Ackerman v. Sobol Family Partnership

Full title: RENA SOBOL ACKERMAN v. SOBOL FAMILY PARTNERSHIP, LLP ET AL

Court: Connecticut Superior Court, Judicial District of Hartford at Hartford

Date published: May 12, 2004

2004 Ct. Sup. 7570 (Conn. Super. Ct. 2004)

Opinion

No. CV 03-0826123

May 12, 2004

MEMORANDUM OF DECISION ON MOTIONS TO STRIKE (#115 #118)

HENNESSEY, JUDGE TRIAL REFEREE.

The defendants in this action, Ephraim Sobol and Sobol Property Management, LLC (SPM), cumulatively move to strike count two and count three of the plaintiff's amended complaint dated November 18, 2003 and the prayer for relief seeking punitive damages. The plaintiff, Rena Sobol Ackerman, commenced this action by filing a complaint, dated May 27, 2003, which purported to plead four claims against Ephraim Sobol, SPM and the Sobol Family Partnership, LLP (partnership). The defendants filed timely appearances and, on August 25, 2003, and August 28, 2003, Ephraim Sobol and SPM, respectively, filed motions to strike several counts of the plaintiff's complaint. In response to the defendants' motions, the plaintiff filed, on November 18, 2003, a three-count amended complaint against only Ephraim Sobol and SPM.

In count one of her amended complaint, the plaintiff alleges that Ephraim Sobol breached his fiduciary duties with respect to the plaintiff. In count two, the plaintiff alleges that both Ephraim Sobol and SPM acted in violation of the Connecticut Unfair Trade Practices Act (CUTPA), Connecticut General Statutes § 42-110a et al. Finally, in count three, the plaintiff alleges that she is entitled to pierce the corporate veil between Ephraim Sobol and SPM, because Ephraim Sobol used SPM as an instrumentality to gain compensation. In her prayer for relief, the plaintiff seeks, inter alia, "[p]unitive damages pursuant to the common law and/or [General Statutes] § 42-110g."

On December 18, 2003, Ephraim Sobol filed a motion to strike count two of the plaintiff's amended complaint as well as the plaintiff's claim prayer for relief seeking punitive damages pursuant to the common law and CUTPA and filed a memorandum in support thereof. Thereafter, on December 22, 2003, SPM moved to strike counts two and three of the plaintiff's amended complaint, and the prayer for relief seeking punitive damages pursuant to CUTPA and filed a memorandum in support thereof On February 23, 2004, the plaintiff filed a memorandum in opposition to the defendants' motions to strike. Because the defendants' motions to strike overlap, this memorandum of decision addresses both motions.

"The purpose of a motion to strike is to contest . . . the legal sufficiency of the allegations of any complaint . . . to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "A motion to strike challenges the legal sufficiency of a pleading, and, consequently, requires no factual findings by the trial court." (Internal quotation marks omitted.) Bhinder v. Sun Co., 263 Conn. 358, 366, 819 A.2d 822 (2003). "It is fundamental that in determining the sufficiency of a complaint challenged by a defendant's motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted." (Internal quotation marks omitted.) Doe v. Board of Education, 76 Conn. App. 296, 299-300, 819 A.2d 289 (2003). "The role of the trial court [is] to examine the [complaint], construed in favor of the plaintiffs, to determine whether the [pleading party has] stated a legally sufficient cause of action." (Internal quotation marks omitted.) Szczapa v. United Parcel Service, Inc., 56 Conn. App. 325, 328, 743 A.2d 622 (2000). "Although the motion to strike admits all facts well pleaded, it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings." (Internal quotation marks omitted.) Emerick v. Kuhn, 52 Conn. App. 724, 739, 737 A.2d 456 (1999).

