UIL v. Therma R. Albright et al. (2013)

MEMORANDUM OF DECISION RE MOTION TO DISMISS

Preliminary Statement

Plaintiff, North Star Contracting Corp. (North Star) brings this derivative action as a shareholder of UIL Holdings Corporation (UIL) purportedly on behalf of UIL. North Star seeks an order directing UIL to investigate conduct which occurred at United Illuminating (UI), its wholly owned subsidiary.   North Star alleges that as a shareholder, it served written demand upon the defendants, the members of the Board of Directors of UIL, to investigate the conduct of UI and its employees as well as its policies and procedures, in connection with the expansion of utility lines in the Fairfield County area from 2006 through 2009.   North Star further alleges that the defendants failed to instigate such an investigation.   The defendants filed a motion to dismiss this action advancing three distinct bases upon which they claim the motion should be granted:  (1) the issues raised are factually moot because UIL did commence the very investigation called for in the demand from North Star;  (2) North Star does not have standing to sue derivatively insofar as it was not a shareholder at the time the alleged misconduct at UI occurred;  (3) North Star cannot “fairly and adequately” represent UIL or its shareholder's interests because North Star's sole owner, J. William Foley, has pending litigation against UI through an affiliate entity, J. William Foley, Inc., arising out of the same alleged misconduct.   Each argument implicates this court's subject matter jurisdiction.   For the reasons set forth below, the motion is granted.

Standard of Review

A Motion to Dismiss is the appropriate vehicle by which to assert that the court lacks jurisdiction, to include subject matter jurisdiction.  P.B. § 10–31;  Upson v. State, 190 Conn. 622, 624 (1983);  Sadloski v. Manchester, 235 Conn. 637, 645–46 n.13 (1995).  “The plaintiff bears the burden of establishing subject matter jurisdiction, whenever and however, raised.”   Fink v. Golenbock, 238 Conn. 183, 199 n.13 (1996).   However, in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged.”  State v. Mann, 271 Conn. 300, 335 (2004).

A claimant's lack of standing implicates the court's subject matter jurisdiction.   The court's analysis will necessarily focus not on the merits of the plaintiff's claim, but rather whether the plaintiff is the proper party to bring such a claim.  Wellswood Columbia, LLC v. Hebron, 295 Conn. 802, 809–10 (2010);  418 Meadow Street Assoc., LLC v. Clean Air Partners, LLC, 123 Conn.App. 416 (2010).  “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.”  Sadloski v. Manchester, 228 Conn. 79, 84 (1993).

Facts

Generally, on a motion to dismiss, the allegations of the complaint are construed in a manner most favorable to the pleader.  Conboy v. State, 292 Conn. 642, 651 (2009).   However, where additional uncontested facts are provided to the court by way of affidavit or other competent evidence, the court may consider those facts and evidence when deciding the issues presented in a motion to dismiss and need not conclusively presume the accuracy of the allegations in the plaintiff's complaint.  Id., 652.¹

Based upon the pleadings and other competent evidence provided, the undisputed facts are set forth.   UIL is the parent corporation of UI, which, among other things, distributes electricity to customers in the Greater New Haven and Bridgeport areas of Connecticut.   The plaintiff, a New York corporation is 100% owned by J. William Foley (Foley).   Foley also owns and operates J. William Foley Incorporated (Foley, Inc.).   Thus, Foley, Inc. is an affiliated entity of North Star. Foley, Inc. is an electrical contractor.

In 2006, UI entered into a contract with Foley, Inc. in connection with the expansion of utility services in Fairfield County.   The contract and the work performed under the contract became the subject of litigation commenced by Foley, Inc. against UI in 2009 docketed as J. William Foley, Inc. v. United Illuminating Company, Dkt. No. HHD–CV–09–5035804–S.   The case was tried to the court (Bright, J.) and a memorandum of decision was issued September 3, 2013.²  The court decided some issues in favor of Foley, Inc. and others in favor of UI. Foley, Inc. filed an appeal of the court's decision which remains pending.

