Opinion
No. X07 CV 04 4025119S
March 7, 2008
MEMORANDUM OF DECISION
I
This case arises from a series of investments, approximately $700,000 total, that the plaintiffs, Michael Christiani and CPTR, LLC (CPTR), made in the defendant company BenefitCard Systems, Inc. (BenefitCard). On March 19, 2004, the plaintiffs filed this action against BenefitCard and the codefendants, BenefitPoint, Inc. (BenefitPoint), an allegedly affiliated company, and BenefitCard's board of directors, John Randazzo, Mark Pulido, Frederick J. DeGrosz and Lorraine Ritch. In the plaintiffs' twelve-count amended complaint, dated May 17, 2004, the plaintiffs allege ten counts against all the defendants: fraud, breach of fiduciary duty, violation of the Connecticut Uniform Securities Act, General Statutes § 36b-29, conversion, negligent misrepresentation, innocent misrepresentation, violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq. (CUTPA), and civil conspiracy. Additionally, the plaintiffs allege counts of larceny and breach of contract against Randazzo, BenefitPoint and BenefitCard.
CPTR is a Connecticut limited liability company owned and controlled entirely by Christiani and his wife, Nancy Christiani.
On April 16, 2004, the defendants removed to federal court. The original complaint alleged violations of the Securities Act of 1933, the Securities Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. The plaintiffs amended their complaint dropping these counts and moved to remand the matter back to the Superior Court. The plaintiffs' motion was granted on October 5, and the transferred file was received by the Hartford judicial district on October 20, 2004.
On or about November 12, 2004, the defendants filed timely motions to dismiss arguing that this court does not have personal jurisdiction or subject matter jurisdiction over them for a variety of reasons. With the exception of Randazzo, who resides in Connecticut, it is undisputed that all other defendants reside or are located outside of the state. The defendants, except Randazzo and BenefitCard, argue that the court does not have personal jurisdiction over them because the plaintiffs have failed to establish that the defendants had minimum contacts with Connecticut. Furthermore, BenefitCard and BenefitPoint argue that improper service was made upon them because service was not made on their registered agents as required by General Statutes § 33-929(a).
Ritch filed her motion to dismiss on November 18, 2004.
General Statutes § 33-929(a) provides: "The registered agent of a foreign corporation authorized to transact business in this state is the corporation's agent for service of process, notice or demand required or permitted by law to be served on the foreign corporation. When the registered agent is other than the Secretary of the State and his successors in office, service may be effected by any proper officer or other person lawfully empowered to make service by leaving a true and attested copy of the process, notice or demand with such agent or, in the case of an agent who is a natural person, by leaving it at such agent's usual place of abode in this state."
The defendants, except for Ritch, also argue that the court lacks subject matter jurisdiction because Christiani is required to arbitrate this matter pursuant to the stock purchase agreement between BenefitCard and Christiani. Additionally, the defendants, with the exception of Ritch, argue that the plaintiffs' breach of fiduciary duty count should be dismissed for lack of subject matter jurisdiction because this is a derivative shareholder action and no pre-suit demand was made upon BenefitCard, as required under Connecticut and Delaware law.
In the plaintiffs' memoranda of law in opposition to the motions to dismiss, filed on March 23, 2007, they argue that the court has personal jurisdiction over the defendants because the defendants had the requisite contacts with Connecticut, that jurisdiction may be had over the defendants pursuant to General Statutes §§ 52-59b(a)(2) and 52-59b(a)(3) and that the court's exercise of jurisdiction would not offend due process. Additionally, the plaintiffs argue that service of process on BenefitCard and BenefitPoint could be made pursuant to General Statutes § 52-57(c). Moreover, the plaintiffs argue that the court is not deprived of subject matter jurisdiction because a pre-suit demand was not required as it was unnecessary, impossible or would have been futile and because the arbitration clause cited by the defendants does not apply. The defendants filed a reply memorandum on April 13, 2007.
Section 52-59b(a) provides: "As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nonresident individual, foreign partnership or foreign voluntary association, or over the executor or administrator of such nonresident individual, foreign partnership or foreign voluntary association, who in person or though an agent: (1) Transacts any business within the state; (2) commits a tortious act within the state, except as to a cause of action for defamation of character arising from the act; (3) commits a tortious act outside the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act, if such person or agent (A) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or services rendered, in the state, or (B) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce; (4) owns, uses or possesses any real property situated within the state; or (5) uses a computer, as defined in subdivision (1) of subsection (a) of section 53-451, or a computer network, as defined in subdivision (3) of subsection (a) of said section, located within the state . . ."
The court held a hearing on the motions on July 10, 2007, July 11, 2007, August 3, 2007 and December 17, 2007. On December 20, 2007, the plaintiffs submitted a supplemental return of process. The defendants filed a supplemental brief on December 28, 2007 and the plaintiffs filed a reply on January 9, 2008.
The court makes the following findings of facts relevant to the issue of whether Connecticut can properly exercise jurisdiction over the defendant. On or about May 2000, Christiani, formerly of Avon, Connecticut, was the owner and manager of CPTR, a limited liability company, which manages a hedge fund. He was contacted by Randazzo and met with him in Avon about investing in BenefitCard, a start-up company. According to the plaintiffs' amended complaint, "BenefitCard would offer a `credit-card-based' system for allocating and tracking health benefit use as part of Flexible Spending Accounts (FSAs) under the Internal Revenue Code." Randazzo was the chief executive officer, president and treasurer of BenefitCard and initially its only director. He later became its board chairman — a position he never relinquished. Beginning in 1999, he was also a consultant and then an executive vice president of BenefitPoint, a California "employee benefits company, alleged to be the industry's leading web-based platform for customer relationship management and procurement." He remained in the latter position until October 17, 2001, when he became the chief executive officer, president and treasurer of BenefitPoint and John Tillotson became president and chief executive officer of BenefitCard. BenefitCard operated solely out of the office of BenefitPoint and used its communication systems.
