The Hartland Pond Corporation et al. v. Charles Noble et al. (2014)

MEMORANDUM OF DECISION RE MOTIONS TO DISMISS (# # 101, 106)

The issue before the court is whether to grant the defendants' motions to dismiss The Hartland Pond Corporation as a plaintiff on the ground that it lacks standing because no authority was given to bring a lawsuit in its name.   The motions to dismiss (# # 101, 106) are denied.

I

NATURE OF THE PROCEEDINGS

On August 22, 2013, the plaintiffs, The Hartland Pond Corporation (“Hartland Pond”), Dennis Brady, James Driscoll, Sharon Murrel and Gary Burghoff, filed a three-count complaint against the defendants, Charles Noble, Stacy Corbran, William Maley, Craig Polley, Alison Wellman, David Wiecek, Susan Windesheim and Hartland Pond. The complaint asserts that it is a derivative action, pursuant to General Statutes § 33–1038, on behalf of Hartland Pond to prevent the waste of corporation assets.   The complaint alleges that the individual plaintiffs are members or designated members of Hartland Pond, and the individual defendants are the directors of Hartland Pond.

On October 11, 2013, defendants Charles Noble, Stacy Corbran, William Maley, Craig Polley, Alison Wellman, David Wiecek and Hartland Pond filed a motion to dismiss (# 101), which was joined by defendant Susan Windesheim on October 18, 2013 (# 106).   The defendants move to dismiss Hartland Pond as a plaintiff on the ground that it lacks standing because no authority was given to bring a lawsuit in its name.   The plaintiffs filed an objection to the motion to dismiss on October 29, 2013 (# 108).   The defendants filed a reply memorandum on November 1, 2013 (# 111).   The matter was heard on the November 4, 2013 short calendar.

II

MOTION TO DISMISS

“A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction.”  (Internal quotation marks omitted.)   Dayner v. Archdiocese of Hartford, 301 Conn. 759, 774 (2011).  “[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.”  (Internal quotation marks omitted.)   Electrical Contractors, Inc. v. Dept. of Education, 303 Conn. 402, 413–14 (2012).  “[B]ecause the issue of standing implicates subject matter jurisdiction it may be a proper basis for granting a motion to dismiss.”   Id., 413.  “[I]t is well established that, in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged.”  (Internal quotation marks omitted.)  Keller v. Beckenstein, 305 Conn. 523, 531 (2012).  “[T]he plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised.”  (Internal quotation marks omitted.)  Fort Trumbull Conservancy, LLC v. New London, 265 Conn. 423, 430 n.12 (2003).

“When a trial court decides a jurisdictional question raised by a pretrial motion to dismiss on the basis of the complaint alone, 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.)   Conboy v. State, 292 Conn. 642, 651 (2009).  “In contrast, if the complaint is supplemented by undisputed facts established by affidavits submitted in support of the motion to dismiss ․ other types of undisputed evidence ․ and/or public records of which judicial notice may be taken ․ the trial court, in determining the jurisdictional issue, may consider these supplementary undisputed facts and need not conclusively presume the validity of the allegations of the complaint ․ Rather, those allegations are tempered by the light shed on them by the [supplementary undisputed facts].”  (Citations omitted;  emphasis in original;  internal quotation marks omitted.)  Id., 651–52.

III

CLAIMS OF THE PARTIES

The defendants argue that Hartland Pond does not have standing to pursue this action as no authority was given to bring a lawsuit in its name.   According to the defendants, Hartland Pond has not passed a resolution authorizing suit to be filed in its name and no corporate officer has given authority to bring suit in the name of Hartland Pond. In support of their position, the defendants submit the affidavit of defendant Charles Noble, the president of Hartland Pond's board of directors, who attests that Hartland Pond has not authorized the filing of this lawsuit.

The defendants rely, primarily, on Community Collaborative of Bridgeport, Inc. v. Ganim, 241 Conn. 546 (1997).

