Opinion
X07HHDCV136058255S X07HHDCV136058256S
11-08-2016
Wayne Budney, Acting Derivatively on Behalf of 40 New Park Drive, LLC v. Budney Industries, Inc. et al
UNPUBLISHED OPINION
MEMORANDUM OF DECISION
David M. Sheridan, J.
This was a consolidated trial to the court of the above referenced matters. These lawsuits arise generally from a management deadlock in two closely-held, affiliated business entities: Budney Industries, Inc. (" Budney Industries"), an aerospace manufacturing company, and 40 New Park LLC (" New Park"), a limited liability company which exists solely to hold the real estate upon which the Budney Industries' manufacturing facility is located, and to receive rents from Budney Industries in connection with that real estate. The owners, directors and managers are the same for both business entities: Wayne M. Budney and Lori K. Budney, a brother and sister.
In the action bearing the docket number CV13-6058255S, the plaintiff, Wayne Budney, derivatively on behalf of New Park, has brought an action against defendant Budney Industries for payment of sums due under a promissory note, for breach of a written lease and for breach of an oral month-to-month tenancy, as well as an action against an officer and director of the corporation, defendant Lori Budney, for breach of fiduciary duty.
The parties referred to this case at trial and in their briefing as " the rent case."
In the action bearing the docket number CV 14-6058256S, the plaintiff Wayne M. Budney, individually and derivatively on behalf of Budney Industries, has brought an action against the defendants Budney Industries and Lori Budney seeking access to corporate records, an accounting, and appointment of a receiver, as well as claims for damages based on unpaid wages and breach of fiduciary duties.
The parties referred to this case at trial and in their briefing as " the corporate case."
The court heard testimony on six different days from seven different witnesses and admitted 119 documents as exhibits. The parties submitted post-trial briefs, with the briefing concluding on June 8, 2016.
The parties waived the provisions of General Statutes § 51-183b.
I. FINDINGS OF FACT
The defendant Budney Industries is a closely-held Connecticut corporation with its principal place of business at 40 New Park Drive, Berlin, Connecticut. The company was formed in February 1984 by Michael Budney and his two children, Lori Budney and Wayne Budney, to manufacture and supply components for jet engines. Michael Budney was a director of the company and its president. Wayne and Lori Budney were the other two directors and were vice-presidents of the company.
Michael Budney resigned from his positions as president and director of Budney Industries in May of 2013. At present, Wayne Budney and Lori Budney each own fifty percent of the shares of Budney Industries, are the only two directors, and are Vice Presidents of Budney Industries with equal seniority. Lori Budney has acted as treasurer of the company for several decades and has been primarily responsible for the handling of Budney Industries' finances. Wayne Budney is the corporate secretary for Budney Industries. The position of president is currently vacant. Today Budney Industries has about 130 employees and continues to manufacture aerospace engine components, with about 60% of its business originating from Pratt & Whitney.
40 New Park LLC is a Connecticut member-managed limited liability company. Wayne and Lori Budney are the only two members of New Park, each with 50% of the membership interests. The LLC's only asset is the real property at 40 New Park Drive, Berlin, Connecticut from which Budney Industries operates its business. Lori Budney handles New Park's financial affairs and is responsible for collection of rents. Wayne Budney has no assigned role with the limited liability company.
Lori Budney and Wayne Budney, as the directors and management of Budney Industries and the managers of New Park, are deadlocked on numerous financial issues, including: 1) Budney Industries' failure to pay rent and New Park's failure to take action to collect unpaid rent or collect promissory notes given in lieu of unpaid rent; 2) Budney Industries' suspension of periodic payments (designated as " wages") which had, in the past, been made to the officers; 3) Budney Industries' ongoing practice of borrowing from officers to meet operating expenses, and making repayments of those loans when company funds are available; 4) Budney Industries' entering into equipment leases with Lori Budney without Board of Directors approval; 5) the need for a corporate receiver to manage the business affairs of Budney Industries; and 6) re-electing a successor to Michael Budney as director and president of the company. At trial, the parties presented an abundance of evidence on those topics, and more. Surprisingly, most of the basic facts regarding the events or transactions that have given rise to the present deadlock are not seriously in dispute.
Though not the subject of any direct proof, the court cannot overlook the fact that the events described below took place against a backdrop of increasingly challenging times for the aerospace industry sector in Connecticut. It is matter of common knowledge to anyone living in this state that local aerospace contractors have baffled a variety of business challenges over the past two decades: reduction in orders due to declining defense spending; the downturn in the commercial aviation sector after September 11, 2001; global competition and rapidly evolving manufacturing technologies, to name a few. Against this background it is difficult to imagine that the business struggles of Budney Industries over the past ten years are due solely to mismanagement or incompetence in the conduct of the company's affairs. It is also apparent to the court that the management stalemate between the shareholders and directors is not the cause of the company's financial difficulties. In fact, quite the reverse: it appears to the court that the company's financial woes are the root cause of the current shareholder and director deadlock.
A. Rent
One bone of contention relates to the rent payments which are supposed to flow from Budney Industries to its landlord, New Park, for eventual distribution to Lori and Wayne Budney as the owners of that limited liability company. Prior to 2000, Budney Industries paid rent directly to Lori and Wayne, who owned the building as join tenants. In 2000, New Park LLC was formed and Lori and Wayne Budney deeded the property to the LLC. By a Consent to Corporate Action dated May 1, 2000, the Board of Directors of Budney Industries authorized the corporation to enter into a lease with New Park. Budney Industries leased the property for a three year term ending April 30, 2003, with a monthly rent of $23,333.33 plus payment of all real estate taxes and water and sewer charges.
