Primer on Interpleader Actions Under Connecticut Law

The Connecticut Supreme Court (318CR76) recently issued a decision that provides a good overview of Connecticut’s interpleader law.  An action in interpleader is an equitable claim attorneys bring on behalf of clients to resolve ownership over disputed claims to property or money.  The typical case involves a situation where one party is the holder of money and there are two other parties fighting over ownership to the money.  Basically, the holder of funds is giving up the money to the court and throwing up his or her hands and saying “figure it out judge.” To avoid getting sued by either or both parties claiming ownership, the holder of the disputed funds files an interpleader action in state superior court.  The purpose of interpleader law is to avoid multiple lawsuits and to provide a more efficient means of resolving a dispute where the holder of money or property has no real interest in the outcome.

In its recent decision, the supreme court set forth the history of the interpleader action in Connecticut.  Initially, interpleader actions were based on Connecticut’s common law.  However, over 100 years ago, the Connecticut legislature specifically enacted a statutory cause of action for interpleader in section 52-484 of the General Statutes.

Section 52-484 states ‘‘[w]henever any person has, or is alleged to have, any money or other property in his possession which is claimed by two or more persons, either he, or any of the persons claiming the same, may bring a complaint in equity, in the nature of a bill of interpleader, to any court which by law has equitable jurisdiction of the parties and amount in controversy, making all persons parties who claim to be entitled to or interested in such money or other property. Such court shall hear and determine all questions which may arise in the case . . .”

In an interpleader case, the trial court will first determine if there exists legitimate adverse claims to the fund or property at issue and the property holder should be discharged.  Provided such legitimate claims exist, and interpleader is proper under the circumstances, the court will then decide by trial, if necessary, the outcome of the disputed claims.  Some examples where interpleader actions might apply include the following:

  • Life insurance disputes.  A life insurance company may know it has to pay out benefits, but there could be a dispute as to who is entitled to the funds.  For example, suppose a brother and sister dispute who is entitled to a life insurance pay out.  To avoid getting sued directly for improper distribution, the life insurance company brings an interpleader action and allows the brother and sister to fight it out in court.
  • Trust fund.  A trustee of a trust may not have a clear answer as to who to distribute funds to when a trust terminates.  This happens many times when a trust exists for generations and the terms of the trust are not clear.  To avoid trustee liability, the trust will bring an interpleader action if there are legitimate and competing claims to the trust property.
  • Real estate dispute.  In a case where a purchase and sales agreement breaks down, frequently there are issues over what to do with the deposit.  The purchaser’s funds are typically held in escrow by the real estate broker.  What happens when the purchaser demands the money back and the seller says no?  To avoid liability to either the purchaser or seller, the real estate broker might hire an attorney to file an interpleader action. The lawsuit would name both the purchaser and seller as defendants.

In each of these cases, an attorney drafting a lawsuit for interpleader will include all of the potentially interested parties.  The goal of interpleader law is to provide all interested parties an opportunity to resolve all questions of ownership in a single case.  The goal of the holder of funds is to avoid the costs and expense of litigation and a potential judgment for wrongful distribution of funds.  If you or your company is holding funds and multiple parties are claiming ownership, an interpleader action can be an effective means of resolving the dispute.

 

Dissolving A Corporation Under Connecticut Law

Under Connecticut law, there are various methods attorneys may use to dissolve or terminate a corporation.  It is referred to as dissolution of the corporation.  A dissolved corporation continues its corporate shell existence but stops carrying on business except where necessary to wind up the affairs of the company.  Winding up typically involves liquidation by collecting assets, disbursing assets, selling of assets and property, and discharging liabilities.

Corporate dissolution is governed by Connecticut General Statutes Chapter Title 33, Chapter 601, Part XIV.  Dissolution can be accomplished by any of the following:

  • Dissolution by the original incorporators or directors under Connecticut General  – voluntary
  • Dissolution by the board of directors and shareholders – voluntary
  • Dissolution by the Secretary of State – administrative
  • Dissolution by a shareholder proceeding in court – judicial
  • Dissolution by a creditor proceeding in court – judicial
  • Dissolution by a company proceeding in court – judicial

The first two methods are known as voluntary dissolution.  Typically, this means the company directors propose dissolution to the shareholders of the company.   The board typically notifies the shareholders of a meeting to address dissolution.  If the proposal passes, a certificate of dissolution is filed with the Secretary of State.  A company may elect to revoke the dissolution with 120 days by following the same procedure.  A company may have a transaction or business law attorney assist with the necessary documents and voting records.  The company may then proceed with winding up the affairs of the company which requires following the statutory requirements for effective dissolution.

Administrative dissolution typically occurs when the company has failed to maintain a registered agent or to file required reports with the Secretary of State.  For example, if the company fails to file an annual report for more than one year, the Secretary of State may take action and send notice to the company of the deficiency and potential for dissolution.  If there is no response or the deficiencies are not fixed, the Secretary of State of Connecticut may then prepare and file a certificate of dissolution.  Although these forms can be maintained without an attorney, some clients prefer to have a business attorney file the required reports.

Judicial dissolution is started with a lawsuit in court and typically involves litigation attorneys representing the shareholder or shareholders and the company.  Although an individual shareholder can bring an action in court by himself or herself (referred to as “pro se”), shareholders tend to hire attorneys based on the complexity of the proceeding.  Under court rules, the company must have an attorney.

The form of a judicial dissolution lawsuit is varied, but typically you have either a deadlock with management or a disgruntled or oppressed shareholder.  A deadlock occurs in cases of 50/50 control of a company and two groups of shareholders or directors are deadlocked in the management of corporate affairs.  The oppressed shareholder claims are based on a claim of unfairness with respect to ownership of shares in the company.  These cases are sometimes referred to as shareholder oppression actions, freeze out actions, or squeeze out actions.  These terms refer to a claim based on minority shareholder rights as the cases are brought by minority shareholders.

