Opinion
FSTCV196042813S
01-31-2020
Guoliang Zhao v. Craig Dean
UNPUBLISHED OPINION
Judge (with first initial, no space for Sullivan, Dorsey, and Walsh): Krumeich, Edward T., J.
MEMORANDUM OF DECISION
Krumeich, J.
Defendants Craig Dean, Sam Valler, Gerald International Limited, Gerald Holdings, LLC and SBM Capital, LLP have moved to strike the Tenth, Eleventh and Twelfth counts of the complaint. For the reasons stated below, the motion is denied.
The Standards for Deciding a Motion to Strike
"The purpose of a motion to strike is to contest ... the legal sufficiency of the allegations of any complaint ... to state a claim upon which relief can be granted." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. Alves, 262 Conn. 480, 498, 815 A.2d 1188 (2003). "[A] motion to strike challenges the legal sufficiency of a pleading and, consequently, requires no factual findings by the trial court ... [The court] construe[s] the complaint in the manner most favorable to sustaining its legal sufficiency ... Thus, [i]f facts provable in the complaint would support a cause of action, the motion to strike must be denied ... Moreover, [the court notes] that [w]hat is necessarily implied [in an allegation] need not be expressly alleged ... It is fundamental that in determining the sufficiency of a complaint challenged by a defendant’s motion to strike, all well-pleaded facts and those facts necessarily implied from the allegations are taken as admitted ... Indeed, pleadings must be construed broadly and realistically, rather than narrowly and technically." (Internal quotation marks omitted.) Coppola Construction Co. v. Hoffman Enterprises Ltd. Partnership, 309 Conn. 342, 350, 71 A.3d 480 (2013). "If any facts provable under the express and implied allegations in the plaintiff’s complaint support a cause of action ... the complaint is not vulnerable to a motion to strike." Bouchard v. People’s Bank, 219 Conn. 465, 471, 594 A.2d 1 (1991). On the other hand, "[a] motion to strike is properly granted if the complaint alleges mere conclusions of law that are unsupported by the facts alleged." (Internal quotation marks omitted.) Santorso v. Bristol Hospital, 308 Conn. 338, 349 (2013).
The Tenth Count States A CUTPA Claim.
The Tenth Count alleges that defendants violated the Connecticut Unfair Trade Practices Act, C.G.S. § 42-110a et seq. ("CUTPA"), by engaging in a fraudulent scheme to induce plaintiffs to enter into transactions with Metals Trading Corporation ("MTC") that they knew would not be honored and by misappropriating and transferring assets away from MTC to entities controlled by them so MTC’s debt to plaintiffs could not be enforced by legal process.
Defendants have moved to strike the CUTPA claim as beyond the scope of that statute on the following grounds: (1) that plaintiffs lack a commercial relationship with defendants, (2) that the transactions at issue were incidental to MTC’s primary business, and (3) that this is an intracorporate conflict outside trade and commerce.
In Fink v. Golenbock, 238 Conn. 183, 212-15 (1996), the Supreme Court held the transfer of assets from one entity in which plaintiff had an interest to another entity controlled by defendants to deprive plaintiff of the benefit of the assets violated CUTPA. "In this case, the defendant took certain actions designed to usurp the business and clientele of one corporation in favor of another. As such, [defendant’s] acts fit squarely within the provenance of CUTPA." Id. at 212. In Fink, 238 Conn. at 212, defendant argued the dispute was an intracorporate conflict that did not impact trade or commerce and thus outside the scope of CUTPA. The Supreme Court rejected that argument: "[defendant’s] actions went well beyond governance of the corporation, and placed him in direct competition with the interests of the corporation."
The Fink Court stressed that the "trade or commerce" element of CUTPA is broadly defined:
Trade or commerce, in turn, is broadly defined as "the advertising, the sale or rent or lease, the offering for sale or rent or lease, or the distribution of any services and any property, tangible or intangible, real, personal or mixed, and any other article, commodity, or thing of value in this state." General Statutes § 42-110a(4). The entire act is remedial in character; General Statutes § 42-110b(d) ... and must "be liberally construed in favor of those whom the legislature intended to benefit." 238 Conn. at 212-13.
Other courts have followed Fink and held that misappropriation of assets and usurpation of corporate opportunities violate CUTPA. See e.g., Spector v. Konover, 57 Conn.App. 121, 133 (2000); Ostrowski v. Avery, 243 Conn. 355, 379 (1997); Getz v. Riek, 2016 WL 6885180 *8 (Conn.Super. 2016). See also Halo Tech Holdings, Inc. v. Cooper, 2008 WL 877156 *19 (D.Conn. 2008) ("this case is about the ... defendants’ unfair and deceptive practices in the sale of a business, conduct to which CUTPA squarely applies").
