Metcoff v. Lebovics

• Decision Date: 16 August 2007
• Docket Number: No. X06-CV-05-5000521 S.,X06-CV-05-5000521 S.
• Citation: 977 A.2d 285,51 Conn.Sup. 68
• Court: Connecticut Superior Court
• Parties: Jerrold M. METCOFF et al. v. Irene LEBOVICS et al.

977 A.2d 285

51 Conn.Sup. 68

Jerrold M. METCOFF et al. v. Irene LEBOVICS et al.

No. X06-CV-05-5000521 S.

Superior Court of Connecticut, Complex Litigation Docket, Judicial District of Waterbury.

August 16, 2007.

Berman & Sable, LLC, Hartford, for the plaintiffs.

Ivy, Barnum & O'Mara, Greenwich, for the defendants.

STEVENS, J.

STATEMENT OF THE CASE

This action was instituted by the plaintiffs, Jerrold M. Metcoff and David Wilson, against the defendants, Irene Lebovics, Cy E. Hammond, John J. McCloy II, Sam Oolie and Michael J. Parrella. All the defendants are officers or directors of a corporation named NCT Group, Inc. (NCT Group).¹ NCT Group is incorporated under the laws of the state of Delaware. The operative complaint is the revised complaint dated December 20, 2006. This complaint asserts two causes of action against the defendants—one for breach of fiduciary duty and the other for violation of the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq. Pending before the court is the defendants' motion to strike. As will be explained, the motion to strike is granted.

The claims at issue emanate from a merger agreement executed by NCT Group, NCT Midcore, Inc., now known as Midcore Software, Inc. (NCT Midcore), and Midcore Software. The plaintiffs were the major stockholders of Midcore Software, and the agreement called for a merger between Midcore Software and NCT Midcore, with NCT Midcore being the surviving corporation. As part of the merger, the plaintiffs were to receive shares of NCT Group stock and certain royalties. Most of the 256 paragraphs of the complaint address how NCT Group and NCT Midcore breached this agreement and, in the process, committed other sundry, wrongful acts. Neither NCT Group nor NCT Midcore is a defendant in this action and, therefore, the allegations about their breach of the agreement are peripheral to the substance of the plaintiffs' complaints against the defendants, except to the extent that they support the plaintiffs' claim that they are creditors of NCT Group.

Count one of the complaint alleges that NCT Group became insolvent and that the defendants, as officers or directors of NCT Group, owed fiduciary duties to the corporation's creditors, such as the plaintiffs. This count further alleges that the defendants committed various acts in violation of these fiduciary duties and contrary to any valid exercise of business judgment. These acts included the defendants' authorizing fraudulent transfers of NCT Group assets, receiving exorbitant compensation, including bonuses and stock options, and engaging in self-dealing (apparently involving NCT Group or its subsidiary dealing with entities controlled by certain of the defendants). The plaintiffs also claim that the defendants breached their fiduciary duties by hot causing the delivery to the plaintiffs of the NCT Group shares that the plaintiffs were entitled to receive under the merger agreement. The plaintiffs further allege that the defendants' actions "demonstrated a marked degree of animus, ill will and spite" toward the plaintiffs.

In count two of the complaint, the plaintiffs allege that the defendants' conduct in breach of their fiduciary duties indicates that they were engaged in an "unfair, deceptive, immoral oppressive and/or unscrupulous practice in the conduct of their primary business, trade or commerce" in violation of CUTPA. According to the complaint, each defendant's primary business, trade or commerce includes "performing the functions of an NCT Group director and/or officer."

In their demand for relief, the plaintiffs seek "money damages," as well as "interest pursuant to [General Statutes] § 37-3a." The plaintiffs also seek punitive damages and attorney's fees under CUTPA, General Statutes § 42-110g.