At the time the lease was entered into Budney Industries had an accrued balance for unpaid rent owed to Wayne Budney and Lori Budney, individually. Budney Industries agreed with Wayne and Lori Budney that the accrued balance for unpaid rent would be rolled into the rent owed to New Park. Over the course of the three year term, Budney Industries payments were made on an intermittent basis; unpaid rent continued to accrue.
After the expiration of the three year lease, commencing on May 1, 2003, Budney Industries continued to occupy the property under a month-to-month tenancy at a reduced monthly rent of $11,666. The monthly rental obligation was thereafter reduced to $10,250 per month, then to $9,250 per month and finally, on January 1, 2007, to $8,750 per month. The monthly rent of $8,750 has continued to the present.
New Park also utilizes Budney Industries' financial records to track the rent receivable it is owed by Budney Industries. Those records show that, with two exceptions, Budney Industries has not paid New Park any rent since 2003. Budney Industries financial records, tax returns and financial statements have continuously reflected that the unpaid rent due to New Park continues to be due and owed. As of December 31, 2014 (the latest year-end financial statement available) the total rent due from Budney Industries to New Park under the Written Lease and the month-to-month tenancy is $1,808,000 and is shown on the financial statement under accrued expenses.
In addition, Budney Industries has given New Park a promissory note to satisfy a portion of its unpaid rent. By a promissory note dated December 31, 2007, Budney Industries promised to pay New Park the original principal sum of $175,000 payable with interest thereon at the rate of 5.25% per annum (subsequently increased to 5.5% per annum). Budney Industries apparently paid down part of the Note by an accounting reclassification in December 2011 in the amount of $27,000. Otherwise, no payments have been made on the Note.
Wayne Budney has known--or should have been aware--of Budney Industries' rent situation with New Park for many years. Wayne did not take any action to challenge the reduction in the rent payment. Wayne testified that he often raised the rent issue with Michael Budney while he was the President of Budney Industries, and he was repeatedly told that the unpaid rent was accruing and would be paid to New Park. Not only do these discussions rebut Wayne's claim that the decision to reduce and defer rental payments was made exclusively by Lori Budney, they also are evidence of Wayne's acquiescence for many years to management's strategy of deferring payment of rent and instead carrying the rent payments on the books of Budney Industries as an account payable to New Park.
B. Shareholder Loans
From the time of its formation in 1984, Budney Industries routinely borrowed money from Michael Budney to meet its operating expenses, and repaid him when able. In October of 1988, Lori Budney made her first recorded loan to the company, which was repaid the following month. Since then, in every year from 1988 to the present, Budney Industries has made a practice of securing loans from, and making repayments--but rarely repayment in full--to Michael Budney and Lori Budney. These shareholder loans were made when Budney Industries was unable to cover payroll, needed to purchase machinery, or needed immediately to pay a creditor or supplier. The court inferred from the testimony and evidence that Budney Industries began this practice as a matter of convenience. In recent years however, it is clear that there is no commercial source for short term borrowing that would be readily available to Budney Industries--at least on favorable terms. The corporation has relied upon the personal assets of two of its shareholders--Michael and Lori Budney--as a private line of credit to cover cash flow shortfalls. The process of borrowing from and repaying the shareholders has always been completely informal. The Board of Directors of Budney Industries never formally approved any of these shareholder loans, and the Board has never formally approved repayment of any of those loans. They were, however, carefully documented in the company's financial records.
Lori Budney and Michael Budney have lent millions of dollars to Budney Industries over the decades and, as of March 2016, are owed approximately $4.6 million in principal and interest. In contrast, Wayne Budney made one loan to Budney Industries of $11,000, in January of 2006, in order to provide funds for the company to pay an outstanding invoice. Wayne felt strongly that the company should pay the invoice immediately, but the company was unable to pay because of cash flow difficulties and Michael Budney rejected his request. Wayne made the loan and was repaid in full about six months later.
Wayne Budney knew--or should have known--about the loans from his father and sister to the company and the repayment of those loans. The loans are noted in the Budney Industries annual financial statements, which have been provided to Wayne annually, and in its tax returns. Nonetheless, Wayne is now protesting the loans and any repayment of the loan as unauthorized by the Board and self-dealing by Lori Budney
C. Wayne's Absence--2008 to 2013
For a period of four years, from 2008 to 2013, Wayne Budney did not " come to work" at Budney Industries. He devoted much of his time to his farm, and not to Budney Industries. At trial, the parties were at odds over whether the absence was caused by medical issues or was the result of personal choice, but there is no disputing that Wayne Budney was not at the Budney Industries facility and voluntarily relinquished any role in the management or operation of the company during that four year period. In Wayne's absence it is clear that Lori Budney, of necessity, took over much of the management responsibilities of the company with the assistance of her aging father. In 2008, Michael Budney was approximately 97 years old.
D. Bi-Weekly Payments to Shareholders Labeled as " Wanes"
By a Consent to Corporate Action dated April 15, 1993, the Board of Directors of Budney Industries decided to pay Wayne Budney as Vice President and Secretary and Lori Budney as Vice President and Treasurer, the sum of $3,000 per week. The amount of the payments was later changed, most recently to bi-weekly payments of $4,333. The payments were made to the two Vice-Presidents regardless of work performed or services rendered to the company. Wayne Budney received the payments during the four year period from 2008 to 2013 when he was absent from the company, and when he concedes that he was performing no work and rendering no services for the company. The records of the company also demonstrate that, at times, the payments were suspended. Payments were suspended in 2007 2010, 2011 and 2012 on many occasions, often for extended periods of time.