In Metcoff v. Lebovics, 51 Conn.Supp. 68, 87-88 (2007) , aff’d 123 Conn.App. 512 (2010), Judge Stevens held that the corporate officers who were defendants in that case had not engaged in "trade or commerce" and thus were not subject to CUTPA liability for acts taken on behalf of the corporation:
The scope of CUTPA is broad, but not that broad. Certainly, there are circumstances in which the individual acts of a corporate officer or employee may form the basis of a CUTPA violation but the actions of an officer, director or employee taken on behalf of the corporation and within the context of his corporate responsibilities are ordinarily outside of CUTPA’s application. This point follows from the fact that an officer, director or employee of a corporation primarily provides services to the corporation and therefore is not engaged "in the conduct of any trade or commerce" within the meaning of CUTPA. Thus, it follows in turn that CUTPA does not apply to intracorporate affairs; Ostrowski v. Avery, supra, 243 Conn. at 379, 703 A.2d 117; or employer-employee relations. Quimby v. Kimberly Clark Corp., 28 Conn.App. 660, 670-71, 613 A.2d 838 (1992). The corporation itself may be engaging in a trade or business in commerce, but not the individual who is merely working for or on behalf of the corporation. In other words, CUTPA is typically directed to businesses and self-employed people, but not to everyone who may be employed or engaged by such individuals.
In Cohen v. Roll-A-Cover, LLC, 2009 WL 2872920 *9 (Conn.Super. 2009), Judge Stevens explained how narrow his ruling was in Metcoff:
The holding in Metcoff is narrow and must be viewed in the context of the facts presented in that case. In Metcoff, the plaintiffs argued that CUTPA applied to the defendants’ conduct because their primary business, trade or commerce involved "performing the functions of a director and/or officer" of the defendant corporation ... The plaintiffs reasoned that trade or commerce under CUTPA was implicated because the claims of the complaint concerned the defendant corporation’s "relationship with its creditors, and in particular, [the corporation’s] ability to pay [the] plaintiffs." ... The plaintiffs in Metcoff did not allege that the individual defendants personally engaged in any conduct against them directly.
The complaint here alleges personal wrongdoing by defendants so does not raise the corporate shield issue that proved dispositive in Metcoff. See Metcoff v. Lebovics, 51 Conn.Supp. at 87-88.
Defendants argue this case is similar to NatTel, LLC v. SAC Capital Advisors, 2005 WL 2253756 *2 (D.Conn. 2005), in which the District Court dismissed a CUTPA claim about fabrication of corporate documents because the "challenged conduct clearly reflects only the internal corporate operations and therefore cannot support a claim under CUTPA." The alleged transaction here did not constitute "purely intracorporate matters," as in Metcoff, but an intercorporate transfer of assets, which as the Appellate Court recognized on appeal in Metcoff, has been held to concern trade or commerce. See Metcoff v. Lebovics, 123 Conn.App: 512, 519 (2010). Unlike Metcoff and NatTel, the alleged transfer of assets out of MTC’s subsidiaries to other entities, which stripped MTC of its value, would be a "distribution" of property within the scope of C.G.S. § 42-110a(4). That the parties are not competitors is not dispositive; the entities alleged to have engaged in the asset transfer are in commerce and CUTPA is not limited to competitors or consumers, but extends to other persons who suffered ascertainable loss caused by unfair or deceptive practices in trade or commerce. See generally Macomber v. Travelers Property and Cas. Corp., 261 Conn. 620, 642-44 (2002). Moreover, the transfer of MTC’s asset base under the circumstances alleged to the detriment of its shareholders and creditors, would be competitive with MTC’s interests. Compare, Spector, 57 Conn.App. at 133-34. That the relationship of the parties may not be commercial is not significant; the analysis under CUTPA focuses on a defendant’s "activities, rather than his. relationship to the plaintiff ..." Larsen Chelsey Realty Co. v. Larsen, 232 Conn. 480, 492 (1995).
