Filed: March 24, 2016
Opinion by: Catherine C. Blake, District Judge
Holdings: (1) Personal jurisdiction
over an out-of-state entity can be shown when a related entity transacts
business in Maryland and the out-of-state entity does not
maintain separate books and records, accounting procedures and directors’
meetings from the related entity.
(2) Maryland may be
considered an out-of-state entity’s principal place of business if that
entity lists a Maryland address on its tax forms and stores business records
primarily at its Maryland location.
(3) When the sole shareholders and directors of business entities sign
an agreement that addressed the ownership of those entities, the entities are bound
by that agreement.
(4) An oral employment contract that lasts for one year is not
enforceable under Florida law if it is not reduced to writing and signed by the
party against whom it is sought to be enforced.
When a contract contemplates a one-year employment relationship,
performance is not deemed complete when a superseding agreement is formed
within that one-year period.
(5) A contract is not void as contrary to public policy unless
its illegality is clear and certain.
(6) Under West Virginia law, a contract may be enforceable when
the language of an agreement indicates that the parties fully intend to be
bound, but they contemplate a more elaborate formalization of the agreement. The formalization of the agreement is not a
condition precedent to the agreement unless the parties expressly indicate as much.
(7) Judicial dissolution may be proper when there is illegal,
oppressive or fraudulent action by majority shareholders with respect to
minority shareholders. Under Maryland
law, conduct is oppressive when it substantially defeats the reasonable
expectations held by minority shareholders in committing their capital to the
enterprise.
(8) Financial accounting is an available remedy when shareholder
oppression is present.
Facts: Daughter and
Father were each 50% owners of Company 1, based in West Virginia, and Company 2, based in Maryland, which owned and
managed a West Virginia summer camp (the “Camp”). As Father contemplated leaving the summer camp business,
he and Daughter wanted to add a European partner to help Daughter run the Camp. Father and Daughter believed that Plaintiff, a Spanish
national, could help with the Camp’s revenue by recruiting European children
from wealthy families. Plaintiff had
attended the Camp as a camper and a counselor for about 20 years.
On December 7, 2010, Father, Daughter and Plaintiff met in Florida to
discuss Plaintiff’s possible involvement with the camp. They discussed the Camp’s debt, liabilities
and size, but Father and Daughter did not correct Plaintiff when he presented
inaccurate figures. According to Plaintiff, the parties agreed
that Plaintiff would work for $72,000 annually to recruit European campers, and
if this worked out well, Father would sell Plaintiff his 50% share of the
Camp. Daughter could also make Plaintiff
her full partner at any time during this first year. Father, on the other hand, insists that he
told Plaintiff that he would need to work successfully with Daughter for one
year before he would sell his interest to Plaintiff. The meeting minutes indicated that Plaintiff
would work as an employee for at least one year, after which there would be an evaluation
and an opportunity for Plaintiff to obtain shares of the company “if everything
goes well.” However, in the course of
working with the Camp, Daughter soon began referring to Plaintiff as her “partner.” In January 2011, Plaintiff and Daughter
formed a new business entity, Company 3, to recruit more campers from Europe.
In January 2011, Father executed a promissory note naming him and Company 2 as jointly responsible for a $350,000 loan that had apparently been made to him in 2009 and which he had not disclosed to Plaintiff. Plaintiff was also unaware of other issues,
such as lawsuits against the Camp, Father and Daughter’s commingling of
personal and Camp funds, and the true acreage of the Camp.
To secure a visa for Plaintiff to work in the United States,
Plaintiff and Daughter were each advised to contribute $55,000 to Company
3. Plaintiff invested $55,000 of his
personal funds in Company 3, but Daughter contributed nothing. Still, Plaintiff and Daughter each received
half Company 3's stock shares.
Daughter also transferred the $55,000 Plaintiff had invested in Company 3 to
Company 2, explaining to Plaintiff that the money was being borrowed for Camp
expenses. Daughter told Plaintiff that
the $55,000 would be credited toward Plaintiff’s eventual purchase of the Camp
from Father.
During the summer of 2011, Plaintiff worked at the
Camp. Father and Daughter were
displeased with Plaintiff’s work.
Plaintiff also learned for the first time that two different companies,
Company 1 and Company 2 owned the Camp, and that the Camp struggled to pay its
bills on time.