During the years in which Wayne was absent from Budney Industries--from 2008 to February 28, 2013--Wayne continued to be paid twice a month. Despite the fact Lori was actively working at the company and Wayne was not, they both received identical payments. In fact, historically, the payments were always made equally to both of them and if the payments were suspended, they were also suspended for both of them.
From all of the evidence, the court finds that the bi-weekly payments were not intended as compensation due to Wayne and Lori by reason of their " employment, " or based on any status as an " employee." Rather, they were a form of distribution of earnings to them as the shareholders of the company. The Budney Industries Board of Directors never formally declared a dividend to its shareholders. But it did make provision for payments from the business to shareholders which did not bear a direct relationship to quantity or quality of labor and services provided to the company. The company's practice of suspending payments regardless of whether labor or services were being provided, but based solely on the availability of company earnings, strongly suggests that the payments are distributions from cash on hand, and not mandatory disbursements of wages from the payroll.
In late 2012 and early 2013, Lori Budney was becoming increasingly reluctant to continue the bi-weekly payments to herself and her brother, since it was obvious to her that the payments were being funded in large part by loans she herself was making to the corporation. At the time, Wayne Budney was still on his four year " leave of absence." Michael Budney was of extremely advanced age (102 years old) and Lori Budney was, for all intents and purposes, left alone to run the company. She made a decision to suspend the payments indefinitely. Lori and Wayne were each paid $4,333.33 on February 7, 2013, but did not receive the next biweekly payment on February 21, 2013. No payments have been made since that date.
E. Wayne's Return to Work
Shortly after the termination of the bi-weekly payments, Wayne Budney sent a letter to his father stating that he was prepared to " return to work." Wayne did return to the Budney Industries facility on February 28, 2013, and since then he has been on-site on various occasions to (his words) " oversee" certain operations. It does not appear that he has a defined, assigned role within the company. Wayne described his functions as " facilitating communications, " overseeing quality meetings to ensure full attendance, " overseeing the process of jobs" to look for time-saving opportunities, identifying OSHA issues, and generally " acting as a catalyst to get things done." However, the General Manager of the company, Mark Zarek, was unable to specifically identify any actual work or services that Wayne Budney performs on behalf of Budney Industries.
F. The Equipment Leases
Over the past five years, Budney Industries has recognized that its productivity was limited by old and inefficient machinery, some of which required more attention from machine operators and prolonged set-up times compared to updated equipment. New machines were needed to replace those that were performing poorly and slowing manufacturing operations. New machines were also needed to be able to bid for and perform more sophisticated--and more lucrative--work that was available in the marketplace.
The need for each of the new machines was discussed in advance of their acquisition at quality meetings held every Tuesday and Thursday and attended by Wayne. Wayne never disputed the need for the new machinery. But the financial condition of Budney Industries prevented it from obtaining outside financing that would allow it to replace and upgrade its machinery. Budney Industries was denied equipment financing credit by four major equipment financing companies. The company turned to Lori Budney--again--for financial help. From 2013 through 2016, Lori has used her personal credit to lease at least six pieces of heavy machinery in her name, and has then leased the machinery to the company on the same terms. The prices of the machines were negotiated by the company's General Manager; they range in cost from $300,000 to $800,000 each.
The new machinery is largely responsible for the recent turnaround at Budney Industries, increasing the efficiency of the corporation's operations and the quality of its products. The new machinery has allowed Budney Industries to remain competitive for existing work and has made it possible to quote jobs it would have been unable to perform with the old machines, including a substantial potential order from a European company. In short, the new machinery has positioned the company to return to profitability.
Financials
Budney Industries has its accountants, Harper & Whitfield, P.C., prepare annual compiled financial statements and schedules. The accountants' annual reports are addressed to Budney Industries' Board. Each of these financial statements contains an Independent Accountant's Compilation Report page signed by the accountants. Copies of the compiled financial statements and schedules are given to Wayne Budney annually. Monthly statements of income and expenditures are provided to Wayne when they became available. Wayne questioned why he did not receive monthly financials" by the seventh day of the following month. The court found the testimony of Lori Budney and the company's bookkeeper credible in explaining that the delay was not occasioned by an intention to deny Wayne access to financial information, but by a need for completeness and accuracy in the financial statement.
Moreover, the testimony established that when Wayne Budney is at the Budney Industries facility, upon reasonable request he is provided access to current, real-time financial information on ordinary business metrics such as receivables, payables, and cash on hand from the company's computerized bookkeeping system. Wayne offered vague testimony to the effect that he did not consider certain employees to be appropriately responsive to his requests, but the court found the testimony of the company employees involved to be more credible. They testified that since Wayne was an owner of the company, they granted him full access to company financial information, no different from Lori Budney.
The plaintiff failed to prove that Budney Industries, Lori Budney, or anyone acting at Lori Budney's direction, ever withheld company records, books or financial information from him. Some proof was offered that certain requests were not immediately honored, either because the requested financials information was still being prepared and was not yet available, or because the exact nature of the information requested was not entirely clear, but no credible evidence was offered to establish that Wayne Budney had ever been totally denied access to company books and records.
