O'Halloran Advertising, Inc. v. Mark O'Halloran (2012)

Memorandum of Decision on Motion to Strike and/or Dismiss (No. 111)

Procedural/Factual Background

On May 25, 2010, the plaintiff, O'Halloran Advertising, Inc. commenced this action against the defendant, Mark O'Halloran.   In its complaint, the plaintiff alleges the following facts relevant to the disposition of the motion that is currently before the court.   Until December 31, 2009, the plaintiff operated as a Connecticut corporation with its principal place of business located at 270 Saugatuck Avenue in Westport.   As of that date, James O'Halloran owned 510 shares of the plaintiff's common stock, which represented 51 percent of the plaintiff's total shares.   The rest of the plaintiff's common stock was allocated as follows:  (1) Marilyn O'Halloran, 210 shares representing 21 percent;  (2) Kevin O'Halloran, ninety shares representing 9 percent;  (3) Susan O'Halloran, ninety shares representing 9 percent and (4) the defendant, 100 shares, representing 10 percent.   As suggested by the fact that all of the relevant individuals have the same last name, the O'Hallorans are all related.   James O'Halloran and Marilyn O'Halloran are the parents of Kevin O'Halloran, Susan O'Halloran and the defendant.

The plaintiff alleges that during his tenure with the plaintiff, the defendant “engaged in conduct that exposed [the plaintiff] to risk of litigation by one or more of its employees for harassment and discrimination on the basis of sex, reckless behavior that put his and [the plaintiff's] reputation at risk, and placed inappropriate conditions upon participation in sales efforts and meetings.”   As a result, in August 2006, the defendant was removed from his role as the plaintiff's president and he ultimately was placed on a leave of absence and resigned.   Following his resignation, the defendant formed his own competing business and began “willfully interfering with [the plaintiff's] customer relationships” and “target[ing] the [plaintiff's] best customers and clients.”   The defendant also began contacting the plaintiff's top employees and encouraged them to leave the plaintiff's employ to work for the defendant.   Additionally, the defendant made derogatory and false statements about the plaintiff's corporate services.

On December 21, 2009, the plaintiff gave notice to its shareholders of a special meeting for the purpose of deciding whether the plaintiff should merge with New O'Ha, Inc. (“Newcorp”).  Following this announcement, the defendant gave notice of his intent to demand payment for his shares if the merger process was completed.   On December 31, 2009, the plaintiff's shareholders approved the merger with Newcorp.   All of the O'Hallorans except for the defendant then invested their shares of common stock with Newcorp.   Pursuant to the terms of the merger agreement, each share of common stock not owed by Newcorp immediately prior to the merger was converted into a right to receive $1,500 from the plaintiff.   On January 8, 2010, the plaintiff served an appraisal notice on the defendant, and pursuant to the merger agreement, on March 19, 2010, the plaintiff paid the defendant $150,000 for his 100 shares of common stock.   Via a letter dated April 9, 2010, the defendant's counsel acknowledged the defendant's receipt of these funds, but the letter also indicated that the defendant rejected the offer because he believed that the fair market value of the shares was $540,000.   The plaintiff contends that there is no reasonable basis for the defendant's proposed valuation of the shares at issue.   Accordingly, the plaintiff has brought this action pursuant to General Statutes § 33–871 ¹ seeking a judicial appraisal of the fair value of the defendant's shares.

The defendant filed an answer along with three counterclaims on August 12, 2010.   As the result of a request to revise these counterclaims, the operative pleading with respect to the defendant's counterclaims is the revised answer dated June 24, 2011.   In his second and third counterclaims,² which allege causes of action for breach of fiduciary duty and “diversion of profits,” the defendant alleges that James O'Halloran, as the majority stockholder in the plaintiff, breached a fiduciary duty owed to the defendant.   The defendant alleges that James O'Halloran “acting alone, in concert with or with the knowledge and consent of other shareholders including Kevin O'Halloran, overcompensated the [plaintiff's] shareholders, to the exclusion of the [d]efendant, and deprived the [d]efendant of his percentage of the profits.”   Furthermore, the defendant alleges that Kevin O'Halloran breached a similar fiduciary duty owed to the defendant and that both James O'Halloran and Kevin O'Halloran benefitted from the overcompensation that they received.   Specifically, the defendant contends that James O'Halloran and Kevin O'Halloran used the plaintiff's funds to pay “substantial non-business expenses over a period of years ․ to the exclusion and detriment of the [d]efendant, in an effort to deny the [d]efendant his share of the profits.”   Additionally, the defendant alleges that James O'Halloran and/or the plaintiff “created a new entity with the express purpose of denying the [d]efendant his 10 [percent] profits from the [plaintiff].”   On August 5, 2011, the plaintiff filed a combined motion to strike all three of the defendant's counterclaims, and to dismiss the second and third counterclaims for lack of standing.³  The plaintiff moves to strike the counterclaims on the ground that the statutory procedure outlined in General Statutes § 33–855 et seq. comprises the exclusive remedy for challenging the merger at issue.   The basis of the plaintiff's motion to dismiss is that the defendant lacks standing to maintain his second and third counterclaims because the harms alleged are derivative in nature.   Both parties have briefed the issues and the court heard argument in this matter at short calendar on September 26, 2011.

