FCR LLC v. Frederick C. Green (2015)

MEMORANDUM OF DECISION RE Motion for Appointment of Independent Persons to Determine Whether this Derivative Action is in the Best Interest of the Corporate Plaintiffs # 161, Short Calendar, April 27, 2015

ISSUE & SUBMISSION

Frederick, Clifford Jr., and Richard Green are brothers and co-owners of FCR Realty, LLC (the LLC), and Clifford B. Green & Sons, Inc. (the corporation).   In a complaint filed February 14, 2013, Clifford pleaded a shareholder's derivative action on behalf of each of the businesses.   The first amended complaint was filed on March 28, 2013, and contained fourteen counts, six alleging common-law and statutory violations as to the corporation, six alleging the same with respect to the LLC, and two additional counts brought by Clifford against Frederick alleging that Frederick breached the LLC operating agreement and an implied covenant of good faith and fair dealing.   Richard was not and is not a party to the action.

The first amended complaint was the subject of a motion to dismiss filed by Frederick and Linda Green.   Judge Boland granted the motion as to the counts against the corporation and Frederick and Linda and denied the motion as to the counts against the LLC. FCR Realty v. Green, Superior Court, judicial district of Windham, Docket No. CV–13–5005777–S (April 30, 2014, Boland, J.).

The plaintiff filed a revised complaint (# 136), a revised/second amended complaint (# 147), and a third amended complaint (# 170), which is now the operative complaint.   The operative complaint contains fourteen counts and alleges the following facts.   Frederick, Clifford, and Richard are each shareholders of the corporation.   Frederick is a controlling shareholder, as well as president of the corporation.   Defendant Linda Green is the finance executive of the corporation.   Each brother owns a one-third interest in the LLC.

On July 13, 2006, the LLC and a non-party buyer entered into a purchase and sale agreement that provided that the LLC would sell real property located in Brooklyn, Connecticut, to the buyer for the purchase price of $874,500.   The closing on this sale occurred on June 12, 2012.   On or about June 22, 2012, the LLC forwarded a check in the amount of $88,645.29 to the plaintiff Clifford purporting to be his full share of the proceeds from the sale.

The complaint alleges self-dealing in that the defendants failed to account for the deposit paid by the buyer and that proceeds of the sale totaling $171,507 were used to satisfy debt on loans from Linda and/or Frederick, when there was no debt owed them by the LLC. The complaint also alleges that $234,000 of the sale proceeds were used toward payment of a debt of the corporation to Citizens National Bank. Unrelated to the sale, the complaint alleges that the defendants diverted LLC assets by transferring receivables totaling $254,699 from the LLC to the corporation over a twelve-month period and creating false liabilities in undisclosed amounts on behalf of the LLC to the corporation.

On or about July 27, 2012;  August 21, 2012;  September 5, 2012;  October 24, 2012;  November 19, 2012;  and December 28, 2012, the plaintiff Clifford, by and through his counsel, forwarded demands to the LLC and the corporation.   The demands were sent to counsel and/or the accountant for the LLC and the corporation and to each member of the LLC and shareholder of the corporation.   The demands stated that Clifford sought to commence litigation as a result of wrongful conduct by the defendants such as the use of proceeds from the previously discussed sale of property to pay obligations of the corporation and disbursements to Frederick and Linda for the payment of purported loans.   The plaintiff alleges that any other demand would have been futile as Frederick and/or Linda exercised control of the operations of the LLC and the corporation, including but not limited to control over the companies' books, records, operations, and financial and other documents.

During June 2015, Frederick and/or Linda sent two CAT backhoes owned by the LLC and/or the corporation to auction.   The equipment and vehicles belonging to the LLC and/or the corporation were scheduled to be catalogued for an auction to be held on June 26, 2015, at 8:30 a.m. On June 22, 2015, the plaintiff Clifford received a letter from Frederick calling an “Emergency Board of Directors meeting” for the LLC and the corporation.¹  During the meeting held on June 25, 2015, Frederick requested the sale of four pieces of equipment owned by the corporation to cover weekly operating expenses including payroll and insurance.   Clifford did not vote in favor of the sale of the corporation's assets, while Frederick and Richard, who are both current employees of the corporation, voted in favor of the sale.   The plaintiffs allege that without an order prohibiting the dissolution of the LLC and the corporation, the defendants will deplete the remaining assets of the LLC and/or the corporation, thus limiting the plaintiff's ability to secure their claims and seek redress.