"Under a `flexible spending account' system, each employee estimates his expenses for the upcoming year, and then each pay period the employee subtracts a pro rata portion of this amount from his gross income and deposits this amount into a flexible spending account. 26 U.S.C. § 125. For example, when the employee visits a doctor and incurs a medical expense, he then submits a receipt to the plan administrator and is reimbursed from the flexible spending account tax-free . . ." Nichols v. Life Ins. Co. of Georgia, 701 So.2d 1126, 1129 (Ala.Civ.App. 1997).
Although the December 6, 2001 filing with the our secretary of state indicates that John Randazzo is still the president and treasurer of BenefitCard.
Pulido resides in California and was both the chairman of the board and the chief executive officer of BenefitPoint from at least May 2000 through October 17, 2001; he is also a member of the board of directors of BenefitCard. DeGrosz also resides in California and is a member of the BenefitCard board of directors. Ritch resides in Florida, is a member of the BenefitCard board of directors and is a principal in the Florida corporation, Fringe Benefits Management Company (FBMC), which contracted with BenefitCard and CPTR to develop software for the BenefitCard product known as BenefitPass.
The plaintiffs allege that as a result of multiple representations from Randazzo and the individual defendants, they invested approximately $700,000 from July 2001 through May 2002 in BenefitCard. The complaint alleges and Christiani testified that, commencing May 2000, after his first meeting with Randazzo, Christiani met with Randazzo on almost a weekly basis and communicated regularly by conference call with the individual defendants. Christiani testified that Randazzo showed him various articles touting BenefitCard's advantages and that Randazzo represented that several companies, including BenefitPoint, Alburger Basso DeGrosz Insurance Services (ABD), FBMC, Wildcard Systems and US Script, had taken or would take an equity position in BenefitCard to guarantee its success. He was told by Randazzo, among other things, that the state of Texas was a client and would generate $1.6 million in revenues for BenefitCard and that the investment firm of Piper Jaffray had established a "pre-valuation" of $10 million and a future valuation of $20 million. Randazzo told Christiani that Randazzo's initial investment of $600,000 was now worth $2.5 million; that future financing would double Christiani's investment; that Randazzo raised $70 million to start BenefitPoint; that BenefitPoint's revenues were growing; that BenefitCard would be an "offshoot" of BenefitPoint; that BenefitPoint would provide BenefitCard with 300,000 card users that would generate $3 million in pre-tax earnings; that BenefitPoint would generate one-third of BenefitCard's 2002 revenues and that the expected 30 percent of market share would bring BenefitCard $40 million in revenue.
At a June 27, 2001 special meeting of the BenefitCard board of directors, attended by directors Randazzo, Ritch and DeGrosz, a resolution was approved. It recognized that CPTR contributed services for the issuance of new cards, preparation of brochures, enrollment services, pharmacy network education and assistance regarding technical development — all with a value of $1 million. As a result, CPTR would have priority and receive payment of $100,000 in perpetuity before the company's obligations to BenefitPoint, FBMC, ABD, US Script and the salaries to senior management, including the chief executive officer, the chief financial officer and the chief technical officer, and be issued 30,000 shares of common stock. There was no evidence that any of those companies consented to the action; indeed, Randazzo testified that they had no right to object to this. Additionally, the resolution ratified all actions taken by the chief executive officer in connection with the marketing services agreement between BenefitCard and CPTR. At the request of Randazzo, on July 1, 2001, the plaintiffs wrote a check in the sum of $30,000 payable to BenefitCard for 30,000 shares of stock; however, no certificates were ever issued.
In August 2001, Randazzo invited Christiani to a BenefitCard board of directors meeting at BenefitPoint's offices in California at which Randazzo and Pulido stressed the interrelationship between BenefitPoint and BenefitCard and emphasized the commitment BenefitPoint had to BenefitCard. Although this was apparently the only meeting Christiani had with Pulido and Christiani never corresponded with Pulido by email, Christiani continued to talk with Pulido via the telephone. On August 17, 2001, Randazzo advised Christiani that he expected that 50 percent of BenefitCard's customers would be "online" by January 1, 2002 and that he was targeting 100,000 participants with an additional 200,000 by March 1, 2002. At Randazzo's request, the plaintiffs wrote a check in the sum of $42,750 payable to J. Randazzo, Inc.
Randazzo made further comments concerning the number of accounts, customers and successes of BenefitCard at meetings and conversations throughout the summer and fall of 2001. On several occasions, Randazzo advised Christiani that his investment would be secured by Randazzo's 5 percent ownership in US Script; Randazzo, in fact, had no such ownership. Additionally, Randazzo, while chief executive officer of BenefitPoint, and Pulido reiterated that any BenefitCard revenues would be paid to CPTR before any other entity.
In December 2001 and January 2002, the plaintiffs were induced to send $325,000 to FBMC pursuant to a marketing services agreement and a CPTR/FBMC funding agreement. Christiani testified that he delivered a total of $626,500 as a result of the defendants' promises. Christiani also testified that he had several discussions with Ritch, usually by telephone, including by conference call and by email, concerning the FBMC software; he met her in Florida in the summer of 2002. Randazzo testified that, as of the early part of 2002, the board ceased to function as Christiani was in control of BenefitCard and made all financial decisions. Yet, he also testified that the rollout of BenefitPass was announced by BenefitPoint's corporate secretary sometime in mid-2002.
In the spring of 2002, business relations between the plaintiffs and BenefitCard as well as between FBMC and BenefitCard had started to sour as the software development had not progressed as expected. Randazzo requested assistance from Rene Lehrer and Steven Shulman, both of whom were from Avon and had significant experience in the insurance sector of the health care industry. While not exactly clear from their testimony, both had positions with either BenefitPoint or BenefitCard. Shulman was a director and co-chair of BenefitPoint in October 2001 and received stock options from the company. Lehrer, unbeknownst to him as well as the plaintiffs, was apparently chief executive officer of BenefitCard. Randazzo testified that by this time, notwithstanding his prior statements concerning Christiani, Lehrer was making the day-to-day decisions for BenefitCard. Christiani had conversations with both individuals about BenefitCard's financial health.