G. Deadlock in the Corporation and the LLC
The evidence established that for over twenty years the officers, directors and shareholders of Budney Industries were accustomed to governing the corporation informally, without the need for board meetings, minutes, resolutions, or any of the traditional mechanisms of corporate governance. Prior to September 10, 2014, Budney Industries' Board of Directors (the " Board") had not met in over twenty years. Wayne Budney certainly condoned this lack of corporate formality, perhaps even contributed to it. As corporate secretary, he is supposed to provide notice of meetings required by the By-laws, including notice of the annual stockholder meetings, but he has failed to do so. Wayne has had many opportunities over the years to call a meeting of the directors or stockholders to discuss non-payment of rent, shareholder loans or the suspension of shareholder payments but, until the commencement of these lawsuits, never chose to do so.
On two recent occasions, whether to force the issue with Lori Budney or to document a shareholder " deadlock, " Wayne has had reason to call Special Meetings of the Budney Industries Board of Directors and the New Park managing members.
On August 28, 2014, Wayne Budney issued a Call Of Special Meeting Of The Board Of Directors Of Budney Industries, Inc. seeking to have the Board meet on September 10, 2014 to consider Wayne Budney's shareholder demand on the Board to consent to the appointment of a corporate receiver. At the September 10, 2014 Special Meeting of the Board, Wayne Budney moved that Budney Industries agree to the appointment of a corporate receiver and to prosecute its claims against Lori Budney. Lori Budney did not second the motion and therefore no action was taken and the meeting was adjourned.
On March 8, 2016, Wayne Budney issued a Call Of Special Meeting Of The Board Of Directors Of Budney Industries, Inc. seeking to have the Board meet on March 15, 2016. At the March 15, 2016 meeting, Wayne Budney made a motion that the corporation authorize the following actions:
1. To acknowledge and ratify the corporation's obligation to pay all unpaid and accrued rents shown as due and owing on the Corporation's compiled financial statement for 2014 prepared by its accountants and any rents that have accrued since that report's preparation and that the corporation shall not assert any statute of limitation defense to any claims by 40 New Park Drive, LLC for such sums.
2. To authorize the Corporation to stipulate to a judgment against it in the case entitled Budney v. Budney Industries, Inc., Connecticut Superior Court, Docket No. X07-HHD-CV 14-6058255-S on Counts Two and Three of Wayne Budney's Amended Complaint dated July 23, 2015 on behalf of 40 New Park Drive, LLC for the amounts shown as due and owing on the Corporation's 2014 compiled financial statement prepare by its accountants plus any rents that have accrued thereafter.
3. To require that Lori Budney provide Wayne Budney with internal monthly income and expense statements and balance sheets for the Corporation by the seventh (7th) day of each month for the preceding month.
4. To prohibit Lori Budney from making any repayments on any officer loans from herself and/or Michael Budney or any trust established by Michael Budney to the Corporation without specific prior authorization for any such payments from the Corporation's Board of Directors.
5. To authorize the corporation to pay Wayne M. Budney the sum of $350,000 in settlement of his wage claim against the Corporation.
6. To require the Corporation to pay wages to Wayne M. Budney and Lori K. Budney sufficient to cover any federal or state income taxes on any pass through income generated to the shareholders by the Corporation.
7. To convert the Corporation's tax status from being an " S Corporation" to a " C Corporation."
Lori Budney did not second the motion and therefore no action was taken and the meeting was adjourned.
On March 8, 2016, Wayne Budney also issued a Call Of Special Meeting Of The Members of 40 New Park LLC seeking to have the members meet on March 15, 2016. At the March 15, 2016 meeting, Wayne Budney made a motion that the company authorize the following actions:
1. To consider seeking the appointment of a receiver for the Company.
2. To authorize the Company to support Wayne Budney's claims against Budney Industries, Inc. and Lori K. Budney in the case entitled Wayne M. Budney, Derivatively On Behalf Of 40 New Park Drive, LLC v. Budney Industries, Inc., Connecticut Superior Court, X07-HHD-CV13-6058255-S to collect all sums due on the subject promissory note from Budney Industries and to collect all accrued and current rents due from Budney Industries.
Lori Budney did not second the motion and therefore no action was taken and the meeting was adjourned.
Despite the stalemate which characterized the March 2016 Special Meetings, the court finds that the lack of harmony among the Budney Industries shareholders and the New Park members has not prevented Budney Industries from continuing its business in an orderly and sensible manner. The company is beset by a number of challenges and difficulties, but it does not appear to be in any immediate trouble. It has orders; it is filling those orders; and it is successfully bidding for new business and expanding its sales to overseas markets. It appears to be on satisfactory terms with its vendors and creditors. The business appears viable. The company seems stable. Budney Industries may have a long term future if its present difficulties can be overcome.
In truth, the subjects of the motions at the special meetings (which are also the subjects of these lawsuits) are the only subjects where there appears to be a true shareholder " deadlock." Although Wayne Budney testified to a somewhat fanciful list of things he would like to see done at Budney Industries (e.g., hiring an engineer, hiring an in-house accountant, building a new storage building, etc.) there does not appear to be a true disagreement among the owners of the business as to these initiatives. Both sides know the company cannot presently afford them. The deadlock has its origins in Wayne's dissatisfaction with the fact that the business is not spinning off benefits to the shareholders as it has done in the past, and Lori's refusal to resume the transfer of company earnings to shareholders until such time as the company's finances can support it. It is not an impasse that affects the day-to-day operations of the business.