Plaintiff, Father and Daughter met in June 2011 to discuss
committing the partnership agreement between Plaintiff and Daughter to
writing. Father and Daughter continued
to refer to Plaintiff as Daughter’s “full partner in the Camp” and assured Plaintiff that
the Camp was doing well financially, though they did not disclose the
extent of the Camp’s liabilities or cash-flow related challenges. In
August 2011, Daughter asked Plaintiff to lend $50,000 to the Camp to
cover a cash-flow shortage. Plaintiff
did so, thereby depleting his life savings.
In late August 2011, the three met again to discuss various
issues concerning the partnership. They
drafted and all signed a document called Partnership Stock Agreement (“PSA”) at that
time. Nevertheless, Father subsequently contended
that this was a letter of intent contemplating a formal agreement in the
future, and that he still needed to evaluate Plaintiff’s involvement,
particularly given that the one-year vetting period had not been completed and
he was not happy with Plaintiff’s performance during the summer.
The August 24, 2011 PSA included several terms. Plaintiff was to pay $50,000 per year for ten years to purchase 50% stock in Company 1 and Company 2. $50,000 of the %55,000 that Plaintiff
invested in Company 3 was to be credited toward his stock purchase. The PSA provided other terms, such as agreement as to the manner in which to invest profits and limits on expenditures requiring consent from the other partner.
The PSA's final term stated that “[a]fter this agreement,
a due diligence of the company and the additional legal papers required for the
transaction will be made.” No stock
certificates or other legal documents were executed at that time, but when Plaintiff encountered other legal
troubles, Daughter faxed documentation of Plaintiff’s investment and part
ownership in the Camp from the Camp’s Maryland office.
Plaintiff’s relationship with Father and Daughter
deteriorated in late 2011. Plaintiff
learned that the Camp’s appraised value was $2.9 million instead of the $6
million he was led to believe it was worth.
Daughter prevented Plaintiff from having input on the business plan and accessing the financial records.
Plaintiff also learned that Father and Daughter used Camp funds to pay
for their personal expenses and commingled funds. Nevertheless, Daughter asked Plaintiff to
contribute more money and bring in more campers. Meanwhile, Father’s wife had died, allowing him to become more actively involved in the Camp’s affairs both with respect to his time and access to additional capital. Father expressed disappointment with
Plaintiff’s work and inability to assume more of the debt, and eventually
banned him from being present or involved in the Camp. Plaintiff sued Father, Daughter, Company 1,
Company 2 and Company 3 (collectively, “Defendants”), alleging breach of
contract and other causes of action. Defendants
moved to dismiss, which the court treated as a motion for summary judgment, and Plaintiff
filed a cross-motion for summary judgment.
Analysis: Company 1, which was organized and ostensibly based in West
Virginia, moved to dismiss, arguing lack of personal
jurisdiction in Maryland. Maryland’s
Code, Courts and Judicial Proceedings § 6-103(b)(1) provides that a court may
exercise jurisdiction over a defendant “who directly or by an agent . . .
[t]ransacts any business or performs any character of work or service in the
State.” By showing that
Daughter faxed Plaintiff documents indicating his stock ownership from the
Maryland office and conducted certain meetings and operations there, Plaintiff made a prima facie showing of personal jurisdiction. Moreover, although generally the contacts
of one entity are not imputed to its affiliate, an exception is found when the
affiliates fail to maintain separate books and records, accounting procedures
and directors’ meetings. Because there
was significant overlap between the books and records of Company 1 and Company
2, a Maryland company, it was not unreasonable to impute Company 2’s Maryland
contacts to Company 1. Finally, the exercise
of jurisdiction was “constitutionally reasonable” because it wasn’t “so gravely
difficult and inconvenient as to place the defendant at a severe disadvantage in
comparison to his opponent.” CFA Inst. V. Inst. of Chartered Fin.
Analysts of India, 551 F.3d 285, 296 (4th Cir. 2009). For example, Daughter, a half-owner and
officer of Company 1 was a resident of Maryland, and Company 1 had retained the same lawyers as the other defendants.
In fact, because Company 1’s tax forms listed a Maryland address, and
the business records were stored in the Maryland office except when Camp was in
session during the summer, the evidence supported a finding that Company 1’s
principal place of business was in Maryland.
The court addressed four of the Defendants’ arguments
relating to breach of contract. First,
Company 1 and Company 2 argued that they were not bound by the PSA because
Father and Daughter signed as individuals, not on behalf of the companies. Second, Defendants argued that the statute of
frauds barred enforcement of the December 2010 employment agreement. Third, they argued that the employment
agreement was illegal or against public policy.
Fourth, they argued that the alleged agreement contained conditions
precedent and therefore was not binding.
