Bontempo v. Lare (Md. Ct. Spec. App.)

Filed: April 30, 2014

Opinion by: Douglas R. M. Zanarian

Holding:

(1) When a minority stockholder petitions a court for dissolution pursuant to Md. Code Ann., Corps. & Ass’ns § 3-413 (the “dissolution statute”), such stockholder’s rights will be informed by any existing stockholder agreement and, where there is no evidence of a deadlock of the board of directors or that the company is likely to become insolvent, the court has discretion under the statute to order alternatives to the extraordinary remedy of dissolution.

(2) The dissolution statute does not provide for personal liability, even if fraud is proven.

(3) The proper remedy when a court finds an officer or director has breached his or her fiduciary duties to the company by diverting money from the company for personal use is an order directing such officer or director to repay such money to the company, not an order requiring the company to declare equivalent distributions for all stockholders.

(4) An award of attorneys’ fees and expenses is only appropriate if the injured company has recovered a common fund.

(5) It is the trial court’s role to determine a party’s credibility and whether evidence is sufficient to support the existence of an oral contract.

Facts: Plaintiff became a minority stockholder of Quotient, Inc. (“Quotient”), a close corporation organized under Maryland law, in 2001. Plaintiff executed a shareholder agreement with the other stockholders of Quotient – the defendants, the Lares (a husband and wife collectively owning 55% of the stock in Quotient). In addition to being a director and officer of Quotient, Plaintiff was also an employee pursuant to an oral agreement with Mr. Lare, which Plaintiff alleged included that he would receive a salary equal to that of the Lares combined. In addition to certain “perks” (e.g., company credit cards for gas, meals and entertainment and a corporate fitness trainer), paid for by Quotient and received by Plaintiff and the Lares, the Lares began paying household employees from Quotient’s payroll account in 2006, advanced interest-free loans from Quotient to two companies in which the Lares had an interest and took a loan from Quotient for renovations to the Lares’ personal home. The relationship between Plaintiff and the Lares began to sour and in 2010 Mr. Lare terminated Plaintiff’s employment with Quotient after Plaintiff refused to voluntarily resign and sell his shares in Quotient. Plaintiff remained an officer and director of Quotient for six months after termination, however, and continued to receive distributions as a stockholder. Plaintiff filed suit against the Lares seeking relief pursuant to Maryland’s dissolution statute and asserted derivate claims on behalf of Quotient for imposition of a constructive trust, breach of fiduciary duty, and constructive fraud and a direct claim for breach of contract.

The trial court ruled in favor of Plaintiff as to his petition for dissolution; however, the trial court refused to dissolve Quotient and instead ordered Quotient to pay Plaintiff $167,638 in damages. The trial court also ruled in favor of Plaintiff as to his claim for breach of fiduciary duty and ordered that the misappropriated funds be treated as a distribution from Quotient and ordered Quotient to pay Plaintiff a proportionate amount, including attorney’s fees, but ruled in favor of the Lares as to Plaintiff’s claim for constructive fraud. The trial court ruled in favor of Plaintiff as to his claim for breach of contract and ordered Quotient to pay Plaintiff $81,818.18 in unpaid distributions, but refused to find an oral equal-compensation contract existed. Both parties appealed.

Analysis: The Court affirmed the holding of the trial court, including the trial court’s refusal to dissolve Quotient; however, it found that the trial court erred in how it allocated the damages.

Although the Court upheld the trial court’s finding, not contested on appeal, that Mr. Lare’s behavior met the standard for oppressive conduct, particularly his threat and ultimate firing of Plaintiff for refusing to voluntarily resign and sell his shares in Quotient, the Court also upheld the trial court’s conclusion that dissolution was not the only available remedy. The Court noted that it was Plaintiff’s status as a stockholder of Quotient, as defined by the shareholder agreement, that defined and bound the rights he was entitled to vindicate under the dissolution statute and the appropriate remedies. Unlike in Edenbaum v. Shcwarcz-Osztreicherne, 165 Md. App. 233 (2005), the Court noted that the shareholder agreement did not mention Plaintiff’s employment rights, thus the shareholder agreement did not give Plaintiff a reasonable expectation of employment or provide an enforceable to such. Instead, the Court found that Plaintiff was entitled to participate in distributions and the affairs and decisions of Quotient consistent with his status as a stockholder. Although Mr. Lare’s actions frustrated such rights, Plaintiff had resigned from Quotient’s board of directors and thus there was no evidence of a deadlock justifying dissolution, nor was there any evidence to suggest that, despite the use by the Lares of Quotient’s funds for personal expenses, Quotient was likely to become insolvent. Therefore, the extreme remedy of dissolution was inappropriate.