Discussion

The defendant has conceded that the first counterclaim may be stricken.   The court therefore grants the motion to strike the first counterclaim.   Before discussing the motion to strike the second and third counterclaims the court must first address the motion to dismiss those counterclaims which alleges lack of standing.   Since standing goes to the court's subject matter jurisdiction, Fort Trumbull Conservancy LLC v. New London, 282 Conn. 791, 802 (2007), “cognizance of it [the claim of lack of standing] must be taken and the matter passed upon before [the court] can move one further step in the cause;  as any movement is necessarily the exercise of jurisdiction.”  Schaghticoke Tribal Nation v. Harrison, 264 Conn. 829, 839, n.6 (2003).   The plaintiff's position is that the defendant lacks standing to bring these counterclaims.  “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 ․ A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction.”  (Internal quotation marks omitted.)  Beecher v. Mohegan Tribe of Indians of Connecticut, 282 Conn. 130, 134 (2007).  “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.”  (Internal quotation marks omitted.)  Cogswell v. American Transit Ins. Co., 282 Conn. 505, 516 (2007).  “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 ․ It is well established that, in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged.”  (Internal quotation marks omitted.)  Association Resources, Inc. v. Wall, 298 Conn. 145, 164 (2010).

“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.”  (Internal quotation marks omitted.)  St. Paul Travelers Cos. v. Kuehl, 299 Conn. 800 (2011).  “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.)  Burton v. Commissioner of Environmental Protection, 291 Conn. 789, 802 (2009).

The plaintiff argues that the defendant does not have standing to maintain the second and third counterclaims because the alleged harms are derivative in nature.   As the plaintiff contends that all of the harms allegedly committed by the plaintiff's shareholders injured the shareholders equally, the plaintiff urges that the defendant's claims need to be brought in the name of the corporation in a derivative action on behalf of all shareholders.   In response, the defendant argues that he alleges a separate and distinct harm from the rest of the plaintiff's shareholders in that he alleges that James O'Halloran and Kevin O'Halloran breached a fiduciary duty owed to him.   Specifically, the defendant points out that the revised counterclaims allege that James O'Halloran and Kevin O'Halloran overcompensated all of the plaintiff's shareholders while excluding only the defendant and that the O'Hallorans used corporate assets in such a manner that they caused the defendant to suffer an individual injury.   Consequently, the defendant maintains that he has standing to bring his counterclaims.

As stated recently by our Supreme Court, “[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 ․ Thus, 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.”  (Internal quotation marks omitted.)  May v. Coffey, 291 Conn. 106, 114–15 (2009).  “[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 ․ [A] shareholder—even the sole shareholder—does not have standing to assert claims alleging wrongs to the corporation.”  (Internal quotation marks omitted.)  Id., 115.   The second and third counterclaims in this case are governed by the rule of May v. Coffey which clarified Connecticut law in the application of the foregoing principles to small or privately held corporations to the same extent as they apply to large or publicly held corporations.   The allegations of the second and third counterclaims are essentially that misconduct and violations of fiduciary duties by the plaintiff and by the majority shareholders (diversion of profits to overcompensation of majority shareholders and payment of their personal non-business expenses) denied the defendant his rightful share of the corporate profits as the minority shareholder.   It is now clear under Connecticut law that these types of claims are derivative in nature and must be brought as a shareholder derivative action.   It is of no moment that the “derivative action would have the indirect effect of redressing an injury to those shareholders whose self-dealing caused the harm to the corporation.”   May, 118, citing, inter alia, Manson v. Stacesu, 11 F.3d 1127, 1131–32 (2d Cir.1993) (even though a shareholder allegedly had participated in wrong-doing, she sustained same injury with respect to value of her shares as plaintiff and both would be made whole by derivative action), cert. denied, 513 U.S. 915 (1994).

