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.

TBC, Inc. v. DEI Holdings, Inc. (Maryland U.S.D.C.)

Filed: March 24, 2015

Opinion by: Catherine D. Blake

Holdings:

(1)   A corporate entity, in acquiring the assets of a predecessor, cannot be held liable solely based on continued use of a predecessor’s trade name, sale of a predecessor’s products, and retention of some of a predecessor’s accounts and employees.  

(2)   When a party does not allege facts to show that a corporate parent used its subsidiary “as a mere shield for the perpetration of fraud,” that party does not state a claim against the parent for the subsidiary’s obligations.

(3)   A party may state a claim for breach of contract without alleging perfect performance of its own obligations under the contract.

(4)   Maryland law does not recognize an independent cause of action for breach of the implied covenant of good faith and fair dealings.

(5)   A party may obtain restitution on the theory of unjust enrichment, despite the existence of an express contract, when the party breaches the express contract.

Facts:

Parent Defendant ("Parent") was the corporate parent of two subsidiaries, Subsidiary 1 and Subsidiary 2.  Additionally, four divisions of Parent were unincorporated until they formed LLCs in February 2014. 

Plaintiff, an advertising and public relations agency, was hired by Subsidiary 1, a consumer electronics vendor, to provide marketing services.  In 2011, Subsidiary 1 agreed to pay Plaintiff $12,500 each month for 83 hours of work per month.  In 2012, Subsidiary 2 hired Plaintiff under a similar agreement.  Plaintiff performed work beyond the monthly retainer for both entities and was paid additional fees accordingly. 

Subsidiary 1 later retained Plaintiff to perform advertising and marketing services for a new line of products on the terms outlined in the 2011 contract.  In 2013, Plaintiff worked 3,000 more hours than the 83 hours per month contemplated in the 2011 contract.  Despite this additional work, Plaintiff was paid monthly fees in 2013 based on the budgeted 83 hours per month.  Based on the experience of its leadership, Subsidiary 1 knew based on the nature of the requested work that it would require substantially more than 83 hours each month. 

In June 2013, Plaintiff’s Executive Vice President (the “VP”) met with three executives of Parent to discuss compensation for Plaintiff’s work in excess of the monthly budget.  The executives assured the VP that Plaintiff would be paid in full for the additional hours.  In August 2013, one of Parent's executives again told the VP that Plaintiff would be paid in full, and Plaintiff continued to perform more work until the Parent's executives informed the VP in January 2014 that Plaintiff’s services would no longer be needed.  Plaintiff was never paid for the 3,000 hours of additional work performed in 2013.

In February 2014, four LLCs (the “LLC defendants”) were formed from the four unincorporated divisions of Parent.  Subsidiary 1 also merged into Subsidiary 2. 

In September 2014, Plaintiff sued Parent, Subsidiary 1, Subsidiary 2 and the four LLCs alleging, inter alia, breach of contract, breach of the covenant of good faith and fair dealings, and unjust enrichment.  All defendants moved to dismiss. 

Analysis: 

(1)   The court first considered whether Plaintiff stated a claim against the LLC defendants.  Under the general rule of corporate successor liability, a corporate entity acquiring assets from another entity does not acquire the liabilities of its predecessor.  An exception is where the successor entity is a “mere continuation or reincarnation” of the predecessor entity.  The exception applies where there is continuity among directors and management, common shareholder interest, and, in some cases, inadequate consideration in the transaction.  Use of the predecessor’s trade name, sale of a predecessor’s products, and retention of the predecessor’s accounts and employees will not alone suffice.  Because the contracts predated the existence of the LLC defendants, and Plaintiff only alleged the latter three factors, Plaintiff failed to state a claim against the LLC defendants.

(2)   Next, the court considered Plaintiff’s claims against Parent.  In general, a parent corporation is not liable for the obligations of its subsidiaries.  The “corporate veil” may be pierced only in circumstances when it is necessary to prevent fraud or enforce a paramount equity, i.e., when the parent uses the subsidiary as a “mere shield” to commit fraud.  Plaintiff never contracted directly with Parent, but instead it contracted with Subsidiary 1 and Subsidiary 2.  Because Plaintiff did not allege facts to support Parent’s use of its subsidiaries to perpetuate fraud, Plaintiff failed to state any cause of action against Parent. 

