Opinion
No. TTD CV 10 6001091 S
September 22, 2010
MEMORANDUM OF DECISION
The plaintiffs move to dismiss the counterclaims filed by the defendants which counterclaims purport to assert individual and derivative causes of actions. In their memorandum in opposition to this motion, the defendants state that they are not pursuing derivative claims. Therefore, the court does not address that issue.
The plaintiffs, Arthur B. Stearns (Arthur Stearns), Leslie Stearns and Arthur C. Stearns (Conrad Stearns), commenced this action against the defendants, Willard J. Stearns Sons, Inc. (the Corporation), David C. Stearns and James W. Stearns, through a complaint filed on January 20, 2010. In their complaint the plaintiffs allege the following. Arthur Stearns, Leslie Stearns and Conrad Stearns have been continuously employed by the Corporation since before March 17, 1993. At all relevant times, Arthur Stearns has served as the Corporation's treasurer, and Conrad Stearns has served as its vice president. The position of president of the Corporation has been vacant for some time. Article IV, Section 3 of the Corporation's Amended and Restated By-Laws, dated March 17, 1993, provide that until such time as a new president of the Corporation is elected, the vice president is empowered to exercise the powers of president and to act as the Corporation's chief executive officer and to be in general charge of its business.
The defendants, David Stearns and James Stearns, have been and continue to be employees of the Corporation, and James Stearns serves as the Corporation's secretary. Plaintiff Arthur Stearns is the son of Willard J. Stearns and Frances C. Stearns. Plaintiffs Leslie Stearns and Conrad Stearns are the grandsons of Willard J. Stearns. The plaintiffs allege that Article III, Section 5 of the Corporation's Amended and Restated By-Laws, dated March 17, 1993, provides that the board of directors of the Corporation may not terminate or substantially alter the employment of any child or grandchild of Willard J. Stearns and Frances C. Stearns who is employed by the Corporation, as of the date of the Amended and Restated By-Laws, without the approval of eighty percent of the board.
The plaintiffs further allege that from before January 1, 2009, to the present, defendants David Stearns and James Stearns have been exercising control over the administration of the Corporation's payroll functions. Utilizing this control, the defendants made a decision to cause the Corporation to withhold wages earned by the plaintiffs for the pay periods running from April 19, 2009, to May 2, 2009. Thereafter, defendants David Stearns and James Stearns made a decision to cause the Corporation to withhold wages due the plaintiffs for pay periods running from December 6, 2009, to the present. The plaintiffs allege that the actions of David Stearns and James Stearns in causing the Corporation to fail to pay wages owed to the plaintiffs were outside the scope of the defendants' powers, were not authorized by the board of directors, and were not authorized by Conrad Stearns, the Corporation's sole vice president. The board of directors never voted to reduce the plaintiffs' wages. On December 29, 2009, the board of directors, at a special meeting, voted to approve resolutions to pay all belated compensation owed to the plaintiffs and that no reduction in the compensation payable to the plaintiffs shall be made without approval by the board.
The plaintiffs claim that, despite demand, the Corporation has not paid the delinquent wages due them. This conduct, the plaintiffs assert, violates General Statutes § 31-71b. The Corporation's failure to pay the wages due to the plaintiffs was undertaken at the direction of David Stearns and James Stearns, and they are liable for such nonpayment. The plaintiffs further allege that they have no adequate remedy at law, will be irreparably harmed, and seek temporary and permanent injunctions prohibiting the defendants from failing to pay wages due to the plaintiffs. Additionally, the plaintiffs seek money damages, double damages pursuant to General Statutes § 31-72 and attorneys fees pursuant to § 31-72.
On June 24, 2010, the defendants filed their revised counterclaims. In each count of the counterclaim, defendants David Stearns and James Stearns state that they bring the counterclaims individually and as a derivative claim as shareholders of the Corporation. In the first count of the counterclaim, sounding in conversion, the defendants allege the following. In 2009, a state and/or federal grant was awarded to the Corporation. The plaintiffs unlawfully took possession and control of the grant and converted it to their own personal use, and this conduct was without corporate authority and constitutes a conversion.
In the second count of the counterclaim, sounding in statutory theft, the defendants allege the following. In 2009, a state and/or federal grant was awarded to the Corporation. The plaintiffs unlawfully took possession and control of the grant and converted it to their own personal use, and this conduct was a statutory theft pursuant to General Statutes § 52-564, entitling the defendants to treble damages.
