Opinion
No. CV07 4008708-S
December 14, 2007
MEMORANDUM OF DECISION RE RULING ON MOTION FOR APPOINTMENT OF RECEIVER #101
Before the court is the plaintiff's application for appointment of a receiver of the defendant corporation, Clinical Dynamics Corp. ("Clinical"). The plaintiff, Robert Smith, is a non-employee who alleges that he is a fifteen percent shareholder in Clinical and has brought a shareholder derivative suit against the individual defendant, Leo Costello ("Costello") and Clinical. Costello is a seventy percent majority shareholder who holds the positions of president and director of Clinical. The plaintiff's complaint includes four counts against Costello individually, alleging civil theft, breach of fiduciary duty, self-dealing and a demand for an accounting from Costello and one count against Clinical seeking the appointment of a receiver "to manage the affairs" of Clinical due to the neglect or mismanagement of Clinical by Costello. Clinical is a Connecticut stock corporation having gross annual revenues of $1,600,000 primarily derived from the sale and service of medical devices to the health care industry. Service was made on Clinical's statutory agent for service and Costello was served in hand. Neither Costello nor Clinical have filed appearances. At this time, the only issue before the court is the application for appointment of a receiver.
An order to show cause why a receiver should not be appointed was issued by the court and a hearing was held on December 10, 2007. At the hearing, the plaintiff offered the following evidence concerning the current condition of Clinical and the need for a receiver:
1. An affidavit and personal testimony from Joseph Rebot ("Rebot") Clinical's, the corporate secretary. Rebot is a fifteen percent shareholder of Clinical, but not a party in this action. Rebot testified that he was employed from 1993 as the marketing and sales manager of Clinical until July 16, 2007 when he was removed from that position by Costello. He further testified that he examined and is familiar with the books and records of Clinical and that: Clinical is suffering from "serious" cash flow problems; Clinical is not paying its bills in the ordinary course of business; and Clinical has not remitted 401k contributions that have been withheld from employees' wages. Rebot also claimed that Costello had "relocated" to North Carolina, complicating the day-to-day management of Clinical and making its operations more expensive.
2. An affidavit and personal testimony from Glenda Hilt. Hilt testified that she was employed by Clinical as its in-house accountant from November 2002 to September 14, 2007 and that it was her responsibility to write checks, manage the accounts receivable and payable and maintain the books of the company. Hilt claimed that in June of 2007, Costello obtained a $100,000 credit line from a bank in the company's name, out of which, Costello drew personal checks in the amount of approximately $33,000. Hilt testified that a substantial portion of the sums paid to Costello were in excess of the remaining balance of any shareholder loan from him. Hilt also testified that in August of 2007, Costello received a cash payment of $3,200 for a medical device sold at a trade show in Florida but failed to remit the funds to Clinical. She also claimed that Costello used the company credit card for personal expenses. When she requested information to record the proceeds from the sale of the medical device and the credit card expenses, she was terminated by Costello on September 14, 2007.
3. Testimony was also provided by Thomas Danko, an employee who manages product assembly, shipping and service. Danko described customer dissatisfaction and difficulties with the filling of new orders and service requests resulting from communication difficulties created by Costello's relocation and the requirement that all customer orders needed Costello's prior approval. Danko also described the morale of the remaining seven employees as being very low and many expressed their concern for their continued employment.
4. The plaintiff submitted copies of a number of past due bills, totaling less than $25,000, together with a number of letters and e-mails from customers expressing dissatisfaction with the company's failure to respond to inquiries and vendors requesting payment and halting the shipment of materials. Correspondence from a third party claiming unpaid commissions and that his calls to the company resulted in a message that the phone number was no longer in service, the company's insurance agent concerning threatened cancellation of insurance coverage, including workers' compensation coverage and e-mails from the 401k plan consultant expressing concern about the unfunded employee contributions were also submitted.
