Ostrowski v. Avery

• Decision Date: 09 December 1997
• Docket Number: No. 15655,15655
• Citation: 703 A.2d 117,243 Conn. 355
• Court: Connecticut Supreme Court
• Parties: James P. OSTROWSKI et al. v. Craig AVERY et al.

Page 117

703 A.2d 117

243 Conn. 355

James P. OSTROWSKI et al. v. Craig AVERY et al.

No. 15655.

Supreme Court of Connecticut.

Argued Sept. 25, 1997.

Decided Dec. 9, 1997.

Robert A. Harris, Bridgeport, for appellants-appellees (plaintiffs).

Dion W. Moore, Bridgeport, with whom was Robert Berta, Southport, for appellees-appellants (named defendant et al.).

Before CALLAHAN, C.J., and BORDEN, KATZ, PALMER and PETERS, JJ.

PETERS, Associate Justice.

This case raises important issues concerning the procedural and substantive rules governing claims of fiduciary misconduct in general and usurpation of a corporate opportunity in particular. The plaintiffs, minority shareholders of Avery Abrasives, Inc. (Avery Abrasives), a manufacturer of abrasive cutting wheels, brought this action in their individual capacities and derivatively on behalf of that corporation pursuant to General Statutes § 52-572j. ¹ On the motion of its special litigation committee, ² Avery Abrasives became a defendant ³ in accordance with General Statutes § 52-107. ⁴ The plaintiffs claimed that, by establishing International Small Wheels (ISW), a corporation engaged in the manufacture of small abrasive cutting wheels, the defendants Craig Avery and Michael Passaro had violated their fiduciary duties to Avery Abrasives. Specifically, the plaintiffs alleged that the defendants had diverted customer orders to ISW, had used Avery Abrasives equipment and personnel for ISW business, had conducted ISW business from the Avery Abrasives premises during business hours, had hired Avery Abrasives employees to work for ISW and had usurped a corporate opportunity. The plaintiffs further claimed that: (1) the defendants' conduct violated General Statutes § 42-110a et seq., the Connecticut Unfair Trade Practices Act (CUTPA); (2) the defendants were unjustly enriched by the salaries and benefits that they received from Avery Abrasives during the time they operated ISW; (3) Avery wrongfully had disregarded his fiduciary duty to Avery Abrasives by allowing an Avery Abrasives employee, Mary Sobek, to engage in a competing business enterprise, Monroe Abrasives, Inc., and to conduct business for Monroe Abrasives, Inc., while at work at Avery Abrasives; (4) Avery's conduct constituted negligence in breach of the duty he owed to Avery Abrasives and its shareholders; and (5) Avery's conveyance to his wife, Antoinette Avery, of their jointly owned home violated General Statutes § 52-552, the Uniform Fraudulent Transfer Act.

After a court trial, Moran, J., concluded that the defendants, although they were corporate fiduciaries, were not liable to the plaintiffs. The court found that the plaintiffs had failed to establish the truth of their allegations, and, accordingly, that: (1) any misconduct by the defendants in working on ISW business while at Avery Abrasives had not adversely affected their job performance or caused more than de minimis harm to Avery Abrasives; (2) the defendants had not misappropriated any property from Avery Abrasives; and (3) Avery had not knowingly allowed Sobek to conduct business for Monroe Abrasives, Inc., while she was working at Avery Abrasives, or, alternatively, even if Avery had allowed Sobek to do such work, the damage to Avery Abrasives had been minimal. The court also determined that the defendants had not violated CUTPA. Implicitly rejecting the plaintiffs' negligence claim, the trial court concluded that because Avery was not liable to the plaintiffs, it would not consider whether the transfer of his interest in his home to his wife was fraudulent. Finally, the court determined that the plaintiffs had met their burden of proof that the defendants had usurped a corporate opportunity by forming ISW. The court, nonetheless, declined to impose liability for such usurpation, principally because, prior to the formation of ISW, the defendants had obtained the consent of Raymond Avery, who is Craig Avery's father, as well as the president, chief executive officer and majority shareholder of Avery Abrasives.

The plaintiffs appealed from the judgment of the trial court claiming that the trial court improperly had: (1) failed to require Avery to prove the fairness of his conduct by clear and convincing evidence; (2) concluded that permission from Raymond Avery absolved the defendants from liability for usurpation of a corporate opportunity belonging to Avery Abrasives; (3) refused to apply disclosure requirements to the defendants in the absence of controlling appellate precedents; and (4) concluded that the defendants' appropriation of a corporate opportunity did not constitute an unfair and deceptive trade practice. ⁵ The defendants cross appealed, claiming that the trial court improperly had determined that the manufacture of small wheels was a corporate opportunity for Avery Abrasives. The appeal and cross appeal were transferred from the Appellate Court to this court pursuant to Practice Book § 4023 and General Statutes § 51-199(c). We reverse the judgment of the trial court and remand the case for a new trial.

