Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Saunders v. Briner

Supreme Court of Connecticut

December 17, 2019

ROGER L. SAUNDERS
v.
CLARK BRINER ET AL.

          Argued December 20, 2018

         Procedural History

         Action to recover damages for, inter alia, breach of contract, and for other relief, brought to the Superior Court in the judicial district of Fairfield, where the named defendant et al. filed a counterclaim; thereafter, the case was transferred to the judicial district of Water-bury, Complex Litigation Docket, where Sloan Saunders et al. were added as counterclaim defendants; subsequently, the case was tried to the court, Zemetis, J.; judgment in part for the plaintiff on the complaint and on the counterclaim, from which the named defendant et al. appealed and the plaintiff cross appealed; thereafter, the court awarded the plaintiff attorney's fees, and the named defendant et al. filed an amended appeal. Reversed in part; order vacated.

          David P. Friedman, with whom were Proloy K. Das and, on the brief, Marilyn B. Fagelson, Taruna Garg, David S. Hoopes and Jay R. Lawlor, for the appellants-cross appellees (named defendant et al.).

          David Feureisen, pro hac vice, with whom were Edward N. Lerner and, on the brief, George Kent Guarino, for the appellee-cross appellant (plaintiff).

          Robinson, C. J., and Palmer, McDonald, D'Auria, Mullins, Kahn and Ecker, Js. [*]

          OPINION

          KAHN, J.

         This appeal requires us to consider five issues: (1) whether, in the absence of authorization in a limited liability company's operating agreement, its members or managers lack standing to bring derivative claims on behalf of it under either the Connecticut Limited Liability Company Act (CLLCA), General Statutes (Rev. to 2017)§ 34-100 et seq., [1] or, in the alternative, the common law; (2) whether a trial court may exempt single member limited liability companies from the direct and separate injury requirement necessary to bring a direct action; (3) under what circumstances may a trial court admit opinion testimony of a joint, court-appointed fiduciary hired to wind up the companies at issue when the party who proffered the testimony of the fiduciary failed to disclose him as an expert witness under Practice Book § 13-4; (4) under what circumstances, if any, may the trial court apportion its award of attorney's fees under the Connecticut Unfair Trade Practices Act (CUTPA), General Statutes § 42-110a et seq., between the plaintiff's CUTPA claims and non-CUTPA claims; and (5) the parameters under which a trial court may order reimbursement for fees incurred by a joint, court-appointed fiduciary hired to wind up the companies at issue. The defendants, Clark Briner and two entities solely owned by Briner, a Connecticut limited liability company and a Texas limited liability company with the same name, Revere Capital, LLC (respectively, Revere Capital CT and Revere Capital TX), [2] appeal, [3] following a bench trial, from the trial court's judgment. The plaintiff, Roger L. Saunders, cross appeals from the trial court's judgment. We reverse the trial court's judgment rendered in favor of the plaintiff as to his derivative claims because we conclude that the plaintiff lacked standing to bring them under the CLLCA or the common law. We, therefore, do not reach the issues of whether the trial court improperly admitted the testimony of a joint, court-appointed fiduciary or whether the trial court incorrectly apportioned the plaintiff's award of attorney's fees under CUTPA. We affirm the trial court's judgment rendered in favor of the plaintiff as to his direct claims and conclude that the trial court did not abuse its discretion in refusing to order the defendants to reimburse the plaintiff for the fees incurred by the joint, court-appointed fiduciary and an accountant hired by him.

         The present case arises from the deterioration of a business relationship between three individuals: Briner, the plaintiff, and the plaintiff's son, Sloan Saunders (Saunders). The trial court found the following facts that are relevant to our resolution of this appeal. In 2009, while working together at Deutsche Bank, Saunders and Briner decided to enter into the high interest, high yield commercial real estate lending business by setting up a limited liability company, Revere Investments, LLC (Revere Investments), to act as a servicer of the loans. Initially, Saunders and Revere Capital TX each owned 50 percent of Revere Investments and constituted its comanagers.[4] Although Saunders and Briner chose to enter an industry in which they had little experience, Saunders introduced Briner to the plaintiff, Saunders' father, who had successfully navigated the ‘‘hard money lending business'' for forty years. Briner and Saunders sought the plaintiff's help in two respects. First, they wanted the plaintiff, who had many contacts in that industry, to help them ‘‘establish the relationships necessary to create and maintain'' the business.

