LLC v. LLC (2013)

MEMORANDUM OF DECISION RE MOTION TO DISMISS (# 104)

Background

In this lawsuit the plaintiff, Internet Airport Parking, LLC (“IAP”), claims that the defendant, Gregory Bessoni, is breaching the Operating Agreement regarding the operation of the defendant, Parking Access, LLC. The plaintiff is a member of Parking Access and a signatory to the Operating Agreement.   Bessoni is also a member of Parking Access and its General Manger.

The complaint is brought in four counts, three against Bessoni claiming breach of contract, breach of the duty of good faith and fair dealing, and breach of fiduciary duty;  and a fourth against both Bessoni and Parking Access seeking an accounting.   The factual basis of these claims are the allegations that Bessoni has breached the contract by misappropriating net profits;  incurring indebtedness, making loans, hiring key employees, entering into non-standard transactions, commingling funds, all in breach of the agreement;  and failing to provide monthly profit and loss statements;  refusing to allow a complete review and audit of the books and records of Parking Access;  failing to distribute 25% of the profits for the years 2010 and 2011;  and engaging in nepotism, taking a pension benefit, and incurring excess automobile expenses to further reduce the profit of Parking Access, thus reducing the profit of the business.

The defendants have moved to dismiss the action, claiming that the allegations in the complaint allege harm only to Parking Access itself and not to IAP individually.   Consequently, the defendants argue, these claims must be brought in a derivative action and the plaintiff has no standing to raise these claims directly.   Therefore, the defendants argue, the court lacks subject matter jurisdiction to adjudicate the claims raised in the complaint and the injunction application.

Discussion

“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 and citation omitted.)  May v. Coffey, 291 Conn. 106, 112–13 (2009).

The defendants claim that IAP's claims must be brought, if at all, in a derivative action.   The law is well settled that a member of a corporation cannot sue directly for injury to the corporation but can pursue such a claim only on behalf of the corporation.  “Since at least the middle of the [nineteenth] century, it has been accepted in this country that the law should permit shareholders to sue derivatively on their corporation's behalf under appropriate conditions ․ [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, with the plaintiff proceeding secondarily, deriving his rights from the corporation which is alleged to have been wronged ․ [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 ․ It is commonly understood that [a] shareholder—even the sole shareholder—does not have standing to assert claims alleging wrongs to the corporation.”   (Internal quotation marks and citations omitted.)  Smith v. Snyder, 267 Conn. 456, 461–62 (2004).

This same principle applies to a limited liability company such as Parking Access.  “A limited liability company is a distinct legal entity whose existence is separate from its members ․ A limited liability company has the power to sue or be sued in its own name;  see General Statutes §§ 34–124(b) and 34–186;  or may be a party to an action through a suit brought in its name by a member.   See General Statutes § 34–187.   A member may not sue in an individual capacity to recover for an injury the basis of which is a wrong to the limited liability company ․” (Citations omitted.)  Wasko v. Farley, 108 Conn.App. 156, 170, cert. denied, 289 Conn. 922 (2008).   The court in Ward v. Gamble, Superior Court Judicial District of Hartford at Hartford, Docket No. CV 08–5017829 S (Prescott, J., Jul. 23, 2009) [48 Conn. L. Rptr. 286], provides a well reasoned decision as to why the rule regarding derivative actions applies as well to limited liability companies.   The court stated:  “The same policy justifications that underlie the rule requiring derivative actions against corporations if a shareholder's injury is not separate and distinct from other shareholders support the application of the rule to LLCs. The predominant policy justification behind the rule is that if the injury is to the corporation itself, any recovery should be shared by those affected, namely the corporation and shareholders.   Thus, the rule ensures that any action brought for redress of such injuries is for the collective benefit of those injured by the wrongs committed.   As one commentator has noted:  ‘Primarily, the injury resulting from mismanagement or wrongful use of corporate property by corporate officers is to the corporation, and a suit for the damages suffered should be by the corporation rather than by the shareholders.   However, if the officers refuse to sue, or a demand to sue is unnecessary, shareholders may sue in equity in their own names, for the benefit of the corporation, bringing suit on behalf of themselves and such other shareholders as may come in, and making the corporation and the guilty officers defendants.   Such an action is in reality one brought on behalf of the corporation ․ The relief granted belongs to the corporation and not to the shareholder individually, and recovered money goes to the corporation.’   3A W. Fletcher, Cyclopedia of the Law of Corporations (2008) § 1283.”   The court also noted that “the Wasko decision supports a conclusion that derivative actions are in fact available for members of an LLC, and in fact, may be absolutely necessary to provide a means to bring suit against the LLC or its other members for wrongs committed to the LLC itself or its members collectively.”

