## Facts

- Jerrold Metcoff and David Wilson were major stockholders of Midcore Software, Inc. (Midcore Software).
- NCT Group, Inc. (NCT Group), NCT Midcore, Inc. (later known as Midcore Software, Inc.), and Midcore Software entered a merger agreement calling for a merger between Midcore Software and NCT Midcore, with NCT Midcore as the surviving corporation.
- As part of the merger transaction, plaintiffs were to receive certain royalties and shares of NCT Group stock.
- Plaintiffs alleged that NCT Group and NCT Midcore breached the merger agreement and that plaintiffs did not receive what they were owed (including stock and other consideration), and they pleaded that they were creditors of NCT Group.
- Plaintiffs did not sue NCT Group or NCT Midcore; instead, they sued only six individuals who were officers and/or directors of NCT Group, including Irene Lebovics.
- The revised complaint (256 paragraphs) included allegations that, after NCT Group became insolvent, the individual defendants owed fiduciary duties to creditors and breached those duties through conduct such as:
  - authorizing fraudulent transfers of NCT Group assets,
  - taking excessive compensation (including bonuses and stock options), and
  - engaging in self-dealing transactions involving entities controlled by certain defendants.
- Plaintiffs did not make a pre-suit demand on the board; they alleged demand would have been futile.
- Plaintiffs pleaded two counts against the individual defendants: (1) breach of fiduciary duty and (2) violation of the Connecticut Unfair Trade Practices Act (CUTPA), premised on the alleged fiduciary breaches.
- Defendants moved to strike both counts.

## Issues

1. Whether plaintiffs, as alleged creditors of an insolvent Delaware corporation, stated direct fiduciary-duty claims against directors/officers based on alleged corporate mismanagement and diversion of assets, or instead asserted derivative claims belonging to the corporation.
2. Whether the complaint adequately satisfied Delaware’s derivative-suit requirements—either by alleging a pre-suit demand or pleading demand futility with the required specificity.
3. Whether the alleged director/officer conduct, largely involving internal corporate management and governance, stated a claim under CUTPA as “unfair or deceptive acts or practices in the conduct of any trade or commerce.”

## Decision

- The court granted the motion to strike the revised complaint in its entirety.
- The breach-of-fiduciary-duty count was stricken because the allegations primarily described harm to NCT Group (e.g., waste, self-dealing, excessive compensation, and improper transfers) and therefore sounded in derivative, not direct, claims.
- Applying Delaware law (as NCT Group was a Delaware corporation), the court concluded the complaint did not plead demand futility with sufficient particularized facts to permit a derivative action to proceed.
- The CUTPA count was also stricken because it rested on the same underlying allegations and did not state an actionable CUTPA theory based on internal corporate governance conduct rather than marketplace trade-or-commerce activity.

## Legal Principles

- The direct-versus-derivative inquiry focuses on the nature of the alleged injury and who would receive the benefit of any remedy; claims centered on mismanagement, corporate waste, diversion of corporate assets, or self-dealing typically belong to the corporation and must be brought derivatively.
- Corporate insolvency may give creditors standing to pursue certain claims on the corporation’s behalf, but it does not transform corporate-injury claims into direct fiduciary-duty claims for individual creditors.
- For a Delaware corporation, Delaware law governs the prerequisites for derivative litigation; a plaintiff must either make a pre-suit demand on the board or plead demand futility with particularized factual allegations, not conclusory assertions.
- A plaintiff cannot avoid derivative-action requirements by styling a corporate-harm case as an individual creditor action seeking recovery tied to a contract dispute.
- CUTPA requires unfair or deceptive conduct in the conduct of trade or commerce; allegations aimed at internal corporate management decisions and alleged fiduciary breaches, without more, generally do not state a CUTPA claim.

## Conclusion

Metcoff held that plaintiffs’ allegations against NCT Group’s directors—though framed as creditor claims following insolvency and a failed merger consideration payout—were, in substance, claims for harm to the corporation that had to be pursued derivatively under Delaware law and were inadequately pleaded because demand futility was not supported by particularized facts; the related CUTPA count failed as well because it repackaged the same internal corporate-governance allegations and did not plead actionable trade-or-commerce misconduct.


Metcoff v. Lebovics, 977 A.2d 285 (2007)