         Second, Briner and Saunders also needed access to the plaintiff's capital ‘‘to fund the high interest loans'' before they secured investors to participate in them. The parties often did not secure all the investors necessary to fund a loan prior to closing the transaction with the borrower. Throughout their business relationship, therefore, the plaintiff helped Revere Investments succeed by lending it the capital necessary to close loans before the parties raised the necessary capital to finance it (bridge financing). After Revere Investments raised capital from investors to participate in the loan, it repaid the plaintiff the principal amount of his bridge loan with interest. The trial court found that, without the plaintiff's bridge financing, Revere Investments ‘‘would have had little or no business.''

         The plaintiff, who ‘‘desired to teach his son'' the business, agreed to source loans, secure investors and financers, and provide bridge financing. Although the plaintiff agreed to provide assistance ‘‘to his economic detriment and for the equal and joint benefit'' of Saunders and Briner, he ‘‘was not willing to forgo the . . . profits on his investment or [on] the investment of [others] that he would have earned if he simply invested in hard money loans outside of [Revere Investments].'' (Emphasis in original.) The plaintiff, Saunders, and Briner, therefore, created a business arrangement in which the plaintiff and his contacts sourced most of the loans and most of the financing, especially at the beginning of their relationship. Revere Investments would charge the borrower a high interest rate. The parties then found investors to purchase a ‘‘participation interest'' in the loans on a deal specific basis (outside investors). Outside investors would provide capital in exchange for a return of the principal invested plus a negotiated interest rate.

         Revere Investments profited from outside investors by offering them a lower interest rate than it received from the borrower on the underlying loan, which provided Revere Investments with a profit equal to the difference between the two interest rates (interest rate spread profit). Revere Investments also withheld from outside investors various fees that it charged the borrower, such as extension fees, late fees, and servicing fees. Revere Investments charged the borrower ‘‘points''[5] ‘‘in connection with most of its loans, '' and, ‘‘[i]n all cases where points were charged, [they] were financed by Revere Investments as part of aloan, so that Revere Investments did not advance to the borrower the full principal amount of the loan, but advanced the principal amount less the points'' (net funding). Revere Investments did not pass the points to outside investors, however, who received a return of principal and interest only on the amount they actually invested.

         Saunders, Briner, the plaintiff, or their respective family members (inside investors) who participated in a loan, by contrast, did profit from points charged to borrowers. The advantageous treatment for inside investors derived from the fact that, unlike the outside investors, they received a return of principal plus interest on the face amount of their investment in the loan, despite the fact that they had not funded the full face amount.[6] This technique of ‘‘grossing up'' allowed inside investors to receive a higher return on their investment than an outside investor who participated equally in a loan.

         As part of the parties' agreement[7] to gross up inside investments, the parties additionally agreed that-in exchange for his help-the plaintiff ‘‘would also keep both the ‘interest rate spread profit' . . . and the ‘fees' earned on certain identified and agreed upon nonfamily [investments].'' (Emphasis added.) This allowed the plaintiff to earn profits that Revere Investments otherwise would have earned on the outside investors he sourced. The oral agreement, however, did not give Briner the same rights with respect to the outside investors he sourced.

         By mid-2011, Briner had grown dissatisfied with the arrangement allowing the plaintiff but not Briner to profit from outside investors sourced by each of them respectively, because, by that time, Revere Investments' business model and the parties' respective responsibilities had changed. Saunders, Briner and the plaintiff had created-at the request of Briner-a second entity, Revere High Yield Debt Fund, L.P. (Fund), which provided a vehicle for pooling outside investor capital, and a controlling general partner of the Fund, Revere High Yield, GP, LLC (Fund GP), which ‘‘was owned equally [and comanaged] by [the plaintiff] and Briner . . . .'' Under this revised arrangement, Revere Investments' loans were funded by various combinations of investments, including (1) financing from the Fund, which would pool money from outside investors and buy a single participation interest in a loan, (2) capital from inside investors, and (3) capital from outside investors that chose to participate in a particular loan alongside the Fund (side car investments)[8].

