Opinion
No. CV 11-6008972
August 3, 2011
MEMORANDUM OF DECISION RE MOTION TO DISMISS, #101
I FACTS AND PROCEDURAL HISTORY
The plaintiff has brought this action claiming the defendants improperly converted property of a limited liability company owned by the plaintiff and the defendant, Richard Rotundo. The defendants have moved to dismiss the five-count complaint for lack of subject matter jurisdiction because the plaintiff lacks standing to bring this action.
The complaint alleges that the plaintiff, Rick P. Calpitano, and the defendant, Richard Rotundo, (Rotundo) were members of a limited liability company known as Fountain Pointe, LLC, (Fountain Pointe), pursuant to a written operating agreement dated March 3, 2006. Fountain Pointe owned, developed and sold property located in Newington, Connecticut. In March 2010, Rotundo transferred property known as Unit A, Building 2 of Fountain Pointe Professional Park, (the property), that was owned by Fountain Pointe to the defendant, Rotundo Developer, LLC, a separate limited liability company owned by Rotundo. Calpitano alleges that the transferred property, valued at over $1.8 million, was transferred for no consideration. As a result of this transfer, Calpitano alleges he has been harmed and has suffered damages.
The complaint is in five counts. The first and second counts allege mismanagement by Rotundo and a breach of his fiduciary duty by violating the terms of the operating agreement by engaging in the transfer. Count three alleges that the transfer constituted civil theft pursuant to General Statutes § 52-564 due to the transfer of the property for no consideration. Count four alleges unfair trade practices by the defendants as a result of the transfer. Count five alleges that the defendant, Rotundo Developers, LLC, knew that the transfer was made for the purpose of avoiding any claim the plaintiff had to the property transferred and it conspired with Rotundo for that purpose.
The defendants now move to dismiss the entire action. The defendants assert that the court lacks subject matter jurisdiction over the action because the plaintiff lacks standing to raise these claims on behalf of a limited liability company and that such claims cannot be brought by the plaintiff individually.
II DISCUSSION
"The standard of review of a motion to dismiss is . . . well established. In ruling upon whether a complaint survives a motion to dismiss, a court must take the acts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." Brookridge District Assn. v. Planning Zoning Commission, 259 Conn. 607, 610-11, 793 A.2d 215 (2002). "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.) Cox v. Aiken, 278 Conn. 204, 210-11, 897 A.2d 71 (2006).
"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, 872 A.2d 408 (2005). "If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause . . ." Fort Trumbull Conservancy, LLC v. New London, 283 Conn. 791, 925 A.2d 292 (2007). "The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss. Practice Book § 10-31(a). It is the burden of the party who seeks the exercise of jurisdiction in his favor . . . clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute." May v. Coffey, 291 Conn. 106, 113, 967 A.2d 495 (2009).
The defendants' motion to dismiss challenges the plaintiff's standing to bring this action. The defendants argue that the plaintiff's allegations boil down to a claim that the defendants improperly converted property of Fountain Pointe to the defendant, Rotundo Developers, LLC, a limited liability company owned entirely by the defendant, Richard Rotundo. They contend that any claims regarding this transfer belong exclusively to Fountain Pointe, and not to the plaintiff individually. Therefore, the plaintiff lacks standing to prosecute the claims. Because of the different nature of the counts, the court will address each individual count as to standing, and its effect on subject matter jurisdiction. Counts one and two raise legal issues, which, in certain circumstances, may be meritorious. Counts three, four, and five do not raise such issues, and, in fact, the plaintiff himself did not challenge or address the defendants' motion as to these counts in its memorandum.
"Standing is the legal right to set judicial machinery in motion. One cannot rightfully invoke the jurisdiction of the court unless he has, in an individual or representative capacity, some real interest in the cause of action, or a legal or equitable right, title or interest in the subject matter of the controversy . . . When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue. Standing requires no more than a colorable claim of injury; a [party] ordinarily establishes standing by allegations of injury. Similarly standing exists to attempt to vindicate arguably protected interests . . .
"Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved . . . The fundamental test for determining aggrievement encompasses a well-settled twofold determination: first, the party claiming aggrievement must successfully demonstrate a specific, personal and legal interest in [the subject matter of the challenged action], as distinguished from a general interest, such as is the concern of all members of the community as a whole. Second, the party claiming aggrievement must successfully establish that this specific personal and legal interest has been specially and injuriously affected by the [challenged action] . . . Aggrievement is established if there is a possibility, as distinguished from a certainty, that some legally protected interest . . . has been adversely affected." (Emphasis added; citations omitted; internal quotation marks omitted.) Avalon Bay Communities, Inc. v. Orange, 256 Conn. 557, 567-68, 775 A.2d 284 (2001).
