Opinion
No. CV09 500 99 89
January 13, 2010
MEMORANDUM OF DECISION RE MOTION TO DISMISS
I. Introduction
The defendants, Scholastic Mortgage, LLC (Scholastic), Edward Woodhead and Tricia Woodhead (collectively, "the Woodheads"), have filed a motion to dismiss arguing that the court lacks subject matter jurisdiction.
II. Background
The plaintiff, David Leclair, filed an eleven-count complaint on August 31, 2009. In it, he alleges that he is a member of Scholastic, a Connecticut limited liability company (LLC), and that Edward Woodhead "is the sole [m]anager and majority shareholder of Scholastic and thus controls the company." He further alleges that Tricia Woodhead "is a paid employee of Scholastic, responsible for bookkeeping, general record keeping and [the] handling of finances of . . . Scholastic," and that she "collaborates with her husband to control [Scholastic] and has received the benefit of distributions from [Scholastic]." The plaintiff claims the Woodheads "acted in a manner that is illegal, oppressive and wrongful in the operati[on] of Scholastic," and further claims that they "misapplied and wasted corporate assets and have threatened to continue to do so in the future . . ." He therefore seeks dissolution of Scholastic pursuant to General Statutes § 33-896.
General Statutes § 33-896 provides in relevant part: "(a) The [S]uperior [C]ourt for the judicial district where the corporation's principal office or, if none in this state, its registered office, is located may dissolve a corporation: (1) In a proceeding by a shareholder if it is established that: (A) The directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent; or (B) the corporate assets are being misapplied or wasted . . ."
The parties agree that their relationship was controlled by two contracts, a "Third Amended and Restated Operating Agreement of Scholastic Mortgage, LLC" (Operating Agreement), dated September 29, 2008, and a Member Compensation Agreement (Membership Agreement), dated December 1, 2007. Aside from the count seeking dissolution of Scholastic, which applies to all the defendants, the plaintiff's complaint relies on the provisions of these contracts, as well as additional allegations, to set forth the following claims: as to all defendants, intentional misrepresentation, negligent misrepresentation, fraudulent misrepresentation, violation of the Connecticut Unfair Trade Practices Act (CUTPA), breach of the Membership Agreement, and violation of General Statutes § 31-72; as to Scholastic and Edward Woodhead, breach of the Operating Agreement and breach of the duty of good faith and fair dealing that stems from both the Operating Agreement and the Membership Agreement; and as to Edward Woodhead only, breach of fiduciary duty.
CUTPA is codified at General Statutes § 42-110a et seq.
General Statutes § 31-72 provides: "When any employer fails to pay an employee wages in accordance with the provisions of [§§]31-71a to 31-71i, inclusive, or fails to compensate an employee in accordance with [§]31-76k or where an employee or a labor organization representing an employee institutes an action to enforce an arbitration award which requires an employer to make an employee whole or to make payments to an employee welfare fund, such employee or labor organization 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, and any agreement between him and his employer for payment of wages other than as specified in said sections shall be no defense to such action. The Labor Commissioner may collect the full amount of any such unpaid wages, payments due to an employee welfare fund or such arbitration award, as well as interest calculated in accordance with the provisions of [§]31-265 from the date the wages or payment should have been received, had payment been made in a timely manner. In addition, the Labor Commissioner may bring any legal action necessary to recover twice the full amount of unpaid wages, payments due to an employee welfare fund or arbitration award, and the employer shall be required to pay the costs and such reasonable attorneys fees as may be allowed by the court. The commissioner shall distribute any wages, arbitration awards or payments due to an employee welfare fund collected pursuant to this section to the appropriate person."
On August 31, 2009, the defendants filed a motion to dismiss the entirety of the plaintiff's complaint for lack of subject matter jurisdiction, as well as an accompanying memorandum of law. Thereafter, on September 30, 2009, the plaintiff filed an objection to the defendants' motion to dismiss, which was also accompanied by a memorandum of law. The matter was heard before the court on October 5, 2009, at which time the defendants filed a reply to the plaintiff's objection.
Ill. Discussion
"Pursuant to the rules of practice, a motion to dismiss is the appropriate motion for raising a lack of subject matter jurisdiction." St George v. Gordon, 264 Conn. 538, 545, 825 A.2d 90 (2003). "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 . . . A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction." (Internal quotation marks omitted.) Beecher v. Mohegan Tribe of Indians of Connecticut, 282 Conn. 130, 134, 918 A.2d 880 (2007); Pedro v. Miller, 281 Conn. 112, 116, 914 A.2d 524 (2007). "A determination regarding a trial court's subject matter jurisdiction is a question of law." (Internal quotation marks omitted.) Burton v. Commissioner of Environmental Protection, 291 Conn. 789, 802, 970 A.2d 640 (2009). "[T]he plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. New London, 265 Conn. 423, 430 n. 12, 829 A.2d 801 (2003).