H. Failures of Proof
In addition to matters found proven, this court, having carefully reviewed the documentary exhibits and evaluated the demeanor and credibility of the witnesses, having analyzed and weighed the evidence according to the applicable standards of law, and having considered the parties' arguments and memoranda of law, concludes that certain matters have not been proven. They include the following.
The plaintiff failed to prove, based on a preponderance of the evidence, any waste and dissipation of corporate assets or gross mismanagement of the corporation.
The plaintiff failed to prove by a preponderance of the evidence that the actions of Lori Budney are exposing Budney Industries to serious harm.
The plaintiff failed to prove that Lori Budney has " misappropriated property" or funds of Budney Industries.
The plaintiff failed to prove that he has been denied the ability to inspect or obtain copies of the books and records, or any other relevant financial information, of Budney Industries.
The plaintiff failed to prove that the books, records and accounts of Budney Industries are so fraudulent, disordered or complicated that it would be difficult to determine what sums are owed by Budney Industries to New Park, or the status of shareholder loans, or what, if any, sums are owed by Budney Industries to the plaintiff Wayne Budney.
The plaintiff failed to prove that the management deadlock threatens immediate and irreparable loss to Budney Industries.
II. ANALYSIS--CLAIMS AND DEFENSES--2013 " RENT" ACTION
The " rent action" brought in 2013 asserts claims against Lori Budney individually and Budney Industries. Count Four, which examines the conduct of Lori Budney and alleges that she has breached her fiduciary duty to the corporation, will be examined first.
A. COUNT FOUR (Lori Budney--Breach of Fiduciary Duty)
In Count Four of the complaint, the individual plaintiff Wayne Budney and 40 New Park LLC, acting derivatively by Wayne Budney, allege that Lori Budney has breached a fiduciary duty she owed to the company and to its only other member, Wayne Budney. Specifically, it is alleged that Lori unilaterally " caused New Park to agree to the reductions in rent from $23,333.33 to $11,666 in approximately May 1, 2003 and a further reduction in rent to the monthly amount of $8,750 in approximately January 1, 2007." (Complaint, Fourth Count, ¶ 20.) It is also alleged that Lori Budney, as the member of New Park given the primary responsibility for collecting any rents due from Budney Industries has neglected, failed, or refused to collect those rents.
To the extent that the reduction of rents that occurred from 2003 to 2007 are claimed as a basis for a breach of fiduciary duty, those claims are clearly barred by the statute of limitations, which has been affirmatively pled in the Second Special Defense. Breach of fiduciary duty is a tort action governed by the three year statute of limitations contained within General Statutes § 52-577. Tortious acts which occurred from 2003 to 2007 are barred by the statute since this action was commenced by service of process in September of 2014.
As to the refusal to collect rent, it appears that was an accepted practice between New Park and its symbiotic business companion, Budney Industries, for decades before Lori Budney could be thought to have solitary control over business decisions. In addition, even if the decision was solely attributable to Lori Budney, there is ample evidence in the record to establish that the decision to forego collection of rent was in the best interests of 40 New Park as well as Budney Industries. 40 New Park's only possibility of providing a return to its members is if its only asset is occupied by a viable tenant. Commencing an eviction action or a proceeding to collect overdue rent would most likely eliminate that possibility, with no return whatsoever. An eviction would only make sense if there was a ready supply of tenants to fill the space. That seems an unlikely prospect in a state that is dotted with hundreds of empty buildings formerly used for manufacturing. A judgment for unpaid rent would probably force Budney Industries into bankruptcy and New Park into the untenable position of an unsecured creditor.
Finally, to the extent that Wayne Budney challenges the wisdom of a business decisions made by Lori, he has failed to overcome the obstacle of the business judgment rule See Rosenfield v. Metals Selling Corp., 229 Conn. 771, 784-87, 643 A.2d 1253 (1994) (" 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 the decisions, and the corporation's shareholders . . . Shareholders challenging the wisdom of a business decision taken by management must overcome the business judgment rule").
For these reasons, the court finds for the defendant Lori Budney as to the breach of fiduciary claims in Count Four.
B. COUNTS ONE AND THREE (Derivative Collection Claims)
Counts One and Three are brought derivatively by Wayne Budney on behalf of New Park. Count One alleges a breach, by reason of nonpayment, of the December 31, 2007 promissory note given by Budney Industries to New Park. Count Three alleges non-payment of rent due to New Park under the month to month tenancy that followed the expiration of the written lease in 2003.
Count Two is not discussed here. Count Two seeks to recover rents allegedly due pursuant to the May 2000 written lease and was stayed pending arbitration. (See April 11, 2014 Memorandum of Decision regarding Defendants' Motion to Dismiss [#112].
A member of a limited liability company does not have standing to bring claims solely belonging to the limited liability company. Wilcox v. Webster Insurance, Inc., 294 Conn. 206, 220 n. 18, 982 A.2d 1053 (2009). He or she can only bring a derivative action on behalf of the limited liability company. Wasko v. Farley, 108 Conn.App. 156, 170, 947 A.2d 978 (2008). See, also Calpitano v. Rotundo, No. CV116008972, 2011 WL 3672092 (Conn.Super.Ct. Aug. 3, 2011) [52 Conn.L.Rptr. 464, ]; Ward v. Gamble, No. CV085017829S, 2009 WL 2781541 (Conn.Super.Ct. July 23, 2009) [48 Conn.L.Rptr. 286, ]. Wayne Budney, as a member of New Park, has commenced this derivative action alleging that the limited liability company has failed to enforce rights which may properly be asserted by it for unpaid rent and an unpaid promissory note.