In fact, Lehrer was adamant that he did not work for nor was he an officer or director of BenefitCard.
Ultimately, FBMC never produced the desired software, the BenefitPass product was never built and BenefitCard failed by the end of 2002.
II
"A motion to dismiss . . . properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court . . . A motion to dismiss tests, inter alia, whether, on the face of the record, the court is without jurisdiction." (Internal quotation marks omitted.) Gerlt v. South Windsor, 284 Conn. 178, 188, 931 A.2d 907 (2007). "The motion to dismiss shall be used to assert (1) lack of jurisdiction over the subject matter, (2) lack of jurisdiction over the person, (3) improper venue, (4) insufficiency of process, and (5) insufficiency of service of process . . ." Practice Book § 10-31(a).
"When a . . . court decides a jurisdictional question raised by a pretrial motion to dismiss, it must consider the allegations of the complaint in their most favorable light . . . In this regard, a court must take the facts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) Cogswell v. American Transit Insurance Co., 282 Conn. 505, 516, 923 A.2d 638 (2007).
"A motion to dismiss may . . . raise issues of fact and would, therefore, require a . . . hearing [to determine the facts] . . . [A]ffidavits are insufficient to determine the facts unless, like the summary judgment, they disclose that no genuine issue as to a material fact exists . . . In almost every setting where important decisions turn on questions of fact, due process requires an opportunity to confront and cross-examine adverse witnesses." (Citation omitted; internal quotation marks omitted.) Standard Tallow Corp. v. Jowdy, 190 Conn. 48, 56, 459 A.2d 503 (1983).
"In a case tried before a court, the trial judge is the sole arbiter of the credibility of the witnesses and the weight to be given specific testimony . . . It is within the province of the trial court, as the fact finder, to weigh the evidence presented and determine the credibility and effect to be given the evidence." (Citation omitted; internal quotation marks omitted.) Cadle Co. v. D'Addario, 268 Conn. 441, 462, 844 A.2d 836 (2004). As the trier of fact, the court "can . . . decide what — all, none, or some — of a witness' testimony to accept or reject." (Internal quotation marks omitted.) Wilson v. Hryniewicz, 51 Conn.App. 627, 633, 724 A.2d 531, cert. denied, 248 Conn. 904, 731 A.2d 310 (1999).
III A.
"Because a lack of personal jurisdiction may be waived by the defendant, the rules of practice require the defendant to challenge that jurisdiction by a motion to dismiss . . . When a defendant files a motion to dismiss challenging the court's jurisdiction, a two part inquiry is required. The trial court must first decide whether the applicable state long-arm statute authorizes the assertion of jurisdiction over the [defendant]. If the statutory requirements [are] met, its second obligation [is] then to decide whether the exercise of jurisdiction over the [defendant] would violate constitutional principles of due process." (Citation omitted; internal quotations omitted.) Knipple v. Viking Communications, Ltd., 236 Conn. 602, 605-06, 674 A.2d 426 (1996). "When a motion to dismiss for lack of personal jurisdiction raises a factual question which is not determinable from the face of the record, the burden of proof is on the plaintiff to present evidence which will establish jurisdiction." (Internal quotation marks omitted.) Cogswell v. American Transit Insurance Co., supra, 282 Conn. 515. "A ruling on a motion to dismiss is neither a ruling on the merits of the action . . . nor a test of whether the complaint states a cause of action." (Internal quotation marks omitted.) Doctor's Associates, Inc. v. Keating, 72 Conn.App. 310, 312, 805 A.2d 120 (2002), aff'd, 266 Conn. 851, 836 A.2d 412 (2003).
In the present case, the plaintiffs have the burden of proof to present evidence that establishes jurisdiction because the defendants' motions to dismiss for lack of personal jurisdiction raise factual questions not determinable from the face of the record. See Cogswell v. American Transit Insurance Co., supra, 282 Conn. 515. The defendants, except Randazzo and BenefitCard, argue that the plaintiffs have failed to allege and prove that the defendants had sufficient contacts pursuant to the relevant longarm statutes, i.e., § 52-59(a), or, in the case of BenefitPoint, General Statutes § 33-929(f). Further, they argue that the court's exercise of jurisdiction would violate due process.
Section 33-929(f) provides: "Every foreign corporation shall be subject to suit in this state, by a resident of this state or by a person having a usual place of business in this state, whether or not such foreign corporation is transacting or has transacted business in this state and whether or not it is engaged exclusively in interstate or foreign commerce, on any cause of action arising as follows: (1) Out of any contract made in this state or to be performed in this state; (2) out of any business solicited in this state by mail or otherwise if the corporation has repeatedly so solicited business, whether the orders or offers relating thereto were accepted within or without the state; (3) out of the production, manufacture or distribution of goods by such corporation with the reasonable expectation that such goods are to be used or consumed in this state and are so used or consumed, regardless of how or where the goods were produced, manufactured, marketed or sold or whether or not through the medium of independent contractors or dealers; or (4) out of tortious conduct in this state, whether arising out of repeated activity or single acts, and whether arising out of misfeasance or nonfeasance."
1. a.
Pulido and DeGrosz maintain that this court has no jurisdiction over them pursuant to §§ 52-59b(a)(2) or 52-59(a)(3). The plaintiffs argue that jurisdiction over Pulido, DeGrosz and Ritch may be had under both §§ 52-59b(a)(2) or 52-59b(a)(3)(B). Sections 52-59b(a)(2) and 52-59b(a)(3)(B), in relevant part, provide: "(a) As to a cause of action arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nonresident individual . . . who in person or through an agent . . . (2) commits a tortious act within the state . . . (3) commits a tortious act outside the state causing injury to person or property within the state . . . if such person or agent . . . (B) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce . . ." Pulido and DeGrosz argue that they both live and work in California, that they do not have any other contacts with Connecticut and that their connection to the plaintiffs is solely in their capacity as members of the board of directors of BenefitCard and, for Pulido, as chief executive officer and as chairman of the board of directors of BenefitPoint.
