Lynn v. Bosco

182 Conn.App. 200

189 A.3d 601

Jack E. LYNN et al.

v.Robert J. BOSCO, Sr., et al.

AC 39172

Appellate Court of Connecticut.

Argued November 16, 2017

Officially released May 29, 2018

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. Polivy³ 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. JerryWagner, 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...