In contrast, the plaintiffs argue that, in a derivative action, a corporation is the real party in interest and is, therefore, properly both a plaintiff and a defendant.   The plaintiffs also argue that the defendants' reliance on Ganim is misplaced as that case deals with the legal theory that an officer lacks standing to litigate a corporation's claims absent authorization.

In reply, the defendants acknowledge that a corporation is a necessary party in a derivative suit, but argue that a corporation is properly named as a nominal defendant, not a plaintiff.   Moreover, the defendants reiterate that, without proper authority to bring an action in its name, Hartland Pond lacks standing.

IV

DISCUSSION

“[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.”  Yanow v. Teal Industries, Inc., 178 Conn. 262, 281 (1979).   The plaintiffs have brought their action pursuant to General Statutes § 33–1038, which provides in relevant part that “(b) A corporation's power to act may be challenged:  (1) In a proceeding by a member or director against the corporation to enjoin the act;  (2) in a proceeding by the corporation, directly, derivatively or through a receiver, trustee or other legal representative, against an incumbent or former director, officer, employee or agent of the corporation;  or (3) in a proceeding by the Attorney General to dissolve the corporation or to enjoin the corporation from the conduct of unauthorized affairs.”

As the present case is a derivative action, the defendants' reliance on Community Collaborative of Bridgeport, Inc. v. Ganim, supra, 241 Conn. 546 is misplaced.   In Ganim, our Supreme Court held that the co-chairperson of a non-profit corporation lacked standing as she did not have inherent authority as president of the corporation to bring the action and represent the corporation.  Id. Ganim is relevant to whether an officer has standing to file an action on behalf of a corporation;  it is not applicable to derivative actions brought by shareholders.  Ganim does not require that a shareholder obtain authorization from a board of directors prior to filing a derivative action.   Thus, contrary to the defendants' position, pre-suit authorization is not a prerequisite to the institution of a derivative action by a shareholder.

However, a pre-suit demand is a prerequisite to the institution of a derivative action by a shareholder.  Stutz v. Shepard, 279 Conn. 115, 118 n.5 (2006).  “In the context of a shareholder derivative dispute, a ‘demand’ is a mechanism for a shareholder to voice his objection regarding the management of a corporation and place the board of directors on notice of his complaints prior to the filing of a formal shareholder derivative lawsuit.   The purpose of requiring a precomplaint demand is to protect the directors' prerogative to take over the litigation or to oppose it ․ Thus, the demand requirement implements the basic principle of corporate governance that the decisions of a corporation-including the decision to initiate litigation-should be made by the board of directors or the majority of shareholders.”  (Internal quotation marks omitted.)  Id.

The plaintiffs submit the affidavit of plaintiff Dennis Brady, a member of Hartland Pond, who attests that he requested that his attorney make demand upon Hartland Pond not to covey certain real property to defendant Susan Windesheim.   A copy of the demand is attached to the affidavit, and states in relevant part that “[p]ursuant to statute, demand is hereby made upon the Corporation through its directors, not to covey such property without proper authorization ․ The Board is committing a waste of the Corporation's assets by acceding to the claim.   Should the Board already have conveyed the property, your members demand immediate action by the Board to rescind its authorization ․ If the Board will not act to prevent irreparable harm to the Corporation by the transfer of the property, others will do so.”   In the complaint, the plaintiffs allege that the board of directors, through their actions, rejected the plaintiffs' demand.   Compl. ¶ 15.   Accordingly, the plaintiffs have satisfied the pre-suit demand prerequisite.

