Summary
finding that shareholder was not entitled to inspection when "there was no credible proof" supporting his allegations of mismanagement and there was evidence that inspection was sought for improper purposes—shareholder "was engaging in a similar, possibly competing business" and sought inspection to "harass the company and its officers and directors and/or [to] go on a ‘fishing expedition’ "
Summary of this case from Benjamin v. Island Mgmt.Opinion
No. FST CV 08-4014480-S
November 14, 2008
MEMORANDUM OF DECISION RE APPLICATION FOR TEMPORARY INJUNCTION
Background
The parties have a lengthy, complex and contentious history. Ronald Perkins (Perkins) was a former high school teacher of the plaintiff, Mark Strauss. After Strauss graduated from college, he contacted Perkins who had set up a consulting/education source business for schools and teachers. In 1994, Perkins and Strauss, incorporated Educational Innovations, Inc. (EI) EI manufactures, assembles and/or sources scientific materials for educational purposes. The materials are marketed to schools, teachers and parents.
In 2004, Strauss engaged in inappropriate and disruptive behavior at EI. During the hearings on the instant matter, Strauss admitted to a significant drug addiction problem. References to other extreme behaviors will be discussed below.
EI attempted to remove Strauss and sought injunctive relief, and further, a restraining order against Strauss was sought by Perkins. At about the same time, Strauss sought, pursuant to General Statutes §§ 33-946 and 33-947, to copy and inspect EI's accounting records.
The cases and claims were consolidated and a settlement agreement was reached on March 8, 2005, before Judge Thomas Nadeau and placed on the record. The Settlement Agreement was also reduced to writing and signed by the parties in September 2006.
Relevant provisions to the Settlement Agreement include a possible transfer of Strauss' fifty percent ownership. Ultimately, his fifty percent was reduced to twenty-five percent, with twenty-five percent ownership transferred to his ex-wife, Tami O'Connor, per the terms of a divorce agreement. Per certain terms of the Settlement Agreement, Strauss would receive quarterly financial statements, be prohibited from disparaging EI, be distributed severance pay and net profits, and be allowed to buy out as per a specific valuation provision. Further, in section 25 of the Settlement Agreement, the parties expressed their intention that the agreement be a full and final settlement of any and all claims among the parties.
As per the remarks made in court, on the record before Judge Nadeau, Strauss was to have no role or participation in the management or control of EI, except as a shareholder "and as his rights to receive information and disclosures as a shareholder are set forth herein." (Transcript, 3/8/08, p. 8.)
On or about June 27, 2008, Strauss served EI with Notice of Demand. ("Demand") The Demand listed thirteen categories of financial records and information. The requested material corresponds the categories of records listed in General Statutes §§ 33-945(e) and 33-946(b). The Demand also contained allegations of potential improprieties engaged in by EI and revealed that the Demand was made for the purpose of determining EI's market value. This immediate action seeking injunctive relief followed. EI objected to the Demand and relief requested.
The court held full hearings on August 25, September 9, 10 and 17, 2008. The parties have submitted post-hearing briefs, proposed findings and orders.
Law
Section 33-946 allows a shareholder of a corporation to inspect and copy, during regular business hours, (1) the records of the corporation described in § 33-945(e), and (2) the records described in § 33-946(b), subject to the limitations contained in § 33-946(c). Section 33-946(b) provides a conditional right of inspection with respect to certain other enumerated records where a requesting shareholder meets the stated notice requirements, as well as the requirements of § 33-946(c). Section 33-946(c) provides: "A shareholder may inspect and copy the records described in subsection (b) of [that] section only if (1) His demand is made in good faith and for a proper purpose; (2) he describes with reasonable particularity his purpose and the records he desires to inspect; and (3) the records are directly connected with his purpose."
Section 33-946 does not define the terms "good faith," "proper purpose," "reasonable particularity" or "directly connected."
"Good faith" means honesty of purpose, lack of intent to defraud and honest intent to refrain from taking unfair advantage of another. CT Page 18130 Pagett v. Westport Precision, Inc., 82 Conn.App. 526, 532, 845 A.2d 455 (2004), citing Snyder v. Reshenk, 131 Conn. 252, 257, 38 A.2d 803 (1944).
