Monte S. Klein v. David Kasowtiz et al. (2011)

MEMORANDUM OF DECISION

The issue raised by the defendants, David J. Kasowitz's and Southern Connecticut Financial Services, Inc.'s (SCFS), motion to dismiss is whether the plaintiff, Monte S. Klein, has standing to bring direct claims against them, based on Kasowitz's alleged wrongful conduct, as opposed to derivative claims on behalf of SCFS, or its members.   Klein brings this action as a minority member of SCFS, a closely held corporation.   For the reasons more fully discussed herein, the court concludes that Klein lacks standing to assert direct claims of injury against the defendants and grants the defendants' motion to dismiss.

The genesis of the present action is a joint venture by Klein and Kasowitz to form and operate a mortgage and financial services company.   In his second amended complaint dated July 14, 2011, the plaintiff alleges the following.   SCFS is a Connecticut corporation with a principal place of business in Milford.   At all relevant times, Klein and Kasowitz each owned forty-eight percent of the shares of the corporation, and two minority shareholders owned the remaining shares.¹  In addition to being shareholders, Klein and Kasowitz are officers and directors of the corporation.

In the operative complaint, Klein alleges a single wrongful act by Kasowitz that gives rise to his various claims against Kasowitz;  that is, that “Kasowitz has misappropriated certain funds of [SCFS] and converted them for his own use.”   Based on that wrongful conduct, Klein claims that Kasowitz breached his fiduciary duty to him;  committed statutory theft;  has been unjustly enriched;  diminished the value of Klein's interest in the corporation;  and has precluded Klein from legally functioning as a director.²  Klein asserts that “the actions of ․ Kasowitz are illegal, oppressive and fraudulent and have caused direct and personal injury to the plaintiff, and to the plaintiff alone.”  (Emphasis added.)   The plaintiff requests a statutory dissolution of SCFS and an accounting.

The defendants' motion challenges the second amended complaint on the ground that Klein does not have standing to maintain the claims set forth therein because the claims are derivative, not direct, in nature.  “The motion to dismiss ․ admits all facts which are well pleaded, invokes the existing record and must be decided upon that alone ․ Where, however ․ the motion is accompanied by supporting affidavits containing undisputed facts, the court may look to their content for determination of the jurisdictional issue ․” (Internal quotation marks omitted.)  Cogswell v. American Transit Ins. Co., 282 Conn. 505, 516, 923 A.2d 638 (2007).  “[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).  “The burden rests with 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.”  (Internal quotation marks omitted.)  Goodyear v. Discala, 269 Conn. 507, 511, 849 A.2d 791 (2004).  “[I]n determining whether a court has subject matter jurisdiction, every 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 parties in the present action have not filed affidavits in support of, or in opposition to, the defendants' motion to dismiss.   Therefore, the court will decide the motion on the basis of the well pleaded facts and the record.   Cogswell v. American Transit Ins. Co., supra, 282 Conn. 516.

The court will first review the law applicable to the defendants' standing claim.  “The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss.”  St. George v. Gordon, 264 Conn. 538, 544, 825 A.2d 90 (2003).  “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 ․ Standing ․ is not a technical rule intended to keep aggrieved parties out of court;  nor is it a test of substantive rights.   Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions which may affect the rights of others are forged in hot controversy, with each view fairly and vigorously represented.”  (Internal quotation marks omitted.)  New Hartford v. Connecticut Resources Recovery Authority, 291 Conn. 511, 518–19, 970 A.2d 583 (2009).

The Supreme Court has stated that “[t]wo broad yet distinct categories of aggrievement exist, classical and statutory ․ [T]he fundamental test for determining [classical] aggrievement encompasses a well-settled twofold determination:  first, the party claiming aggrievement must successfully demonstrate a specific personal and legal interest in the subject matter of the decision, as distinguished from a general interest, such as is the concern of all the members of the community as a whole.   Second, the party claiming aggrievement must successfully establish that the specific personal and legal interest has been specially and injuriously affected by the decision.”   (Internal quotation marks omitted.)  Id.

The defendants move to dismiss the second amended complaint asserting that Klein lacks standing to maintain the action in his individual capacity because his injuries are not separate and distinct from SCFS or the other members of the corporation.   More particularly, the defendants contend that given the nature of the plaintiffs' claims, and under well settled law of corporations, the plaintiff must bring a derivative action on behalf of SCFS. The court agrees.

“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.”  Yanow v. Teal Industries, Inc., 178 Conn. 262, 281, 422 A.2d 311 (1979).  “Since at least the middle of the [nineteenth] century, it has been accepted in this country that the law should permit shareholders to sue derivatively on their corporation's behalf under appropriate conditions ․ [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 ․ [I]n order for a shareholder to bring a direct or personal action against the corporation or other shareholders, that shareholder must show an injury that is separate and distinct from that suffered by any other shareholder or by the corporation ․ It is commonly understood that [a] shareholder even the sole shareholder does not have standing to assert claims alleging wrongs to the corporation.”  (Citations omitted;  internal quotation marks omitted.)  Smith v. Synder, 267 Conn. 456, 461, 839 A.2d 589 (2004).