"The LLC is an unincorporated form of business organization similar to a general or limited partnership but possessing a limited liability `shield' which protects its owners from liability to the same extent that stockholders of a corporation are insulated from its debts and obligations." R. Convicer L. Schatz, Connecticut Limited Liability Company Forms and Practice Manual (1995 Sup. 2006) Paragraph 1.4.
The Appellate Court in Wasko v. Farley, 108 Conn.App. 156, 947 A.2d 978 (2008), held that a member of an LLC may not bring an individual action for a wrong committed to the LLC or its members. "A limited liability company is a distinct legal entity whose existence is separate from its members. A limited liability company has the power to sue or be sued in its own name; see General Statutes §§ 34-124(b) and 34-186; or may be a party to an action through a suit brought in its name by a member. See General Statutes § 34-187 . . . A member may not sue in an individual capacity to recover for an injury the basis of which is a wrong to the limited liability company." (Citations omitted.) Id., 170. Based upon this reasoning, the court finds that the plaintiff lacks the requisite personal interest in the property of Fountain Pointe to confer standing. Nevertheless, the court will address the specific counts and defendants' arguments with respect to each and whether standing may be conferred through alternative means. The plaintiff must have standing to pursue each count.
A Counts One and Two
The first and second counts of the complaint allege mismanagement by the defendant, Richard Rotundo, in that he violated the terms of the operating agreement and breached his fiduciary duty owed to the plaintiff by engaging in the transfer. Count two, ¶ 8. Applying the rules pertaining to derivative actions of corporations to LLCs, the defendants argue that the plaintiff has no standing to make these claims because he cannot establish that he incurred an injury that is distinct and separate from the alleged injury to Fountain Pointe or other members of Fountain Pointe.
Whether the plaintiff has standing to bring an individual action is a question of law. May v. Coffey, supra, 291 Conn. 113. While the Connecticut appellate courts have not directly addressed the issue of whether the rules pertaining to derivative actions rather than direct actions apply to limited liability corporations as well as to corporations, a Superior Court judge in Ward v. Gamble, Superior Court, judicial district of Hartford, Docket No. CV 08 5017829 (July 23, 2009) ( 48 Conn. L. Rptr. 286), held that laws that govern a plaintiff's standing for individual and derivative suits as applied to corporations extend to LLCs. "In Connecticut, in order for shareholders of a corporation to bring a direct or personal action against the corporation or its directors, the shareholder must allege an injury that is separate and distinct from that suffered by other shareholders or the corporation itself. If the injury is not separate and distinct, the shareholder is required to bring a shareholder derivative suit alleging injuries to the corporation or to the shareholders collectively. Although this rule is well-established with respect to corporations, there is a dearth of Connecticut authority as to whether it applies to limited liability companies." The court based its holding on analysis of statutory law, public policy justifications and case law from this and other states. The case specifically addressed the question of where one member of the LLC seeks to sue, among others, the other members of the LLC for mismanagement and misappropriation of the LLC's assets. The court concluded that the plaintiff "may not maintain a direct action against the majority members, but instead is obligated to assert his claims in a derivative suit" because the plaintiff failed to allege an injury suffered by him that is separate and distinct from that suffered by the LLC or any other member.
Although not cited in Ward v. Gamble, the Revised 2006 ULLCA clarified the 1996 ULLCA by adding a provision for direct actions by members as well as derivative actions. Section 901, Direct Action by Member provides: (a) Subject to subsection (b), a member may maintain a direct action against another member, a manager, or the limited liability company to enforce the member's rights and otherwise protect the member's interests, including rights and interests under the operating agreement . . . or arising independently of the membership relationship. (b) A member maintaining a direct action under this section must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company." Section 902, Derivative Action, provides: "A member may maintain a derivative action to enforce a right of a limited liability company if: (1) the member first makes a demand on the other members in a member-managed limited liability company, or the managers of a manager-managed limited liability company, requesting that they cause the company to bring an action to enforce the right, and the managers or other members do not bring the action with a reasonable time; or (2) a demand under paragraph (1) would be futile." Connecticut, as well as many other jurisdictions, has not adopted the ULLCA.
