Opinion
FSTCV136018235S
03-23-2016
Elizabeth Weed v. Edythe Sherwood et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION RE MOTION TO DISMISS (#105)
Hon. Charles T. Lee, J.
This controversy arises out of an effort to preserve a beloved, but dilapidated, structure constructed in 1909 and located on Ponus Ridge Road in New Canaan, CT. Formerly a community chapel, then a community center, it is now abandoned. It stands on a seventh of an acre in a two-acre zone and is owned by the Ponus Ridge Chapel and Community Association, Inc., a Connecticut nonstock corporation (the " Association"). In 2012, its president, the late Edythe Sherwood, entered into a letter of intent to dissolve the Association and convey the property via the New Canaan Library to a limited liability company, defendant PRC, LLC, which was formed by Mr. and Mrs. Hayes, who live on property abutting the structure to the south. They have indicated their interest in establishing an easement on their property allowing the construction of parking and a septic field benefitting the Association property, and restoring the building for use as their guest house. The neighbor abutting the property to the north, plaintiff Elizabeth Weed, is a member of the Association's board of directors and has brought this derivative action to block the transaction, claiming that Ms. Sherwood acted without authority from the board of directors.
The resolution of this lawsuit turns on the determination of a legal question apparently of first impression in Connecticut, i.e., whether a general corporate statute, requiring that an action brought on behalf of a corporation must first be tendered to the board of directors via a demand that it pursue the action against a defendant, should apply to a nonstock corporation. As more fully explained below, the court finds that the policy reasons supporting the statute's application to a business corporation apply equally to a nonstock corporation. Because the plaintiff did not make such a demand on the Association's board, she lacks standing to bring this case, and the court grants defendants' motion to dismiss.
BACKGROUND
On May 6, 2013, the plaintiff, Elizabeth Weed, commenced this action by service of a writ, summons and ten-count complaint against the defendants, Edythe Sherwood, PRC, LLC, and Ainsley and Brendan Hayes. The complaint contends that the proposed transaction is invalid because Sherwood did not obtain the consent of the Association's board of directors. Although defendants have not filed an answer at this stage of the proceedings, they do not claim that the board of directors has approved the transaction. Specifically, the first four counts and the tenth count of the plaintiff's complaint are brought against Sherwood individually, and allege a claim for an injunction against the transaction (first count), breach of fiduciary duty (second count), violation of General Statutes § 33-1111 (standards of conduct for officers) (third count), diversion of corporate assets (fourth count), and a demand for an accounting of the books and records of the Association (tenth count). The fifth, sixth, and eighth counts are pled against all of the defendants, and allege conversion (fifth count), civil conspiracy (sixth count), and violation of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § § 42-110a et seq. (eighth count). The seventh count is directed to PRC and the Hayes defendants, and alleges tortious interference with business relations. The plaintiff's ninth count requests a court-ordered directors meeting pursuant to General Statutes § 33-1096 and is not directed to a specific defendant.
On June 27, 2013, Sherwood filed a motion to dismiss the first through sixth, eighth, and tenth counts of the plaintiff's complaint on the ground that the plaintiff lacks standing to assert her claims. Sherwood's motion was accompanied by a memorandum of law, and the sworn affidavit of Sherwood. On July 17, 2013, the plaintiff filed (1) an objection to Sherwood's motion, accompanied by a variety of exhibits and the affidavit of the plaintiff, and (2) a cross motion to cite in the Association as a party defendant, accompanied by a memorandum of law (which motion has not been ruled upon). The Hayes defendants and PRC filed a notice of adoption of Sherwood's motion to dismiss and the accompanying memorandum on July 18, 2013, as against the fifth, sixth, seventh, and eighth counts of the plaintiff's complaint. Sherwood filed a reply to the plaintiff's objection on July 19, 2013. The parties' arguments were heard at short calendar on July 27, 2015. The defendants did not move to dismiss the ninth count seeking a court-ordered meeting of the directors.