DISCUSSION

A motion to strike tests the legal sufficiency of a pleading. Practice Book § 10-39; Ferryman v. Groton, 212 Conn. 138, 142, 561 A.2d 432 (1989); Mingachos v. CBS, Inc., 196 Conn. 91, 108, 491 A.2d 368 (1985). "The purpose of a motion to strike is to contest ... the legal sufficiency of the allegations of any complaint ... to state a claim upon which relief can be granted. In ruling on a motion to strike, the court is limited to the facts alleged in the complaint. The court must construe the facts in the complaint most favorably to the plaintiff." (Internal quotation marks omitted.) Novametrix Medical Systems, Inc. v. BOC Group, Inc., 224 Conn. 210, 214-15, 618 A.2d 25 (1992). The trial court deciding a motion to strike must consider as true the well pleaded facts, but not the legal conclusions, set forth in the complaint. Liljedahl Bros., Inc. v. Grigsby, 215 Conn. 345, 348, 576 A.2d 149 (1990); Blancato v. Feldspar Corp., 203 Conn. 34, 36-37, 522 A.2d 1235 (1987). The court should view the facts in a broad fashion, on one hand, to include facts that are necessarily implied by and fairly provable by the allegations but, on the other hand, to avoid enlarging the allegations of the complaint by assuming facts that are clearly not alleged. See Faulkner v. United Technologies Corp., 240 Conn. 576, 580, 693 A.2d 293 (1997); Dennison v. Klotz, 12 Conn.App. 570, 577, 532 A.2d 1311 (1987), cert. denied, 206 Conn. 803, 535 A.2d 1317 (1988).

I

FIRST COUNT—BREACH OF FIDUCIARY DUTY

A Direct Claim

In the first count of the complaint, the plaintiffs assert claims against the defendants for breaching the fiduciary duties that the defendants, as officers and directors of NCT Group, allegedly owed to the corporation's creditors generally, and to the plaintiffs, as creditors, particularly. The first claim may be characterized as a derivative claim on behalf of the corporation and the second claim may be characterized as a direct claim by the plaintiffs.

As to their direct claim, the plaintiffs allege that because NCT Group was insolvent and the defendants' actions evidenced hostility directly toward them as creditors, the defendants, as officers and directors of NCT Group, owed the plaintiffs fiduciary duties on which they may base personal claims for monetary compensation against the defendants. In support of this position, the plaintiffs primarily rely on Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del.Ch.2004). In support of their motion to strike, the defendants contend that as a matter of law, they do not owe the plaintiffs any such fiduciary duties and, even if they did, the plaintiffs have failed to assert allegations sufficient to bring a direct claim against them under the holding of Production Resources Group, L.L.C.²

As a general rule, officers and directors of a corporation owe fiduciary duties to the corporation and its shareholders, not to any individual creditor. However, the court in Production Resources Group, L.L.C. v. NCT Group, Inc., supra, 863 A.2d at 772, opined that directors may owe a fiduciary duty to a corporate creditor when the corporation is insolvent, the creditor's claim is liquidated or "imminently" due and the directors' actions against the creditor evince direct animus or hostility. Id., at 798.

After the parties' oral argument on the motion to strike, the Delaware Supreme Court issued the decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del.2007), rejecting the holding and reasoning of Production Resources Group, L.L.C, regarding a director's exposure to direct claims of creditors when a corporation is insolvent or in the "zone of insolvency." The court held that "creditors of a Delaware corporation that is either insolvent or in the zone of insolvency have no right, as a matter of law, to assert direct claims for breach of fiduciary duty against its directors." Id., at 103.

In a supplemental memorandum of law filed in response to the Delaware court's decision in North American Catholic Educational Programming Foundation, Inc., the plaintiffs emphasize that this issue is one of first impression in Connecticut, and they urge the court to reject that court's holding and adopt the reasoning of courts in other jurisdictions recognizing direct claims by creditors of insolvent corporations against the corporations' directors.³ The court rejects this invitation, finding that the reasoning of North American Catholic Educational Programming Foundation, Inc., is persuasive and dispositive: "It is well established that the directors owe Their fiduciary obligations to the corporation and its shareholders. While shareholders rely on directors acting as fiduciaries to protect their interests, creditors are afforded protection through contractual agreements, fraud and fraudulent conveyance law, implied covenants of good faith and fair dealing, bankruptcy law, general commercial law and other sources of creditor rights. Delaware courts have traditionally been reluctant to expand existing fiduciary duties. Accordingly, the general rule is that directors do not owe creditors duties beyond the relevant contractual terms." (Internal quotation marks omitted.) Id., at 99.

"Recognizing that directors of an insolvent corporation owe direct fiduciary duties to creditors, would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interest of the insolvent corporation. To recognize a new right for creditors to bring direct fiduciary claims against those directors would create a conflict between those directors' duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it, and the newly recognized direct fiduciary duty to individual creditors. Directors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation." Id., at 103.

Thus, the court holds that as a matter of law, the general rule is that whether a corporation is solvent or insolvent, directors of the corporation do not...