Budney Industries does not contest that it is in default of its obligations under the promissory note and its month to month tenancy with New Park. Nonetheless, Budney Industries asserts that the relief sought in the derivative action should be denied, based on equitable grounds set forth in its special defenses.
The defendant asserts that the court in a derivative action proceeds in equity, and the relief requested by the plaintiff is not consistent with established principles of equity. " A shareholder's derivative suit is an equitable action by the corporation as the real party in interest with a stockholder as a nominal plaintiff representing the corporation . . ." May v. Coffey, 291 Conn. 106, 113-14, 967 A.2d 495 (2009). " [T]he determination of what equity requires in a particular case, the balancing of the equities, is a matter for the discretion of the trial court." (Internal quotation marks omitted.) Connecticut Bank & Trust Co. v. Winters, 225 Conn. 146, 162, 622 A.2d 536 (1993). Equitable remedies " are not bound by formula but are molded to the needs of justice." Montanaro Bros. Builders, Inc. v. Snow, 4 Conn.App. 46, 54, 492 A.2d 223 (1985). In balancing the equities, the court may consider all relevant circumstances to ensure that complete justice is done. See McKeever v. Fiore, 78 Conn.App. 783, 788, 829 A.2d 846, 851 (2003). " The governing motive of equity in the administration of its remedial system is to grant full relief, and to adjust in the one suit the rights and duties of all the parties, which really grow out of or are connected with the subject-matter of that suit . . . (Citations omitted). Thompson v. Orcutt, 70 Conn.App. 427, 439, 800 A.2d 530, 539 (2002).
A court exercising its powers in an equitable proceeding " must look to substance over form, may consider equitable principles even though they may not have been specifically pleaded, and may consider all relevant circumstances to ensure that complete justice is done." (Citations omitted: internal quotations omitted). McKeever v. Fiore, 78 Conn.App. 783, 788, 829 A.2d 846 (2003).
The balance of equities does not tip in favor of Wayne Budney. He has reaped the benefits of distributions of earnings from Budney Industries during the entire time that the rent was not paid. Even though he claims he raised his concerns about unpaid rent with his father on many occasions he never insisted, as he does now, that the rent due to 40 New Park should be satisfied before any repayment of shareholder loans. For more than 10 years, Wayne benefited from an arrangement where payment of rent to 40 New Park was optional, depending on the company's other obligations, most especially bi-weekly payments to shareholders. Equitable principles of estoppel based on acquiescence will not now permit him to disavow that arrangement.
The proof at trial also made it clear that Wayne Budney was an occasional and often absentee owner of both Budney Industries and New Park. His involvement in the management of the company's business affairs was admittedly minimal. He has refused to provide financial support for Budney Industries--which would have permitted it to meet its financial obligations, including the rent--when it was desperately needed and it was within his means. When the company was perhaps most in need of active, dedicated leadership from its owners to maintain its competitiveness and profitability (from 2008 to 2013) Wayne retreated to his farm and left the other shareholders to carry that burden. When his cash payments from the company were stopped, he promptly returned from the farm, but his contributions to either New Park or Budney Industries since that return--other than entangling it in litigation--are difficult to quantify. The court will not reward the plaintiff's self-indulgence, indolence and obstinacy by overriding the various good faith decisions that have helped Budney Industries and New Park to survive to this point. To do so would be to create an injustice, rather than render justice.
Moreover, a court must exercise its equitable powers equitably, so as to avoid disproportionate hardship. The harm that would be done to Budney Industries--not to mention 130 employees who depend on this business for their livelihood--by a multi-million dollar judgment would be far out of proportion to any harm that has come to either New Park or Wayne Budney by reason of the failure to collect rents.
The amounts due from Budney Industries and due to New Park have been fully and accurately carried on the company's books. If time and business fortunes permit, they will be repaid. Accelerating that process will write a death sentence for the company. This court, in equity, cannot do so simply to satisfy the interests of a disgruntled shareholder.
For these reasons, on equitable grounds, the court denies the relief requested in Counts One and Three of the complaint, and finds the issues for the defendant as to those counts.
III. ANALYSIS--CLAIMS AND DEFENSES--2014 ACTION
This action, referred to variously as " the corporate action" or " the receiver action" was commenced by Wayne Budney individually and derivatively on behalf of Budney Industries, in six counts. For convenience and clarity, the court begins its analysis with Count Two, which is brought by Wayne Budney individually to recover unpaid " wages."
A. COUNT TWO (Unpaid Wages)
Count Two alleges that Budney Industries, and Lori Budney as the " individual who is the ultimate responsible authority to set the hours of employment and to pay wages, " have violated Connecticut General Statutes § 31-71 b by terminating payments of Wayne Budney's " salary." (See Complaint, ¶ 17.)
General Statutes § 31-72 provides that " w]hen any employer fails to pay an employee wages in accordance with the provisions of sections 31-71a to 31-71i, inclusive . . . such employee . . . may recover, in a civil action, twice the full amount of such wages, with costs and such reasonable attorneys fees as may be allowed by the court . . ." Section 31-71a(1) defines employer as " any individual, partnership, association, joint stock company, trust, corporation, the administrator or executor of the estate of a deceased person, the conservator of the estate of an incompetent, or the receiver, trustee, successor or assignee of any of the same, employing any person, including the state and any political subdivision thereof . . ."
