Opinion
HHDCV196108009S
09-25-2019
Robert J. LINK, Jr., Individually and Derivatively on Behalf of BB and Sons, Inc. v. Robert J. LINK, Sr. et al.
UNPUBLISHED OPINION
OPINION
CESAR A. NOBLE, J.
Before the court is the motion of the defendants, Robert J. Link, Sr., Barbara Link, Sarah Link, Daniel Link and BB and Sons, Inc. (Company) to dismiss eight of ten counts of the present action brought by the plaintiff, Robert J. Link, Jr. asserting claims for shareholder, individual and derivative liability and seeking a dissolution of the Company. For the following reasons the motion is granted and denied in part.
The four individual defendants will be collectively referred to as the "Individual defendants" and individually by their first name. The individual defendants and the company, as a defendant, are referred to as the "defendants."
The Company is also nominally a plaintiff.
Robert J. Link, Jr. will be referred to as "Link."
The following factual and procedural history is relevant to the present motion. The plaintiff’s complaint is in nine counts. The first is brought on behalf of Link and seeks a dissolution of the Company pursuant to Conn. Gen. Stat. § 33-896. The next seven counts are brought individually and derivatively. Count two asserts a claim of unjust enrichment, count three raises a claim for breach of the director’s fiduciary duties established by Conn. Gen. Stat.§ 33-756, count four sounds in breach of common-law fiduciary duties, count four claims a breach of the officer’s fiduciary duties imposed by Conn. Gen. Stat. § 33-765, an equitable accounting is sought in count six, count seven asserts a claim for conversion and count eight claims statutory theft. Count nine, directed to Link, Sr., Barbara Link and Daniel Link, asserts a claim for breach of contract relative to a shareholder agreement. The demand for relief seeks a dissolution or sale of the Company, the appointment of a temporary and permanent receiver over the Company, damages, treble damages, an accounting and restitution.
The common allegations of the complaint are as follows. The Company is contracted to deliver packages to Fed Ex Ground Contracted Services areas (CSA’s). At the time of incorporation the Company had four initial shareholders holding equal shares, Robert Sr., (Link’s father), Barbara (Link’s mother), Daniel (Link’s brother) and Link. Subsequently Barbara transferred her shares to Robert Sr. and Daniel transferred his shares to his wife, Sarah, although Link was not notified of the transfers. During a period of incapacity due to injury, Daniel, who was unable to drive a truck, continued to receive income from the company. Subsequently, the plaintiff, who continued to drive for the Company, attempted to sell his 25% interest in the Company. During this time Sarah and Daniel inequitably received an increase in the compensation they obtained from the Company. In January of 2018, Link was surreptitiously removed as a director and officer without due corporate notice or resolution. In May of 2018 Link’s services as an employee of the Company were terminated, he was locked out of the Fed Ex Ground website and received no further compensation from the Company. Link has been frozen out of the Company’s management by the other shareholders and the Company failed to adhere to Connecticut laws and Company bylaws regarding governance including the holding of meetings. Link complains of a lack of effective management of the affairs of the Company causing it injury and actions to fraudulently divert money from the Company to the individual defendants to the exclusion of the plaintiff. As a result of the absence of coherent management improper accounting procedures are followed which makes the company subject to IRS audits and penalties. Finally, the plaintiff asserts that he is "further oppressed in that he is unable to receive buy-out payments for his interest in the company and/or distribution payments." Further allegations will be set forth as necessary.
The gravamen of the defendants’ motion is that Link lacks individual and derivative standing to assert certain claims because (1) he cannot recover as an individual for injury to the Company, (2) he cannot advance derivative claims because the dissolution he seeks is incompatible with the requirement that a derivative plaintiff "fairly and adequately represent the interests of the corporation" as required by Conn. Gen. Stat. § 33-721 and (3) he failed to comply with the pre-suit demand requirement mandated by Conn. Gen. Stat. § 33-722. Link asserts that he has alleged individual harm, that persuasive case law exists that a similarly situated shareholder has standing to assert claims for injury to the corporation even where seeking dissolution, and he did provide demand to the corporation to take suitable action. The court addresses the first argument separately as to each count, agrees with the plaintiff on the second ground for the motion to dismiss and agrees with the defendants on the third ground.
Section 33-721 provides "A shareholder may not commence or maintain a derivative proceeding unless the shareholder: (1) Was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time; and (2) fairly and adequately represents the interests of the corporation in enforcing the right of the corporation." (Emphasis added.)
