Jill Fiore et al. v. LLC (2012)

MEMORANDUM OF DECISION RE DEFENDANTS' MOTION TO STRIKE (# 141)

On August 29, 2012, the defendants, Utility Investment Group, LLC (“UIG”), Robert Zappone, John Lanteri and Jeffrey Nicholas, filed a motion to strike counts three and four of the plaintiffs' third amended complaint, along with a supporting memorandum of law.   On October 5, 2012, the plaintiffs, Jill and Philip Fiore, filed their objection to the motion, to which the defendants replied on October 12, 2012.   This matter came before the court at short calendar on October 22, 2012.   The motion is granted.

I

PROCEDURAL AND FACTUAL HISTORY

On August 14, 2012, the plaintiffs filed a four-count third amended complaint against the defendants, alleging breach of contract, breach of fiduciary duty, violations of Connecticut's Unfair Trade Practices Act (“CUTPA”) and seeking declaratory relief, respectively.   The complaint alleges the following relevant facts.   Jill Fiore became a member of UIG in July 2008 when two hundred shares of Public Power Utility, Inc. (“PPU”) stock were contributed to UIG on her behalf.   UIG is a limited liability company formed for the purpose of holding shares of PPU stock.   The plaintiffs allege that UIG has no assets other than PPU stock and that UIG did not transact any business.   In October 2009, Zappone, acting on behalf of UIG, Lanteri and Nicholas,¹ solicited written consent for the approval of a sale of UIG's shares in PPU to GF Power I, LLC (“GF Power”) for approximately $1.9 million.   The complaint alleges that the defendants failed to distribute the proceeds of the sale of UIG's shares in PPU in accordance with UIG's operating agreement and in violation of the individual defendants' fiduciary duties as members of UIG.

The complaint also alleges that Zappone improperly amended an indemnification clause contained in the stock purchase agreement between GF Power and UIG. Under the original stock purchase agreement, GF Power agreed to accept full financial responsibility for any claims made by the plaintiffs concerning the manner of distribution of the proceeds resulting from the sale of the PPU stock to GF Power.   Zappone and GF Power agreed to amend this indemnity provision in order to settle unrelated litigation between PPU and Starion Energy, Inc. (“Starion”).²  Under the amended agreement, GF Power's indemnity obligations were limited to $250,000, and Zappone became liable for all indemnity obligations in excess of GF Power's obligation.   The complaint alleges that the amended indemnity provision is less valuable to UIG and the plaintiffs.

Count three alleges violations of CUTPA against Zappone for his modification of the stock purchase agreement, which resulted in the amended indemnity agreement.   Count four, seeking declaratory relief, calls for a judgment declaring that the amendment to the stock purchase agreement is void.

II

DISCUSSION

Practice Book § 10–39(a) provides in relevant part:  “Whenever any party wishes to contest (1) the legal sufficiency of the allegations of any complaint ․ or (2) the legal sufficiency of any prayer for relief in any such complaint ․ that party may do so by filing a motion to strike the contested pleading or part thereof.”  “A motion to strike admits all facts well pleaded;  it does not admit legal conclusions or the truth or accuracy of opinions stated in the pleadings.”  (Emphasis in original;  internal quotation marks omitted.)  Faulkner v. United Technologies Corp., 240 Conn. 576, 588, 693 A.2d 293 (1997).

In ruling on a motion to strike, the court must “construe the complaint in the manner most favorable to sustaining its legal sufficiency.”  (Internal quotation marks omitted.)  American Progressive Life & Health Ins. Co. of New York v. Better Benefits, LLC, 292 Conn. 111, 120, 971 A.2d 17 (2009).   The court is limited, in its review, “to a consideration of the facts alleged in the complaint.”  Doe v. Marselle, 38 Conn.App. 360, 364, 660 A.2d 871 (1995), rev'd on other grounds, 236 Conn. 845, 675 A.2d 835 (1996);  see Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990).

“[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.)   Connecticut Coalition for Justice in Education Funding, Inc. v. Rell, 295 Conn. 240, 252–53, 990 A.2d 206 (2010).

