MEMORANDUM OF DECISION

MICHAEL E. SHAY, JUDGE.

The plaintiffs herein, shareholders of Xerox Corporation ("Xerox"), commenced a seven-count lawsuit as a derivative action on behalf of the corporation, in which it is alleged that the individual defendants herein, past and present officers and directors of Xerox ("Xerox defendants"), breached their fiduciary duty and engaged in some business practices with regard to its worldwide operations, in particular in Mexico and Brazil, during the period 1997 through 2000, including the violation of certain accounting standards, that were detrimental to the corporation and its shareholders and benefitted the defendants. In addition, it is claimed that said officers and directors engaged in gross mismanagement to the detriment of the company and its shareholders. Further, the plaintiffs allege that the defendant KPMG, LLP ("KPMG") was negligent, made negligent misrepresentations, breached its contract and its fiduciary duty to the company, and, in addition, the plaintiffs seek contribution from said defendant.

The legal proceedings have had a long history. The original suit was commenced in the New York Supreme Court and later withdrawn. The present action was commenced September 30, 2005. The Xerox defendants challenge the jurisdiction of the court to entertain the action by way of a Motion to Dismiss (# 104) contesting the standing of the plaintiffs to bring this lawsuit, and also by way of a Motion for Summary Judgment (# 102) as to Counts I and II, alleging that the statute of limitations has run. The defendant KPMG, LLP has also challenged the jurisdiction of the court with a Motion to Dismiss (#107). The issues have been briefed by the parties, and the court heard oral argument on March 13, 2006.

DISCUSSION AS TO THE MOTION FOR SUMMARY JUDGMENT

The Xerox defendants have moved for summary judgment on Counts I and II which are directed toward them, alleging their breach of fiduciary duty and gross mismanagement, on the grounds that the applicable statute of limitations has expired. Summary judgment is the appropriate remedy where a court makes that finding. Doty v. Mucci, 238 Conn. 800, 806 (1996). Both of the claims set forth in Counts I and II fall into the category of general tort. "No action founded upon a tort shall be brought but within three years from the date of the act or omission complained of." General Statutes § 52-577. The Connecticut Supreme Court recently held that "[a] statute of limitations is generally considered to be procedural, [and therefore presumptively retroactive] especially whe[n] the statute contains only a limitation as to time with respect to a right of action and does not itself create the right of action." (Internal quotation marks omitted.) Moore v. McNamara, 201 Conn. 16, 22, 513 A.2d 660 (1986) . . . This is so because . . . the limitation merely acts as a bar to a remedy otherwise available." Moore v. McNamara, supra, 22. State v. Skakel, 276 Conn. 633, 682 (2006). The Appellate Court has determined that "[s]ection 52-577 is an occurrence statute, meaning that the time period within which a plaintiff must commence an action begins to run at the moment the act or omission complained of occurs." Farnsworth v. O'Doherty, 85 Conn.App. 145, 149 (2004).

"An action is commenced not when the writ is returned but when it is served upon the defendant." (Citation omitted; internal quotation marks omitted.) Broderick v. Jackman, 167 Conn. 96, 99 (1974); see Rana v. Ritacco, 236 Conn. 330, 337 (1996) (our Supreme Court "has long held that an action is brought once the writ, summons and complaint have been served upon a defendant"); Consolidated Motor Lines, Inc. v. MM Transportation Co., 128 Conn. 107, 109 (1941) ("From a very early date in this state the time when the action is regarded as having been brought is the date of service of the writ upon the defendant . . . That, in our judgment, is the sounder rule, because only thus is the defendant put upon notice of the purpose of the plaintiff to call upon him to answer to the claim in court" [citations omitted]) . . ." Davis v. Family Dollar Store, 78 Conn.App. 235, 241 (2003).