Counts one and three, brought by the LLC, allege mismanagement or misappropriation of assets and breach of fiduciary duty against Frederick.   Counts two and four, brought by the corporation, allege mismanagement or misappropriation of assets and breach of fiduciary duty against Frederick.   Count five, brought by the LLC, alleges conversion against Frederick and Linda and count six alleges the same by the corporation.   Count seven alleges civil statutory theft against Frederick and Linda as to the LLC, and count eight alleges the same as to the corporation.   Counts nine and ten allege unjust enrichment against Frederick and Linda by the LLC and the corporation, respectively.   Counts eleven and twelve allege violations of the Connecticut Unfair Trade Practice Act against Frederick and Linda by the LLC and the corporation, respectively.   Counts thirteen and fourteen seek injunctive relief by the LLC and the corporation.

On March 23, 2015, the defendant Frederick filed the present motion for the appointment of independent persons to determine whether this derivative action is in the best interest of the corporate plaintiffs (# 161).   The plaintiffs, the LLC, the corporation, and Clifford, filed an objection on April 2, 2015 (# 165).   The matter was heard at short calendar on April 27, 2015.

DISCUSSION

The defendant argues that the court should appoint one or more independent persons to determine whether or not maintaining this action is in the best interest of the companies, laying the groundwork for dismissal of this suit.   More specifically, the defendant contends that:  (1) General Statutes § 33–724 should apply to the counts involving the LLC as well as to the counts involving the corporation;  (2) the court is authorized to make the appointment provided in § 33–724 in the absence of a motion by the entity or entities;  and (3) appointment of a panel pursuant to § 33–724(e) is necessary and appropriate.

The plaintiff objects, arguing that according to the plain language of § 33–724(e), only the corporation can move for such an appointment.   The plaintiff further argues that appointment of a receiver in equity is not warranted under the circumstances, and should the court find that an equitable remedy is necessary, the proper remedy is to allow the corporation and the LLC an opportunity to decide whether to appoint a receiver or other neutral party.   Additionally, the plaintiff contends that the defendant's motion for an appointment of a panel to determine whether a derivative action is in the best interest of the LLC is an attempt to relitigate the issue of standing.

Section 33–724 discusses the dismissal of derivative proceedings and provides in relevant part in subsection (a):  “A derivative proceeding shall be dismissed by the court on motion by the corporation if one of the groups specified in subsection (b) or (e) of this section has determined in good faith, after conducting a reasonable inquiry upon which its conclusions are based, that the maintenance of the derivative proceeding is not in the best interests of the corporation.”   Subsection (e) provides:  “Upon motion by the corporation, the court may appoint a panel of one or more individuals to make a determination whether the maintenance of the derivative proceeding is in the best interests of the corporation.   In such case, the plaintiff shall have the burden of proving that the requirements of subsection (a) of this section have not been met.”

“Courts may not, by construction, read into a statute provisions not clearly expressed therein ․ Courts also are not privileged to substitute their own ideas of preferences for what might be a better provision in place of the clear expression of the legislature ․ A statute, therefore, should be applied as its language directs.”  (Citations omitted.)  Passini v. Decker, 39 Conn.Sup. 20, 23, 467 A.2d 442 (1983).   The Supreme Court has outlined the process of statutory interpretation:  “The principles that govern statutory construction are well established.   When construing a statute, [o]ur fundamental objective is to ascertain and give effect to the apparent intent of the legislature ․ In other words, we seek to determine, in a reasoned manner, the meaning of the statutory language as applied to the facts of [the] case, including the question of whether the language actually does apply ․ In seeking to determine that meaning, General Statutes § 1–2z directs us first to consider the text of the statute itself and its relationship to other statutes.   If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered ․ When a statute is not plain and unambiguous, we also look for interpretive guidance to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement, and to its relationship to existing legislation and common law principles governing the same general subject matter ․ We recognize that terms in a statute are to be assigned their ordinary meaning, unless context dictates otherwise.”  Groton v. Commissioner of Revenue Services, 317 Conn. 319, 328 (2015).