CONTENTIONS OF THE PARTIES
The defendants move for the dismissal of all counts of the complaint except the ninth for lack of subject matter jurisdiction. The defendants argue that the plaintiff lacks standing to assert her claims in an individual capacity because her claims are on behalf of and belong to the Association, and are therefore derivative. Further, the defendants assert that the plaintiff cannot assert her claims derivatively on behalf of the Association pursuant to the provision of the Revised Nonstock Corporation Act (Chapter 603, Title 33 of the Connecticut General Statutes) which permits such derivative actions on behalf of nonstock corporations, i.e., General Statutes § 33-1038 (Ultra vires) because (a) claims for injunctive relief can only be brought against the corporation and not an officer as is the case here; (b) damage claims must be brought by the corporation directly, derivatively or through a legal representative and plaintiff is not the corporation or its legal representative; and (c) plaintiff has failed to make a pre-litigation demand on the Association's board of directors, and has not alleged or shown that such demand would have been futile (among other arguments which the court need not consider).
In response, the plaintiff argues that she does not seek to assert her claims in her individual capacity, but rather as a director of the association, and is authorized to do so against an officer of the corporation. Further, plaintiff contends that the pre-litigation demand imposed upon derivative actions involving business corporations by Gen. Stat. § 33-722 (Demand) does not apply to derivative actions commenced by a director of a nonstock corporation under Gen. Stat. § 33-1038(b). Plaintiff also contends that her notification of Sherwood, of the Association's secretary and another director, would satisfy the requirement of a pre-litigation demand if it were to apply a nonstock corporation. Plaintiff also indicated that she considered the tenth count, seeking an accounting, to be moot.
In reply, defendants note that derivative actions are defined as actions commenced by shareholders or members and do not include directors as plaintiffs. Further, defendants contend that, while plaintiff may have informed another director of her opposition to the transaction, this did not constitute a request or demand that the Association take over the litigation against defendants. Further, defendants note that the other director, Joan Tewksbury, indicated her support for the project.
ALLEGATIONS OF THE COMPLAINT AND UNDISPUTED FACTS
The allegations of the complaint and undisputed facts contained in the affidavits submitted by the parties establish the following facts: Sherwood is president of the Association and has been since 1969. The plaintiff is a member and director of the Association, which is a Connecticut nonstock corporation. The association was incorporated in 1959. The articles of association provide that the purposes of the association include, " To provide a place for church services and a Sunday School" and " To provide a center where members can meet for entertainment and social activities of various kinds." The articles also state that, " In the event that this corporation shall ever be dissolved, all the property and assets of the corporation shall be turned over absolutely to the New Canaan Public Library." Gen. Stat. § 33-1171 (Dissolution by board and directors) of the Connecticut Revised Nonstock Corporation Act, Conn. Gen. Stat. § § 33-1000 - 33-1290 (the " Nonstock Act") provides that a nonstock corporation may be dissolved upon approval by the board of directors and vote of the members. There have been no meetings of the members or the directors during the past twenty years. The septic system has failed and there is inadequate space on the parcel to replace it. The roof is seriously deteriorated.
In September 2009, the Hayes defendants purchased the property adjoining the Association property. Three years later, the Hayes defendants formed PRC with the intention of acquiring and developing the association property into a single-family dwelling or guest house. To accomplish that end, the Hayes defendants negotiated with Sherwood and entered into a letter of intent to affect a transfer of the Association property to the New Canaan Library upon the Association's dissolution, so that the association property subsequently could be transferred to the Hayes defendants' entity, PRC. The letter of intent also provides that the Hayes will grant an easement over their property to permit the construction of parking and a new septic field and that the building will be restored.
Sherwood did not receive prior approval for the transaction from the Association's board of directors. Plaintiff received a letter, not as a director of the association but as a neighboring landowner, informing her that a variance application had been filed for the Association property on behalf of PRC, and that a hearing before the New Canaan zoning board of appeals (the " ZBA") was pending. The letter received by the plaintiff indicated that PRC was a purported contract purchaser of the association property. In response, the plaintiff took various measures to register her dissatisfaction with the proposed transaction, and her conviction that Sherwood was acting outside of her authority as president of the association in pursuing the proposed transaction with board approval. These measures included letters sent to the defendants and at least one of the remaining board members of the association. Plaintiff appeared before the ZBA in opposition to the variance. The New Canaan Historical Society and the New Canaan Preservation Commission supported the application. The ZBA granted the application, and plaintiff has filed an appeal to this court.