Christiani testified that he met Pulido and DeGrosz at an August 2001 board meeting at which Pulido made representations concerning the connections between BenefitPoint and BenefitCard and that he had other telephone conversations with Pulido. Nevertheless, Christiani had no other meetings or correspondence with DeGrosz. No evidence was presented that DeGrosz derived substantial revenue from interstate or international commerce. Thus, the court finds that there is not enough evidence to support the claims of a tortious action by DeGrosz pursuant to §§ 52-59b(a)(2) or 52-59b(a)(3).
The same cannot be said, however, for Pulido. Christiani testified that he had multiple telephone conversations with Pulido, some including Randazzo and some without him, to discuss the investments, the agreements and the relationship between BenefitPoint and BenefitCard. These conversations constitute tortious conduct within the state. See Knipple v. Viking Communications, Ltd., supra, 236 Conn. 610 (holding that false representations, entering Connecticut, made by foreign corporation by wire or mail, constitute tortious conduct in Connecticut); see also Parker v. Bonfanti, Superior Court, judicial district of Middlesex, Docket No. CV 05 4002747 (November 15, 2005, Silbert, J.) [40 Conn. L. Rptr. 278] (extending Knipple to nonresident individual); American Protective Services, Inc. v. Brady, Superior Court, judicial district of New Haven, Docket No. CV 00 0436227 (December 7, 2001, Jones, J.) (30 Conn. L. Rptr. 755, 756-57) (same); see also Cody v. Ward, 954 F.Sup. 43, 45-46 (D.Conn. 1997). Thus, the court has longarm jurisdiction over Pulido under § 52-59b(a)(2).
The same reasoning, and essentially the same factual background, applies as to Ritch, except that the telephone calls were made to and came from Florida and that Christiani traveled to Florida instead of California. Additionally, Ritch communicated with Christiani via email. Therefore, the court finds that it has longarm jurisdiction over Ritch pursuant to § 52-59b(a)(2). See Knipple v. Viking Communications, Ltd., supra, 236 Conn. 610; Parker v. Bonfanti, supra, Superior Court, Docket No. CV 05 4002747; American Protective Services v. Brady, supra, Superior Court, Docket No. CV 00 0436227; see also Cody v. Ward, supra, 954 F.Sup. 45-46.
b.
As noted above, "[i]f the statutory requirements [are] met . . . [the trial court's] second obligation [is] then to decide whether the exercise of jurisdiction over the [defendant] would violate constitutional principles of due process." Knipple v. Viking Communications, Ltd., supra, 236 Conn. 606. "[T]he constitutional due process standard requires that, in order to subject a defendant to a judgment in personam, if he be not present within the territory of the forum, he have certain minimum contacts with it such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice . . . In other words, [t]he Due Process Clause protects an individual's liberty interest in not being subject to the binding judgments of a forum with which he has established no meaningful contacts, ties, or relations . . . By requiring that individuals have fair warning that a particular activity may subject [them] to the jurisdiction of a foreign sovereign . . . the Due Process Clause gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit . . . The due process test for personal jurisdiction has two related components: the `minimum contacts' inquiry and the `reasonableness' inquiry. The court must first determine whether the defendant has sufficient contacts with the forum state to justify the court's exercise of personal jurisdiction . . . "For the purposes of this initial inquiry, the Supreme Court of the United States has articulated, and this court has recognized, two types of personal jurisdiction. Either specific jurisdiction or general jurisdiction can satisfy the constitutional requirement of sufficient minimum contacts between the defendant and the forum. A state court will have specific jurisdiction over a nonresident defendant whenever the defendant has purposefully directed [its] activities at residents of the forum . . . and the litigation [has] result[ed] from alleged injuries that arise out of or relate to those activities . . . Alternatively, [e]ven when the cause of action does not arise out of or relate to the foreign corporation's activities in the forum State, due process is not offended by a State's subjecting the corporation to its in personam jurisdiction if the defendant has had continuous and systematic general business contacts with the state . . . Whether a given defendant has contacts with the forum state sufficient to satisfy due process is dependent upon the facts of the particular case . . .
"Due process demands more, however, than the existence of minimum contacts between the defendant and the forum state. Once minimum contacts have been established, [t]he second stage of the due process inquiry asks whether the assertion of personal jurisdiction comports with `traditional notions of fair play and substantial justice' — that is, whether it is reasonable under the circumstances of the particular case . . . [Therefore] [w]hile the exercise of jurisdiction is favored where the plaintiff has made a threshold showing of minimum contacts at the first stage of the inquiry, it may be defeated where the defendant presents a compelling case that the presence of some other considerations would render jurisdiction unreasonable." (Citations omitted; emphasis omitted; internal quotation marks omitted.) Cogswell v. American Transit Ins. Co., supra, 282 Conn. 523-25.
In the present case, the testimony indicates that Pulido and Ritch purposefully directed their activities toward Connecticut by having multiple telephone conversations with Christiani, who was in Connecticut, to induce him and CPTR to invest in BenefitCard. The alleged monetary loss to the plaintiffs arises from, or is related to, the activities of Pulido and Ritch. Thus, the court finds that the plaintiffs have shown that Pulido and Ritch have the required minimum contacts with Connecticut.
Furthermore, Pulido's and Ritch's contacts in Connecticut were sufficient such that they could have reasonably anticipated being sued in this state. Pulido and Ritch knew or should have known that contacting the plaintiffs in Connecticut to induce them to invest in BenefitCard would possibly lead them to be haled into court in this state. As a result, the court's exercise of personal jurisdiction over Pulido and Ritch is reasonable under the circumstances of this case.
2. a.