(3)   The court then turned to Plaintiff’s contract claim against Subsidiary 2.  To state a claim for breach of contract under Maryland law, a plaintiff must only show (1) the existence of a contractual obligation owed by defendant to the plaintiff and (2) a material breach of that obligation by the defendant.  A plaintiff is not required to show that it complied with every procedural obligation described in the agreement.  Here, Plaintiff did not allege that it had obtained approval for additional work or that timely billed for the work, but these omissions were not fatal to the claim.  Plaintiff met its burden by alleging that (1) Subsidiary 2 was contractually obligated to pay for additional services beyond those contemplated in the 83 hour budget and (2) Subsidiary 2 failed to pay Plaintiff in breach of that obligation. 

(4)   The court dismissed Plaintiff’s claim of breach of the covenant of good faith and fair dealings, noting that Maryland does not recognize this as an independent cause of action.

(5)   Lastly, the court addressed Plaintiff’s unjust enrichment claim.  In Maryland, a claim of unjust enrichment may not be brought where the subject of the claim is covered by an express contract.  An exception to this rule occurs when there has been a breach of contract, in which case a party may obtain restitution on the theory of unjust enrichment.  If a jury finds that Plaintiff did not substantially perform under the agreement, thereby rejecting Plaintiff’s contract claim, then Plaintiff may still recover for unjust enrichment.  Both the contract and unjust enrichment claims may stand as alternative, inconsistent theories of liability.

The opinion is available in PDF.

In Re: MTBE Products Liability Litigation (New York U.S.D.C.)

Filed: March 30, 2015

Opinion by: Shira A. Scheindlin

Summary:  In a case involving multiple jurisdictions, a federal court held that in the absence of a federal question, the laws of the forum state should control, in this case Pennsylvania. The court then applied Pennsylvania’s choice-of-law rules to hold that the laws of the jurisdiction where the “targeted entity” is incorporated should determine whether to piece the corporate veil. The defendant’s parent company was incorporated in Delaware, but its Maryland subsidiary—the target of the lawsuit—was formed in Maryland. Thus, under the court’s ruling, Maryland’s veil-piercing laws should govern.

The full opinion is available in PDF.

Karen R. Goozh v. Howard Richmond (Cir. Ct. Mont. Cnty.)

Filed: July 8, 2014

Opinion by: Ronald B. Rubin

Holding: A stockholders’ agreement that expired upon the “dissolution” of the company was terminated when the company was administratively dissolved for failure to file a regular report, despite having its charter later reinstated when the failure was cured.

Facts: Stockholders in a Washington, D.C., company entered into a stockholders’ agreement that included a provision whereby the agreement would terminate upon the “liquidation or dissolution of the Company.” The company’s charter was then revoked twice after it failed to file a required biennial report with the District of Columbia Department of Consumer and Regulatory Affairs. In each instance, the revocation was eventually annulled, but the Plaintiffs argued that the stockholder’ agreement remained terminated after the first revocation despite such reinstatement.

Analysis: The court noted that a different District of Columbia statute applied to each administrative dissolution of the company. In the second instance, the law stated that when a company’s charter was revoked and later restored, the restoration would “relate back” to the date of the administrative dissolution. In other words, the gap in the company’s continuity would effectively be erased.

The court found two D.C. cases instructive: In Accurate Construction Co. v. Washington, a contract entered into while a company’s charter was revoked was held to be unenforceable, and in T.K., Inc. v. National Community Reinvestment Coalition, Inc., the tenant under a commercial lease was found to have remained a valid party to the lease despite the revocation and subsequent reinstatement of its charter during the lease term.

Finding neither case dispositive, the court said that because the stockholders’ agreement failed to define the term dissolution, the plain meaning of the word should apply. The court acknowledged that the drafters may not have intended a “technical” or “administrative” dissolution of the company to terminate the agreement. Nevertheless, it held that a reasonable person would understand the word dissolution to include such events.

Although the case hinges on D.C. law, the court occasionally draws comparisons with Maryland law and cites Maryland law when discussing the effects of revival.

Full opinion is available in PDF.

Schlossberg v. Bell Builders Remodeling, Inc. (Ct. of Appeals)

Filed:  February 20, 2015

Opinion by: Clayton Greene, Jr.

Holding:  A court may disregard the corporate formality to prevent a paramount inequity and fraud is not required.  