A

Count Three CUTPA

The defendants move to strike count three, alleging CUTPA violations, on the ground that the plaintiffs do not allege conduct that occurred in trade or commerce.   According to the defendants, Connecticut trial courts have routinely followed a well-settled rule that purely intracorporate disputes do not constitute CUTPA violations, and the conduct alleged by the plaintiffs is merely an intracorporate dispute between members of UIG. Furthermore, although the plaintiffs alleged that UIG and Zappone are persons engaged in trade and/or commerce, such an allegation is simply a legal conclusion unsupported by facts.   Moreover, the defendants argue that the plaintiffs have not alleged an ascertainable loss, and, as the CUTPA claim is legally insufficient, the plaintiffs' request for punitive damages must also be stricken.

The plaintiffs argue that the conduct at issue is Zappone's extra-corporate conduct as founder of Starion, a non-party to the present action.   Specifically, Starion's activities in Connecticut caused it to be sued by PPU, and, as part of the consideration for settling that lawsuit, Zappone fundamentally altered the indemnity agreement that concerned only claims brought against UIG by the plaintiffs.   Whereas the prior indemnity was backed entirely by GF Power, this amendment shifted all but $250,000 of the first $500,000 in liability to Zappone.   Nonetheless, the plaintiffs assert that even if the conduct is not completely extra-corporate, it is certainly not purely intracorporate because the allegations in the complaint go well beyond the governance of UIG. Finally, the plaintiffs assert that they have alleged an ascertainable loss in that the prior indemnity agreement provided no cap on GF Power's liability, but under the amended indemnity agreement, GF Power is responsible for the first $200,000 of any liability to the plaintiffs, Zappone is responsible for any subsequent liabilities up to $200,000, GF Power and Zappone evenly divide any subsequent liabilities up to $100,000, and Zappone is responsible for any remaining liabilities in excess of $500,000.   Not only do the plaintiffs claim to be damaged due to the lower quality of the indemnity agreement, they also assert that there is an uncertainty as to whether they will be indemnified should they prevail in the lawsuit because, they assert, Zappone put his equity in Starion in his wife's name.

In reply, the defendants assert that the plaintiffs' arguments ignore the actual allegations contained in count three, i.e., that the CUTPA claims are based on alleged conduct of Zappone and other UIG members, including the manner in which the indemnity agreement was amended.   This conduct relates to the governance and operation of UIG, not Zappone's alleged activities outside of UIG. Furthermore, even if the court credits the plaintiffs' argument, there are no facts from which it can be concluded that Zappone's activities occurred in his primary trade or commerce.   The conduct that allegedly violates CUTPA occurred in connection with the settlement of litigation of an unrelated matter between two entities who are not parties to the present action.   Finally, the defendants contend that the plaintiffs' claim of ascertainable loss is speculative and dependent on future events, i.e., the claimed loss does not arise unless and until the plaintiffs prevail in this action.   Thus, the plaintiffs are claiming damages under CUTPA for a loss that may, or may not, occur in the future.

CUTPA prohibits “unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”  General Statutes § 42–110b.  “Trade” and “commerce” include “the sale ․ 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).   Despite the broad statutory definition of “trade or commerce,” not every transaction implicates CUTPA.   Our Supreme Court has made clear that “purely intracorporate conflicts do not constitute CUTPA violations ․” Ostrowski v. Avery, 243 Conn. 355, 379, 703 A.2d 117 (1997);  see Russell v. Russell, 91 Conn.App. 619, 647–48, 882 A.2d 98, cert. denied, 276 Conn. 924, 925, 888 A.2d 92 (2005).

In the present case, the complaint alleges improper conduct relative to the defendants' handling of Jill Fiore's PPU stock, which had been invested in UIG and, thereafter, was sold to GF Power.   The plaintiffs allege that the sale was improper in various respects.   The plaintiffs also allege that, after the PPU stock was sold to GF Power, Zappone and GF Power agreed to amend the indemnity provision contained in the stock purchase agreement.   According to the plaintiffs, this amendment made the indemnification provision “less valuable to UIG and the Fiores ․” The plaintiffs claim that the amendment was effected in order to settle unrelated litigation between PPU and Starion.   The plaintiffs rely on this allegation in support of their theory that the present case is based on extra-corporate conduct.

