Schumann et al v. Schumann et al
ORDER granting in part and denying in part 33 Motion to Dismiss; granting 76 Motion to Purchase Shares and the Court STAYS all proceedings related to plaintiffs' motion for preliminary relief. Signed by Judge Warren W. Eginton on 6/5/2012. (Candee, D.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
DAVID D. SCHUMANN, KEITH W.
SCHUMANN, and HEIDI SCHUMANN, :
DOUGLAS D. SCHUMANN and
MEMORANDUM OF DECISION ON PENDING MOTIONS
In this action, plaintiffs David D. Schumann, Keith W. Schumann and Heidi
Schumann allege that defendant Douglas D. Schumann has abused his position as
President, Chairman of the Board of Directors (“Board”) and majority shareholder of P-Q
Controls, Inc. (“P-Q”) by engaging in unauthorized, self-dealing transactions with
Plaintiffs allege claims of fraud and breach of fiduciary duty against defendant
Schumann, and request appointment of a receiver and judicial dissolution of P-Q
pursuant to Connecticut General Statutes § 33-896. Defendants have filed a motion to
dismiss and a motion to purchase shares.
For the following reasons, the motion to dismiss will be granted in part and denied
in part. The motion to purchase shares will be granted because the Court will order that
defendant P-Q may exercise its statutory right to elect to purchase shares pursuant to
Connecticut General Statutes § 33-900.
Plaintiffs allege the following facts that are taken to be true for purposes of ruling
on this motion.
Plaintiffs are minority shareholders of P-Q. Commencing in January 2001,
defendants Schuman and P-Q have engaged in unauthorized and self-dealing
transactions, including P-Q’s payment of $32 million in salary to defendant Schumann
for his role as President; P-Q’s payment of $3.5 million to defendant Schumann for loans
made by defendant Schumann to P-Q; P-Q’s payment of $4.4 million to defendant
Schumann for the lease of property used as P-Q’s headquarters; payment of
approximately $3.5 million to Exec-Jet, Inc., an entity wholly owned by defendant
Schumann, for the lease of airplanes; and a series of transactions between P-Q and PQ Maine, Inc., an entity wholly owned by defendant Schumann.
Between 2001 and 2008, no board meetings or shareholder meetings were held
for approval of transactions as required by state law, Connecticut General Statutes §§
33-783 and 33-784.
On May 7, 2009, defendant Schumann sent plaintiffs notice of the annual meeting
of shareholders to be held on May 22, 2009. He attached to the notice proposed
amendments to P-Q’s bylaws. Such meeting had not been held in more than ten years.
On May 22, defendant Schumann convened a meeting of P-Q’s shareholders to
adopt amended bylaws. Defendant Schumann, who was the only shareholder in
attendance, voted to adopt the Amended Bylaws, which then permitted him to elect
himself to serve as the single Director.
Plaintiffs have not received any distributions from P-Q since the third quarter of
2008. Plaintiffs have not received any financial statements from P-Q for either 2009 or
A motion to dismiss under Federal Rule of Civil Procedure12(b)(1) "challenges
the court’s statutory or constitutional power to adjudicate the case before it." 2A James
W. Moore et. al., Moore’s Federal Practice, ¶ 12.07, at 12-49 (2d ed. 1994). Once the
question of jurisdiction is raised, the burden of establishing subject matter jurisdiction
rests on the party asserting such jurisdiction. See Thomson v. Gaskill, 315 U.S. 442,
The function of a motion to dismiss under FRCP 12(b)(6) is "merely to assess the
legal feasibility of the complaint, not to assay the weight of the evidence which might be
offered in support thereof." Ryder Energy Distrib. v. Merrill Lynch Commodities, Inc.,
748 F. 2d 774, 779 (2d Cir. 1984). When deciding a motion to dismiss for failure to state
a claim, the Court must accept all well-pleaded allegations as true and draw all
reasonable inferences in favor of the pleader. Hishon v. King & Spalding, 467 U.S. 69,
73 (1984). The complaint must contain the grounds upon which the claim rests through
factual allegations sufficient “to raise a right to relief above the speculative level.” Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007).
Defendants assert that plaintiffs lack standing to bring their claims directly rather
than derivatively against defendants. Plaintiffs counter that they have been injured as
individuals separate from the corporation and therefore have a direct cause of action.
To establish standing, plaintiffs must allege that (1) they have suffered an injury in
fact, (2) which is fairly traceable to the challenged action of defendants, and (3) which is
likely to be redressed by the requested relief. See Lujan v. Defenders of Wildlife, 504
U.S. 555, 560–61 (1992).
Fraud and Breach of Fiduciary Duty
The Connecticut Supreme Court has explained that, in most instances, individual
stockholders cannot sue corporate officers at law on the basis of corporate
mismanagement that has rendered their stock of less value. Yanow v. Teal Industries,
Inc., 178 Conn. 262, 281-82 (1979). The injury is generally not to the shareholder
individually, but to the corporation and to the shareholders collectively who have the right
to sue derivatively on behalf of the corporation alleged to be injured. May v. Coffey, 291
Conn. 106, 114 (2009). “[A] claim of injury, the basis of which is a wrong to the
corporation, must be brought in a derivative suit, with the plaintiff proceeding
secondarily, deriving his rights from the corporation which is alleged to have been
wronged.” Fink v. Golenbock, 238 Conn. 183, 200 (1996). According to Connecticut
statutory law, “[w]henever 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, provided the shareholder
or member was a shareholder or member at the time of the transaction of which he
complained or his membership thereafter devolved on him by operation of law.” Conn.
Gen. Stat. § 52-572j(a).