In October 2012, Foley, Inc. brought a complaint against UI with the Federal Energy Regulatory Commission (FERC) alleging much of the same misconduct contained in the 2009 complaint against UI. The FERC dismissed this action without prejudice pending the outcome of the state court claim against UI. Insofar as an appeal of the action against UI is pending, whether Foley, Inc. will recommence an action with the FERC remains unknown but is certainly a potential.

On January 2, 2013, North Star purchased shares of UIL stock becoming a shareholder.³  Thereafter, on January 23, 2013, North Star sent a letter to the UIL Board outlining substantially the same claims of wrongdoing by UI as had been pursued in the action against UI and in the FERC complaint.   The letter requested that the UIL Board commence an independent investigation into the allegations aided by counsel other than UI or UIL's existing outside counsel, Wiggin and Dana, LLP.⁴

This action was commenced in April 2013.

Discussion

“A shareholder's derivative suit [evolved as] an equitable action by the corporation as the real party in interest with a stockholder as a nominal plaintiff representing the corporation ․ It is designed to facilitate holding wrongdoing directors and majority shareholders to account and also to enforce corporate claims against third persons.”  (Internal citations omitted.)   Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 370 (1977).   Statutory authority to bring a derivative action is found at Conn. Gen.Stat. § 52–572j which provides in relevant part:  “(a) Whenever any corporation ․ fails to enforce a right which may properly be asserted by it, a derivative action may be brought by one or more shareholders ․”

“[T]he defendants in a derivative action may properly question whether the plaintiff has standing ․ to act as the nominal shareholder acting on behalf of the corporation and the other shareholders ․ In this aspect of a derivative suit, the corporation is a named defendant, and it also has the right to object to and question the capacity of a minority shareholder to bring suit on its behalf.”  (Citation omitted.)  Id., 370–71.

I. Plaintiff's Standing as a Fair and Adequate Representative

Generally, in order to maintain a derivative action, a plaintiff must establish that he was a shareholder at the time of the wrongful conduct complained of, and that he fairly and adequately represents the interests of the other shareholders and/or the corporation.   See, Conn. Gen.Stat. § 52–572j and § 33–721(1) and (2).⁵  As indicated, the defendants challenge the plaintiff's ability to establish either prerequisite.   The court looks first to the question of “fair and adequate” representation.

Although our Supreme Court has discussed, on more than one occasion, the requirement that a plaintiff “fairly and adequately represent the interests of the shareholders ․ similarly situated in enforcing the right of the corporation,” see e.g. Barrett v. Southern Connecticut Gas, Co., supra;  Fink v. Golenbock, 238 Conn. 183 (1996), our appellate courts have not had occasion to discuss the impact on this precedent of the subsequently enacted Connecticut Business Corporations Act (CBCA), Conn. Gen.Stat. § 33–600—33–998.   The CBCA adopted much of the proposed Model Business Corporations Act to include its provisions regarding the bringing of derivative actions.   Conn. Gen.Stat. § 33–720 et seq.   Thus, Connecticut has two statutes which describe the prerequisites for bringing a shareholder derivative proceeding, § 52–572j and § 33–720 et seq.

Specifically, Conn. Gen.Stat. § 52–572j provides that a derivative action “may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders ․ similarly situated in enforcing the right of the corporation.”   However, Conn. Gen. Stat § 33–271(2) affirmatively confers standing to bring a derivative action upon those who “fairly and adequately represent the interests of the corporation in enforcing the right of the corporation.”   While the provisions in the two statutes are very similar, the language is not identical.⁶  This court has not found any appellate authority that addresses the differences in the language of the two statutes or the impact of the passage of the § 33–271 on existing case law.⁷  However, insofar as this court determines that under either or both statutes the plaintiff lacks standing, this court does not undertake that analysis.⁸

