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InteliClear, LLC v. Victor

United States District Court, D. Connecticut

September 1, 2017

INTELICLEAR, LLC; A. MARTINHO BARRETTO; JOHN PAUL DEVITO; and GUY T. POWELL, Plaintiffs,
v.
ROBERT J. VICTOR, Defendant.

          RULING ON COUNTERCLAIM DEFENDANTS' MOTION TO DISMISS FOR LACK OF STANDING AND FAILURE TO STATE A CLAIM

          JANET BOND ARTERTON, U.S.D.J.

         Plaintiff InteliClear filed this action on August 17, 2016 against Defendant Robert J. Victor ("Victor") alleging breach of fiduciary duty (Count One); civil theft in violation of Conn. Gen. Stat. § 52-564 (Count Two); conversion (Count Three); and demanding an accounting of all financial transactions regarding InteliClear assets and funds performed by Victor or at his direction (Count Four). On September 1, 2016 Plaintiff filed an Amended Complaint [Doc. # 10] adding a claim for tortious interference with business expectancies (Count Five); and seeking a declaratory judgment (Count Six). On January 19, 2017 InteliClear filed its Second Amended Complaint [Doc. # 66], in which Barretto, Powell, and DeVito joined the case as plaintiffs. Defendant's Answer [Doc. # 83] was filed February 15, 2017.

         Victor also filed an Amended Counterclaim ("Counterclaim") [Doc. # 78] February 13, 2017 asserting ten counterclaims against Powell, Barretto, DeVito and Brandon Consulting ("Brandon").[1] In his individual capacity, Counterclaim Plaintiff Victor asserts the following claims: (1) an injunction against all Counterclaim Defendants (Count One); (2) damages for conspiracy against all Counterclaim Defendants (Count Two); (3) breach of contract against Powell, Barretto, DeVito and InteliClear (Count Three); (4) fraud/intentional misrepresentation against Powell, Barretto, DeVito and InteliClear (Count Five); (5) breach of fiduciary duty against Powell, Barretto and DeVito (Count Seven); (6) reformation of the Operating Agreement provisions relating to dissociation of Members (Count Nine); and (7) a declaratory judgment of the parties' rights and responsibilities under the Operating Agreement and the Members Agreement against Powell, Barretto, DeVito and InteliClear (Count Ten). Derivatively, on behalf of InteliClear, Victor asserts as counterclaims: (1) tortious interference with business relationships against Powell, Barretto and DeVito (Count Four); (2) fraud/intentional misrepresentation against Powell, Barretto, and DeVito (Count Six); and (3) violations of the Connecticut Unfair Trade Practices Act, Connecticut General Statutes §§ 42-110a et seq. ("CUTPA") against Barretto (Count Eight).

         Counterclaim Defendants InteliClear, Barretto, Powell and DeVito ("Counterclaim Defendants") move [Doc. # 89] for dismissal of Counts One through Nine of the Amended Counterclaim. Oral argument was held July 5, 2017. For the reasons that follow, Counterclaim Defendants' Motion is granted in part and denied in part.

         I. Facts Alleged

         Victor began to work on the design of a new securities clearing and settlement software product in 2002, and over the next several years he invested substantial time, effort, and resources in developing the product. (Amended Counterclaim ("Am. Counterclaim") ¶¶ 18-19.) In January 2005 Powell, Barretto and DeVito joined as Members of the Company and InteliClear adopted its present name, Operating Agreement, and Members Agreement. (Id. ¶¶ 23-24, 28.)

         Victor was appointed General Manager[2] with broad powers to run the Company. (Id. ¶ 29.)[3] Under Victor's management, InteliClear grew and achieved a high level of success. (Id. ¶ 27.) As the value of InteliClear increased and a pending transaction which would provide a substantial benefit to InteliClear and its Members approached fruition in August 2015, Powell, Barretto, and DeVito, undertook actions in contravention of the Operating Agreement, to take over control of InteliClear and force Victor out of the company, resorting to disparagement, threats, intimidation, and extortion. (Id. ¶¶ 34-35.) Their actions caused this transaction to fail, resulting in harm to InteliClear's business and reputation. (Id. ¶¶ 58-59.)

         Specifically, the other Members passed "Resolutions" that were not approved by the requisite voting percentage of the Members to: (a) remove Victor as General Manager; (b) change the Company's principal office; (c) close its bank accounts and take control of its funds; (d) open a new bank account and write unauthorized checks; (e) interfere with the Company's customer relationships and sources of revenue; and (f) interfere with Victor's ability to make a living. (Am. Counterclaim 36-38.) When Powell, Barretto, and DeVito directed InteliClear's bank to close its accounts in Connecticut, the bank froze the accounts. (Id. ¶ 39.) They also opened a new and unauthorized bank account in New Jersey, over which Victor had no signature authority, and executed a lease for the Company's office space in New Jersey that was not authorized by Victor. (Id. ¶¶ 40, 43.)