         The parties' formation of the Fund and Fund GP expanded Revere Investments' ‘‘loan portfolio size . . . [thereby] increasing the ‘back office' workload.'' During that time, however, Saunders had accepted and begun a full-time job at another investment firm, which required him to work sixty to seventy hours per week. This placed a strain on Briner's relationship with Saunders, because Briner-concerned that Saunders left him to handle much of the work himself, including sourcing the loans and finding the Fund investors-felt that he worked ‘‘disproportionately greater'' than Saunders yet profited less because he could not derive profits from the outside investors he sourced in the same way as the plaintiff did.

         Eventually, Briner demanded that the plaintiff and Saunders allow him to ‘‘skim the same . . . profits'' from Revere Investments and the Fund on his outside investors that the plaintiff received on the investors he sourced. Both the plaintiff and Saunders refused. Despite their refusal, and without their knowledge, Briner created Revere Capital CT, which constituted an inside investor as Briner owned 100 percent and which enabled Briner to conceal the true source of the funds he sourced by placing investments of outsider capital into that company as opposed to the Fund or Revere Investments. Consequently, when Revere Capital CT participated in Revere Investments' loans, either through the Fund or as a side car investment, Briner was able to treat those outside investments as insider capital, allowing him to retain ‘‘100 percent of the profits associated therewith, '' including a benefit from the elevated treatment of points. This conduct effectively ‘‘erased the distinction between the treatment of [Briner's] ‘inside and outside investors,' negatively affecting the profits of [Revere Investments] and/or the Fund and correspondingly increasing [Briner's] personal profits.''

         In addition to diverting outside capital away from Revere Investments and the Fund in order to profit off of those investments as if they were his own insider capital, Briner also misallocated investor profits by withholding interest on points from the other inside investors, so that they received a return only on the net amount they invested. At the same time, Briner grossed up investments made by his inside investors. Briner also improperly[9] charged Revere Investments for expenses incurred by Revere Capital TX, [10] including employment, rent, travel and advertising expenses. In mid-2012, after Saunders discovered Briner's misallocation of points in some of Revere Investments' loan spreadsheets, he and the plaintiff hired outside accountants and legal counsel, who exposed[11] ‘‘the extent of [Briner's] incompetent and inconsistent management of [Revere Investments], the Fund, and Fund GP . . . .''

         In November, 2012, the plaintiff commenced this action and, in May, 2014, filed the operative twenty-seven count second amended complaint[12] against the defendants, consisting of fourteen direct counts brought by the plaintiff, individually, and thirteen derivative counts brought on behalf of Revere Investments, Fund GP, or both.[13] In addition to moving for judicial dissolution of Revere Investments and Fund GP in direct count one, the plaintiff asserted both direct and derivative counts alleging common-law fraud, [14] breach of contract, [15] breach of the implied covenant of good faith and fair dealing, [16] breach of fiduciary duty, [17] and violations of CUTPA and the Connecticut Uniform Securities Act.[18]

         After the plaintiff initiated the action, the parties agreed to hire a joint, court-appointed fiduciary, Citrin Cooperman and Company, LLP (Citrin), to wind up the Fund and Fund GP. After a team led by Citrin's partner Alan A. Schachter examined sixteen of Revere Investments' loans, ‘‘totaling nearly $18 million'' of Revere Investments' approximately $40 million loan portfolio, Schachter wrote a report containing Citrin's findings. In that report, Schachter noted that the team ‘‘found a lack of internal controls'' and ‘‘a number of . . . reporting and recording problems, '' which he noted were ‘‘not surprising . . . given the lack of oversight and the complexity of the investments.'' Schachter concluded that Revere Investments, the Fund, and Fund GP, ‘‘as managed by Briner, had underpaid both the investors and the principals, particularly [the plaintiff].'' During the bench trial, the plaintiff called Schachter to testify at trial regarding the findings he outlined in his report. Over Briner's objection, the trial court allowed Schachter to testify and admitted his report into evidence.