The Court also held that the Lares could not be personally liable under the dissolution statute, even if their actions constituted fraud, because the purpose of that statute is to vindicate the reasonable expectations of minority stockholders, in such capacity, against oppression by majority stockholders. Plaintiff’s injury as a minority stockholder was lost distributions, and thus, Plaintiff was made whole by accounting to determine how much money the Lares diverted from Quotient and an order to pay distributions to Quotient stockholders based on the amounts diverted.

The Court also agreed that the Lares had breached their fiduciary duties as directors and officers of Quotient by diverting money from Quotient for personal use; however, the Court held that the trial court erred in ordering a distribution to all stockholders as a remedy. The Court noted that it was Quotient, not Plaintiff, who was harmed because it was Quotient’s money that was taken by the Lares and, thus, distributions would not make Quotient whole but would instead take more money from Quotient. The Court held that the appropriate remedy would have been ordering the Lares to repay Quotient for the money taken. Because such payment would result in a recovery by Quotient of a common fund, the Court noted that an award by the trial court on remand of attorneys’ fees and expenses would be appropriate under the common fund doctrine.

Despite holding that the Lares had breached their fiduciary duties to Quotient, the Court affirmed the trial court’s ruling in favor of the Lares as to Plaintiff’s claim for constructive fraud. Although constructive fraud usually arises from a breach of fiduciary duty, the Court noted that they are not equivalent and that “a director can breach fiduciary duties without committing fraud.” The Court found that, although the Lares had used bad judgment in using funds from Quotient for their personal expenses, they had not engaged in a long course of illegal or fraudulent conduct, especially since all of the transactions were recorded on the books of Quotient and Plaintiff had access to such books. For the same reason, the Court found that the Lares did not act with malice.

Finally, the Court found that the trial court committed no error in refusing to find that an oral equal-compensation contract existed between Plaintiff and Quotient. Although Plaintiff and his wife testified to the oral equal-compensation agreement and evidence showed that Plaintiff was paid a salary equal to the Lares for four years, there was also evidence that, for multiple years in the beginning and towards the end of his employment, the salaries of Plaintiff and the Lares differed significantly. The Court noted that it was the trial court that heard the evidence and it was not for the Court to determine on appeal whether the trial court gave appropriate weight to the parties’ credibility.

The full opinion is available in PDF.

Monmouth Meadows HOA, Inc. v. Hamilton; Montpelier HOA, Inc. v. Thomas-Ojo; Constant Friendship HOA, Inc. v. Tillery (Ct. of Appeals)

Filed: July 27, 2010

Opinion by Judge Sally D. Adkins

Held: In calculating attorneys' fees in breach of contract cases between private parties where the award of fees is not based on the terms of the contract, it is improper to use either the lodestar method or to calculate the attorney's fee by applying a flat percentage of the amount claimed. Instead, courts should use the factors set forth in Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as a rubric for determining the reasonable attorneys' fees to award.

Facts: This opinion grew out of a number of cases involving claims by howeowners' associations against some of their members for delinquent association fees. As a condition of membership in each of the HOAs, each of the defendants was contractually obligated to pay annual assessments to their respective HOA and interest and late charges were assessed on any past due amounts that were owed for the annual assessments.

In each case, when the Defendant Resident did not pay the annual assessments or late fees when due, their respective HOA directed the law firm of Nagle & Zaller, P.C. to collect the debt. After Nagle & Zaller's attempt to collect the debt by contacting each of the Defendant Residents in writing was unsuccessful, each of the HOAs established and recorded liens on the property of their respective Defendant Resident in accordance with the Contract Lien Act as authorized by Section 14-203 of the Real Property Article of the Maryland Code, notified their respective Defendant Resident of the lien and demanded payment of the debt and the HOA's attorneys' fees in pursuing collection of the debt. When payment was not received, each HOA, through Nagle & Zaller, initiated suits against their respective Defendant Resident seeking payment of the debt and attorneys' fees as calculated by the lodestar method.

In each case, the district court elected to not use the lodestar method to calculate the attorneys' fees that would be awarded to the HOA, but instead awarded attorneys' fees based on a flat percentage of the principal amount sought by the HOA. Each HOA appealed the fee award to the applicable Circuit Court.

Certain cases were first appealed to the Circuit Court for Harford County. That court awarded the fees that each HOA incurred during its trial in the district court and did not award any fees that were incurred in the appeal process.