A "proper purpose" is a lawful and reasonable purpose germane to the shareholder's status as a shareholder. Id., 532. Conversely, a purpose will be found to be improper if it is for "speculative or trading purposes or for any purpose inimical to the interest of the corporation or of its shareholders." Id., citing MMI Investments, LLC v. Eastern Co., 45 Conn.Sup. 101, 109, 701 A.2d 50 (1996).
A stated purpose will meet the "reasonable particularity" requirement where it is expressed with sufficient particularity so that the reason for the inspection can be ascertained by the corporation. Id., 537-38. If disputed by the corporation, the "connection" of the records to the shareholder's purpose may be determined by a court's in camera examination of the records. 4 A.B.A. Model Business Corporation Act Annotated (3d Ed. 2000-02 Sup.) § 16.02, pp. 6-14.
The requested records will be "directly connected" with the stated purpose where there is a correlation between the stated purpose and the documents requested. Pagett v. Westport Precision, Inc., supra, 82 Conn.App. 539.
General Statutes § 33-948(a) provides: "If a corporation does not allow a shareholder who complies with the subsection (a) of section 33-946 to inspect and copy any records required by that subsection to be available for inspection, the superior court . . . may summarily order inspection and copying of the records demanded at the corporation's expense upon the application of the shareholder." Section 33-948(d) further provides: "If the court orders inspection of the records demanded, it may impose reasonable restrictions on the use or distribution of the records by the demanding shareholder."
However, "it is not clear what procedures are necessary to enforce stockholder rights under § 33-948." New Country Motor Cars, Inc. v. Coddington, Superior Court, judicial district of Hartford, Docket No. CV 00 0595686 (April 4, 2000, Booth, J.) ( 27 Conn. L. Rptr. 2, 3), aff'd, 63 Conn.App. 901, 772 A.2d 1152 (2001). "It appears that these rights are nominally enforced by a request for a writ of mandamus." Id., citing Basswood Partners, LP v. NSS Bankcorp, Inc., Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 98 0163412 (February 6, 1998, Dean, J.) ( 21 Conn. L. Rptr. 370).
"Temporary orders of mandamus are authorized under . . . the rules of practice. Orders of temporary mandamus may issue only when the following four conditions are satisfied: (1) there is no other adequate remedy; (2) irreparable harm has been shown; (3) the law imposes a mandatory, not discretionary, duty on the party against whom the writ is sought; and (4) the party who is seeking the writ of mandamus has a clear legal right to have the duty performed." (Internal quotation marks omitted.) Basswood Partners, LP v. NSS Bankcorp, Inc., supra, 21 Conn. L. Rptr. 370, 371, citing Meyers v. Westport, 41 Conn.Sup. 295, 570 A.2d 249 (1989).
To be entitled to injunctive relief, a party must allege and prove irreparable harm and lack of adequate remedy at law. Tighe v. Berlin, 259 Conn. 83, 87-88, 788 A.2d 40 (2002). "The extraordinary nature of injunctive relief requires that the harm complained of is occurring or will occur if the injunction is not granted. Although an absolute certainty is not required, it must appear that there is a substantial probability that but for the issuance of the injunction, the party seeking it will suffer irreparable harm . . . We note also that, in exercising its discretion, the court, in a proper case, may consider and balance the injury complained of with that which will result from interference by injunction . . ." (Citations omitted; internal quotation marks omitted.) Id.
"Even where the danger of irreparable injury is shown, the granting of an injunction is not mandatory but within the sound discretion of the court." Waterbury Teachers Ass'n. v. Civil Service Commission, 178 Conn. 573, 578, 424 A.2d 271 (1979). The granting of an injunction must be compatible with the equities of the case, should take into account the gravity and willfulness of the violation as well as the potential harm, Town of Haddam v. LaPointe, 42 Conn.App. 631, 639, 680 A.2d 1010 (1996).
An applicant for equitable relief, such as an injunction or mandamus, must come into court with clean hands and "must show that his conduct has been fair, equitable and honest as to the particular controversy in issue." Bauer v. Waste Management of Connecticut, Inc., 239 Conn. 515, 525, 686 A.2d 481 (1996).