As to personal jurisdiction over BenefitPoint, § 33-929(f) subjects foreign corporations to jurisdiction in Connecticut in four situations: (1) when a contract is made in or is to be performed in this state; (2) when any business is repeatedly solicited in this state by mail or otherwise; (3) when a foreign corporation produces, manufactures or distributes goods with the reasonable expectation that they will be used and are used in this state; and (4) when tortious conduct occurs in this state, whether arising out of repeated activity or single acts and whether arising out of misfeasance or nonfeasance. See footnote 9. BenefitPoint argues that none of these categories apply here because there is no proof that BenefitPoint, or anyone representing BenefitPoint, committed any of the four actions. Although it is uncontested that BenefitPoint solicited and conducted other business in Connecticut, BenefitPoint, itself, did not sign any contract or directly solicit business with the plaintiffs.
Nevertheless, as the testimony overwhelmingly revealed, there was no real distinction between BenefitPoint and BenefitCard. It may be true that the two companies may have had separate corporate structures, that some board members may not have served on both boards and that BenefitPoint may not have owned all of the shares of stock of BenefitCard. However, Randazzo and Pulido swapped jobs and roles between the two companies and other individuals became directors du jour, with no formal appointments or notice; indeed, some were not even told.
The same was true for the officers. As chief executive officer of BenefitCard and chairman of its board of directors, Randazzo ran the company without any board involvement. Prior to his appointment as chief executive officer of BenefitPoint in October 2001, Randazzo was a vice president of BenefitPoint and worked out of his home in Avon, Connecticut. As chief executive officer of BenefitPoint, and chairman of its board of directors, Randazzo also ran BenefitCard, again without any board involvement; nothing changed. There was no separation, no separate decision structure; indeed, there was nothing more than the pretense of a separate entity. Simply put, BenefitCard was BenefitPoint and Randazzo's newest start-up company. Additionally, wearing his BenefitPoint hat, Pulido made numerous representations, on behalf of and about BenefitPoint, that led the plaintiffs to invest money in BenefitCard. This was consistent with BenefitPoint's marketing agreement with BenefitCard in which BenefitPoint was to tout BenefitCard's virtues and seek partners for the enterprise. Most of the negotiations, solicitations and promises concerning the plaintiffs' investment, or, put another way, the formation of the contract, whether orally here or by telephonic communication, occurred in Connecticut. Therefore, this court finds that it has personal jurisdiction over BenefitPoint pursuant to § 33-929(f)(1).
Furthermore, as stated above, BenefitPoint, through Randazzo and Pulido, solicited Christiani here in Connecticut. "[A] plaintiff need not show that, because of the acts of solicitation, the defendant was on notice that it might be sued by the plaintiff himself or herself. A plaintiff similarly need not show that the defendant solicited his or her business in Connecticut. A plaintiff need only demonstrate that the defendant could reasonably have anticipated being haled into court here by some person who had been solicited in Connecticut and that the plaintiff's cause of action is not materially different from an action that might have resulted directly from that solicitation." (Emphasis in original.) Thomason v. Chemical Bank, 234 Conn. 281, 296, 661 A.2d 595 (1995). Hence, this court has jurisdiction pursuant to § 33-929(f)(2). Finally, this court finds, for the reasons stated above, that jurisdiction is also proper pursuant to § 33-929(f)(4), because sufficient facts have been alleged to support the claims of a tortious act whether from misfeasance or nonfeasance.
b.
Because the statutory requirements of § 33-929(f) have been met, this court must now evaluate whether the exercise of jurisdiction over BenefitPoint would violate due process. See Knipple v. Viking Communications, Ltd., supra, 236 Conn. 606. As noted, "[e]ither specific jurisdiction or general jurisdiction can satisfy the constitutional requirement of sufficient minimum contacts between the defendant and the forum. A state court will have specific jurisdiction over a nonresident defendant whenever the defendant has purposefully directed [its] activities at residents of the forum . . . and the litigation [has] result[ed] from alleged injuries that arise out of or relate to those activities . . . Alternatively, [e]ven when the cause of action does not arise out of or relate to the foreign corporation's activities in the forum State, due process is not offended by a State's subjecting the corporation to its in personam jurisdiction if the defendant has had continuous and systematic general business contacts with the state . . ." (Citations omitted; emphasis omitted; internal quotation marks omitted.) Cogswell v. American Transit Ins. Co., supra, 282 Conn. 524.
In the present case, BenefitPoint is both registered to do business in Connecticut and is doing business in Connecticut. Additionally, BenefitPoint derived some revenue from 2002-04 from customers located in Connecticut. BenefitPoint did business with several Connecticut-based companies, among them, Connecticare and Magellan Health Services, Inc. BenefitPoint met with representatives from these companies in Connecticut from 2000-04 to engage them as clients. Therefore, the test for general jurisdiction is met. Moreover, due to the fact that its officers purposefully directed activities — and with Randazzo, activity after activity — at Connecticut residents, the specific jurisdiction test is also met.
"The twin touchstones of due process analysis under the minimum contacts doctrine are foreseeability and fairness. [T]he foreseeability that is critical to due process analysis . . . is that the defendant's conduct and connection with the forum State are such that he should reasonably anticipate being haled into court there." (Internal quotation marks omitted.) United States Trust Co. v. Bohart, 197 Conn. 34, 41, 495 A.2d 1034 (1985). BenefitPoint's contacts in Connecticut were sufficient such that it could have reasonably anticipated being sued in this state. Thus, this court finds that its exercise of personal jurisdiction over BenefitPoint is both foreseeable and fair under the circumstances of this case.
3.
BenefitCard and BenefitPoint also argue that the court lacks personal jurisdiction based upon improper service. They assert that they could only be served through their registered agents pursuant to General Statutes § 33-929(a). It is undisputed that the two companies were served by certified mail, return receipt requested. The plaintiffs argue that BenefitCard and BenefitPoint were served pursuant to General Statutes § 52-57(c).
