II v. Lee Yaworski et al. (2011)

MEMORANDUM OF DECISION

I. BACKGROUND

This matter was tried to the court on Count 5 of the plaintiff's Third Revised Complaint, which alleges conversion and breach of fiduciary duty against the defendant, Eugene Singer.¹  The plaintiff, Pasquale Cavaliere, is the conservator of the estate of James Yaworski II. In Count 5, the plaintiff alleges that, after James Yaworski became incapacitated due to an illness in October 1996, Singer induced James Yaworski's brother, Denis Yaworski, to execute promissory notes and mortgages from three LLCs, owned in whole or in substantial part by the Yaworski brothers, in favor of a partnership, Montauk Point Associates, controlled by Singer.   The amount of the notes and related mortgages was $1,600,000.   The mortgages were on real estate owned by Packer Mining, LLC ($1,200,000), Aspinook, LLC ($300,000), and Packer Limited, LLC ($100,000).   The plaintiff alleges that the three LLCs received nothing of value in return for the notes and mortgages, and further alleges that Singer used his status as the Yaworski family's accountant and confidant to wrongfully obtain the notes and mortgages.

The plaintiff claims that Singer continued his wrongful conduct in 1999 when the Yaworskis were negotiating a sale of their waste-hauling business and assets to Waste Management.   In connection with that transaction, the Yaworskis wanted Montauk Point Associates to release at least two of the mortgages granted to it in November 1996.   In addition, they wanted Montauk Point, LLC, another entity controlled by Singer, to release a mortgage on a third piece of property owned by Haul of Fame, Inc., yet another related Yaworski owned entity.   According to the plaintiff, Singer, acting on behalf of himself and the Montauk Point entities, demanded a $1,000,000 payment in exchange for releases of the mortgages from Packer Mining, LLC, Aspinook, LLC, and Haul of Fame, Inc. Yaworski Trucking, Inc., another corporation in which James Yaworski II owned an interest, paid the $1,000,000 in exchange for the releases.   The plaintiff claims that because no value was given by Singer or Montauk Point Associates for the mortgages in the first place, the $1,000,000 was fraudulently obtained by Singer.

The plaintiff claims that he is entitled to $1,000,000 in damages, the amount Singer fraudulently received from Yaworski Trucking, Inc. in 1999.   He also seeks interest, punitive damages, treble damages pursuant to Conn. Gen.Stat. § 52–564, and attorneys fees.   Plaintiff's Trial Memorandum, p. 11.²

During the trial of these claims, the court began to question whether the plaintiff had standing to assert the claims he was making against Singer.   In particular, the plaintiff's allegations and evidence all related to Singer's actions as to the various corporations in which the plaintiff owns an interest.   None of the allegations or evidence related to claims that Singer took from the plaintiff his personal assets, either by conversion or by breaching his fiduciary duty to the plaintiff.   When the court raised these concerns during the trial, counsel for the plaintiff, in addition to arguing that the plaintiff did have standing, made an oral motion to add the corporate entities as plaintiffs.   The court declined to consider the oral motion, but gave the plaintiff an opportunity to file a written motion to add additional plaintiffs.³  The plaintiff did not file such a motion, nor did any other party move to be added as a plaintiff to assert claims against Singer.   Instead, the plaintiff has argued in his Trial Memorandum that he has standing to assert the claims in his individual capacity.

II. DISCUSSION

Before reaching the merits of the plaintiff's claims, the court must first resolve the question of whether the plaintiff has standing to assert the claims he is making against Singer.  “The issue of standing implicates subject matter jurisdiction.”  (Internal quotation marks omitted.)  May v. Coffey, 291 Conn. 106, 113, 967 A.2d 495 (2009).   Consequently, “[t]he question of standing may be raised by any of the parties, or by the court, sua sponte, at any time during judicial proceedings.”  (Internal quotation marks omitted.)   Connecticut Carpenter Benefit Funds v. Burkhart Hotel Partners II, LLC, 83 Conn.App. 352, 355, 849 A.2d 922 (2004).  “Standing is the legal right to set judicial machinery in motion.   One cannot rightfully invoke the jurisdiction of the court unless he [or she] 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 ․ When standing is put in issue, the question is whether the person whose standing is challenged is a proper party to request an adjudication of the issue ․ Standing requires no more than a colorable claim of injury;  a [party] ordinarily establishes ․ standing by allegations of injury.   Similarly, standing exists to attempt to vindicate arguably protected interests ․

“Standing is established by showing that the party claiming it is authorized by statute to bring suit or is classically aggrieved ․ The fundamental test for determining 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 challenged action], as distinguished from a general interest, such as is the concern of all members of the community as a whole.   Second, the party claiming aggrievement must successfully establish that this specific personal and legal interest has been specially and injuriously affected by the [challenged action] ․ Aggrievement is established if there is a possibility, as distinguished from a certainty, that some legally protected interest ․ has been adversely affected.”  (Internal quotation marks omitted.)  May, supra, 291 Conn. 112–13.