The purpose of the fair and adequate representation requirement is to avoid possible antagonism between the interests of the representative and those of the other shareholders such that “the interests of the other stockholders are disregarded in the management of the case.”  Barrett v. Southern Connecticut Gas, Co., 172 Conn. 362 (1977).   See also, Fink v. Golenbock, 238 Conn. 183, 204 (1996).   In Fink, our Supreme Court discussed this requirement, as contained in CGS § 52–572j, and adopted the approach used by the Ninth Circuit Court of Appeals in the case of Larson v. Dumke, 900 F.2d 1363, 1367 (9th Cir.).⁹  There, the Court of Appeals identified eight factors for determining whether a plaintiff is a “fair and adequate” representative.   Our Supreme Court adopted these factors as “nonexclusive and interrelated” and further held that “it is frequently a combination of factors that guides a court in determining whether a plaintiff meets the requirements of fair and adequate representation.”  Id., 205–06.   The factors include:  (1) whether the named plaintiff is the real party in interest;  (2) the plaintiff's familiarity with the litigation and willingness to learn about the suit;  (3) the degree of control exercised by attorneys over the litigation;  (4) the degree of support given to the plaintiff by the other shareholders;  (5) the plaintiff's personal commitment to the action;  (6) the remedies sought by the plaintiff;  (7) the relative magnitude of the plaintiff's personal interests as compared to the plaintiff's interest in the derivative action itself, and (8) the plaintiff's vindictiveness toward the other shareholders.  Id., 205.   In adopting these factors the Court further noted that “Not all factors will come into play in all cases, and in some cases, there may be additional factors for the court to consider.”  Id., 206.

Here, the defendants rely upon Barrett which involved circumstances very much like those presented in this matter.   In Barrett, as is the case here, the defendant corporation was a large publically traded company and the plaintiff was a small minority individual shareholder.   Barrett had been in conflict with the company management over a number of issues and in several different forums.   Eventually, the plaintiff brought suit against the gas company seeking damages he claimed were due him as a result of the prior conflicts.   The plaintiff also sought to maintain a derivative action arising out of the same series of events but seeking damages owed to the corporation.   The Supreme Court held that the plaintiff, in bringing both a derivative claim on behalf of the corporation and a direct claim against the corporation, had conflicting interests and was therefore not a fair and adequate representative for purposes of maintaining the derivative litigation.  Id., 375–77.   The Court further held that such conflicts give rise to the possibility of abuse of the derivative action:

We believe that the trial court here properly concluded that much the same likelihood for abuse existed [as existed in G.A. Enterprises, Inc. v. Leisure Living Communities, Inc., 517 F.2d 24 (1st Cir.1975) ] with this derivative action in light of the preexisting relationship between Barrett and Southern.   That relationship included his unsuccessful proxy fight and his opposition to Southern's application for a rate increase, in addition to his individual damage action.   Barrett's financial interest in any recovery he won for Southern in the derivative action would be negligible, assuming Southern distributed the recovery to the shareholders, but his interest in a successful completion of his individual action would be substantial.  “(T)he many faceted relationship between (Barrett) and (Southern) suggests that this suit may be an attempt to open still another front in a wide ranging battle having objectives unrelated to those shared by the class.”  DuPont v. Wyly, 61 F.R.D. 615, 622 (D.Del.).

Id., 376.

Notwithstanding the holding of Barrett, Plaintiff maintains that an analysis of the Fink factors establishes its standing as a fair and adequate representative.   The situation presented in Fink, was decidedly different than that presented in Barrett.   There, the plaintiff brought derivative claims as the 50% shareholder against, among others, the other 50% shareholder.   The claims arose out of the defendant's unilateral dismantling of the corporation, misappropriation of the corporation's assets and other wrongs against the corporation.   It was axiomatic that the plaintiff shareholder did not have interests which were coextensive with the other shareholders, because there was only one other shareholder and he was the defendant accused of the wrong doing.   In discussing Barrett, the Court noted however that “Barrett ․ does not hold that a plaintiff with possible individual claims against the corporation can never fairly and adequately represent other shareholders in a derivative action.   Whether a plaintiff is an appropriate representative is fact specific and depends upon any number of factors.”   Id., 205.   After adopting the eight factors identified above, the Court went on to hold:

Under the facts of this case, and in light of the plaintiff's special status as one of only two shareholders, we conclude that he is a fair and adequate representative of the corporation.   The rule is not that the plaintiff must fairly and adequately represent the interests of all other shareholders;  rather, under § 52–572j, the plaintiff must answer to those shareholders who are similarly situated.   In a case such as this, where there is only one other shareholder in the corporation and it's that shareholder who is allegedly responsible for the harm to the corporation, there is no other similarly situated shareholder and the plaintiff should not be prevented from bringing an otherwise proper derivative action by an objection from the wrongdoing shareholder.

(Bold emphasis added;  Italicized emphasis in the original) Id., 206–07.¹⁰  Consistent with this language, the Supreme Court's ultimate conclusion to permit derivative standing in Fink, stemmed less from the comparison between the plaintiff and the other shareholder, but rested on the practical observation that “the derivative action is appropriate, not because the plaintiff is representative of the opposing shareholders, but because the corporation has interests that need to be represented, and the plaintiff shareholder may be the only representative in a position to protect those interests.”  Id., 207.   The same cannot be said about North Star with respect to UIL.

Under the analyses set forth in both Barrett and Fink, this court concludes that the plaintiff cannot and does not fairly and adequately represent either the corporation or its shareholders.   This derivative action shares many of the risks for abuse identified in Barrett and as encompassed within the Fink factors.   In bringing a derivative action seeking to force an investigation into Foley, Inc.'s still pending allegations, (by counsel other than counsel to the litigation) plaintiff asks UIL to get what is essentially a second legal opinion regarding the merits of the still pending Foley, Inc. lawsuit.   This could serve to undermine or otherwise impact UI and UIL's position in that litigation and could be construed as a backdoor attempt to manipulate UI in the action brought by Foley, Inc.

Further, as part of the still pending litigation, Foley, Inc., plaintiff's affiliate, seeks millions of dollars in damages from UI for the very conduct he seeks investigated in this derivative action.   The Foley, Inc. claim, if successful, will inure to the direct and inescapable detriment of the corporation or shareholders North Star seeks to represent.¹¹

The court recognizes that the Plaintiff offered alternative, largely altruistic, motives for this derivative action.   This court does not make any factual determination as to the actual motive for the derivative action.   The court simply identifies conflicts which give rise to the potential for abuse in assessing the “fair and adequate” representation requirement for standing.   It is this potential which our courts have relied upon in making these determinations.

The standard is one of potential for abuse, and thus the plaintiff's averments of good faith and a desire to benefit the corporation cannot overcome the type of conflict which maintenance of both an individual and a derivative action suggests.   The kind of assurance demanded by due process and the equitable requirement of adequate and fair representation is that the nominal plaintiff be free of any interest which holds the potential of influencing his conduct of the litigation in a manner inconsistent with the interests of [the] shareholders.

(Citations omitted;  internal quotation marks omitted.)  Barrett v. Southern Connecticut Gas Co., supra, 172 Conn. 377.   The plaintiff must be able to provide fair and adequate representation “devoid of personal considerations.”  Id., 375.   See also, Lawrence v. Harrington, Dkt. No. X07CV04–0084752 (April 11, 2005, Sferrazza, J.) [39 Conn. L. Rptr. 108];  Melton v. Blau, judicial district of Middlesex, Dkt. No. X04CV03–0103953 (August 26, 2004, Quinn, J.);  Goodrich v. Libero, 19 Conn. L. Rptr. 567 (May 27, 1997, Moraghan, J.).