Section 52-57(c) provides: "In actions against a private corporation, service of process shall be made either upon the president, the vice president, an assistant vice president, the secretary, the assistant secretary, the treasurer, the assistant treasurer, the cashier, the assistant cashier, the teller or the assistant teller or its general or managing agent or manager or upon any director resident in this state, or the person in charge of the business of the corporation or upon any person who is at the time of service in charge of the office of the corporation in the town in which its principal office or place of business is located. In actions against a private corporation established under the laws of any other state, any foreign country or the United States, service of process may be made upon any of the aforesaid officers or agents, or upon the agent of the corporation appointed pursuant to section 33-922." (Emphasis added.)
Section 33-929(a), in relevant part, provides: "The registered agent of a foreign corporation authorized to transact business in this state is the corporation's agent for service of process, notice or demand required or permitted by law to be served on the foreign corporation. When the registered agent is other than the Secretary of the State . . . service may be effected by any proper officer or other person lawfully empowered to make service by leaving a true and attested copy of the process, notice or demand with such agent or, in the case of an agent who is a natural person, by leaving it at such agent's usual place of abode in this state." (Emphasis added.) Nevertheless, General Statutes § 33-929(h) provides that "[t]his section does not prescribe the only means, or necessarily the required means, of serving a foreign corporation."
"[T]he language of § 52-57(c) makes service of process by the means proscribed in § 33-929 permissive, rather than mandatory." Lane v. Jones, Superior Court, judicial district of Fairfield, Docket No. CV 06 5001032 (August 18, 2006, Arnold, J.); see also Townsend v. XPECT Discount Drugs, Ltd., Superior Court, judicial district of Ansonia-Milford at Derby, No. CV 06 5000380S (July 28, 2006, Sylvester, J.T.R.) (41 Conn. L. Rptr. 738, 738-39); Loughery v. Commissioner of Correction, Superior Court, judicial district of Hartford, Docket No. CV 01 0812161 (July 9, 2002, Hennessey, J.). "A plaintiff may invoke means of service of process set forth in § 33-929 or comply with the requirements of § 52-57." (Emphasis in original.) Townsend v. XPECT Discount Drugs, Ltd., supra, 41 Conn. L. Rptr. 739. Therefore, service on the BenefitCard's and BenefitPoint's registered agents pursuant to § 33-929 was not the only method of service that the plaintiffs could have used. Accordingly, the defendants' motion to dismiss for lack of personal jurisdiction based upon improper service is denied.
While neither §§ 33-929(a) or 52-57(c) specifically provides for service by certified mail, return receipt requested, service upon a corporation by certified mail is allowed under General Statutes §§ 33-929(b) or 33-663(b) provided that the corporation has no registered agent or that the agent cannot with reasonable diligence be served. Both BenefitCard and BenefitPoint had registered agents and there is no allegation that they could not with reasonable diligence be served. Nevertheless, "Connecticut law repeatedly has expressed a policy preference to bring about a trial on the merits of a dispute whenever possible and to secure for the litigant his or her day in court." (Internal quotation marks omitted.) Fine Homebuilders, Inc. v. Perrone, 98 Conn.App. 852, 860, 911 A.2d 1149 (2006), cert. granted in part, 282 Conn. 901, 918 A.2d 888 (2007). "[S]ervice must be effectuated in a way reasonably calculated to provide actual notice." Id., 857 (finding that state marshal's service of process at a locked front gate single-family estate was sufficient service of process). Furthermore, "[w]here the form of service employed is improper but it is undisputed that the defendant received timely notice of the suit and did in fact respond, the appropriate remedy is to allow amended service of process, rather than dismissal for insufficient process." (Internal quotation marks omitted.) Leask v. Jenkins, Superior Court, judicial district of Fairfield, Docket No. CV 97 0341565 (July 10, 1997, Thim, J.) (20 Conn. L. Rptr. 61, 62), citing 62B Am.Jur.2d, Process § 112; see also Trinidad v. Munez, Superior Court, judicial district of New Haven at Meriden, Docket No. CV 06 5001231 (March 13, 2007, Rubinow, J.) (43 Conn. L. Rptr. 54, 57-58) (holding that purpose of nonresident motorist statute met because defendant had actual notice and therefore court had personal jurisdiction over defendant).
In the present case, the plaintiffs effectuated service in a way reasonably calculated to provide actual notice, i.e., by certified mail addressed to the secretaries of the companies, return receipt requested. Although illegible, the return receipts indicate that service was signed for by the same person for both companies. Furthermore, it is undisputed that BenefitCard and BenefitPoint received actual, timely notice of the suit and responded by removing to federal court.
BenefitCard also asserts that service was improper because it was served at BenefitPoint's office at 801 Montgomery Street, San Francisco, California, rather than at its registered address at 1170 North Financial Drive, Suite 124, Fresno, California. There is no question that BenefitCard's amended December 6, 2001 filing with the Connecticut secretary of the state, which was never subsequently updated or corrected, indicates that its address is in Fresno. The testimony reveals, however, that its address, like other aspects of the entity was also a fiction; BenefitCard conducted all business at BenefitPoint's office in San Francisco. Thus, BenefitCard's "principal place of business" was in San Francisco.
B. 1.
The defendants' next ground for dismissal, or at least to stay the action, is that the court lacks subject matter jurisdiction because the plaintiffs agreed to binding arbitration to resolve any disputes. As mentioned above, Christiani testified that he invested $30,000 in BenefitCard for 30,000 shares of stock. Indeed, the first allegation of the amended complaint states that "[t]he Plaintiffs assert claims of: Connecticut Securities Fraud; Common Law Fraud; Misrepresentation; Theft; Breach of Fiduciary Duty; Conversion; and Unfair Trade Practices arising from a protracted fraudulent scheme by which the Defendants induced the Plaintiffs to invest almost $700,000 in the now-worthless unregistered securities of a speculative start-up company known as BenefitCard Systems, Inc. (`BenefitCard')." Christiani signed a stock purchase agreement that stated, among other things, at § 6.7, "[t]he parties shall use reasonable good faith efforts to resolve any dispute relating to the subject matter of this Agreement by negotiations or through mediation with JAMS. If negotiation and mediation fail, any party may submit the dispute to final and binding arbitration . . . Mediation and arbitration shall take place in Santa Clara or San Mateo County, California . . . By entering into this Agreement, the parties have surrendered and waive the right to submit any dispute to a court or jury, or to appeal to a higher court." (Defendants' Exhibit [Exh.] 500.)