"When a . . . court decides a jurisdictional question raised by a pretrial motion to dismiss, it must consider the allegations of the complaint in their most favorable light . . . In this regard, a court must take the facts 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." (Internal quotation marks omitted.) Cogswell v. American Transit Ins. Co., 282 Conn. 505, 516, 923 A.2d 638 (2007); Cox v. Aiken, 278 Conn. 204, 211, 897 A.2d 71 (2006); Filippi v. Sullivan, 273 Conn. 1, 8, 866 A.2d 599 (2005). "[E]very presumption favoring jurisdiction should be indulged." (Internal quotation marks omitted.) Connor v. Statewide Grievance Committee, 260 Conn. 435, 443, 797 A.2d 1081 (2002).
The defendants argue that this court is without subject matter jurisdiction because provisions within the Operating Agreement and the Membership Agreement make mediation and arbitration, respectively, conditions precedent to litigation, and the plaintiff did not exhaust or so much as pursue these forms of alternative dispute resolution prior to commencing this lawsuit. In support of this proposition, the defendants rely entirely on Neiman v. Yale University, 270 Conn. 244, 851 A.2d 1165 (2004), which they argue is controlling. That case however, is distinguishable from the matter now before the court.
The mediation clause in the Operating Agreement provides in relevant part: "Mediation. If any dispute, claim, disagreement or other matter arising from or relating to this Agreement or the alleged breach of this Agreement cannot be settled within thirty . . . days after any party sends written notice to each other party to this Agreement, the parties shall try in good faith to settle such matter by non-binding mediation in Hartford, Connecticut, administered by the American Arbitration Association under its Commercial Mediation Rules which are then in effect before commencing arbitration, litigation or other legal proceedings . . . If any party fails to take any action within the time required under this subsection and within ten . . . days written notice of such failure is provided to such party, any other party may commence legal proceedings with respect to such matter. Time shall be of the essence with respect to each action to be taken under this [s]ubsection."
The arbitration clause in the Membership Agreement provides: "ARBITRATION: Any controversy, claim, or breach arising out of or relating to this Agreement shall be submitted to arbitration to a panel of three arbitrators. Each party shall select an arbitrator and the two thus chosen shall select a third. The decision of a majority of arbitrators shall be final and binding on the parties. If the two arbitrators cannot agree upon a third arbitrator, the American Arbitration Association will be requested to appoint an arbitrator. Such arbitration shall be held in Milford, Connecticut, in accordance with the rules and practices then pertaining, and the judgment upon the award rendered may be entered by consent in any court having jurisdiction thereof."
In Neiman, the plaintiff, a former professor at Yale University, brought various claims against Yale after it declined to offer her a tenured appointment to its faculty. Id., 246. Yale moved to dismiss all counts "on the ground that the trial court did not have subject matter jurisdiction over the action because the plaintiff had failed to exhaust the remedies available to her at Yale, namely, [an] internal grievance procedure provided for by the faculty handbook." Id., 249.
In granting Yale's motion to dismiss, the Supreme Court effectively extended the exhaustion of remedies doctrine — which holds that, in certain circumstances, a plaintiff's failure to exhaust alternative avenues for obtaining relief prior to resorting to litigation deprives the court of subject matter jurisdiction — to situations in which an internal grievance procedure is set forth in a faculty handbook at an academic institution. Id., 253-57. In doing so, the court noted that it had previously applied the doctrine in various other situations, "including when an exclusive grievance or arbitration procedure is contained in a collective bargaining agreement and when an administrative appeal is taken." Id., 253.
The court went on to explain the rationale for applying the doctrine in each situation. In the collective bargaining context, it noted that applying the doctrine gives the "employer and union . . . the ability to establish a uniform and exclusive method for orderly settlement of employee grievances." (Internal quotation marks omitted.) Id., 254. It further noted that allowing an aggrieved, unionized employee to sidestep such agreements "would inevitably exert a disruptive influence upon both the negotiation and administration of collective [bargaining] agreements." (Internal quotation marks omitted.) Id. In the context of administrative appeals, the court explained that the rationale for the rule is primarily "to foster an orderly process of administrative adjudication and judicial review, offering a reviewing court the benefit of the agency's findings and conclusions," and also noted that applying the rule in this context "protects the courts from becoming unnecessarily burdened with administrative appeals . . ." (Internal quotation marks omitted.) Id.
