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Lynn v. Bosco

Court of Appeals of Connecticut

May 29, 2018


          Argued November 16, 2017

         Procedural History

         Action for, inter alia, a declaratory judgment determining whether the plaintiffs' preemptive rights were violated in connection with the sale of certain shares of stock, and for other relief, brought to the Superior Court in the judicial district of New Britain, where the court, Robaina, J., granted the plaintiffs' motion to cite in Aerospace Techniques, Inc., as a defendant; thereafter, the named defendant et al. filed a counterclaim; subsequently, the matter was tried to the court, Hon. Lois Tanzer, judge trial referee; judgment in part for the plaintiffs on the complaint and on the counterclaim; thereafter the court, Hon. Lois Tanzer, judge trial referee, issued a certain order, from which the plaintiffs and the defendant Aerospace Techniques, Inc., appealed to this court. Appeal dismissed in part; judgment reversed in part; further proceedings.

          Richard P. Weinstein, with whom, on the brief, was Sarah Black Lingenheld, for the appellants (defendant Aerospace Techniques, Inc., and plaintiffs).

          Dale M. Clayton, for the appellee (defendant Richard B. Polivy).

          Megan Youngling Carannante, with whom, on the brief, were Eliot B. Gersten and Johanna S. Katz, for the appellee (named defendant).

          Prescott, Elgo and Norcott, Js.


          ELGO, J.

         This case is about the propriety of a judicial remedy binding a company that had been cited in as a party by the plaintiffs, Jack E. Lynn and Jeffrey Lynn, for notice purposes only and against whom no allegations had been pleaded. The defendant Aerospace Techniques, Inc. (company), [1] appeals from the January 11, 2016 judgment of the trial court ordering the company to pay the owners of 141 shares of treasury stock issued to the defendants Clyde E. Warner, [2] Robert J. Bosco, Sr. (Bosco), Anthony Parillo, Jr., and Richard B. Polivy[3]in exchange for the return of the 141 shares to the company. The company claims that the trial court acted beyond the scope of its authority by entering an order that imposed a remedy on the company, although neither party made any allegations against or sought relief from the company in the operative complaint. We agree and, accordingly, reverse the judgment of the trial court.

         The following facts and procedural history are relevant to this appeal. In 1965, Jack Lynn and two other individuals incorporated the company under the laws of Connecticut. Jack Lynn was chairman of the company's board of directors (board) from that time until 2011. In June, 2011, the board, then consisting of Jack Lynn, Bosco, and Warner, met.[4] The board voted to reaffirm Polivy as the company's corporate counsel. Bosco and Warner then voted for Bosco to replace Jack Lynn as chairman and for Bosco and Warner to replace Jack Lynn and Jeffrey Lynn in their respective positions as officers of the company. In October, 2011, Jack Lynn sent a letter to all shareholders of the company, indicating that he and Jeffrey Lynn needed thirty-nine shares of stock to exceed 50 percent ownership of the company, and offering to purchase the first forty-one shares offered to him. Later that month, at the annual shareholder meeting, Jack Lynn was removed from the board, which then was reconstituted with Bosco, Warner, Parillo, and Polivy as directors.

         On December 8, 2011, shareholder Joseph R. Dube sent a letter to Bosco, offering to sell his 141 shares to Bosco if the company did not purchase them. At a board meeting on December 14, 2011, the board agreed to seek approval from its bank for the company to purchase Dube's shares and agreed to reissue the shares at $2000 per share, to be sold and distributed as follows: forty-seven shares to Bosco, forty-seven shares to Parillo, forty-six shares to Polivy, and one share to Warner (Dube transaction). The plaintiffs were not aware of the transaction. After receiving the bank's approval, the company paid Dube $100, 000 and issued him a promissory note for the outstanding balance of $82, 000 in exchange for his 141 shares of stock. Bosco, Parillo, and Polivy each provided a promissory note to the company in exchange for their respective allocation of the shares, agreeing to pay the company in three installments. As the first installment, Bosco and Parillo each promised to pay $32, 900, and Polivy promised to pay $32, 200. Warner paid the $2000 he owed in cash.