"It is well recognized that an agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties . . . Once reached, the agreement cannot be repudiated by either party. Rather, such an agreement will be summarily enforced by the court . . ." (Citations omitted.) Zauner v. Brewer, Superior Court, judicial district of Litchfield, Docket No. 049135 (August 11, 1992, Gill, J.) ( 7 Conn. L. Rptr. 251, 252). "A settlement agreement is a legally enforceable contract to settle, with consideration predicated upon mutuality of agreement . . . [S]uch agreements are favored by the law." Id.
As with any other contract, a settlement agreement "must be construed to effectuate the intent of the parties, which is determined from the language used interpreted in the light of the situation of the parties and the circumstances connected with the transaction . . . [T]he intent of the parties is to be ascertained by a fair and reasonable construction of the written words and . . . the language used must be accorded its common, natural and ordinary meaning and usage where it can be sensibly applied to the subject matter of the contract . . . Where the language is clear and unambiguous, the contract is to be given effect according to its terms. A court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity . . . Similarly, any ambiguity in a contract must emanate from the language used in the contract rather than from one party's subjective perception of the terms." (Citations omitted; internal quotation marks omitted.) Lawson v. Whitey's Frame Shop, 241 Conn. 678, 686, 697 A.2d 1137 (1997); see Tallmadge Bros. v. Iroquois Gas Transmission System, 252 Conn. 479, 496, 746 A.2d 1277 (2000).
In Breen v. Phelps, 186 Conn. 86, 99, 439 A.2d 1066 (1982), the Supreme Court held that "where a matter has previously been ruled upon interlocutorily, the court in a subsequent proceeding in the case may treat that decision as the law of the case, if it is of the opinion that the issue was correctly decided, in the absence of some new or overriding circumstance." Further, the court stated that, "[a] judge should hesitate to change his own ruling and should be even more reluctant to overrule those of another judge . . . Judge shopping is not to be encouraged and a decent respect for the views of his brethren on the bench is commendable in a judge." (Citation omitted.) Id.
Discussion
Mark Strauss, through counsel, maintains that the Settlement Agreement, in conjunction with the order of Judge Nadeau, allows him to seek information from EI, not withstanding the language in section 7 of the Settlement Agreement. Section 7 of the Settlement Agreement, entitled "Documents and Information Provided to Strauss as a Shareholder" provides that "as a passive shareholder of the Company, Mark Strauss shall only receive quarterly financial statements prepared by the Company's accountants, which shall include a balance sheet, a profit and loss statement, and a cash flow statement. Mark Strauss shall not be entitled to any other documents or information concerning the Company." (Emphasis added.)
While on its face, the Demand appears to be reasonable and consistent with Connecticut statutory and case law, when viewed through the circumstances surrounding the Settlement order of Judge Nadeau and the behavior of Strauss, it is not.
Some of those circumstances need to be reviewed here.
Beginning in approximately 2004, Strauss repeatedly engaged in inappropriate and disruptive behavior at EI. At various times, he yelled at and threatened employees, and shut down the company's computer system. He also threw a heavy key ring at Perkins.
In July 2004, Perkins became aware that Strauss had used EI funds to purchase prescription narcotics over the Internet for his personal use, but had instructed accounting personnel to characterize those payments as "RD." The misappropriated funds exceeded $23,000.
Following Perkins discovery of Strauss' actions, Perkins retained an outside accountant to audit EI's accounts to determine the extent of Strauss' misappropriation of company funds. When the auditor arrived, on August 5, 2004, Strauss attempted to interfere with the auditor's examination of EI's records, and Perkins asked Strauss to leave.
At that point, Strauss became enraged. He attempted to remove corporate records and documents, including EI checks, denied computer access to an employee by changing her access settings, and attempted to discharge another employee. Following Strauss' departure, Perkins changed the locks to EI's offices due to Strauss' volatile and threatening behavior.
Since 2004, Strauss has openly declared his intention to destroy EI, and has expressed his desire for Perkins' financial ruin and death.