Finally, the court provided rationales for extending the rule to situations in which an internal grievance procedure is set forth in a faculty handbook at an academic institution. First, the court noted that in an employee-employer setting at an academic institution, an internal grievance mechanism found in a faculty handbook "is part of the contractual bargain and defines the [parties'] rights themselves," and "[t]o allow a plaintiff to sidestep these procedures would undermine the internal grievance procedure that the parties had agreed to and encourage other litigants to ignore the available process as well." (Internal quotation marks omitted.) Id., 255. Second, the court explained that "academic institutions themselves are best suited to be the original forum for these types of disputes" because "university officials and the plaintiff's peers are most familiar with the requirements for tenure, the operation of the institution's tenure process and the purposes underlying the handbook provisions." Id. Finally, the court observed that if a party was not satisfied with the outcome of such an internal grievance proceeding, it would still be free to then seek redress from a court. Id., 256.
Nowhere, however, did the Supreme Court express that its ruling in Neiman was designed to extend the exhaustion of remedies doctrine to the circumstances of this case; namely, those in which a member of an LLC resorts to litigation prior to pursuing alternative dispute resolution, even where the parties previously agreed to arbitrate and mediate their disputes. Rather, the holding in Neiman is limited to circumstances in which an employee or former employee brings an action against an employer-academic institution, but fails to first exhaust internal grievance procedures, as provided for in a faculty handbook.
Indeed, in reaching its conclusion, the Supreme Court relied heavily on authority from other jurisdictions, authority which uniformly dealt with a plaintiff's failure to follow internal grievance procedures as set forth in a faculty handbook at an academic institution. See Krynicky v. University of Pittsburgh, 560 F.Sup. 803 (W.D.Pa. 1983); Long v. Samson, 568 N.W.2d 602 (N.D. 1997); McDowell v. Napolitano, 119 N.M. 696, 895 P.2d 218 (1995); Snitow v. Rutgers University, 103 N.J. 116, 510 A.2d 1118 (1986); Berkowitz v. Harvard College, 58 Mass.App. 262, 789 N.E.2d 575 (2003); Muth v. Board of Regents of Southwest State University, 887 S.W.2d 744 (Mo.App. 1994); Law v. Howard University, Inc., 558 A.2d 355 (D.C.App. 1989).
In the present case, the plaintiff argues, and the court agrees, that another rule of law, which applies generally to arbitration clauses, is controlling in the present case. This rule holds that "[w]here a contract contains a stipulation that the decision of arbitrators on certain questions shall be a condition precedent to the right of action on the contract itself, such a stipulation will be enforced and, until arbitration has been pursued or some sufficient reason given for not pursuing it, no action can be brought on the contract . . . Whether an agreement makes arbitration a condition precedent to an action in court depends on the language of the arbitration clause. While it is true that in the absence of express language a provision for arbitration may be construed, by implication, to be a condition precedent to suit that implication must be so plain that a contrary intention cannot be supposed. It must be a necessary implication. The mere agreement to arbitrate, standing alone, does not give rise to the necessary implication that arbitration is a condition precedent to an action in court. For arbitration to be a condition precedent, the agreement to arbitrate must expressly so stipulate, or it must necessarily be implied from the language used." (Citation omitted.) Multi-Service Contractors, Inc. v. Vernon, 181 Conn. 445, 447-48, 435 A.2d 983 (1980).
However, our Appellate Court recently clarified that even where arbitration is made a condition precedent to litigation, whether by express provision or necessary implication, the court is not robbed of its subject matter jurisdiction by a plaintiff's failure to first pursue arbitration. See Catrini v. Erickson, 113 Conn.App. 195, 197, 966 A.2d 275 (2009). In Catrini, "[t]he defendants moved to dismiss the [plaintiff's] action on the ground that the court lacked subject matter jurisdiction because the parties had a signed contract providing that they would submit any disputes arising from the agreement to final and binding arbitration. The [trial] court granted the motion to dismiss" and the plaintiff appealed. Id., 196. On appeal, the Appellate Court reversed, explaining that "[t]he fact that General Statutes § 52-409 allows a court to enter a stay in a matter involving an arbitration agreement belies the defendants' claim, and the trial court's implicit ruling, that an agreement to arbitrate ousts the court of its subject matter jurisdiction. If the existence of an arbitration agreement in a contract implicated the court's jurisdiction to hear an action, then a court would, accordingly, not have jurisdiction to stay such a matter because, in the absence of jurisdiction, the court may only dismiss a matter. In short, because the power to order a stay implies that the court has jurisdiction over a matter, the legislature could not have empowered the court to enter a stay in such a matter unless the court has jurisdiction over it." Id., 197.
General Statutes § 52-409 provides: "If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate, the court in which the action or proceeding is pending, upon being satisfied that any issue involved in the action or proceeding is referable to arbitration under the agreement, shall, on motion of any party to the arbitration agreement, stay the action or proceeding until an arbitration has been had in compliance with the agreement, provided the person making application for the stay shall be ready and willing to proceed with the arbitration."