Other courts have found this case persuasive as well. In Roh v. Devack, United States District Court, D. Connecticut, Docket No. 3:07-cv-1901, December 3, 2010, an action between the sole members of an LLC, the court dismissed the action, finding that the causes of actions were of a derivative nature and thus the LLC was a required party. The plaintiff, a minority member of the LLC, attempted to bring a direct action against the defendant majority member of the LLC, asserting claims which essentially amounted to a claim of business mismanagement. The plaintiff argued that his claims were not derivative, but arose from "express and continuing breaches [of the defendant's] duties and obligations under the Operating Agreement between [the parties] and not [the defendant's] general fiduciary duties and obligations to the limited liability company . . ." "While it happens that plaintiff and defendant are the only members, that does not mean that a `special relationship' exists between them that changes the derivative nature of the claims. Nor does it mean that Defendant's obligations as General Manager, as set forth in the Operating Agreement, are to Plaintiff personally rather than to the LLC itself and to all its members. Plaintiff's allegations, if proven, would demonstrate harm to [the LLC] itself, and therefore derivatively, to all of the members' interests in [the LLC]. Therefore, the plaintiff has not alleged injuries that are separate and distinct from those to [the LLC]. This is a derivative suit for business mismanagement and must be brought as such, consistent with Connecticut law, rather than as a direct action." Id. See also, Savino v. Sullivan, Superior Court, judicial district of Hartford at Hartford, Docket No. 10-6013378 (February 14, 2011) (court applied reasoning in Ward v. Gamble, and allowed plaintiff, a member of an LLC, to bring a personal as opposed to derivative cause of action on a claim of conspiracy by fellow members of the LLC); Newlands v. NRT Associates, LLC, Superior Court, judicial district of Fairfield, Docket No. CV 08 4027098 (March 25, 2010) ( 49 Conn. L. Rptr. 557) (court decided that traditional corporate law principles should apply to LLCs).
Although these cases are not binding on this court, the court finds them persuasive. Having determined that the rules of derivative pertain to LLCs, the court must next determine whether the plaintiff in this case may maintain a direct action against the defendants or whether he must sue derivatively on behalf of Fountain Pointe.
The Supreme Court in Yanow v. Teal Industries, 178 Conn. 262, 422 A.2d 311 (1979), distinguished 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. "Generally, individual stockholders cannot sue the officers at law for damages on the theory that they are entitled to damages because mismanagement has rendered their stock of less value, since the injury is generally not to the shareholder individually, but to the corporation to the shareholders collectively. In this regard, it is axiomatic that a claim of injury, the basis of which is a wrong to the corporation, must be brought in a derivative suit, with the plaintiff proceeding "secondarily," deriving his rights from the corporation which is alleged to have been wronged. 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 . . . Thus, where an injury sustained to a shareholder's stock is peculiar to him alone, and does not fall alike upon other stockholders, the shareholder has an individual cause of action . . ." Id., 281-83. In Yanow, the court permitted the plaintiff's direct action because he alleged that corporate officers' fraudulent conduct caused their stock to be worth more than his stock.
The court in Smith v. Snyder, 267 Conn. 456, 462, 839 A.2d 589 (2004), held that the plaintiffs lacked standing to bring a personal cause of action because if the allegations in their complaint were true, it would demonstrate that the defendant's actions harmed the corporation itself, but not the plaintiffs individually, where the plaintiffs had sued the director of the corporation, alleging he breached his fiduciary duty that he owed to the corporation. "[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 . . . It is commonly understood that [a] shareholder — even the sole shareholder — does not have standing to assert claims alleging wrongs to the corporation." (Citations omitted; internal quotation marks omitted.) Id., 461.
Although the transfer that the defendant Rotundo made was to another LLC owned by him, and he depleted the assets of one LLC to benefit another in which the plaintiff had no interest, this still does not make the plaintiff's injuries "separate and distinct." The claim alleges harm to an asset belonging to the LLC, and the plaintiff has not shown that he was directly deprived of any legal right or opportunity other than as a direct result of an injury to the LLC's interests. The injuries that the plaintiff claims are to Fountain Pointe itself, and not to the plaintiff individually. Thus, the plaintiff lacks standing in count one to bring a personal action against Rotundo for mismanagement.
Under their domestic laws and not pursuant to the ULLCA, other jurisdictions have analyzed similar fact patterns and have reached the same result, applying the same principles as here. See, Bartfield v. Murphy, 578 F.Sup.2d 638 (S.D.N.Y. 2008) (applying New York law) (An LLC member's allegation that a second LLC member used the LLC to divert business to his new company stated harm to an asset of the LLC, rather than an asset of the LLC member, so that the action was derivative. The claim alleged harm to an asset belonging to the LLC, and the LLC member had not shown that he was directly deprived of any legal right or opportunity rather than as an indirect result of any injury to the LLC's interests); Bischoff v. Boar's Head Provisions Co., Inc., 436 F.Sup.2d 626 (S.D.N.Y. 2006) (applying New York law) (where controlling members and managers of an LLC were sued by an LLC member based on claims that the controlling members and managers had diverted profits from the LLC to a related corporation in which they had a greater interest. The court found that the LLC member had the right to bring a derivative action on the part of the LLC, because the LLC member had alleged significant personal losses, but only as a result of the LLC's losses due to the alleged misconduct, and the cause of action belonged to the LLC). Marsh v. Billington Farms, LLC, 2006 WL 2555911 (R.I.Super.Ct. 2006) (unreported opinion) (an action based upon an acquisition of property, the organization of the LLC, and subsequent disagreements that arose among the LLC members, the court found that LLC members' claim for alleged breach of fiduciary duties by other LLC members was derivative, as it struck at the members' interest in the LLC).
