismissed for lack of standing on the part of Dr. Puri.
In his Fifth Count Dr. Puri makes a claim against all defendants for breach of the implied covenant of good faith and fair dealing. This count is presumably tied to the Third and Fourth Counts, which are not subject to the motions to dismiss, alleging breach of contract against NAPC and NAOBA, respectively. In the Third Count Dr. Puri alleges that by entering into the subcontract with AASC and failing to pay his severance and buyout rights under his employment agreement, NAPC breached its agreement with him. In the Fourth Count Dr. Puri claims NAOBA breached its operating agreement by failing to redeem his shares and by transferring the rights to provide anesthesiology services to Fairfield Surgical Center to AASC.
The Fifth Count also includes a claim that NAPC has not paid for Dr. Puri's services in December 2004 which appears to be duplicative of or similar to the claims in the Second Count.
Leaving aside the issue of whether a non-contracting party can breach the duty of good faith and fair dealing (a subject not within the realm of the question as to whether this court has subject matter jurisdiction over a claim), the claims in the Fifth Count appear to be closely related to the direct claims of Dr. Puri against NAPC and NAOBA set forth in the Second, Third and Fourth Counts. Therefore, the motions to dismiss the Fifth Count are denied.
In his Sixth Count Dr. Puri alleges that Dr. Smith, in his position as president of NAPC in the latter part of 2004, owed a duty to Dr. Puri and the other member-shareholders of NAPC to honestly, fairly and properly manage NAPC's business affairs and accurately apprise the member-shareholders of those affairs, to collect accounts receivable of NAPC and transmit those funds to NAPC for the benefit of the shareholders and to observe all formalities in obtaining shareholder approval for contracts obligating NAPC and its shareholders. This count is brought solely against Dr. Smith.
The claims in the Sixth Count are derivative in nature because they allege actions which directly affected the corporation, NAPC, and affected each of NAPC's shareholders in the same fashion. While the complaint couched its allegations to set out a fiduciary duty owed by Dr. Smith to Dr. Puri individually, in fact Dr. Smith owed identical duties to all shareholders and to NAPC itself. Dr. Puri also argues that he was injured to a greater extent than the other shareholders. However, it was not the alleged breaches by Dr. Smith which caused the purported disproportionate injuries but other actions, including those taken by the other shareholders. The Sixth Count is dismissed on the basis of the plaintiff's lack of standing.
The Eighth Count is directed at AASC, Dr. Kitain, his professional corporation, and CAF alleging tortious interference with business relations and prospective economic advantage. This count alleges that Dr. Puri had contractual and beneficial relationships with NAPC and NAOBA and a contractual relationship with CAF. Specifically, it is alleged that the four defendants interfered with the business and contractual relationships of between Dr. Puri and NAPC and Dr. Puri and NAOBA. Presumably, these contractual relationships included Dr. Puri's rights under his employment agreement with NAPC and the operating agreement of NAOBA which include rights upon his resignation to a certain amount of NAPC and NAOBA accounts receivable, unused sick leave and redemption of the value of his NAPC and NAOBA stock.
The Eighth Count alleges that the defendants interfered with the individual rights of Dr. Puri as an employee, member and shareholder of NAPC and NAOBA. On their face Dr. Puri's claims appear to be direct claims. But, the underlying facts alleged in the complaint speak of the "defendants' unlawful acts . . . done in furtherance of misappropriating NAPC and NAOBA and CAF's assets and depriving Dr. Puri of his contractual benefits." Complaint, ¶ 39. Therefore, what deprived Dr. Puri of his contractual rights was the misappropriation of NAPC and NAOBA assets which is a claim of direct injury to the corporation and derivative injury to Dr. Puri. The Eighth Count is dismissed for lack of standing.
The Ninth Count makes a claim of statutory theft seeking treble damages pursuant to General Statutes § 52-564. This claim alleges that AASC, Dr. Kitain, his professional corporation, NAPC, Dr. Smith, Dr. Hughes and Dr. Beiles took Dr. Puri's money and/or property by virtue of their misrepresentation and/or omissions and committed theft and larceny against Dr. Puri.
Because the Ninth Count incorporates all the allegations previously made in the complaint, it is difficult for the court to ascertain exactly what money or property is referred to. For instance, in the First and Second Count Dr. Puri "was still owed $20,377.33 by NAPC for his work pursuant to the subcontract between NAPC and AASC." Complaint ¶¶ 37, 41. In his Second Count Dr. Puri has made a claim for double damages against NAPC and AASC under the wage claim statute, General Statutes § 31-72. The allegations of the Ninth Count encompasses the sum claimed in the Second Count which is clearly a direct, if possibly duplicative, claim. The non-payment for services claim is also raised in the Third Count, a breach of contract claim against NAPC. Therefore, because the Ninth Count raises at least one direct claim by Dr. Puri, he has standing to pursue it, although at trial the evidence allowed in to support the count may well be limited to that pertaining to the direct claim only.
The Tenth Count is styled as a breach of trust and confidence claim and is directed at the seven individual anesthesiologists who with Dr. Puri make up all the shareholders and members of NAPC. The claim is also directed at the remaining defendants as aiders and abetters of the breach. It is alleged that the seven member-shareholders had a relationship of trust and confidence with Dr. Puri which they breached by (1) failing to use their best efforts to collect "all funds due NAPC," (2) by acquiescing in the subcontract between NAPC and AASC and in events surrounding NAPC's "improper transfer of assets to AASC." Complaint ¶¶ 76-77. These allegations clearly set forth an injury to, and a claim that must be pursued by, NAPC and can only be pursued derivatively by Dr. Puri. The Tenth Count is dismissed.
The Eleventh Count alleges the tort of conversion against all defendants. Here again, this count, as pleaded, includes some direct and some derivative claims. Paragraph 82 of the Eleventh Count specifically references Dr. Puri's severance and redemption claims which, to the extent they are similar to the claims made in the First and Eighth Counts are derivative and references Dr. Puri's claim for compensation due him for work performed in December 2004 which to the extent it is not duplicative is a direct claim. The court denies the motions to dismiss this count because at this point it contains at least one valid direct claim.
The same can be said about the Twelfth Count which also appears to contain both direct and derivative claims. However, as discussed earlier, admissible evidence in support of the Eleventh and Twelfth Counts may be limited to that related to the direct claims.
The Thirteenth Count seeks the imposition of a constructive trust over the assets of all the defendants "as each has obtained or holds legal rights to Dr. Puri's property that they ought not in equity and good conscience hold and enjoy." Complaint, ¶ 89. This language is not helpful in discerning whether the plaintiff is alleging a direct or derivative claim. However, in the "wherefore" clause Dr. Puri asks for the imposition of a constructive trust "over any properties held by any of the defendants that represent assets of NAPC and/or NAOBA." The latter description of the scope of the trust sought clarifies that the claim brought by Dr. Puri is in fact one which belongs to NAPC and NAOBA and must be dismissed.
Conclusion
The defendants' motions are granted to the following extent: the First, Sixth, Eighth, Tenth and Thirteenth Counts of the complaint are dismissed, and otherwise the motions are denied.