For all of the foregoing reasons, Plaintiff has not established that it is a fair and adequate representative of either UIL or its shareholders.   The motion to dismiss is granted.¹²

SO ORDERED

Kari A. Dooley, Judge

FOOTNOTES

FN1. As indicated, defendants also raise factual mootness as a basis to dismiss this action.   On that claim, the plaintiff argues that there are facts in dispute which would require both discovery and an evidentiary hearing.   See, e.g. Conboy v. State, 292 Conn. 642, 652–53 (2009).   However, as to the issue of fair and adequate representation, the facts set forth are not in dispute and thus no evidentiary hearing was sought and none is required.  Id., 652;  Pinchbeck v. Dept. of Public Health, 65 Conn.App. 201, 209, cert. denied, 258 Conn. 928 (2001)..  FN1. As indicated, defendants also raise factual mootness as a basis to dismiss this action.   On that claim, the plaintiff argues that there are facts in dispute which would require both discovery and an evidentiary hearing.   See, e.g. Conboy v. State, 292 Conn. 642, 652–53 (2009).   However, as to the issue of fair and adequate representation, the facts set forth are not in dispute and thus no evidentiary hearing was sought and none is required.  Id., 652;  Pinchbeck v. Dept. of Public Health, 65 Conn.App. 201, 209, cert. denied, 258 Conn. 928 (2001).

FN2. The court is permitted to, and does in this instance, take judicial notice of the file in that matter..  FN2. The court is permitted to, and does in this instance, take judicial notice of the file in that matter.

FN3. This occurred after the trial of the action but prior to the court's ruling..  FN3. This occurred after the trial of the action but prior to the court's ruling.

FN4. The defendants aver that the investigation requested was commenced by the Board with the assistance of Day Pitney, LLP. The issues implicated by the existence and nature of the investigation, to wit, mootness and justiciability of the controversy, are not decided herein..  FN4. The defendants aver that the investigation requested was commenced by the Board with the assistance of Day Pitney, LLP. The issues implicated by the existence and nature of the investigation, to wit, mootness and justiciability of the controversy, are not decided herein.

FN5. Distinctions between these statutes are noted, though not analyzed infra..  FN5. Distinctions between these statutes are noted, though not analyzed infra.

FN6. CGS § 52–572j was enacted by Public Act 77–310 and appears to codify for the first time the shareholder derivative action recognized at common law.  PA 77–310 was passed within months of the Barrett decision and incorporates the language used by the court on the issue of “fair and adequate representation.”  CGS § 33–720 et seq. was enacted by Public Act 94–186 with an effective date of January 1, 1997 as part of the Connecticut Business Corporations Act..  FN6. CGS § 52–572j was enacted by Public Act 77–310 and appears to codify for the first time the shareholder derivative action recognized at common law.  PA 77–310 was passed within months of the Barrett decision and incorporates the language used by the court on the issue of “fair and adequate representation.”  CGS § 33–720 et seq. was enacted by Public Act 94–186 with an effective date of January 1, 1997 as part of the Connecticut Business Corporations Act.

FN7. The legislative history for PA 94–186 contains an inquiry regarding the impact of the new statute on existing laws regarding the bringing of derivative law suits.   The history contains no answer to the inquiry however.   The history does indicate that the purpose of setting an effective date for the statute so far into the future was so that questions such as the one posed could be examined and addressed in advance of the effective date.   House Proceedings, PA 94–186, May 2, 1994, Vol. 37 PT18, pp 6443–44.   This does not appear to have happened..  FN7. The legislative history for PA 94–186 contains an inquiry regarding the impact of the new statute on existing laws regarding the bringing of derivative law suits.   The history contains no answer to the inquiry however.   The history does indicate that the purpose of setting an effective date for the statute so far into the future was so that questions such as the one posed could be examined and addressed in advance of the effective date.   House Proceedings, PA 94–186, May 2, 1994, Vol. 37 PT18, pp 6443–44.   This does not appear to have happened.