         Following a ten day bench trial, in which the parties distilled ‘‘897 trial exhibits exceed[ing] several hundred thousand pages in length, '' the trial court rendered judgment in favor of the plaintiff on four of his thirteen derivative counts and four of his fourteen direct counts. Under derivative counts two and six, which alleged, on behalf of Revere Investments, breach of contract against Revere Capital TX and violations of CUTPA against the defendants, respectively, the trial court ordered the defendants to pay Revere Investments one payment of $284, 600. Under derivative counts seven and eight, which alleged breach of fiduciary duty on behalf of Revere Investments and Fund GP, respectively, the trial court ordered Revere Capital TX to pay Revere Investments and/or the Fund GP one payment of $92, 797, under counts seven and eight, and an additional $71, 000 under count seven. Under direct counts four and six, alleging breach of the implied covenant of good faith and fair dealing against Revere Capital TX and Briner, respectively, and counts nine and ten, alleging breach of fiduciary duty on the part of Briner and Revere Capital TX, the trial court awarded the plaintiff one payment of $85, 078 in connection with the failure to repay one of the plaintiff's loans to Revere Investments. As to direct counts four and six, however, the court rejected the plaintiff's claim that the court should direct Briner to reimburse him for ‘‘fees [related to] tax and accounting experts, '' including Schachter.

         After the court rendered judgment, it held a hearing to determine the appropriate amount of attorney's fees to award the plaintiff under derivative count six, which alleged that the defendants had violated CUTPA through Briner's diversion of outside capital into Revere Capital CT. After the posttrial hearing, the trial court filed a memorandum of decision and supplemental order awarding the plaintiff $639, 054.91 in attorney's fees pursuant to General Statutes § 42-110g. This appeal followed.

         The issues presented for resolution on appeal are numerous. The defendants first challenge the plaintiff's standing to bring any of the direct or derivative counts for which the trial court rendered judgment in his favor. The defendants appeal from the trial court's judgment in favor of the plaintiff as to his claims under derivative counts two, six, seven, and eight-alleging breach of contract, violations of CUTPA, and breach of fiduciary duty-claiming that the trial court lacked subject matter jurisdiction to review the plaintiff's derivative counts, because the CLLCA, the statutory scheme in place at the time the plaintiff commenced his action, did not provide a derivative remedy. Additionally, the defendants claim that, in the absence of such statutory authority by the legislature under the CLLCA, the common law does not afford a member or manager of a limited liability company derivative standing, because the CLLCA, the statute that created that company structure, solely governs this issue. The plaintiff responds that trial courts have interpreted the CLLCA as permitting derivative claims. In the alternative, the plaintiff claims that this court should conclude that the common law grants him derivative standing.

         The defendants also appeal from the trial court's judgment in favor of the plaintiff as to his claims under direct counts four, six, nine, and ten, alleging breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. The defendants claim that the plaintiff lacked standing to challenge Briner's failure to repay one of the plaintiff's loans to Revere Investments, because the plaintiff's single-member limited liability company, Saunders Capital, LLC (Saunders Capital), provided the investment at issue and, therefore, constituted the proper party to bring the action. The plaintiff responds that, because he funded the investment with his personal capital, he satisfies the requirements for direct standing regardless of the source of his investments.

         Additionally, the defendants appeal from the trial court's judgment in favor of the plaintiff as to derivative counts seven and eight, claiming, specifically, that the trial court abused its discretion in admitting Schachter's testimony because the plaintiff failed to disclose him as an expert pursuant to Practice Book § 13-4. The plaintiff responds that the trial court did not abuse its discretion in admitting Schachter's testimony in the absence of expert disclosure because he did not call Schachter to testify as an expert but, rather, as a fact witness testifying in his capacity as the court-appointed fiduciary. To the extent that the trial court allowed Schachter to provide expert opinion, the plaintiff claims, Briner suffered no prejudice from its admission, and the trial court needed Schachter's assistance in understanding the complex calculations required to determine what Revere Investments owed to its investors and principals.

         Finally, the defendants appeal from the trial court's award of attorney's fees under derivative count six, on which the trial court rendered judgment for the plaintiff under CUTPA. The defendants claim that the trial court improperly awarded attorney's fees associated with both the plaintiff's CUTPA and non-CUTPA claims, rather than those fees attributable only to the CUTPA claims. The plaintiff responds that the trial court properly apportioned attorney's fees under CUTPA because, when parties litigate both CUTPA and non-CUPTA claims in the same action and those claims involve the same inextricably entwined facts, the trial court does not need to apportion the payment of attorney's fees only to work performed on the CUTPA related claims.

         The plaintiff cross appeals from the trial court's judgment on his direct counts four and six insofar as he claims that the trial court abused its discretion in refusing either to order Briner to reimburse Revere Investments for the fees incurred by Schachter and another accountant hired by him or to hold a hearing for the purpose of apportioning those fees. The defendants respond that the trial court properly rejected the plaintiff's request for reimbursement because it determined that all of the owners of Revere Investments, including the plaintiff, bore some responsibility for failing to ensure that Revere Investments operated in accordance with proper bookkeeping and accounting procedures.