COUNT TWO: CUTPA

In count two of her amended complaint, which incorporates the allegations of count one, the plaintiff alleges the following facts. On or about October 4, 2001, Sam Sobol and Ruth Sobol entered into a contract with SPM purportedly on behalf of the partnership, pursuant to which SPM would manage the real property owned by the partnership. (Count One, ¶ 10.) Under the terms of the partnership agreement, the managing general partner could perform services for the partnership himself or could "hire management agents and other required personnel" to perform them. (Count One, ¶ 9.) Also, on October 4, 2001, Sam Sobol and Ruth Sobol purportedly designated Ephraim Sobol as the successor managing general partner of the partnership. (Count One, ¶ 10.) SPM and Ephraim Sobol, who is the sole owner and member of SPM, therefore receive compensation in exchange for managing the partnership's real property, in violation of the partnership agreement. (Count One, ¶ 10.) Moreover, Ephraim Sobol has acted in conflict with the best interest of the partnership, by collecting management fees for SPM, paying SPM commercially unreasonable fees and failing to make mandatory annual distributions of net cash profits from the operations of the partnership to the plaintiff. (Count One, ¶ 14(a), (b) and (c).) The plaintiff alleges that these actions "constitute unfair, deceptive, unethical and unscrupulous acts and practices" that are contrary to public interest and in violation of CUTPA. (Count Two, ¶ 10). The crux of count two of the plaintiff's amended complaint is that Ephraim Sobol's conduct "goes well beyond the simple governance of the partnership and places him in direct competition with, and in conflict with, the best interests of the partnership." (Count Two, ¶ 11.)

With regard to SPM, the plaintiff alleges that by action of its sole member and owner, Ephraim Sobol, SPM entered into the management contract which called for excessive fees to be paid to SPM. (Count Two, ¶ 12.) The plaintiff alleges that SPM contracted for and accepted these excessive fees knowing that payment of such fees was a breach of the partnership agreement and a breach of Sobol's fiduciary duties to the partnership and its general partners. (Count Two, ¶ 12.) Finally, the plaintiff alleges that SPM's actions in accepting these unreasonable fees "constitute unfair, deceptive, unethical and unscrupulous acts and practices" that are contrary to public policy and in violation of CUTPA. (Count Two, ¶ 13.)

Both Ephraim Sobol and SPM move to strike count two of the plaintiff's amended complaint on the ground that the plaintiff has failed to allege any conduct prohibited by CUTPA. Ephraim Sobol and SPM argue that count two should be stricken because the plaintiff's allegations exclusively concern the internal operations of the partnership and Ephraim Sobol's duties and responsibilities as managing general partner, which are not within the scope of CUTFA. In opposition, the plaintiff argues that by using SPM to obtain excessive compensation that was not otherwise permitted to a managing general partner under the partnership agreement, Ephraim Sobol's actions went beyond the governance of the partnership. The plaintiff argues that the present case is similar to cases in which Connecticut courts have held that defendants violated CUTPA by diverting partnership funds to benefit their other properties or acting in ways designed to usurp the business in favor of another business.

General Statutes § 42-110b(a) provides that "[n]o person shall engage in unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce." General Statutes § 42-110a(4) defines "trade or commerce" broadly to encompass "the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state." Although the Connecticut Appellate Court has explicitly stated that "CUTPA does not apply to purely intercorporate conflicts"; Spector v. Konover, 57 Conn. App. 121, 133, 747 A.2d 39, cert. denied, 254 Conn. 913, 759 A.2d 507 (2000); the Connecticut Supreme Court has held that CUTPA does apply when the defendant's actions go well beyond the governance of an entity and place him in direct competition with the interests of the entity. Fink v. Golenbock, 238 Conn. 183, 213, 680 A.2d 1243 (1996).

The plaintiff cites two appellate cases, Ostrowski v. Avery, 243 Conn. 355, 703 A.2d 117 (1997), and Spector v. Konover, supra, 57 Conn. App. 121, which she argues support a conclusion that the plaintiff has sufficiently pleaded a CUTPA violation in this case in that Sobol and SPM's actions went beyond the governance of the partnership. The Ostrowski case dealt with the usurpation of a corporate opportunity. Ostrowski v. Avery, supra, 243 Conn. 379. The court held "[a]lthough purely intracorporate conflicts do not constitute CUTPA violations, actions outside the scope of the employment relationship designed to usurp the business and clientele of one corporation in favor of another . . . fit squarely within the provenance of CUTPA." Id. Moreover, in Spector, the defendant-partner delayed the disbursement of profits from a shopping center to the plaintiff so that those funds could be used to finance other shopping centers owned by the defendant-partner. Spector v. Konover, supra, 57 Conn. App. 133. The court held that those actions clearly placed the defendants in direct competition with the interests of the partnership and therefore violated CUTPA. Id., 133-34.