The statutes define " wage" as " compensation due to an employee by reason of his employment." General Statutes § 31-58(h). The biweekly payments issued to the two shareholders do not satisfy the statutory definition of wages because they are not compensation for labor or services rendered in connection with " employment." The biweekly payments were never related in any way to the hiring of services by the company. The amount of the payment was never realistically tied to the value of the individual's contribution to the productivity or profitability of the company. In fact, the payments were not even tied to performing any work at all--as amply demonstrated by the continuation of payments to Wayne during his four year absence from the company. In the absence of any of the hallmarks of a traditional employment arrangement--a bargained-for exchange of monetary value for labor or services--the court cannot find that the payments represent " compensation for labor and services rendered by an employee." General Statutes § 31-71a(3). The payments are more properly characterized as distributions of company earnings to shareholders.
The plaintiff Wayne Budney has failed to establish a violation of Connecticut General Statutes Section 31-71b. The court finds the issues for the defendant as to Count Six of the Complaint.
B. COUNTS THREE AND FOUR (Claims Against Lori Budney for Breach Of Fiduciary Duties)
In Counts Three and Four of the complaint, the individual plaintiff Wayne Budney and the corporation, derivatively by Wayne Budney, allege that Lori Budney, as a director and officer of Budney Industries, has breached a fiduciary duty she owed to the corporation and to its only other shareholder, Wayne Budney.
There is ample evidence in the record to establish that Lori Budney fulfilled her duty of care in her management of Budney Industries. Her management decisions were well-informed, made in good faith and in the honest belief that the actions taken were in the best interests of the corporation. Her loans to the corporation and leases of equipment to the corporation were not made for personal financial gain, but in order to provide the company access to cash which it desperately needed to get through some lean times, and equipment it needed to profitably continue its business. Her suspension of payments to the shareholders and her refusal to pay rent to 40 New Park (which was simply another means of transferring company earnings to the shareholders) were reasonably prudent decisions in light of the company's precarious financial position. Earnings needed to be retained to insure the company's survival, to the long-term benefit of the shareholders, rather than irrationally funnel distributing cash to shareholders until the company ultimately collapsed.
Not only did the plaintiff's evidence fail to establish that Lori Budney breached her duty of care and duty of loyalty to the corporation, but to the extent that he challenges the wisdom of a business decisions made by her, he has failed to overcome the business judgment rule See Rosenfield v. Metals Selling Corp., 229 Conn. 771, 784-87, 643 A.2d 1253 (1994) (" 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 the decisions, and the corporation's shareholders . . . Shareholders challenging the wisdom of a business decision taken by management must overcome the business judgment rule"). The business judgment rule shields Lori Budney's management decisions from review by the courts.
For these reasons, the court finds for the defendant as to the breach of fiduciary claims in Counts Three and Four.
C. COUNT ONE (Action For A Receiver)
Count One seeks the appointment of a corporate receiver for Budney Industries because the corporation needs to be protected against " fraud, collusion, gross mismanagement in the conduct or control of the corporation, and waste or dissipation of its assets."
The court is authorized to appoint a receiver pursuant to General Statutes § 33-898. Though this section does not specifically state the standards to be applied, the section refers to the ability to appoint a receiver when the company is involved in a dissolution proceeding. Section 33-896(a), in turn, provides for a cause of action to dissolve a corporation to be brought by a shareholder if the directors " or those in control of a corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent" or if the " corporate assets are being misapplied or wasted." See Horton v. Hydra Systems International, Inc., 16 Conn.App. 420, 547 A.2d 926 (1988); Krall v. Krall, 141 Conn. 325, 106 A.2d 165 (1954); Olechny v. Thadeus Kosciuszko Society, 128 Conn. 534, 24 A.2d 249 (1942); Shorrock v. Law, 1996 WL 680068 (Karazin, J., 1996).
The power to appoint receivers should be exercised with equitable principles in mind and only sparingly. Horton, supra ; Olechny, supra; Massoth v. Central Bus Corp., 104 Conn. 683, 695, 134 A. 236 (1926). " Where another remedy exists, or where equity does not demand the extreme remedy, the court ought not appoint a receiver." (Citations omitted). Bascom/Magnotta, Inc. v. Magnotta, Superior Court, judicial district of New Britain, Doc. No. X04-4000302-S, (April 17, 2007, Beach, J.).
The proof before this court in no way justifies the appointment of a receiver. The plaintiff failed to prove waste and dissipation of corporate assets and gross mismanagement of the corporation. The plaintiff has failed to prove that Lori Budney has " misappropriated property" or funds of Budney Industries. The plaintiff has failed to prove that the actions of Lori Budney are exposing Budney Industries to serious harm or that " the survival of Budney Industries is being placed at risk."
Moreover, equity does not demand the extreme remedy of a receiver in this particular case. The court can conceive of no sensible reason to appoint a receiver to oversee the operations of a functioning corporation with no plans to dissolve. Compensation for a receiver would be an unwarranted expense at a time when the corporation needs to limit, rather than increase, expenditures. Moreover, appointing a receiver without dissolving the corporation does nothing to address the deadlock; it merely divests the shareholders and directors of any role in the business and substitutes the control of the receiver. If and when the receiver is relieved of his or her duties, the deadlock resumes.