One case was initially appealed to the Circuit Court for Prince George's County. In that case, the Circuit Court held that it was not appropriate to use the lodestar method to calculate the attorneys' fees that were due to the HOA. It then looked to Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as guidance. Concluding that the attorneys' fees requested by the HOA was unreasonably high for the work actually required, the Circuit Court for Prince George's County reduced the fee award to the HOA to $300.00 and did not award any fees that were incurred by the HOA during its appeal.

Analysis: Before addressing the argument by each of the HOAs that the lodestar method is the proper method that should be used in each of their cases for calculating the award of attorneys' fees, the Court of Appeals first explained that a court that uses the lodestar method calculates the fee award by multiplying the number of hours reasonably spent pursuing a legal matter by a reasonable hourly rate for the type of work performed and then adjusts the amount based on its view of the following external factors )set forth, and approved by the US Supreme Court, in Blanchard v. Bergeron, 489 U.S. 87 (1989):

(1) the time and labor required;
(2) the novelty and difficulty of the questions;
(3) the skill requisite to perform the legal service properly;

(4) the preclusion of other employment by the attorney due to acceptance of the case;
(5) the customary fee;
(6) whether the fee is fixed or contingent;
(7) time limitations imposed by the client or the circumstances;
(8) the amount involved and the results obtained;

(9) the experience, reputation, and ability of the attorneys;
(10) the 'undesirability' of the case;
(11) the nature and length of the professional relationship with the client; and
(12) awards in similar cases.

The court noted that the lodestar method could lead to fee awards that are much larger than the principal amount sought. The Court of Appeals then noted that, as established by its precedent in Friolo v. Frankel , the lodestar method is only generally appropriate in the context of fee-shifting statutes where the goals of public policy are advanced, such as in complex civil litigation involving challenges to institutional practices or conditions.

Because the Defendant Residents were obligated to pay the attorneys' fees to the HOAs as a result of the contract that was entered into by each of the Defendant Residents when they became a member of their respective HOA and not as a result of public policy or a fee-shifting statute, the Court of Appeals concluded that the lodestar method was not the appropriate method that should be used to calculate the fee award. Instead, agreeing with the method used by the Circuit Court for Prince George's County, the Court of Appeals held that a trial court should use the factors set forth in Rule 1.5 of the Maryland Lawyers' Rules of Professional Conduct as the foundation of its analysis in determining what constitutes a reasonable fee when the court is awarding attorneys' fees based on a breach of contract case where the award of fees is based on the terms of the contract. The Court also held that it was error to automatically apply a percentage of recovery "without a substantive inquiry into the appropriateness of [such an] award[]."

The full opinion is available in pdf.

Thomas v. Capital Medical Management Associates, LLC (Ct. of Special Appeals)

Date: December 7, 2009
Opinion by Judge Alexander Wright, Jr.

Held:

Because the defendants, a doctor and a medical practice, failed to raise negative averments in their answer concerning their capacity to be sued, they were precluded from disputing their status as parties to the contract. Further, because terms in the agreement were found to be ambiguous, parol evidence was admissible to prove that the defendants had additional duties to facilitate the plaintiff billing company's collection efforts. The plaintiff was entitled to recover lost profit for work yet to be performed because it was able to prove the losses with reasonable certainty. Finally, because the indemnification clause in the agreement did not expressly provide for recovery of attorney fees in a first-party enforcement claim, the plaintiff was precluded from recovering attorney fees and costs.

Facts:

The defendant doctor and medical practice retained the plaintiff billing company to process its bills. The billing company terminated the contract after 16 months and sued, alleging that the defendants failed to provide the billing company with timely information, failed to compensate the billing company, and failed to take steps necessary to ensure that the bills processed by the billing company would be paid.

The trial court ruled in favor of the billing company and awarded it contract damages, including lost profit for work not yet performed. The trial court also awarded attorneys' fees and costs.

The defendants appealed, arguing four issues: (1) The defendants were not proper parties to the lawsuit; (2) The defendants had no contractual duty to provide the information and assistance at issue; (3) The plaintiff was not entitled to damages for work yet to be performed; and (4) The plaintiff was not entitled to attorneys' fees pursuant to the contract's indemnification clause.

Analysis:

(1) The defendants were parties to the agreement

The defendants argued that neither was actually a party to the contract. The Court rejected the argument. The Court noted that the defendants failed to raise negative averments concerning their capacity in the answer as required by Maryland Rule 2-323(f). Instead, the defendants admitted that there was an agreement between the parties and averred that it spoke for itself. Accordingly, the Court held that a written contract was properly executed between the parties and the defendants were bound by it.

