Herman M. Braude v. John Jerry Robb (Md. Ct. of Spec. Appeals)

Filed: July 29, 2022

Opinion: Michael W. Reed

Holding:

The trial court erred in finding that there was no enforceable contract because there was insufficient consideration, as the appellant might recover under his claim for detrimental reliance depending on the version of events found credible. The trial court also erred in finding appellee did not breach his fiduciary duty to appellant because he was not appellant’s exclusive agent for the purpose of claiming the horse named Hydra, as appellee was appellant’s agent, owed appellant a fiduciary duty, and could not serve as agency for more than one principal who was seeking to purchase the same horse. Finally, the court incorrectly concluded that there was no factual basis or law that required it to address the legal theory of fraud. The Special Court of Appeals reversed and remanded for a new trial.

Facts:

Mr. John Robb (“Mr. Robb” or “Appellee”) is a horse trainer who owns his own stable, and has served as a horse trainer for Mr. Herman Braude (“Mr. Braude” or “Appellant”), a horse enthusiast and attorney, for more than 30 years. The dispute in this case centers on whether there was an enforceable oral agreement between Mr. Braude and Mr. Robb that Mr. Robb would claim for Mr. Braude a horse named Hydra during a race on January 4, 2020, at the Laurel Park Racetrack. According to Mr. Braude, Mr. Robb assured him several times that he would claim the horse. According to Mr. Robb, he had advised Mr. Braude that he would not claim the horse for him.

On January 2, 2020, Mr. Braude reviewed the advance race sheet for the Laurel Park Racetrack and became interested in Hydra, a one-year-old race horse racing two days from then for the claiming price of $25,000. A “claiming race” is one in which all horses racing are for sale at the same price, and one cannot physically examine a horse prior to the race. A horse is “claimed” by dropping a claim slip with the name of the horse, claimant, trainer, and the signature of the claimant into a lock box located at the Racing Office at least ten minutes before the post time for the race. Many claims are made in the minutes prior to the race when the horse is brought into the paddock area where a person can visually observe the condition of the horse. Mr. Robb had claimed at least 25 horses on behalf of Mr. Braude over the years.

Mr. Braude called Mr. Robb and asked him to submit a claim slip for Hydra before the race, and Mr. Braude asked his legal secretary, Ms. Dodd, to make formal arrangements with Mr. Robb to claim the horse. Mr. Robb texted Ms. Dodd that Mr. Braude needed to fill out a 2020 Authorized Agent form, since it was a new year. Mr. Robb and Ms. Dodd also communicated regarding wiring $25,000 from Mr. Braude’s personal bank account into his racing account at the Laurel Park Racetrack. On January 4, the day of the race, Mr. Braude filed the Authorized Agent form and added funds to his racing account to cover state taxes.

Mr. Braude met Mr. Robb in the paddock area to watch another horse owned by Mr. Braude and trained by Mr. Robb race. Mr. Braude informed Mr. Robb that he had $26,500 in his racing account and to meet him before Hydra’s race so they could jointly look at Hydra. Mr. Robb said he had not yet dropped a claim slip for Hydra, but he would. Video evidence shows Mr. Robb speaking to a man later identified as Mr. Eugene Gould, Jr. The parties provided conflicting testimony regarding their conversations about Mr. Robb dropping a claim slip on Mr. Braude’s behalf.

After the race, Mr. Robb told Mr. Braude there had been multiple claimants for Hydra and someone else had won. Mr. Braude later saw a report listing Mr. Gould as Hydra’s new owner and Mr. Robb as the new trainer. Mr. Braude fired Mr. Robb, and withdrew him as his authorized agent the following day.

On September 15, 2020, Mr. Braude filed a complaint in the Circuit Court for Montgomery County against Mr. Robb, alleging, among other things, breach of contract, breach of fiduciary duty, and fraud. After a bench trial, the circuit court denied Mr. Braude’s complaint for breach of contract and breach of fiduciary duty, but did not address the fraud count.