The present case is factually dissimilar from both Ostrowski and Spector. The present case can be distinguished from Ostrowski by the mere fact that the plaintiff here does not allege that Ephraim Sobol and SPM took actions to usurp partnership opportunities. Similarly, the present case is distinguishable from Spector for two reasons. First, SPM is not alleged to be a competitor of the partnership, but rather allegedly was hired to help the partnership manage its real estate. Second, the crux of the plaintiff's CUTPA allegations is that Ephraim Sobol is benefitting from the partnership's contract with SPM. It must be noted that Sam Sobol and Ruth Sobol were the partners who allegedly entered into the agreement with SPM, not Ephraim Sobol. The plaintiff does not allege that Ephraim Sobol diverted partnership funds for the benefit of other properties.

Moreover, the plaintiff claims that Ephraim Sobol's alleged activities of collecting management fees for SPM, paying SPM commercially unreasonable fees and failing to make mandatory annual distributions of net cash profits from the operations of the partnership to the plaintiff are in violation of CUTPA. (See Count One, ¶ 14(a), (b) and (c).) These allegations deal with nothing more than a disagreement over Sobol's governance of the partnership as general managing partner: an intrinsic conflict between the plaintiff and Ephraim Sobol over how Ephraim Sobol conducts the partnership's business. See Standish v. Sotavento Corp., Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 96 0330936 (June 23, 1998, Skolnick, J.), aff'd on other grounds, 58 Conn. App. 789, 755 A.2d 910, cert. denied, 254 Conn. 935, 761 A.2d 762 (2000). The plaintiff has failed to allege facts that support her assertion that Ephraim Sobol's and SPM's actions go well beyond the governance of the partnership and place him in direct competition with the interests of the entity. The defendants' motions to strike court two of the plaintiff's amended complaint are granted.

COUNT THREE: PIERCING THE CORPORATE VEIL

In count three of her amended complaint, the plaintiff seeks to hold SPM liable for Ephraim Sobol's acts by piercing the corporate veil under the instrumentality theory. Specifically, the plaintiff alleges that "[a]t the time of the Management Agreement, Ephraim Sobol owned, controlled, and was the sole member of Sobol Management. Ephraim Sobol had complete dominion over Sobol Management's finances, policy and business practices. Sobol Management was incapable of engaging in business other than by the action of Ephraim Sobol. As such, Sobol Management had no separate mind, will or existence of its own with respect to the Management Contract with the Partnership." (Count three, ¶ 13.) The plaintiff alleges that "Ephraim Sobol used his control of Sobol Management to obtain compensation for managing the Partnership's real estate, a duty for which he was not otherwise entitled to compensation." (Count three, ¶ 14.) As a result, the plaintiff alleges that she "is entitled to pierce the corporate veil between Ephraim Sobol and Sobol Management. Sobol Management is liable for Ephraim Sobol's self-dealing and payment of commercially unreasonable fees to the same extent as Ephraim Sobol." (Count three, ¶ 16.)

SPM moves to strike count three of the plaintiff's amended complaint on the ground that under the instrumentality theory, the plaintiff fails to state a cognizable cause of action against SPM. SPM argues the plaintiff does not allege facts that satisfy the three-prong instrumentality theory test, which must be met in order for a court to pierce the corporate veil under these circumstances. In opposition, the plaintiff argues that the elements of the instrumentality theory test have been met.

Connecticut courts have held that "piercing the corporate veil is difficult and that it is appropriate only under exceptional circumstances." DeLeonardis v. Subway Sandwich Shops, Inc., 35 Conn. App. 353, 358, 646 A.2d 230, cert. denied, 231 Conn. 925, 648 A.2d 162 (1994). In this case, the plaintiff is attempting to pierce the corporate veil in reverse. She is attempting to hold the corporation, SPM, liable for the alleged unlawful acts of its member, Ephraim Sobol. The Connecticut Appellate Court has held that under certain circumstances a court may pierce the corporate veil in reverse: "A guiding concept behind both standard and reverse veil piercing cases is the need for the court to avoid an over-rigid preoccupation with questions of structure . . . and apply the preexisting and overarching principle that liability is imposed to reach an equitable result . . . We consider this directive to be sensible and therefore recognize that under the appropriate circumstances, i.e., when the elements of the identity or instrumentality rule have been established, a reverse pierce is a viable remedy that a court may employ when necessary to achieve an equitable result and when unfair prejudice will not result." (Citations omitted; internal quotation marks omitted.) Litchfield Asset Management Corp. v. Howell, 70 Conn. App. 133, 151, 799 A.2d 133 (2002).