At the same time this stock agreement was signed, on or about August 1, 2001, the parties also entered into a "Marketing Services Agreement" that governed the respective obligations of BenefitCard and CPTR; this agreement was, however, silent on the topic of arbitration and mediation. Indeed, in § 6.8, "Jurisdiction and Venue," "[t]he parties hereto consent to the personal jurisdiction of all federal and state courts in Connecticut." (Plaintiffs' Exh. 100.) The plaintiffs, of course, argue that this provision, giving jurisdiction to this court, trumps the stock agreement, which they assert, at best, only concerns a small portion of the total investment.
The problem with this argument is, however, that the marketing agreement cannot be viewed as separate from the common stock purchase agreement. Notwithstanding the fact that the parties to the stock agreement are BenefitCard and Christiani and that the parties to the marketing agreement are BenefitCard and CPTR, the plaintiffs do not distinguish between Christiani, the individual, and CPTR, his hedge fund. As noted above, the first paragraph of the complaint states that "[t]he Plaintiffs assert claims . . . arising from a protracted fraudulent scheme by which the Defendants induced the Plaintiffs to invest almost $700,000 . . ." (Emphasis added.) Paragraph thirteen states, "CPTR LLC, is a Connecticut limited liability company ("CPTR") owned and controlled entirely by Michael and Nancy Christiani. CPTR has a principle place of business in Avon, Connecticut. (CPTR and Michael Christiani are collectively referred to herein as `the Plaintiffs')." The marketing agreement presumes that CPTR will invest $1 million in BenefitCard — an investment based upon 10 percent ownership in the company pursuant to the stock purchase agreement — and sets forth a method of repayment. Therefore, the investment by the plaintiffs originates with the stock purchase agreement that is inextricably intertwined with the marketing services agreement.
"[A]rbitration is a creature of contract and there must be an express agreement to arbitrate in order for the arbitrators to have authority and the court to have jurisdiction . . . Arbitration . . . is designed to avoid litigation and secure prompt settlement of disputes and is favored by the law . . . [A] person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which, he has agreed to do so . . . No one can be forced to arbitrate a contract dispute who has not previously agreed to do so . . . Therefore, [t]he authority for arbitration must be derived from the agreement of the parties . . . and the relevant provisions of applicable statutory directives." (Citations omitted; internal quotation marks omitted.) Lussier v. Spinnato, 69 Conn.App. 136, 142-43, 794 A.2d 1008, cert. denied, 261 Conn. 910, 806 A.2d 49 (2002).
General Statutes § 52-409 provides: "If any action for legal or equitable relief or other proceeding is brought by any party to a written agreement to arbitrate, the court in which the action or proceeding is pending, upon being satisfied that any issue involved in the action or proceeding is referable to arbitration under the agreement, shall, on motion of any party to the arbitration agreement, stay the action or proceeding until an arbitration has been had in compliance with the agreement, provided the person making application for the stay shall be ready and willing to proceed with the arbitration."
"To establish its right to a stay of proceeding under [Section 52-409] a movant must establish the following facts: (1) that both it and the plaintiff in the action sought to be stayed are parties to a written arbitration agreement; (2) that at least one issue involved in the action sought to be stayed is referable to arbitration under the agreement; and (3) that the movant is ready and willing to proceed with the arbitration." American Materials Corp. v. Eagle Crusher Co., Inc., Superior Court, judicial district of Hartford, Docket No. CV 03 0827738 (December 16, 2003, Sheldon, J.); see also Goldberg v. Goodwill Industries, Superior Court, judicial district of Hartford, Docket No. CV 05 4009642 (January 3, 2006, Keller, J.) ("[u]nder both state and federal law, the court must grant the defendant's motion for stay if it finds that at least one issue is referable to arbitration").
In the present case, there is no dispute that the defendants are ready and willing to arbitrate. Additionally, issues relating to the plaintiffs' investments, including the original $30,000 investment are referable to arbitration, even if the second agreement was silent on the subject. See Invotech, LLC v. Anderson, Superior Court, judicial district of Hartford, Docket No. CV 02 0820978 (February 2, 2004, Beach, J.) (holding that, where parties executed multiple agreements, document containing arbitration clause controlled those that were silent but deferred to that agreement); see also Lussier v. Spinnato, supra, 69 Conn.App. 145 (finding that trial court properly concluded that two documents must be read together as contract that contained valid arbitration clause). Furthermore, as to the issue of unnamed parties to the contract, some courts have found that, while not specifically named or a party to the document containing the arbitration clause, the individual corporate directors should be deemed to be a party for the purposes of the arbitration clause. See Office v. iEDI Group, Inc., Superior Court, judicial district of New Haven, Docket No. CV 01 0456900 (September 19, 2002, Booth, J.) (33 Conn. L. Rptr. 143, 144); Dodsworth v. Bridgeport Transit District, Superior Court, judicial district of Fairfield, Docket No. CV 99 0362734 (May 10, 2000, Moran, J.). As noted, the plaintiffs and BenefitCard, though Randazzo, agreed to arbitration to resolve any disputes. Accordingly, the defendants' request that this matter be stayed pending arbitration is granted.
2.
Finally, the defendants argue that this case should be dismissed as to the count for breach of fiduciary duty based upon a lack of subject matter jurisdiction because, as a derivative action by a shareholder, the plaintiffs failed to make a pre-suit demand. The defendants cite to Jaroslawicz v. Krass, Superior Court, judicial district of Danbury, Docket No. CV 98 0331117 (June 16, 1999, Moraghan, J.), and Royce v. Willowbrook Cemetey Ass'n., Superior Court, complex litigation docket at Stamford, Docket No. X05 CV 01 0185694 (October 21, 2002, Rogers, J.). The plaintiffs argue that a pre-suit demand would have been futile in this case.