Defendant cites my ruling in LeBlanc v. Tomoiu, Superior Court, complex litigation docket at Stamford, Docket No. X08 CV06–5001421S (June 5, 2007, Jennings, J.) (43 Conn. L. Rptr. 599, 601) where the plaintiff shareholder was allowed to maintain an individual action for, inter alia, claims of breaches of fiduciary duties of the majority to the minority LeBlanc can be distinguished to some extent in that the plaintiff Le Blanc was also claiming he had been ousted from management of the corporation, but his other claims were not unlike those made here by defendant Mark O'Halloran.   LeBlanc was decided without benefit of the Supreme Court's holding in May.⁴ Now having the benefit of the May opinion it is likely that LeBlanc would be decided differently at least as to the plaintiff's claims unrelated to his ouster from management of the company.   The more appropriate precedent from this court's decisions would be Morgan Howard (United States), LLC v. Lewis, Docket No. CV05–006343, Superior Court, Judicial District of Stamford/Norwalk at Stamford (July 14, 2006, Jennings, J.), 2006 Conn.Super LEXIS 2214, at *8–13 (shareholder's claim that the limited liability company “intended to deprive him of his profits and capital stock interest” should have been brought as a derivative action, because “it would be the [LLC] which would have been injured by the alleged conduct and all shareholders or members of the company would have suffered the same injury as those allegedly sustained by the defendant.”   Under the present law of Connecticut defendant Mark O'Halloran's second and third counterclaims clearly must be brought in a shareholder derivative action.   He lacks standing to bring those claims in these counterclaims made by an individual shareholder and the court therefore lacks subject matter jurisdiction over those counterclaims.

Conclusion

For the reasons stated above, the motion to strike the defendant's first counterclaim is granted by agreement.   The motion to dismiss the second and third counterclaims is granted.   The court makes no ruling on the motion to strike the second and third counterclaims, as the court lacks subject matter jurisdiction over those claims.

Alfred Jennings, Jr.

Judge Trial Referee

FOOTNOTES

FN1. General Statutes § 33–871(a) provides:  “If a shareholder makes demand for payment under section 33–868 which remains unsettled, the corporation shall commence a proceeding within sixty days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest.   If the corporation does not commence the proceeding within the sixty-day period, it shall pay in cash to each shareholder the amount the shareholder demanded pursuant to section 33–868 plus interest.”.  FN1. General Statutes § 33–871(a) provides:  “If a shareholder makes demand for payment under section 33–868 which remains unsettled, the corporation shall commence a proceeding within sixty days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest.   If the corporation does not commence the proceeding within the sixty-day period, it shall pay in cash to each shareholder the amount the shareholder demanded pursuant to section 33–868 plus interest.”

FN2. On page six of his memorandum of law in opposition, the defendant states that he “concedes that Count One is not proper and should be stricken.”   There is therefore no need to discuss the first counterclaim..  FN2. On page six of his memorandum of law in opposition, the defendant states that he “concedes that Count One is not proper and should be stricken.”   There is therefore no need to discuss the first counterclaim.

FN3. Although a motion to dismiss ordinarily needs to be brought before a motion to strike;  Practice Book § 10–6;  the law is clear that the doctrine of standing implicates subject matter jurisdiction and that the court's lack of subject matter jurisdiction can be raised at any time.   Practice Book § 10–33.   As the court's potential lack of subject matter jurisdiction serves as the basis of the plaintiff's motion to dismiss, the plaintiff has not waived this argument by simultaneously filing a motion to strike and motion to dismiss..  FN3. Although a motion to dismiss ordinarily needs to be brought before a motion to strike;  Practice Book § 10–6;  the law is clear that the doctrine of standing implicates subject matter jurisdiction and that the court's lack of subject matter jurisdiction can be raised at any time.   Practice Book § 10–33.   As the court's potential lack of subject matter jurisdiction serves as the basis of the plaintiff's motion to dismiss, the plaintiff has not waived this argument by simultaneously filing a motion to strike and motion to dismiss.

FN4. See “2007 Developments in Connecticut Business Law” Connecticut Bar Journal, Vol 82, No. 2 at page 153, where the authors, in commenting on LeBlanc, say:  “The decision in May was published about the time the decision in LeBlanc was released, and its analysis surely would have been helpful in tracing its own analysis.”.  FN4. See “2007 Developments in Connecticut Business Law” Connecticut Bar Journal, Vol 82, No. 2 at page 153, where the authors, in commenting on LeBlanc, say:  “The decision in May was published about the time the decision in LeBlanc was released, and its analysis surely would have been helpful in tracing its own analysis.”

Jennings, Alfred J., J.T.R.