The plaintiffs are incorrect in their understanding of what is meant by “intracorporate” activity.   The present case is based on the plaintiffs' disagreement with the way the defendants sold the plaintiffs' PPU stock to GF Power, as well as with the amendment to the indemnity agreement that is tied directly to that sale.   The third and fourth counts of the complaint involve only the amendment to the indemnity agreement.   The plaintiffs were not parties to the PPU suit against Starion.   The court accepts as true, for purposes of this motion, the plaintiffs' allegation that the indemnity agreement was amended in order to effect a settlement of the PPU/Starion litigation.   However, for purposes of deciding whether the complaint alleges anything other than intracorporate activity, the latter allegation is irrelevant.   It is true that the plaintiffs have identified what may have been the motive behind the GF Power/Zappone agreement to amend the indemnity agreement, but the existence of such a motive does not make the amendment to the agreement anything other than intracorporate activity.   The plaintiffs' claim is that their amended right to indemnification is less valuable than it had been, but that claim is the same regardless of the motive for the amendment.

The plaintiffs' CUTPA claim is further defective in that it does not allege that the plaintiffs have suffered an ascertainable loss.   CUTPA requires a plaintiff to establish an ascertainable loss of money or property in order to recover actual damages.  General Statutes § 42–110g(a).   The plaintiffs' CUTPA claim is based solely on the amendment to the indemnity agreement and the plaintiffs have insufficiently alleged that the amendment reduces the protection afforded to the plaintiffs.   First, the plaintiffs' “loss” due to the amendment to the indemnity agreement is speculative at this time.   Second, the plaintiffs have insufficiently alleged that the amendment to the indemnity agreement eliminated the plaintiffs' right to indemnification, should they ultimately establish a right to recover under the agreement.

In their memorandum, the plaintiffs claim that “Zappone has put his main asset, a large equity stake in Starion, in his wife's name.”   Pls.' Mem. at 8. However, the complaint does not allege that Zappone's equity in Starion was “his main asset.”   Even if the complaint did contain such an allegation, the complaint does not allege that Zappone lacks other assets sufficient to indemnify the plaintiffs, should he be obligated to do so in the future.   For all of the foregoing reasons, the defendants' motion to strike count three is granted.

The plaintiffs' claim for punitive damages is principally dependent on their CUTPA claim.  General Statutes § 42–110g(a);  see Gargano v. Heyman, 203 Conn. 616, 622, 525 A.2d 1343 (1987).   Since the CUTPA claim has been stricken, CUTPA cannot serve as a basis for a punitive damage claim.

The other basis on which the plaintiffs claim a right to punitive damages is their claim that the amendment of the indemnity agreement constitutes “wanton and malicious injury, and evil motive.”   Pls.' Mem. at 10;  see Stone v. Pattis, Superior Court, judicial district of Stamford–Norwalk at Stamford, Docket No. CV 09 5011515 (April 21, 2010, Brazzel–Massaro, J.).   This court has concluded that the plaintiffs have not yet suffered any loss due to the amendment to the indemnity agreement.   This court has also concluded that the plaintiffs have not sufficiently alleged that the amended agreement is less valuable to them.   Therefore, it is not possible to conclude that the allegations regarding the amendment to the indemnity agreement are sufficient to constitute “wanton and malicious injury, and evil motive.”   Therefore, the plaintiffs' claim for punitive damages is stricken.

B

Count Four Declaratory Relief

The defendants move to strike count four, seeking declaratory relief, on the ground that the plaintiffs failed to satisfy Practice Book § 17–56 in that they did not attach the necessary certificates to the complaint.   The stock purchase agreement is between GF Power, UIG and Zappone but the plaintiffs have not named GF Power in the lawsuit nor have they provided notice of the declaratory judgment to GF Power.   Furthermore, the plaintiffs do not have standing to request declaratory relief because they have neither a legal nor equitable interest in a declaratory judgment concerning a contract to which they are not parties.   Moreover, adjudication by the court is unnecessary because there is no dispute or substantial uncertainty between the plaintiffs and the defendants concerning any legal rights of the plaintiffs in the contract.   Finally, the defendants argue that the plaintiffs have not exhausted their remedies because they can bring an action for damages.

