Filed: July 2, 2020
Opinion by: Judge Steven B. Gould
Holding:
In the absence of a petition for dissolution, demand
for appointment of a receiver does not trigger the statutory right, under §4-603(a)
of the Corporations & Associations Article of the Maryland Code, to
purchase the complainant’s stock in the subject company.
Facts:
Appellant (“Aggrieved Shareholder”, or “Aggrieved”) and Appellee (“Continuing
Shareholder”, or “Continuing”) were the sole shareholders in a two Maryland
close corporations and one Maryland LLC (the “Businesses”). In February 2017, Aggrieved Shareholder filed
a complaint in the Circuit Court for Harford County against Continuing Shareholder
and the Businesses, alleging malfeasance by Continuing and requesting (1)
injunctive relief in the form of appointment of a receiver to prevent
Continuing’s further alleged malfeasance and to conduct forensic accounting in
order to detect past malfeasance, (2) an award of damages, expenses, attorney’s
fees, and costs, and (3) declaratory relief in the form of a finding that certain
of Aggrieved’s actions related to the Businesses were lawful.
Continuing Shareholder considered receipt of the
complaint to have triggered his right under CA §4-603(a) to acquire Aggrieved
Shareholder’s shares in the Businesses, answering with a request to stay
dissolution in order to determine the fair value of Aggrieved’s interests, and
enforce his election to purchase Aggrieved’s shares.
In January 2018, Aggrieved Shareholder amended
her complaint to add breach of contract claims and other injunctive relief and
damages.
In April 2018 the Circuit Court for Harford
County agreed that the statutory right had been triggered and ruled that appraisers
be nominated and appointed, and proceedings stayed until the valuation process
had concluded. Aggrieved Shareholder
filed motion for reconsideration which was denied, and then filed notice of
appeal.
In June 2019, Aggrieved Shareholder filed for
bankruptcy, resulting in automatic stay of all litigation. That month, the appraisers determined Aggrieved’s
interest in the two close corporations to be $560,000. In November 2019, the circuit court granted
Continuing Shareholder’s motion to confirm the appraisal and further ordered
Continuing to pay to Aggrieved two installments of $280,000. The court granted leave for Continuing to
escrow the installments with the court, to be disbursed only on court
order. Aggrieved appealed in December
2019. The circuit court in February 2020 declared Continuing to have satisfied
the payment obligations.
In May 2020, the Court of Special Appeals
consolidated the two appeals.
Analysis:
The first threshold issue before the Court was whether to dismiss the second
appeal on grounds of mootness; whether the passage of the valuation process and
satisfaction of Continuing Shareholder’s ensuing payment obligations had rendered
the controversy moot due to the fact that Aggrieved Shareholder had filed for
bankruptcy, making the proceeds subject to claims by creditors and therefore
unavailable to repurchase the shares.
The bankruptcy court in September 2019 had lifted the stay of the
instant litigation, but ordered enforcement of judgments against Aggrieved to
remain stayed. Because the funds
Continuing Shareholder deposited with the circuit court remained there, subject
to the stay and unavailable to Aggrieved, the Court found the second appeal not
to be moot and denied its dismissal.
The
second threshold issue before the Court was jurisdictional; because Aggrieved
Shareholder’s initial and amended complaints had asserted claims related to the
LLC but the circuit court’s orders had applied only to claims related to the close
corporations, the decision had not adjudicated all claims, rights and
liabilities of the parties to the action and had not resulted in a final
judgment. The Court noted, however, that
statutory exceptions to the final judgment rule, enumerated in CJP §12-303
allowed for interlocutory appeal of orders “for the sale, conveyance, or
delivery of…personal property or payment of money…”. Because the circuit court’s second order compelled
conveyance of Aggrieved’s personal property (shares in the close corporations)
and payment of Continuing's money ($560,000), and its first order meritoriously
intertwined with the second, the Court found both interlocutory orders to be
properly reviewable on appeal.
The
Court subsequently turned to the substantive issue on appeal, whether the
purchase right under CA §4-603(a) had been triggered by Aggrieved Shareholder’s
complaint for appointment of a receiver.
That statute provided:
Any one or more stockholders who desire to
continue the business of a close corporation may avoid the dissolution of the
corporation or the appointment of a receiver by electing to purchase the
stock owned by the petitioner at a price equal to its fair value. (emphasis
added)
Success
in the argument would turn on whether CA §4-603(a) applied to any kind of
receiver (statutory or equitable), whether CA §4-603(a) applied only to
situations where a receiver had been appointed in a dissolution proceeding, or
whether Aggrieved Shareholder’s plea for
appointment of an equitable receiver was tantamount to a statutory receiver.