(2) Parol evidence established that the defendants had duties to facilitate the plaintiff's billing work

The trial court accepted the plaintiff's theory that the defendants had a duty to provide demographic information and to perform certain credentialing so that the plaintiff could process the defendants' bills. On appeal, the defendants argued that there was no such duty written into the contract. The Court found the terms of the contract ambiguous. Reviewing the parol evidence, the Court concluded that the trial court properly held that the defendants had such a duty.

3. The plaintiff was properly awarded damages for lost profits

The defendants argued that the award of damages for lost profit on future work was entirely speculative. The Court stated that a claimant may recover for lost profit if the loss is reasonably foreseeable and can be proven with reasonable certainty. Damages can be proven by reference to some fairly definite standard, such as market value, established experience, or direct inference from known circumstances.

At trial, the plaintiff proved its lost profit by means of testimony from its billing manager. She had experience in medical billing and was acquainted with the plaintiff's transactions. After considering the records of prior collections, she calculated an estimate of the lost expected profit on the work yet to be performed. The Court approved of the method and affirmed the award.

4. The plaintiff was not entitled to recover for attorneys' fees

An indemnification clause in the contract was the only clause that provided for recovery of attorneys' fees. The Court noted that a party may recover attorneys' fees pursuant to contract only if the contract expressly provides for it. Here, the indemnification clause did not expressly provide for attorney's fees for enforcement in a first-party breach of contract action. Accordingly, the Court held that the plaintiff was not entitled to recover its fees from the defendants.

The full opinion is available in PDF.

Saul Holdings Limited Partnership, et al. v. Raquel Sales, Inc. and Barefeet Enterprises, Inc. (Cir. Ct. for Mont. County)

Filed August 27, 2009
Opinion by Judge Durke G. Thompson

Held: When accelerated rent clauses provide for the payment to the landlord of a lump sum over a lengthy term and also allows the landlord the present possession of the leased premises with no incentive to mitigate its damages, the accelerated rent clause will be found to speculative and unenforceable as a penalty.

Facts: On or about January 23, 2006, Raquel Sales, Inc. (“RSI”) entered into a 10-year shopping center retail lease with Saul Holdings Limited Partnership for space in the South Dekalb Plaza Shopping Center in Decatur, Georgia and a 10-year shopping center retail lease with Briggs Chaney Plaza, LLC for space in the Briggs Chaney Shopping Center in Silver Spring, Maryland. Barefeet Enterprises, Inc. (“BFI”) executed a guaranty for each of the 10-year shopping center retail leases, whereby BFI guaranteed RSI’s performance under the terms of each of the leases, including payment of all obligations and liabilities under the terms of the leases.

On or about August 1, 2007, RSI abandoned the leased space in the shopping center in Georgia and failed to pay the rent and other fees due under the lease since October of 2007. RSI also abandoned the leased space located in Maryland in October of 2008 and ceased paying the rent and other fees due under the lease beginning in November of 2008. Saul and Briggs Chaney filed suit in the Circuit Court for Montgomery County for breach of lease against RSI and breach of guaranty against BFI seeking damages for unpaid rent and accelerated rent due under Section 29(c) of each lease.

The Court ruled that the accelerated rent due under Section 29(c) of the Georgia lease upon the breach of the lease was not permitted under Georgia law as liquidated damages, but was considered a penalty because the damages were too speculative and uncertain. The Court also found that Saul was entitled to any deficiency resulting from its re-letting of the leased space under its new 5-year lease with a replacement tenant.

With regard to Briggs Chaney, the Court similarly ruled that the accelerated rent due under Section 29(c) of the Maryland lease upon breach of the lease was not permitted under Maryland law as liquidated damages but was considered a penalty because it would disincentivize Briggs Chaney from mitigating its damages. Moreover, the Court determined that the length of the remaining lease term was far too long to fairly calculate Briggs Chaney’s damages resulting from RSI’s default. Thus it concluded that RSI was liable only for those damages resulting from Briggs Chaney’s inability to re-let the premises despite it using commercially reasonable efforts.

The Court also found BFI liable to each of Saul and Briggs Chaney for RSI’s default in accordance with the terms of the damage provisions set forth in each respective guaranty.