In count two, the plaintiff argues that he has suffered personal and individual injuries, rather than derivative injuries, specifically when the defendant breached his fiduciary duty and transferred the property from Fountain Pointe to Rotundo, LLC. His interest in Fountain Pointe has been rendered worthless, while the defendant, Rotundo, has profited from the transfer to his own LLC without consideration. Although he may meet the test for classical aggrievement, any cause of action he has is derivative of those belonging to Fountain Pointe, and not solely personal to him because the direct loss was suffered by Fountain Pointe.
The plaintiff also cites General Statutes § 34-134, which provides that: "[a] member or manager of a limited liability company is not a proper party to a proceeding by or against a limited liability company solely by reason of being a member or manager of the limited liability company, except where the object of the proceeding is to enforce a member's or manager's right against or liability to the limited liability company or as otherwise provided in an operating agreement." By its terms, the statute has no applicability to this case, as it is not "a proceeding by or against a limited liability company." See, Wilcox v. Webster Ins., Inc., 294 Conn. 206, 219-20, 982 A.2d 1053 (2009).
There is a question of whether the plaintiff may have standing to bring an action as a member if his claim arises out of a separate fiduciary duty owed to him by the defendant, Rotundo. The plaintiff in count two of his complaint alleges that "[a]s a member of Fountain Pointe, LLC, the defendant, Richard Rotundo, owed a fiduciary duty to the plaintiff," (¶ 7), and the conveyance of the property by the defendant Rotundo to the defendant Rotundo Developers, LLC, "constituted a breach of the fiduciary duty owed to the plaintiff by the defendant, Richard Rotundo." ¶ 8. The plaintiff does not provide any authority for the proposition that members of an LLC owe a fiduciary duty to each other. General Statutes § 34-141 provides that "a member shall discharge his duties under . . . the operating agreement, in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and in the manner he reasonably believes to be in the best interests of the limited liability company . . ." Although some courts have found that "like a partner in a partnership, a member of a limited liability company has a fiduciary duty to the other members"; See Ruotolo v. Ruotolo, Superior Court, judicial district of New Haven, Docket No. CV 09-5026804 (December 29, 2009); Wilcox v. Schmidt, Superior Court, judicial district of Windham, Docket No. CV 04 4001126 (June 3, 2010); Yavarone v. Jim Moroni's Oil Service, LLC, Superior Court, judicial district of Middlesex, Docket No. CV 03-01023189 (February 18, 2005); the court is not aware of any statutory or appellate authority for such a finding.
In fact, the question of what fiduciary duties the members of a limited liability company owe to each other has generated considerable debate in other jurisdictions. Although Connecticut has not adopted the Uniform Limited Liability Corporations Act (ULLCA), "[t]he Uniform Limited Liability Corporations Act takes the approach that all LLC members and managers, regardless of how the company is managed, are subject to the basic contractual (i.e., non-fiduciary) obligation of good faith and fair dealing. However, members of a manager-managed LLC have no fiduciary duty to the company or to the other members solely by reason for being members.
See, e.g.: Gowin v. Granite Depot, LLC, 272 Va. 246, 634 S.E.2d 714, 722 (2006) (manager did not breach fiduciary duty to LLC by amending articles to allow for elimination of member for nonpayment of capital contributions); Bishop of Victoria Corp. Sole v. Corporate Business Park, LLC, 137 Wash.App. 50, 62, 151 P.3d 1028, 1034-35 (2007) (LLC members, like partners, are accountable to each other and to LLC as fiduciaries); Gottsacker v. Monnier, 697 N.W.2d 436, 444-45 (Wis. 2005) (member with material conflict of interest is not precluded from voting but cannot willfully act in manner that would constitute unfair dealing and would injure LLC or its other members). None of the states in these cases have adopted the 1996 ULLCA nor the Revised 2006 ULLCA.
