Bontempo v. Lare (Md. Ct. of Appeals)

Filed: August 6, 2015

Opinion by: Robert N. McDonald

Holdings:

(1) The standard for determining whether a minority shareholder has been “oppressed” by the majority is the shareholder’s “reasonable expectations” upon obtaining an ownership interest in the company. This standard does not, however, dictate the type of equitable relief a trial court must provide, unless it is to be dissolution of the company.

(2) A breach of fiduciary duty to a corporation does not constitute fraud, absent a finding of fraud by the court. In this case, the majority shareholder’s self-dealing was a breach of his fiduciary duty, but because it did not involve deception, it did not rise to the level of fraud. The requested remedies of dissolution of the company and an award of punitive damages were therefore denied.  

Facts: See prior summary of Bontempo v. Lare (Md. Ct. Spec. App.).

Analysis:

The Court agreed with the opinions of the Circuit Court and the Court of Special Appeals on the standard for determining whether a minority shareholder has been “oppressed”: The court should look to the shareholder’s “reasonable expectations” at the time of acquiring an ownership interest in the company. If oppression has occurred, then dissolution of the company can be a remedy.

The Court of Appeals found, however, that even upon a finding of oppression, other, less punishing remedies can also be considered. In choosing a possible remedy, the court should take into account other stakeholders who may be affected, including other shareholders, managers, employees, and customers.

In this instance, Plaintiff argued that he had a reasonable expectation of future employment when he acquired a stake in the company. He said his investment, in the form of sweat equity, should trump his status as an at-will employee. The Court said a “reasonable expectation” can be used to determine whether oppression has occurred but does not dictate what form of equitable relief a court should grant. In addition, reinstating Plaintiff as an employee would not have been a viable option because he and Defendant could not reasonably have been expected to run a business together.

A provision in the shareholder agreement requires an employee to sell his stock upon termination “for cause.” Plaintiff argued that this provision effectively created an employment agreement, overriding his status as an employee at will. The Court was unpersuaded by this argument as well, noting that a buy-out requirement when a shareholder-employee is terminated for cause does not imply that the individual may be terminated only for cause.

On another mater, Plaintiff asked the Court to reconsider his allegations of fraud, which the Circuit Court had denied. He argued that Defendant’s breach of his fiduciary duty to the company constituted fraud as to the company itself and to Plaintiff as an oppressed shareholder.

The Court affirmed the lower court’s finding, noting that although Defendant’s self-dealing did constitute a breach of his fiduciary duty to the company, he made no attempt to conceal the activity. The illicit personal expenditures from the corporation’s accounts were entered into the company’s books, to which Plaintiff had full access.

Plaintiff made his allegations of fraud in connection with seeking dissolution of the company and an award of punitive damages for his benefit. As to the request for punitive damages, the Court said that they are not available as an equitable remedy and that, in any event, a finding of fraud would not support an award of punitive damages.

The full opinion is available in PDF.

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.

Kimberly Pinsky v. Pikesville Recreation Council (Ct. of Special Appeals)

Filed: October 30, 2013
Opinion by Judge Robert A. Zarnoch

Held:

Directors and officers of an unincorporated nonprofit association may be held liable for contracts entered into by the association if they authorized, assented to or ratified the contract in question.

Facts:

Defendant, an unincorporated nonprofit association, hired plaintiffs to work in a pre-school. Before the end of their respective contract terms, defendant terminated plaintiffs pursuant to letters of termination. Plaintiffs sued defendant and its individual officers and directors to recover payments still owed to them, plus treble damages, attorney's fees, and costs. After a three-day bench trial, the circuit court entered judgment for plaintiffs, but rejected the claims against the individual directors and officers. The court also declined to grant appellants' motions for sanctions and for attorney's fees and costs. Plaintiffs appealed  the adverse judgment with respect to the individual directors and officers and the court's rulings on sanctions, attorney's fees, and costs.

Analysis:

The Court of Special Appeals noted that as an unincorporated association, defendant had at least some formal organization, as it operated under a constitution, bylaws and policy manual. Citing Littleton v. Wells & McComas Council, 98 Md. 453, 455 (1904) and Restatement (Second) of Judgements Sec. 61 cmt. a (1982) the Court found that unincorporated associations had the right to sue and be sued and that a judgement against the association alone does not reach the assets of its members.  Further, although no law explicitly permits unincorporated associations to enter into contracts, the Court indicated that this is a long-recognized and uncontroversial power (see Miller v. Loyal Order of Moose Lodge No. 358, 179 Md. 350, 356).