During the hearing on September 11, 2008, Tami O'Connor, Strauss' ex-wife, testified that her then husband said he would kill Mr. Perkins and his entire family. Equally disturbing was Ms. O'Connor's testimony that Strauss' mother allegedly contacted Ms. O'Connor to offer her financial help to see to the death of Mr. Perkins. Ms. O'Connor said that at the time the events were taking place, Strauss would rant and rave "for hours."
Other testimony offered at the hearing was that Strauss would occasionally appear at trade shows and tell potential customers of his post-settlement association with EI and allegedly speak of the company's success, while at the same time, allegedly telling EI's vendors and competitors that EI was "in the toilet" and could not meet its obligations. The credit arrangement change with Strategic Paper, per the deposition testimony of Sarah Peters (8/21/08), read into the record on September 11, 2008, was especially informative in regard to the conduct of Strauss in disparaging EI.
Strauss also tried to access company e-mail several times post settlement, per the testimony of Tami O'Connor and Sarah Peters. This was in direct conflict with section 1 of the Settlement Agreement.
The testimony and demeanor of Strauss in the hearings also factored into the evaluation of his credibility. While Strauss is to be commended for acknowledging and dealing with his drug addiction, there was sufficient evidence to indicate that he lacked the self control exercised by emotionally and physically stable people. His anger at both his ex-wife, now a currently salaried employee of EI, and his ex-partner, Perkins, was obvious. Strauss' eagerness to encourage EI to distribute net profits to him or otherwise sell or liquidate the company for his own gain was also obvious.
When the list of demands made by Strauss is reviewed and put in context, it creates the inference that Strauss is simply seeking to harass the company and its officers and directors and/or go on a "fishing expedition." Such a motive is improper and does not entitle Strauss to inspect EI's records. While he alleges mismanagement, there was no credible proof of that.
There was evidence that Strauss was engaging in a similar, possibly competing business. Therefore, the refusal to honor his demand was not unreasonable given his prior conduct, his recent activities and the nature of the Settlement Agreement and Judge Nadeau's order.
The parties had engaged in prolonged negotiations resulting in a settlement which became an order of Judge Nadeau.
The Settlement Agreement states that it is intended to be a full and final settlement of any and all actions, claims, causes, rights and suits between and among the parties. Further, it expressly states that Strauss shall have no active role in EI and is not entitled to any documents or information concerning the company other than quarterly financial statements prepared by the company's accountants. Taken together, the clear, unambiguous import of the Settlement Agreement's language is that Strauss has no right, statutory or otherwise, to EI's records. Accordingly, the Settlement Agreement controls in this matter. See Tallmadge Bros. v. Iroquois Gas Transmission System, supra, 252 Conn. 496 (where contracts are commercial in nature and were made by sophisticated commercial parties with the advice of counsel during an extensive drafting process, these factors raise a presumption of definitiveness; where there is definitive contract language, the determination of what the parties intended by their contractual commitments is a question of law.).
Furthermore, there was a waiver of any statutory rights available to Strauss. The evidence in the record supports the position that such rights were knowingly waived and with the assistance of competent counsel. Under Connecticut law, such a waiver, when clear and unambiguous is permitted. City of New Haven v. Local 884, Council 4, AFSCME, AFL-CIO, 237 Conn. 378, 385, A.2d 1350 (1996).
Finally, there is insufficient evidence that Strauss will be irreparably harmed. Any damages he might sustain can be measured and would be subject to legal remedy. Therefore, Strauss has not proven irreparable harm and is not entitled to injunctive relief.
The court also denies Strauss' claim for fees and costs.
Conclusion
In 2004, EI's shareholders had a falling out, which resulted in litigation. In the context of the litigation, Strauss demanded to inspect EI's records pursuant to § 33-946. Ultimately, the parties entered into a settlement, which they entered into the record and further refined in a Settlement Agreement executed in connection with a dissolution agreement between Strauss and Tami O'Connor. At all times, the parties were represented by counsel. The Settlement Agreement, on its face, is complete, clear and unambiguous and contains all necessary provisions to make it binding. It clearly limits Strauss' rights with respect to EI's records. Accordingly, it controls with respect to that issue. The court, (Nadean, J.) also made the Settlement Agreement an order of the court.