Connecticut General Statutes section 33-896 sets forth that a superior court judge may order dissolution when a shareholder brings an action and can prove 1) that there is a deadlock in management or an inability to elect directors; 2) there is shareholder oppression; or 3) the corporate assets are being wasted.    Seems simple enough.  However, there are complexities to these claims and the parties typically vigorously defend their positions.  Experts are often needed for damages, accounting, and forensics.  Many times, shareholder oppression actions end up on Connecticut’s complex litigation docket.  On this docket, the parties, attorneys, and litigants are subject to a specific set of procedural rules and the case is assigned to one judge for the length of the case.

This post is only an outline of typical examples and there are many details to each aspect of the statutory framework for dissolution.  Before seeking dissolution, shareholders should consider consulting an attorney.  Regardless of involving a lawyer, a shareholder may want to become familiar with the statutory framework for dissolution, the by-laws of the company, shareholder agreements, and the certificate of incorporation.  In a later post, I will go through some of the various types of judicial dissolution actions including oppression claims and the applicable defenses.

Do Members of LLCs Owe A Fiduciary Duty To Each Other in CT?

A limited liability company is essentially a combination or mix of a corporation and a partnership.  The LLC as an entity provides the flexibility of a partnership with the ability to govern and create ownership interests similar to a corporation.  The legislature codified the framework for LLCs in Connecticut in Title 34, Chapter 613 of the General Statutes.  The statutory frameworks permits the owners or members of LLCs to include specific governance provisions in a document called an “operating agreement.” Many times members use an attorney to draft the operating agreement. The operating agreement may cover a variety of topics including:

  • duties and rights of members and managers
  • finance
  • distributions
  • ownership and transfer of property
  • admission and withdrawal of members
  • lawsuits by and against the company
  • merger, consolidation and conversion
  • dissolution

If the members of an LLC fail to address any of these issues, the provisions for the Connecticut general statutes apply as a default.  With some exceptions, the statutory framework basically provides for simple majority control. The failure to address these issues typically results in significant control in the majority member.  So, if a minority member wants some aspect of control on these topics, the member would be well advised to take care of it by using an attorney to negotiate or draft provisions in the operating agreement with protections as part of the admission process.

Notwithstanding the above, members holding a minority ownership interest in an LLC continue to have rights that may provide some protection depending on the circumstances and the operating agreement.  In particular, a minority owner might be permitted to assert claims in a lawsuit for  breach of fiduciary duty or breach of statutory duty to address various inequities and unfair management of an LLC.  A minority interest holder might seek to apply these rights in various situations such as:

  • freezing out of the minority owner from affairs of the business
  • unfairly devaluing the member’s ownership interest
  • operating the company in bad faith
  • depriving the member of books and records of the LLC
  • use of deception and fraud in a buy-out of a member
  • unfair expulsion of a member
  • inequitable assignment of membership interest or sale of business
  • improper dissolution or valuing of membership interests
  • self dealing with excessive guaranteed payments or distributions

The outcome of these claims might depend on whether the court acknowledges a fiduciary duty exists between members of an LLC or between a member-manager of an LLC and the other owners.  The existence of a fiduciary duty is significant because it requires the utmost good faith and loyalty.  It also might help the attorney because it shifts the burden of proof in a civil case requiring the member owing such a duty to prove good faith and fair dealing.  As a result, the question in many disputes involving minority ownership of LLCs is whether a fiduciary duty exists.

In Connecticut, by case law, a court may deem a fiduciary duty to exist when there is “justifiable trust confided on one side and a resulting superiority and influence on the other.”  The relationship is broadly defined to permit courts to consider new situations.  It is generally a relationship “characterized by a unique degree of trust and confidence.”  The superior position of one party typically will permit a great opportunity for abuse of confidence.

At the outset, a fiduciary duty is likely to be found to exist if the operating agreement includes such duties for members or managers.  As such, an individual that is offered a minority stake in an LLC might want to insist that the operating agreement impose a fiduciary duty on the manager or controlling members.  In addition to an operating agreement, a claim for breach of duty may be found in General Statutes Section 34-141.  The statute states in relevant part:

 A member or manager shall discharge his duties under section 34-140 and the operating agreement, in good faith, with the care an ordinary prudent person in a like position would exercise under similar circumstances, and in the manner he reasonably believes to be in the best interests of the limited liability company, and shall not be liable for any action taken as a member or manager, or any failure to take such action, if he performs such duties in compliance with the provisions of this section.

Further, there are a series of trial court cases in Connecticut where lawyers have argued this point and judges have recognized a fiduciary duty between managers and/or controlling members of an LLC and the other members.  The reasoning is based, in part, on the law dealing with partnerships and the fiduciary duty owed to each partner.  There is some dispute as to the existence and extent of this duty, but the Connecticut Supreme Court has chosen to keep an open definition of a fiduciary relationship.  Nevertheless, until such duties are further codified or deemed to exist as a matter of law, a controlling member or manager might opt to have such duties disclaimed in an operating agreement.

A fiduciary duty may or may not be desirable depending on your ownership interest or your role in the LLC.  The take away here is that an operating agreement is the best method to clearly define the duties of members and managers.  The operating agreement can include specific provisions on the extent and nature of the duties of a manager or member of an LLC.  In the absence of a specific provision in the operating agreement stating otherwise, members or managers may be deemed a fiduciary with respect to other members.  Although not required, a lawyer familiar with LLCs can assist in ensuring valuable rights are in an agreement or bringing a lawsuit when rights are violated.