At common law, officers of an unincorporated association were personally liable for the debts of the association. Since the Court of Appeals= decision in Littleton, 98 Md. at 456, and the Legislature's subsequent enactment of the legislative predecessors to CJP  Sec. 11-105, a judgment rendered solely against an association does not, on its own, expose the association's officers to liability. Yet CJP Sec. 11-105 does not address whether the officers, if named personally, can be held liable in actions also brought against the association. The Court quoted Littleton, which observed that "[t]he statute does not take away the right existing at common law to sue the members of an unincorporated association, but the creditor has the option to sue either the association or the members; and, when the suit is against the former, a judgment obtained can only affect its joint property." The Court noted that it does not read Littleton as positing an either/or system of recovery.

Officers and other agents of associations, such as the defendant, are statutorily protected from personal liability for damages in any suit if the association maintains insurance coverage. CJP Sec. 5-406(b). The Court noted that, absent such insurance coverage, personal liability could attach.  The Court then turned to the case law of other states for a better understanding of when officers are personally liable, and since the majority of states have not enacted comprehensive statutes on unincorporated associations, the common law still generally covers the principles of liability.  The Court found a distinction in the case law between for-profit and nonprofit associations.  Individual liability of a for-profit organization is analyzed under partnership principles; individual liability of a nonprofit association is analyzed under agency principles. Therefore, in nonprofit associations, "a member is personally responsible for a contract entered into by the nonprofit association only - if viewing him as though he were a principal and the association were his agent - that member authorized, assented to, or ratified the contract in question." (See Karl Rove & Co. v. Thornburgh, 39 F. 3d 1273, 1284).  The Court went on to discuss ratification, authorization and assent to a contract.

The full opinion is available in PDF.

Raglani v. Ripken Professional Baseball, d/b/a Aberdeen Ironbirds (Maryland U.S.D.C.)

Filed: April 16, 2013
Opinion by Judge Catherine C. Blake

Held: Agreement requiring at-will employee to arbitrate disputes with employer, which recited only hiring and continued employment as consideration, which did not require employer to arbitrate, and which gave employer unilateral control over pool of potential arbitrators, was held unenforceable because it lacked mutuality of consideration and denied the employee access to a neutral arbitral forum.

Facts: Plaintiff was an employee at the Defendant company who was terminated in 2011.  Plaintiff alleged that she was discriminated against and terminated because of her gender and filed suit under Title VII of the Civil Rights Act of 1964 and Maryland state law.

When Plaintiff commenced employment with the Defendant company, she signed a Problem Support Policy that included “a valid and binding” arbitration agreement under which employees of the Defendant company promised to arbitrate disputes in consideration of only the employees’ hiring and continued employment.  Defendant had exclusive control over the list of potential arbitrators.  When an employee of Defendant elected to arbitrate a dispute, Defendant was to provide the employee with its list of qualified arbitrators from which the employee could choose.  The agreement required employees of the Defendant company to arbitrate but did not require the Defendant company to follow similar procedures or submit to arbitration.

Defendant filed a motion to dismiss or to stay and compel arbitration pursuant to the arbitration agreement signed by Plaintiff.

Analysis: Although the court acknowledged the Fourth Circuit’s liberal policy toward arbitration agreements, it emphasized it still must evaluate arbitration agreements as contracts.  The court therefore first analyzed whether the arbitration agreement was valid and enforceable.  The court found two independent reasons the arbitration agreement was unenforceable: (1) the agreement lacked consideration and (2) the agreement denied employees access to a neutral forum.  Because the arbitration agreement was unenforceable the court denied Defendant’s motion to dismiss the case or to stay and compel arbitration.

