Opinion
No. X07-CV04 0084752S
April 11, 2005
MEMORANDUM OF DECISION
A defendant, Sealco, LLC (Sealco), applies for the discharge of a lis pendens lodged by the plaintiff, Michael Lawrence, against property located at 293 Oakwood Drive, Glastonbury, Connecticut. On February 14, 2005, the court held an evidentiary hearing on his application.
The lis pendens was recorded in connection with a lawsuit in which the plaintiff sues: Steven Harrington; Industrial Air Flow Dynamics, Inc. (IAFD); Industrial Air Flow Dynamics Expansion Joint Division (IAFDEJD); and Sealco. Steven Harrington owns a ninety percent interest in IAFD and is its sole director and president. He also is the sole member and owner of Sealco. The plaintiff owns a five percent share of IAFD stock as does another shareholder, Thomas Wyrebeck.
IAFD sells and installs expansion joints which are used by power plants. When IAFD was incorporated in 2001, the plaintiff was both its vice president and an employee in charge of the service division. In 2002, IAFD moved its operations to its current location at 293 Oakwood Drive. This property is owned by Sealco, which company was formed for that purpose. The premises comprises a state of the art commercial building with a climate-controlled warehouse as well as ample office space. The property is situated in a very desirable location.
IAFD presently pays $11,175 per month rent to Sealco and occupies 15,800 square feet at the site. There are other businesses, including IAFDEJD, which also lease space at the property.
In the first and second counts of the complaint, the plaintiff, as an individual, sues IAFD on the bases of breach of contract and promissory estoppel for wrongful termination of employment. As to the fifth count, the plaintiff sues as a shareholder of IAFD to gain access to corporate records.
The third count is a derivative action brought by the plaintiff on behalf of the corporation and requests, inter alia, the creation of a constructive trust over 293 Oakwood Drive for the benefit of IAFD. It is this claim for equitable ownership which purports to justify the lis pendens which encumbers that property. Consequently, the viability of the third count alone is relevant to determine whether discharge of the lis pendens is warranted.
Sealco submits three grounds requiring discharge of the lis pendens. First, the plaintiff lacks standing to assert a shareholder derivative suit on behalf of IAFD. Second, the plaintiff's allegations in the third count fail to constitute an action intended to affect real property as needed under General Statutes § 52-325. Finally, there is no probable cause to believe in the existence of the allegations of the third count.
The absence of standing implicates subject matter jurisdiction. Connecticut State Medical Soc. v. Oxford Health Plans, 272 Conn. 469, 476 (2005). Our legislature has deemed that only a shareholder who can fairly and adequately represent the interests of a corporation can initiate a derivative proceeding to enforce corporate rights. General Statutes § 52-572(a) and General Statutes § 33-721.
In Barrett v. Southern Connecticut Gas Co., 172 Conn. 362 (1977), our Supreme Court held, as a matter of law, that a shareholder, who had sued the corporation in another action, had an irreconcilable conflict of interest which disqualified that shareholder from representing the corporation in a derivative suit. Id., 378-80.
Nineteen years later, the Supreme Court clarified the holding of Barrett, supra, by indicating that the mere possibility of a claim against the corporation by a shareholder did not automatically deprive that party of standing to pursue a derivative claim for the corporation. Fink v. Golenbock, 238 Conn. 183, 204-05 (1996). Instead, trial courts must determine standing based on a multifactored approach including (1) whether the plaintiff is the real party in interest; (2) the plaintiff's familiarity with the litigation and willingness to learn about the lawsuit; (3) the degree of control exercised by attorneys over the litigations; (4) the degree of support for the derivative action by other shareholders; (5) the plaintiff's personal commitment to the action; (6) the remedies sought by the plaintiff; (7) the relative magnitude of the plaintiff's personal interests as compared to the plaintiff's interest in the derivative action itself, and (8) the plaintiff's vindictiveness toward other shareholders. Id., 205-06. These factors are nonexclusive, and the relative importance of each factor will vary depending on the particular circumstances of each case. Id., 206.
The burden is on the plaintiff to demonstrate, by a preponderance of the evidence, that he has standing to instigate this derivative claim on behalf of IAFD. Id., 199. The court determines that the plaintiff has failed to meet this burden.
While it is apparent that the plaintiff is familiar with the claims asserted in the third count and is highly committed to pursuit of this claim, the other factors militate against finding that the plaintiff is a fair and adequate representative of IAFD with respect to the allegations of loss of corporate opportunity and breach of fiduciary duty by Harrington. The gravamen of the third count is that IAFD ought to have seized the opportunity to purchase 293 Oakwood Drive. Instead, Harrington created Sealco to buy the property and has taken advantage of IAFD in making the purchase, and leasing the property to IAFD, and using IAFD assets and financial wherewithal to facilitate this purchase by Sealco.
First, the plaintiff's personal claims against IAFD form a direct conflict to representing that corporation. The plaintiff alleges that he was fired because he opposed the acquisition plan by Sealco once he learned of it. The plaintiff is the real party in interest in this matter.
Next, the more assets that IAFD possesses, the greater the possibility of recovery against those assets by virtue of the plaintiff's personal claim of wrongful termination. The plaintiff is exposed to claims that his motivation for seeking the constructive trust is to enhance the likelihood of satisfaction of his personal claims. Fink v. Golenbock, supra, may have limited the ruling in Barrett v. Southern Connecticut Gas Co., supra, but it did not overturn that case. In evaluating whether a shareholder who has sued the corporation has such a competing interest so as to render the shareholder unsuitable to bring a derivative action on behalf of the corporation the "standard is one of potential for abuse, and thus the plaintiff's averments of good faith and a desire to benefit the corporation cannot overcome th[is] type of conflict." Id., 377 (emphasis added).
The plaintiff's personal claims regarding wrongful termination against IAFD may very well entail damages comparable in magnitude to his five percent interest in the derivative claims of the third count. At least, there was no evidence adduced which demonstrates that the personal claims are minor relative to any benefits which may accrue to the plaintiff from the five percent interest via the derivative action.
Also, the complaint lacks support from Wyrebeck, the only other shareholder besides Barrington who is, of course, the object of the derivative claim. Wyrebeck disagrees with the institution of the derivative proceeding.
Clearly, the plaintiff harbors great resentment and suspicion toward Harrington who is the majority owner of IAFD and owner of Sealco. Indeed, in the fourth count of the complaint the plaintiff is seeking punitive damages against Harrington under the Connecticut Unfair Trade Practices Act (CUTPA). The plaintiff accuses Harrington of breaking his fiduciary trust and of wrongfully firing him.
Other trial courts have found that minority shareholders who have sued their corporate employers based on termination issues cannot act as fair and adequate representatives of that corporation in derivative proceedings. Goodrich v. Libero, Superior Court, Danbury J.D., d.n. 325566 (May 27, 1997), Moraghan, J., and Melton v. Blau, Superior Court, C.L.D. Middlesex, d.n. X04-CV03-103953 (August 26, 2004), Quinn, J.
After weighing the salient factors of Fink v. Golenbock, supra, the court concludes that the plaintiff has failed to satisfy his burden of proving that he is a fair and adequate representative of IAFD for purpose of asserting the derivative claims of the third count. Therefore, the plaintiff lacks standing to pursue this claim, and the court lacks subject matter jurisdiction to adjudicate it.
The application for discharge of the lis pendens is granted, and the derivative claim embodied in the third count is dismissed. Because of the ruling, the court need not address the other grounds for discharge propounded by the applicant.
Sferrazza, J.