"Here, the defendants, as officers and directors of NCT Group, were providing services to NCT Group, not the plaintiffs. It is well settled that purely intracorporate conflicts do not constitute CUTPA violations. Ostrowski v. Avery, 243 Conn. 355, 379, 703 A.2d 117 (1997.); Russell v. Russell, 91 Conn.App. 619, 647, 882 A.2d 98, cert. denied, 276 Conn . 924, 925, 888 A.2d 92 (2005). Our Supreme Court has distinguished, however, internal corporate actions that also have the effect of usurping the customers, employees or assets of one business in favor of another business. Ostrowski v. Avery, supra, at 379, 703 A.2d 117. In the present case, the plaintiffs did not allege that the defendants personally engaged in any business or commercial activity in competition with the plaintiffs. Accordingly, the present matter involves purely intracorporate matters, and the plaintiffs failed to allege any facts in their revised complaint that would satisfy CUTPA’s requirement that the defendants’ conduct implicated trade or commerce." Metcoff, 123 Conn.App. at 519.
Defendants argue that the alleged transfer of assets had nothing to do with commodities trading, the primary business of MTC’s subsidiaries, and so the CUTPA claim must fail because it cannot satisfy the exclusion where the alleged transaction is merely "incidental to an entity’s primary trade or commerce." Sovereign Bank v. Licata, 116 Conn.App. 483, 484 (2009). Here, the alleged transfer of assets related to MTC’s alleged trade or business as a holding company of subsidiaries whose values were allegedly diluted by asset transfers causing MTC to plummet in value; the damage to MTC’s business from the alleged scheme effectively could not be said to be merely "incidental" to its primary business, rather the alleged conduct adversely affected MTC’s primary business by stripping assets from its holdings needed to support its worth and thereby drastically reducing the value of its stock. Nor is the CUTPA claim alleged a "securities" claim, see e.g., Romano v. Marvin, 2014 WL 660616 *3 (Conn.Super. 2014) (Jennings, J.), or an employment dispute, see Robinson & Cole, LLP v. Ryan, 2011 WL 6934569 *4-5 (Conn.Super. 2011) (Domnarski, J.), so those exclusions to CUTPA do not apply. The motion to strike the CUTPA claim alleged in the Tenth Count is denied.
The Derivative Claims Alleged in Counts Eleven and Twelve May Not Be Stricken
Defendants contend that the derivative claims in the Eleventh and Twelfth counts must be stricken because plaintiffs are not qualified shareholder representatives under Delaware law. Defendants assert that plaintiffs’ interests are antagonistic to the interests of MTC because they are brought direct claims against MTC. In addition, defendants argued that plaintiffs were required to file an affidavit with the Clerk of this court that they are free from conflicts to comply with Delaware Court of Chancery Rule 23.1 and failed to do so. To bring these arguments before the Court on a motion to strike defendants argue plaintiffs have not alleged facts to show they are qualified to act as shareholder representatives.
The Stockholders Agreement appended to the complaint provides that it is to be construed and enforced under Delaware law.
To show antagonism between plaintiffs’ personal interests and the interests of the other shareholders of MTC defendants’ counsel filed two affidavits to bring to the Court’s attention facts relating to conflicts between MTC and Mr. Zhao (but not Mr. Calia). The defendants principally rely on two cases to show plaintiffs disqualification as shareholder representatives under Delaware law: Scopas Technology Co. v. Lord, 1984 WL 8266 *2 (Del Ch. 1984), and Youngman v. Tahmoush, 457 A.2d 376 (Del Ch. 1983).
In Scopas, 1984 WL 8266 *2, the Delaware Chancery Court granted summary judgment dismissing the derivative claim on the ground that plaintiff was not a proper shareholder representative under Delaware Court of Chancery Rule 23.1 applying the factors established by the Chancery Court in Youngman, 457 A.2d at 379-80. Youngman lists eight factors to be considered:
[E]conomic antagonisms between representative and class; the remedy sought by plaintiff in the derivative action; indications that the named plaintiff was to the driving force behind the litigation; plaintiff’s unfamiliarity with the litigation; other litigation pending between the plaintiff and defendants; the relative magnitude of plaintiff’s personal interests as compared to his interest in the derivative action itself; plaintiff’s vindictiveness toward the defendants and, finally, the degree of support plaintiff was receiving from the shareholders he purported to represent.Id. at 379-80, citing, Katz v. Plant Industries, Inc., Del.Ch., C. A. No. 6407, Marvel, C. (October 27, 1981). One or any combination of these factors may be sufficient to warrant disqualification of the derivative plaintiff, but the burden is upon the defendant to "show a substantial likelihood that the derivative action is not being used as a device for the benefit of all the stockholders." Youngman, supra, at 381. 1984 WL 8266 *2.