         We affirm the trial court's judgment rendered in favor of the plaintiff on his direct counts, including its determination not to apportion the fees incurred by Schachter and another accountant hired by him. Because we conclude, however, that the plaintiff lacked standing to bring his derivative claims, we reverse the trial court's judgment in favor of the plaintiff on his derivative counts and vacate the court's award of attorney's fees under CUTPA. Additionally, because we conclude that the plaintiff lacked standing to bring his derivative claims, we do not reach the issue of whether the trial court improperly admitted Schachter's testimony.

         I

         STANDING

         The first two issues we resolve, regarding the standing our state affords to members of limited liability companies to bring derivative claims under the CLLCA and certain direct claims, present matters of first impression. First, the defendants claim that the trial court incorrectly determined that the plaintiff had standing to bring derivative claims against them. Second, the defendants contend the plaintiff lacked standing to bring direct claims against Briner for failing to repay the remainder of one of the plaintiff's loans to Revere Investments when that company's books and records indicate that the plaintiff's solely owned limited liability company, Saunders Capital, rather than the plaintiff himself, provided the capital.

         A

         Derivative Standing

         We begin by addressing whether, in the absence of authorization in the operating agreements of Revere Investments and Fund GP, [19] the plaintiff lacked standing to bring derivative claims on behalf of those companies under either General Statutes (Rev. to 2017) § 34-187 or, in the alternative, the common law. The defendants claim for the first time on appeal that the plaintiff, a 50 percent member of Revere Investments and Fund GP, lacked standing to bring derivative claims on behalf of those companies under § 34-187 of the CLLCA, the operative statute at the time the plaintiff commenced the present litigation. Further, the defendants claim that, in the absence of legislative authority under the CLLCA, there is no common-law authority granting a member or manager ofa limited liability company derivative standing. The plaintiff responds that, although this court has never addressed whether limited liability company members or managers can sue derivatively, other courts have interpreted the CLLCA as permitting it. In the alternative, the plaintiff claims that this court should conclude, as other courts have, that the common law grants him derivative standing.[20] We conclude that, in the absence of a provision in the operating agreements of the respective companies authorizing the filing of derivative lawsuits, the plaintiff lacked standing to bring his derivative claims on behalf of Revere Investments and Fund GP because neither the CLLCA nor the common law provided for a derivative remedy at the time the plaintiff commenced the present action.[21]

         The record reveals the following additional facts that are relevant to our resolution of this claim. The operating agreements of Revere Investments and Fund GP list Briner and/or Revere Capital TX as both a 50 percent member and comanager of those companies. The operating agreement of Fund GP also lists the plaintiff as a 50 percent member and comanager of that company, and evidence at trial indicated that Saunders transferred his 50 percent interest in Revere Investments to the plaintiff in February, 2012.[22] Additionally, the operating agreements of both companies vest the authority to manage the business of each company in its managers (manager-managed). Neither company's operating agreement, however, authorizes its members or managers to bring a derivative action.

         In his second amended complaint, in which the plaintiff added derivative claims on behalf of Revere Investments and Fund GP in thirteen separate counts, the plaintiff alleged that, as a member or manager of the companies, he ‘‘fully and adequately represent[ed] [their] interests . . . .'' He further alleged that he ‘‘made demands . . . of Briner on behalf of Revere Investments and [Fund] GP to remedy the issues'' upon which he based his claims. To the extent that he failed to make ‘‘any formal demand, '' the plaintiff claimed, ‘‘it was [because] such a demand would be futile . . . .''

         In its memorandum of decision, the trial court concluded that the plaintiff had standing. With respect to the four derivative counts on which the trial court rendered judgment in favor of the plaintiff, the court noted that, ‘‘[i]nsofar as [the plaintiff] alleges misconduct that damaged investors, other than himself, he fairly and adequately represents the interests of investors in [Revere Investments] and . . . Fund [GP].'' The court reasoned that the plaintiff constituted ‘‘an investor . . . and a co-owner of [Revere Investments] (after February, 2012), '' and ‘‘a manager and co-owner of Fund GP.''