The plaintiffs claim that the previous action in the New York State Supreme Court, which has been withdrawn, tolled the statute of limitations. The prior pending action doctrine is "a rule of justice and equity and [is] not . . . a principle of absolute law." Gaudio v. Gaudio, 23 Conn.App. 287, 297 (1990). In the case of Sauter v. Sauter, 4 Conn.App. 581 (1985), the Connecticut Appellate Court held that the "pendency of an action in one state is not a ground for abatement of a later action in another state." Sauter v. Sauter, supra, 584. "So long as the pendency of the prior action does not prevent enforcement of the remedy sought in the later action, the pendency of the first action will not toll the statute of limitations for the second action." Perzanowski v. New Britain, 183 Conn. 504, 506 (1981).

"Under the prior pending action doctrine, "[t]he pendency of a prior suit of the same character, between the same parties, brought to obtain the same end or object, is, at common law, good cause for abatement. It is so, because there cannot be any reason or necessity for bringing the second, and, therefore, it must be oppressive and vexatious." Cumberland Farms, Inc. v. Groton, 247 Conn. 196, 216 (1998). "Moreover, allowing an action that raises claims that are substantially identical to claims raised in a prior action would undermine an orderly and efficient judicial process and would potentially lead to inconsistent verdicts." Larobaina v. McDonald, 274 Conn. 394, 409 (2005). "This is a rule of justice and equity, generally applicable, and always, where the two suits are virtually alike, and in the same jurisdiction." Hatch v. Spofford, 22 Conn. 485, 494 (1853); Cahill v. Cahill, 76 Conn. 542, 547 (1904). Dettenborn v. Hartford-National Bank Trust Co., 121 Conn. 388, 392 (1936); see Zachs v. Public Utilities Commission, 171 Conn. 387, 391-92 (1976)." Henry F. Raab Connecticut, Inc. v. J.W. Fisher Co., 183 Conn. 108, 112-13 (1981).

This court agrees with the foregoing reasoning, and finds that the prior pending action doctrine is inapplicable in this case — In other words, the action in New York did not serve to toll the statute of limitations. Moreover, the court specifically finds that the suit filed in this court commencing September 30, 2005, is a separate and distinct legal action, and it is not a continuation of the original lawsuit filed in the State of New York which was later withdrawn.

The plaintiffs ask the court to interpret the Agreement which was reached by the parties in the New York case on April 6, 2005, to mean that the defendants therein had somehow waived any right to assert a defense of any applicable statute of limitations in a case filed subsequent to that date. Nothing could be further from the case as is evident from a fair reading of the plain language. Quite the contrary, the defendants clearly sought to preserve such a right and did not intend to breathe new life into any case where the statute of limitations had already run at the time of the execution of the Agreement on April 6, 2005.

The Xerox defendants argue quite correctly that in considering a motion for summary judgment based upon a running of the statute of limitations as set forth in General Statutes § 52-577, the court looks at two dates, namely the "occurrence date" and the "commencement date." "When conducting an analysis under § 52-577, `the only facts material to trial court's decision on a motion for summary judgment are the date of the wrongful conduct alleged in the complaint and the date the action was filed.'" Collum v. Chapin, 40 Conn.App. 449, 451 (1996). Clearly, the commencement date was September 30, 2005. However, more problematic is a determination of the occurrence date. The Xerox defendants argue that the clear thrust of the complaint revolves around the period 1997 through 2000. However, for purposes of their argument, they are willing to concede the latest occurrence date as April 1, 2002, the date in which the corporation filed Form 8-K with the SEC. If the analysis ended there, the decision would be clear — that is, the statute would have run on April 1, 2005, five days prior to the April 6, 2005 Agreement. It doesn't.

Paragraphs 117 through 122 of the Complaint allege that the Xerox board of directors agreed to indemnify certain corporate officers and directors in the amount of $22,000,000.00 in "penalties, disgorgement, and interest" which had been levied against the defendants Romeril and Thoman by the Securities and Exchange Commission ("SEC") following an investigation into the practices which were the subject of this lawsuit. The SEC made a public announcement to that effect on June 5, 2003. According to the affidavit of J. Michael Farren, Vice President of External and Legal Affairs, General Counsel, and Corporate Secretary of Xerox Corporation, the minutes of the board reflect that the decision to indemnify was made on May 30, 2003. The question for the court becomes whether or not this claim, which is part of Counts I and II, is sufficient to extend the occurrence date to May 30, 2003. In order to do so, the court would have to find that the later act was part of a continuous course of conduct on the part of the Xerox defendants.