         Victor also alleges that Powell and Barretto conspired with Brandon, a company controlled by Barretto that provides computer programmers and other services to InteliClear. (Id. ¶¶ 44-45.) Because Brandon did not keep proper records of its activities on behalf of InteliClear, neither InteliClear nor Victor were able to determine whether Brandon's charges were justified by the services it purported to provide, nor could they identify work or services which may be properly chargeable to clients. (Id. ¶¶ 44-47.) Barretto eventually told Victor that there was only a nominal markup of approximately three percent and also claimed that Victor had been aware of this markup. However, when Victor demanded to know the actual markup and requested documentation, Barretto refused to provide the information, claiming it was proprietary to Brandon. (Id. ¶¶ 48-49.) Victor believes the actual markup imposed by Brandon is higher than three percent and a reasonable estimate of the cumulative amount of the markup is hundreds of thousands of dollars. (Id. ¶¶ 50-53.)

         InteliClear's governance over the years was informal and its policies regarding Members' benefits and expense allowances had been liberal. (Am. Counterclaim ¶ 60.) In addition, Powell and Barretto have repeatedly obligated InteliClear to pay sums in excess of $5, 000 without the Super Maj ority Vote required by its Operating Agreement. (Id.) Nonetheless, in what Victor claims to be an effort to force him out of the Company, Powell, DeVito and Barretto demanded extensive documentation regarding Victor's expenses going back to the inception of InteliClear, and used this information in order to claim, and to cause InteliClear to claim, misconduct by Victor. (Id. ¶ 62.) Despite this, Powell and Barretto have refused to hold their own claims for expense payment and reimbursement to the same standard and have routinely charged and been reimbursed for items that are not ordinary business expenses. (Id. ¶¶ 63-64.)

         In September 2015, Powell and Barretto's actions led Victor to commence an action in the Connecticut Superior Court, which included a Verified Complaint and Application for Temporary and Permanent Injunction ("the Litchfield Action"). (Id. ¶ 65.) Victor also sought an order in the Litchfield Action directing the defendants to provide him a full and functioning version of InteliClear's software accessible by computer. (Id. ¶ 66.) On October 13, 2015 the parties to that Action entered into a stipulated agreement on the record. (Id. ¶¶ 67-68.) The agreement entered as an Order of the court and included that Powell and Barretto would not further interfere with InteliClear's bank accounts. (Am. Counterclaim ¶ 68.) They also agreed (and the Court directed) that disputes concerning InteliClear, which the parties could not resolve, would be submitted to Justice C. Ian McLachlin (Ret.) for resolution. (Id. ¶ 69.) Based upon these agreements, a scheduled hearing on the application for injunction in the Litchfield Action was cancelled. (Id. ¶ 70.) On May 26, 2016 the defendants removed the Litchfield Action to federal court (the "Federal Action"). On August 12, 2016, Victor filed a voluntary dismissal of the Federal Action, without prejudice. (Id. ¶ 72.)

         On August 16, 2016, Powell, Barretto, and DeVito, denominating themselves "non-defaulting parties" under the parties' "Members Agreement, " purported to dissociate Victor as a Member of InteliClear and to remove him as its General Manager. (Id. ¶ 74.) The next day, Powell, Barretto, and DeVito, claiming to act as the sole members of InteliClear, and Barretto, claiming to act as General Manager, again caused InteliClear's bank to freeze its account and attempted to move the funds to a bank account in New Jersey over which Victor has no access. (Am. Counterclaim ¶ 75.) That same day, August 17, 2016, Powell and Barretto caused InteliClear to initiate the instant federal court action against Victor. (Id. ¶ 76.)

         These more recent actions by Powell, Barretto and DeVito were taken soon after Victor presented them with a memorandum and term sheet for a transaction, potentially worth more than twelve million dollars, for the sale of the company and soon after Victor made additional efforts to stop their unauthorized actions and require accountability for payment of services to Brandon. (Id. ¶ 78.) Their actions caused InteliClear to lose the opportunity to complete the potential sale. (Id.)