Section 33-722 provides "No shareholder may commence a derivative proceeding until: (1) A written demand has been made upon the corporation to take suitable action; and (2) ninety days have expired from the date delivery of the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the ninety-day period."
"[A] motion to dismiss ... properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court." (Internal quotation marks omitted.) Santorso v. Bristol Hospital, 308 Conn. 338, 350, 63 A.3d 940 (2013). "[B]ecause the issue of standing implicates subject matter jurisdiction, it may be a proper basis for granting a motion to dismiss." Electrical Contractors, Inc. v. Dept. of Education, 303 Conn. 402, 413, 35 A.3d 188 (2012). "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." Town of New Hartford v. Connecticut Resources Recovery Authority, 291 Conn. 511, 518, 970 A.2d 583 (2009). "It is the burden of the party who seeks the exercise of jurisdiction in his favor clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute." (Citation omitted, internal quotation marks omitted.) May v. Coffey, 291 Conn. 106, 113, 967 A.2d 495 (2009). "When a trial court decides a jurisdictional question raised by a pretrial motion to dismiss on the basis of the complaint alone, 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.) Conboy v. State, 292 Conn. 642, 651, 974 A.2d 669 (2009). In the present case the parties did not request a hearing and none was held. The plaintiff offered, undisputed by the defendants as to the act of it being sent, what it viewed as a pre-suit demand letter from Link’s counsel, which the court considers.
The defendants’ first argument is that the plaintiff lacks standing to assert individual claims for unjust enrichment, breach of director’s and officers’ duties, equitable accounting, conversion and statutory theft because these claims are based on injury to the Company that do not cause direct harm to him. The principle upon which the defendants rely was first adopted by the Connecticut Supreme Court in Yanow v. Teal Industries, Inc., 178 Conn. 262, 422 A.2d 311 (1979), a case that involved a shareholder’s derivative suit and individual action against a parent corporation and its officer seeking an accounting, a nullification of a merger and damages. "A distinction must be made between the right of a shareholder to bring suit in an individual capacity as the sole party injured, and his right to sue derivatively on behalf of the corporation alleged to be injured ... Generally, individual stockholders cannot sue the officers at law for damages on the theory that they are entitled to damages because mismanagement has rendered their stock of less value, since the injury is generally not to the shareholder individually, but to the corporation to the shareholders collectively ... In this regard, it is axiomatic that a claim of injury, the basis of which is a wrong to the corporation, must be brought in a derivative suit, with the plaintiff proceeding ‘secondarily, ’ deriving his rights from the corporation which is alleged to have been wronged ... It is, however, well settled that if the injury is one to the plaintiff as a stockholder, and to him individually, and not to the corporation, as where an alleged fraud perpetrated by the corporation has affected the plaintiff directly, the cause of action is personal and individual ... In such a case, the plaintiff-shareholder sustains a loss separate and distinct from that of the corporation, or from that of other shareholders, and thus has the right to seek redress in a personal capacity for a wrong done to him individually." (Citations omitted.) Id., 281-82.
The determination of whether a particular claim belongs to a shareholder individually or to the corporate entity involves an examination of each count and an analysis of whether the defendant has demonstrated an injury that is separate and distinct from that of any other shareholder or the corporation. Guarnieri v. Guarnieri, 104 Conn.App. 810, 821-22, 936 A.2d 254 (2007). In so doing, however, the court recognizes that a minority shareholder in a closely held corporation may suffer consequences from wrongful conduct that in a larger corporate setting would result only in injury to the corporation subject solely to a derivative claim. As noted by the court in Leblanc v. Tomoiu, Superior Court, judicial district of Stamford, Docket No. X08CV065001421, 2007 WL 1828898, at *4 (June 5, 2007, Jennings, J.) , "[t]he application of these general principles [distinguished between individual and corporate harm] to claims brought by a shareholder of a closely held corporation against other shareholders of the corporation is particularly difficult." This is so because "where a sole minority stockholder, ... is the victim of a fraud perpetrated by the sole controlling stockholder, ... the injury, and the action for redress, cannot be said to belong merely to the corporation. If the controlling majority stockholder seeks to injure the minority stockholder through the means of looting the corporation or so wrecking it that the minority stockholder would get nothing out of his assets, the claim resulting therefrom is sufficient to constitute an individual action ... Likewise, where an injury sustained to a shareholder’s stock is peculiar to him alone, and does not fall alike upon other stockholders, the shareholder has an individual cause of action." (Citations omitted.) Yanow v. Teal Industries Inc., supra, 178 Conn. 282, n.9.