Analysis:

The court reviewed the bench trial decision, viewing the evidence in the light most favorable to the party who prevailed at trial, but reviewing the trial court’s legal findings de novo.

(1) The trial court in considering the breach of contract claim failed to make a credibility determination and determine whether detrimental reliance occurred.

Where a contact lacks formal consideration, a formal contract may nevertheless exist by virtue of the doctrine of detrimental reliance. The trial court found no enforceable contract because there was a lack of consideration; however, it failed to make any findings as to which version of events it believed. If Mr. Braude’s version of events were found credible and the court found that he had relied to his detriment on Mr. Robb’s promise to drop a claim for him, Mr. Braude might recover under his claim for detrimental reliance.

The trial court found other problems with the parties’ alleged contract, including that too much time had elapsed between the offer and acceptance, and that Mr. Braude failed to mitigate his injury because he did not put down his own claim and he chose not to claim Hydra in her next six claim races. The Court of Special Appeals finds these are not failures to contract in this context. If Mr. Braude’s version of events were found credible, there was offer and acceptance. Furthermore, under the theory of detrimental reliance, Mr. Braude was under no duty to drop a claim slip himself, as he had relied on Mr. Robb to do so for 30 years and was not in the physical condition to retrieve the horse himself. The Court directs the trial court to make findings of fact and a credibility assessment, and then conclusions of law as to whether there was a breach of contract.

(2) The trial court erred in denying the breach of fiduciary count, as a non-exclusive agent could not serve as an agent for more than one principal who sought to purchase the same horse.

Mr. Braude argues that the trial court erred in rejecting his breach of fiduciary duty count, on the ground that Mr. Robb did not owe him a fiduciary duty because Mr. Robb was not Mr. Braude’s exclusive agent for the purpose of claiming Hydra. The Court considers the duties of an agent to a principal, including the duty to “act solely for the benefit of the principal in all matters connected with his agency,” the duty to “avoid any conflict between his or her self-interest and that of the principal,” and the duty to “‘make full disclosure of all known information that is significant and material to the affairs’ of the fiduciary relationship.” Green v. H & R Block Inc., 355 Md. 488, 517–18 (1999) (citing RESTATEMENT (SECOND) OF AGENCY § 387 (1958); Ins. Co. of N. Am. v. Miller, 362 Md. 361, 380 (2001); Impala Platinum v. Impala Sales, 283 Md. 296, 324 (1978) (quoting Herring v. Offutt, 266 Md. 593, 597 (1972)).

The Court found Mr. Robb was Mr. Braude’s agent and owed him a fiduciary duty. Due to the conflicting testimony about whether Mr. Robb told Mr. Braude he would claim Hydra for him, the Court directs the trial court upon remand to make findings of fact and a credibility assessment, and then conclusions based on the applicable law as to whether there was a breach of duty.

(3) The trial court incorrectly concluded there was no factual basis or law that required it to address the legal theory of fraud.

Mr. Braude argues that the trial court erred when it failed to address his fraud count. Prior to addressing what error if any was made by the trial court, the Court holds that the trial court addressed all of the claims presented to it by the Appellant, including the fraud claim. The trial court disposed of the claim, even though it did not address each of the legal theories that Mr. Braude presented to support his claim: breach of contract, breach of fiduciary duty, and fraud. The trial court incorrectly concluded that there was no factual basis or law that required it to address the legal theory of fraud, therefore the Court remands for retrial on the issue of fraud.

The full opinion is available here.

Connaughton v. Day (Cir. Ct. Mont. Co.)

Filed: December 9, 2019

Opinion by: Judge Anne K. Albright

Holding: Plaintiffs alleging securities fraud were denied class certification because, despite demonstrating commonality of questions of law and fact, they failed to show that joinder of approximately 35 putative claimants was impracticable or that their claims were typical or their representation adequate, given the variety in the source, nature of and reliance on information received by the plaintiffs and putative class members.

Facts: The four Original Defendants were individuals and entities accused of procuring investors for a Ponzi scheme run by three non-parties, the MLJ Group. The second amended complaint named 14 New Defendants and additional related claims.

