Samuel Tellar v. Warren Webber et al. (2012)

MEMORANDUM OF DECISION

MOTION TO DISMISS

The plaintiff, Samuel Tellar, commenced this action by service of process upon the defendants, Warren Webber and Warren's Foods, LLC, on January 3, 2011.   The seven-count revised complaint alleges the following.   The plaintiff possessed a relish recipe.   In the winter of 2007–08, the plaintiff and Webber discussed and negotiated a business proposal to manufacture and market relish made from the plaintiff's recipe.   The parties agreed to form Webtel Enterprises, LLC, in which they would be sole and equal principals.   Webtel Enterprises began to manufacture and market relish.   In or about June 2008, Webber offered to buy out the plaintiff's interest in Webtel Enterprises.   The plaintiff refused the offer.   On or about July 28, 2008, Webber, without authorization, wrote himself a check for $2,000 from the account of Webtel Enterprises and used the funds for his own use.   On or about December 30, 2008, Webber executed articles of dissolution of Webtel Enterprises, without informing the plaintiff.   On or about January 8, 2009, Webber formed Warren's Foods, LLC, which was comprised of Warren Webber and Carol Webber.   On April 30, 2009, Webber filed the articles of dissolution for Webtel Enterprises with the secretary of state.   Since the formation of Warren's Foods, Webtel Enterprises has ceased producing and marketing relish.   Based on the forgoing, the plaintiff alleges breach of contract, breach of the covenant of good faith and fair dealing, conversion, civil theft, usurpation of a business opportunity, breach of fiduciary duty and violations of the Connecticut Unfair Trade Practices Act (CUTPA).

On September 15, 2011, the defendants filed a motion to dismiss the complaint on the ground that the court lacks subject matter jurisdiction.   Specifically, the defendants assert that the plaintiff lacks standing to bring individual claims against the defendants and that he has not properly pleaded a derivative action in counts one through seven of the complaint.   The motion has been fully briefed by the parties.   Oral argument was held on September 12, 2011 at short calendar.

“A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction ․ 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 ․ The motion to dismiss ․ admits all facts which are well pleaded, invokes the existing record and must be decided upon that alone ․ [I]n determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged.”   (Citations omitted;  internal quotation marks omitted.)  Dayner v. Archdiocese of Hartford, 301 Conn. 759, 774, 23 A.3d 1192 (2011).

In the present case, the defendants argue the court lacks subject matter jurisdiction because the plaintiff does not have standing to bring any of the claims set forth in his complaint.   The plaintiff counters that he has suffered individual harms and has standing to bring these claims in a direct action against the defendants.

“The issue of standing implicates subject matter jurisdiction and is therefore a basis for granting a motion to dismiss ․ [I]t 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 ․”Standing is the legal right to set judicial machinery in motion.   One cannot rightfully invoke the jurisdiction of the court unless [one] has, in an individual or representative capacity, some real interest in the cause of action ․ 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 [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.”  (Citation omitted;  internal quotation marks omitted.)  St. Paul Travelers Cos. v. Kuehl, 299 Conn. 800, 808–09, 12 A.3d 852 (2011).

The defendants argue that the plaintiff does not have individual standing to bring a direct action because he has not alleged any individual harm separate and distinct from harm to Webtel.   Therefore, the defendants assert that these claims were required to be brought derivatively and the plaintiff fails to satisfy the standard for filing a derivative action on behalf of Webtel.   The plaintiff counters that the first two claims, alleging a breach of contract and breach of the duty of good faith and fair dealing, are sufficiently separate from the interests of Webtel, such that the plaintiff may pursue them individually.   As to the remaining counts, the plaintiff argues that the harms were personal to him and, therefore, he may pursue them.   Further, the general rules pertaining to lawsuits by individual shareholders, when applied to closely held corporations, do not bar a direct action in the present case.

“[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 ․ 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.”  (Internal quotation marks omitted.)  May v. Coffey, 291 Conn. 106, 114–15, 967 A.2d 495 (2009).

“[Our Supreme Court has] recognize[d] that there may be some instances in which the facts of a case give rise either to a direct action or to a derivative action such as when an act affects both the relationship of the particular shareholder to the corporation and the structure of the corporation itself, causing or threatening injury to the corporation.”  Fink v. Golenbock, 238 Conn. 183, 202, 680 A.2d 1243 (1996).¹  In a footnote, the Supreme Court noted that, “[a]t least one authority has suggested that in the case of a closely held corporation, the court may choose to treat a derivative action as a direct action:  ‘In the case of a closely held corporation ․ the court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery ․’ 2 American Law Institute, Principles of Corporate Governance:  Analysis and Recommendations (1994) § 7.01(d).”  Fink v. Golenbock, 238 Conn. 200 n.14.

In analyzing whether a claim belongs to the individual, “one commentator has noted, it can be ‘difficult to determine whether a particular claim belongs to a shareholder individually or to the corporate entity itself.’   M. Ford, Connecticut Corporation Law & Practice (2d Ed.2007) § 4.06, p. 4–88.   Normally, the court would examine each count and ascertain 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).   However, in Guarnieri, the Appellate Court found that the plaintiff had standing because “[t]his is not the normal case.   This case involves a closely held corporation.   Most importantly, the alleged perpetrator of the corporate wrongs is now the sole owner of that very corporation.   There is thus no shareholder similarly situated to the defendant.”  Id., 822.   Likewise, in the present case the corporation is closely held and there are not similarly situated shareholders who are not a party to this suit.