The plaintiffs object, arguing, first, that the defendants did not comply with Practice Book § 10–39(b) in that they failed to give the identity and residence of the missing party and failed to state the missing party's interest in the cause of action.   Second, the plaintiffs contend that they have standing under the classical aggrievement test, which requires, first, that a plaintiff demonstrate an identifiable legal interest in the subject matter.   The indemnity agreement, originally and as modified, expressly mentions the plaintiffs and concerns only claims brought by the plaintiffs.   The second element of classical aggrievement is a showing by a plaintiff that the conduct at issue has specifically and injuriously affected his or her legal interest.   The plaintiffs claim that, in the event they succeed in the present action, there is a reasonable possibility that the indemnity is less valuable and their recovery may be diminished because the amended indemnity shifted all but $250,000 of the indemnity obligation from UIG to Zappone.   The plaintiffs argue that there is a possibility that the amended indemnity agreement affects them differently from the membership of UIG, and they are specially and injuriously affected by the amendment.

The plaintiffs also argue that there is substantial uncertainty as to Jill Fiore's rights as the sole UIG member named in the indemnity agreement, and thus, a sufficient practical need for the determination of the matter.   Although Jill Fiore is not a party to the indemnity agreement between UIG and GF Power, she is a member of UIG and the indemnity agreement is contained in the stock purchase agreement, in which her 200 shares of PPU were sold to GF Power along with 600 other shares held in UIG. Thus, the plaintiffs claim, they are entitled to be able to ascertain, with reasonable certainty, the validity of the amended indemnity agreement.   Finally, the plaintiffs argue that the burden is on the defendants to show that the court cannot, in the exercise of its discretion, permit the declaratory judgment action.

In reply, the defendants argue that the plaintiffs do not contest the claim that they did not satisfy the notice requirements of Practice Book § 17–56(b).  Moreover, in contrast to the plaintiffs' claim, the defendants assert that they did, in fact, satisfy Practice Book § 10–39(b) by providing the name and address of the missing entity.   Next, the defendants argue that the plaintiffs are not parties to the indemnity agreement or third party beneficiaries of the agreement merely because the amended indemnity agreement references possible liability arising from claims of the plaintiffs.   The intent of the parties to the indemnity agreement was to indemnify UIG against certain claims.   Therefore, the plaintiffs cannot be third party beneficiaries and there is no basis on which to pursue a declaratory judgment against the parties to the contract.

Practice Book § 17–56(b) provides in relevant part that “[t]he party seeking the declaratory judgment shall append to its complaint ․ a certificate stating that all such interested persons have been joined as parties to the action or have been given reasonable notice thereof.”   The plaintiffs' failure to append a Practice Book § 17–56(b) notice to the complaint requires the court to strike the count seeking declaratory relief.   Practice Book § 17–56(c).³  Nonetheless, the court will address the other grounds asserted by the defendants in their motion to strike.

The defendants argue that the plaintiffs do not have standing to request declaratory relief because they do not have a legal or an equitable interest in the indemnity agreement to which they are not parties.   The defendants acknowledge that the plaintiffs have standing to seek declaratory relief if they sufficiently allege that they are third party beneficiaries to the agreement.   See Dow & Condon, Inc. v. Brookfield Development Corp., 266 Conn. 572, 579–81, 833 A.2d 908 (2003).

The plaintiffs have alleged sufficient facts to permit the conclusion that they are third party beneficiaries of the indemnity agreement.  “[T]he ultimate test to be applied [in determining whether a person has a right of action as a third party beneficiary] is whether the [mutual] intent of the parties to the contract was that the promisor should assume a direct obligation to the third party [beneficiary] and ․ that intent is to be determined from the terms of the contract read in the light of the circumstances attending its making ․” (Internal quotation marks omitted.)  Pelletier v. Sordoni/Skanska Construction Co., 264 Conn. 509, 531, 825 A.2d 72 (2003).   A fair reading of the indemnity agreement indicates that both Zappone and GF Power agreed to assume direct obligations to the plaintiffs in the event that there arises a need to indemnify the plaintiffs from liability, and the complaint clearly makes such allegations.   Compl. ¶¶ 87–88.   The agreement identifies the plaintiffs by name and further identifies the two parties to the agreement who have promised to indemnify them.