The
Court briefly paused to explain the dilemma affecting “trapped” shareholders in
close corporations: with no liquid market for shares, no board of directors,
and transfer of shares made possible only on unanimous consent), a shareholder desiring
to exit the company is suddenly pit against their partners and left with few
options. Such a shareholder can risk accepting a lower
price per share in order to gain unanimous consent, or they can invoke
dissolution and either end the going concern or be bought out.
The
Court next turned to construe the meaning of CA §4-603: its plain language if
clear while read in context of the surrounding statutory section(s); but with other
indicia of intent if ambiguous (such as structure, caption, relationship to other
laws, legislative history, and purpose, e.g.).
Citing to both CA §4-602 (Involuntary dissolution) and CA §4-603
(Avoidance of dissolution by purchase of petitioner’s stock), the Court made
four general observations.
First,
the Court pointed out that the captions had been written by the General Assembly
and were part of the bills considered prior to enacting the statute, giving
weight to the argument that CA §4-603(a) was intended only to apply in
situations where a shareholder sought to avoid dissolution.
Second,
the Court found the plain language of CA §4-603(a) confirmed the intent espoused
by the caption, implying an option (1) created for shareholders who desire to continue the
business of a close corporation and (2) one made necessary to spare the business from
extinction.
Third,
CA §4-603 routinely used the words petition or petitioner, which could only be
read logically in conjunction with CA §4-602 as the shareholder/petitioner seeking
dissolution in CA §4-602(a).
Fourth,
the exchange of shares for value contemplated by CA §4-603 was only possible
after a determination of fair value, defined by CA §4-603(b) as occurring on
the close of business on the day when the petition for dissolution is filed.
If
CA §4-603(a) only operated in the context of dissolution proceedings, did the
phrase “or the appointment of a receiver” retain any meaning? To find an answer, the Court looked to Title
3 of the Corporations & Associations Article, specifically CA §3-413 and §3-414
which defined grounds and process for involuntary dissolution proceedings. CA §3-414 provided for the appointment of two
types of receivers: a temporary receiver to operate the business pending final
determination as to dissolution, and a liquidating receiver charged with the
dissolution of the company. Answering
its question in the positive, the Court supposed a scenario in which the non-petitioning
shareholder might opt to exercise the purchase right rather than suffer a
perceived intrusive or meddlesome court-appointed temporary receiver.
Next examining
the legislative history, the Court was further persuaded that the CA §4-603(a)
purchase right only applied in dissolution proceedings, pointing to its own
discussion of the legislative history in Papillo (199 Md. App. at 86),
as well as the re-codification in 1975 of the Annotated Code which separated a
single section, Article 23 §109 Judicial Dissolution – Close Corporations, into now CA §4-602 and CA §4-603, thus revealing the original legislative intent that they be
construed together. Under the express
language of the original text, the buy-out right existed only in a dissolution
proceeding.
Finding
that CA §4-603(a) applied only to statutory receivers and only in the context
of a dissolution proceeding, the Court turned to the last question: was CA §4-603(a)
invoked by a shareholder requesting
appointment of an equitable receiver with powers authorized by CA §3-414? The Court, noting that dissolution consisted of a particularly
harsh irrevocable and “all or nothing” remedy, indicated that it had
recommended equitable remedies short of dissolution in relevant Maryland caselaw, particularly the appointment of a non-liquidating receiver to continue the operations of the
corporation for the benefit of all shareholders. Aggrieved Shareholder, then, was entitled to
seek an equitable remedy short of dissolution without triggering the CA §4-603(a)
purchase rights.
The
Court noted that while equitable receivers had broad applicability
(partnership disputes, mortgagor-mortgagee disputes, divorce proceedings, e.g.)
and enjoyed a long history, dating back to the chancery courts of England, such
appointments were to be reserved for extraordinary circumstances involving
fraud, danger of spoliation, or imminent prospect of loss or injury to
property. An equitable receiver’s authority
did not extend to dissolution, which was only granted by statute to a receiver
appointed to wind up the corporation’s affairs.
Accordingly,
finding that Aggrieved Shareholder’s complaint requested appointment of an
equitable receiver vested with authority to operate the Businesses, not to
liquidate them, her complaint did not invoke dissolution, did not invoke Continuing
Shareholder’s CA §4-603(a) purchase right, and did not compel Aggrieved’s transfer
of shares to Continuing. A shareholder who
seeks equitable relief to stop alleged oppression should not have to do so at
the risk of being forced to sell her shares to the alleged oppressor.
The Court denied the motion to dismiss, reversed the lower court's orders and ruling, and remanded to the circuit court.
The
full opinion is available in PDF.