The following facts are relevant to this appeal. Avery Abrasives is a Connecticut corporation that manufactures abrasive cutting wheels. Raymond Avery, the president and chief executive officer of Avery Abrasives, owns more than 54 percent of the outstanding Avery Abrasives stock. During the period of time in question, the remainder of Avery Abrasives stock was held by eight minority shareholders, including the plaintiffs, and an employee stock ownership plan. Avery is the vice president of manufacturing for Avery Abrasives, and was elected a director of Avery Abrasives in 1976. Passaro is the finishing supervisor at Avery Abrasives.

Avery Abrasives manufactures cutting wheels in diameters of five inches and larger. Prior to 1970, Avery Abrasives had manufactured smaller wheels in diameters of less than five inches but, in 1970, Raymond Avery had decided to focus on the manufacture and sale of larger wheels, particularly wheels of twenty inches or more in diameter.

In 1976, the defendants became persuaded that there was a market for small cutting wheels of less than four inches in diameter. Avery asked his father whether he and Passaro could retain their positions at Avery Abrasives while running their own corporation to manufacture small cutting wheels. After obtaining Raymond Avery's consent to the plan, the defendants incorporated ISW by certificate filed January 27, 1977. At an Avery Abrasives board of directors meeting held the following day, January 28, 1977, Raymond Avery proposed to the directors that Avery Abrasives expand to manufacture small wheels. Neither of the defendants disclosed to the minority shareholders of Avery Abrasives that ISW already had been formed to pursue this very opportunity.

The defendants operated ISW from 1976 until late 1989 or early 1990. ISW manufactured wheels of less than four inches in diameter, which it produced from large wheels purchased at a discount from Avery Abrasives. ISW sold some of its finished wheels to Avery Abrasives, hired several Avery Abrasives employees and shared some customers with Avery Abrasives. ISW ran an advertisement in the Yellow Pages listing Avery Abrasives' telephone number as its own. Occasionally, the defendants conducted ISW business while at Avery Abrasives. Between 1976 and 1988, ISW generated total gross revenues of $328,562, producing an annual average gross revenue of $25,274.

This case presents an unusual factual situation in which the majority shareholder of the corporation is the father of the corporate fiduciary who has been charged with usurpation of a corporate opportunity. The issues presented have significance, however, for all corporations, particularly closely held corporations.

I

The starting point of our analysis is the proper allocation of the burden of proof in claims of violation of a corporate fiduciary's duty to his or her corporation. ⁶ We begin by setting out the basic framework for analyzing claims of violation of fiduciary duty. We then turn to the requirements specific to a claim of usurpation of corporate opportunity.

The plaintiffs claim that the defendants violated their fiduciary duty to Avery Abrasives in a number of ways. In essence, the plaintiffs allege that the defendants misused Avery Abrasives' resources, interfered with its business relationships, engaged in self-dealing transactions with Avery Abrasives, and, finally, usurped a business opportunity belonging to Avery Abrasives.

The trial court found that the plaintiffs had met their burden of proof with respect to establishing the role of the defendants as corporate fiduciaries. It concluded, nonetheless, that the plaintiffs also were required to assume the burden of proving that the defendants had violated their fiduciary obligations to Avery Abrasives. This latter conclusion was improper.

It is well established in our corporate fiduciary law that once a plaintiff establishes the existence of a fiduciary duty, the burden shifts to the corporate fiduciary to prove fair dealing by clear and convincing evidence. See Konover Development Corp. v. Zeller, 228 Conn. 206, 229-30, 635 A.2d 798 (1994); Oakhill Associates v. D'Amato, 228 Conn. 723, 726-27, 638 A.2d 31 (1994).

In our cases concerning self-dealing transactions, we have stated that, if a director of a corporation enters into a transaction with the corporation that will inure to his or her individual benefit, the director bears the burden of proving that the transaction is "fair, in good faith and for adequate consideration...." Rosenfield v. Metals Selling Corp., 229 Conn. 771, 795-96, 643 A.2d 1253 (1994); Osborne v. Locke Steel Chain Co., 153 Conn. 527, 534-35, 218 A.2d 526 (1966); see also Klopot v. Northrup, 131 Conn. 14, 20-21, 37 A.2d 700 (1944); Massoth v. Central Bus Corp., 104 Conn. 683, 688-89, 134 A. 236 (1926).

The framework governing a claim of usurpation of a corporate...