The plaintiff acknowledges that his claims against Singer are not derivative claims.   He is not seeking damages or other relief on behalf of any of the LLCs that provided mortgages to Montauk Point Associates.   Nor is he seeking damages on behalf of Yaworski Trucking, Inc. for the $1,000,000 that the company paid to Singer and the Montauk entities.   Instead, he is seeking, individually, damages he claims to have suffered as a shareholder of those entities due to Singer's actions.   Plaintiff's Trial Memorandum, pp. 7–9.

The general rule is that a shareholder does not have standing to assert an individual claim of damages for wrong done to the corporation.  “It is axiomatic that a claim of injury, the basis of which is a wrong to a 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.”  Yanow v. Teal Industries, Inc., 178 Conn. 262, 281, 422 A.2d 311 (1979).   More recently, our Supreme Court stated that “a shareholder—even the sole shareholder—does not have standing to assert claims alleging wrongs to the corporation.”  (Internal quotation marks omitted.)   Smith v. Snyder, 267 Conn. 456, 461, 839 A.2d 589 (2004).

The plaintiff argues that the general rule should not apply to him because:  1) the corporations involved here were closely-held corporations;  and 2) he felt the harm from Singer's actions far worse than any other shareholder.   As to the first issue, the plaintiff relies upon our Supreme Court's decision in Fink v. Golenbock, 238 Conn. 183, 680 A.2d 1243 (1996).   The plaintiff's reliance is misplaced.   Unlike the plaintiff here, in Fink, the plaintiff brought his claim derivatively, on behalf of the closely-held corporation.   Id., 185.   Furthermore, the court reaffirmed the limitation on direct claims by shareholders by quoting the very language from Yanow set forth above.   Id., 200.   While the court did note that in some cases involving a closely-held corporation a shareholder might be able to assert a claim in his individual capacity, such situations appear to be limited to claims brought against the other shareholders of the corporation.  Id., 202–03;  May, supra, 291 Conn. 120–21.   The individual action might arise in such a scenario if the action of the other shareholders “affects both the relationship of the particular shareholder to the corporation and the structure of the corporation itself, causing or threatening an injury to the corporation.”  (Internal quotation marks omitted.)  Id., 122.

Applying this test, it is difficult, if not impossible, to imagine a scenario where the actions of a third party, like Singer, towards a corporation could give rise to an individual claim by one of the shareholders.   If a third party does something to harm a corporation, then all of its shareholders are harmed, and any one shareholder can only seek redress derivatively.

This case proves precisely that point.   The plaintiff claims that Singer wrongfully obtained $1,000,000 from Yaworski Trucking, Inc. The plaintiff also admits that he is, at most, a 50% owner of the corporation.   It makes little sense to say that because he decided to bring this claim he gets to personally recover all of Singer's ill-gotten gains.   The law requires instead that he bring a claim against Singer derivatively, on behalf of all of the shareholders of the corporation.   Through such a suit, each shareholder would realize a portion of any recovery based on their ownership interest in the corporation.   The plaintiff admits he has not brought such a derivative claim here.

The plaintiff's second argument is equally unpersuasive.   He claims that he should be able to recover from Singer individually because he has suffered more harm from Singer's conduct than has any of his fellow shareholders.   He claims that, unlike the other shareholders, he did not participate in the sale of Yaworski Trucking, Inc., and, therefore, did not know of the harm done to him until years later.   He also claims that his position was antagonistic to the other shareholders.

The problem with the plaintiff's claim is that it ignores the fact that he has settled his claims against the other members of the Yaworski family.   Thus, to the extent the plaintiff is claiming that the other Yaworskis are somehow responsible for allowing Singer to get away with his conduct, or worse, assisting Singer in his actions, the plaintiff has relinquished those claims.   He cannot avoid the effects of the settlement by now essentially surcharging those same parties by depriving them of their share of the claim against Singer.   The claim against Singer must be viewed separately and distinctly from the plaintiff's claims against his fellow shareholders.   When one does so, it is clear that all of the shareholders have the same right to participate in any potential recovery against Singer, whether through a direct action brought by the corporation or through a derivative action brought by one or more of the shareholders.   None of them though has a right to seek relief solely on their own behalf.