Plaintiff’s Amended Motion for Class Certification requested certification of a class of all persons who invested in securities, in the form of promissory notes, by lending money to borrowers of the MLJ Group. The requested class excluded individuals who profited off the Ponzi scheme and those affiliated with any Defendant.

The Amended Motion was served via counsel on the Original Defendants, but there were no Affidavits of Service for the New Defendants. The Original Defendants responded to the Amended Motion and participated in prior discovery; the New Defendants did not do either.

Analysis: The Court held that the Amended Motion did not meet the threshold requirements of Maryland Rule 2-231(b). As to the first numerosity requirement, the Court accepted an Original Defendant’s estimate that the putative class would be made up of 35 members, and the Plaintiffs provided only conclusory arguments for why joinder would be impracticable. As to second requirement of commonality, the Court was satisfied that Plaintiffs identified seven common questions of law and fact.  

As for the third typicality requirement, some Plaintiffs were contacted regarding the transaction by a non-party accountant rather than a Defendant. Other putative class members contacted by the Defendants themselves did not receive scripted, uniform information. The variety in the sources of information, the information received, and the reliance on the information makes the Plaintiffs’ claims less typical.

As for the fourth adequacy requirement, because the Plaintiffs may have relied on statements of the non-party accountant rather than a Defendant, the named Plaintiffs cannot adequately represent the putative class. Additionally, the accountant is both a potential target of claims and putative class member. Thus, only one of the four threshold requirements of Maryland Rule 231(b) was met.

The Plaintiffs also failed to meet the requirements of Maryland Rule 2-231(c)(3). As for the predominance requirement, fraud claims are not normally susceptible to class treatment because there could be too much variety regarding the degree of reliance placed on representations. This appears to be case here given the role of the non-party accountant and the receipt of unscripted information, as discussed above. As for the superiority of class action requirement, considering the pre-set trial schedule, the fact that the New Defendants were not given a chance to address these questions, and that more time would not cure the other failings of the Amended Motion, Plaintiff’s argument fails.

Thus, Plaintiffs’ Amended Motion for Class Certification was denied.

The full opinion is available in PDF.

Al-Sabah v. Agbodjogbe (Maryland U.S.D.C.)

Filed:  January 14, 2019

Opinion by:  Ellen L. Hollander

Holding:  Motions for summary judgment (1) granted in part as to breach of contract claim where no genuine dispute of material fact existed as to the formation of a contract for a loan and its subsequent default, and (2) denied in part as to a claim for fraudulent misrepresentation where genuine dispute of material fact existed as to the requisite scienter.

Facts: 

Plaintiff (“Donor”) is a Kuwaiti citizen who met Defendant (“Entrepreneur”) in 2014 in Baltimore.  Entrepreneur operated a few restaurants and convinced Donor to invest in his business and to entrust him with the creation of investment entities and charitable endeavors on her behalf.  Donor thereafter transferred more than $3 million for these purposes.

Instead, Entrepreneur allegedly formed entities with himself as sole owner through which he purchased commercial property.  Entrepreneur also, allegedly without authorization, purchased a $470,000 family home in cash using the proceeds of a 2015 wire transfer from Donor. 

Donor became suspicious of Entrepreneur in early 2016 and demanded documentation relating to the business and charitable entities and their transactions.  These requests were met with delays and misrepresentations.  Three months later, Entrepreneur’s wife contacted Donor claiming that a loan taken out against the family home was in default and would result in the family’s eviction if $350,000 were not paid by the end of the week.  Donor phoned Entrepreneur requesting more details.  Entrepreneur responded indicating the amount needed was only $165,000 by the next Friday or he risked eviction. 

In fact, Entrepreneur’s pending obligation was less than $10,000, paid weekly toward a personal loan and bearing no collateral relationship to the family home.