"A shareholder's derivative suit is an equitable action by the corporation as the real party in interest with a stockholder as a nominal plaintiff representing the corporation . . . [T]he defendants in a derivative action may properly question whether the plaintiff has standing in equity to act as the nominal shareholder acting on behalf of the corporation and the other shareholders." (Citations omitted.) Barrett v. Southern Connecticut Gas Co., 172 Conn. 362, 370, 374 A.2d 1051 (1977). General Statutes § 33-722 provides, "[n]o shareholder may commence a derivative proceeding until: (1) A written demand has been made upon the corporation to take suitable action; and (2) ninety days have expired from the date the demand was made unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the ninety-day period." Additionally, General Statutes § 33-727 provides that the law of the state in which a foreign corporation, such as BenefitCard, was incorporated shall apply. BenefitCard was incorporated in Delaware, but it argues in its memorandum in support of their motion to dismiss that Connecticut and Delaware have "the same stringent pre-suit demand requirements." Indeed, "Rule 23.1 [of the Rules of the Delaware Chancery Court] requires plaintiffs in a shareholder derivative action to make a demand for redress on the board prior to suit, or to allege with particularity why such a demand would be futile." Goodrich v. Libero, Superior Court, judicial district of Danbury, Docket No. CV 0325566 (May 27, 1997, Moraghan, J.) (19 Conn. L. Rptr. 567, 571) (applying Delaware law on demand futility).
Section 33-727 provides, "In any derivative proceeding in the right of a foreign corporation, the matters covered by sections 33-720 to 33-727, inclusive, shall be governed by the laws of the jurisdiction of incorporation of the foreign corporation except for sections 33-723, 33-725 and 33-726."
In Jaroslawicz, the defendants moved to dismiss the action for failure to make such a demand upon the board of directors. Jaroslawicz v. Krass, supra, Superior Court, Docket No. CV 98 0331117. The court noted: "[t]he rationale for making a demand or, alternatively, offering a sufficient explanation for failure to make a demand, derives from the principle that the management of a corporation is entrusted to its board of directors who are responsible for acting in the name of the corporation and who are often in a position to correct the alleged wrongful acts without resorting to the courts." (Internal quotation marks omitted.) Id., citing Goodrich v. Libero, supra, 19 Conn. L. Rptr. 571, quoting RCM Securities Fund, Inc. v. Stanton, 928 F.2d 1318, 1326 (2d Cir. 1991).
"[D]emand can only be excused where facts are alleged with particularity which create a reasonable doubt that the directors' action was entitled to the protections of the business judgment rule." CT Page 3687 Aronson v. Lewis, 473 A.2d 805, 808 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). "Demand futility is gauged by the circumstances existing at the commencement of the derivative suit." Goodrich v. Libero, supra, 19 Conn. L. Rptr. 571.
"Demand futility under Rule 23.1 must be determined pursuant to either the standards articulated in Aronson v. Lewis [ supra, 473 A.2d 805], or those set forth in Roles v. Blasband [ 634 A.2d 927 (Del. 1993)]. Under the two-part Aronson test, demand will be excused if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. In Roles v. Blasband, this Court identified three circumstances in which the Aronson standard will not be applied: (1) where a business decision was made by the board of a company, but a majority of the directors making the decision has been replaced; (2) where the subject of the derivative suit is not a business decision of the board; and (3) where . . . the decision being challenged was made by the board of a different corporation. In those situations, demand is excused only where particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand." (Internal quotation marks omitted.) Braddock v. Zimmerman, 906 A.2d 776, 784-85 (Del. 2006).
In the present case, whether or not a decision of the board is at issue, the plaintiffs allege throughout the complaint that the directors are not disinterested or independent; rather, as discussed above, the plaintiffs claim divided loyalties and directorial interest. See Goodrich v. Libero, supra, 19 Conn. L. Rptr. 571-72 ("[d]irectorial interest exists whenever divided loyalties are present, or a director either has received, or is entitled to receive, a personal financial benefit from the challenged transaction which is not equally shared by the shareholders" [internal quotation marks omitted]). Specifically, they allege that Randazzo and Pulido, as officers and directors of the two companies, continuously misrepresented, among other things, that BenefitCard and BenefitPoint were affiliated businesses; that BenefitPoint was committed to the success of BenefitCard; and that BenefitPoint would generate substantial revenues for BenefitCard. Randazzo, of course, was a director and even chairman, as well as, at various times, the chief executive officer, president and treasurer of BenefitCard. Pulido, likewise, was a director of BenefitCard, as well as the chief executive officer of BenefitPoint. Ritch was both a member of the BenefitCard board and the chief executive officer of FBMC — the recipient of a substantial amount of the plaintiffs' money. Thus, as a result of the allegations and evidence, this court finds that demand would have been futile. Consequently, the defendants' motion to dismiss the breach of fiduciary count is denied.
As a practical matter, a demand would have also been futile because first, Christiani was running BenefitCard, according to Randazzo's testimony, and second, BenefitCard was out of business when this suit arose; therefore, a demand would have served no purpose. See, e.g., Pioche Mines Consolidated, Inc. v. Dolman, 333 F.2d 257, 264-65 (9th Cir. 1964) (finding demand futile where corporation defunct), cert. denied, 380 U.S. 956, 85 S.Ct. 1081, 13 L.Ed.2d 972 (1965); but see, e.g., Taylor v. Holmes, 127 U.S. 489, 492, 8 S.Ct. 1192, 32 L.Ed. 179 (1888) (finding demand required even though corporation extinct).
IV
For the above reasons, the motion to dismiss as DeGrosz is granted and the request for a stay to conduct arbitration is also granted. All remaining motions to dismiss are denied.