Section 33–724(c) explicitly requires that the corporation make a motion for the court to “appoint a panel of one or more individuals to make a determination whether the maintenance of the derivative proceeding is in the best interests of the corporation.”   The defendant argues that a court may appoint a special master on its own initiative based on the Official Comment to § 7.44 of the Model Business Corporation Act. While the Model Business Corporation Act § 7.44, Official Comment ¶ 1 states that the court may appoint a special master on its own initiative pursuant to state rules of procedure, there is no persuasive case law on which the court may base a conclusion that such an action should be taken in the present situation.   Furthermore, there is no implementing language as to the role of the special master, the scope of the special master's determination, and the court's standard of review of the special master's determination.

Connecticut has a legislative history that “demonstrates a desire to consider the Model Business Corporation Act and its commentary as expressive of the intent of the legislature in passage of the act,” Sojitz America Capital Corp. v. Kaufman, 141 Conn.App. 486, 492 n.6, 61 A.3d 566 (2013), and a history of courts applying the business corporation statutes to derivative actions involving limited liability companies.   However, there is no Connecticut case law or law from other jurisdictions (presented by the defendant or found by this court) where a court has cited the Model Business Corporation Act § 7.44 in appointing an independent panel or special master to determine whether a derivative action involving a corporation or a limited liability company should proceed.²  The court found a single case where an independent panel was appointed based on a state statute and there was no discussion of the Model Business Corporation Act Official Commentary.   In Sessions, III v. Five “C's,” Inc., 212 N.C.App. 692, 718 S.E.2d 737 (2011), an independent panel was appointed to determine “whether maintenance of the derivative aspect of the case would be in the best interest” of the defendant corporation.³  However, this panel was appointed by consent order and was not challenged by a party as in the present case.  Id.

Additionally, in its memorandum of decision, dated April, 29, 2014, the court, Boland, J., previously found that the plaintiff has standing to bring a derivative suit against the LLC and the counts against the corporation were dismissed for lack of standing.⁴  FCR Realty v. Green, supra, Superior Court, Docket No. CV–13–5005777–S.   Given this court's previous determination that “the plaintiff has standing to bring this action on behalf of the limited liability company,” id., the defendant's argument that there should now be a determination of whether the derivative suit is in the best interests of the companies is unpersuasive.

The defendant argued that Sojitz stands for the proposition that “[t]he law favors a reasoned, careful assessment by people who are not personally invested in the outcome.”   However, the holding in Sojitz was that the determination by the quorum of qualified directors as to whether prosecuting the case was in the best interest of the corporation was within the board's discretion.⁵  Sojitz America Capital Corp. v. Kaufman, supra, 141 Conn.App. 510.   While the directors participating in the decision should be disinterested parties as to the actions alleged in the derivative suit, there is no support in Sojitz for the proposition that a court should appoint persons so disinterested that they are not members of the board.

It is worth noting that the facts of this case, in which the members of the corporation and the limited liability company consist of three brothers, two pitted against each other and one apparently attempting to remain neutral, present a plausible argument for the need of an independent person to assist in resolving the dispute.   However, it is not the court's role to appoint an independent panel where the requirements of the statute have not been met and the third brother, Richard, can join with the defendant to make a motion for an independent panel on behalf of the corporation or continue to remain silent and allow the derivative action to proceed.   The parties describe Richard as the “neutral” brother, yet Richard's silence and inaction have allowed the present litigation to proceed.   Richard could join with the defendant to make a motion pursuant to § 33–724(c), and the court could then appoint an independent panel.⁶  As a member of the LLC and a shareholder of the corporation, Richard has thus effectively created an alliance with the plaintiff as a result of his acquiesce to the plaintiff's actions.   The defendant is asking the court to play a role that is properly reserved for Richard.