The court summarily dismissed the first argument by saying
that because the subject of the PSA was the ownership of Company 1 and Company
2, and because Father and Daughter were the only two shareholders of both
companies, it was clear that Father and Daughter signed on behalf of Company 1
and Company 2.
The court agreed with the second argument concerning the
statute of frauds by interpreting Florida law. The oral employment
agreement arose from a meeting of Plaintiff, Father and Daughter in Florida, so
Florida’s statute of frauds applied.
Florida law requires that any agreement that cannot be fully performed
within one year of creation to be reduced to writing and signed. The statute of frauds barred enforcement of
the December 2010 employment agreement, which completed Plaintiff’s employment
for one year beginning in January 2011.
Moreover, the court rejected Plaintiff’s argument that the employment
agreement had been fully performed in light of the August 2011 PSA, because
Daughter had effectively made him a partner.
Because Plaintiff’s own complaint referred to the oral agreement as “an
oral agreement that was to last one year,” the court granted summary judgment
for Defendants on the breach of contract claim.
The court rejected the third argument regarding terms
contrary to public policy. First, the
court observed that contracts should not be held unenforceable for public
policy grounds unless their illegality is clear and certain. The court found no merit in Defendants’ argument
that it would have been illegal for a partnership to replace a corporation, as
Plaintiff could have been both a partner and a shareholder in Company 1 and
Company 2. The court also rejected
Defendants’ argument that the contract was unenforceable because a “nonresident
alien” may not own stock in an S corporation pursuant to 26 U.S.C. §
1361(b)(1)(C). A nonresident alien’s
purchase of stock in an S corporation is not illegal, but rather it causes the
entity to lose its tax status as an S corporation. Finally, the court rejected Defendants’
argument that the PSA was illegal and unenforceable because Plaintiff’s E-2
visa authorized him to work in the United States for Company 3, not Company 2
or Company 1. This argument failed
because the PSA did not call for Plaintiff to work in the United States, but
rather he was to work in Europe recruiting campers, and the agreement did not
call for the violation of the terms of his visa.
As for the conditions precedent argument, the court found
that summary judgment was improper on that ground. Because the PSA was written and signed in
West Virginia, the court applied West Virginia law on the existence of a
contract. The court noted that nothing
on the face of the PSA indicated that it was a letter of intent and not a
contract. Moreover, even if the PSA were
construed as a “preliminary agreement,” it would still be enforceable. Under West Virginia law, there are two types
of binding preliminary agreements, called Type I and Type II. Type I is a complete agreement in which the
parties fully intend to be bound, but they contemplate a more elaborate
formalization of the agreement. See Burbach v. Broad Co. of Delaware v.
Elkins Radio Corp., 278 F.3d 401, 407 (4th Cir. 2002). By contrast, Type II agreements do not fully
commit the parties to the ultimate contractual objective, but they commit the
parties to negotiate the open terms in good faith within an agreed-upon
framework. See id. at 408. The court
found that the PSA was a Type I preliminary agreement, as its language, “[a]fter
this agreement, a due diligence of the company and the additional legal papers
required for the transaction will be made,” states that the agreement only
needed to be formalized. Because the
parties did not express their intent for the formalization to be a condition
precedent, the court would not construe it as such.
Summary judgment was denied with respect to Plaintiff’s shareholder
oppression claims. The claim against
Company 1 arose under West Virginia law, and the claim against Company 2 arose
under Maryland law. Both states’ laws
allow for the dissolution of a corporation when the directors or controlling parties act in a manner that is illegal, oppressive or fraudulent. The court observed
that majority shareholders of a corporation have a fiduciary duty to the
minority shareholders, which requires the former to exercise good faith and
fair dealing toward the latter. In West
Virginia, when a majority shareholder acts to “freeze or squeeze out” a
minority shareholder from deriving any benefit of his investment without a
legitimate business purpose, oppressive conduct may be found. In Maryland, oppression is conduct that “substantially
defeats the reasonable expectations held by minority shareholders in committing
their capital to the particular enterprise.”
Bontempo v. Lare, 119 A.3d
791, 804 (Md. 2015). The court rejected
Defendants’ argument that Plaintiff was not a shareholder of Company 1 or
Company 2, because Daughter provided Plaintiff with documentation that he had
contributed capital and was a 10% shareholder of both companies. Summary judgment on this claim was therefore
improper.
The court further observed that both West Virginia and
Maryland law provide for accounting as a form of relief against shareholder
oppression. Because there was evidence
that Plaintiff was a shareholder of Company 1 and Company 2, summary judgment
on the accounting claim was denied.
The full opinion is available in PDF.