Analysis:  This ruling comes from a certified question sought by the Bankruptcy Court. The Court relied on Hildreth v. Tidewater Equip. Co. Inc., which sets forth that piercing the corporate veil is proper for fraud or to prevent a paramount inequity. The Court determined that preventing a paramount inequity is sufficient grounds to disregard the corporate formality.

The full opinion is available in PDF.

Consortium Atlantic Realty Trust, Inc. v. Plumbers & Pipefitters National Pension Fund, et al. (Cir. Ct. Mont. Co.)

Filed:  February 5, 2013
Opinion by Judge Ronald B. Rubin

Held:  A board of directors is not subject to Revlon duties when shareholders choose to exercise their put rights under a shareholders agreement.

Facts:  Plaintiff, a Maryland corporation, sued Defendants, union pension funds who owned approximately 93% of the stock in Plaintiff, for breach of a shareholders’ agreement entered into between Plaintiff and Defendants.  Under the shareholders’ agreement, each Defendant was granted the unilateral right to withdraw as a shareholder six years after the effective date of the agreement. Defendants gave proper notice of the exercise of their withdrawal right under the shareholders’ agreement, but the parties disputed the valuation of Defendants’ shares under the withdrawal right. The pertinent section of the shareholders’ agreement required Plaintiff to redeem all of the shares held by a withdrawing shareholder at fair market value. Plaintiff set the fair market value of Defendants' shares at $7.93 per share, the price set forth in an appraisal of one share of stock done two years earlier.  Defendants refused to accept any “discounted” value for their shares, insisting on redemption at $10.00 per share, the price initially paid by Defendants for each share.

Plaintiff filed suit for breach of the shareholders’ agreement. Defendants filed a counterclaim raising a number of claims regarding the shareholders’ agreement and its interpretation, the most pertinent of which was Plaintiff’s failure to maximize shareholder value. Plaintiff moved to dismiss the counterclaim.

Analysis:  Defendants alleged a breach of fiduciary by Plaintiff and certain of its directors by failing to sell the company before Defendants exercised their withdrawal rights so that the directors could obtain a “windfall” when Defendants redeemed their shares for a discounted value. Defendants also contended that the exercise of their withdrawal rights, which collectively amounted to 93% of Plaintiff’s shares, constituted a change-in-control transaction under Maryland law. In short, the court stated that Defendants were attempting to impose Revlon duties, as applied to Maryland law in Shenker v. Laureate Education, on Plaintiff and its directors.

The court agreed that Shenker is limited, until the Court of Appeals says otherwise, to a cash-out merger when the decision to sell the corporation is already made, and dismissed Defendants’ claims. Here, it was the shareholders, not the board of directors, who made the decision to “sell”, i.e., to exercise their put rights under the shareholders’ agreement. Much like a tender offer situation, the decision to be made, withdraw as, or remain a shareholder does not implicate the duties or functions of the board of directors. Revlon duties were inapplicable because the board had nothing to do with the decision to “sell.”

The court also rejected Defendants’ change of control argument, stating that shareholders cannot unilaterally “create” a change of control implicating Revlon solely by virture of their own decisions. Revlon duties are premised upon action taken by the board, which results in a change from managing the company to selling the company. Plaintiff’s board made no decision to sell, merge or otherwise re-organize the business of the company.  Shareholders cannot impose additional duties on a board solely by reason of their own economic decisions to involve provisions of a shareholders’ agreement.


The full opinion is available in pdf.

Serio v. Baystate Properties, LLC (Ct. of Special Appeals)

Filed: March 8, 2012

Opinion by Retired Judge James A. Kenney, III

Held: Absent a finding of fraud, the circuit court erred by finding defendant personally liable for the debts of the limited liability company solely owned by him.

Facts: The plaintiff, a home builder, entered into a contract with defendant, as managing member of an LLC, to build houses to certain specifications on two lots lots which were owned by the defendant individually. As work progressed, the plaintiff drafted multiple addenda to the Agreement reflecting changes to the work. Each addendum, when first presented by the plaintiff, referenced the defendant individually, but the defendant revised those references and both parties signed the addenda, with the defendant signing as Managing Member of LLC. Both parties executed a waiver of any claims for personal liability under this agreement.