Plaintiff did not ask the Association's board of directors to pursue or take over the instant litigation against the defendants. The board has not met to consider this litigation and has not otherwise authorized it.
DISCUSSION
" [A] motion to dismiss . . . properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court." (Internal quotation marks omitted.) Santorso v. Bristol Hospital, 308 Conn. 338, 350, 63 A.3d 940 (2013). " A court deciding a motion to dismiss must determine not the merits of the claim or even its legal sufficiency, but rather, whether the claim is one that the court has jurisdiction to hear and decide." (Internal quotation marks omitted.) Hinde v. Specialized Education of Connecticut, Inc., 147 Conn.App. 730, 740-41, 84 A.3d 895 (2014). " [J]urisdiction over the person, jurisdiction over the [subject matter], and jurisdiction to render the particular judgment are three separate elements of the jurisdiction of a court." (Internal quotation marks omitted.) Morgan v. Hartford Hospital, 301 Conn. 388, 401, 21 A.3d 451 (2011). " Subject matter jurisdiction involves the authority of the court to adjudicate the type of controversy presented by the action before it . . . [A] court lacks discretion to consider the merits of a case over which it is without jurisdiction The subject matter jurisdiction requirement may not be waived by any party, and also may be raised by a party, or by the court sua sponte, at any stage of the proceedings . . ." (Internal quotation marks omitted.) Keller v. Beckenstein, 305 Conn. 523, 531-32, 46 A.3d 102 (2012). " Standing is the legal right to set judicial machinery in motion . . . Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved." St. Paul Travelers Cos. v. Kuehl, 299 Conn. 800, 809, 12 A.3d 852 (2011).
As discussed above, plaintiff claims that she is bringing this action on behalf of the Association and that it is authorized Gen. Stat. Section 33-1038, which provides, in relevant part:
(a) Except as provided in subsection (b) of this section, the validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act.
(b) A corporation's power to act may be challenged: (1) in a proceeding by a member or director against the corporation to enjoin the act; (2) in a proceeding by the corporation, directly, derivatively or through a receiver, trustee or other legal representative, against an incumbent or former director, officer, employee or agent of the corporation . . .
As mentioned above, the primary dispute in this action is whether the derivative action authorized by subsection (b)(2), above, is subject to the provisions of Gen. Stat. § 52-572j of Chapter 925 (Statutory Rights of Action and Defenses) and Part (D) (Derivative Proceedings) of the Business Corporations Act (Sections 33-720 - 727), in particular, Gen. Stat. § 33-722 (Demand).
Gen. Stat. § 52-572j (Derivative actions by shareholders or members) provides, in relevant part:
(a) Whenever any corporation or any unincorporated association fails to enforce a right which may properly be asserted by it, a derivative action may be brought by one or more shareholders or members to enforce the right, provided the shareholder or member was a shareholder or member at the time of the transaction of which he complained or his membership thereafter devolved on him by operation of law. The action shall be commenced by a complaint returnable to the superior court for the judicial district in which an office of the corporation or association is located. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association . . . (b) In any action brought pursuant to this section, process shall be served on the corporation or association as in other civil actions, and notice of the service of process after its having been served shall be given to the board of directors and such other interested persons as the court deems proper. It shall not be necessary to make shareholders or members parties thereto.
Gen. Stat. § 33-722 (Demand) provides:
No shareholder may commence a derivative proceeding until (a) A written demand has been made upon the corporation to take suitable action; and (2) ninety days have expired from the date delivery of the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the ninety-day period.