         We begin our review of the trial court's determination with the general principles governing standing to sue. ‘‘If a party is found to lack standing, the court is without subject matter jurisdiction to determine the cause. . . . A determination regarding a trial court's subject matter jurisdiction is a question of law. When . . . the trial court draws conclusions of law, our review is plenary and we must decide whether its conclusions are legally and logically correct and find support in the facts that appear in the record.'' (Internal quotation marks omitted.) PNC Bank, N.A. v. Kelepecz, 289 Conn. 692, 704- 705, 960 A.2d 563 (2008). ‘‘In addition, because standing implicates the court's subject matter jurisdiction, the issue of standing is not subject to waiver and may be raised at any time.'' Equity One, Inc. v. Shivers, 310 Conn. 119, 126, 74 A.3d 1225 (2013).

         ‘‘Standing is not a technical rule intended to keep aggrieved parties out of court; nor is it a test of substantive rights. Rather it is a practical concept designed to ensure that courts and parties are not vexed by suits brought to vindicate nonjusticiable interests and that judicial decisions which may affect the rights of others are forged in hot controversy, with each view fairly and vigorously represented. . . . These two objectives are ordinarily held to have been met when a complainant makes a colorable claim of direct injury he has suffered or is likely to suffer, in an individual or representative capacity. Such a personal stake in the outcome of the controversy . . . provides the requisite assurance of concrete adverseness and diligent advocacy. . . . The requirement of directness between the injuries claimed by the plaintiff and the conduct of the defendant also is expressed, in our standing jurisprudence, by the focus on whether the plaintiff is the proper party to assert the claim at issue. . . .

         ‘‘Two broad yet distinct categories of aggrievement exist, classical and statutory.'' (Internal quotation marks omitted.) PNC Bank, N.A. v. Kelepecz, supra, 289 Conn. 705.The issue of whether the CLLCA provided the plaintiff with a derivative remedy implicates statutory aggrievement, which ‘‘exists by legislative fiat, not by judicial analysis of the particular facts of the case. In other words, in cases of statutory aggrievement, particular legislation grants standing to those who claim injury to an interest protected by that legislation.'' (Internal quotation marks omitted.) Id.

         ‘‘In order to determine whether a party has standing to make a claim under a statute, a court must determine the interests and the parties that the statute was designed to protect. . . . Essentially the standing question in such cases is whether the . . . statutory provision on which the claim rests properly can be understood as granting persons in the plaintiff's position a right to judicial relief. . . . [Stated differently, the] plaintiff must be within the zone of interests protected by the statute.'' (Citation omitted; internal quotation marks omitted.) McWeeny v. Hartford, 287 Conn. 56, 65, 946 A.2d 862 (2008).

         The issue of whether the CLLCA authorizes a member or manager of a limited liability company to bring a derivative action on its behalf presents a question of statutory interpretation, over which we exercise plenary review, guided by well established principles regarding legislative intent. See, e.g., Kasica v. Columbia, 309 Conn. 85, 93, 70 A.3d 1 (2013) (explaining plain meaning rule under General Statutes § 1-2z and setting forth process for ascertaining legislative intent). We begin by noting that Connecticut first recognized the limited liability company structure in 1993 when our legislature enacted the CLLCA, a statutory scheme it modeled after the Prototype Limited Liability Company Act (Prototype Act).[23] See Scarfo v. Snow, 168 Conn.App. 482, 500 n.9, 146 A.3d 1006 (2016) (Connecticut's limited liability company statutory provisions were modeled after Prototype Act). We recently recognized that our legislature enacted the CLLCA in order to establish ‘‘the right to form [a limited liability company] and all of the rights and duties of the [limited liability company], as well as all of the rights and duties of members . . . .'' Styslinger v. Brewster Park, LLC, 321 Conn. 312, 317, 138 A.3d 257 (2016).

         On the basis of the plain language of the act, we conclude that the CLLCA does not permit members or managers to file derivative actions but, rather, authorizes them to collectively commence an action in the name of the limited liability company upon a requisite vote of disinterested members or managers (member initiated action). The CLLCA recognizes the right of the limited liability company ‘‘to . . . sue and be sued.'' General Statutes (Rev. to 2017) § 34-124 (b). General Statutes (Rev. to 2017) § 34-186 generally authorizes ‘‘[s]uits . . . brought by or against a limited liability company in its own name.'' (Emphasis added.) Section 34-187[24] provides the procedure that members or managers must follow if they wish to file a lawsuit in the name of the company. Section 34-187 (a) (1) and (b) authorizes any member of a limited liability company, regardless of whether that company vests management responsibilities in its members or managers, to bring an action in the name of the company upon the vote of a majority of disinterested members. Likewise, § 34-187 (a) (2) authorizes any manager of a manager-managed limited liability company to bring an action in the name of that company upon the vote necessary under General Statutes (Rev. to 2017) § 34-142 (a), which requires ‘‘more than one-half by number of [disinterested] managers . . . .''

