Ostrowski v. Avery
703 A.2d 117, 1997 Conn. LEXIS 484, 243 Conn. 355 (1997)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
In claims of corporate opportunity usurpation, once a plaintiff establishes a fiduciary relationship and the existence of a corporate opportunity, the burden shifts to the corporate fiduciary to prove fair dealing by clear and convincing evidence, either through adequate prior disclosure to disinterested parties (creating a safe harbor) or by demonstrating their conduct caused no harm to the corporation, with nondisclosure given special weight.
Facts:
- Avery Abrasives, Inc., a Connecticut corporation, manufactured abrasive cutting wheels, having focused on diameters of five inches and larger since 1970, although it previously manufactured smaller wheels.
- Raymond Avery was the president, CEO, and majority shareholder of Avery Abrasives, owning over 54% of its stock, while Craig Avery (Raymond's son) was the Vice President of Manufacturing and a director, and Michael Passaro was the finishing supervisor.
- In 1976, Craig Avery and Michael Passaro identified a market for small cutting wheels (less than four inches in diameter) and sought Raymond Avery’s consent to form their own corporation to pursue this opportunity while retaining their positions at Avery Abrasives.
- After obtaining Raymond Avery’s consent, Craig Avery and Michael Passaro incorporated International Small Wheels (ISW) on January 27, 1977.
- On January 28, 1977, Raymond Avery proposed to the Avery Abrasives board of directors that the corporation expand to manufacture small wheels, but neither Craig Avery nor Michael Passaro disclosed to the minority shareholders that ISW had already been formed to pursue this opportunity.
- ISW operated from 1976 until late 1989 or early 1990, manufacturing wheels less than four inches in diameter, purchasing large wheels at a discount from Avery Abrasives, selling finished wheels to Avery Abrasives, sharing some customers, and hiring several Avery Abrasives employees.
Procedural Posture:
- Minority shareholders of Avery Abrasives, Inc. (plaintiffs) brought an action in their individual capacities and derivatively on behalf of Avery Abrasives against Craig Avery and Michael Passaro (defendants) in trial court, alleging breach of fiduciary duties, usurpation of corporate opportunity, CUTPA violations, unjust enrichment, negligence, and fraudulent transfer (against Antoinette Avery).
- Avery Abrasives became a defendant on the motion of its special litigation committee, which had sought to dismiss the plaintiffs' cause of action; the trial court denied the motion, finding the committee's recommendation biased.
- After a court trial, Judge Moran concluded that the defendants, despite being corporate fiduciaries and having usurped a corporate opportunity, were not liable because they had obtained the consent of Raymond Avery, the president and majority shareholder.
- The plaintiffs appealed the trial court's judgment to the Appellate Court, claiming errors in the burden of proof, the effect of Raymond Avery's permission, disclosure requirements, and the CUTPA finding.
- The defendants cross-appealed, claiming the trial court improperly determined that the manufacture of small wheels was a corporate opportunity for Avery Abrasives.
- The appeal and cross-appeal were transferred from the Appellate Court to the Supreme Court of Connecticut pursuant to Practice Book § 4023 and General Statutes § 51-199 (c).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the burden of proof shift to corporate fiduciaries to demonstrate fair dealing by clear and convincing evidence, including appropriate disclosure or lack of corporate harm, once minority shareholders establish a fiduciary relationship and the existence of a corporate opportunity?
Opinions:
Majority - Peters, J.
Yes, the burden of proof shifts to corporate fiduciaries to demonstrate fair dealing by clear and convincing evidence, including appropriate disclosure or lack of corporate harm, once minority shareholders establish a fiduciary relationship and the existence of a corporate opportunity. The court reversed the trial court's judgment, holding that the trial court improperly placed the burden on the plaintiffs to prove the defendants violated their fiduciary duties, particularly regarding the usurpation of a corporate opportunity. Citing Konover Development Corp. v. Zeller and Katz Corp. v. T. H. Canty & Co., the court affirmed that once a plaintiff establishes a fiduciary relationship and the existence of a corporate opportunity, the burden shifts to the fiduciary to prove the fairness of their dealings by clear and convincing evidence. The court adopted a dominant "avowed business purpose" test (a variant of the "line of business" test), clarifying that it assesses whether the opportunity is closely associated with the corporation’s existing and prospective activities, its business purposes, and is adaptable to its existing business and resources. The court concluded that the trial court correctly found the manufacture of small wheels was a corporate opportunity for Avery Abrasives. Regarding defenses, the court adopted a "safe harbor" rule, similar to Broz v. Cellular Information Systems, Inc., stating that adequate prior disclosure of the opportunity to disinterested directors or shareholders constitutes an absolute defense to liability for usurpation. The court found that disclosure to Raymond Avery alone was insufficient because he was Craig Avery's father and not a "disinterested" party, and minority shareholders were not informed. In the absence of adequate disclosure, fiduciaries may still prove good faith by clear and convincing evidence that their conduct did not harm the corporation, but the fact of nondisclosure is given "special weight" in this determination. The court also clarified that if fiduciary duty violations are found on remand, the trial court must then determine if such misconduct constitutes a CUTPA violation (reiterating that actions to usurp business for another corporation can fall under CUTPA, citing Fink v. Golenbock and Larsen Chelsey Realty Co. v. Larsen) and whether Craig Avery's conduct constituted negligent breach of duty, which would then trigger the fraudulent conveyance claim.
Analysis:
This case significantly clarifies and strengthens the corporate opportunity doctrine in Connecticut by explicitly shifting the burden of proof to fiduciaries once a corporate opportunity and fiduciary relationship are established. By establishing a 'safe harbor' for full disclosure to disinterested parties, the ruling incentivizes transparency and independent oversight, particularly crucial for closely held corporations where family ties can create conflicts of interest. The requirement that nondisclosure be given 'special weight' in assessing harm further protects minority shareholders, ensuring fiduciaries cannot easily profit from undisclosed opportunities. This framework provides greater clarity for corporate governance and enhances accountability for officers and directors.