Analysis: In determining whether the accelerated rent due under Section 29(c) of the Georgia lease was liquidated damages or a penalty under Georgia law, the Court reviewed previous opinions of the Georgia Court of Appeals. Specifically, the Court applied the precedent set by the Georgia Court of Appeals in Peterson v. P.C. Towers, L.P., 206 Ga. App. 591 (1992), where the Georgia Court of Appeals held that accelerated rent provisions were enforceable liquidated damage clauses if the injury caused by the breach was difficult or impossible to accurately estimate, the parties to the lease intended to provide for damages rather than a penalty, and the sum stipulated in the accelerated rent provision was a reasonable pre-estimate of probable loss. This lead the Court to conclude that the damages provided for in Section 29(c) of the Georgia lease were too uncertain and speculative and, therefore, a penalty. Moreover, because Section 29(c) of the Georgia lease did not either require Saul to mitigate its damages by re-letting the premises or account for the possibility that Saul would re-let the premises, the Court found that awarding Saul the accelerated rent would provide Saul with present possession of the premises and a lump sum award for the lengthy 7 years remaining in the term, even though the awarded damages bore no relation to the actual damages suffered by Saul.

Although Maryland case law allows parties to a lease agreement to impose liability for rent, damages or any deficiency arising after re-letting premises, the question of whether accelerated rent provisions were permitted as liquidated damages had not been addressed by Maryland Courts. Because Maryland courts have generally enforced liquidated damages provisions that provide for a fair estimate of potential damages at the time that the parties entered into the contract and if the damages were incapable of being estimated at the time the parties entered into the contract, for Section 29(c) of the Maryland lease to be enforceable as a liquidated damages clause it would have to meet that standard. Briggs Chaney argued that Section 29(c) was enforceable as liquidated damages because it provided a reasonable estimate of potential damages by calculating the monthly rent at the amount due at the time of default and not at the increased amounts due in future months. Moreover, it contended that lease alleviated any concerns regarding awarding a lump sum payment of future rent for the remainder of the lease term because Maryland law required Briggs Chaney to mitigate its damages.

The Court ultimately held that Section 29(c) of the Maryland lease was a penalty and not enforceable as liquidated damages because it did not provide a fair estimate of the potential damages that would arise out of RSI’s breach of the lease. Rather, the lease provided for damages that were disproportionate to the damages that might be reasonably expected to result from RSI’s breach. As with Saul, the Court found that by awarding the lump sum provided for under Section 29(c), the Court would be providing Briggs Chaney a lump sum award for payment of rent for the remainder of the lengthy term and, at the same time, would allow the landlord present possession of the premises. As a result, Briggs Chaney would have no incentive to re-let the premises during the remainder of the term.

The Court also awarded the plaintiffs attorneys' fees and there is a brief discussion of the procedure and standards to be followed in awarding such fees.

The full opinion is available in PDF.

On November 2, 2009, the Court entered a judgment against RSI in the amount of $704,365.45 and against BFI in the amount of $402,970.53.

Mervis Diamond Corp. v. Congressional Hotel Corp. (Cir. Ct. Mont. County)

Filed October 1, 2009

Opinion by Judge Ronald B. Rubin

Held: When there is a remand after an appeal, the prevailing party is not automatically barred from recovering fair, reasonable, and necessary contract-based attorneys' fees incurred as a consequence of the second trial.

Facts: Mervis Diamond Corporation entered into a 10 year commercial lease with Congressional Hotel Corporation ("CHC") for retail space. Under the terms of the lease, CHC was to complete certain construction work prior to providing the premises to Mervis ("Landlord's Work"). When CHC did not respond to Mervis's inquiries regarding CHC's commencement of the Landlord's Work on the premises, Mervis filed suit on March 16, 2005 in Circuit Court for Montgomery County for (1) breach of contract; (2) specific performance; and (3) a temporary restraining order to prevent CHC from demolishing the premises.

The Circuit Court ruled that CHC had breached the lease and entered judgment ordering CHC to specifically perform its obligations under the lease. The Circuit Court also enjoined CHC from performing any work on the premises other than the Landlord's Work and awarded Mervis damages for lost profits. In addition to lost profits, the Circuit Court also awarded Mervis attorneys' fees in accordance with Section 25.01 of the lease (a fee shifting provision that provided for the prevailing party to receive reasonable attorneys' fees).

On appeal, the Court of Special Appeals reversed the Circuit Court's ruling on lost profits because it concluded that the correct date to be used for calculating lost profits was the date CHC should have completed the Landlord's Work and not the date used by the Circuit Court, namely the date that CHC was to commence the Landlord's Work.

Analysis: On remand, CHC argued that Mervis was barred from recovering any amount of attorneys' fees from the second trial because Mervis's incorrect argument regarding lost profits necessitated the second trial. The Circuit Court found that the argument asserted by Mervis during the first trial, although incorrect, was not unreasonable and awarded attorneys' fees to Mervis for the second trial. Moreover, CHC, after remand, pursued an aggressive defense, raising many issues and arguments not pursued during the first trial. Thus, the Court found that the second trial bore little resemblance to the first trial.

The full opinion is available in PDF.