Thus, in the present case, it is clear that the plaintiff's failure to pursue arbitration before resorting to the commencement of this action does not implicate the court's subject matter jurisdiction over the claims that arise out of the Membership Agreement, which contains an arbitration provision. If the defendants wish to enforce their right to have these claims resolved by arbitration, their remedy is to seek a stay from this court pursuant to § 52-409 and an order compelling arbitration. See, e.g., KND Corp. v. Hartcom, Inc., 5 Conn.App. 333, 336-37, 497 A.2d 1038 (1985) (determining § 52-409 may be used to stay legal proceedings and compel arbitration in accordance with an agreement to arbitrate even where arbitration is not made a condition precedent to litigation).
The relevant language of this arbitration provision is found at footnote five of this memorandum of decision.
There are, however, no Connecticut statutes similar to § 52-409 that expressly authorize a court to stay judicial proceedings and compel mediation in accordance with the terms of a mediation provision, like the one found in the Operating Agreement. Nevertheless, the court does not believe the plaintiff's failure to pursue mediation before commencing this action acts to deprive the court of subject matter jurisdiction over the claims that arise out of the Operating Agreement.
The language of this mediation provision is found at footnote four of this memorandum of decision.
In the first place, it would make little sense to hold that an agreement to mediate disputes implicates the court's subject matter jurisdiction when our Appellate Court has already determined that agreements to arbitrate disputes do not implicate the court's subject matter jurisdiction. Furthermore, there is some authority for the proposition that even where a contract makes mediation a condition precedent to litigation, a party's failure to pursue mediation before resorting to litigation will not deprive the court of subject matter jurisdiction. See Cafarelli v. Colon-Collazo, Superior Court, judicial district of Danbury, Docket No. CV 05 5000279 (June 20, 2006, Schuman, J.) ( 41 Conn. L. Rptr. 539, 541); but see Ventre v. Ventre, Superior Court, judicial district of Fairfield, Docket No. CV 00377148 (January 9, 2001, Rush, J.) (analogizing mediation to arbitration and dismissing for lack of subject matter jurisdiction because mediation was condition precedent to litigation but not first pursued); Coburn v. Grabowski, Superior Court, judicial district of Waterbury, Docket No. CV 96 0134935 (May 29, 1997, Pellegrino, J.) (same). In Cafarelli, Judge Schuman found that, because "[m]ediation is nonbinding, does not involve a contested hearing, and, in general, does not duplicate proceedings in court," a plaintiff's failure to pursue mediation before resorting to litigation will not deprive a court of subject matter jurisdiction, even where a governing contractual provision makes mediation a condition precedent to litigation. Cafarelli v. Colon-Collazo, supra, 41 Conn. L. Rptr. 541.
It is important to note that both Ventre and Coburn were decided before Catrini v. Erickson, supra, 113 Conn.App. 197, wherein the Appellate Court mled that agreements to arbitrate disputes do not implicate a trial court's subject matter jurisdiction.
Finally, although no Connecticut statute expressly provides courts with the authority to stay proceedings and compel mediation where the parties contractually agreed to mediate their disputes, it is apparent that the court nevertheless has authority to do so. In general, "[e]very court has the authority to stay proceedings before it to insure that justice is done or as an incident of its right to provide for the efficient and economic use of judicial resources." 1 Am.Jur.2d 848, Actions § 68 (2005); see also Park City Hospital v. Commission on Hospitals Health Care, 210 Conn. 697, 701, 556 A.2d 602 (1989) ("the Superior Court's exercise of its equitable powers in [deciding whether to grant a stay] is in fact much broader" than that expressly conveyed by statute); EJV Development, LLC v. CRC Real Estate Development, LLC, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 08 5009105 (March 12, 2009, Pavia, J.) [ 47 Conn. L. Rptr. 365] ("The court has inherent power to stay proceedings before it in the interest of the just resolution of controversies." (Internal quotation marks omitted.)). Furthermore, it is not unprecedented for a court to order parties to mediate, even after the commencement of legal action, where the parties contractually agreed to do so. See, e.g., Turn of River Fire Department, Inc. v. Stamford, Superior Court, judicial district of Stamford-Norwalk at Stamford, Docket No. CV 07 4011910 (May 2, 2008, Tierney, J.). Thus, if the defendants wish to enforce the mediation and arbitration provisions at issue, they have the ability to do so even though the plaintiff has already commenced this action. Neither of the provisions at issue affects the court's jurisdiction, however.
IV. Conclusion
For all of these reasons, the court finds that it has subject matter jurisdiction over the plaintiff's claims. The defendants' motion to dismiss is therefore denied.