In the third count of the counterclaim, in which the defendants seek an accounting, the defendants allege the following. At all pertinent times the plaintiffs and the defendants have been shareholders in the Corporation. Upon information and belief, the plaintiffs made financial decisions without consulting the defendants and without the defendants' approval. Those decisions have included the sale of farm property to pay debts, the failure to pay debts, and the use of grant money for the plaintiffs' personal use. The defendants have demanded an accounting of all income received by the "farm division" and all expenses incurred and/or paid by the "farm division," but no such accounting has been produced. The defendants request an accounting of all income received by the farm division and all expenses incurred and/or paid by the farm division for the past two fiscal years, including all receipts for the sale of farm-owned property.
On July 7, 2010, the plaintiffs filed a motion to dismiss all three of the defendants' revised counterclaims on the grounds that the defendants lack standing to bring such counterclaims because (1) the defendants failed to comply with the universal demand requirement pursuant to General Statutes § 33-722 and, therefore, may not commence a derivative proceeding, and (2) the defendants have no individual right to assert such counterclaims. The parties appeared before the court for oral argument on August 23, 2010.
"The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss. Practice Book § 10-31(a)." (Internal quotation marks omitted.) May v. Coffey, 291 Conn. 106, 113 (2009). "The proper procedural vehicle for disputing a party's standing is a motion to dismiss." (Internal quotation marks omitted.) D'Eramo v. Smith, 273 Conn. 610, 615 n. 6 (2005). "When a [trial] court decides a jurisdictional question raised by a pretrial motion to dismiss, it must consider the allegations of the [pleading] in their most favorable light. . . . In this regard, a court must take the facts to be those alleged in the [pleading], including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) State v. Marsh McLennan Cos., 286 Conn. 454, 464 (2008).
The plaintiffs argue that the defendants lack standing to bring their counterclaims as individual or direct claims and that claims such as those brought in the defendants' counterclaims must be brought as derivative claims. The plaintiffs note that in order for a shareholder to bring a direct or personal action against the corporation or other shareholders, the shareholder bringing the direct action must show an injury that is separate and district from that suffered by any other shareholder of the corporation and argue that the defendants in the present case have failed to allege such an injury.
The defendants contend that they have standing to bring their counterclaims because they are minority shareholders asserting claims against majority shareholders which allege that the majority shareholders have looted the corporation. The defendants also contend that their injuries are separate and distinct from the other shareholders of the corporation, viz, the plaintiffs.
One commentator has noted that "[i]t is sometimes difficult to determine whether a particular claim belongs to a shareholder individually or to the corporate entity itself. As a general rule, if the basis of the claim in an injury to the corporation, it must be brought in a derivative suit, with the shareholders proceeding secondarily and deriving their rights from the wronged corporation . . . An individual shareholder who desires to bring a direct action against a corporation or other shareholders must show an injury that is separate and distinct from that suffered by any other shareholder or the corporate entity." M. Ford, Connecticut Corporation Law Practice (2d Ed., 2010 Supplement) § 4.06, p. 4-88, 4-89.
Consistent with that viewpoint, our Supreme Court has stated that 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 . . . [I]t is axiomatic that a claim of injury, the basis of which is a wrong to the corporation, must be brought in a derivative suit . . . 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 him individually." (Citations omitted.) Yanow v. Teal Industries, Inc., 178 Conn. 262, 281-82 (1979). The Supreme Court has reaffirmed the general rule that "[i]n order for a shareholder to bring a direct or personal action against the corporation or other shareholders, that shareholder must show an injury that is separate and distinct from that suffered by any other shareholder or by the corporation." (Emphasis added; internal quotation marks omitted.) Smith v. Snyder, 267 Conn. 456, 461 (2004).
The defendants rely on Yanow to support their position that they have standing to bring a direct action against the plaintiffs. In Yanow, the plaintiff, a ten percent shareholder, brought both a derivative suit and an individual action against Teal, a Connecticut corporation, and Gentry, who, at relevant times, was an officer and director of Teal, seeking an accounting, damages, and nullification of a merger between Teal and Mallard Manufacturing Company. Yanow v. Teal Industries, Inc., supra, 178 Conn. 263-65. The complaint alleged in four counts that Teal and Gentry had committed a series of corporate wrongs resulting in damage to the plaintiff individually and to Mallard. Id., 265. The trial court found that all of the claims stated in counts one, three, and four of the complaint were derivative in nature, but the Supreme Court disagreed. Id., 283.