The court will refrain from acting where the General Assembly has outlined the procedure for an independent panel to be appointed by the court in § 33–724(c).  Richard has the ability to change his position to align with the interests of the defendant or continue to remain silent in allegiance with the plaintiff and allow the derivative action to proceed.   There is no support for the court to act on its own initiative when there is a procedure outlined by the legislature and available to the parties.

Furthermore, as previously discussed, it is not clear from a reading of § 33–724(c) that the statute applies equally to a limited liability company as it does to a corporation.   Given the lack of case law, the language of § 33–724, and the court's previous determination that the plaintiff has standing, the defendant's argument that the court has the authority to appoint an independent panel on the motion of the defendant in his individual capacity to examine the claims against the LLC and the corporation is unpersuasive.

CONCLUSION

For the foregoing reasons the defendant's motion for the appointment of independent persons to determine whether this derivative action is in the best interest of the corporate plaintiffs is denied.

THE COURT

CALMAR, J.

FOOTNOTES

FN1. The agenda items were:  (1) discuss and vote on the disposition of the corporation;  and (2) discuss and vote on the disposition of the LLC..  FN1. The agenda items were:  (1) discuss and vote on the disposition of the corporation;  and (2) discuss and vote on the disposition of the LLC.

FN2. Various jurisdictions have addressed the use of a special litigation committee of qualified directors which differs from the independent panel the defendant is asking the court to appoint.   See § 33–724(b)(2) (describing a special litigation committee as one of the groups that may determine that the derivative action is not in the best interest of the corporation)..  FN2. Various jurisdictions have addressed the use of a special litigation committee of qualified directors which differs from the independent panel the defendant is asking the court to appoint.   See § 33–724(b)(2) (describing a special litigation committee as one of the groups that may determine that the derivative action is not in the best interest of the corporation).

FN3. “[T]he independent panel filed a recommendation stating that:  Plaintiff lacked standing to maintain a derivative action because he [was] not a stockholder of [the corporation], all claims of plaintiff were barred by the applicable statutes of limitation, and maintenance of the derivative action would not be in the best interest of [the corporation].”  Id..  FN3. “[T]he independent panel filed a recommendation stating that:  Plaintiff lacked standing to maintain a derivative action because he [was] not a stockholder of [the corporation], all claims of plaintiff were barred by the applicable statutes of limitation, and maintenance of the derivative action would not be in the best interest of [the corporation].”  Id.

FN4. The court recognizes that the counts against the corporation that were previously dismissed were included in the plaintiff's third amended complaint, however, at this time the defendant has not made a motion to dismiss these counts as to the third amended complaint based on the law of the case or other grounds to dismiss.   The court is presently concerned with the motion to appoint an independent panel..  FN4. The court recognizes that the counts against the corporation that were previously dismissed were included in the plaintiff's third amended complaint, however, at this time the defendant has not made a motion to dismiss these counts as to the third amended complaint based on the law of the case or other grounds to dismiss.   The court is presently concerned with the motion to appoint an independent panel.

FN5. The Appellate Court declined to “examine the propriety of the board's considerations ․ The factors that the board takes into consideration as part of its inquiry are properly left within the board's discretion, subject only to the good faith and reasonableness requirements.”  Sojitz America Capital Corp. v. Kaufman, supra, 141 Conn.App. 510..  FN5. The Appellate Court declined to “examine the propriety of the board's considerations ․ The factors that the board takes into consideration as part of its inquiry are properly left within the board's discretion, subject only to the good faith and reasonableness requirements.”  Sojitz America Capital Corp. v. Kaufman, supra, 141 Conn.App. 510.

FN6. Richard has not been completely inactive even though he is not a party to this suit.   The plaintiffs allege that during an emergency board of directors meeting on June 25, 2015, Richard joined with Frederick to vote in favor of the sale of four pieces of equipment owned by the corporation, as requested by Frederick to cover weekly operating expenses including payroll and insurance..  FN6. Richard has not been completely inactive even though he is not a party to this suit.   The plaintiffs allege that during an emergency board of directors meeting on June 25, 2015, Richard joined with Frederick to vote in favor of the sale of four pieces of equipment owned by the corporation, as requested by Frederick to cover weekly operating expenses including payroll and insurance.

Calmar, Harry E., J.