Klein's claims arise from alleged acts by Kasowitz relating to SCFS, a closely held corporation.   As properly noted by Judge Jennings, “[t]he application of these principles to claims brought by a shareholder of a closely held corporation against other shareholders of the corporation is particularly difficult.”   LeBlanc v. Tomoiu, Superior Court, complex litigation docket at Stamford, Docket No. X08–CV–06–5001421 (June 5, 2007, Jennings, J.) [43 Conn. L. Rptr. 599].³

In opposing the defendants' dismissal motion, Klein claims, simply, that “[a]s the only other shareholder in addition to ․ Kasowitz ․ [Klein] has a ‘specific personal and legal interest’ in the subject matter at issue ․” Klein claims that he has standing because he is one of two shareholders in SCFS and that he “has alleged injuries which he has suffered individually and to the exclusion of another shareholder.”   Klein's contention that he has standing merely because he is one of two shareholders is wrong under our law.   See Smith v. Synder, supra, 267 Conn. 461.

The well pleaded allegations in the plaintiff's complaint, deemed admitted for the purpose of deciding this motion, demonstrate that Klein has not sustained injuries separate and distinct from SCFS, itself, or its other members.   The claims that he asserts are claims that could be asserted by the other members of the corporation.⁴

This case is readily distinguishable from cases like Yanow, which involved an “action in the nature of both a shareholder's derivative suit and an individual action brought by the plaintiff, Bernard Yanow, against Teal Industries, Inc. (Teal), a Connecticut corporation, and Martin B. Gentry, Jr., who, at relevant times, was an officer and director of Teal, seeking an accounting, damages and nullification of a merger between Teal and Mallard Manufacturing Company (Mallard), of which Yanow was a 10 percent shareholder.   The complaint alleged in four counts that Teal and Gentry had committed a series of corporate wrongs resulting in damage to Yanow individually and to Mallard.”  Yanow v. Teal Industries, Inc., supra, 178 Conn. 263–64.   An issue on appeal was whether the trial court properly granted the plaintiff's summary judgment motion on certain counts of the complaint for the reason that the counts set forth derivative claims “and could only be brought by one who, unlike the plaintiff, was a shareholder of Mallard acting on behalf of Mallard at the time of suit.”  Id., 281.

The Supreme Court disagreed with the trial court that the claims in the subject counts were derivative in nature.  Id., 283.

Count one, as noted earlier, states nineteen individual transactions which the plaintiff alleged to be unfair and undisclosed to him, which put into issue the looting of Mallard by Gentry.   Such claims—of looting the corporation and of failure of the directors to disclose important facts concerning corporate transactions state personal, as opposed to derivative, causes of action ․ In count four, the plaintiff alleged that Gentry, in his capacity as officer and director of Mallard and Teal, took advantage of special facts concerning Mallard's financial condition, which he failed to disclose to the plaintiff, and that Gentry caused the merger to deprive the plaintiff of his shares and to avoid paying the plaintiff their full fair market value.   The plaintiff, in effect, via counts one and four, alleged that both defendants dismantled Mallard step-by-step, transaction-by-transaction, depriving Mallard and the plaintiff of income and assets.   These allegations claim a pervasive breach of the fiduciary duty owed by the corporate majority to the sole minority stockholder.   The rule of corporation law and of equity invoked is well-settled:  the majority has the right to control, but when it does so, it occupies a fiduciary relationship toward the minority, as much as the corporation itself or its officers and directors ․ As pleaded, these causes of action are based upon alleged unlawful acts relating solely to the stock owned by the plaintiff, in violation of the fiduciary duty owed the plaintiff by the defendants, and they thus state individual, and not derivative, claims.

(Citations omitted.)  Id., 283–84.

In the present case, Klein's allegations against the defendants do not concern improper acts and omissions solely against the plaintiff's interest in SCFS. In fact, the plaintiffs' complaint fails to contain any allegations supporting a cause of action based on wrongful conduct by Kasowitz that relate solely to Klein's corporate interest.   Therefore, the complaint sets forth derivative, not individual, claims.

In view of the foregoing, the defendants' motion to dismiss (133.00) is granted.

TYMA, J.

FOOTNOTES

FN1. The plaintiff alleges that Kasowitz presently owns fifty-two percent of the shares, and that he is the majority shareholder and Klein is the minority shareholder..  FN1. The plaintiff alleges that Kasowitz presently owns fifty-two percent of the shares, and that he is the majority shareholder and Klein is the minority shareholder.

FN2. The second amended complaint contains only one count..  FN2. The second amended complaint contains only one count.

FN3. Similarly, Judge Adams commented that “[r]eading Connecticut Supreme Court cases on the distinctions between direct and derivative actions can be an unsettling experience as the decisions are few in number, somewhat sporadic in issuance, and deal with different factual scenarios.”   Puri v. Norwalk Anesthesiologists, P.C., Superior Court, complex litigation docket at Stamford, Docket No. X08–CV–05–4003801 (July 19, 2006, Adams, J.)..  FN3. Similarly, Judge Adams commented that “[r]eading Connecticut Supreme Court cases on the distinctions between direct and derivative actions can be an unsettling experience as the decisions are few in number, somewhat sporadic in issuance, and deal with different factual scenarios.”   Puri v. Norwalk Anesthesiologists, P.C., Superior Court, complex litigation docket at Stamford, Docket No. X08–CV–05–4003801 (July 19, 2006, Adams, J.).

FN4. One of the allegations that is deemed to be admitted for purposes of this motion is that at all relevant times Klein and Kasowitz equally owned ninety-six percent of the shares of SCFS, and the remaining shares were owned by two other shareholders.   Presumably, those shareholders could make the same claims against Kasowitz as Klein..  FN4. One of the allegations that is deemed to be admitted for purposes of this motion is that at all relevant times Klein and Kasowitz equally owned ninety-six percent of the shares of SCFS, and the remaining shares were owned by two other shareholders.   Presumably, those shareholders could make the same claims against Kasowitz as Klein.

Tyma, Theodore R., J.