The Connecticut Appellate Court has recently reiterated the doctrine of continuing course of conduct:

[W]hen the wrong sued upon consists of a continuing course of conduct, the statute does not begin to run until that course of conduct is completed . . . [I]n order [t]o support a finding of a continuing course of conduct that may toll the statute of limitations there must be evidence of the breach of a duty that remained in existence after the commission of the original wrong related thereto. That duty must not have terminated prior to commencement of the period allowed for bringing an action for such a wrong . . . Where [our Supreme Court has] upheld a finding that a duty continued to exist after the cessation of the act or omission relied upon, there has been evidence of either a special relationship between the parties giving rise to such a continuing duty or some later wrongful conduct of a defendant related to the prior act. Bellemare v. Wachovia Mortgage Corp., 94 Conn.App. 593, 608 (2006).

Applying those principles to the case at hand, the court finds that there has been a continuous course of conduct. First and foremost, it is axiomatic that the officers and directors of a corporation stand in a fiduciary capacity in relation to its shareholders. Katz Corporation v. T.H. Canty Co., 168 Conn. 201, 207 (1975). This is clearly a continuing duty. Secondly, the act complained of (i.e., the indemnification) relates directly to the original tortious conduct, as alleged.

Therefore, in viewing the pleadings and evidence in the light most favorable to the plaintiffs, it is clear that the period of time in which the conduct complained of last occurred was May 30, 2003. Accordingly, the court finds that the action was commenced within three years thereof, that it was timely, and that the motion for summary judgment should be denied.

AS TO THE MOTION TO DISMISS

A motion to dismiss contests the jurisdiction of the court to hear a matter. Practice Book § 10-30. The motion is "used to assert (1) lack of jurisdiction over the subject matter, (2) lack of jurisdiction over the person, (3) improper venue, (4) insufficiency of process, and (5) insufficiency of service of process." Practice Book § 10-31(a). "Subject matter jurisdiction involves the authority of the court to adjudicate the type of controversy presented by the action before it." Amodio v. Amodio, 247 Conn. 724, 729 (1999). Subject matter jurisdiction can neither be waived nor conferred upon the court by the parties and can be raised at anytime during the pendency of the case, even sua sponte by the court. Practice Book § 10-33; State v. Commins, 276 Conn. 503, 512 (2005). On the other hand, objections to personal jurisdiction must be raised in a timely fashion via a motion to dismiss or they are waived. Carpenter v. Law Offices of Dressler Associates, 85 Conn.App. 655, 661 (2004). When a question of jurisdiction arises, the court should address the matter prior to deciding other aspects of the case. State v. Malkowski, 189 Conn. 101, 104 (1983).

In brief, a derivative action is an equitable proceeding to enforce a right of a corporation, brought on its behalf by a shareholder of the corporation, who is only a nominal plaintiff, in which it is alleged that there was wrongful conduct on the part of its board of directors and/or officers. Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 370 (1977). In other instances, the thrust of such an action is, "to compel assertion of a corporate right of action against a corporation's directors or officers when the corporation, usually under the control of the defendant officers and directors, refuses to sue on its own behalf." Rosenfield v. Metal Selling Corp., 229 Conn. 771, 791 (1994). "Since at least the middle of the [nineteenth] century, it has been accepted in this country that the law should permit shareholders to sue derivatively on their corporation's behalf under appropriate conditions" . . . (Emphasis added) Smith v. Snyder, 267 Conn. 456, 461 (2004). Moreover, but for such actions, "many wrongs done by directors would never be remedied." Barrett v. Southern Connecticut Gas Co., supra, 370.