Against her better judgment, Donor provided $150,000 in the form of an interest-free one-year loan.  Entrepreneur defaulted on the loan and Donor filed suit alleging claims of (1) fraudulent misrepresentation, (2) conversion, (3) conspiracy, (4) detrimental reliance, (5) unjust enrichment, (6) breach of contract, (7) breach of agency duties, and seeking damages and other equitable relief. 

After discovery, Donor moved for partial summary judgment on the fraudulent misrepresentation and breach of contract claims. 

Analysis: 

The court began with the breach of contract claim, requiring Donor not only to establish that Entrepreneur owed a contractual obligation and breached that obligation, but also that no genuine dispute of material fact existed in the matter. 

Entrepreneur contended that a genuine dispute of material fact existed due to the possibility that the money had not come from Donor but one of her charities.  The court, however, properly found Donor to have acted through her agent as a partially disclosed principal – an arrangement which did not undermine her claim for breach of contract.  The court also found compelling the evidence that Donor had personally reimbursed the charity for the cost of the loan and that her agent had disclaimed any personal interest in the sum. 

Accordingly, the court found no genuine dispute that the parties formed a contract which Entrepreneur breached by failing to repay the loan.

Moving next to the fraudulent misrepresentation claim, the court required Donor to show no genuine dispute of material fact existed that:

(1) Entrepreneur had made a false representation
(2) its falsity was known to Entrepreneur or made with reckless indifference to its truth
(3) the misrepresentation was made for the purpose of defrauding Donor
(4) Donor relied on the misrepresentation and had the right to do so
(5) Donor suffered compensable injury from the misrepresentation. 

Evaluating the factual record, the court found no genuine dispute as to element 1 given that the actual amount owed was less than $10,000 and that Entrepreneur’s representation of needing $165,000 would have made the actual amount received, $150,000, insufficient to meet the purported obligation.

The court had more difficulty finding the necessary scienter requirement of element 2, refusing to impute deliberate intent to deceive from Entrepreneur’s failure or inability to explain why he thought eviction was imminent or why he needed such a large sum of money.  Faced with ambiguity and silence, the court determined a fact-finder more appropriate to determine the merits of Donor’s fraudulent misrepresentation claim.

The full opinion is available in PDF.

Greenspring Quarry Assoc., Inc. v. Beazer Homes Corp. (U.S.D.C.)

Filed:  June 26, 2017

Opinion by:  James K. Bredar

Holding:  Where (1) a principal exerts control over a corporation’s board via a majority acting within the principal’s scope of employment, (2) the board takes actions in breach of contract and in contravention of principal’s express statements, and (3) sufficient privity exists to survive a challenge based on economic loss doctrine, well-pleaded allegations of fraudulent misrepresentation against the principal are sufficient to survive a motion to dismiss for failure to state a claim.

Facts:  Plaintiffs (“Owners”) are members of master and subordinate property owners’ associations in a mixed residential and commercial development.  Defendant (“Developer”) is the developer of the relevant properties.

Development began in 2005, and Developer incorporated master and subordinate owners’ associations one year later.  Soon thereafter, Developer caused its employees to occupy the initial positions on both associations’ boards.  Developer filed on behalf of each association similar covenants under which a management company would maintain common areas, with Developer to pay costs until such time as it transferred title to the common area property to the associations.  Developer began billing Owners in 2008 but did not transfer title to the common areas until December 2015.

Owners, as members of the master and subordinate associations, brought separate but practically identical actions alleging breach of contract, negligent misrepresentation, and fraudulent misrepresentation.  Developer removed both actions under diversity jurisdiction and moved to dismiss the tort claims for failure to state a claim.  Removal was granted, and both actions were joined for convenience and efficiency.

Analysis:  Developer first argued that Owners’ allegations sounded only in contract.  The court began by noting that under the doctrine of respondeat superior, because Developer’s employees joined the boards under its direction and in furtherance of its objectives, Developer would be vicariously liable for any tortious acts committed by the board.  By extension, because board members of Maryland non-stock corporations owe the same fiduciary obligations as any other Maryland corporation, breach of duty accompanying a contractual obligation would be sufficient to support a tort claim.  So finding, the court permitted Owners’ tort claims.