Even though the court is satisfied that the plaintiffs have sufficiently alleged that they are third party beneficiaries to the indemnity agreement that is not the end of the inquiry.   They must also sufficiently allege that “[t]here is an actual bona fide and substantial question or issue in dispute or substantial uncertainty of legal relations which requires settlement between the parties.”  Practice Book § 17–55(2).   Here, there is no dispute between the parties as to whether Zappone and GF Power have a contingent obligation to indemnify the plaintiffs.   The agreement clearly sets forth that obligation.

The plaintiffs claim that the defendants' conduct has specially and injuriously affected their legal interests because “there is a reasonable possibility that the indemnity is ‘less valuable’ and that [their] recovery may be diminished.”   Pls.' Mem. at 14.   The court has already concluded that the plaintiffs have not sufficiently alleged that the amended agreement is less valuable to them than it was prior to the amendment.   In view of that failing, the court concludes that the plaintiffs have not sufficiently alleged that the amendment to the indemnity agreement has specially and injuriously affected their legal interests.

For the foregoing reasons, the motion to strike count four is granted.

V

CONCLUSION

For all of the foregoing reasons, the defendants' motion to strike counts three and four is granted.   The motion to strike the claim for punitive damages is also granted.

So ordered.

BY THE COURT,

John A. Danaher III

FOOTNOTES

FN1. The complaint alleges that Zappone, Lanteri and Nicholas are co-founders, managers and members of UIG. Collectively, these defendants and their family members owned at least one-third (or 157) of UIG's 800 shares of PPU stock prior to the sale to GF Power.   Jill Fiore owned 200 of UIG's 800 shares of PPU stock and, thus, had a 25% membership interest in UIG..  FN1. The complaint alleges that Zappone, Lanteri and Nicholas are co-founders, managers and members of UIG. Collectively, these defendants and their family members owned at least one-third (or 157) of UIG's 800 shares of PPU stock prior to the sale to GF Power.   Jill Fiore owned 200 of UIG's 800 shares of PPU stock and, thus, had a 25% membership interest in UIG.

FN2. The complaint alleges that, prior to the sale of PPU stock to GF Power, certain employees and agents of PPU created Starion, a direct competitor to PPU. PPU sued Starion, alleging that it lost a historic number of customers as a result of intentional acts by Starion..  FN2. The complaint alleges that, prior to the sale of PPU stock to GF Power, certain employees and agents of PPU created Starion, a direct competitor to PPU. PPU sued Starion, alleging that it lost a historic number of customers as a result of intentional acts by Starion.

FN3. The plaintiffs respond that the defendants' motion is defective in that they did not provide the information required by Practice Book § 10–39(b), which states in relevant part that the defendants must provide the name and residence of the missing party ․ and ․ state the missing party's ․ interest in the cause of action.”   The plaintiffs are incorrect.   The defendants complied with Section 10–39(b) on page two of their Motion to Strike:  “GF Power is a Florida limited liability company located at 4830 West Kennedy Boulevard, Suite 445, Tampa, FL which is a party to the contract the plaintiff requests be declared null and void.”.  FN3. The plaintiffs respond that the defendants' motion is defective in that they did not provide the information required by Practice Book § 10–39(b), which states in relevant part that the defendants must provide the name and residence of the missing party ․ and ․ state the missing party's ․ interest in the cause of action.”   The plaintiffs are incorrect.   The defendants complied with Section 10–39(b) on page two of their Motion to Strike:  “GF Power is a Florida limited liability company located at 4830 West Kennedy Boulevard, Suite 445, Tampa, FL which is a party to the contract the plaintiff requests be declared null and void.”

Danaher, John A., J.