Shortly thereafter, payments to the plaintiff slowed. When the plaintiff contacted the defendant regarding the payments, the defendant assured that the properties would soon be sold. Although both properties had been sold, the buyers subsequently defaulted on a mortgage and the defendant received only a small portion of the sale. According to the plaintiff, none of the proceeds from the sale of the lots were deposited in the defendant's business account. 

The plaintiff sued, and the defendant LLC filed for bankruptcy protection. After a bench trial, the circuit court deemed it necessary to pierce the corporate veil to enforce a paramount equity. Accordingly, it entered a verdict against the individual defendant. The defendant appealed.

Analysis: On appeal, the Court affirmed that "except as otherwise provided [in this title], no member shall be personally liable for the obligations of a limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company." The Court noted, however, that the corporate shield may be disregarded under certain circumstances. Specifically, "shareholders generally are not held individually liable for debts or obligations or a corporation except where it is necessary to prevent fraud or enforce a paramount equity." Bart Arconti & Sons, Inc. v. Ames-Ennis, Inc. 275 Md. 295 (1975).

The Court qualified this by stating the standard is so narrowly construed, that no appellate court finds an "equitable interest more important than the state's interest in limited shareholder liability." Residential Warranty v. Bancroft Homes Greenspring Valley, Inc., 126 Md. App. 294 (1999). Further, there is no precedent in the court's history of approving this extraordinary remedy of paramount equity. Even Maryland decisions that recognize alternate grounds for piercing the corporate veil do not do so absent a finding of fraud.

The Court compared this case to Hildreth v. Tidewater, where the trial court found circumstances establishing paramount equity that would warrant disregarding the entity shield based on the fact that defendant was the sole shareholder, personally involved in the transaction at issue, there was evidence of bad faith, the business conducted by the corporation was illegal because it was not registered in Maryland, Maryland law precluded an unregistered foreign corporation from engaging in business in Maryland, and there was evidence of a conscious evasion of responsibility. 378 Md. 724 (2006). The Court of Appeals, however, reversed, holding that those circumstances, individually or in combination did not warrant piercing the corporate veil. Id. at 734.

In discussing one possible ground where a corporate entity will be disregarded, the Court discussed the "alter ego" doctrine, and found it would only apply in exceptional circumstances and with great caution where a plaintiff shows "(1) complete domination, not only of the finances, but of the policy and business practice...(2) such contract was used by the defendant to commit fraud or wrong.. and (3) that such control and breach of duty proximately caused injury or unjust loss." Id. at 735. Further factors include whether the corporation was adequately capitalized, the company's solvency when entering the transaction, the observance of corporate formalities, and evidence that the corporation "has no separate mind, will or existence of its own." Id. at 736. The Court also touched upon the theory of whether the conduct was for the purpose of evading legal obligation, but found that the court's narrow interpretation of this ground did not warrant the defendant being held personally liable. The court found, moreover, the decisions of this Court and the Court of Appeals have made clear that the corporate veil will not be pierced to redress the breach of a contractual obligation in the absence of fraud when the party seeking to pierce the corporate shield has dealt with that corporation in the course of its business on a corporate basis. In sum, Maryland is averse to disregarding the entity shield in a business situation in the absence of fraud. 

Here, the circuit court did not find fraud, but found circumstances that warranted paramount equity. The circuit court viewed the defendant's failure to deposit the funds from the sale of the lots into the defendant's bank account and the fact that the defendant later filed for Chapter 7 bankruptcy as evidence of an intent to evade the company's legal obligations to the plaintiff. When reviewing these circumstances, this Court saw a greater parallel to Bart Arconti where the Court refused to pierce the corporate veil and hold a shareholder personally liable for conduct that rendered its corporation all but insolvent and was "clearly designed to cause the corporation to evade a legal obligation." 275 Md. at 305. This Court also refused to pierce the corporate veil in a situation where a shareholder placed corporate funds into his personal account and lied regarding matters affecting public safety. See Bancroft, 126 Md. App. 294.

The Court concluded that the defendant fulfilled the contract with the plaintiff until, as the defendant testified, the collapse of the housing market caused problems. The plaintiff was an established building contractor who understood and agreed that it was doing business with another limited liability company, as reflected in the Agreement, and their continuing court of business. Under those conclusions, the Court found that the circuit court abused its discretion in finding the defendant personally liable for the obligations of the defendant.

The full opinion is available in pdf.