         On August 23, 2016 Powell, Barretto and/or DeVito filed documents with the Connecticut Secretary of State, purportedly on behalf of InteliClear, reflecting their purported removal of Victor as General Manager and Member of InteliClear. (Id. ¶ 81.) Powell, Barretto and/or DeVito, also contacted InteliClear's clients and misrepresented to them the validity of their actions with respect to InteliClear and directed clients to send payments to addresses and accounts controlled by them. (Id. ¶ 82.) Powell, Barretto and DeVito also misrepresented to clients that there has been a final determination that Victor is dissociated from InteliClear and that he embezzled funds and changed their proportionate shares of the business to reflect that they are entitled to larger percentages due to their purported removal of Victor. (Id. ¶¶ 83-84.)

         II. DISCUSSION[4]

         A. Victor has Standing to Assert Derivative Claims on Behalf of InteliClear

         Victor asserts claims for Tortious Interference with Business Relationships (Count Four), Fraud (Count Six), and Unfair Trade Practices (Count Eight) derivatively on behalf of InteliClear. Counterclaim Defendants maintain Victor lacks standing to pursue his derivative claims because he does not adequately represent InteliClear's interests. (Def.'s Mot. to Dismiss at 27.) Victor maintains that he has standing to sue derivatively because, as the sole member whose interests have been targeted individually and who has not participated in the self-dealing and conflict of interest transactions alleged in his Counterclaim, he adequately represents the interests of the only member who would assert these claims. (Pl.'s Opp'n at 28.)

         Conn. Gen. Stat. § 52-572J provides in relevant part:

Whenever any corporation or any unincorporated association fails to enforce a right which may properly be asserted by it, a derivative action may be brought by one or more shareholders or members to enforce the right The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association.

         Similarly, Conn. Gen. Stat. § 33-721 provides: "[a] shareholder may not commence or maintain a derivative proceeding unless the shareholder ... (2) fairly and adequately represents the interests of the corporation in enforcing the right of the corporation."[5] In turn, "[a]dequate and fair representation consists of the nominal plaintiffs having interests and issues coextensive with those of the class of shareholders he seeks to represent and being able to assure the trial court that as a representative, he will put up a real fight." N. Star Contracting Corp. v. Albright, 156 Conn.App. 311, 318 (2015) (citing Barrett v. S. Conn. Gas Co., 172 Conn. 362 (1977)). "The real issue is whether an inquiry of all possible antagonisms between the interests of the representative and those of the class . . . reveals conflicts which make it likely that the interests of the other stockholders will be disregarded in the management of the suit." Barrett, 172 Conn, at 374 (internal citations and quotation marks omitted).

         In Barrett, the Connecticut Supreme Court noted that an important factor in considering whether a "nominal plaintiff has conflicts that preclude assurance of fair and adequate representation of all other shareholders" is whether the plaintiff has previously brought an action individually against the company he or she now purports to represent. Id. at 374-75. However, Connecticut courts have recognized that even a plaintiff who may have a claim against a company can still adequately represent the interests of that company in a derivative action. Beckworth v. Bizier, 138 F.Supp.3d 144, 153-54 (D. Conn. 2015) (citing Barrett, 172 Conn, at 373) ("Barrett.. . does not hold that a plaintiff with possible individual claims against the corporation can never fairly and adequately represent other shareholders in a derivative action.").[6] "Whether a plaintiff is an appropriate representative is fact-specific and depends upon any number of factors, " including:

(1) whether the named plaintiff is the real party in interest; (2) the plaintiffs familiarity with the litigation and willingness to learn about the suit; (3) the degree of control exercised by attorneys over the litigation; (4) the degree of support given to the plaintiff by the other shareholders; (5) the plaintiffs personal commitment to the action; (6) the remedies sought by the plaintiff; (7) the relative magnitude of the plaintiffs personal interests as compared to the plaintiffs interest in the derivative action itself; and (8) the plaintiffs vindictiveness toward the other shareholders.

Fink v. Golenbock, 238 Conn. 183, 205 (1996).

         Here, nearly all of the factors weigh in favor of finding Victor has standing to pursue the claims on behalf of InteliClear.[7] As the only shareholder not involved in the actions forming the basis for the derivative claims, Victor is the real party in interest and is more than sufficiently familiar with and committed to the litigation. Moreover, the court in Beckworth concluded with respect to the seventh Fink factor: where "no party other than the plaintiffs is likely to pursue the derivative claims against the defendants, " because the remaining parties are alleged to have benefitted from the alleged unlawful actions, the plaintiffs' interest in the derivative claims was "not outweighed by their personal interests." 138 F.Supp.3d at 154. In so holding, the court found significant that the plaintiff had abandoned all claims in "direct conflict with those of the corporations they seek to represent." See Id. at 153. Similarly, Victor's individual claims do not conflict with InteliClear's claims and thus the seventh factor also weighs in favor of finding Victor has standing.