Developer next argued that the economic loss doctrine barred any tort claims, such that its alleged negligence causing purely economic harms ought not create tort liability in the absence of privity, actual physical injury, or risk thereof.  However, noting that Maryland has traditionally permitted tort actions for purely economic losses in the context of fraud, and finding more than sufficient allegation of privity between the parties via the intimate nexus between Owners and the associations, and Developer’s control of the boards, the court deemed risk of tort liability reasonably foreseeable.

Third, Developer argued that Owners’ reliance on Developer’s allegedly negligent or fraudulent statements was unreasonable.  Avoiding the factual question of whether reliance was reasonable, the court evaluated the board’s alleged conduct under the adverse domination doctrine, where knowledge or actions of an agent whose interests are adverse to the principal cannot be imputed to the principal.  Because corporate entities act through agents who wouldn’t rationally be expected to communicate their own wrongdoing to the principal, equitable considerations lean in favor of the corporation and create a rebuttable presumption.  Here, a cause of action against the board (and vicariously, Developer) would not accrue if a disinterested majority board could be proven.  In the court’s view, Developer had not alleged sufficient facts to show that the boards contained a disinterested majority during the time period at issue.

Lastly, Developer argued that Owners’ claims failed to meet FRCP Rule 9(b)’s particularity requirements that time, place, and contents of allegedly fraudulent statements and the person making such statements be pled with sufficiency.  Finding the complaint to contain sufficiently complete allegations (an accounting of dated bills approved by the boards while under Developer’s control, with identities of the board members responsible), the court found Owners to have met their Rule 9(b) burden.

Accordingly, the court found Owners to have survived Developer’s motions to dismiss.

The full opinion is available in PDF.

Malinowski v. The Lichter Group, LLC (Maryland U.S.D.C.)

Filed: January 28, 2016

Opinion by: James K. Bredar

Holding:  The U.S. District Court for the District of Maryland, declining to import the doctrine of presumed reliance from federal securities-fraud cases, held that to succeed on a negligent misrepresentation theory involving audit reports made in connection with a 401(k) Plan, employees must prove, among other matters, justifiable action was taken in reliance on the alleged misrepresentation.

Facts:  Plaintiffs were former employees of a transportation contractor.  The company established a 401(k) Plan as an employee benefit plan governed by ERISA.  Defendant-auditor was retained to perform an audit of the Plan’s financial statements for 2009, 2010 and 2011, as required by ERISA’s detailed reporting requirements.

By year-end 2011, the company’s contributions to the Plan were several quarters behind, such that the company owed over $700,000 to the Plan.  Plaintiffs alleged that the Defendant’s audit reports for 2010 and 2011 contained material omissions regarding the Plan.

Analysis:  A plaintiff asserting a claim for negligent misrepresentation must prove that, among other factors, the plaintiff took justifiable action in reliance on the statement.  The Court stated that for purposes of the Plaintiff’s negligent misrepresentation theory, it was not enough that the audit reports may have contained omissions or even misinformation.  The Plaintiffs must demonstrate that they relied on the reports to their detriment.  The Court highlighted that four of the five Plaintiffs admitted that they had no independent recollection of reading or reviewing the audit reports. 

Plaintiffs urged the Court to import the doctrine of presumed reliance from federal securities-fraud cases into this state law claim.  The Court noted precedent indicating that the “most prominent distinction between common law fraud and a [10b-5] violation is that the latter permits recovery based on a … theory which presumes reliance, while the former requires proof of actual reliance.”  The Court, noting that it was a federal court sitting in diversity, declined to expand tort liability under Maryland law and granted summary judgment on the negligent misrepresentation claim. 