Here the allegations of the complaint allege harm to the corporation, Parking Access, in the form of breaches of the Operating Agreement by Bessoni, and practices which have reduced the profit of Parking Access.   As the plaintiff notes in its Memorandum of Law in Opposition to Motion to Dismiss (p. 1), “[t]his action arises due to various financial and accounting irregularities that the plaintiff Internet Airport Parking, LLC (‘IAP’) has noted regarding defendant Parking Access, LLC (‘Parking Access') whereby the defendant, Gregory Bessoni (‘Bessoni’), has siphoned off considerable sums of money to the detriment of IAP.” The complaint does not allege any distinct injury to the plaintiff but only to the limited liability company of which it is a member.

The plaintiff does not dispute that in order for an individual member to bring a direct or personal action against a limited liability company it “must show an injury that is ‘separate and distinct’ from that suffered by any other member or by the company.”   Memorandum of Law in Opposition to Motion to Dismiss (p. 3).   The plaintiff claims, however, that the first three counts of the complaint which allege breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty against Bessoni, are contractual in nature and related to the contract between the plaintiff and Bessoni.

The plaintiff cites Yanow v. Teal Industries, Inc., 178 Conn. 262 (1979), in support of its argument that its claims of contract breaches convert its alleged damages to ones that are separate and distinct as to it.   There the Court noted that:  “Count one ․ states nineteen individual transactions which the plaintiff alleged to be unfair and undisclosed to him, which put into issue the looting of Mallard [in which the plaintiff owned a minority share] by Gentry.   Such claims—of looting the corporation and of failure of the directors to disclose important facts concerning corporate transactions—state personal, as opposed to derivative, causes of action ․ In count four, the plaintiff alleged that Gentry, in his capacity as officer and director of Mallard and Teal, took advantage of special facts concerning Mallard's financial condition, which he failed to disclose to the plaintiff, and that Gentry caused the merger to deprive the plaintiff of his shares and to avoid paying the plaintiff their full fair market value.   The plaintiff, in effect, via counts one and four, alleged that both defendants dismantled Mallard step-by-step, transaction-by-transaction, depriving Mallard and the plaintiff of income and assets.   These allegations claim a pervasive breach of the fiduciary duty owed by the corporate majority to the sole minority stockholder.   The rule of corporation law and of equity invoked is well-settled:  the majority has the right to control, but when it does so, it occupies a fiduciary relationship toward the minority, as much as the corporation itself or its officers and directors ․ As pleaded, these causes of action are based upon alleged unlawful acts relating solely to the stock owned by the plaintiff, in violation of the fiduciary duty owed the plaintiff by the defendants, and they thus state individual, and not derivative, claims.”  (Citations omitted.)  Id. 283–84.   The allegations here do not state a similar claim as in Yanow regarding injury to the interest of the plaintiff apart from damage to the company.   In any event, as the defendants point out, the continued validity of Yanow has been questioned.   In Winograd v. Siebrecht, Superior Court, Judicial District of New Britain at New Britain, Docket No. HHB CV11 6012234 (Pittman, J., Aug. 9, 2012) [54 Conn. L. Rptr. 502], the court noted that:  “The facts as alleged in Yanow contain one crucial difference from the facts in Smith v. Snyder, supra, and in the instant case:  in Yanow, the corporation had merged with another company and had ceased its legal existence.   The court held that there was no longer any corporation that had the capacity to sue in a representative capacity on behalf [of] its shareholders, so that Mr. Yanow could sue on his own ․ To the extent that other parts of Yanow seem to hold otherwise ․ it appears that Smith v. Snyder, supra, has overruled that decision sub silencio.”  (Citations omitted.)   Similarly here, the limited liability company is still in existence and can sue in a representative capacity.   The complaint alleges that “[t]he Defendant, Parking Access, LLC (hereinafter ‘Parking Access') is a Connecticut limited liability company with an office and place of business at 220 Old Boston Post Road, Old Saybrook, Connecticut.”  (Verified Complaint Seeking Injunctive Relief and Damages, paragraph 2.)