         At the December 14, 2011 meeting, the board also agreed to award and pay performance bonuses of $32, 900 to Bosco, $32, 900 to Parillo, and $2000 to Warner.[5] During the repayment period for their promissory notes, the board awarded additional bonuses to Bosco, Parillo, and Warner of approximately $100, 000 each. Polivy never received a bonus.[6]

         In December, 2012, the plaintiffs filed a two count complaint against the remaining shareholders.[7] The plaintiffs claimed that Bosco, Parillo, Polivy, and Warner (individual defendants) (1) acquired stock from the company in violation of the plaintiffs' preemptive rights as stockholders and (2) breached their fiduciary duties to the plaintiffs by self-dealing and violating the plaintiffs' preemptive rights. The initial complaint did not name the company as a party.

         In January, 2013, the individual defendants moved to strike the plaintiffs' complaint, arguing, in part, that ‘‘the plaintiffs fail[ed] to join a proper and necessary party defendant for the declarative judgment sought . . . . [The company] is a necessary party to any declaratory judgment regarding the preemptive rights held by its shareholders and any constructive trust that may (or may not) be created based on the defendants' alleged ‘self-dealing.' Additionally, . . . [the company] is the entity which could grant and/or deny the plaintiffs preemptive rights, not the individual defendants.'' In response, the plaintiffs moved to add the company as a party defendant, arguing that although ‘‘the plaintiffs believe that the issue of whether [the company] is a necessary party may be debatable, in the interests of moving this case along the plaintiffs ask the court to grant their motion to cite in [the company] as a party defendant.''

         The court, Robaina, J., granted the plaintiffs' motion, and the plaintiffs filed an amended complaint, naming the company as a defendant with respect to their claim of a violation of preemptive rights only.[8] The amended complaint did not include any allegations against or seek relief from the company. The court, Hon. Jerry Wagner, judge trial referee, thereafter denied the individual defendants' motion to strike, noting in its memorandum of decision that they had conceded that their argument regarding the plaintiffs' failure ‘‘to join a proper and necessary party defendant was moot.'' In October, 2013, the individual defendants filed their answer to the plaintiffs' complaint, therein asserting several affirmative and special defenses, and a two count counterclaim against the plaintiffs. The individual defendants did not assert a cross claim against or seek any relief from the company.

         In February, 2014, the company moved to strike the plaintiffs' complaint for failure ‘‘to state a cause of action against'' it. The plaintiffs opposed the company's motion, noting that the company's ‘‘participation in this case is at the insistence of its board of directors, '' the individual defendants in this case. The plaintiffs noted that the complaint ‘‘merely identifies [the company] as an additional defendant in its count one in recognition of the fact that [the company] is, in essence, a mere stakeholder upon the plaintiff's claims, including for declaratory relief, to validate its preemptive rights in [the company's] stock . . . .'' The plaintiffs clarified that the company ‘‘is not accused of wrongdoing since its actions were only by virtue of the actions of the individual defendants.'' The court, Abrams, J., denied the company's motion to strike, and the company remained named as a defendant.

         In May, 2014, the case proceeded to trial. At the commencement of the first day of the two day trial, the court, Hon. Lois Tanzer, judge trial referee, asked the parties about the status of the company's motion to strike. The plaintiffs' counsel explained that the motion had been denied and that the court had decided that ‘‘because it's a declaratory judgment action there doesn't need to be adversity against the [company], but it should have formal notice or be joined so the [company] is here.'' The plaintiffs' counsel further stated: ‘‘I did speak to [Mark Block, the company's counsel]. It's my understanding that he's here to represent the [company], but I maintain we are not adverse to the [company]. It's my understanding he's not an active participant.'' Attorney Block clarified ‘‘that as an indispensable party, the [company] should be afforded an opportunity to participate in the proceedings, '' and therefore reserved that right. The court noted that it believed that the company was brought in so that it could ‘‘protect [its] interest.'' Halfway through the first day of the trial, Attorney Block stated: ‘‘[M]y appearance on behalf of the [company] was as a necessary party to a declaratory judgment act, and I have no active role in the litigation, and I've discussed the same with counsel. They have no objection to my being released from the rest of the trial since there's no active role I intend to take at this point.'' The parties did not object. The plaintiffs' counsel further stated that ‘‘it's just an added expense for the [company] which I think under the circumstances is not even necessary.'' The court released Attorney Block, and he was not present for the remainder of the trial.

         Importantly, after the trial concluded on May 16, 2014, but before the court rendered judgment, Warner realigned himself with the plaintiffs, and, as a result, by October 10, 2014, the plaintiffs had become majority shareholders and regained control of the company's affairs. Prior to Warner's realignment, collectively, the plaintiffs held 950 shares, and the defendants held 1026 shares, of which 605 belonged to Warner. When Warner ‘‘teamed [up] with the [plaintiffs], '' he and the plaintiffs became majority shareholders, together holding 1555 shares, and the remaining defendants holding 421 shares.