“[I]f the injury is one to the plaintiff as a stockholder, and to him individually, and
not to the corporation, as where an alleged fraud perpetrated by the corporation has
affected the plaintiff directly, the cause of action is personal and individual.” Yanow, 178
Conn. at 282. In Yanow, the plaintiff had a separate and distinct injury because he had
alleged that the corporate officer’s fraudulent conduct had depressed the value of his
stock shares so that the shares could be purchased for less than fair market value. Id.
at 267 (“these causes of action are based upon alleged unlawful acts relating soley to
the stock owned by the plaintiff ....”). Nevertheless, even a sole shareholder does not
have standing to allege wrongs to the corporation. Smith v. Snyder, 267 Conn. 456, 461
In this instance, plaintiffs have alleged that defendants’ self-dealing and
mismanagement has caused P-Q to underperform and earn substantially less income.
Plaintiffs complain that they have not received any distributions since 2008. However, in
the counts of fraud and breach of fiduciary duty, the harms asserted–corporate fraud,
looting and mismanagement–represent damage sustained by the corporation. Plaintiffs
have not asserted any injuries that are separate and distinct from that suffered by the
corporation or where the remedy should belong to the shareholders rather than to the
corporation. See Fink, 238 Conn. at 201. Accordingly, as to the first two counts, the
Court will grant the motion to dismiss for lack of standing but will permit plaintiffs to
amend the complaint.
Receivership and Dissolution
Plaintiffs maintain that the claim for receivership and dissolution may be brought
directly pursuant to the plain language of Connecticut General Statutes § 33-896(a)(1),
which provides for dissolution by a superior court:
In a proceeding by a shareholder if it is established that: (A) (i) The directors are
deadlocked in the management of the corporate affairs, (ii) the shareholders are
unable to break the deadlock, and (iii) irreparable injury to the corporation is
threatened or being suffered or the business and affairs of the corporation can no
longer be conducted to the advantage of the shareholders generally, because of
the deadlock; (B) the directors or those in control of the corporation have acted,
are acting or will act in a manner that is illegal, oppressive or fraudulent; (C) the
shareholders are deadlocked in voting power and have failed, for a period that
includes at least two consecutive annual meeting dates, to elect successors to
directors whose terms have expired; or (D) the corporate assets are being
misapplied or wasted.
Plaintiffs argue that the reference to a proceeding by a “shareholder” contemplates a
direct rather than derivative cause of action for dissolution and receivership. In
construing a state statute, the court should “presume that laws are enacted in view of
existing relevant statutes.” State v. John F.M., 285 Conn. 528, 546 (2008). The Court
should not consider extratextual evidence if the meaning of the statute is plain and
unambiguous after examination of the text and its relationship to relevant statutes.
Conn. Gen. Stat. § 1-2z.
Defendants point out that the words “a shareholder” is also used in Connecticut’s
statute devoted to the standards for derivative action standing, Connecticut General
Statutes § 33-721. However, Section 33-896 is silent as to the type of action that may
be brought to pursue a judicial dissolution.
State superior courts have noted that the legislature sought to protect
shareholders of closely held corporations when it enacted Section 33-896. Johnson v.
Gibbs Wire & Steel Co.,Inc., 2010 WL 4276768 (Conn. Sup. Ct. 2010). The stock of
closely held corporations is generally not readily salable and a minority shareholder “at
odds with management policies may be without either a voice in protecting his or her
interests or any reasonable means of withdrawing his or her investment.” Matter of
Kemp and Beatley, Inc., 64 N.Y.2d 63, 72-73 (1984).
However, the Connecticut legislature has enacted a statutory scheme that gives a
voice to that minority shareholder, who can file for appointment of receiver and
dissolution when faced with corporate mismanagement. After filing a petition for
dissolution, the corporation may purchase for the fair market value the shares of the
“petitioning shareholder’s shares, and if the corporation declines, the remaining
shareholders may purchase such shares. Conn. Gen. Stat. § 33-900. Further, after a
hearing upon the shareholder’s petition for dissolution, the court may appoint a
custodian to manage the corporation or a receiver to wind-up and liquidate the
corporation. Conn. Gen. Stat. § 33-898. Accordingly, Section 33-896 and the related
statutes provide a remedy for a shareholder oppressed by corporate malfeasance. The
Court will allow plaintiffs to proceed with their direct action for appointment of receiver
and dissolution against defendants.
Motion to Purchase Shares
Defendant P-Q requests that the Court grant permission for it to buy out the
plaintiffs’ shares pursuant to Connecticut General Statute § 33-900(b). Although P-Q
seeks to file this election beyond the ninety days provided by Section 33-900, the statute
provides that the Court may in its discretion allow such action at a later time. The Court
finds that good cause exists for allowing defendant to pursue a buy-out of the plaintiffs’
shares. The buyout will eliminate the need for a judicial dissolution as sought by
plaintiffs and therefore allow P-Q to remain in business. Further, the purchase of
plaintiffs’ shares will allow for plaintiffs to receive their financial interest in P-Q. The
Court will also stay the proceedings related to the plaintiffs’ motions for preliminary relief
so that a fair valuation of plaintiffs’ shares may proceed.
For the foregoing reasons, the motion to dismiss [doc. #33] is GRANTED without
prejudice as to the counts for fraud and breach of fiduciary duty, and is DENIED as to
count three for appointment of a receiver and dissolution. Defendants’ motion to
purchase shares is GRANTED [doc. #76], and the Court STAYS all proceedings related
to plaintiffs’ motions for preliminary relief.
Consistent with this ruling, plaintiffs may replead counts one and two within fifteen
days of this ruling’s filing date, and defendant P-Q should commence the process of
electing to purchase plaintiffs’ shares within ten days of this ruling’s filing date.
Warren W. Eginton
Senior United States District Judge
Dated this _5th__ day of June 2012 at Bridgeport, Connecticut.
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