With these principles in mind, the court turns to the allegations of the complaint. Count Two adds to the common allegations the factual claims that Daniel, Robert Sr., Barbara and Sarah have unjustly and without authorization taken monies "from the Company." Because, as pled, this claim is for an injury or wrong to "the Company," it may only be brought derivatively and thus Link has no standing to bring the action individually.
Count Three asserts violations of the statutory fiduciary obligations imposed on directors, alleges mismanagement of the Company in a fashion not reasonably believed to be in the best interests of the Company (paragraph 56), that the directors failed to put in place proper corporate controls for the management of the Company finances and distributions to shareholders (paragraph 57), acted in self-dealing contrary to the best interests of the Company caused unauthorized and excessive monies to be paid to them from Company funds and used Company assets for personal gains (paragraph 58). These allegations would clearly allege only injury to the corporate interest in a larger company. However, taken in the context of a closely held corporation where the only other three stockholders are alleged generally to be acting against the specific interests of the minority stock holder, the count alleges an injury to the individual shareholder, Link. The last allegation of count three, contained in paragraph 59 of the complaint, more clearly sets out an injury to the individual stockholder than the previous allegations. This count alleges that "The defendants have in bad faith prevented the Plaintiff from participating in the management of the Company and have thwarted the operations of the Company governance procedures and/or bylaws." (Emphasis added.) The allegation of preventing Link from participating in the management of the Company relates solely to the stock owned by Link and states an individual, not a derivative claim, because they affect only the plaintiff and none of the other defendants or shareholders. See Rocco v. Furrer, Superior Court, judicial district of Middlesex, Docket No. 136009192, 2013 WL 5879523, (October 17, 2013, Aurigemma, J.) (claim of three majority shareholders freezing minority shareholder plaintiff out of investment and involvement in corporate entities states individual claim); Newlands v. NRT Associates, LLC, Superior Court, judicial district of Fairfield, Docket No. 084027098, 2010 WL 1665283, at *4 (March 25, 2010, Tyma, J.) (allegation that other shareholders precluded plaintiff shareholder from being involved in company states individual claim); Leblanc v. Tomoiu, supra, 2007 WL 1828898 (action to marginalize a single minority stockholder to diminish and dilute his share in the company permits individual claim). The motion to dismiss is therefore denied as to the allegations of Count Three which, taken in context of a closely held corporation where the actions of the three other stockholders are taken in concert to impact the rights of the remaining minority stockholder, establishes standing for a violation of direct individual rights.
In addition to the common factual allegations the fourth count, sounding in a breach of common-law fiduciary duties, alleges that the defendants usurped control over the Company and are in a position of trust and confidence vis-à-vis the Plaintiff’s interest in the Company. The defendants had a duty to represent the Plaintiff’s interest (paragraph 61), the defendants have not managed the affairs of the Company in good faith, or with the care of an ordinary prudent person, or in a manner that he or she reasonably believes to be in the best interests of the Company (paragraph 62), the defendants have imprudently failed to put in place proper corporate controls for the management of the Company’s finances and shareholder compensation (paragraph 63), the defendants’ actions were self-dealing and contrary to the best interests of the Company and have caused unauthorized and excessive monies to be paid to them from Company funds, and/or used Company assets for personal gains (paragraph 64), the defendants paid themselves compensation contrary to Connecticut law and/or Company bylaws (paragraph 65), the defendants, in bad faith, prevented the Plaintiff from participating in the management of the Company, and have thwarted the operation of the Company governance procedures, Connecticut law, and/or bylaws (paragraph 66). As with the third count these allegations are sufficient in a closely held corporation to establish standing in the minority stockholder.
Count five, which asserts a claim of the breach of the statutory fiduciary duties imposed on officers of a corporation, contains allegations which mirrors those of the third count with the exception that there is no allegation that the Plaintiff was prevented from participating in the management of the Company. For the same reasons articulated in the analysis of count three the motion to dismiss is denied as to count five in relation to Link’s individual claim.