Plaintiffs also alleged breach of professional negligence.  The Court stated that a professional negligence claim, similar to any negligence claim, requires the plaintiff to establish: (i) a duty was owed to Plaintiff; (ii) a breach of that duty; (iii) causation between the breach and the harm; and (iv) damages.  Maryland courts recognize the “but for” test and the substantial factor test when analyzing whether causation exists.  The Court noted that the Defendants, as auditors, were not directly responsible for the over $700,000 deficiency in the Plan.  The Court also noted that the Plaintiffs cannot contend they would have taken action to remedy the deficiencies in the Plan because four of five of the Plaintiffs never saw the reports. 

Plaintiffs argued that the audit reports serve a dual purpose of alerting the Plan participants and the Department of Labor of irregularities and that “but for” the inaccurate audit reports the DOL would have been on notice of the deficiencies and able to correct the arrearage.  The Court stated that the DOL was already conducting an investigation at the time of the 2011 report and that “a careful study of the documents [from the 2010 report] shows the numbers reconcile.”  The Court granted summary judgment on the professional negligence claim.

The opinion is available in PDF.

Zorzit v. Comptroller of Md. (Ct. of Special Appeals)

Filed:  October 1, 2015

Opinion by:  Judge Douglas R. M. Nazarian

Holdings:  (1) Maryland Court of Special Appeals upheld Tax Court’s finding of fraud, holding that appellant taxpayer’s (“Taxpayer”) intent to defraud Maryland Comptroller of Admissions and Amusement tax revenues could be inferred from  circumstantial evidence of understatement of income, failure to maintain records, and concealment of assets.  (2) In the absence of Taxpayer’s relevant records of sales or income, the Comptroller’s tax liability assessment was supported by substantial evidence of reasonableness, making the Tax Court’s affirmance of the assessment not in error.  (3)  No actionable claim of spoliation occurred where duty to preserve and evidentiary advantage were not present.

Facts:  From 1993 until 2009, Taxpayer owned and operated a business providing video poker machines and other coin-operated entertainment to establishments.  Under Md. Code §17-405, 408, and 414 of the Business Regulation Article, it is lawful to operate video poker machines without making cash payouts, provided that the machines are properly licensed and taxes paid on all revenues generated.  However, Taxpayer ran afoul of the Code in several ways.  First, with Taxpayer’s knowledge and approval, proprietors of the establishments made cash payments to video poker winners, deducting the payouts from the profit split between Taxpayer and proprietors.  Second, Taxpayer kept no records of the cash payments, nor any records of individual revenues on a per-machine basis.  Third, Taxpayer calculated its tax liability net of the cash payments.

A wide-scale undercover police investigation conducted from 2006 to 2009 led to the seizure of 83 video poker machines owned by Taxpayer.  Forensic analysis of the motherboards allowed police to determine the in- and out-credits from each machine and compile the data into a report later issued to the Comptroller’s Office.  Although the investigating officers conceded that (1) proprietors likely did not pay out every credit won and (2) in- and out-credits from prior ownership of the machines could not be distinguished, the Comptroller calculated its assessment assuming that every out-credit was paid.  Applying its hypothesis that 55% of in-credits would be paid out, the Comptroller assessed a tax deficiency of $2,159,724.97 for the 2000-2009 period, added interest and imposed a 100% fraud penalty.

Taxpayer appealed the assessment to the Tax Court in 2013, arguing that the payoff percentage was more likely between 20 and 25% due to (1) proprietors often declining to pay out-credits and (2) the unreliability of the in- and out-credits data where significant number of video poker machines had been purchased used.  Accounting for these differences, Taxpayer’s expert testimony provided by a statistician placed the tax deficiency at $466,016.10.  Taxpayer further disputed the fraud penalty on the theory that neither his employed CPAs, his retained attorney, nor his staff were aware the payouts were taxable, thus Taxpayer lacked requisite intent to defraud.  The Tax Court was only partially persuaded, finding the record insufficient to change the Comptroller’s tax liability assessment, but using its discretion to adjust the fraud penalty to 50% by balancing the facts that the accounting was not perfectly accurate but Taxpayer’s fraud warranted a penalty.

Taxpayer filed petition for judicial review in the Circuit Court for Baltimore County which affirmed the Tax Court’s decision on June 5, 2014.  Taxpayer thereafter filed a timely notice of appeal.

