Standing is Slippery Subject Matter

Standing is slippery subject matter, as made clear in the Connecticut Appellate Court’s decision in R.S. Silver Enterprises, Inc. v. Pascarella, to be officially released on February 9, 2016.

The essence of this dispute was that plaintiff, a real estate brokerage, invested $1,250,000 in defendant’s real estate project in exchange for a share of the project’s profits. Plaintiff later transferred its brokerage assets to a new company and ceased operating. Apparently, plaintiff’s principal later realized that defendant never paid plaintiff any share of profits. Plaintiff sought and obtained reinstatement as a corporation from the Secretary of State. It then sued defendant for breach of contract, breach of fiduciary duty and an accounting.

Defendant asserted twenty-two special defenses, including two that called plaintiff’s standing into question. The twenty-first special defense challenged plaintiff’s standing with a claim that plaintiff had assigned its rights under the contract it claimed defendant breached when it transferred its brokerage assets to the new company. The sixth special defense challenged standing on the ground that the Secretary of State should not have reinstated plaintiff as a corporation.

On plaintiff’s motion to strike, the trial court struck the twenty-first and sixth special defenses, and eighteen others. The case was tried to the court, who ultimately (more on that later) found for plaintiff on the breach of contract claim and awarded damages.

Defendant appealed. The Appellate Court remanded to the trial court for determination of the twenty-first special defense, presumably because it implicated standing. The Appellate Court retained jurisdiction over defendant’s other claims pending the trial court’s decision. The trial court conducted an evidentiary hearing and determined that plaintiff had not assigned its interest in the contract it had with defendant.

Because the trial court rejected the twenty-first special defense, the case returned to the Appellate Court for review of that determination as well as defendant’s other claims on appeal.

The Appellate Court affirmed.

Arguments on Appeal

Defendant maintained that plaintiff lacked standing because it had assigned its contract interest to the new company and “lacked the legal capacity to bring this action because it should have been
barred from reinstatement as a Connecticut corporation before this action was commenced.”

Defendant also argued that the trial court should not have struck its second and fourth special defenses which alleged that public policy precluded plaintiff from pursuing this matter because plaintiff (i) obtained reinstatement through a fraud on the Commissioner of Revenue Services; and (ii) engaged in bankruptcy fraud when it entered into the contract at issue and thus had unclean hands.

Defendant also argued that the trial court’s judgment was ‘‘ineffective because it was issued 966 days after the completion of trial in violation of . . . General Statutes § 51-183b [which requires a court to issue a decision on a matter heard by it within 120 days from the date of the end of the proceeding].’’

Appellate Court’s Conclusions

The Appellate Court agreed with trial court that the contract pursuant to which plaintiff transferred assets to the new company unambiguously transferred only brokerage assets. Plaintiff’s interest under the contract with defendant was not a brokerage asset and was not listed in the schedule of assets transferred. So, plaintiff still owned the contract interest.

Next, defendant based its “lack of legal capacity” argument on its claim that plaintiff obtained corporate reinstatement from the Secretary of State through a fraud on the Commissioner of Revenue Services. The court noted that defendant already had brought a separate action on this fraud issue against the Commissioner of Revenue Services, the Secretary of State and plaintiff. The trial court in that separate action dismissed it, finding that defendant did not have standing to challenge plaintiff’s reinstatement because defendant was not aggrieved by plaintiff’s reinstatement. Aggrievement is an element of standing. The Appellate Court affirmed and the Supreme Court denied certification. Since defendant did not have standing to raise the issue in a separate action, it did not have standing to raise it as a defense in this action.

The court rejected defendant’s first public policy argument for the same reason: defendant lacked standing to challenge plaintiff’s reinstatement. The court also rejected defendant’s bankruptcy fraud-unclean hands public policy argument. Fleshing it out a bit more, defendant’s  claim was that plaintiff was in bankruptcy when it invested with defendant and had promised the investment funds to its creditors as part of the bankruptcy. The court first noted that the special defense said nothing about unclean hands. Even if defendant’s allegations could be read as asserting that defense, the unclean hands must have some relation to the activities at issue in the instant case. The possibility that the investment funds should have gone to plaintiff’s creditors does not change the fact that the investment funds actually went to defendant. If plaintiff’s hands were unclean, they were unclean as to its bankruptcy creditors, not as to defendant.

The Appellate Court agreed with the trial court’s conclusion as to defendant’s “timeliness of decision” argument.  As its decision deadline approached after the trail and post-trial briefing, the trial court had asked for an extension of its time to decide. All parties consented and no party placed any limitation on its consent. The trial court found for plaintiff on the breach of contract claim but only as to liability. It reserved decision on the accounting claim because it was unclear whether plaintiff, having prevailed on the breach of contract claim, still wanted an accounting. It also reserved decision on the amount of damages for the breach of contract claim because the amount could be affected by an accounting if there was going to be one. The court asked the parties to submit additional briefing on those issues, which they did. Defendant later initiated motion practice essentially claiming that its consent was to a “reasonable” extension and the court had taken too long. The trial court denied the motions on the ground that defendant’s unconditional consent to the court’s requested extension was a waiver of any time limit on the court’s decision. The trial court ultimately issued a final judgment denying the accounting claim and awarding damages on the breach of contract claim.

Impact

This decision tells me that standing is slippery subject matter. First on my list of things that confuse me is that it is well-settled that standing is an aspect of subject matter jurisdiction, which cannot be waived. The law also is clear that plaintiff has the burden of proof on standing. For these reasons, a defendant does not have to raise lack of standing as a special defense. Though I didn’t mention it above, the court ascribed the burden of proof on the standing issue to defendant. It seems to me that plaintiff should have had that burden. It probably would not have changed the outcome but I like to have clarity.

Next, the reinstatement question is really one of capacity to sue. It seems to me that if plaintiff obtained its capacity to sue (i.e., corporate reinstatement) through fraud, it never really obtained capacity to sue. If a plaintiff who lacks capacity to sue also lacks standing, the court’s focus should have been on whether plaintiff lacked capacity to bring the instant action, not on whether defendant lacked standing to raise the issue as a plaintiff in a separate action. In other words, defendant’s aggrievement, or lack of it, is irrelevant to whether plaintiff lacks standing.

Lastly, if you don’t want the court to have as much time as it wants to decide something, you have to limit your consent to an extension of time.