Whether the plaintiff has standing to assert claims on behalf of the association depends on: (1) the application of § 52-572j, a general statutory cause of action, to derivative claims brought under § 33-1038(b)(2) of the Nonstock Corporation Act, and (2) whether a pre-suit demand requirement applies to derivative claims brought on behalf of nonstock corporations under § 33-1038(b)(2), and whether the requirement has been satisfied.
The treatise Ford, Connecticut Corporation Law and Practice (Second Edition, 2016 Supp.), contains a helpful discussion of derivative proceedings under Connecticut law in Section 4.06, at 4-91 to 4-93:
At common law, there was no action in law permitting a shareholder to call corporate managers to account. Rather, there were two actions in equity that evolved into a single derivative action. In one action, the corporation was named as a defendant in order to compel it to take action against its controlling officers. In addition, the shareholder maintained an action on the corporation's behalf against its officers and directors. These dual action were cumbersome and were eventually combined to form the present-day unitary derivative action. In 1977, the Connecticut general assembly adopted a statute on the subject, which, after subsequent amendment, provided as follows: [Quotation of Section 52-572j, above.]
The 1977 statute left many questions concerning shareholder derivative actions unanswered. For example, it did not answer the question of whether the plaintiff must place a demand on the board of directors to enforce the corporation's right before a derivative action could be filed in court. Other unanswered questions were: (i) Whether a demand could be excused as futile when directors who were to be sued had such conflicts of interest and control over the board that it was assumed the board would not sue the directors? (ii) What sort of demand should be made: was simply writing a letter to the president, stating that corporation ought to sue a particular party because of some business loss incurred, sufficient? . . . These and other questions were answered with the adoption of Subchapter D of the [Connecticut Business Corporations Act], the current statutory provisions on shareholder derivative proceedings and the corporation's response to them . . .
The [Connecticut Business Corporation Act] clearly requires a demand to be made on the board of directors to enforce the corporation's right before a derivative proceeding may be commenced . . . A pre-suit demand protects the directors' prerogative to take over the litigation or to oppose it, thereby implementing the basic principle of corporate governance that a corporation's decisions should be made by its directors or by a majority of its shareholders.
ANALYSIS
Sections 52-572j and 33-722 predated the passage of Section 33-1038(b)(2). Section 52-572j was passed by the General Assembly as part of Public Act 77-310 in 1977. The Business Corporations Act, containing Section 33-722 (Demand), was passed as part of Public Act 94-186 in 1994. Section 33-1038(b)(2) was passed as part of Public Act 96-256, the Nonstock Corporation Act, in 1996. Thus, it can be said that the General Assembly was aware of the existence of § 52-572j and 33-722 when it was drafting the language of § 33-1038(b)(2), and would have been conscious of the fact that the use of the terms " derivative action" within § 33-1038(b)(2) would bring that section under the broad umbrella of § 52-572j and § 33-722.
By its text, Section 52-572j(a) applies broadly to derivative actions commenced " [w]henever any corporation or any unincorporated association fails to enforce a right which may properly be asserted by it." (Emphasis added.) As mentioned above, that section was part of an act of broad application, relating to " Statutory Rights of Action and Defenses." Plainly, Section 33-1038 created a statutory cause of action, specifically the remedy for ultra vires acts in the nonstock context. Section 33-1038(b)(2) applies to derivative actions brought on behalf of a type of corporation--namely a nonstock corporation. The broad scope of the language used by § 52-572j, coupled with the fact that § 33-1038(b)(2) specifically contemplates a derivative action, suggests that actions commenced under § 33-1038(b)(2) are subject to the requirements of § 52-572j.
The inclusion of " members" within the statutory language of § 52-572j(a) reinforces this conclusion, because it indicates that the application of the statute is not limited to a shareholder plaintiff. § 33-1038(b)(1) authorizes a director or member to seek an injunction against the corporation. Subsection (2) authorizes a " proceeding by the corporation, directly, indirectly, derivatively or through a receiver, trustee or other legal representative" to maintain a challenge to corporate action. The use of additional, different language from § 52-572j in this section is a recognition of the fact that there are no shareholders in a nonstock corporation, and that there are different titles for those authorized to bring an action on behalf of a nonstock corporation. In other words, the slightly different language in the two statutes that is used by the General Assembly does not reflect an effort to create a new type of derivative action apart from the one contemplated by § 52-572j.