         On November 4, 2014, the plaintiffs moved to reopen the evidence, arguing that this reorganization provided them with ‘‘access [to] . . . some substantially damaging evidence which had otherwise been concealed and unknown to the plaintiffs and even to . . . Warner in regard to the conduct of Parillo, Polivy, and Bosco . . . .'' Soon thereafter, Attorney Block moved to withdraw his appearance, noting that he had been ‘‘requested to enter an appearance on behalf of the company to protect the interests of the company although the only allegations were against the individual defendants, '' and that the reorganization put him ‘‘in the position of representing a corporation which is now suing its controlling shareholders . . . .''[9] As the company's controlling shareholders, the plaintiffs did not hire a new attorney to represent the company's interests. In February, 2015, the court held a hearing on the plaintiffs' motion to reopen. The plaintiffs argued that the new information would ‘‘demonstrate that the testimony given to the court was not . . . accurate, not forthright in regard to the financial conditions of the company.'' On March 23, 2015, the court denied the motion, reasoning that the evidence proffered related ‘‘to the credibility of testimony and evidence relating to the financial conditions of [the company] at the time of the events complained of in the pleadings and not related to issues of a substantive or material nature.''

         That same day, the court issued its memorandum of decision, in which it ruled in favor of the plaintiffs on count one of the complaint and for the individual defendants on count two.[10] At the outset, the court noted that the company and Bosco, Jr., were ‘‘named as defendants in count one only and only for the purpose of notice.'' The court then found that the 141 shares of stock that the company reacquired from Dube and then sold to the individual defendants had been subject to preemptive rights. The court thus concluded that the Dube transaction violated the plaintiffs' preemptive rights.[11] The court also found that Bosco, Parillo, and Warner had engaged in self-dealing by awarding themselves bonuses in connection with the Dube transaction but that, nevertheless, the plaintiffs had failed to satisfy all of the elements for a cause of action for breach of fiduciary duty. Specifically, the plaintiffs did not show that they had suffered damages or that any such damages were caused by the individual defendants' actions. Upon determining that the plaintiffs were entitled to equitable relief for the violation of their preemptive rights, the court ordered all parties to submit proposed remedies regarding disposition of the 141 Dube shares, noting that ‘‘[a]side from the form of remedy, there are questions concerning whether payment or reimbursement by the plaintiffs and/or to the defendants will be required and, if so, at what per share price.''

         The plaintiffs, as well as Polivy and Parillo, filed proposed remedies. In April, 2015, the plaintiffs proposed that the 141 shares should be returned to the company as treasury stock and that the individual defendants should not receive payment for returning their shares because their ‘‘source of payment for the shares was the [company] itself through the self-dealing of the [individual] defendants.'' Additionally, the plaintiffs argued that ‘‘[i]n the event the court rejects this approach as to payment . . . the determination of whether or not payment is to be made to the [individual] defendants should await an adjudication of the [other] case'' pending between these parties. See Lynn v. Bosco, Superior Court, judicial district of Hartford, Docket No. CV-14-6063040-S (Lynn II).[12] In July, 2015, Parillo proposed ‘‘that the [c]ourt order rescission of the [individual] defendants' purchase of the Dube shares from [the company], with the shares returned to [the company's] treasury and [the company] simultaneously returning the consideration the [individual] defendants paid for these shares.'' Similarly, Polivy proposed that, upon his return of his shares to the company, the company should pay him the $92, 000 he paid out of his personal funds for the shares. The plaintiffs responded that if the court ordered the company to return the $92, 000 to Polivy, that money should be held in escrow until Lynn II was resolved.

         In December, 2015, the court held a hearing on the issue. In response to Polivy's and Parillo's proposed remedies, the plaintiffs argued that ‘‘there are no allegations in this case against the [company] and the idea of [the court] just being able to award money or order money from the [company] to be paid to one of the defendants without the [company] being named and given an opportunity to appear in regard to those issues . . . would be improper in this case.'' The plaintiffs suggested that the appropriate remedy would be for the court ‘‘to void the . . . transfer to the individual defendants and then the individual defendants can pursue the [company]'' for reimbursement.

         On January 11, 2016, the court ordered that (1) the Dube transaction be set aside, (2) the 141 shares be restored to the company's treasury, (3) the company reimburse the owners of the 141 shares, and (4) whether to leave the 141 shares as ...

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