The Supreme Court stated that "[s]uch claims — of looting the corporation and of failure of the directors to disclose important facts concerning corporate transactions — state personal, as opposed to derivative, causes of action." Id. The court noted that "where a sole minority stockholder, such as the plaintiff, is the victim of a fraud perpetrated by the sole controlling stockholder, such as the defendant . . . the injury, and the action for redress, cannot be said to belong merely to the corporation. If the controlling majority stockholder seeks to injure the minority stockholder through the means of looting the corporation or so wrecking it that the minority stockholder would get nothing out of his assets, the claim resulting therefrom is sufficient to constitute an individual action." (Emphasis added.) Id., 282 n. 9. The court concluded that "[a]s pleaded, these causes of action are based upon alleged unlawful acts relating solely to the stock owned by the plaintiff in violation of the fiduciary duty owed to the plaintiff by the defendants, and they thus state individual, and not derivative, claims." (Emphasis added.) Id., 284.
The defendants also point to Newlands v. NRT Associates, Superior Court, judicial district of Fairfield, Docket No. CV 08 4027098 (March 25, 2010, Tyma, J.) ( 49 Conn. L. Rptr. 557), to support their contention that they have standing to bring their direct counterclaims. In Newlands, the defendants moved to dismiss the plaintiffs complaint on the grounds that the plaintiff lacked standing to bring the direct claims alleged. Id. At issue was whether the plaintiff had standing to bring direct claims against the defendants involving company malfeasance and nonfeasance, as opposed to derivative claims on behalf of NRT Associates or its members. Id. The plaintiff claimed to have brought the action as the sole minority member of a limited liability company, NRT, against its two other members. Id. The plaintiff alleges that the defendants, the two other members of the limited liability company, controlled NRT in such a way to have caused the plaintiff to suffer separate and distinct harms from those suffered by the defendants as members of NRT or by the company itself, including wrongfully diverting business to RT Management, a business in which the defendants were members. Id. The court denied the defendants' motion to dismiss, noting that the allegations of the plaintiffs complaint assert that the defendants, as majority members, "have assumed control of NRT to their benefit and the plaintiffs detriment by, among other things, depriving him of certain sums due to him, failing to provide him with certain company information, and preventing him for participating in the company. These allegations concern improper acts and omissions solely against the plaintiff's membership interest in NRT. They set forth individual, not derivative, claims." (Emphasis added.) Id., 560.
In contrast, in May v. Coffey, supra, 291 Conn. 122, upon which the plaintiffs rely to support their motion to dismiss, the Supreme Court affirmed a decision of the trial court to dismiss the plaintiffs' direct claims due to a lack of standing, concluding that the plaintiffs were required to bring their claims in a derivative suit on behalf of the company. In CT Page 18275 May, the plaintiffs, minority shareholders in a corporation, commenced an action against the defendants, who collectively owned a majority of the shares of stock in the corporation, alleging that the defendants, acting in concert as a shareholder majority, set the offering price of new shares too low, resulting in the dilution of the plaintiffs' percentage ownership of the company. Id., 111. The company's board of directors had previously determined that the company needed to raise capital in order to continue its operations, and the company's shareholders approved the increase in the company's outstanding shares. Id., 110. As a result, the plaintiffs' percentage of ownership of the outstanding stock was reduced from 1.79 percent to 0.6 percent. Id., 111. The defendants filed a motion to dismiss for lack of standing on the grounds that the plaintiffs' complaint alleged an injury to the corporation, requiring a derivative, not direct action. Id.
The Supreme Court stated that "the central inquiry in [its] resolution of the plaintiffs' claim is whether the stock offering to existing shareholders at a price that was unreasonably low resulted in a separate and distinct harm to the plaintiffs, or whether the unreasonably low price harmed the corporation and, accordingly, all shareholders collectively." Id., 115. The court held that "[b]ecause the unreasonably low offering price injured the corporation and because a proper remedy to the corporation would make all shareholders whole, we conclude that the injury suffered by the plaintiffs, the dilution of their existing shares by the unreasonably low pricing of the new shares, was derivative of the harm suffered by the company. Accordingly, we reject the plaintiffs' claim that they have individual standing because the unreasonably low offering price injured them directly." Id., 119-20.
Likewise, in Smith v. Snyder, supra, 267 Conn. 456, the Supreme Court held that the plaintiff shareholders, having failed to demonstrate that they sustained an injury separate and distinct from that suffered by any other shareholder or by the corporation, lacked standing to bring an action against the defendants in their individual capacities. In Snyder, the plaintiffs brought an action against the defendants, who were officers of the corporation, and the corporation itself alleging that the defendant director of the corporation breached a fiduciary duty that he owed to the corporation by engaging in a pattern of self-dealing and other abuses of his position that were designed to destroy or devalue the corporation. Id., 458-59. The plaintiffs further alleged that certain other defendants conspired with the director in his alleged improprieties. Id., 459. Among other things, the plaintiffs claimed that the defendants misappropriated corporate property and that their conduct violated the Connecticut Unfair Trade Practices Act (CUTPA). Id. The court concluded that the plaintiff shareholders "lacked standing to bring this action in their individual capacities because the allegations in the plaintiffs' complaint, if true, demonstrate that the corporation was harmed, but that no specific shareholder sustained an injury separate and distinct from that suffered by any other shareholder or by the corporation." Id., 462.