In Lagueux v. Leonardi, 148 Conn.App. 234, 240-41, 85 A.3d 13 (2014), the Appellate Court stated, " [T]he legislature, in amending or enacting statutes, always [is] presumed to have created a harmonious and consistent body of law . . . We also presume that the legislature does not intend to promulgate statutes . . . that lead to absurd consequences or bizarre results." (Citations omitted; internal quotation marks omitted.) Id., 241-42. " The General Assembly is always presumed to know all the existing statutes and the effect that its action or [lack thereof] will have [on] any one of them. And it is always presumed to have intended that effect which its action or [lack thereof] produces." Envirotest Systems Corp. v. Commissioner of Motor Vehicles, 293 Conn. 382, 398, 978 A.2d 49 (2009).
Our Supreme Court has explained the important function pre-suit demand plays in derivative actions, albeit in the broader, more common context of a shareholder derivative suit on behalf of a business corporation:
" In the context of a shareholder derivative dispute, a 'demand' is a mechanism for a shareholder to voice his objection regarding the management of a corporation and place the board of directors on notice of his complaints prior to filing of a formal shareholder derivative lawsuit. 'The purpose of requiring a precomplaint demand is to protect the directors' prerogative to take over the litigation or to oppose it . . . Thus, the demand requirement implements the basic principle of corporate governance that the decisions of a corporation--including the decision to initiate litigation--should be made by the board of directors or the majority of the shareholders.' (Citations omitted; internal quotation marks omitted.) Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 101, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991)." Stutz v. Shepard, 279 Conn. 115, 118 n.5, 901 A.2d 33 (2006).
As described further by our Supreme Court in Barrett v. Southern Connecticut Gas Co., supra, 172 Conn. 370-71, the need to ensure the integrity of basic principles of corporate governance in light of an individual's right to sue on behalf of a corporation is highlighted by
[T]he dual nature of the stockholder's action: first, the plaintiff's right to sue on behalf of the corporation and, second, the merits of the corporation's claim itself . . . With regard to the first cause of action, the defendants in a derivative action may properly question whether the plaintiff has standing in equity to act as the nominal shareholder acting on behalf of the corporation and the other shareholders . . .
The standing of the nominal shareholder plaintiff is important largely because of the res judicata effect of a judgment rendered in a derivative action which has proceeded to adjudicate the merits of the corporate claim . . . In this respect, the derivative action resembles other representative suits, including the class action, since the plaintiff is able to foreclose all future litigation by other shareholders or the corporate directors by obtaining a judgment on the merits of the corporate cause, even if the judgment is adverse . . . Particularly in jurisdictions where shareholder suits are common, courts have developed equitable standards to ensure procedural fairness. These conditions act as prerequisites that the shareholder must satisfy in order to assert the alleged corporate claim as a representative plaintiff. (Citations omitted; internal quotation marks omitted.)
It is logical that similar principles should apply to derivative actions commenced on behalf of nonstock and business corporations, because a derivative action brought by a member in a nonstock corporation is not functionally different from a derivative action brought by a shareholder in a stock corporation. In both actions, the plaintiff asserts claims on behalf of a corporation that the corporation either cannot or will not assert for itself, and that fundamental principle does not change based on the nature of the corporation. Accordingly, while it is true that § 33-1038(b)(2) does not mention § 52-572j or § 33-722 explicitly, the broad scope of the § 52-572j language read in tandem with the authorization of a derivative suit under § 33-1038(b)(2) makes clear that these sections should apply to derivative actions brought by a member of a nonstock corporation under § 33-1038(b)(2). If our statutes are to be interpreted harmoniously, uniform procedures should apply to derivative actions, whether involving business or nonstock corporations because the same concerns exist in either setting.