Boland Trane Associates v. Boland (Mont. Co. Cir. Ct.)

Filed: June 6, 2012
Opinion by Judge Ronald B. Rubin

Held: Applying the standard newly announced by the Court of Appeals, by which trial courts are to assess the decisions of special litigation committees in response to shareholder demands, the circuit court held that the committee in this case used proper methods, focused on the correct issues, and reached a reasonable, good faith business decision. Accordingly, the court accepted its recommendation to terminate the pending derivative litigation.

Facts:In Boland v. Boland, 423 Md. 296 (2011), the Court of Appeals announced new standards to be used when trial courts review the decisions of a special litigation committee ("SLC") in a derivative suit. We analyzed that opinion, with a full account of the facts, in a previous post. The case was returned to the circuit court for disposition consistent with the standard.

Pursuant to the standard, the circuit court considered the evidence concerning how the SLC members were chosen, the relationships, if any, among the SLC and the company board(s), and the methods and procedures of the SLC investigation, the issues reviewed, and the basis for it conclusions.The circuit court was to determine whether there was a reasonable basis for the SLC's conclusions. The burden of proof was on the SLC to show its independence and the reasonableness of its investigation and conclusion(s).

BTA and BTS were related, closely held Maryland S corporations.They were owned by husband and wife, who issued stock over time to eight children and some long-term employees. Each recipient executed a stock purchase agreement ("SPA") that restricted transfer. After the death of the founder/husband, his wife sold her stock back to the companies for an annuity. This was followed by a series of stock sales to some but not all of the children. When the non-participating children found out, they were upset.

After one child/shareholder died, the executor of her estate refused to sell the stock back to the companies. The companies sued for a declaration seeking to enforce the SPA. Each stockholder was named as an interested party. The children/shareholders who had been left out of the latest stock sales then filed a counterclaim advancing claims against the board members of each corporation.The counterclaimants also filed a derivative action based on exactly the same facts.

The companies moved to dismiss, advising the court that the boards of both companies had voted to form an SLC of two newly appointed directors who did not participate in the offending stock transactions.The SLC also hired independent, outside counsel. The circuit court stayed the litigation pending the outcome of the SLC inquiry.

After an investigation, the SLC issued its report and recommended that the derivative action be terminated.

Analysis: As an initial matter, the circuit court noted that the factual allegations of the direct claims against the directors track those of the derivative complaint. The court assessed the viability of the claims as direct and/or derivative. Relying on the standard set forth in Paskowitz v. Wohlstadter, 151 Md. App. 1 (1993), the circuit court posed the relevant inquiry as two-fold: 1) who suffered the alleged harm, the corporation or the individuals; and 2) who would receive the benefit of any recovery?

The court summarized the thrust of the claims as: 1) the defendants improperly redeemed the mother's stock for insufficient consideration; and 2) the claimants were excluded from the "sweet deal" of the subsequent stock sales. The court concluded that the harm alleged was to the companies, not the individual stockholders suing. Thus, the claims should be considered derivative.

Next, the court assessed the independence of the SLC and its counsel.The court noted that the board undertook a lengthy search for suitable candidates. One of the new directors was an experienced CPA. The other an experienced lawyer. The SLC selected another experienced lawyer as outside, independent counsel. The SLC members and its counsel had no prior experience or contacts with the parties. On this basis, the circuit court concluded the search for and retention of the SLC directors was proper and that the SLC was independent.

Next, the court assessed the reasonableness of the SLC's investigation and conclusions. The court held that there is no formula or set procedure that an SLC must follow. In sum, the SLC must act reasonably to investigate the theories of recovery and obtain and review information relevant to the subject matter. Here, the SLC investigated for five months. It solicited briefs from all parties outlining their legal positions. The companies did so. The claimants did not.The SLC also obtained and reviewed relevant documents, interviewed 11 witnesses (including the key actors), and spent at least 160 hours in the process. The SLC met with counsel eight times before issuing a report. The SLC also relied on generally accepted stock valuation methodologies, sources of information, and four independent appraisals.

On that basis, the court held that the SLC understood its role, employed proper methods of investigation, and focused on the right legal and factual issues. The court concluded that the SLC reached a reasonable, good faith business decision, in a reasonable and fair manner, and it accepted its recommendation to terminate the derivative litigation.

The full opinion is available in pdf.