A shareholder must first establish standing in order for the court to exercise its jurisdiction in a derivative action. "[A] party must have standing to assert a claim in order for the court to have subject matter jurisdiction over the claim . . . 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." (Internal quotation marks omitted.) Fleet National Bank v. Nazareth, 75 Conn.App. 791, 793 (2003); American States Ins. Co. v. Allstate Ins. Co., 94 Conn.App. 79, 83-84 (2006). "Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved . . ." Smith v. Snyder, supra, 460. "The question of standing does not involve an inquiry into the merits of the case. It merely requires the party to make allegations of a colorable claim of injury to an interest which is arguably protected or regulated by the statute or constitutional guarantee in question." (Citations omitted; internal quotation marks omitted.) State v. Pierson, 208 Conn. 263 (1988), cert. denied, 489 U.S. 1016 (1989). "Standing is not a technical rule intended to keep aggrieved parties out of court; nor is it a test of substantive rights. Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions which may affect the rights of others are forged in hot controversy, with each view fairly and vigorously represented . . . These two objectives are ordinarily held to have been met when a complainant makes a colorable claim of direct injury [that] he has suffered or is likely to suffer, in an individual or representative capacity." (Internal quotation marks omitted.) Broadnax v. New Haven, 270 Conn. 133, 153 (2004); State v. Iban C., 275 Conn. 624, 664-65 (2005). Xerox is a corporation organized under the laws of the State of New York, having a headquarters in Stamford, Connecticut. This court looks first to Connecticut corporation law which states: "In any derivative proceeding in the right of a foreign corporation, the matters covered by sections 33-720 to 33-727, inclusive, shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for sections 33-723, 33-725 and 33-726." General Statutes § 33-727. Accordingly, the court must look next to New York corporation law. Shareholder derivative lawsuits in New York are governed by Business Corporation Law § 626, entitled "Shareholders' derivative action brought in the right of the corporation to procure a judgment in its favor," which provides as follows:

(a) An action may be brought in the right of a domestic or foreign corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.

(b) In any such action, it shall be made to appear that he was such a holder at the time of the transaction of which he complains, or that his shares or his interest therein devolved upon him by operation of law.

(c) In any such action, the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort.

It is uncontroverted that the plaintiffs herein have met the first two prongs of the test. The court must now consider whether they have met their burden as to the crucial element of demand.

The necessity of making a demand or, in the alternative, demonstrating the futility thereof, is a critical element in the analysis of standing in a derivative action. Most states break down into one of two approaches to this issue. Some, like Connecticut, are referred to as "universal demand" states, that is those jurisdictions in which the specific criteria for instituting such suits are set forth in statutory form, the most important being the necessity of a demand being first made upon the board of directors. Other states, such as New York, require the plaintiff to, "allege particularized facts which create a reasonable doubt that, (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Marx v. Akers, 88 N.Y.2d 189, 195 (1996). "The demand requirement in State [New York] corporation law is generally designed to weed out unnecessary and illegitimate shareholder derivative suits and to give those in control of the corporation — the directors — the opportunity to redress a matter before an individual shareholder can purport to exercise the powers of the corporation." In Re Recoton Corporation, United States Bankruptcy Court (S.D.N.Y.), 13 (2004). Here, the plaintiffs have alleged the futility of making such a demand. (Complaint ¶¶ 123-51).

Clearly, at the heart of the matter is the question, "Who will act on behalf of the corporation in this situation?" "The entire question of demand futility is inexorably bound to issues of business judgment and the standards of that doctrine's applicability." Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). The governance of a corporation is normally the responsibility of its officers and board of directors, and courts are reluctant to substitute their judgment in that area. Derived from common law, and now codified by statute, this doctrine is called the "business judgment rule." The Connecticut Appellate Court has recently offered the following definition:

The business judgment doctrine [is] a rule of law that insulates business decisions from most forms of review. Courts recognize that managers have both better information and better incentives than they. The press of market forces . . . will more effectively serve the interests of all participants than will the error-prone judicial process. [internal citations omitted] The business judgment rule expresses a sensible policy of judicial noninterference with business decisions made in circumstances free from serious conflicts of interest between management, which makes decisions, and the corporation's shareholders. Not only do businessmen know more about business than judges do, but competition in the product and labor markets and in the market for corporate control provides sufficient punishment for businessmen who commit more than their share of business mistakes. [internal citations omitted] The fact is that liability is rarely imposed upon corporate directors or officers simply for bad judgment and this reluctance to impose liability for unsuccessful business decisions has been doctrinally labeled the business judgment rule. [Citation omitted.] Rosenfield v. Metal Selling Corp., supra, 787.