         Connecticut modeled the procedure set forth in § 34-187 on § 1102 of the Prototype Act.[25] The drafters of the Prototype Act expressly ‘‘emphasize[d] that [§ 1102] does not permit derivative suits unless they are provided for in the operating agreement.'' 3 L. Ribstein & R. Keatinge, Limited Liability Companies (2d Ed. 2011) Appendix C, p. App. C-109.[26] Instead, the drafters intended to create a substitute for the derivative action, which they deemed more appropriate ‘‘in closely held firms like the typical [limited liability company] . . . [in which] members can be expected to be actively interested in the firm, and . . . can readily be coordinated for a vote on a suit by the firm.'' Id., p. App. C-110. The ‘‘extra expense'' and procedural hurdles required to bring a derivative action, the drafters reasoned, ‘‘may not be worth it'' in the limited liability company context; id.; which differs from that of ‘‘public corporations . . . [where] the members are generally passive . . . uninvolved in management and . . . too numerous to coordinate effectively for action against errant managers.'' Id., p. App. C-109.

         We conclude, therefore, that, in adopting a functionally identical provision to § 1102 of the Prototype Act, our legislature chose to omit the derivative action under the CLLCA for members and managers of limited liability companies.[27] Consequently, the plaintiff in the present case failed to allege that he undertook the proper procedure to maintain standing under the CLLCA. Although the allegations set forth in the plaintiff's second amended complaint-namely, that he was a member or manager of both companies and that either he made demands on Brinerorsuch demands were futile- comport with the procedural requirements for bringing a derivative action under the CULLCA, they do not comply with the requirements for bringing a member initiated action under the CLLCA.[28]

         The plaintiff asks this court, however, to look past the CLLCA and conclude that, despite our legislature's omission of a derivative remedy in the CLLCA, limited liability company members and managers may sue derivatively under the common law.[29] We have recently explained, however, that ‘‘[o]ur common law does not recognize [limited liability companies], which were first created by [the enactment of the CLLCA].'' Styslinger v. Brewster Park, LLC, supra, 321 Conn. 317. The question we must resolve, therefore, is‘‘whether the recognition of [this] common-law remedy would conflict with or frustrate the purpose of the [CLLCA] . . . .'' (Internal quotation marks omitted.) Caciopoli v. Lebowitz, 309 Conn. 62, 69, 68 A.3d 1150 (2013). For the reasons we have already explained, we conclude that it would. Consistent with our reasoning, we observe that other Prototype Act jurisdictions have held that members and managers of limited liability companies must follow the procedure for bringing a member initiated action and, as such, lack standing to bring derivative actions under the common law. See, e.g., Marx v. Morris, 386 Wis.2d 122, 148, 925 N.W.2d 112 (2019) (declining to ‘‘judicially import . . . corporate derivative standing provisions into the [limited liability company] context where the legislature has not done so'').[30] Consequently, we conclude that the trial court improperly exercised subject matter jurisdiction over the plaintiff's claims on behalf of Revere Investments and Fund GP.

         B

         Direct Standing

         We next address whether the trial court incorrectly determined that the plaintiff had standing to bring direct claims alleging breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing against Briner and Revere Capital TX for failure to repay one of his loans, the LR Global bridge loan. The defendants claim that, because Saunders Capital made the investment at issue, the plaintiff lacked standing to bring a direct claim seeking repayment, as he lacked a distinct and separate injury from the company. According to the defendants, therefore, we should reverse the trial court's judgment as to those claims because the plaintiff was required to bring the action on behalf of Saunders Capital.[31] The plaintiff acknowledges the general rule prohibiting a member of a limited liability company from bringing a direct action when seeking to recover for a harm suffered by the company. He argues, however, that the general rule should not apply because he financed the loan with his personal capital through his wholly owned company. The plaintiff, therefore, asks this court to ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.