In Scopas the Chancery Court treated the motion to dismiss as a motion for summary judgment because the parties "have each relied extensively upon matters outside the pleadings." 1984 WL 8266 *1. Here, defendants have sought to bolster their arguments with facts outside the complaint. The Court will not consider the affidavits and exhibits filed in support of the motion to strike because "speaking" motions to strike for failure to state a claim are not permitted under our rules of procedure. See e.g., Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 347-48 (1990). Accord Tracy v. New Milford Public Schools, 101 Conn.App. 560, 566 (2007) "[A] motion to strike is essentially a procedural motion that focuses solely on the pleadings ... It is, therefore, improper for the court to consider material outside of the pleading that is being challenged by the motion." Id. If Delaware law is applicable, applying the Youngman factors would require consideration of extrinsic evidence that cannot be done on a motion to strike. Nor is there a per se rule that would disqualify a plaintiff who has raised both direct and derivative claims. See Fink v. Golenbock, 238 Conn. 183, 205 (1996).
Neither party has cited any case law on the issue of whether Delaware Chancery Rule 23.1 has any application to this action. Connecticut has its own rules about the qualifications of a representative in a shareholder derivative action. See C.G.S. § 52-572j. See generally Fink, 238 Conn. at 205; Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 370 (1977). Defendant also cited Fed.R.Civ.P. 23.1, which clearly is not applicable to this action. But see Fink, 238 Conn. at 205. Quaere whether the qualifications to maintain a derivative action are substantive, in which case Delaware law may apply, or procedural so Connecticut law would apply. See generally Reclaimant Corp. v. Deutsch, 332 Conn. 590, 602-03 (2019). This may be an academic question given the similarity of the factors to consider to qualify a shareholder representative in a derivative action. Under either state’s law evaluating plaintiffs’ qualifications as class representative would require consideration of extrinsic evidence and is not properly raised by a motion to strike.
At oral argument defense counsel argued for the first time that plaintiffs lacked standing to raise derivative claims on behalf of MTC because they were no longer shareholders because their shares were subject to the share repurchase agreement appended as an exhibit to the complaint. Although defendants correctly point out that exhibits to a complaint are considered part of the complaint, see Tracey v. New Milford Public Schools, 101 Conn.App. 560, 566 (2007) ("[a] complaint includes all exhibits attached thereto"), this Court in considering the motion to strike is not free to disregard allegations in the complaint that allege plaintiffs are shareholders of MTC. Moreover, in ruling on a motion to strike the Court is not permitted to consider the "facts" outside the pleadings which counsel incorporated into his argument as to why plaintiffs lack standing to bring a derivative action. See Tracy, 101 Conn.App. at 566.
But see A.C. Consulting LLC v. Alexion Pharmaceuticals, Inc., 194 Conn.App. 316, 326 (2019) (granting motion to strike breach of contract claim upheld based on unambiguous contract provision). Here, the Court may not interpret the provisions of the agreement appended as an exhibit to the complaint to contradict the factual allegations of plaintiffs’ status as shareholders without consideration of facts not alleged in the complaint incorporated into these counts.
A defense of lack of standing is more properly raised in a motion to dismiss where the Court may consider matters outside the pleading. See Pecan v. Madigan, 97 Conn.App. 617, 621 (2006); Conn. Podiatric Med. Assoc. v. Health Net of Conn., Inc., 49 Conn.Supp. 462, 468 (2006) (Sheedy, J.). "There is a significant difference between asserting that a plaintiff cannot state a cause of action and asserting that a plaintiff has not stated a cause of action, and therein lies the distinction between the motion to dismiss and the motion to strike." Pecan, 97 Conn.App. at 621.
The fatal defect in defendants’ argument that plaintiffs lacked standing to assert derivative claims because they are not shareholders is that this reason to strike the derivative claims was not raised in the motion . See Himmelstein v. Town of Windsor, 116 Conn.App. 28, 35 (2009); Stoll v. Ariori, 2018 WL 6015770 *2 n.2 (2018) (Harmon, J.). The only ground asserted in the motion is that "Counts Eleven and Twelve must be stricken because Plaintiffs are fatally conflicted out of bringing derivative claims." The moving and reply briefs filed by defendants did not raise the shareholder standing issue. Practice Book § 10-39(b) requires that "[e]ach claim of legal insufficiency enumerated in this section shall be separately set forth and shall specify the reason or reasons for such claimed insufficiency."
The motion to strike the derivative claims in the Eleventh and Twelfth Counts is denied.