"The application for a receiver is addressed to the sound legal discretion of the court, to be exercised with due regard to the relevant statutes and rules . . ." (Citation omitted). Masterton v. Lenox Realty Co., 127 Conn. 25, 33, 15 A.2d 11 (1940). In considering an application for the appointment of a receiver, "The determinative inquiry is whether, considering all the circumstances, the affairs of the corporation should continue to be managed and wound up by those in control of it or, instead, it appears that those in control are so using their power that the property of the corporation should be taken over and administered under the direction of the court . . ." Cogswell v. Second National Bank, 76 Conn. 252, 262, 56 A. 574 (1903). "A receiver is properly appointed when there are such dissensions in the governing body of a corporation . . . that the corporation ceases to function in the manner provided for by its own by-laws and in accordance with the statutes relating to corporations." Krall v. Krall, 141 Conn. 325, 335, 106 A.2d 165 (1954).
The plaintiff, at this time, has not petitioned for the appointment of a receiver to wind up the affairs of Clinical and dissolve the corporation pursuant to § 33-898 or § 33-896 of the Connecticut General Statutes or alleged that equal shareholders are deadlocked. In the present case, the plaintiff alleges that the acts and omissions of Costello "have severely compromised the ability of the Corporation to operate as an ongoing business concern" and that "there is no person functionally responsible for the day-to-day operations of the business, for payment of its employees and other obligations, for servicing its customers or any other normal business operation."
The court has been presented with evidence that Clinical's ability to continue to function as a viable economic enterprise is in serious doubt. At the time of the hearing, several key employees had been discharged, payables were past due, important financial obligations, such as insurance, employee benefit contributions and telephone service, had been neglected, and the president had relocated to North Carolina leaving Clinical in an apparent state of paralysis. The plaintiff has alleged self-dealing, civil theft and acts and omissions by the person in control of the company which have resulted, or if continued, are likely to result in severe corporate waste and loss. Neither Costello nor Clinical have appeared to contest the plaintiff's allegations.
"The object of appointing receivers is to secure the property in dispute from waste or loss. It is not the office of a court of equity to appoint receivers as a mode of granting ultimate relief." Hartford Federal Savings Loan Ass'n. v. Tucker, 196 Conn. 172, 175, 491 A.2d 1084, cert. denied, 474 U.S. 920, 106 S.Ct. 250, 88 L.Ed.2d 258 (1985). "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). Under general principles of equity, the court has the power to appoint a receiver as the exigencies of the case may require. Under the circumstances presented, the court believes that equity compels the appointment of a receiver on a temporary basis.
The plaintiff has requested that Xhemil Koliani, CPA, ABV of the firm of Kostin, Ruffkess and Company, LLC be appointed receiver and has submitted a letter from Koliani expressing his willingness to serve, if appointed. Koliani has been a certified public accountant for fifteen years and holds an Accredited Business Valuation designation.
Based upon the foregoing, the court issues the following order:
1. The court appoints Xhemil Koliani as temporary receiver of Clinical Dynamics Corp.
2. Based on the annual gross revenues of Clinical of $1.6 million, the receiver is ordered to post a bond in sum of $150,000. The receiver's appointment shall not become effective until the receiver files the bond with the court.
3. Compensation of the receiver is limited to the lesser of, his current hourly professional rate or $175 per hour, whichever is less.
4. The receiver is authorized and empowered to:
a. Take possession of Clinical's books and records, including all accounting, computer, payroll, employee benefits, banking deposit account records and tax returns;
b. Collect, take possession and custody of all Clinical's income, receivables, assets and property and take all reasonable steps to secure and safeguard the same;
c. Have access to, and check writing authority on, all Clinical's existing bank accounts or the authority to initiate new accounts in the company name, in order to pay such bills, expenses and obligations of the company as the receiver, in his sole reasonable discretion, believes to be urgent, necessary and in the best interests of Clinical, its employees and shareholders; and
d. Expend such reasonable sums, only to the extent necessary, for such additional personnel necessary to assist with the discharge of his duties as receiver.
5. The receiver is ordered to conduct a review level assessment of the financial condition of Clinical, based on its books and records, and file with the court, within ten business days following his appointment, a written report and opinion of the prospects for the continued economic viability of Clinical.
The court will schedule a hearing on the receiver's report for the purpose of determining the continuation, modification or termination of the temporary receivership within seven days following its filing with the court.
It is so ordered.