The defendants rely on Roh v. Devack, United States District Court, 3:07–cv–1901 (Haight, S.D.J., D.Conn., 12–3–2010), for their argument that IAP cannot maintain this action.   There the plaintiff was the minority member of OLM, while the defendant was the majority member and, pursuant to the Operating Agreement executed by the parties to establish OLM, the defendant was the General Manager.   The plaintiff filed a complaint against the defendant which included counts for breach of the Operating Agreement;  dissolution of OLM;  appointment of a receiver;  breach of fiduciary duty;  and for an accounting.   As to these counts, the court held that:  “In the instant case, the minority member of an LLC has attempted to bring a direct action against the majority member of the LLC, asserting claims which, although Plaintiff attempts in his briefs to characterize them otherwise, essentially amount to a charge of business mismanagement.   Plaintiff maintains that his claims are not derivative but rather arise from Defendant's ‘express and continuing breaches of his own personal duties and obligations under the Operating Agreement between Roh and DeVack, not DeVack's general fiduciary duties and obligations to the limited liability company and other members as Managing Member.   Therefore Roh's claims are direct because they arise from a special relationship—the contractual relationship—that exists between Roh and DeVack, and they may be pursued individually’ ․ In fact, the OLM, LLC Operating Agreement ․ appears to be a rather standard form contract which requires Defendant, in his role as General Manager, to fulfill certain management duties with respect to the LLC, such as keeping the books accurately, preparing and circulating necessary financial reports, spending adequate time running the business, making timely distributions to members, and so forth.   The Operating Agreement makes clear that these obligations are to all the members of the LLC, not to Plaintiff personally.   Indeed, the Operating Agreement provides for the possibility that other members may be added to whom the same obligations would be owed.   ‘Member’ is defined as ‘each Person signing this Agreement and any Person who subsequently is admitted as a member of the Company’ ․ While it happens that Plaintiff and Defendant are the only members, that does not mean that a ‘special relationship’ exists between them that changes the derivative nature of the claims.   Nor does it mean that Defendant's obligations as General Manager, as set forth in the Operating Agreement, are to Plaintiff personally rather than to the LLC itself and to all its members.  [P]laintiff's allegations, if proven, would demonstrate harm to [the LLC] itself, and therefore derivatively, to all of the members' interests in [the LLC]. Therefore, the plaintiff has not alleged injuries that are separate and distinct from those to [the LLC] ․ This is a derivative suit for business mismanagement and must be brought as such, consistent with Connecticut law, rather than as a direct action.”  (Internal quotation marks and citations omitted.)