General Statutes § 52–572j governs derivative actions and provides in relevant part that “[i]n any action brought pursuant to this section, process shall be served on the corporation or association as in other civil actions ․” It has been noted that General Statutes § 52–572j is ambiguous as to whether a corporation must be made a defendant.   Rocco v. Furrer, Superior Court, judicial district of Middlesex, Docket No. CV–13–6009192–S (October 17, 2013, Aurigemma, J.);   Bakogiannis v. Bailer, Superior Court, judicial district of Ansonia–Milford, Docket No. CV–93–043906–S (December 19, 1995, Comerford, J.) (16 Conn. L. Rptr. 499, 500–01).   As our Appellate Court has explained, “[t]he derivative suit is an action brought on behalf of a corporation by some percentage of its shareholders ․ [In many of these actions, the] corporation is in an anomalous position of being both a defendant and a plaintiff in the same action.   This unusual posture for the corporation is the result of the historical evolution of the derivative suit.   At common law, there was no action in law permitting a shareholder to call corporate managers to account ․ In equity, there were two actions that evolved into a single derivative action:  in one action the corporation was named as a defendant in order to compel it to take action against its controlling officers;  in the second, the shareholder maintained an action against the officers and directors of the corporation, on behalf of the corporation.   The dual actions were cumbersome and evolved into the present day unitary derivative action ․ A shareholder's derivative suit is 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 ․

“The use of a nominal plaintiff in a derivative action makes it an unusual procedural device by reason of its dual nature in that it consists of the basic cause of action, which pertains to the corporation and on which the corporation might have sued, and the derivative cause of action, based upon the fact that the corporation will not or cannot sue for its own protection ․ Thus the dual nature of the stockholder's action:  first, the plaintiff's right to sue on behalf of the corporation, and, second, the merits of the corporation's claim itself.”  (Citations omitted;  internal quotation marks omitted.)   Ma‘Ayergi & Associates, LLC v. Pro Search, Inc., 115 Conn.App. 662, 668–69 (2009).

V

CONCLUSION

Based on the historical evolution of a derivative action, this court determines that there is no prohibition against Hartland Pond being named simultaneously as a plaintiff and a defendant.   Even if Hartland Pond was improperly named as a plaintiff, such a defect does not implicate the court's subject matter jurisdiction.   See Rocco v. Furrer, supra, Superior Court, Docket No. CV–13–6009192–S (court's subject matter jurisdiction is not implicated because § 52–572j does not require corporation to be made a party);  Bakogiannis v. Bailer, supra, 16 Conn. L. Rptr. 501.

Additionally, a motion to dismiss is not the proper procedural posture by which to challenge Hartland Pond as a plaintiff.   Rather, the defendants should have made such a challenge by way of a motion to strike for misjoinder.   See Witt v. Weitzman, Superior Court, judicial district of Ansonia–Milford, Docket No. CV–09–5009458–S (November 23, 2009, Bellis, J.) (48 Conn. L. Rptr. 851, 852–53).  “Normally, [t]he proper procedural vehicle for disputing a party's standing is a motion to dismiss ․ When an action is maintained by plaintiffs whose standing is not challenged, however, an attack on the standing of one of the plaintiffs is essentially a claim of misjoinder ․ Misjoinder is the [n]aming [of] an improper person as a party in a legal action ․ Moreover, General Statutes § 52–108 provides [that] [a]n action shall not be defeated by the nonjoinder or misjoinder of parties ․ Rather, under Practice Book § 11–3, [t]he exclusive remedy for misjoinder of parties is by motion to strike.”  (Citations omitted;  internal quotation marks omitted.)   Id.;  see Fountain Pointe, LLC v. Calpitano, 144 Conn.App. 624, 648–49, cert. denied, 310 Conn. 928 (2013) (“an action cannot be defeated due to the ․ misjoinder of parties ․” (internal quotation marks omitted)).

In the present case, the defendants' motions to dismiss challenge only Hartland Pond's standing, not that of the individual plaintiffs.   As such, the defendants should have brought a motion to strike for misjoinder, not a motion to dismiss for lack of standing.   However, such a procedural alternative would not affect the posture of this case because, as discussed above, it is appropriate for Hartland Pond to be named both as a plaintiff and a defendant in this derivative action.

This court finds that the plaintiffs were not required to obtain authorization to bring the derivative action and Hartland Pond has not been improperly named as a plaintiff.   For the foregoing reasons, the motions to dismiss (# # 101, 106) are denied.

So ordered.

Wilson J. Trombley, Judge

Trombley, Wilson J., J.