Count six seeks an equitable accounting. Considering the allegations of this count in the most favorable light the court finds that Link has individual standing to assert this claim. The allegations broadly allege an exclusion of Link from the affairs of the corporation while the other shareholders maintain access to its affairs, including inferentially, the books of the Company. This then is a distinct damage claim that Link alone among the stockholders has suffered. See Kasper v. Valluzzo, Superior Court, judicial district of Stamford, Docket No. 075004383S, 2011 WL 8883574, (December 23, 2011, Tierny, JTR) (where trial evidence showed none of four other shareholders were deprived of access to company’s books and records minority shareholder deprived of that access had individual standing to obtain equitable accounting). The motion to dismiss is denied as to this count.
Count seven claims conversion on the grounds that the defendants had a duty to refrain from appropriating to themselves any share of the profits in excess of their percentage of ownership interests. Instead, the defendants appropriated to themselves, and exercised unauthorized dominion and control over, Company funds in excess of their rightful share of profits, to the exclusion of the Plaintiff and/or the Company (paragraph 76). This alleges an injury unique to Link and asserts an individual claim.
Count eight alleges committed larceny by embezzlement within the meaning of Conn. Gen. Stat. § 53a-119(a)(1), which in turn constitutes civil theft within the meaning of Conn. Gen. Stat. § 52-564. This count is based on the appropriation of property of another in one’s care or custody. The appropriation in this count is only indirectly an injury to Link because the property in question was the assets and funds of the Company and thus were only a direct injury to the Company. This count is dismissed.
This statute provides: "A person commits larceny when, with intent to deprive another of property or to appropriate the same to himself or a third person, he wrongfully takes, obtains or withholds such property from an owner. Larceny includes, but is not limited to: (1) Embezzlement. A person commits embezzlement when he wrongfully appropriates to himself or to another property of another in his care or custody." General Statutes § 53a-119(a)(1).
Accordingly, and for the foregoing reasons, counts two and eight are dismissed for lack of individual standing as to the plaintiff’s individual claims of injury. The motion to dismiss as grounded on the same basis is denied as to counts three, four, five, six and seven.
The defendant next argues that the plaintiff lacks standing to assert derivative claims on behalf of the company because the plaintiff cannot fairly and adequately represent the interests of the company, as required by § 33-721, as a predicate for commencing or maintaining a derivative proceeding. It is true that a number of courts have recognized that a plaintiff cannot properly represent the interests of a corporation where he "seek[s] the involuntary dissolution of the corporations [he] claim[s] to represent and thus [is] actively pursuing claims that put [his] interests in conflict with those of the corporations." Beckworth v. Bizier, 48 F.Supp.3d 186, 195 (D.Conn. 2014) (holding plaintiffs asserting dissolution claim were not adequate representatives of corporation and lacked standing to assert derivative claims); accord, Read v. Read, 205 Wis.2d 558, 556 N.W.2d 768, 771 (Wis.Ct.App. 1996) (holding under Wisc. Stat. § 180.0741- a statute virtually identical to Conn. Gen. Stat. § 33-721- that plaintiff’s claim for dissolution of the corporation "eliminated the prospect of the plaintiff being able to ‘fairly and adequately represent the corporate interest’ "); Kasten v. MOA Invs, LLC, Nos. 2006AP1405, 2006AP1510, 2007 WL 677804, 301 Wis.2d 747, 731 N.W.2d 383 (Wis.Ct.App. 2007) (following Read and affirming dismissal of derivative claims because plaintiff "filed an action seeking dissolution. That remedy is contrary to the interests of the continued viability of the LLC").
See footnote 4.
In the absence of controlling Connecticut authority, however, the court is persuaded by the analysis of the court in Bragoni v. Francalangia, Superior Court, judicial district of Hartford, Docket No. X03176079494S, 2017 WL 5642275 (October 25, 2017, Moll, J.) . The court held that the prosecution of both an action for derivative damages and dissolution are not incompatible. The statute imposes the requirement that the shareholder prosecuting a derivative action "fairly and adequately represents the interests of the corporation in enforcing the rights of the corporation." A derivative claim would, if successful, involve the return of funds by the defendants to the corporation. These same funds would, upon dissolution, be disbursed to all shareholders, including the plaintiff shareholder. This would insure that the plaintiff’s personal interests "are in line with those of the corporation’s so that the return of assets to the corporation will clearly be vigorously litigated." Id., 2017 WL 5642275, at 6.