In support of their motion to dismiss the defendants' counterclaims for lack of standing, the plaintiffs also rely on Morgan Howard (United States) v. Lewis, Superior Court, judicial district of Stamford-Norwalk, Docket No. FST CV 05 4006343 (July 14, 2006, Jennings, J.). In Morgan, the plaintiffs, a limited liability company ("the LLC") engaged in executive recruiting. The LLC's parent company and the LLC's ultimate holding company brought suit against Lewis, who was the former president of the LLC, director of the parent company, and a shareholder of the holding company. The plaintiffs alleged that the defendant set up a new executive recruiting firm to compete with the plaintiffs and breached other obligations to the plaintiffs before and after his resignation. The plaintiffs claimed breach of fiduciary duties, misappropriation of trade secrets, interference with contracts and business relationships, unfair and deceptive trade practices, and unjust enrichment. In the defendant's fifth counterclaim, he alleged that he was granted a ten percent equity interest in the LLC and that plaintiffs engaged in a course of action intended wrongfully to deprive him of the value of his profit and capital stock interests "(a) by causing revenues and profits from executive search assignments performed in significant part in the United States at the expense of [the LLC] to be diverted, booked and received by affiliates of plaintiffs' controlling shareholder . . . outside the United States; (b) by causing the revenues, profits and assets of [the LLC] to be diverted to pay the personal, living, vacation, recreation, and gift expenses of [the plaintiffs' controlling shareholder]; and (c) by causing the books, records, and accounts of plaintiffs to be falsified to reflect such personal and other expenses of [the controlling shareholder] as legitimate business expenses of plaintiffs." The plaintiffs moved to dismiss the fifth counterclaim, arguing that the defendant lacked standing to make the claims individually as opposed to making them derivatively on behalf of the LLC.
The court stated that "[t]he revenues allegedly diverted to affiliate companies are revenues that otherwise would have accrued to the company itself, and the personal expenses allegedly improperly paid by the company would depress the net revenues of the company with indirect consequences to the members in the form of suppression of the value of their capital interests in the company. This is the type of claim that the Supreme Court in Yanow . . . specifically found to be claims derivative to the corporation." Accordingly, the court granted the plaintiffs' motion to dismiss the fifth counterclaim.
In the present case, the defendants counterclaim that the plaintiffs unlawfully took possession and control of a government grant awarded to the Corporation, converted the grant to their own personal use, and did so without corporate authority. Additionally, the defendants allege that the plaintiffs have made financial decisions without consulting the defendants and without the defendants' approval. These decisions included the sale of corporate, farm property to pay debts and the failure to pay debts. Unlike the plaintiffs in Yanow and Newlands, however, in the present case, the plaintiffs are not sole minority shareholders. The defendants here pursue a direct cause of action against the plaintiffs, arguing that they have sustained a loss separate and distinct from that of the corporation or from that of other shareholders. This argument fails to account for the fact that the counterclaimants are not a sole minority shareholder claiming to have suffered a distinct loss but, instead, two shareholders. Both defendants have alleged causes of action in which they claim to have suffered the same injuries, so it is unclear how the injuries alleged in their counterclaims can be considered separate and distinct from that of other any other shareholders.
It is a similarly murky argument that the injuries alleged in the counterclaims are separate and distinct from the injuries suffered by the Corporation, particularly when it is noted that the defendants' own pleading alleges that the plaintiffs wrongfully took possession of corporate property for their own personal use. As in Snyder and Morgan, the allegations in the present case of injuries suffered by the defendants because of the plaintiffs' purported misdeeds fail to demonstrate that any "specific shareholder sustained an injury separate and distinct from that suffered by any other shareholder or by the corporation." The defendants have alleged in their counterclaims that the plaintiffs have wrongfully taken possession of and sold corporate assets. These are allegations that demonstrate that the corporation has suffered injury. The defendants' direct counterclaims can only survive a motion to dismiss for lack of standing if they demonstrate a separate and distinct injury from any other shareholders or the corporation itself. In the absence of such allegations, the only appropriate vehicle for the defendants to pursue their claims is a derivative cause of action on behalf of the corporation.
The motion to dismiss is, therefore, granted.