One of these procedures is the requirement of the pre-suit demand on the board of directors. A close reading of § 52-572j leads to the conclusion that a pre-suit demand is a prerequisite to a derivative action, which is made explicit in the business corporation context by § 33-722. In its first sentence, § 52-572j(a) authorizes a derivative action " [w]henever any corporation or any unincorporated association fails to enforce a right which may be properly asserted by it." (Emphasis added.) In other words, under § 52-572j, the discretion to bring an action on behalf of an entity does not fall first to a derivative plaintiff, but rather to the entity and its relevant decision maker. A derivative plaintiff must wait for the entity to " fail to enforce" its rights as a prerequisite to acting on behalf of that entity. For an entity to fail to enforce its rights, it follows that the entity must at least (1) be aware of a given right and (2) make a decision not to enforce it. Therefore, under § 52-572j, prior to commencing a derivative action, and in order to have standing to do so, an eligible derivative plaintiff must first make a pre-suit demand on an entity, be that entity a corporation, nonstock corporation, or other unincorporated association as the case may be, to enforce a right prior to taking matters into his or her own hands. To read § 52-572j any other way would lead to " absurd consequences or bizarre results, " see Lagueux v. Leonardi, supra, 148 Conn.App. 240-41, in that an eligible plaintiff could commence a derivative suit any time he or she deemed it necessary, without first determining the wants of the majority of shareholders or the board of directors. To cause such a result would contradict the principles of corporate governance discussed above.
Having determined that a derivative plaintiff, acting pursuant to § 33-1038(b)(2), must make a pre-suit demand prior to asserting a derivative action in accordance with § 52-572j and 33-722, the precise boundaries of what constitutes sufficient pre-suit demand can be left for another day. In the present action, it is apparent that the plaintiff failed to make adequate demand on the Association board of directors prior to filing her derivative action. While the plaintiff insists that she " formally notified all living and able officers and [d]irectors of the [association], including the [defendants] . . . of [the] [p]laintiff's adamant objection" to the proposed transaction, and that she followed up that notification with letters which " registered her strong opposition" to the proposed transaction, these communications convey the plaintiff's opposition, rather than a demand to initiate litigation. In short, while the plaintiff may have conveyed her objections regarding the proposed transaction, she never gave the board of the association the opportunity to take over or oppose the litigation against the defendants.
In the present action, neither the arguments of the parties, nor the record, indicate that the plaintiff ever demanded that the association board of directors enforce the rights of the association against the defendants before she filed her complaint. Had the plaintiff done so, the board of directors, as a whole, could have determined whether action against the defendants is in the best interests of the association. Because the plaintiff did not make a pre-suit demand, as required by § 52-572j and § 33-722, she has not established her standing to assert a derivative claim on behalf of the Association and the court need not address the parties' arguments regarding the plaintiff's suitability as a derivative plaintiff or the ripeness of the plaintiff's claims.
Finally, the court dismisses the first count of the complaint, which seeks an injunction against Sherwood, for two reasons. First, § 33-1038(b)(1) permits " a proceeding by a member or director against the corporation to enjoin the act." Here, the first count is brought against Sherwood as president, not against the Association. Consequently, it is not authorized by the statute as pleaded. Second, the count is moot because the court is advised that Ms. Sherwood died on March 21, 2015. As a result, the plaintiff would gain no practical relief from the issuance of an injunction against her, even if proper under the statute. " Mootness . . . imposes a duty on the court to dismiss a case if the court can no longer grant practical relief to the parties." Internal quotation marks omitted.) Batchelder v. Planning & Zoning Commission, 133 Conn.App. 173, 180, 34 A.3d 465, cert. denied, 304 Conn. 913, 40 A.3d 319 (2012).
CONCLUSION
Accordingly, for the reasons set forth above, count one of the plaintiff's complaint is dismissed as moot. Counts two through eight of the plaintiff's complaint are dismissed for lack of subject matter jurisdiction. Count ten of the plaintiff's complaint is dismissed as moot, upon agreement of the parties. Count nine remains in the case.