Even if the court were to determine that the Settlement Agreement is not controlling, Strauss failed to meet the statutory requirements with respect to items of the Notice of Demand, in that the evidence indicates that the demand was not made in good faith or for a proper purpose, and failed to demonstrate that the records are directly connected with a proper purpose. Therefore, EI acted reasonably in denying Strauss access to those items.
Also, the evidence indicates that Strauss has not acted with clean hands, and is not entitled to the equitable remedy sought by him.
Regarding attorney fees sought by EI, section 24 of the Settlement Agreement provides, in part that, "[i]f either Party breaches or threatens to breach this Agreement or any of the implementing documents referred to and/or contemplated by this Agreement, the non-breaching Party shall also recover from the breaching Party any and all legal fees and costs incurred by him as a result of such breach or threatened breach, including reasonably attorneys fees." The Notice of Demand and this lawsuit, together with Strauss' ongoing disparaging statements concerning Perkins and EI and his efforts to access and disrupt e-mails, constitute a breach of the Settlement Agreement, and EI is therefore entitled to its legal fees and costs incurred in responding to the Notice of Demand and defending this lawsuit.
ORDER
The Court finds that the plaintiff, Mark Strauss, is a twenty-five percent shareholder of the defendant, Educational Innovations, Inc. (EI) but has been acting in a manner inimical to the interests of the company and its other shareholders over the course of several years. During the course of prior litigation between Strauss and EI, Strauss issued a demand to inspect and copy records pursuant to General Statutes § 33-946. The court further finds that the parties fully resolved all their disagreements by means of a Settlement Agreement effective as of March 9, 2005 (Settlement Agreement), which is the final embodiment of the stipulated judgment approved by the Hon. Thomas Nadeau and of the agreement of the parties.
Section 29 of the Settlement Agreement is a typical merger clause, indicating that it constitutes the entire Settlement Agreement of the parties and supersedes all prior understandings and agreements. Further, section 24 of the Settlement Agreement provides that if "either Party breaches . . . this Agreement . . . the non-breaching Party shall recover from the breaching Party any and all legal fees and costs incurred by him as a result of such breach . . . including reasonable legal fees."
Section 1 of the Settlement Agreement denies Strauss access to the records of EI and section 7 obligates EI to provide certain accounting records, but provides that "Mark Strauss shall not be entitled to any other documents or information from the Company [EI]."
Since the effective date of the Settlement Agreement, Strauss served upon EI another request to inspect and copy records of EI pursuant to § 33-946 (Demand) which sought, among other things, "according records" of EI.
Pursuant to § 33-946, a shareholder may inspect and copy the accounting records of a corporation only if (a) his demand is made in good faith and for a proper purpose, (b) he describes with reasonable particularity his purpose and the records he desires to inspect, and (c) the records are directly connected with his purpose.
On July 8, 2008, representatives of Dempsey Partners (Dempsey) demanded and were denied entry to EI's premises located at 362 Main Street, Norwalk, Connecticut (the Premises), to inspect and copy the corporate records listed in the Demand. On July 16, 2008, Strauss caused to be served on the Corporation his Application for Temporary Injunction and Order to Show Cause (Application).
Having heard extensive testimony of the parties and witnesses, and having reviewed all of the exhibits including the deposition transcript of Sarah Peters, the court further finds that: (i) Strauss has relinquished his right to inspect and copy records pursuant to § 33-946 by virtue of the Settlement Agreement; (ii) he failed to make his demand in good faith and with a proper purpose; (iii) he has "unclean hands" as a result of his harmful conduct toward EI and its other shareholders and his own breaches of the Settlement Agreement; (iv) his Demand failed to describe with reasonable particularity the records he desires to inspect; and (v) his demand to inspect and copy records, itself, constitutes a breach of the Settlement Agreement.
THEREFORE, the court hereby enters an order with respect to Plaintiff's Application for Temporary Injunction and Order to Show Cause, as follows:
1. Strauss and his representatives shall not be allowed to inspect and copy documents of EI;
2. EI shall recover from Strauss legal fees in the amount of $57,890.36;
3. The court shall have continuing jurisdiction to modify or amend this Order as the interests of justice may require.
DATED at Stamford, Connecticut this 14th day of November 2008.