First, as to counts one and two, the plaintiff alleges breach of contract and breach of the duty of good faith and fair dealing.   The contract to which the plaintiff refers is alleged to have been entered into by the plaintiff and Webber as individuals before the creation of the corporation.   Therefore, because the plaintiff seeks to enforce rights pursuant to that contract, which are alleged to be individual and not shared by fellow shareholders, he has standing to do so.   Because the breach of the duty of good faith and fair dealing stems directly from that breach of contract, the plaintiff also has standing to assert that claim.

As to the remaining counts, the plaintiff incorporates the harms he allegedly suffered as a result of the breach of contract and breach of covenant of good faith and fair dealing, and further alleges conversion, civil theft, usurpation of a business opportunity, breach of fiduciary duty and CUTPA.   While, as previously stated, it is difficult to distinguish between the rights of the individual and the rights of the corporation, in the present case, viewing the alleged facts in the light most favorable to the plaintiff, the plaintiff has alleged individual harm.   In particular, the plaintiff has alleged that Webtel was a closely held corporation in which he and Webber were the only shareholders.   He further alleged that Webber committed harms that impacted him individually, as he was the only other member of the corporation.   For example, the plaintiff has alleged that the relish recipe belonged to him personally and was used by the corporation only after the contract was entered into.   As a result of the actions set forth in the complaint, the recipe has been co-opted by the defendants to the detriment of the plaintiff.   It is true that these harms undoubtedly also injured the corporation.   However, as previously noted, in certain situations the facts of a case may give rise to both an individual and derivative action.   This is such a case.   While the alleged actions caused damage to the corporation, they specifically caused damage to the plaintiff and no other shareholder.   Likewise, the money allegedly taken from Webtel was taken by Webber.   While all of the money taken may not have been directly contributed by the plaintiff, it would be an unjust result to allow the defendant to avoid suit, considering that, aside from the plaintiff, Webber was the only other shareholder to be impacted by the action, and he was its perpetrator.   Therefore, because this is a closely held corporation and the plaintiff is the only shareholder to suffer damages, he has standing to pursue these claims individually in a direct action.

Further, the plaintiff specifically alleges that Webber's actions caused a breach of a fiduciary duty owed to him.   Case law supports the plaintiff's argument that, in a closely held corporation, one shareholder owes another a fiduciary duty.  “[C]lose corporations are in many instances more like partnerships in how the owners operate the business and how they conduct themselves with one another.   A business that involves only two or three owners, each of whom owns an identical share in the company and who retains identical rights over the operation of the company, through corporate title or voting rights, is more like a partnership than a large, faceless, multi-state conglomorate ․ As it would not do substantial justice to allow the choice of business entity to give a license to shareholders to subject another shareholder's interests in a close corporation to the unbridled whim of the collective majority, fiduciary obligations must be imposed on shareholders of close corporations.”   Trans–Oceanic Motors, LTD v. Dubicki, Superior Court, judicial district of New London, Docket No. 4003532 (November 13, 2006, Harley, J.) (42 Conn. L. Rptr. 317, 320).   It has also been said that “[s]hareholders in a close corporation owe each other a fiduciary duty as do partners.   As 50% shareholders in [the close corporation], [the parties] ․ owe each other a fiduciary duty.”   Lopiano v. Gedney, Superior Court, judicial district of Stamford–Norwalk at Stamford, Docket No. CV X05 020191749 (November 15, 2004, Rogers, J.).   Considering that this closely held corporation may be thought of as a partnership, the plaintiff has standing to pursue these claims based upon a duty owed to him by his fellow shareholder and partner.²

CONCLUSION

For all the foregoing reasons, the plaintiff has standing to assert the causes of action set forth in counts one through seven of the revised complaint and the court has subject matter jurisdiction.   Accordingly, the motion to dismiss is hereby denied.

Peck, J.

FOOTNOTES

FN1. In Fink v. Golenbock, 238 Conn. 183, 202, 680 A.2d 1243 (1996), the defendants argued that the plaintiff had only a direct cause of action, and lacked derivative standing.   The court did not decide whether the plaintiff possessed individual standing, but found the plaintiff had derivative standing and noted that it was possible to have both individual and derivative standing..  FN1. In Fink v. Golenbock, 238 Conn. 183, 202, 680 A.2d 1243 (1996), the defendants argued that the plaintiff had only a direct cause of action, and lacked derivative standing.   The court did not decide whether the plaintiff possessed individual standing, but found the plaintiff had derivative standing and noted that it was possible to have both individual and derivative standing.

FN2. General Statutes § 34–339(b) states:  “A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to:  (1) Enforce the partner's rights under the partnership agreement;  (2) Enforce the partner's rights under sections 34–300 to 34–399, inclusive, including:  (A) The partner's rights under section 34–335, 34–336 or 34–337;  (B) the partner's right on dissociation to have the partner's interest in the partnership purchased pursuant to section 34–362 or enforce any other right under sections 34–355 to 34–357, inclusive, or sections 34–362 to 34–366, inclusive;  or (C) the partner's right to compel a dissolution and winding up of the partnership business under section 34–372 or enforce any other right under sections 34–372 to 34–378, inclusive;  or (3) Enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.”.  FN2. General Statutes § 34–339(b) states:  “A partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to:  (1) Enforce the partner's rights under the partnership agreement;  (2) Enforce the partner's rights under sections 34–300 to 34–399, inclusive, including:  (A) The partner's rights under section 34–335, 34–336 or 34–337;  (B) the partner's right on dissociation to have the partner's interest in the partnership purchased pursuant to section 34–362 or enforce any other right under sections 34–355 to 34–357, inclusive, or sections 34–362 to 34–366, inclusive;  or (C) the partner's right to compel a dissolution and winding up of the partnership business under section 34–372 or enforce any other right under sections 34–372 to 34–378, inclusive;  or (3) Enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.”

Peck, A. Susan, J.