First, like all contracts, arbitration agreements must contain adequate consideration.  Cheek v. United Healthcare of Mid-Atlantic, Inc., 835 A.2d 656, 661 (Md. 2003); Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Noohi v. Toll Bros., Inc., 708 F.3d 599, 609 (4th Cir. 2013); Hill v. Peoplesoft USA, Inc., 412 F.3d 540, 543-44 (4th Cir. 2005).  The court followed the logic laid out in Cheek, supra, to conclude that employment or continued employment is not alone adequate consideration for an employee’s promise to arbitrate.  Cheek, 835 A.2d at 666.  Because it did not require Defendant to submit to arbitration, the arbitration agreement was entirely “one-directional” and therefore lacked mutuality of consideration.

Second, even if the arbitration agreement did have adequate consideration, it denied employees access to a neutral forum.  Although there is uncertainty as to whether an arbitration agreement that denies one party access to a neutral forum results in unconscionability, a material breach, or simply unenforceability of the agreement, courts agree that denial of access to a neutral forum in an arbitration agreement may make the agreement unenforceable.  Muriithi v. Shuttle Exp., Inc., 712 F.3d 173, 176 (4th Cir. 2013); Hooters of America, Inc. v. Phillips, 173 F.3d 933, 938-39 (4th Cir. 1999); Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d 297, 302 (4th Cir. 2002).

Here the arbitration agreement denied Plaintiff access to a neutral forum because Defendant had exclusive control over the list of arbitrators from which employees were required to select.  In the Fourth Circuit an employer may not retain this exclusive right.  Murray, 289 F.3d at 303.  Defendant’s promise in the agreement to provide a list of impartial arbitrators was not deemed sufficient to overcome the lack of mutuality in the arbitration selection process.  In addition the arbitration agreement was vague with respect to the rules to be followed, thereby providing a further reason to challenge the neutrality of the forum.

The full opinion is available in PDF here.

Post written by Maria A. Stubbings

Cowan Systems, LLC v. Jeffrey Shane Ferguson (Maryland U.S.D.C.)

Filed:  August 3, 2012
Opinion by Judge Ellen Lipton Hollander

Held:  State law claims related to an employment agreement's confidentiality and non-soliciation provisions in the transportation industry are not preempted by the Interstate Commerce Commission Termination Act ("ICCTA") because the Act's preemption provision was created to ensure that the States would not undo federal deregulation with regulation of their own.

Facts:  Cowan Systems, LLC ("Employer"), a broker in the transportation industry, filed suit against Jeffrey Shane Ferguson ("Employee"), a former employee, for breach of his employment agreement, and Lipsey Logistics Worldwide, LLC ("Competitor"), also a broker in the industry, for tortious interference with contract, tortious interference with prospective economic advantage, violation of the Maryland Uniform Trade Secrets Act, and civil conspiracy.

Employee entered into an employment agreement with Employer that contained confidentiality and non-solicitation provisions prohibiting him from from ever disclosing Employer's business secrets and from soliciting Employer's customers for one year post-termination.  Employee resigned from Employer and began working for Competitor, a direct competitor of Employer's, the next day.  Employer alleges that Employee violated his employment agreement by communicating and soliciting Employer's customers on Competitor's behalf before and after his tenure with the company.  Employer also claims that both Employee and Competitor are causing an immediate threat to Employer's business.

Competitor filed a motion to dismiss based on the premise that state law claims are preempted the ICCTA which provides in part, "a State...may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier...or any...broker...with respect to the transportation of property."  Employer opposed the motion.

Analysis:  The USDC for Maryland denied Competitor's motion following the ruling in Aloha Airlines, Inc. v. Mesa Air Group, Inc., No. 07-00007, 2007 WL 842064 (D. Haw. Mar. 19, 2007), which found that an intentional tort claim was not preempted by the Airline Deregulation Act ("ADA"), a federal law in which the Supreme Court has recognized as having a preemption provision with identical scope as that of the preemption provision of the ICCTA.  The Aloha Court found that courts have upheld state tort claims against entities subject to the ADA when those claims do not contravene the law's purpose to promote competition in that industry.  That Court concluded that to find otherwise would indeed undermine the purpose of the ADA which was to ensure the components of the transportation industry relied upon competitive market forces.  It found that the ADA's preemption provision was to prevent the States from superceding federal deregulation with its own regulation.