         In sum, Victor is the only individual who would assert the claims in Counts Four, Six and Eight on behalf of InteliClear because they are grounded in actions taken by the remaining Members. Thus, there are no similarly situated shareholders or members to whom consideration must be given and Victor has standing to assert claims derivatively on behalf of InteliClear.

         B. Counterclaim Defendants Argue Counts One Through Nine Fail to State Claims Upon Which Relief can be Granted

         I. Count One: Injunction

         In Count One of his Amended Counterclaim, "Victor seeks an injunction requiring that InteliClear recognize his ownership interest and rights as General Manager and rescind the improper and unlawful actions taken by the other members by which they have purported to seize control of InteliClear." (Am. Counterclaim ¶ 90.) Counterclaim Defendants, looking to federal law, argue that an injunction cannot stand as an independent cause of action. See E. Point Sys., Inc. v. Maxim, No. 3T3-CV-00215 VLB, 2014 WL 523632, at *12 (D. Conn. Feb. 7, 2014) ("E. Point I") (quoting Williams v. Walsh, 558 F.2d 667, 671 (2d Cir.1977)) ("injunctive relief, does not constitute [a] separate' cause of action."). Victor, however, relies upon Connecticut state law, which recognizes a claim for an injunction as a viable free-standing cause of action. See Baker v. Town of Cheshire, No. CV075013602, 2008 WL 1971495, at *9 (Conn. Super. Ct. Apr. 24, 2008J, affd in part, rev'd in part sub nom. Ugrin v. Town of Cheshire, 307 Conn. 364, 54 A.3d 532 (2012) C'[i]t appears that a majority of Connecticut courts have recognized a claim for an injunction as a viable free-standing cause of action."); Frantz v. Romaine, No. CV000176623S, 2001 WL 358861, at *2 (Conn. Super. Ct. Mar. 28, 2001) (finding that the "plaintiff. . . alleged a legally sufficient cause of action for an injunction.").

         Counterclaim Defendants urge that "[t]he manner of procedure in suits seeking injunctive relief is governed by federal law." (Counterclaim Def.'s Reply ("Def.'s Reply") at 2 (citing 13 James Wm. Moore, Moore's Federal Practice § 65.07[1] (2011).) However, in at least two other diversity cases, federal district courts looked to state law to determine whether an injunction could be pled as an independent cause of action. See In re A Purported Judgment Lien Against Rose Ann Juarez, No. 3:14-CV-2173-P, 2015 WL 12939259, at *3 (N.D. Tex. Mar. 20, 2015) ("injunctive relief is not an independent cause of action under Texas law, and thus granting an injunction is contingent on a viable underlying claim."); Dun v. Bank of Am., NA, No. 12-11840, 2013 WL 6050140, at *7 (E.D. Mich. Nov. 15, 2013) (citing state court of appeals for proposition that "an injunction is an equitable remedy, not an independent cause of action."). Accordingly, because an injunction is recognized as a freestanding cause of action under Connecticut law, Count One should not be dismissed on that basis.

         Because Victor's Counterclaim asserts a cause of action for an injunction, which is recognized under Connecticut law, but not federal, the court will look to state law to determine what he must plead to state this claim. The Connecticut Supreme Court has held that a "party seeking injunctive relief has the burden of alleging and proving irreparable harm and lack of an adequate remedy at law." Tighe v. Berlin, 259 Conn. 83, 87 (2002). "Although an absolute certainty is not required, it must appear that there is a substantial probability that but for the issuance of the injunction, the party seeking it will suffer irreparable harm." Id. at 87-88. Counterclaim Defendants argue that "notwithstanding oblique references to his 'livelihood' and the 'unique value of his interest as a Member of InteliClear, ' Victor fails to show that his distributions and other benefits or his interest in the company cannot be monetized." (Def.'s Reply at 2.) While Connecticut courts do not appear to have spoken on this issue, the Second Circuit recognizes that "the denial of a controlling ownership interest in a corporation may constitute irreparable harm." Wisdom Imp. Sales Co. v. Labatt Brewing Co., 339 F.3d 101, 114 (2d Cir. 2003). The Court thus finds that Victor has sufficiently pled irreparable harm and thus denies Counterclaim Defendants' Motion to Dismiss Count One.[8]

         ii. Count Two: Civil Conspiracy

         Victor alleges civil conspiracy among InteliClear, Powell, Barretto, and DeVito with Brandon "to commit fraud, tortiously interfere with business relationships . . . [and] to allow Brandon to impose, collect and retain charges that are excessive and unfair." (Am. Counter Claim ¶¶ 85-86.) Counterclaim Defendants maintain that Victor has not alleged facts sufficient to establish that any of the alleged acts constitute a substantive tort that can ...


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