This court finds the decision in Roh instructive since it addresses a situation almost identical to that before the court here.   Here the complaint alleges various violations of the Operating Agreement.   For example, a violation of section 4.3 which provides that:  “Income or Loss and tax credits for each fiscal year shall be allocated among the Management Members ․”;  a violation of section 6.1(c)(ii) which provides that:  “The Managers shall not have the authority without the prior approval of a Super Majority in interest to:  ․ Cause the Company to incur any indebtedness for borrowed money in excess of $5,000.00”;  and a violation of section 6.1(c)(ix) which provides that “The Managers shall not have the authority without the prior approval of a Super Majority in interest to:  ․ Cause the Company to commingle its funds with the funds of others.”  (Exhibit A to Memorandum of Law in Support of Motion to Dismiss, p. 11.) ¹  As in Roh, the Operating Agreement requires Bessoni to fulfil certain management duties regarding the LLC. For example, “to direct and manage the business of the Company,” with the authority to “[e]xpend Capital, Assets, and Income of the Company in furtherance of the Company's business”;  “[r]etain and dismiss other Persons as independent contractors or employees”;  and “[e]nter into contracts and take all other actions necessary to pursue the Company's business.”  (Exhibit A to Memorandum of Law in Support of Motion to Dismiss, p. 10.)   Likewise, as in Roh, the Operating Agreement defines “Member(s)” as “those Person(s) that are from time-to-time required to be set forth in Exhibit ‘A’ pursuant to the terms of this Agreement, which shall include, without limitation, any additional or substitute Member(s) duly accepted by the other Members pursuant to the terms of this Agreement.”   The Operating Agreement also indicates that these obligations are to all members of Parking Access, not just IAP. The agreement states that it “contains the entire agreement among the Members, in such capacity, relative to the formation, operation and continuation of the Company.”  (Exhibit A to Memorandum of Law in Support of Motion to Dismiss, p. 19.)   Thus, as in Roh, this suit is essentially one alleging business mismanagement which must be brought as a derivative action.

The plaintiff also claims that this action is allowed under the Operating Agreement.   It cites Article 12.8 of the Agreement.   That states:  “Any dispute between the parties arising out of or relating to the Agreement shall be settled by arbitration conducted in the municipality where the Company's office is located (or as close thereto as possible) in accordance with the Commercial Arbitration Rules, as applicable, of the American Arbitration Association and judgment upon the award, which shall be binding and conclusive upon the parties hereto, may be entered in any court having jurisdiction thereof.”  (Exhibit A to Memorandum of Law in Support of Motion to Dismiss, pp. 19–20.)   This court agrees with the defendants that this provision, by its terms, does not allow a direct action in the Superior Court by the plaintiff to enforce the provisions of the Agreement.   In any event “parties are free to enter into a contract and to modify any existing contracts.   That does not, however, give them the right or ability to confer jurisdiction on a court where such jurisdiction is statutorily precluded.   Subject matter jurisdiction, unlike jurisdiction of the person, cannot be created through consent or waiver.”  (Internal quotation marks and citation omitted.)  Pina v. Pina, 55 Conn.App. 42, 46 (1999).

As to the last count, seeking an accounting, the plaintiff claims it has a right to an accounting under the Operating Agreement with Bessoni;  pursuant to statute, General Statutes §§ 52–401 and 402;  under the Limited Liability Act;  and the side agreement.   This claim too is without merit.   First, as noted above, the Operating Agreement benefits all members not simply the plaintiff, and therefore a claim for an accounting under the Agreement must be brought as a derivative action.   Second, General Statutes §§ 52–401 and 402 provide for only general terms when an action for accounting is brought, they do not confer standing on the plaintiff to bring one.   Third, the plaintiff has cited no provision of the Limited Liability Act which allows it to pursue an action for accounting against the defendants.   Lastly, the side agreement is not referenced in the complaint as a basis of the plaintiff's claim for an accounting.  “It is a well established principle that Connecticut is a fact pleading jurisdiction.   See Practice Book § 10–1.   Pleadings have an essential purpose in the judicial process ․ The purpose of pleading is to apprise the court and opposing counsel of the issues to be tried ․ Although the court is required to read the pleadings broadly and in the light most favorable to sustaining the legal sufficiency of the claim, it cannot read additional allegations into the pleading.”  (Internal quotation marks and citation omitted.)  Pike v. Bugbee, 115 Conn.App. 820, 828, fn.5, cert. granted, 293 Conn. 923 (2009).

Conclusion

Therefore, for the reasons stated above, the Motion to Dismiss is granted.

Jane S. Scholl, J.

FOOTNOTES

FN1. The court notes that the plaintiff and defendants have submitted a copy of the Operating Agreement to the court in support of and in opposition to the Motion to Dismiss..  FN1. The court notes that the plaintiff and defendants have submitted a copy of the Operating Agreement to the court in support of and in opposition to the Motion to Dismiss.

Scholl, Jane S., J.