The court in May rejected an argument similar to the one being made by the plaintiff here.   In May, the plaintiffs, minority shareholders, claimed that the majority shareholders breached their fiduciary duty by offering for sale a new round of stock at an unreasonably low price that allowed the majority shareholders to dilute the plaintiffs' ownership share of the company.   The plaintiffs claimed that because they were hurt, while the other shareholders were not, they had standing to assert an individual claim for damages.   The court rejected the plaintiffs' argument.   In doing so, it held that “[t]he plaintiffs have focused on the wrong inquiry.   The issue in this case is not whether the existing shareholders were able to offset the injury to their existing shares by participating in the offer, but whether the company, i.e., all existing shareholders suffered an injury as a result of the unreasonably low offering price of the new shares.   It is undisputed that the unreasonably low offering price equally diluted the value of all existing shares.   Participating shareholders and nonparticipating shareholders, therefore, were harmed equally by the offering ․ The plaintiffs' argument improperly distracts our attention from the injuries that flow to the corporation from the defendants' allegedly wrongful conduct by focusing on the benefits to certain shareholders that accrued therefrom.”  (Emphasis added.)  May, supra, 291 Conn. 117–18.

Similarly, here, the plaintiff's argument seeks to distract the court's attention from the injury that flows to the corporation from Singer's allegedly wrongful conduct by focusing instead on what benefits the other shareholders might have obtained by working with Singer, or turning a blind eye to what he was doing.   The court cannot, and will not, conflate the two issues.   As noted above, Singer's actions have to be viewed in isolation.   Doing so leads to the inevitable conclusion that any harm from his conduct was done to the corporation, not to an individual shareholder like the plaintiff.

III. CONCLUSION

For all the reasons set forth above, the plaintiff does not have standing to assert an individual claim against Singer for wrongdoing that Singer allegedly perpetrated on the companies in which the plaintiff had an ownership interest.   Consequently, this court lacks subject matter jurisdiction over such a claim and Count 5 is DISMISSED.

Bright, J.

FOOTNOTES

FN1. The trial actually began as a jury trial against all of the defendants.   Counsel for the plaintiff and counsel for all of the defendants, except Singer, selected a jury to hear the case.   Singer, who represented himself in this matter, did not attend jury selection.   After the jury was selected, but before the start of evidence, the plaintiff and the defendants, other than Singer, settled their disputes.   The plaintiff then withdrew his jury claim as to his claims against Singer.   Singer had never made a claim for a jury.   Consequently, the plaintiff's one count against Singer was tried to the court..  FN1. The trial actually began as a jury trial against all of the defendants.   Counsel for the plaintiff and counsel for all of the defendants, except Singer, selected a jury to hear the case.   Singer, who represented himself in this matter, did not attend jury selection.   After the jury was selected, but before the start of evidence, the plaintiff and the defendants, other than Singer, settled their disputes.   The plaintiff then withdrew his jury claim as to his claims against Singer.   Singer had never made a claim for a jury.   Consequently, the plaintiff's one count against Singer was tried to the court.

FN2. Although the plaintiff claims entitlement to statutory damages permitted for civil theft, Count 5 sounds solely in conversion and breach of fiduciary duty, and makes no reference to Conn. Gen.Stat. § 52–564..  FN2. Although the plaintiff claims entitlement to statutory damages permitted for civil theft, Count 5 sounds solely in conversion and breach of fiduciary duty, and makes no reference to Conn. Gen.Stat. § 52–564.

FN3. The court was not willing to act on the plaintiff's oral motion for a number of reasons.   First, the parties he wanted to add were in fact among the defendants the plaintiff had sued and settled with.   It was unclear to the court what authority, if any, plaintiff's counsel had to act on their behalf.   In fact, counsel for the defendants, other than Singer, was in the courtroom when plaintiff's counsel made the oral motion.   The court inquired of defendants' counsel if his clients wished to be added as plaintiffs in the claims against Singer.   He indicated that he was not authorized to make that decision and would have to consult with them.   Second, given the late date on which the motion was being made, the court believed it was important that any motion to add a party plaintiff be in writing so that Singer, who is not an attorney and was representing himself, would have time to consider a response..  FN3. The court was not willing to act on the plaintiff's oral motion for a number of reasons.   First, the parties he wanted to add were in fact among the defendants the plaintiff had sued and settled with.   It was unclear to the court what authority, if any, plaintiff's counsel had to act on their behalf.   In fact, counsel for the defendants, other than Singer, was in the courtroom when plaintiff's counsel made the oral motion.   The court inquired of defendants' counsel if his clients wished to be added as plaintiffs in the claims against Singer.   He indicated that he was not authorized to make that decision and would have to consult with them.   Second, given the late date on which the motion was being made, the court believed it was important that any motion to add a party plaintiff be in writing so that Singer, who is not an attorney and was representing himself, would have time to consider a response.

Bright, William H., J.