Moreover, where the derivative and dissolution claims "are contingent upon proof of the same nucleus of facts, then it is presumed that the plaintiff will advance both actions with the same vigor." (Citation omitted.) Bragoni, supra, 2017 WL 5642275, at 6. This court adopts the analysis and reasoning of the court in Bragoni as well its conclusion that a "plaintiff’s direct claim for dissolution does not prevent him from fairly and adequately representing the interests of the corporations with respect to the derivative claims. To conclude otherwise would lead to an unworkable result, by essentially forcing upon a similarly situated plaintiff the Hobson’s choice between remaining an allegedly oppressed shareholder and foregoing derivative claims against other shareholders for corporate malfeasance. The court cannot conceive of any public policy to support such a conclusion." Id. at 7. The motion to dismiss Link’s derivative claims on this ground is therefore denied.
The defendants advance another ground for dismissal of the derivative claims, the failure of Link to issue a pre-suit demand letter. This argument is derived from the requirement imposed by § 33-722 which provides that "[no] shareholder may commence a derivative proceeding until: (1) A written demand has been made upon the corporation to take suitable action; and (2) ninety days have expired from the date delivery of the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the ninety-day period." The defendants assert that Link never issued the written demand upon the corporation to take suitable action. Link counters that he did in fact send timely such a letter. An undisputed copy of the letter relied upon by Link was attached to his objection to the motion to dismiss. The letter is dated September 24, 2018 and is from Link and states:
"I am acting as counsel for your son, Robert, Jr. who has a 25% ownership interest in BB and Sons, Inc. My client would like to avoid the need for litigation and receive a fair buyout of his ownership interest in this corporation. It is my understanding that my client made an offer of [REDACTED] for his interest in the corporation and your response was that he is owed nothing. I have represented other individuals that have sold their companies such as yours and the routes that BB and Sons own have significant value. It is my understanding that BB and Sons own six routes. Please reconsider your position to compensate my client for his interest in the corporation and avoid the necessity of litigation to reach a fair settlement. I look forward to hearing from you or your legal representative in response to this demand." The letter is dated more than ninety days from the date that suit was commenced on February 26, 2019. The defendants do not dispute the timeliness of the letter. Rather, they argue that the letter fails to satisfy the requirement of a demand for "suitable action." The court agrees.
The contours of an adequate pre-suit demand have not been set by Connecticut appellate authority. Our Supreme Court has explained that "[i]n the context of a shareholder derivative dispute, a ‘demand’ is a mechanism for a shareholder to voice his objection regarding the management of a corporation and place the board of directors on notice of his complaints prior to the filing of a formal shareholder derivative lawsuit. The purpose of requiring a precomplaint demand is to protect the directors’ prerogative to [act] ... Thus, the demand requirement implements the basic principle of corporate governance that the decisions of a corporation- including the decision to initiate litigation- should be made by the board of directors or the majority of shareholders." (Citation omitted, internal quotation marks omitted.) Stutz v. Shepard, 279 Conn. 115, 119, n.5, 901 A.2d 33 (2006). The court, finding that the text of the statute is clear and unambiguous, examines the plain meaning of the statute. See Conn. Gen. Stat. § 1-2z. This meaning supports the conclusion reached, albeit in dicta, in Stutz that the pre-suit demand letter must be suitable. This adjective is defined as "adapted to a use or purpose." Merriam-Webster, Collegiate Dictionary, (11th Ed. 2003). The demand letter may not be considered suitable, or adequate, unless it serves to alert the governing authority of the corporation of the nature of the malady which the forthcoming suit will seek to cure and the proposed remedy. Such a letter would be without value if it complained of X but brought suit on the grounds of Y. The demand letter relied upon by the plaintiff in the present case simply does not alert the defendants to what "suitable action" is desired. To the contrary, it contains only a simple request for a buyout of Link’s stock and does not address any of the malfeasance which, in the plaintiff’s view, constitutes the predicate for the claims set out in his complaint. Neither does the letter suggest in any way that the corporation take action related to these claims. In light of this infirmity, the court finds that Link failed to issue a "suitable" pre-suit demand letter and holds that he lacks standing to bring a claim derivatively.
Section 1-2z provides: "The meaning of a statute shall, in the first instance, be ascertained from the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered."
For the foregoing reasons, counts two and eight are dismissed to the extent that Link seeks to assert individual claims on the grounds of lack of standing. Counts two through eight are also dismissed with respect to Link’s assertion of derivative claims. Thus, the remaining counts of the complaint are one and eight, which were not addressed in the present motion to dismiss, and three through seven which remain viable claims for individual injury over which the court has subject matter jurisdiction.
So ordered.