New York courts have also long recognized this common-law doctrine which calls for judicial restraint in the area of good faith decisions made by a board of directors. 40 West 67th Street Corp. v. Pullman, 100 N.Y.2d 147, 153 (2003). "Derivative claims against corporate directors belong to the corporation itself. As with other questions of corporate policy and management, the decision whether and to what extent to explore and prosecute such claims lies within the judgment and control of the corporation's board of directors. Necessarily such decision must be predicated on the weighing and balancing of a variety of disparate considerations to reach a considered conclusion as to what course of action or inaction is best calculated to protect and advance the interests of the corporation. This is the essence of the responsibility and role of the board of directors, and the courts may not intrude to interfere." Auerbach v. Bennett, 47 N.Y.2d 619, 631 (1979).

When a plaintiff contemplates the filing of a derivative suit, the question must first be posed to the directors who constitute the board at that time. In this case, the operative date was on or before September 30, 2005. It is for the then constituted board to pursue the lawsuit in place of the plaintiff or to oppose it. "Under state law, the determination whether a derivative representative can initiate a suit without making demand typically is made at the outset of the litigation, and is based on the application of the State's futility doctrine to circumstances as they then exist." (Emphasis added) Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 104 (1991). All jurisdictions require the making of a demand upon a board of directors as a jurisdictional prerequisite to a derivative suit. To do otherwise, would fly in the face of the business judgment doctrine. Any differences among the various jurisdictions lie in the extent to which an exception to the prior demand rule will be permitted, whether by case law or statute, and the criteria therefor. As set forth above, New York requires the plaintiff to plead, "with particularity the efforts . . . to secure the initiation of such action by the board (i.e., "demand") or the reasons for not making such effort (i.e., "demand futility"). Business Corporation Law § 626(c). Moreover, the issue is one of substance and not procedure. Kamen v. Kemper Financial Services, supra, 97.

Under New York law, in order to establish the futility of a demand upon the board of directors, the plaintiff must allege "with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction." Marx v. Akers, supra, 198. In addition, the allegations in the Complaint must be sufficiently specific and not merely conclusory. Bildstein v. Atwater, 222 A.D.2d 545, 546 (2d Dept. 1995).

Viewing the evidence and pleadings, including the Affidavit of J. Michael Farren dated November 23, 2005, in a light most favorable to the plaintiffs, it is clear that a majority of the eleven-person board of directors as September 30, 2005, had no interest in the events giving rise to the lawsuit, nor were they in a position to acquaint themselves with said events as they transpired. Moreover, the plaintiffs have failed to plead with sufficient particularity that the majority of the current board of director's decision not to sue the former officers and directors was anything but a good faith exercise of their business judgment. Five of the directors were appointed between January 2004 and May 2005, while the sixth, Ann N. Reese, while appointed to the board in May 2003, did not attend her first board meeting until June 2003, thus after the effective date of the vote to indemnify on May 30, 2003. None have been named in this lawsuit.

Thus, the plaintiffs have failed to establish sufficient grounds to apply the exception to the requirement of prior demand and to override the strong public policy articulated in what has become known as the business judgment doctrine. "Courts have consistently held that the business judgment rule applies where some directors are charged with wrongdoing, so long as the remaining directors making the decision are disinterested and independent." Auerbach v. Bennett, supra, 632. This court concurs. Accordingly, the motions to dismiss should be granted.

ORDER

The court having heard the parties and considered the evidence and pleadings, for the foregoing reasons, the Motion for Summary Judgment (#102) is HEREBY DENIED, and the Motions to Dismiss (#104 and #107) are HEREBY GRANTED.