"The instrumentality rule requires, in any case but an express agency, proof of three elements: (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) that such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights; and (3) that the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of." (Emphasis in original; internal quotation marks omitted.) Id., 152.

In count three of her amended complaint, the plaintiff fails to allege facts that support her instrumentality theory claim against SPM. The facts the plaintiff alleges do not satisfy the three-prong test. In viewing the facts alleged in a light most favorable to the plaintiff. the court concludes that the factor of control may be present because the plaintiff alleges that Ephraim Sobol "owned, controlled, and was the sole member of [SPM]" and "had complete dominion over [SPM's] finances, policy, and business practices" at the time SPM entered into the contract with the partnership. (Count three, ¶ 13.) However, the plaintiff fails to allege facts that support the second prong of the test. The plaintiff alleges that Ephraim Sobol "used his control of Sobol Management to obtain compensation for managing the Partnership's real estate." (Count three, ¶ 14.) As discussed earlier, Sam Sobol, the prior managing general partner, was the individual who entered into the agreement with SPM to manage the partnership's real estate, not Ephraim Sobol. (Count one, ¶ 10.) The partnership agreement allowed for such transactions. (Count one, ¶ 9.) As a result, the plaintiff does not allege facts that demonstrate that Ephraim Sobol, at the time of entering into the contract, used his control of SPM "to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights," particularly in light of the fact that Ephraim Sobol was not the individual who entered into the contract with SPM. Because the facts that the plaintiff alleges do not satisfy the second prong of the instrumentality theory test, the plaintiff's claim under the instrumentality theory fails.¹ SPM's motion to dismiss count three of the plaintiff's amended complaint is granted.

1 Because the plaintiff fails to allege facts that meet the second prong of the instrumentality theory test, that "such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest or unjust act in contravention of plaintiff's legal rights," the court need not consider whether "the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of."

PRAYER FOR RELIEF: PUNITIVE DAMAGES CT Page 7577

Both Ephraim Sobol and SPM move to strike the plaintiff's prayer for relief for punitive damages pursuant to CUTPA. Because the court is granting the defendants' motions to strike as to the CUTPA claim in count two of the plaintiff's amended complaint, the plaintiff's claim for punitive damages under CUTPA is stricken as well.

Moreover, Ephraim Sobol moves to strike the plaintiff's claim for common-law punitive damages on the ground that count one of the plaintiff's amended complaint, alleging breach of fiduciary duty against Ephraim Sobol, fails to state a cognizable claim for an award of such damages. Ephraim Sobol argues the plaintiff's allegations that his actions were "wanton and willful" are mere conclusory assertions not supported by the facts alleged. Ephraim Sobol argues that because Sam Sobol allegedly had the authority to enter into the management agreement on behalf of the partnership with SPM, Ephraim Sobol's alleged actions in entering into the agreement on behalf of SPM and upholding the terms of the contract when serving as general managing partner did not constitute "wanton or willful and/or reckless malicious misconduct." (Count one, ¶ 16.) In opposition, the plaintiff argues that she sets forth a basis for punitive damages in connection with count one because she alleges that Ephraim Sobol's acts were wanton, willful and/or reckless, malicious conduct.

"Practice Book . . . § 10-39, allows for a claim for relief to be stricken only if the relief sought could not be legally awarded." Pamela B. v. Ment, 244 Conn. 296, 325, 709 A.2d 1089 (1998). "As a general matter, [p]unitive damages, applying the rule in this state as to torts, are awarded when the evidence shows a reckless indifference to the rights of others or an intentional and wanton violation of those rights." (Internal quotation marks omitted.) Dunn v. Leepson, 79 Conn. App. 366, 371, 830 A.2d 325 (2003). Because Ephraim Sobol does not move to strike count one of the plaintiff's amended complaint, and therefore does not challenge the legal sufficiency of this count, a viable recklessness claim remains in this action. As a result, the court denies Ephraim Sobol's motion to strike the common-law punitive damages the plaintiff seeks in her prayer for relief.

CONCLUSION

The court grants the defendants' motions to strike with regard to count two and count three of the plaintiff's amended complaint and the prayer for relief seeking punitive damages pursuant to the CUTPA claim. The court denies Ephraim Sobol's motion to strike the prayer for relief seeking common-law punitive damages.

Hennessey, J.