The Court denied Competitor's motion to dismiss finding that the same principles in the ADA apply to the ICCTA preemption provisions.  The purpose of the ICCTA preemption provision was to promote competition within the transportation industry and to free it from state laws and regulations that could interfere with interstate commerce.  The fact that Employer's claims against Competitor pertained to pricing information "should not serve to insulate Competitor from liability" because it engages in brokerage services.  Congress never intended to shield individual bad actors from "thwarting competitive enterprise."

The full opinion is available in PDF.

Weichert Co. of Maryland, Inc.. v. Faust (Md. Ct. of Special Appeals)

Opinion by Judge Albert Matricianni

Held

Pursuant to the narrow scope of the fee provision in the employment agreement, the Court of Special Appeals affirmed the trial court’s decision on awarding attorney fees to an employee who prevailed against the employer's breach of contract claim and denied the employer’s claim for attorney fees even though the employer was successful with its breach of duty of loyalty claim.

Brief Facts:

This suit arises from an employment dispute whereby the employer initiated an action against the employee alleging breach of contract, employee piracy, breach of fiduciary duty, and unfair competition. The employee counterclaimed for breach of contract, fraud, negligent misrepresentation, and violation of the Maryland Wage and Payment Act. At trial, the jury found the employee liable for breach of her duty of loyalty and awarded the employer $250,000 in damages and the employer liable for violation of the Maryland Wage and Payment Act and awarded the employee $116,000 in damages.

At the conclusion of trial, both parties (employee - $1,485,500 and employer $2,203,037) petitioned for an award for attorney’s fees pursuant to the employment agreement between the parties. The trial court granted the employee’s petition for attorney’s fees that were reduced to $946,014 but denied the employer’s petition. The employer appealed.

The contested fee provision provided as follows:

If employer brings any action(s) (including seeking injunctive relief) to enforce its rights hereunder and a judgment is entered in employer’s favor, then the employee shall reimburse the employer for the amount of employer’s attorney fees incurred in pursuing and obtaining the judgment. If the employee prevails in such a suit, then the employer shall reimburse the employee for the amount of the employee’s fees incurred in same.

Analysis:

On appeal, the employer challenged the trial court’s award of attorney’s fees to the employee and the lower court’s denial of the employer’s claim to attorney fees. The employer argued the following:

(i) The employee did not “prevail” under the agreement because the employer obtained a verdict on its claim for breach of the duty of loyalty;

(ii) The employee did not incur the fees and expenses;

(iii) The fee award to the employee should be denied since the employee was in breach of the duty of loyalty and the breach should excuse the employer of its performance; and

(iv) The fee award was not reasonable nor supported by the evidence.

The Court rejected the employer’s claim that the lower court erred in denying the employer its legal fees and the Court rejected the employer’s claim that the employee did not “prevail” as required under the fee provision. The employer argued on appeal that the term “hereunder” encompasses all rights and duties under the agreement including the duty of loyalty. The Court, however, interpreted the term “hereunder” in the fee-shifting provision narrowly, to apply exclusively to non-solicitation claims since the fee provision was an appurtenance to the non-solicitation paragraph. Because the employee prevailed against the employer's breach of contract claim and the employer's breach of duty of loyalty claim was not due to a breach of the non-solicitation paragraph of the agreement, the Court affirmed the trial court's grant of attorney's fees to the employee and the denial of the same to the employer.

Relying on the meaning of the term "incurred" as specified by the Dutta v. State Farm Ins. Co., 363 Md. 540 (2001), the Court rejected the employer’s argument that the employee did not “incur” the fees and expenses but rather her current employer which agreed to indemnify her from any damages arising in the case because the fee provision does not specify “by whom” the fees must have been incurred. The Court reasoned that the employee, in effect, incurred the attorney’s fees since her compensation at her new employment reflected the indemnification arrangement.

The Court rejected the employer’s claim that the employee’s breach of the agreement excuses it from paying the employee’s legal fees on the grounds that the employee’s duty of loyalty was not a condition precedent to the employer paying the employee’s legal fees and expenses.

The Court also rejected the employer’s argument on the amount of the legal fees since the court found that the lower court properly applied the “common core of fact” doctrine and that the employee was able to reasonably document the amount of the fees.

Practitioner’s Tip

Parties drafting fee provisions should be careful of its location and concise and unambiguity in the language used in the provision.

The full opinion is available here.