Accordingly, the plaintiff has failed to sustain his burden of demonstrating equitable grounds justifying the appointment of a corporate receiver, and therefore the court finds the issues for the defendant as to Count One of the Complaint.
D. COUNT FIVE (Inspection of Corporate Records)
Count Five alleges that on various occasions Wayne Budney has made demand for the ability to inspect or obtain copies of the books and records of Budney Industries, and his requests have not been honored, in violation of General Statutes § 33-946.
The court has reviewed carefully all the testimony and exhibits in this case and finds no evidence that either the corporation or Lori Budney has intentionally denied the plaintiff access to any of the books and records of the company. Some issues have been raised about the length of time needed to generate monthly financials and provide them to Wayne, but those delays do not appear to be unreasonable and they do not rise to the level of a complete denial of access to company records.
The court finds the issues as to Count Five in favor of the defendant.
E. COUNT SIX (Accounting)
Count Six seeks an accounting from Lori Budney, pursuant to General Statutes Section 52-401, " as to any funds and assets of Budney Industries in her possession or over which she has exercised control" and an accounting of " shareholder loan balances" and " misappropriated property."
" The remedy of an accounting has been traditionally recognized in Connecticut, and is codified in [Connecticut General Statutes] § § 52-401 through 52-405." R.S. Silver Enterprises Co., Inc. v. Pascarella, Superior Court, judicial district of Stamford--Norwalk at Stamford, Docket No. CV-06-5002499-S, (April 25, 2012, Jennings, J.T.R.), remanded on other grounds, 148 Conn.App. 359, 86 A.3d 471 (2014).
" To support an action of accounting, one of several conditions must exist. There must be a fiduciary relationship, or the existence of a mutual and/or complicated accounts, or a need of discovery, or some other special ground of equitable jurisdiction such as fraud . . ." (Internal quotation marks omitted.) Shames v. Prottas, 2012 WL 6924430 (Conn.Super.Ct. Dec. 27, 2012, Cosgrove, J.) [55 Conn.L.Rptr. 310, ].
" An accounting is not available in an action where the amount due is readily ascertainable. Equity will ordinarily take jurisdiction to settle the account only if the facts create a reasonable doubt whether adequate relief may be obtained at law." Mankert v. Elmatco Prods., Inc., 84 Conn.App. 456, 460, 854 A.2d 766 (2004).
A full accounting of from Lori Budney, Budney Industries or New Park is neither required nor necessary. The plaintiff's claim for relief asks for an accounting regarding " shareholder loan balances" and " misappropriated property." It has not been proven that there is any uncertainty as to the recording or calculation of " shareholder loan balances" as reflected in the company's books, and no proof was offered at trial of a " misappropriation" of company property by the defendant Lori Budney.
The analysis as to whether an accounting is required is fact-specific and depends on whether there was fraud, breach of fiduciary duty or other wrongdoing, and whether the accounts at issue are either so disordered or so complicated as to warrant the accounting process. See 1 Am. Jur.2d Accounts and Accounting § 54 (noting that an accounting is an appropriate remedy when the accounts at issue are complicated or mutual).
The expense and effort of an outside accounting is also not warranted when the accuracy of the company's books and records has not been put into question. It is quite clear -almost to the penny--from the company's records what sums are due, and to whom they are owed. Under such circumstances, the utility of an accounting is questionable. See 1 Am. Jur.2d Accounts and Accounting § 56 (noting that the need for an accounting is based upon the plaintiff's legal inability to determine how much money, if any, is due to him).
The plaintiff has failed to sustain his burden of demonstrating a genuine need for an accounting by showing that the amount due to him or to the corporation is not readily ascertainable, and therefore the court finds the issues for the defendant as to Count Six of the Complaint.
F. (Counterclaim) Count One: Breach of Fiduciary Duty
The defendant Lori Budney has asserted a counterclaim against Wayne Budney, asserting that he has breached his fiduciary duty to Budney Industries in two respects: first, by using the New Park derivative lawsuit (" the rent case") solely to wrest a personal windfall from Budney Industries, to the detriment of the corporation; and second, that Wayne misappropriated a valuable " broach machine" that was property of Budney Industries.
On their face, both claims seek to remedy harm to the corporation and any recovery must go to the corporation. The corporation is the real party in interest, since it will directly bear any financial losses due to a judgment for payment of rent or the loss of use or value of the broach machine. Lori Budney has not sustained an injury distinct and separate from that of the corporation or its other shareholders. " [I]t is axiomatic that a claim of injury, the basis of which is a wrong to the corporation, must be brought in a derivative suit, with the plaintiff proceeding secondarily, deriving his rights from the corporation which is alleged to have been wronged . . ." May v. Coffey, 291 Conn. 106, 114-15, 967 A.2d 495 (2009).
In order for Lori Budney to have standing to prosecute the wrongs alleged in the counterclaim, she must file a derivative action on behalf of the corporation. That has not been done in this case. Therefore, the plaintiff lacks standing and the court consequently lacks subject matter jurisdiction. " Whenever it is found . . . that the court lacks jurisdiction of the subject matter, the judicial authority shall dismiss the action." Practice Book § 10-33.
The defendant Lori Budney's counterclaim is therefore dismissed.
IV. CONCLUSION
In the action bearing docket number 13-6058255, judgment will enter for the defendants on Counts One, Three and Four.
In the action bearing docket number 14-605 8256, judgment will enter for the defendants on all counts. The defendant Lori Budney's counterclaim is dismissed based upon lack of subject matter jurisdiction.