Analysis:  Taxpayer presented the court with two questions for review:  first, whether the Tax Court erred in imposing its fraud penalty without a finding of intent to evade payment.  And second, whether the Tax Court erred in affirming an assessment based on admittedly erroneous assumptions and evidence the Comptroller failed to preserve.

The court began by pointing to a case both fully on-point and decided by the same court in 1993: Rossville Vending.  In that case, Rossville’s video poker units had been placed in establishments whose proprietors paid cash payments directly to winners, but Rossville paid no taxes on the cash payments.  Finding no ambiguity in the amusement tax statute’s operative phrase ‘gross receipts,’ the Rossville court found no room for reasonable argument for adjustments or deductions before calculation of the tax due.

Taxpayer pled ignorance: arguing that although he had personal relationships with Rossville Vending’s owners and knowledge of their business, he lacked actual knowledge of the Rossville court’s decision until after the Comptroller’s assessment, and so lacked any intent to withhold taxes.

The court next referenced Genie & Co., which held that direct evidence of fraud is unnecessary, but often inferred by circumstantial evidence.  The Genie court imported the federal “badges of fraud” doctrine to Maryland jurisprudence, highlighting seven factors to guide courts in identifying circumstantial evidence of fraud: 

1. Consistent and substantial understatements of income (or sales, in the sales tax arena);
2. Failure to maintain adequate records;
3. Implausible or inconsistent explanations of behavior, including lack of credible testimony before a tribunal;
4. Concealment of assets;
5. Failure to cooperate fully with tax authorities;
6. Awareness of the obligations to file returns, report income or sales, and pay taxes, and;
7. Failure to file returns.

Finding substantial evidence of badges one, two, and four in the failure to keep records of gross revenues, concealment to avoid criminal liability, and faulty accounting methods recording net income by location rather than per-machine basis, the court agreed with the Tax Court that the badges of fraud analysis indicated an intent to conceal revenue.  Even were the Taxpayer’s claimed ignorance legitimate, the court further found the failure to research its tax liability to be willful blindness, and tantamount to fraud.  Accordingly, the court affirmed the Tax Court’s penalty.

Turning next to Taxpayer’s arguments against the Comptroller’s method of calculation, the court noted that the Tax General Article TG §13-403 anticipated situations where parties neglected to keep accurate records (emphasis added):

(a)  If a person … fails to keep the records required under §4-202 of this article, the Comptroller may

(1)    Compute the admissions and amusement tax by using a factor….

* * *

(b)  The factor utilized by the Comptroller pursuant to this section shall be developed by:

(1)    a survey of the business… including any available records

(2)    a survey of other persons… engaged in the same or similar business

(3)    other means.

The court continued, pointing out that the plain meaning of the statute indicated the legislature had vested broad discretion in the Comptroller to use reasonable methods for calculating assessments against parties like Taxpayer.   Indeed, the court found the Comptroller’s calculation methods to be supported by substantial evidence of reasonableness in light of the lack of relevant financial records.  Using the only records available – those obtained by the police’s forensic investigation – the Comptroller calculated Taxpayer’s tax liability as best he could.  As a result, the court found Taxpayer’s request to substitute his expert’s “guesstimate” for the Comptroller’s assessment notwithstanding Taxpayer’s failure to retain adequate records unconvincing.  Such a finding would lead Maryland companies to keep no records, file no returns, and refer the Comptroller to unverifiable memories of employees; an untenable result.  Thus the court found that the Tax Court did not err by relying on the Comptroller’s calculation.

Dealing finally with Taxpayer’s spoliation claim (which arose after a police agency destroyed the motherboards of the video poker machines), the court found the Comptroller lacked any duty to preserve the video poker machine motherboards because he neither possessed nor had access to them.  Moreover, no evidentiary advantage existed because both the Comptroller and Taxpayer had copies of the police report.  Accordingly, the court found no misbehavior to sanction.

The full opinion is available in PDF.

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.