"The ULLCA further provides that the members of a member-managed LLC, and the managers of a manager-managed LLC, owe fiduciary duties of loyalty and care to the company and its other members. The duty of loyalty includes the obligations to account to the company, to refrain from dealing with the company in a manner that is adverse to it, and to refrain from competing with the company." 2 Business Organizations with Tax Planning § 33.05[3] (Matthew Bender).
The 1996 ULLCA provided that "[t]he only fiduciary duties a member owes to a member-managed company and its other members are the duty of loyalty and the duty of care . . ." while the 2006 ULLCA expanded the concept of fiduciary duties and provides: "(a) A member of a member-managed limited liability company owes to the company and . . . the other members the fiduciary duties of loyalty and care . . . (b) The duty of loyalty of a member in a member-managed limited liability company includes the duties: (1) to account to the company and to hold as trustee for it any property, or benefit derived by the member . . . (2) to refrain from dealing with the company in the conduct . . . of the company's activities as or on behalf of a person having an interest adverse to the company . . . (c) . . . the duty of care of a member of a member-managed limited liability company . . . is to act with the care that a person in a like position could reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company . . ." Uniform Laws Annotated, Volume 6B, Business and Nonprofit Organizations and Associations, Rev. 2008, Thomson West.
"[A] fiduciary or confidential relationship is characterized by a unique trust and confidence between the parties, one of whom has superior knowledge, skill or expertise and is under a duty to represent the interests of the other . . . The superior position of the fiduciary or dominant party affords him great opportunity for abuse of the confidence reposed in him . . . We have not, however, defined that relationship in precise detail and in such a manner as to exclude new situations, choosing instead to leave the bars down for situations in which there is a justifiable trust confided on one side and a resulting superiority and influence on the other . . . [U]nder our case law, the fiduciary relationship is not singular. The relationship between sophisticated partners in a business venture may differ from the relationship involving lay people who are wholly dependent upon the expertise of a fiduciary. Fiduciaries appear in a variety of forms, including agents, partners, lawyers, directors, trustees, executors, receivers, bailees and guardians. [E]quity has carefully refrained from defining a fiduciary relationship in precise detail and in such a manner as to exclude new situations." (Citations omitted; internal quotation marks omitted.) Falls Church Group, LTD. v. Tyler, Cooper Alcorn, LLP, 281 Conn. 84, 108-09, 912 A.2d 1019 (2007).
General Statutes § 34-141 sets forth a duty of good faith which is not the same as the duty of a fiduciary, which goes beyond good faith, and requires the fiduciary to put the interests of those to whom the fiduciary duty is owed ahead of the interests of the fiduciaries. In this case, the court is required to address the nature of an LLC. Assuming a continuum which has at one point a partnership, and at the other a corporation, the question is whether an LLC more closely resembles a partnership and whether the members stand in relation to each other as partners, or whether the LLC is closer in nature to a business corporation, where it is clear that shareholders owe no particular duty to each other because of their status as fellow shareholders. Reading § 34-141, it is clear that the intention was that an limited liability corporation more closely resembles a business corporation than a partnership, and the members' relationship to each other is more akin to shareholders than partners. The legislature provided for the establishment of LLCs which are individual legal entities, and the courts are not free to ignore the rights and protections created by this legislation. See, Wasko v. Farley, supra, 108 Conn.App. 156.
Although there may be some situations in which one member of an LLC owes some duty to another member, for purposes of this case and in this context, regardless of whether a duty is owed to the other members, the breach, if any, was in the duty owed to the LLC.
B Counts Three, Four, and Five
The defendants argue that counts three, four, and five should be dismissed because they allege harm to Fountain Pointe which the plaintiff seeks to vindicate in his own name. The property which is the basis for the alleged improper transfer was owned by Fountain Pointe, and not by the plaintiff, and therefore any harm alleged by this transfer is harm to Fountain Pointe — not to the plaintiff.
General Statutes § 34-167 provides: "(a) Property transferred to or otherwise acquired by a limited liability company is property of the limited liability company and not of the members individually. A member has no interest in specific limited liability company property. (b) Property may be acquired, held and conveyed in the name of the limited liability company. Any interest in real property may be acquired in the name of the limited liability company and title to any interest so acquired shall vest in the limited liability company itself rather than in the members individually."
The plaintiff did not address the defendants' arguments concerning counts three, four and five. These counts allege harm to Fountain Pointe, as it was the legal entity owner of the property, and even assuming that the transfer was improper, Fountain Pointe was harmed by the transfer. Any harm to the plaintiff is derivative of the harm to Fountain Pointe.
CONCLUSION
For the foregoing reasons, the motion to dismiss is granted as to all counts.