FN8. For example, the Supreme Court in Fink v. Golenbock, 238 Conn. 183 (1996) relied on the language of 52–572j and the substantial body of case law that focused upon a comparison between the nominal plaintiff and the other shareholders.   However, under Section 33–271, such analysis could be argued to be unnecessary or perhaps tangential, the focus being on whether the nominal plaintiff can fairly and adequately represent the interests of the corporation.   It is unclear to this court which provision's language should be applied or whether, in the final analysis, these are distinctions without a difference.   It is worth noting however, that the Commentary to the Model Business Corporations Act, provides as follows:Section 7.41(2), [CGS § 33–721(2) ] follows the requirements of Federal Rule of Civil Procedure 23.1 with the exception that the plaintiff must fairly and adequately represent the interests of the corporation rather than shareholders similarly situated as provided in the rule.   The clarity of the rule's language in this regard has been questioned by the courts.   See Nolen v. Shaw–Walker Company, 449 F.2d 506, 508 n.4 (6th cir.1972).   Furthermore, it is believed that the reference to the corporation in section 7.41(2) more properly reflects the nature of the derivative suit..  FN8. For example, the Supreme Court in Fink v. Golenbock, 238 Conn. 183 (1996) relied on the language of 52–572j and the substantial body of case law that focused upon a comparison between the nominal plaintiff and the other shareholders.   However, under Section 33–271, such analysis could be argued to be unnecessary or perhaps tangential, the focus being on whether the nominal plaintiff can fairly and adequately represent the interests of the corporation.   It is unclear to this court which provision's language should be applied or whether, in the final analysis, these are distinctions without a difference.   It is worth noting however, that the Commentary to the Model Business Corporations Act, provides as follows:Section 7.41(2), [CGS § 33–721(2) ] follows the requirements of Federal Rule of Civil Procedure 23.1 with the exception that the plaintiff must fairly and adequately represent the interests of the corporation rather than shareholders similarly situated as provided in the rule.   The clarity of the rule's language in this regard has been questioned by the courts.   See Nolen v. Shaw–Walker Company, 449 F.2d 506, 508 n.4 (6th cir.1972).   Furthermore, it is believed that the reference to the corporation in section 7.41(2) more properly reflects the nature of the derivative suit.

FN9. Conn. Gen.Stat. § 52–572j mirrors the language of Fed.R.Civ.P. 23.1 governing derivative actions in federal court.   Our Supreme Court thus looks to federal case law for guidance.   See, e.g. Fink v. Golenbock, supra, 205–06..  FN9. Conn. Gen.Stat. § 52–572j mirrors the language of Fed.R.Civ.P. 23.1 governing derivative actions in federal court.   Our Supreme Court thus looks to federal case law for guidance.   See, e.g. Fink v. Golenbock, supra, 205–06.

FN10. The Supreme Court's reference to both the plaintiff's ability to fairly and adequately represent the corporation as well as the other shareholders is perhaps an indication that § 52–572j and § 33–721 should be read to mean the same thing..  FN10. The Supreme Court's reference to both the plaintiff's ability to fairly and adequately represent the corporation as well as the other shareholders is perhaps an indication that § 52–572j and § 33–721 should be read to mean the same thing.

FN11. That Foley is the controlling person of both affiliated entities cannot be overlooked when assessing the presence of a conflict, the potential for abuse or the Fink factors.   See, e.g. G.A. Enterprises, Inc. v. Leisure Living Communities, Inc., 517 F.2d 24 (1st Cir.1975)..  FN11. That Foley is the controlling person of both affiliated entities cannot be overlooked when assessing the presence of a conflict, the potential for abuse or the Fink factors.   See, e.g. G.A. Enterprises, Inc. v. Leisure Living Communities, Inc., 517 F.2d 24 (1st Cir.1975).

FN12. Defendant's remaining challenges to the plaintiff's complaint and standing are therefore not addressed herein..  FN12. Defendant's remaining challenges to the plaintiff's complaint and standing are therefore not addressed herein.

Dooley, Kari A., J.